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Bouncing Along Bottom for HDDs

But NAND still falling

Analysts from Trendfocus, Inc. published an Information Services Executive Summary:

Bouncing Along the Bottom for HDDs, but NAND Still Falling

Just a quick two-and-a-half months from our last Asia swing in March, this trip continued to support the ongoing dim view of storage demand in the market for the most part.

Public earnings calls by the HDD companies over the past month all but confirmed there is no way to sugarcoat the outlook for the next couple of quarters and that those same companies are taking drastic measures to cut costs and reduce cash burn as demand weakens following some temporary nearline shipment increases in 1CQ23.

Build plans projected to the HDD supply chain remain volatile in the out quarters given the huge uncertainty in demand, but the dynamic for the industry is clear and tracking the pattern Trendfocus observed back in our last Executive Brief back in March.

Vendors will cut builds and capacity to the bare bone with no desire to lift product inventories ahead of any hoped-for recovery. If all goes as planned, the industry will move through 2H23 with supply targeting a pessimistic demand forecast. While factory output will remain below the resized capacity limits – after all, raw capacity must be sized for the eventual return of demand – HDD companies will keep operating staffs lean and refrain from triggering excessive component inventory orders. Even if a low demand scenario continues, the strict control over output should stabilize the industry in the areas of cost and the prevention of excessive price erosion.

When HDD demand begins to improve in earnest, the industry, for now, will act cautiously, looking for certainty in customers’ forecasts before committing to increasing output. While it is too early to say that prices for HDDs will increase as a result, tight supplies will challenge customers to commit to their outlook knowing that lead times may increase. Large hyperscale companies, who themselves are struggling with reduced services revenue and are instituting cost cuts and efficiency improvements, are starting to voice some concerns about the HDD industry’s flexibility to respond when upsides eventually come – a perfect scenario for HDD companies to raise the idea of long-term agreements (LTAs) one again.

The HDD side of the storage industry, for now, can apparently see that it is at or close to the bottom of the demand curve and just has to weather the conditions for at least a few more quarters to emerge in a better place.

If there is one industry in storage that appears in better shape than HDDs, it is tape, ironically. Tape consumption has shown resilience during the market collapse for storage and while the LTO consortium has yet to release its 2022 results, preliminary checks indicate that tape capacity increased modestly last year and could rise further this year, especially in terms of hyperscale consumption. The upcoming Tape and Archive Storage Service (TASS) 1CQ23 Quarterly Update will provide a revised long-term forecast for tape storage along with additional commentary on archive storage demand dynamics.

If there is one storage industry worse off than HDDs right now, it is NAND flash …

The record declines in shipments witnessed in 1CQ23 were far more severe than expected. Some of the same factors affecting the HDD market contributed to the downturn, albeit in a much more drastic manner, including elevated levels of inventory and lack of end market demand for both system OEMs and data center companies. Aggressive pricing and special deals have exacerbated 2023’s deteriorating market conditions, as some customers have decided to take on even more inventory, reaching levels that seem beyond excessive.

There are, however, a few reasons for optimism worth noting. First, the mobile segment enjoyed an increase in exabytes shipped in 1CQ23. NAND vendors pushed higher-density offerings, and so far, it seems to have worked – though at very low prices. Second, the push for higher densities for client SSDs has aided bit shipments, especially to the channel. Channel sales accounted for 60% of all exabytes shipped in the quarter with vendors continuing to push SSDs into this segment. Finally, SAS inventories have eased and some purchasing has returned to the market. This segment is being helped by the suppressed demand of dual-port PCIe for the storage market as buyers are looking for lower-priced options, favoring SAS over PCIe.

Coming into 2023, most companies had high hopes for 2H23. Those hopes have been dashed and any possibility of improvement has now been pushed into 2024, and without much indication that conditions will get better during 1H23. That being said: by next year, nearly every major storage market will have been in a downturn for 5 to 7 quarters, and logic dictates that a recovery must take place eventually … but what does logic have to do with the current times in which we are living?