Markets

Western Digital Launches 2-Terabyte Hard Drive Amid Slump

By David Phillips

Updated on: January 31, 2009 / 3:00 AM EST / MoneyWatch

: Western Digital Logo

Against a backdrop of dwindling demand, credit difficulties for customers, and too much inventory, Western Digital is introducing a 2-terabyte hard drive with 3 1/2 inch platters, the largest capacity hard drive in the industry. Is this an opportune time to introduce a next generation product?

Management of the world's second largest maker of disk drives is experiencing declines in average selling prices (as competitors look to liquidate excess inventories) and expects sector-wide demand to fall an additional 13 percent in the current quarter ending March, according to the second-quarter 2009 regulatory filing:

For the quarter ended December 26, 2008, net revenue was $1.8 billion, a decrease of 17% over the quarter ended December 28, 2007. Total hard drive shipments increased to 35.5 million for the second quarter of 2009 as compared to 34.2 million for the second quarter of 2008. The decreases in revenue resulted from a decline in average hard drive selling prices [16 percent to $51 per unit] during the three months ended December 26, 2008. The decline in our average hard drive selling prices reflect a very competitive pricing environment as a result of all competitors having anticipated more robust demand and consequently having too much supply available for the demand that materialized. The decline in our ASPs was partially offset by increases in unit shipments, which resulted from our continuing diversification into non-desktop markets. For example, we shipped 13.8 million 2.5-inch drives in the three months ended December 26, 2008. This compares to 8.7 million units in the three months ended December 28, 2007. Revenue from all non-desktop PC markets comprised of 65% of hard drive revenue for the quarter ended December 26, 2008 as compared to 54% for the prior-year period.

Prices and margins will continue to erode until end-user demand stabilizes and customers can access credit financing to begin upgading storage systems, which is forecasted to occur in first-half 2010. No matter how one spins it, hard drives exist in a commodity marketplace, where demand and supply balance remain critical. Nonetheless, in my view, Western Digital can stumble through the trough of this economic slowdown by cutting costs. Management told analysts on the second-quarter earnings call it believes the company can remain profitable and cash flow positive by maintaining operating expenses in the range of 9 percent to 11 percent of revenues at a $1.5 billion quarterly run-rate (by "re-sizing" production-slash output-and idling or closing facilities). Although year-on-year the cash conversion cycle more than doubled to nine days, the company threw off $300 million in cash from operations during the December quarter, ending with total cash and cash equivalents on hand of $1.4 billion.

The first one-terabyte hard drive came to market less than two years ago. Does the average consumer really need an additional 1,000-gigabytes of storage? Probably not. But when the global economy turns around, and original equipment manufacturers start pumping out next-generation electronics that gobble ever-larger volumes of digital content, such as graphic files for gamers, mobile devices with multiple applications, home-entertainment systems capable of storing 1,000 movies, and higher capacity business database and external file servers, Western Digital will be ready with its 2-terabyte hard drive.