Seagate Technology CEO Steve Luczo explained on Tuesday where all his cost cutting and restructuring is headed. As Seagate lays off almost one in five employees, shrinks plants and retools its product line, the goal is to sell many fewer drives.
Where Seagate once aimed to make 55 million to 60 million drives per quarter, once the changes are complete early next year, the company will have the capacity to make only 35 million to 40 million per quarter.
But the aim isn’t simply to create a shrunken version of Seagate. Luczo aims to increase revenue and profits despite selling fewer drives by adapting to the market’s rapidly changing storage requirements. The number of PCs and traditional network servers sold each year is shrinking, rendered unnecessary by a combination of mobile devices and cloud data centers run by the likes of Amazon (AMZN), Google (GOOGL), and Facebook (FB). Compared to PCs, cloud data centers need fewer but higher capacity and more reliable drives.
So Luczo is moving away from some parts of the PC market, like storage for low-end notebook computers, that could increase the number of drives Seagate sells but without providing much growth or profits. Instead, Seagate is focusing on the data center market with new high capacity drives. It started selling 10 TB models this year and will move up to 12 TB capacities, enough to hold 2.4 million music tracks or 3.6 million photos or about 300 hours of ultra high definition 4K video, soon. Test units go out to customers this quarter.
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The growth will come from the ever increasing storage appetite of smartphone toting consumers snapping more pictures, downloading more apps, and watching more streaming digital video. Data centers will expand not only to store pictures and videos consumer upload to the cloud but also to have millions of movies, TV shows, and other video clips available for streaming.
The trend is already evident in Seagate’s results. While the number of drives it sold dropped 19% to 36.8 million, the average capacity of those drives increased 46% to a record 1.7 TB each. And the combined amount of storage capacity in all the drives sold also hit a record of nearly 62 exabytes.
The majority of exabyte growth is “related to high definition streaming content,” Luczo told analysts on Tuesday after Seagate released its results for the second quarter, its fiscal fourth quarter. Just looking at how many people will own mobile devices over the next few years and the increasing richness of all kinds of media, Luczo said he expected data centers would need to expand their storage by 30% to 35% per year through 2020. “Demand is outstripping supply,” he said.
Seagate had pre-reported its revenue of $2.65 billion last month, when it became clear that sales would far exceed Wall Street’s expectations. On Tuesday, Seagate (STX) added full details to its quarter, including that it had adjusted profits per share of 69 cents, beating analysts expectations of 60 cents.
Shares of Seagate, which had risen 35% since the pre-reported revenue surprise last month, lost 5% in morning trading on Tuesday.