Flash Memory Entering the Big League?

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The humble flash memory is poised to play a more important role in the evolution of the electronics market as the increasing focus on small form factors and the ascendance of the smartphone segment propel segments of the industry even farther away from hard disk drives (HDDs). This is good news for flash memory drive vendors, many of which previously played under the shadow of their now embattled, but still much bigger rivals in the HHD market.

While the dominant flash vendors have reasons to celebrate the rapid adoption of the component in OEM products, they also now face a swarm of bigger players from the HDD segment jostling for market share and the opportunity to remind customers that they can meet all of their storage needs. What all these companies must remember, though, is that the flash memory market is still subject to the vagaries of customers, themselves, still trying to figure out how much of a role the component should be given in their product offerings.

The projected sales numbers for flash memory are certainly enticing. Sales are forecast to jump to $38 billion by 2016, up 46 percent, from $26 billion in 2012, according to Sanjay Mehrotra, co-founder, president and CEO of SanDisk Corp. in a presentation to analysts on June 12. Few other segments of the electronics industry can lay claim to anything remotely close in demand over the same period.

The surge in demand for flash memory is being fueled by widespread demand from smartphones, ultra-thin notebooks, cameras, single-stick USB drives, some enterprise market applications and emerging use as replacement for the core storage — such as DRAM — in some PCs.

What this means is that companies like SanDisk are on a growth spurt unimaginable only a few years ago. As electronics manufacturers respond to customer demand for smaller form-factor devices, flash is getting included in more OEM designs –as solid state drives (SSD), for instance — and its share of the market is surging as a result. Flash is also eating deeply into the huge market once controlled by HDDs, a market sector now straining under some erratic volume shipments and pricing pressure.

“This is an exciting growth trajectory for the industry and SanDisk is certainly very well positioned to enter this market opportunity as well,” Mehrotra said. “This industry will add more than $10 billion in annual revenue over a four-year period. The industry is already large and what that means is that SanDisk revenue share is expected to outperform SanDisk bit share.”

The accelerating demand for flash drives also has implications for the larger market, especially the top HDD manufacturers, all of which are being forced to implement drastic reorganization actions to protect market share and expand into fast-growing storage segments. The top disk drive vendors are also diving deep into the flash memory market, and making significant investments in the sector.

Recent consolidations in the HDD market have also improved performance and boosted margins at top vendors like Seagate Technology and Western Digital, but challenges remain for these companies to demonstrate they are not lagging behind the demand and technology curves.

Seagate Technology, for instance, shipped 47 exabytes of storage in the March quarter and more than 130 exabytes for the nine-month period, up 33 percent on a year-over-year basis, but revenue for the fiscal third quarter − ended March 29, 2013 − fell to $3.5 billion, down 21 percent, from $4.5 billion in the comparable fiscal 2012 period. The company’s gross profit margins for the March quarter fell to 27 percent from 37 percent in the year ago quarter.

The problem Seagate faces is that many of its customers are still trying to figure out what role HDD will play in their future product offerings as flash components continue to offer small form factor, pricing, and competitive technology advantages. Seagate is being forced as a result to direct more of its resources to the high-end market even as it tries to better determine the direction of future demand, according to company executives.

“Our focus over the last few quarters is centered on effectively optimizing our business model in an environment with limited visibility due to uncertain macroeconomic conditions and technical product transitions among our core customers,” said Stephen Luczo, chairman and CEO of Seagate during a conference call in May discussing the company’s March results.

Ready or Not the Market is Changing

The transitions Luczo referenced are more obvious in the notebook PC market where many OEMs are experimenting with flash and solid state drives (SSDs). Today, only about 10 percent of notebooks shipped have flash and SSD, but it is a growing portion of the market. This has forced Seagate to invest in these technologies and begin marketing itself as “serious about SSD and flash technology,” as noted in a section of the corporate website.

Hybrid memory offerings are key to Seagate’s plan to remain long-term competitive, according to company executives, but as Luczo notes the company isn’t universally recognized as a player in the flash market, and it also must strike a delicate balance between this new market segment and its traditional – and still growing – offerings in other electronics sectors. Luczo said he expects demand for hybrid memory offerings to ramp rapidly in the tablet market and said Seagate will be a major part of that expansion once the uptick becomes clearly visible.

“Some of the innovative products we have introduced this year that have been well-received by leading OEMs include our 7 millimeter, 500 gigabytes for ultra-mobile devices and two terabytes desktop hybrid products,” Luczo said. “We began shipping our third generation of solid-state hybrid drives in the March quarter and we have additional performance-based and high-capacity client products on our roadmap for this year.”

SanDisk doesn’t have to prove itself a player in the flash and SSD market. It’s an acknowledged leader in the sector, but it will have to dig in deeper to protect its turf from rivals expanding their product offerings in the market. The company has a nice head start on the competitors, though. SanDisk turned 25 this year and has been celebrating quietly by pointing to what executives termed its technological advantages over newer rivals in the flash market.

Mehrotra said SanDisk’s flash memory production, combined with those from a joint venture with Japan’s Toshiba Corp., represents about 50 percent of worldwide output, adding the company has one of the lowest cost structures in the industry. “In terms of industry, the supply bit growth is moderating due to technology challenges where you are getting less gigabyte per wafer with each successive generation, as well as with the industry mix shifting toward more OEM and enterprise applications,” he said.

“The combination of these two effects gives you a shallower cost reduction on a year-over-year basis, as well as moderating the supply bit growth in the industry,” Mehrotra added. “So this is, overall, good news for the industry in terms of the demand-supply environment.”

Flash bit growth has, in fact, tightened to the point where SanDisk was able to raise prices in the last two consecutive quarters, according to Mehrotra. “This is the first time ever, that two quarters in a row, we had average price increases due to the industry environment as well as our improving mix of product,” Mehrotra said.

Other players are watching too and salivating over the strong margin gains SanDisk is expecting; the company sees long-term gross profit margins in the range of 38 percent to 44 percent, about 300 basis points above its previous forecast. While Seagate and Western Digital may for now be more focused on protecting their larger market share in HDDs, they are also casting out their fishing nets farther into the flash market, enticed by the prospects for netting better margins in a fast-growing industry segment.

SanDisk’s 25-year anniversary is worth celebrating because it demonstrates the successes the company and the once-lowly flash memory market have recorded. Flash technology is no longer an underdog to HDD but a bigger part of an OEM’s components list, making planning for the future harder for SanDisk and other players in the sector.