Some notes on Seagate CC
Well I listened late last night/early morning to this very long CC. Some interesting things were said, though. Before getting to the notes, I want to throw out a question so that it doesn't get buried: one of the analysts spoke about some "crazy" (I think that was his word) pricing during the week of June 19. Does anyone know anything about that? Who initiated it, what programs were involved? How does one find out about such things?
1. The Desktop Disaster. Speaking of pricing, the article I posted last night holds: a loss in Sept, "possibly breakeven" in Dec quarter. Pricing on the desktop atrocious. Some people are selling below cost, SEG thinks. They implied that they too sold some drives below cost, but walked away from other business when the price got too low, when it "didn't make sense" to them to participate. Looks to me like the PC OEMs are so desperate that they are just trying to see how low they can get the DD vendors to go, and some of the DD vendors are so desperate to keep share and pay overhead that they are letting themselves be walked on. The root problem, SL said, is that 4 suppliers each want to get 30% of the desktop market. Something's gotta give (more on this below).
2. The proximate cause of the disaster. Seagate claimed that they were the proximate (as opposed to the root) cause of the desktop pricing problem, but not because they were selling below cost. They are the cause because the U4 ramp was so successful, and it has a $15/drive cost advantage over the next lowest competitor, and grabbed share. They think that they gained 1.5% share on the desktop this quarter, and think that they will either maintain that or increase it slightly this Q, though visibility is so bad that not much can be said with certainty other than they will lose money if trends continue the way they are. They also said that the U8, successor to the U4, will be introduced in late Sept/early Dec quarter.
3. The High End. They said that they thought that they lost half a percent of share on the high end. They didn't say to whom, but they said that they lost it due to execution lapses of their own which have been identified but have not yet been fixed to their satisfaction. The lapses basically were their own inability to respond quickly enough to customer requests for specific kinds of drives. They believe that with inventory being cut to the bone everywhere, this was going to be an important issue, and the company that can react quickly to changing customer requests will realize a lot of marginal revenue. These requests include changes in spindle speed, capacity and interface. They think they have (or ought to have) an advantage over everyone else here because they control so much of their own manufacturing, but they lost business because they couldn't react in time. They said that they regarded Fujitsu as their most significant competition, with IBM next, though they claim that they have regained a good deal of lost share from IBM over the past 6 months, perhaps as much as 6 or more points. QNTM has some "pretty effective" High End (HE) drives, SL grudgingly said, but later suggested that they won't be able to consistently successful over the long haul because they don't own the components. (BTW, SEG said that they purchased 26% of their media and 19% of their heads from external sources last Q, slightly more than the quarter before.)
4. Their competitive advantages. SEG was asked if they said the sub1000 sector as destroying the sector. No, SL said, it plays into their strengths, he thinks. Sub1000 PCs still require drives, and SEG is best able to supply them. They also end up creating more server demand, and SEG is best able to supply them as well. He repeated once again the factors that he believes constitutes their competitive advantages over the other independents: (1) ownership of key enabling technologies, (2) broad product line, (3) low cost producer, due to manufacturing effiencies and vertical integration, and (4) significant financial resources. As noted above, they said (at different times, in different contexts) that no one who is not vertically integrated can hope to compete successfully long term on either the high end or the low end. This is a question which we have debated on this thread, and I would ask anyone who has read this far to throw in their 2 cents on whether they believe it. My own 2 cents is: I think that they are underestimating MKE/QNTM, even if they are separate companies, they act as one, MKE even does fulfillment now. But of course MKE depends on TDK for heads, and [I forget who] for media, will QNTM be able to compete even paying these other people's margins? Or will an independent head maker be able spread their costs over enough more heads that their final price will be equivalent to SEG's in-house price? And beat them to market to boot?
5. Consolidation. One of the analysts asked in a tactful way if SL thought any consolidation would take place in the near future. "These companies always seem to somehow come up with enough money to keep on going," he said, using APM as an example (apparently they just got some cash from someone). SL didn't want to answer that too directly, but reiterated that he didn't see how the current situation could continue as is for too long, something had to give. Takata of Gruntal said that some drives were being sold for $70, how can anyone make any money on that? SL said, they can't. No one mentioned any names, but I will interested to hear WDC's CC.
6. Miscellaneous stuff. SL said that in 3-5 years every TV and VCR will have some sort of hard drive either in it or near it. They said that LTO may ramp in Feb, but didn't elaborate or seem to want to talk about it much. They are non-committal on flex vs. TSA suspensions, said that their designs for future programs would allow for either one, and they guessed that they would use both. They are getting close to the bone in terms of wringing out costs, next 4-6 quarters should be it. Their first 7200 desktop Barracuda will ramp next month sometime.
Inventory at end of June was better than at end of March, and it was in good shape then. More units to be sold in Sept q, but offset by lower ASPs (good for HTCH).
I'm sure I'm missing some things, but I think that these were the major issues raised. Look forward to hearing comments from others.
Best wishes for a soft landing,
Sam
(P.S. Remember: Diversify!) |
