Marty, thanks for the response. My comment in Msg #3271 was just
kidding, the only purpose of that is to stimulate the discussion
on this thread. The report is very long so I just post HARD DISK DRIVES & DISK DRIVE COMPONENTS two sections. Maybe Dennis, you,
and others will have some thoughts on that.
SB: Feedback from the May 12 Storage Conference - Part I of II
Salomon Smith Barney (DEAN/ROTHACHER (415) 951-1622)
--SUMMARY:------------------------------------------------------------------
The Salomon Smith Barney Storage Conference on May 12 was a great success, with 34 companies presenting on seven panels and numerous breakouts. We counted more than 350 attendees, including 34 presenting companies and more than 250 investors.
Below, we note some of the more important information that came out of the conference.
We cover the panels roughly in the order that they were presented during the conference day.
--OPINION:------------------------------------------------------------------
HARD DISK DRIVES
The following companies composed the disk drive panel:
Fujitsu - Larry Sanders, President and CEO of Fujitsu Computer Products of America
Maxtor Corporation - Michael Cannon, President and CEO
Quantum Corporation - Young K. Sohn, President, Enterprise and Personal Storage Group
Seagate Technology - Charles Pope, Senior VP, Finance and CFO
Western Digital Corporation - Duston Williams, Senior Vice President and CFO
The panel opened with a brief company introduction from each of the speakers followed by a question and answer session, topical in nature.
Topics covered in the session included inventory levels, pricing trends, demand drivers, increased competition, removable technologies, and a retrospect of the challenges in the industry (hindsight is 20/20 vision). Generally speaking, the tone of the session was cautiously optimistic - suggestive of a firmer stance on "a bottoming" in the industry, though lacking clarity on timing of the turn. Moreover, steady incremental
improvements made in inventory levels and pricing activity were overshadowed somewhat by the changing face of the industry, in terms of enhanced competition and increased demands by OEMs (relative to supply
chain management and cost control per the sub $1,000 PC segment). With a change in the market dynamics, the current cycle correction will likely be more gradual and somewhat dislocated.
Question and Answer Session:
a. Inventory The resounding response from the disk drive manufacturers on the panel confirmed that inventories in general appearing to be declining slowly. Desktop drive channel inventories appear to be in the 6-8 week range and high-end inventories have similarly come down, to approximately 5 weeks (the inventory level of high-end drives appears to be more program specific).
b. Pricing Although it seems too early to tell how quickly pricing will moderate and return to "normal," the general agreement is that pricing for desktop and enterprise class products has been very aggressive but appears to be stabilizing somewhat from the "brutal" environment in the first quarter. Market share jockeying, high expectations and tougher standards from OEMs, and excess inventories are gating factors to price stabilization. As inventory levels abate, drive manufacturers expect to see a gradual firming and the return of more normal, historical pricing trends. However, the sub $1,000 PC market presents a unique challenge to pricing.
c. Demand (new drivers) Generally, the panelists agree that demand continues to be solid although it is apparent that total drive production has outstripped demand in recent quarters. Application packages do not
appear to be driving demand as much as has been seen in prior cycles, although opportunities for increased demand may come from Win 98, imagery, accelerating bandwidth, and the popularity of video conferencing and the like. The growth in the less that $1,000 PC segment arguably may provide
opportunities via upgrade market demands.
d. Increased Competition The panelists indicated a more competitive environment. Despite the challenged state of the industry, a number of companies are executing well today which has made execution on future
programs (in terms of time to market, time to volume, leading technology and quality) the key focal point of disk drive manufacturers today. Positioning with OEMs today and in the future hinges largely on delivery, breadth and differentiation of product, gated by access to strategic relationships/partnerships with suppliers and cost management. Component technology advancement plays an increasingly important role in the economics of disk drives and the supplier base imparts critical technology integration know-how.
e. Removables When the going gets tough, survival instinct dictates streamlined focus and operations. Faced with issues in the marketplace, the predominant course of action by drive companies has been to concentrate energies on desktop and enterprise class programs, forfeiting/shelving mobile and/or removable efforts. For example (and most recently), Western Digital and Seagate curtailed/is curtailing mobile efforts. The exception is Fujitsu which has a successful magneto optical business that has achieved #1 market share and popularity in Japan (however, the business is managed by the parent company). Challenges (a retrospect) A weaker than expected December quarter and an enhanced/renewed presence by a few drive manufacturers, compounded by certain drive companies, missteps (including misjudged timing of certain
capacity points and a hockey-stick ramp of MR-based technology) contributed to the challenged condition through which the drive industry is muddling.
DISK DRIVE COMPONENTS
The following companies and speakers composed the disk drive components panel:
Applied Magnetics - Craig Crisman, Chairman and CEO
HMT Technology - Ron Schauer, President, Chairman and CEO
Hutchinson Technology - Wayne Fortun, President, COO and CEO
Read-Rite Corporation - John Kurtzweil, CFO
Despite the tough times in the marketplace, technological development continues to accelerate. The winners in the components industry tend to be those that lead the technology advancement, have high volume capability and low cost manufacturing, and are responsive to customers, changing needs.
In a highly capital intensive environment, astute spending for equipment that is extendable and that facilitates increased automation of production manufacturing is critical. The panelists tone suggested that a bottoming is upon us. Again, we believe that the industry will experience a "U" off the bottom in the current cycle, not a "V" off the bottom; hence, we continue to recommend that investors wisely cherry pick those companies positioned with fundamental strength in the face of the anticipated "turn."
Capacity Expansion
To preserve time to market, components manufacturers focus on the direction and future needs of the industry and plan capital expenditures accordingly. Hutchinson's Fortun noted that its latest technology suspension, TSA, required new/re-tooled equipment that required a big initial investment but that yield enhancements are partly a function of development and experience with the equipment developed over-time (the equipment has a 5-7 year life).
Read-Rite,s Kurtzweil expressed the importance of working with capital equipment providers to develop equipment more precisely aligned with technology needs and that is upgradeable. Read-Rite is presently working on a capital efficiency program that is demand-pull-based which will likely result in improved return on equipment.
HMT's Ron Schauer added that technological advanced via equipment enhancements is a key element to successful transitions and that the company's transition to MR-based products was largely facilitated by its
wise choice of capital equipment (the company's capital expenditure plan has been fairly aggressive).
And, Applied Magnetics, Craig Crisman stated on the panel that it is commonplace for components manufacturers to look out toward a five year horizon and to incorporate/manipulate changes early on in the process of each technology transition. Applied early on converted a portion of is thin-film head manufacturing capacity to anticipate the transition to MR technology, though Crisman noted that the company's capacity expansion plan to target MR development and manufacturing was poorly timed.
The Challenge of the Sub $1,000 PC
The needs of this market segment have/will be met initially by existing designs that are cost reduced, and
an oversupply of disk drive inventories has made this a suitable option. However, a second generation of drives that will target the segment must be enabled by technology as the cost reducer - fewer components, creativity in design, and an elimination of non-value added steps in manufacturing. Schauer noted that it will likely need to drive its price per disk to the $7 per disk level (a significant reduction from today,s $10-$11 per disk). Kurtzweil added that the push on areal density will likely drive 4GB per platter disk drive designs by the end of the year.
Although the needs of the particular market segment will pose quite a challenge to the drive and component manufacturers and require a reduction in the number of components per drive, the segment provides an untapped market and should benefit from elasticity of demand. Fortun expects the increases in areal densities will drive increased tracks per inch (tpi), increased bit densities and a change in the channel read, which will require technologies capable of managing the advancements. Hutchinson has anticipated these needs and is developing technologies that will address the stringent requirements.
Obsolescence/Consolidation
Although consolidation is a possibility amongst component vendors as a solution to over-capacity and tough competition in the industry and we have seen some consolidation on the media side, the heads market has actually seen an increased number of players in the recent past. The suspension business is already consolidation and Hutchinson excepted, there are two alternate merchant suppliers each representing
approximately 12% share of the market. Component manufacturers are always challenged to drive high utilization of capital equipment and resources and to prevent obsolescence - which is managed partly by early development of roadmaps and via tight relationships with the supply base. Execution, or lack thereof, is viewed as the driver of consolidation.
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TAPE DRIVES AND LIBRARIES
The following companies were represented on the tape drive and library
panel:
Exabyte - Bruce Huibregtse, SVP Corporate Marketing
Quantum - Brodie Keast, VP and GM of DLTtape Division
Seagate - Brian Dexheimer, VP and GM of Tape Operations
StorageTek - Gary Francis, VP and GM of Enterprise Tape Operations
Sutmyn - Flavio Santoni, EVP of Marketing and Business Development
The general summation we brought away from the tape panel was that DLT continued as the de facto standard in the rapidly growing mid-range tape market. However, the market remained very fragmented, with much growth yet left in it, due to the relatively shallow penetration of tape solutions overall in the tape market. Further, with the transition to the next generation super DLT on the way, there would be an opening for new tape drive standards to emerge.
Seagate, Exabyte and StorageTek all took the opportunity to explain how they would exploint numerous segments in the market surrounding the general purpose DLT market. Exabyte hoped to exploit the fact that SDLT would have numerous technologies to bring to market in the next iteration, while its Mammoth2 drives would be a simple extension of existing technologies. StorageTek,s new Eagle drive would aim above DLT, at specialized applications. Meanwhile, StorageTek has every intention of remaining with
DLT for its tape applications.
Finally, Seagate,s Linear Tape Open standard, developed in conjunction with IBM and Hewlett-Packard, would aim at bringing an open standard to market to combat the proprietary DLT. We believe this standard would rely heavily on its large proponents to drive broad use. However, as a counter, Quantum reiterated that it intended to open the DLT standard to alternate sources. Thus, LTO is the most direct future competitor to SDLT.
DISK STORAGE SYSTEMS
The following companies were on the client server disk storage systems
panel:
Artecon - Jim Lambert, President and CEO
Box Hill - Philip Black, CEO
Compaq - Vic Mahadevan, VP and GM Enterprise Storage and Options
Data General - Joel Schwartz, SVP Clariion Storage
Dell - Michael Lambert, Senior VP Server Group
StorageTek - Dave Weiss, Chairman President and CEO
The following companies were on the enterprise storage systems panel:
Amdahl - Charles Foley, VP Operations, Worldwide Field Operations
EMC - Jack Egan, EVP Products and Offerings
Hitachi Data Systems - Ray Cosyn, Director of Storage Marketing
Sun Microsystems - Jeff Allen, Sr. Director, Storage Business Operations and Marketing
StorageTek - Victor Perez, EVP Enterprise Business Operations
The two panels were separated primarily along the lines of the "high-end" enterprise storage versus the "mid-range" open systems storage. Admittedly this was somewhat of an artificial separation due to the fact that many of the companies could fit into either category. Nonetheless, it worked well, given the panel nature of the conference.
General conclusions coming out of the two panels, were that the subsystems area continued to see very robust demand across the board, but especially in the enterprise storage area. The panelists were mixed on their outlook for Windows NT, as to when it would be ready as a true "enterprise" system. Nonetheless, no one seemed ready to deny that it was the enterprise system of the future.
On the topic of UNIX as the replacement operating system for legacy enterprise systems, the companies were split as to the future. Most opinions were obviously dependent on a company's outlook for the speed
with which Windows NT would likely be ready as an enterprise operating system. The real question here seemed to be whether the company thought that a skip directly to NT was in order or that UNIX would be a viable way-station on the way to NT. Regardless, the opinion was for very robust growth in the open systems segment going forward, both Windows NT and UNIX.
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END OF NOTE
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