HDD Industry Returns to Profitability

The HDD industry shipped 138 million drives in the third quarter of 2007, up 19.6 percent from 115 million drives in the second quarter, according to iSuppli Corp. Combined third-quarter revenue for all HDD suppliers was $8.8 billion, up 22.2 percent from the second quarter.

"The HDD industry as a whole returned to profitability in the third quarter, marking the first time the business has been in the black since December 2006," said Krishna Chander, senior analyst for storage systems at iSuppli.

Leading HDD maker Seagate Technology LLC in the third quarter reported a gross margin of 24.6 percent, up 300 basis points from 21.6 percent in the second quarter. Second-ranked HDD supplier Western Digital Corp. (WDC) reported a gross margin of 18.4 percent, up 340 basis points from 15.0 percent in the second quarter. Number-three HDD maker Hitachi GST narrowed its losses to $58 million, down from -$174 million in the second quarter, and projected an optimistic fourth quarter with a profit estimate of more than $9 million.

"The revival of HDD profits is being driven partly by the consumer-electronics market," Chander said. "Shipments to consumer-electronics applications represented 17 percent of the total HDD market in the third quarter, up from 15.5 percent in the second quarter. iSuppli expects this to continue to grow to 22 percent by the third quarter of 2008. The rising adoption of High Definition Television (HDTV) is spurring demand for higher-capacity HDDs for Digital Video Recorders (DVRs), helping to propel consumer electronics sales."

The computer market is propelling HDD shipments also, with enterprise secondary-storage external drives experiencing strong demand. The threat from Solid State Drives (SSDs) using NAND flash instead of traditional rotating media has not stalled shipments or profitability in the HDD industry.

In terms of HDD revenue in the fourth quarter, iSuppli is estimating it to be around $9.3 billion; a slight dip in industry revenue in prior quarters has been overcome by firmness in price and increased supply of hard drives to both the compute and consumer-electronics segments. Moreover, there is an allocation mode in the industry for specific types of hard drives.
iSuppli predicts conditions in the HDD market will remain robust in the fourth quarter, with shipments rising 6.9 percent to 147 million units.

The HDD industry has worked its way out of the major challenges it faced in 2005 and is rapidly growing, confounding experts who predicted the slowdown of this industry. Profitability for the two major HDD makers, Seagate and WDC, is expected to rise in 2008.

iSuppli Corp.