Number two hard drive supplier Western Digital, not currently an enterprise drive supplier, appears to be readying itself to ship 2.5-inch enterprise SAS drives.
Western Digital does not compete with Seagate for high-performance enterprise disk drives. But with the emergence of serial-attached SCSI (SAS) it has a way to do this and aims, judging by its third quarter results earnings call transcript, to do so with 2.5-inch drives. The company has just announced a high-performance 2.5-inch drive, the VelociRaptor, which is shipped inside a 3.5-inch chassis and which is targeted at high-performance (gaming) PC and workstation applications.
During the earnings call Richard Kugele, an analyst from Needham & Co., asked this question: "... to follow-up on your prepared comments there on the VelociRaptor ... unlike the previous Raptor which had been somewhat more of a niche product accepted by the high performance community, this one really is an enterprise 2.5-inch in a 3.5-inch clothing. Can you just talk about how much of a leap it is to take this product and actually make it a 2.5-inch enterprise class SASS for example, or the next leap in technology to get it to be a pure play enterprise?"
John Coyne, WD's president and CEO answered: "... the product is a very significant demonstration of our continued momentum in technology deployment, offering as it does a leading areal density in the industry today. You are correct; we are selling it in the 3.5-inch clothing, targeted specifically at the high performance workstation and the high energy gaming environment, where the Raptor has established a very powerful brand position for us."
"However, as a 2.5-inch drive, it is also targeted at the blade server market in that SATA drives plug into SAS. So we expect to see some significant opportunity there. As to the rest of your question, you know we never announce product until it is [shipping in bulk]."
No denial and no confirmation but, we think, a clear hint affirming the intention.
Coyne was asked by another analyst, Robert Marson, about HDD industry consolidation: "... how do you sort of feel about the entire industry’s profit margin structure and sustainability thereof? I know that in the last four quarters, Western Digital and Seagate have made money. Hitachi for the full trailing 12 months has struggled, and the other Asian companies have either broken even or lost money."
"When I look at - when I try to roll up the businesses as best I can, I come to a high single, mid to high single-digit operating margin for the business. Do you feel there has been enough consolidation in addition to organic unit growth opportunities for the whole industry, so that existing pricing structures and profit margin structures can continue within the business, with Hitachi trying to become more profitable?"
Coyne's answer made a clear statement about further consolidation being unlikely: "... you know, when we look at consolidation, I don’t think there is any compelling trigger to drive further consolidation in the industry."
Additional remarks confirmed the general opinion about the relative status of the various HDD suppliers but also an interesting dependency upon TDK by some suppliers: "The way we look at the industry today, you’ve got Seagate, a very large, very capable, very profitable company generating significant cash. You’ve got Western Digital, a not so big, well-managed, low cost, high profit, high cash generation business. You’ve got Hitachi, who seem to be finally focusing on the fundamentals of cost structure appropriate to the market opportunities available to them and driving towards a positive outcome."
"And then the three - Toshiba, Fujitsu, and Samsung - essentially all dependent on the single merchant head supplier, TDK, for their products. And if you look at the financials of TDK, I think that’s where you see where the value is being captured. However, Fujitsu, Toshiba, and Samsung, as well as Hitachi, being divisions of large Asian corporate owners, it appears to me that as long as they produce marginally positive results on an ongoing basis, they will potentially keep being funded. However, we have seen evidence over the last year-and-a-half to two years that where they deliver negative results, the parents do not have the patience to allow that to continue for extended periods. "
Marson pushed back on this: "You’ve made your intentions known to enter the enterprise businesses. Is there any - and your chief competitor, Seagate, has sort of done its fair share in the consolidation movement - is there any chance you would try to purchase an enterprise drive business were it to become available?"
Coyne politely said 'No': "We are looking at all business segments in which we currently don’t participate and assessing the business cases for all of those opportunities. Our experience tells us that organic growth has been the thing that has generated the best results for us."
"As we’ve watched the outcomes of other people’s horizontal acquisitions at the drive level, while we have focused on vertical acquisitions at the component level and so we don’t currently have any designs on anything other than growing into segments in which we don’t participate where we can close a business case to generate profitable growth from that activity."
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