Newsmaker: Take your tech recession and stuff it

Like a lot of technology CEOs these days, Seagate's Bill Watkins finds himself frequently asked whether the world as we know it is coming to an end--or something like that.

What with regular triple-digit losses on the Dow Jones and the occasional global stock meltdown, these are trying times for any chief executive, let alone one in charge of the world's biggest drive business (measured in sales)--and one subject to endemic quarterly ups and downs. But stock blips and persnickety Wall Street analysts aside, Watkins remains confident about the longer-term direction of technology and business trends. In its second fiscal quarter, which was announced last week, Seagate tripled net income on a 14 percent increase in sales.

Seagate did fess up to some management stumbles, but Watkins, who recently sat down with CNET News.com, says those are behind it now and the company intends to capitalize on the increasing appetite to consume different forms of digital media.

Q: Your quarterly numbers came out, Seagate gets upgraded to a strong buy, and yet the stock still falls. Do you think you got pounded because the forecast was a little on the low end of the Street's estimates or is that just the way things work today?
Watkins: I don't know. Maybe that's sort of the rationale. We have this saying: Go a day without food, a day without water, a day without sex, but you can't go a day without rationalizing something. I just think there's fear. I mean, think about the forecast we put out: it's 15 percent year-on-year revenue growth with a 30 some percent year-on-year earnings increase.

So maybe people aren't going to restaurants, maybe they don't buy a new home but they're getting on the Internet.

I'm generating over $700 million in cash, over $500 million in free cash, no inventories, double-digit growth, and yet I'm trading at less than an 8 (price to earnings) multiple. All I can think of is that there's just real fear out there. But we're in this for the long haul and I think the market always gets back to reality. It will this time, too.

How much does what's going on in the stock market and the rest of the economy affect Seagate, as well as the other drive makers?
Watkins: Outside of the financial institutions I don't see it.

Well, there's housing.
Watkins: Well, yes, housing, but that really is financial-related with the subprime mortgage issue. I guess it's there but we're not seeing it in stores. Our Christmas was great. We just hit records. So maybe people aren't going to restaurants, maybe they don't buy a new home, but they're getting on the Internet. They're playing; they're watching content; they're sharing it--and it's all driving storage.

The other thing is, you know, over 70 percent of our product goes international. We're not seeing a lot of slowdown anywhere international, either in Asia or Europe, which are both very strong for us. I think we're going to talk ourselves into a recession (rather) than there's an actual one there. But you talk with IBM or other people in the Valley and they're not seeing world recession.

After Seagate's quarter, one of the problem areas the company talked about was what were described as time-to-market issues. Where are you with that?
Watkins: I've got to blame myself. I took a real hard look after last March and I cut. I stopped all hiring, I started cutting programs...I put a lot of churn in the organization that basically spent three months doing stuff that we didn't even use. Then the whole industry turned and was doing a lot better and we had to do a lot of scrambling. But it wasn't like our engineers got dumb. Maybe I got dumb.

We're paying the consequences, but we've got the 250 (gigabyte version) coming out in the quarter. We've got the 320 coming, and so we're catching up on two programs simultaneously. I feel really good about the progress we're making. Once given the resources, our people have been able to execute. So we feel good.

What are your thoughts about the likely adoption rate curve of 1.8-inch drives in the notebook market?
Watkins: We think the 1.8 will eventually be a notebook product, but we think it's still early. You saw Apple come out with a 1.8 on its machine and so, again, we're looking at it. We think it's on a cost-price basis that the 2.5 still is favored, but long-term we think it's a viable format...To be honest, in our road map we've got some timing when we want to bring it on but we're going to time it right.

You were quoted last year saying that you expect to have solid-state drives across the board in '08. Are you sticking by that?
Watkins: We're going to have a solid-state drive solution on every road map we have, and by this end of this year, I expect us to have solid-state drive out in at least one specific market.

Why hasn't the technology caught on faster?
Watkins: Because the cost-per-storage gigabyte (ratio) just hasn't played very well. A lot of people are going to buy and pay this extra premium. And we do think that architectures or enterprises, it makes some sense where you can get the performance. They're not big volumes yet but three or four years from now, depending on how the technology, the cost-per-gigabyte, and the reliability issues get resolved, there will be other places for it...We've just got to make sure we're agnostic and have all the solutions available.

Do you think solid state provides any extra measure of assurance or reliability for the user?
Watkins: No. There is this argument that no moving parts is better, but if you look at the returns why PCs fail to come back, the hard drive is not the No. 1 or 2 issue. Chips generally have a higher failure rate in the systems than do hard drives, to be honest. I think you can make an argument that less moving parts is a good thing, but again, the reliability of hard drives is pretty good. I don't think you've got to pay a premium for that.

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[johngallagher]

Typical CEO

Ooops, my bad. Sorry you got layed off, my mistake and it didn't need to happen. And it has cost the company profits and stressed out the remaining workforce to make the numbers. But now we can say there is a recession and hire you back with less pay and benefits. Or better yet, out source your job!

[kgsbca]

Hardly a typical CEO

Watkins is one of my favorite CEOs (the list is very small, most are just politicians, and I do not like politicians), and Seagate is one of my favorite stocks (even though they are grossly undervalued by analysts and stockbrokers). You're expecting him to not make mistakes, that is impossible. At least he admitted it, unlike most CEOs and politicians, who will try to spin their way out of any blame.

And speaking of spinning, he is uncharacteristically (for a CEO/politician) forthright in his comments on encrypted drives - he admits he has a bias in favor of using those drives because he sells them.

Watkins is unique among executives - he understands his business, and is not just a manager. Don't paint him with the same brush as the bean counters that run most other companies, who increase profits the way you described.

[co_z]

Hard drive failure is not a big issue?

"if you look at the returns why PCs fail to come back, the hard drive is not the No. 1 or 2 issue"

This is utterly false, especially when dealing with laptops. In my experience hard drives are the #1 failure point in laptops - hard drive often have a shorter life span than batteries.

This sounds like a way for Mr. Watkins to pitch how reliable his products are.

I think a lot of people who have been burned with multiple laptop hard drive failures will switch to solid state once the capacity matches traditional drives.

[Mycroft_514]

Actually, in my experience, he's right.

I'm on my 5th laptop now (upgrading for performance each time.)

Failures (each once, and spread across machines):

1. Power supply
2. cover hinge
3. virus
4. Motherboard failure
5. DVD drive failure

And that is over a 20 year span from first laptop to now.

[jscott418]

Smaller form factor affects durability

I think the smaller hard drives and the environment that laptops
function in has more to do with failures. All of a sudden we have
become backup user's? I see external hard drives for sale all over
the place. What is needed is a second hard drive in a laptop to
serve as a backup drive. Too many of us fail to carry with us a
external drive along with our laptops.

[Phillep_H]

Failures

Laptop batteries are the worst, followed by the wiring to the display on the laptop. Floppy drives and CD drives in laptops are next, with desktop drives after.

Hard drives have been pretty reliable.

[mjvtz]

Lap&Desk Top drives fail excessively

and they have been since the manufacturers lowered their warrantee period from three years to one year ... failure rate on business machines are much lower because they dont want to lose bulk purchasers ... so the drives (and other components) that test out marginally go into "home" computers ... duhhhhh