Trendfocus Embarks on First Business Trip After Two and Half Years

This is Trendfocus, Inc.‘s Information Services, Executive Brief.

The Trendfocus team recently embarked on its first business trip in nearly 2 and a half years, engaging in discussions that confirmed storage demand drivers reflected in 1CQ22 results and added color to directional movements heading into 2CQ22 and beyond.

On the HDD front, nearline shipments in 1CQ22 rose, even as tier-1 US hyperscale demand remained expectedly mixed with some companies recovering from component shortages while others faced ongoing or emerging system component constraints. While hyperscale expansion into 2H22 is still expected, these supply chain issues may continue to ultimately limit storage purchases at some companies. 1CQ22 results detailed in recently published Trendfocus reports also indicated unusual strength in shipments to non-hyperscale customers (OEMs, smaller OEMs, and distribution) even as end demand weakened. HDD customers apparently pulled committed volumes to access 1CQ22 negotiated pricing ahead of widespread pricing increases implemented in 2CQ22.

HDD purchases in excess of customer end-demand invariably caused the accumulation of inventory moving into 2CQ22. At the same time, end demand remains soft, especially at customers of OEM systems in light of a worsening of economic conditions brought on by geo-political conflicts and multiple Covid-related lockdowns in China. While Trendfocus is forecasting muted seasonal enterprise growth in the second half of the year, OEMs continue to assess an uncertain demand outlook beyond the current quarter. Despite, or perhaps because of these market uncertainties, HDD suppliers have publicly announced pricing actions to recover and maintain target gross margins, especially for nearline HDDs. As HDD industry revenues and profits are dominated by high-capacity rotating disk storage that have no suitable replacement, there is little demand elasticity based on price. Suppliers are apparently exploring the magnitude of price increases that the market is willing to bear in upcoming quarters.

Specific to SSDs in the enterprise, the OEM situation mirrors the HDD side, with inventory now looming. A strong second half for demand will hopefully not only manage the inventory down, but also result in a rebound with an uptick in shipments of newer technologies like dual-port PCIe. Hyperscale demand remains solid for SSDs, with strong sales expected well into 3CQ22. However, with overall softening in the NAND market due to downward mobile and PC adjustments, pricing should be more relaxed in the coming quarters, and may even decline in certain segments.

Tailwinds to PC demand resulting from Covid pandemic shifts in computing requirements at home and school as well as the commercial refresh as offices reopen have largely played out with forward-looking computing demand weakening, especially in the consumer PC segment. In addition, SSD attach rates have risen to nearly 90% across all PCs, relegating HDDs to a tiny fraction of notebook PCs and a somewhat higher%age of desktop models. Further threatening HDD demand for PCs is Microsoft’s push at OEMs to drop HDDs as primary PC storage devices in Windows 11 with current deadlines set for 2023. OEMs are pushing back, trying to negotiate extensions to this deadline to manage storage costs, especially for emerging market PCs. Replacing 1TB HDDs in low-end PCs requires OEMs to use 256GB SSDs (a capacity point considered too low for most of today’s market) to maintain current storage budgets or jump to 512GB models which continue to cost more than the HDDs currently in use in budget PCs. OEMs are already expecting deceleration of HDD demand requirements in 2023, but the demise of HDDs in most PCs may be hastened further by the outcome of OEM negotiations with Microsoft.