Pandemic, inflation and supply chain issues hurt Seagate revenues


Disk drive maker Seagate saw its revenues drop almost ten percent year-on-year as inflationary pressures, COVID lockdowns in Asia, and non-HDD component shortages impacted sales outside the enterprise nearline drive market. 

Quarterly revenues were $2.63 billion, 12.7 percent lower than a year ago, with a profit of $276 million, 43 percent lower year-on-year. Full fiscal 2022 year revenues were $11.66 billion, up nine percent annually from $10.68 billion, with a profit of $1.65 billion, up 25.5 percent from the $1.31 billion reported a year ago.

Video and image application (VIA) sales improved sequentially off very weak March levels, but remain impacted by COVID lockdowns. Consumer HDD demand went down more than Seagate anticipated. Seagate is reducing overall production plans as a result, to avoid building inventory, and expects the current quarter to be similarly affected. However it believes the long-term secular demand for high-capacity disk drives is unaffected and its revenues will pick up when restrictions ease.

CEO Dave Mosely said in the earnings call: “Our June quarter financial results reflected near record datacenter demand, contrasted with the impacts from a confluence of macro headwinds in other end markets, particularly in the consumer-facing legacy markets. We believe the secular data trends driving long-term demand growth for mass capacity storage and infrastructure remain intact.”

Disk drive revenues were $2.4 billion, down 12 percent annually, with systems, SSDs and other revenues reaching just $218 million, down a much larger 21 percent. Seagate shipped 154.6 exabytes of capacity, up just one percent on the year, with 138.5EB being mass (high) capacity disks – 12 percent higher annually. The nearline (enterprise and hyperscaler) category took 119EB of that, up 17 percent on the year, and providing the bright spot. 

Legacy drive (10K enterprise, PC 3.5-inch and 2.5-inch, etc.) capacity shipped was 16.1EB, down 45 percent on the year as SSD cannibalization proceeded apace. Mosley pointed out that: “the PC or notebook markets … are effectively already gone. … Mission-critical has been a little bit choppy through the COVID period. It is slowly declining as well, but it has a long tail.”

The outlook for next quarter is $2.5 billion plus/minus $150 million in revenues, meaning a 19.7 percent decline year-on year. The revenue downturn is getting worse, and it could continue past the next quarter, after which Seagate hopes to see a recovery. 

Wells Fargo analyst Aaron Rakers told subscribers: “While the company is not providing guidance beyond F1Q23, the company did qualitatively note that it believes it could see fiscal 2023 revenue as flat or up slightly vs F2022.”

Financial summary

  • Q4:
    • Gross margin: 28.9 percent compared to 29.4 percent a year ago
    • Cash flow from operations: $180 million
    • Free cash flow: $108 million compared to $354 million a year ago
    • Cash: $615 million; it was $1.21 billion a year ago
    • Debt: $5.65 billion; up from $514 billion a year ago
    • Diluted EPS: $1.27
  • Fiscal year 2022
    • Gross margin: 29.7 percent
    • Cash flow from operations: $1.7 billion
    • Free cash flow: $1.3 billion (highest for 4 years)
    • Diluted EPS: $7.36

Capacity secretiveness – or weakness

Seagate’s highest-capacity drive is its Exos 20TB product. Western Digital, its main competitor, launched its 22TB Ultrastar drive in May for cloud datacenters, along with a shingled (overlapped write track) version with 26TB capacity. It has just introduced three 22TB enterprise drive models, leaving Seagate apparently lagging in the capacity stakes.

Seagate revealed in January that some hyperscaler customers were pushing the Exos 20TB capacity out to 22TB, using host-managed shingled (overlapping write track) media technology to format and use the drives.

Back in April, when reporting its third quarter results, it then said that it was “shipping 20-plus terabyte drives in high volume” and expected unit shipments “to more than triple quarter-over-quarter in Q4 to well over one million units. This puts us on a pace for the company to achieve crossover with 18-terabyte drives early in the new fiscal year.”

Mosley said in the latest earnings call there was “strong cloud customer adoption of our 20-plus terabyte nearline drives.” He said: “We attained our fastest ever ramp with a 20-plus terabyte nearline platform, handily beating the projections that we made at the start of the quarter. We are on track to achieve volume and revenue crossover with the 18-terabyte drive in the current quarter.”

Seagate is selling a 20+TB drive without having officially announced it for sale. And it will become its biggest revenue drive in this quarter (Seagate’s fiscal 2023 Q1) without anyone – outside Seagate and its few hyperscaler customers – knowing the exact capacity. Moseley confusingly said: “We don’t really talk about all the details of 20, 22, you know, 23, whatever people are using things out [there] because I don’t think that’s setting the right narrative. It’s more just we want to make sure that we have flexibility with our platform that we’re on today.” 

Why is Seagate keeping the 20+ capacity level unclear? Perhaps it is not fixed and entirely down to hyperscaler customers setting it themselves with their specific customizations on shingled capacity.

With Western Digital shipping 22TB conventional drives and an OptiNAND-enhanced 26TB shingled drive, it does seem clear that Seagate is currently at a capacity disadvantage.

Mosley did say Seagate could “extend into the mid to upper 20 terabyte capacity points with minimal changes to our design, which allows us to meet customers’ timing, readiness and offers an attractive cost profile for both customers and for Seagate.”

HAMR boost

Once again HAMR (Heat-Assisted Magnetic Recording) drive shipments are said to be coming, with Mosely saying: “We are well down the development path towards launching our 30-plus terabyte family of drives based on HAMR technology.” It said it’s expecting customer shipments of 30+ TB HAMR-based products within the next 12 months. That will be quite a capacity jump.

But Seagate has been hyping up its HAMR technology’s prospects for several years. 

Back in June 2019 it said it was expecting customer shipments of 30+ TB HAMR-based products within the next 12 months. Here we are, three years later, and it’s still expecting to ship HAMR drives in the next 12 months. Perhaps HAMR stands for Humorous Anticipations Meet Reality.

Mosley answered an analyst question about HAMR HDD technology and delivery timing by saying: “We’re very confident in that, but how fast do we make that turn? That’s a good question. A lot of it is our ability to go to work the yields in the scrap and cost to the point where we need to be.” This suggests that Seagate HAMR disk manufacturing – the platters and their media, the read/write heads and the component electronics – is not yet at a high enough quality level because there is not enough high quality product output or yield from manufacturing, and stuff has to be scrapped.