Disky business: Seagate hyperscale customers slow to 'digest' inventory

Antacid, anyone?

Analysis Hyperscale customers went on a disk drive buying strike late in Seagate's first quarter of fiscal '19, ended September 28.

The bottom line

Seagate chalked up revenues of $2.99bn – 13.64 per cent up on the year ago's haul.

HDD product sales were $2.801bn compared to $2.39bn a year ago. Revenue from enterprise systems, flash and "other" was $190m, a fall from the $240m reported a year ago – something has clearly gone wrong here. Profits were up from $181m to $450m.

There was free cash flow of $410m, compared with $113m for the same period last year. Cash and cash equivalents totalled $1.9bn at the end of the quarter. Gross margin was 30.5 per cent, compared to 28 per cent in the year-ago quarter.

Seagate has stopped revealing how many hard drives it has shipped in various categories. Consider it the storage equivalent of Apple. Instead it provides capacity shipped numbers for the enterprise (mission-critical, nearline), edge non-compute (CE and consumer), and edge compute (desktop and notebook) sectors. These numbers go up, whereas drive units are trending down.

Exabyte shipments* totalled 98.8, up 41 per cent year-on-year, with average capacity being 2.5TB. The equivalent numbers a year ago were 70.3EB and 1.9TB.

The consumer and desktop/notebook categories saw minimal exabyte growth so the unit ship number declines must have been impressive as consumer average TB/drive went up from 1.9TB to 2.2TB over the year while desktop/notebook average TB/drive increased to 1.2TB from 1.1TB.

Hyperscale indigestion

Although enterprise drive capacities were up, unit sales to hyperscale customers abruptly slowed in the quarter. In the earnings call, CEO Dave Mosley talked of customers' "digestion" issues:

This recent demand fallout happened fairly systemically, many, many different accounts we talk about. And basically – quickly, it wasn't something that we'd ever seen as quickly before...

"Intermittent periods of digestion, where strong buying patterns from large-scale customers will dampen in order to build through existing inventory before proceeding. One of these digestion cycles began in earnest in late Q1 FY 2019 and our best estimate is that it may last for up to three quarters."

Seagate was shocked by the drop, it seems: "This recent demand fallout happened fairly systemically, [across] many, many different accounts...And basically – quickly, it wasn't something that we'd ever seen as quickly before. So in these typical digestion phases, I think this one was fairly pronounced.

He added: "In addition, we are seeing some enterprise spending caution in the China market."

Bad timing – as were execution issues with 12TB and 14TB drives: "These demand disruptions fall in the middle of numerous product transitions with customers for our 12-terabyte and 14-terabyte nearline products, where we have not executed as crisply as we would have wanted."

Oops.

Mosley reckoned it's only a temporary setback in demand: "While indications of CSP digestion phase, along with other supply chain disruptions have decreased the market outlook for [the] nearline HDD addressable market in fiscal 2019, we are confident that, as in the past, demand will resume at a higher growth rate beyond this digestion phase, driven by [the] unabated rate of data creation and growth in cloud applications. We believe we are on the front end of a long-term secular data productivity era that will evolve over the next decade."

A second problem area, outside disk drives, was referenced by interim CFO Kate Scolnick: "Non-hard disk drive revenues in the September quarter were $190m, down 21 per cent year over year. The decrease was primarily due to the planned end of life of some legacy OEM cloud system products and some intra-quarter supply chain challenges where we could not meet demand for some products."

NAND was OK though, and Scolnick added: "Silicon revenues were up 38 per cent year over year."

Seagate is facing at least one, two or three quarters of reduced demand for its headline drives - due to hyperscalers already having more than enough stock - just as it has confirmed it has a new 16TB capacity nearline drive coming in the first half of 2019. ®

Bootnote

* The exabyte market breakout numbers are here:

Category	Sub-category	Q1 fy'18	Q1 fy'19
Enterprise	Mission-critical	2.1	3.0
	Nearline	25.1	42.5
Edge non-Compute	Consumer Electronics	13.5	23.4
	Consumer	11.1	11.2
Edge Compute	Desktop + Notebook	18.6	18.7