HDD Industry Reports Bleak Results as Shipments Plunge in Q3

Weak PC demand and the rising challenge from tablets blunt sales of the storage medium

November 16, 2012 Fang Zhang

Hard disk drive manufacturers had a rough third quarter when HDD shipments plunged a steep 11 percent, a loss the industry blames on a host of economic and market-related factors, such as the usurping of PCs among consumers by ever-more popular tablet devices, according to an IHS iSuppli Storage Space market brief from information and analytics provider IHS.

HDD shipments in the third quarter amounted to 139.2 million units, down from 157.0 million units during the second quarter. The most recent results reversed the 8 percent gain that took place in the second quarter, and they also represent the lowest third-quarter shipment level in at least five years for the storage medium. Just last year for the same July to September period, HDD shipments had stood at a lofty 175.3 million units.

Hard disks are used in a variety of PC settings, including desktops, notebook computers and servers. They also figure in non-PC applications such as automotive, external hard drives and DVR equipment.

Overall, the slump in third-quarter numbers reflected the continuing morass in which the industry finds itself. The five-year low in third-quarter shipments suggests, too, that the aggravating factors this year had a more potent effect than in times past.

For instance, PC sales had already been dwindling to begin with, hammered by tablets and smartphones with PC-like functionalities being embraced in the legion by consumers. And for those that had been toying at all with the idea of obtaining new PCs, the decisions got put on hold as buyers awaited the new Windows 8 operating system from Microsoft, which finally launched toward the end of October, the start of the fourth quarter. Another factor, the super-thin PCs known as Ultrabooks that had been anticipated to make an impact on consumers, have also not panned out as expected, further depriving the HDD industry of another outlet into which hard drives could be sold.

On top of those market-inhibiting elements, the global economy continued to play a large role in explaining the extraordinarily large decline of HDDs in the third quarter this year. The lingering shadow of uncertainty meant less consumer dollars to go around with. Faced with a choice, buyers opted to spend any discretionary income left on newer mobile devices like tablets or smartphones, instead of upgrading an older PC with a newer purchase.

Corporate entities struggling with tight budgets also extended the replacement cycles for their computers, cutting off yet another target market for the hard drives.

Prospects won’t be looking up anytime soon.

Fourth-quarter shipments are projected to retreat even further, in line with the normal seasonal decline that the market experiences toward the end of every year. Moreover, the continuing popularity of tablets and smartphones—which use the rival storage medium known as solid state drives—will equate to fewer hard disks being sold. PC sales could pick up because of Ultrabooks and Windows 8, which would then revive the HDD space—but that scenario is looking increasingly more likely to occur next year, if it happens at all, IHS iSuppli believes.

Among suppliers, Western Digital Corp. ruled the market in the third quarter with HDD shipments of 62.5 million units or 45 percent. Seagate Technology was second with 57.6 million units or 41 percent; and Toshiba Corp. accounted for the remainder of the HDD space with 19.1 million units or 14 percent.

The rankings were replicated in revenue terms, with Western Digital again on top with quarterly revenue of $4.03 billion, followed by Seagate with $3.75 billion and Toshiba with $950 million.

Gross margins declined for the players in the third quarter, signaling increased pressure in the companies’ ability to service costs and other obligations. Western Digital's gross margin fell to 30 percent, down 1 percent from the second quarter. In comparison, Seagate’s gross margin fell by a much larger 5 percent to 28 percent.

Still, a silver lining could be glimpsed through the dense cloud of disappointing results.

Despite the expected continued adoption of tablets and solid state drives, hard disks will remain the final destination for the majority of digital content, having the lowest cost of any storage medium on the market. As file sizes among consumers continue to increase, and as the enterprise struggles with storage limitations and the analysis of big data, the need for additional storage becomes essential—either locally, such as on an external HDD; or in the cloud, which will require additional hard disks. Because of this, HDDs will continue to play a major role in data storage moving forward.

A return to growth, then, for the HDD space is more than likely—even though that would transpire over the longer term, and not for what’s left of the year.