boom to bust and back again? - idemapacific, march 2009 4 trouble seeing beyond the shire concerns...

IDEMA Diskcon Asia Pacific, March 2009 1

Boom to Bust and Back Again?

An Industry’s Tale


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Celebrating, Just A Year Ago

• Record profits for many participants

• Hitachi returning to financial health after a lengthy period of losses


Trouble Seeing Beyond the Shire

Concerns were mostly industry specific– Competitors were enjoying a respite from

the shift from a “Price Takers” to a “Price Makers” market

– Question I asked was why are HDD company’s undervalued?

– Significant questions about SSDs


Same Old Orcs - ASP DeclinesThe HDD industry reverted to a price takers’ market as oversupply of product and competitive bids to gain share adversely impacted pricing power


ASP Declines 2008Pricing Trends Since 2004

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Western Digital Seagate

CAGR -1.7%

CAGR -5.7%


New Capital Structures • Debt has historically created problems for HDD

companies• Long periods of profitability appear to have allowed

companies to forget this lesson• Hutchinson – Raised capital primarily for

investment, but also engaged in share repurchases in 2008

• Seagate – Tried to shift itsWACC and lift its stock pricefollowing its purchase ofMaxtor by issuing debt inorder to provide proceeds forshare buybacks


The Larger Threat

A Global Financial Crisis


Impact is Sudden• The failure of Lehman Brothers touched off

the global financial crisis in September• HDD shipments declined from 153M units

in CQ3 ’09, to just north of 120M in CQ4 with only 110M units expected to ship this quarter

• The decline in unit demand helped sustain ASP declines through CQ4 into CQ1

• Profitability across the HDD industry collapsed


What Now? How far did Gandalf Fall?Avian is forecasting a 12% decline in unit shipments in 2009

But visibility into 2009 is limited

2008 Q1'09 Q2'09 Q3'09 Q4'09 2009

TotalPCs 299 62 60 68 74 264

Y/YChange 11% -11% -15% -15% -4% -12%


HDD & PC Consumption in 2009? • History of PCs (and HDDs) relatively limited

– only two recessions • 2001 – GDP growth of 2.5% yielded a 5%

decline in PCs and a 2% decline in HDDs• But the IMF’s latest projection is for 0.5%

worldwide GDP growth – the lowest rate since WWII

• Emerging markets (China) and the US consumer, which helped in 2001, likely won’t help this time around


PC Shipments Down 10% If PC industry declines are just 10% the HDD industry is in good shape

– HDD shipments were well below those levels in CQ4

– Shipment expectations for both CQ1 and CQ2 have been moderated to declines nearly twice as steep as this PC forecast

– HDD industry has done a surprisingly good job controlling desktop inventories despite the difficult demand environment


US Distribution Inventory Index

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10% Down = V-Shaped RecoveryRecovery Path

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Variability Is SignificantRecovery Path

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Cost containment, but not at the expense of future development

– Conservatism in manufacturing ahead of R&D, particularly as the HDD industry can already produce more drives than it will likely ship in any given quarter.

How to Best Fight the Battle


Industry Success Depends on PXG

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– WD and more recently Hitachi have been successful in moderating costs.



HDD Supplier Profitability MatrixCompany Vertically

IntegratedProduct Scope & Scale

Unique Product

Western Digital

Seagate

Hitachi

Toshiba

Fujitsu

Samsung

Toshiba

Hitachi


HDD Supplier Profitability MatrixCompany Vertically

IntegratedProduct Scope & Scale

Unique Product

Western Digital

Seagate

Hitachi

Toshiba

Fujitsu

Samsung

Hitachi

Seagate




– WD and more recently Hitachi have been successful in moderating costs.

– Do not shortchange new technologies –particularly those that can potentially build margins.



Specialty Products• By adding value in niche segments, vendors can

also achieve profitability– Western Digital MyBook/Passport– Toshiba 1.8” drives– Seagate Fibre Channel Drives

• Opportunities exist in both personal storage and SSDs


Consumer Push

Western DigitalWD HD TV

Hitachi/Fabrik [re]drive

SeagateFree Agent Theater

Western DigitalShareSpace


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3.5" SSD2.5" SSD<1.8" SSD

Enterprise-Class SSD:

2007: 473K Units, $157.4M

2012: 8.6M Units, $1.7B

Units (M)

Source: Gartner Update February 2009by Joe Unsworth

Gartner on Enterprise-Grade SSDs

While Hitachi’s joint venture with Intel is the only Enterprise SSD development with a publically announced roadmap, Avian believes all HDD vendors are currently developing an Enterprise SSD solution.


Secondary Concerns• SSDs

– Momentum has been far less than anticipated

– Catch 22: SSD traction depends on better pricing yet any significant SSD momentum in notebooks will likely boost PX

• Netbooks– Unclear that Netbook gains

will materially impact HDD sales/ASPs


Netbooks• Netbooks are the only PC growth Segment in 2009

• We believe the danger from netbooks in 2009 for HDDs is likely overstated– The most common capacity shipped is now 160 GB– It does not appear that SSD traction will increase– New Vista SKUs could slow netbook momentum

• However HDD vendors must be cautious of this trend because when adoption does occur, it will be rapid

2008 Q1'09 Q2'09 Q3'09 Q4'09 2009

Desktop 157 29 27 30 32 118Notebook 130 28 27 30 33 118Netbook 13 5 6 8 9 28


Gartner’s SSD Forecast by Segment

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Entry-Level PC SSDPC SSDEnterprise SSD

• Entry-Level PC SSD: 2007: 635K Units, $22.7M 2012: 38.4M Units, $518M

• Mainstream PC SSD: 2007: 86K Units, $65.7M 2012: 42.3M Units, $3.6B

• Enterprise-Grade SSD: 2007: 473K Units, $157.4M 2012: 8.1M Units, $2.0B

Units (M) 256GB PC SSD ~$50 OEM Price available late 2012

TOTAL SSD 5 Year Outlook (07-12)

- Unit Growth: 137%- MB Growth: 323%

2012: Mainstream PC SSD Account for ~18% of Notebooks (Excludes low-cost SSDs)

Source: Gartner Update February 2009by Joe Unsworth


Some Signs of Hope


High Cost of Capital• The high cost of debt and equity

creates a higher hurdle rate for new projects

• In turn, the funding limitations should slow 1) capacity expansion and 2) areal density growth

• This situation has historically benefitted industry profitability


Consolidation Has Marked a Bottom

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MaxtorWestern DigitalSeagate

Hitachi to Purchase IBM's Drive Division Seagate to

Buy Maxtor

Stock Price


Questions/Comments

Contact: [email protected]

boom to bust and back again? - idemapacific, march 2009 4 trouble seeing beyond the shire concerns...

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