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Hard drives fall on hard times

Hard drive manufacturers have had a couple of bad quarters due to the lingering effects of the pandemic and supply chain issues, but see a turning point on the horizon.

Revenue for hard drive manufacturers is down but not out as they see some signs of market improvement and newer technologies on the horizon.

Seagate and Western Digital (WD) are the two largest HDD suppliers in the world, accounting for 80% of the market in 2021, according to Statista. Both companies have seen a drop in revenue over the last six months, and in Seagate's case, a round of layoffs. However, both companies are pushing on with innovation in density per drive -- one of the key selling points of the technology.

WD released its fiscal second-quarter 2023 earnings Tuesday, where it reported a 36% decline in total revenue year over year and a 34% decline in HDD revenue year over year. WD has also entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments of $900 million.

"We continue to take action to reset the business in response to the post-pandemic environment by optimizing our cost structure and strengthening our liquidity," said David Goeckeler, Western Digital CEO, in a press statement.

Last week, Seagate reported a 41% year over year decline in HDD revenue during its second-quarter earnings for fiscal 2023. The company said it took a net loss of $33 million, its first quarterly loss since 2016. In its first-quarter earnings for fiscal 2023, which ended Sept. 30, Seagate reported a 35% drop in revenue and told investors it planned to lay off 3,000 workers.

During Seagate's earnings call last week, CEO Dave Mosley attributed the downturn in earnings to several factors, including COVID-19 restrictions in China that slowed sales, an oversupply of nearline HDDs by hyperscalers, more cautious demands due to signs of an economic slowdown and disruptions affecting consumer-facing markets.

"These factors remained at play during the December quarter and weighed heavily on the mass capacity markets, resulting in a 10% sequential decline in mass capacity revenue," Mosley said.

What went wrong

The largest buyers of HDDs are the major cloud companies, and they are feeling the effects of a slowing economy, with Amazon, Google and Microsoft recently laying off workers and reducing their spending, according to Ed Burns, a research director at IDC.

Hyperscalers are going to continue to grow, just not like it was before, and that will have an adverse impact on HDD purchases.
Ed BurnsResearch director, IDC

"Hyperscalers are going to continue to grow, just not like it was before, and that will have an adverse impact on HDD purchases," Burns said.

Both HDD vendors said supply chain disruptions -- which reached an apex during COVID-19 where certain components couldn't be acquired -- continue. Now, however, companies are sitting on too much inventory as opposed to not enough.

The slowdown in spending from hyperscalers is coupled with softening device sales, which affects associated applications, according to Thomas Coughlin, president of analyst firm Coughlin Associates.

"The decline in legacy applications and the lowering of buying of nearline drives by the big data center guys has really impacted [HDD manufacturers]," Coughlin said.

HDDs are generally known for high density at a lower cost. WD and Seagate have continued to focus on density over the last year. In May 2022, WD released a 22 TB conventional magnetic recording HDD and a 26 TB shingled magnetic recording HDD, with data tracks that slightly overlap like roof shingles, allowing for greater density. Seagate began shipping 20 TB HDDs at the end of 2021, a 2 TB increase over their predecessor.

The density innovation might be slowing sales, according to Steve McDowell, principal analyst and founding partner at NAND Research.

"You can get a 24 TB HDD right now, whereas before I would have to buy three 8 TB HDDs," McDowell said.

Fewer drives can fill the orders due to the higher capacity. However, denser, cost-effective drives will be more attractive as storage needs increase and the storage market turns around, he said.

Spinning disk at the end of the tunnel

Coughlin noted that the buying patterns are cyclical. While this is a larger downswing, the amount of data that needs to be stored and managed is still growing, and HDDs remain the most cost-effective method for the job, he added.

"I think that buying HDDs will go back up in the data center sometime over the next year," Coughlin said.

The acquisition cost of hard drives is lower than flash storage, McDowell said. Unless users need the performance of flash, HDDs store more data for less money, making HDD a viable storage option as markets improve.

During the company's earnings call, Seagate's Mosley pointed to signs of the market already improving as COVID-19 restrictions lifted in China, a slow but increasing ease to supply chain issues, and a gradual improvement in nearline HDD sales with even higher capacities.

"Ongoing adoption of our 20-plus TB family of nearline products -- which represented close to 60% of nearline exabyte shipments in the December quarter -- is expected to trend even higher in the current quarter," Mosley said.

Seagate used the reduced factory utilization to focus on its heat-assisted magnetic recording, demonstrating 5 TB per disk. Because of this, Mosley said that Seagate expects to launch its 30-plus TB platform in the fourth quarter of fiscal 2023, ahead of schedule.

Adam Armstrong is a TechTarget Editorial news writer covering file and block storage hardware and private clouds. He previously worked at StorageReview.com.

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