Larger Hard Drive Capacities Feeding Demand of Storage- Hungry CE Devices

Seagate is shipping drives with storage of 160 GB per platter, double the current level, and expects to spread the technology across its product line by June, Global Sales & Mktg. Vp Brian Dexheimer told analysts in an earnings conference call. Seagate, along with Toshiba, Maxtor and others, is also shifting toward perpendicular recording that boosts storage density and reduces the need for additional components, industry officials said.

The perpendicular technology aligns bits of data vertically rather than horizontally, enabling Seagate and others to further increase the density of drives without a risk of scrambling data, industry officials said. Since they were first introduced in 1956, hard drives have arranged data bits in a flat, horizontal fashion on the spinning platters. To increase capacity, engineers reduced the size of the magnetic particles that stored data.

But with some of Seagate’s high-end drives topping out at 500 GB, industry officials say the shrinking of components is nearing its limit. If particles get much smaller, they start to interfere with the magnetism of each other, possibly resulting in data being damaged. By storing data in a perpendicular arrangement, drive manufacturers can increase storage by taking advantage of additional space.

Perpendicular drive technology will gradually expand across all sizes of drives from 0.85” to 3.5” within the next 12 months, industry officials said. Toshiba has already introduced the perpendicular technology in 0.85” drives used in Gigabeat digital audio players sold in Japan. Hitachi has demonstrated a real density of 230 GB, twice that of current drives. Seagate also showed it can lay down 245 GB in with perpendicular recording.

Seagate shipped the Momentus 5400.3 hard drive for notebook PCs earlier this weak that uses the perpendicular technology to increase maximum capacity to 160 GB from 120 GB. The 2.5” drive sells for $325 vs. $240 for a 120 GB model and a premium for the technology will likely exist for at least the next year, Maxtor CE Mktg. Dir. Lenn Sharp said.

Seagate is among the first companies to introduce drives with 160 GB per platter storage. It started limited production of the drives late last year and will ramp to volume manufacturing in the first quarter, Dexheimer said. Seagate officials declined comment on product plans for the 160 GB design, but analysts noted that the increased storage would allow the company introduce 320 and 500 GB drives with one less platter. The 160 GB design requires a single disc and 2 recording heads, all priced at about $6 each, Seagate officials said. That’s against current 160 GB drives, which need to 2 platters and 4 recording heads, company officials said.

The increased storage capacities come as Seagate and other drive suppliers benefit from increased demand for PVRs, digital cable set-top boxes and hard drive-equipped DVD recorders. Seagate shipped 3.5 million CE-related drives during the 2nd quarter ended Dec. 30, 2.9 million of which were installed in PVRs, Seagate COO David Wickersham told analysts. The CE drive shipments were up from 3.36 million units a year ago, he said. Also included in the total were drives delivered for videogames consoles including Microsoft’s Xbox 360, which uses Seagate devices. Seagate shipped slightly less than 800,000 units of its 1” drive (2.5 and 5 GB capacities) used in digital audio players and other products, down from the first quarter, company officials said.

Seagate also shipped 3.2 million, 2.5” drives for mobile PC products and also is considering introduction of 1.8” models, Dexheimer said. It shipped 1.2 million drives a year ago. “We have a very keen level of interest” in 1.8” drives, which have been marketed by Hitachi, Toshiba and others, Dexheimer said. Seagate is considering designing 1.8” drives for notebook PCs, Dexheimer said.

Desktop PC drives continued to be Seagate’s top seller, shipping 18.9 million units during the 2nd quarter, up 18% from a year ago. Overall, Seagate’s average selling price for hard drives increased to $80 during the quarter from $78 in the first quarter, $76 a year ago. A decline in drive pricing from the first quarter was offset by product mix and cost reductions, enabling Seagate to post the slight increase, company officials said.

Seagate made a required Hart-Scott-Rodino filing with FTC on Jan. 13, initiating the review process for its proposed acquisition of Maxtor. Seagate expects to meet with FTC officials “in the coming weeks” and release a preliminary proxy in March that would set the stage for shareholder votes in June, Wickersham said. Seagate, which announced the proposed purchase of Maxtor in Dec., increased capital spending for the next fiscal year to $950-$1 billion from $700-$800 million, company officials said. The capital budget was increased partly to boost manufacturing capacity for Maxtor products, company officials told analysts. The purchase of Maxtor would give Seagate a factory in China. “We also need to restore some capacity flexibility,” Wickersham said. “We've been running at full capacity for the past year.”

Meanwhile, Seagate reported 2nd-quarter net income improved to $287 million from $144 million despite its taking a $20 million non-cash, stock-based charge tied to a licensing agreement for storage technology. It also incurred a $2 million charge for early repayment in mid- Oct. of a $340 million term loan, company officials said. Revenue increased to $2.3 billion from $1.8 billion. OEM accounted for 71% of 2nd-quarter sales, up from 69% a year ago. Distributors and retail were 26% and 3% of revenue, respectively, vs. 29% and 2% during the year-ago period. Inventories rose slightly to $505 million from $431 million.