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By | Chris Mellor 23rd January 2009 11:00

Seagate's complacency blasted away - what now?

Navigating the tanker through treacherous waters

During 2008 Seagate became a technology follower. Business results at the end of the year tore the veils from its executives' eyes as they looked a half billion dollar loss in the face. Now there is a new CEO, and a determination to get a strong grip back on the business.

Seagate sold $3.42bn worth of hard drives, 50m units, to its customers in the final quarter of 2007, profiting to the tune of $403m. It was riding high and knew it. The hard disk drive market seemed predictable and the main suppliers stable. The company decided to relax from its constant drive to improve absolute areal density, and use the density levels it already had to optimise disk drive revenues across the markets it was in.

This was a misstep. It underestimated the market for small form factor (SFF) or 2.5-inch drives as the desktop PC market declined in favour of notebooks. Competitor Western Digital did not. The recession struck and, in the final quarter the depth of Seagate's mistake was exposed for all to see. It sold just 37m drives, 23 percent lower than the previous quarter, with revenues of $2.3bn and a net loss of half a billion dollars, $496m to be precise. The price competition had been intense and the average selling price (ASP) per drive slipped from $68.40 a year ago to $62.16.

Returning CEO Steve Luczo did not mince his words at the Q4 '08 earnings call: "After demonstrating sustained areal density leadership through a number of product generations, we decided to manage areal density growth in an attempt to optimize our product portfolio and R&D investment.

"This decision resulted in products that were less competitive in some markets, as (head) technologies advanced at rates greater than our estimates... we haven't executed at the level that we are capable of."

Read/write head technology was the key area where Seagate lost leadership. The company lagged behind in two product cycles and according to Luczo, "internal execution issues were compounded by the macroeconomic environment, which we believe will continue to be challenging through calendar 2009 and potentially into the first half of calendar 2010".

The result has been the restructuring that started early on in 2008 and which was accelerated this month with a six per cent worldwide headcount reduction and salary cuts.

Luczo wants Seagate to get back to being undisputed numero uno in the disk drive... but not just the disk drive business. Here is what he said: "We are committed to implementing actions that will result in Seagate being the clear leader in storage devices across all markets, providing our customers with the industry's leading technology, highest performance and highest quality products, and using our scale and technology to be the most advanced and lowest-cost manufacturer in the industry."

Being 'the clear leader in storage devices' means that Seagate's rush into solid state drives (SSDs) is going to continue.

New chief operations officer (COO) Bob Whitmore added more detail about the product technology area: "We have not been satisfied with the consistency of our product and technology execution. We recognized this several quarters ago and have been addressing it directly."

The company has regained areal density equality with its competitors/ Whitmore said: "Last month we successfully launched the industry's first 7200 rpm 500 gigabyte per platter 3.5 inch product... our 5400 rpm 250 gigabyte per platter 2.5 inch drives have been shipping in volume for over a quarter and match the leading capacities in the industry today... in the Enterprise market we have now completed the refresh of our 2.5 inch product line, doubling capacity to 300 gigabytes."

300GB per platter enterprise SFF drives? This ought to refer to Savvio drives, with the current 10K.3 generation, introduced in June 2008, offering c150GB/platter and available as 146GB or 300GB products. It can't mean Momentus 5400 FDE.3 2.5-inch drives as they are laptop drives and offered in 160GB and 320GB versions, meaning 160GB/platter, at 5400rpm. Momentus 7200.4 drives have 250GB/platter and come as 250GB or 500GB product.

This means that it looks as if Whitmore has effectively pre-announced a Savvio 10K.4 drive with 300GB/platter and 300GB and 600GB products spinning at 10,000rpm. The extension of that areal density to Momentus drives indicates a possible Momentus 7200.5 product offering 300GB or 600GB or, as density can be increased with slower drives, 320GB/640GB.

SSDs and organisation changes

Turning to SSDs, Whitmore said: "In the Enterprise market... (the) road map includes the commitment to solid state devices. We are set to deliver our first SSD product into Enterprise applications later this calendar year. SSDs and solid state technology are essential to our long-term product roadmaps, and we will maintain our investment levels to deliver leading technology."

Chief financial officer Pat O'Malley mentioned the SSD technolgy when answering a question: "We also have some investment in our solid states, you know, technology that we look at that's probably above and beyond what you've seen in the past." That sounds promising.

Responding to a questions about plants and organisational structure, Luczo answered: "The org structure changed to a business unit structure. We're now shifting it back to a functional structure, and we do believe there's opportunities in terms of both management layers, ability to delegate and restructure, that there are some opportunities certainly to pursue there. And longer term structural issues, as you mentioned, whether or not it's any facility, design related or factory related, have to be assessed in terms of the overall outlook."

What he means is that the number and location of factories and R&D plants will only be changed if the long-term outlook changes. For example, the remaining Londonderry plant might have its future questioned if pressure on costs was unabated and there was a need to gain further manufacturing efficiencies, meaning lower costs.

The company has already consolidated some manufacturing operations; the finish media operation in Milpitas, California, has been closed down, as has the Limavaddy aluminium disk substrate plant in Northern Ireland, and the Pittsburgh R&D centre is being closed.

Looking ahead in the short term, the company thinks that there will be a market for 110m disk drives in the first quarter of this year, about the same next quarter and possible slow growth after that. It entered the final 2008 quarter thinking there was a total market need for 156m drives, so the recession has cut that number and will keep it low for the rest of the year. It thinks it might earn $1.6bn - $2bn in the current quarter, but is intent on making a profit and not another loss.

That means it has to offer drives with high areal densities so as to get back the two per cent of market share it thinks it lost in Q4 '08, without unwanted price cuts driving the volume needed. It has transitioned from 6-inch to 8-inch wafers for read/write head production and that will drive the cost/head down.

Can Seagate do it? It certainly isn't complacent any more and it knows that sales in the drive market, transitioning slowly from 3.5-inch to 2.5-inch drives, depend utterly on areal density leadership with no quality problems. The recent Barracuda firmware problems indicate that customer loyalty could prove fragile and that product quality must not suffer in the rush to increase drive capacity.

Accelerating an oil tanker while changing the way the officers are organised and making sure it's navigated away from rocks is a tricky proposition. Doing so in stormy economic seas adds to executive stress levels. Seagate needs to be stressed enough to step forward faster, but not so much that it stumbles - again. ®

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