Why Dramatic Weakening of Performance Enterprise HDD Demand – Trendfocus

The Trendfocus, Inc.‘s Intra-Quarter Briefing report, Does Weak Performance Enterprise HDD Demand Signal Longer-Term Transformations of the Market? is a part of Trendfocus’ Cloud, Hyperscale, and Enterprise Storage Service – a detailed data set and service that dives deeply into the short term and long range market dynamics that are impacting and evolving enterprise HDD and SSD designs and demand.

Does Weak Performance Enterprise HDD Demand
Signal Longer-Term Transformations of the Market?

In early April, Trendfocus issued its preliminary CQ1 ’16 HDD TAM number of a disappointing 100 million units shipped. While information since that time continues to support the 100 million TAM number, additional color has emerged regarding accelerated softness in various enterprise HDD market segments that point to several factors weighing on the industry’s most profitable product types.
 
In short, change may be coming faster than expected to the performance (10,000rpm, 15,000rpm models) enterprise segment. Shipment levels fell from 8.75 million HDDs in CQ1 ’15 (an unusually high volume for a seasonally soft quarter) down to 7.21 million in the final calendar quarter of last year. Initial indications for CQ1 ’16 pointed to another sequential decline of over half a million additional units.

Based on updated preliminary information – numbers which could change materially once official reports are released – the sequential decline for performance, also known as traditional, enterprise HDDs could be in excess of one million units. Such a dramatic drop, both in units and%age, has not occurred since the post-Thailand flood correction after volume purchase agreements signed immediately following the flood pushed too many drives into customers’ hands through the middle of 2012. Seagate’s CQ1 ’16 earnings pre-announcement made on April 13, 2016, also pointed to weaker-than-expected performance enterprise HDD demand as one factor for missing its original gross margin projections.
 
While some have quickly concluded that the eroding unit shipments are a direct result of SSD penetration into the server and storage market, other factors must be considered for this dramatic weakening of performance HDD demand.

First, slack demand for traditional enterprise storage systems has cut revenue growth and outlook at nearly every major enterprise storage system company.

Second, traditional enterprise server spend also appears to be slowing due to weak global economic growth resulting in cuts to traditional IT spend.

Third, the apparent growth of the cloud and the shift of resources to public and private cloud solutions also weighs on traditional server/storage demand. This last factor has direct impact on performance enterprise HDDs as scale-out cloud systems tend to utilize nearline (capacity enterprise) HDDs and SSDs, rather than 10,000rpm and 15,000rpm HDDs.
 
Parsing the additional preliminary data further, it appears that nearline HDD shipment totals may have declined slightly in CQ1 ’16, despite every indication that high-capacity demand from cloud and hyperscale customers continues to show strength. Looking back one quarter, the sequential increases in nearline HDD shipments in CQ4 ’15 came completely from hyperscale growth and only the 2TB and 8TB capacity points grew in unit volume that quarter – key capacities for large hyperscale customers.
 
In CQ1 ’16, small form factor nearline – a niche market served by Seagate and HGST – appears to have declined as well. Small form factor 2.5″ nearline HDDs are usually targeting server JBODs and largely unused by traditional storage system or hyperscale customers. If only hyperscale-focused 3.5″ 2TB and 8TB HDDs grew in the quarter, demand for other capacities likely contracted as well. In traditional server and storage markets, nearline HDDs are leveraged either for low-cost entry-level systems or cost effective high-capacity storage – uses that are not currently served nor impacted by SSD penetration into the traditional IT hardware space.
 
Taken together – weak performance enterprise, small form factor nearline and non-hyperscale nearline HDDs – the data points to something larger than just purely SSD erosion effects. Muted IT spending patterns may weigh more heavily on traditional and legacy systems as those that are spending are likely focusing dollars on targeted performance enhancements, such as all flash or flash-accelerated solutions. Potentially more important is the shift towards scalable cloud solutions. Companies spending on private cloud systems, or leveraging large public cloud services mark a fundamental change in resource deployment that has already begun to impact traditional IT hardware demand patterns.
 
When global economic doldrums subside, IT spending will invariably recover; however, by then, the solutions available will have evolved further away from performance enterprise HDDs and shift towards SSD and nearline-HDD-enabled systems.

What remains for the rest of 2016 is a rather cloudy demand picture for performance enterprise HDDs.