Western Digital Corporation, also known as WDC, held its investor meeting yesterday. We highlight four important disclosures: (a) it expects HDD to survive, despite flash's advantages, (b) WDC's plans to use RISC and launch a new memory interface, (c) an update on current business trends, and (d) the company's plans for its storage systems business.
First, since the company owns both Hard Disk Drive (HDD) and Flash divisions, it has an interest in keeping investors informed of the relative competitiveness between the two. Two and a half years ago, WDC closed on its acquisition of flash pioneer Sandisk. Around that time, the company was asserting that there is, and the company anticipates it will remain the case, that HDDs will retain at least a 10-times advantage versus flash on a cost per bit ($/GB) stored basis. At the company's meeting yesterday the company reiterated its view that this 10x advantage will continue at least till the year 2022.
The 10x $/GB differential is important because, if true, it means HDDs will not go away for many applications, especially for storage of big data at hyperscalers. Consider this - storage systems vendors such as Pure Storage are announcing software systems that allow premises-based flash storage to be seamlessly moved to the cloud for longer-term storage, which means that cloud hyperscalers like Amazon Web Services (AWS) are likely to be HDD customers for a very long time. Nevertheless, flash will keep on taking share from HDD. The company has been reducing its manufacturing capacity for HDD, with significant layoffs and factory shutdowns over the past several years. In fact, it plans significant ongoing cost cutting in its HDD manufacturing, it the range of 15-25% Y/Y decline next year.
The company also announced an ambitious plan to transition from licensed CPU cores to RISC based cores, for which it expects to pay no licensing and/or royalty fees. WDC says it ships over 1 billion CPU cores per year, so this is a significant shift. Also, the company plans to introduce an open-sourced memory interface called OmniXtend memory fabric, which will pit it against Intel (using DDR4, etc.) who has historically launched its own interfaces. WDC is now a very big player in storage, having built through organic growth and acquisitions. It has more market might and these new initiatives have a better opportunity to launch than in the past.
Additionally, the company said that its near-term business trends are under pressure due to cyclical market fluctuations. The memory semiconductor industry has historically endured a boom/bust cycle and now the company is explaining it has entered the bust part of that cycle. Since its earnings call on October 25, 2018, it says conditions have deteriorated somewhat more, partly the result of hyperscalers continuing to reduce inventories and partly due to mobile phone companies still reducing forecasts of demand. The company expects 2019 will see flash demand below the historical range and that hyperscalers should see a return to growth in 2H19.
Lastly, the company's Data Center Solutions group, which employs a vertically integrated strategy to compete with traditional storage systems companies such as DELL-EMC, NetApp, HPE, Pure Storage and others, just experienced a record quarter on a revenue basis and is approaching break-even in its operations. The company has the goal of becoming a top 5 player in data center solutions, which we take to mean, it is planning to take share from the current players. The group has experienced 17x revenue growth from Q1FY19 compared to Q1FY16, according the presentation (of course, the group has made acquisitions that bolster this number), has shipped 3 Exabytes in the months in calendar 2018 (which isn't over yet) and has shipped 8,500 systems and platforms since inception. The company plans to experience "double digit" revenue growth rates for this unit in the future.
The main theme of the the Huawei HAS 2018 meeting keynotes was Artificial Intelligence and, secondarily, nearly ubiquitous networks connections across the world. Huawei expects 86% of enterprises to have experimented with AI by 2025 (<5% in 2018). It is leveraging AI across nearly all its products and will offer a full stack AI solution to all Huawei partners at its @Huawei Connect 2018 conference (Oct 10, 2018).
More specifcially, Huawei is using AI to elevate products & solutions to new levels: cloud, networks, devices, EI, SoftCOM AI, and Intelligent phones. The company's strategy has changed over time and is now AI-focused:
2006-2011: Single strategy: All IP
2012-2017: SoftCOM: All Cloud
2017+: All Intelligence: SoftCom AI (autonomous networks / services 2.0) - this reduces operating and maintence costs
The company expects that networks will be 10x more efficient in the operation of equipment as a result of AI.
By 2025, Huawei expects 440M AR/VR users, 40% of cars to be 'connected," 80% of users with access to mobile broadband, usage of 1 Gbps / user / day (versus .03 in 2018) and 20B connected devices worldwide.
Connected Devices Forecast (Huawei) by 2025: 40B sensors and 100B connections. This thinking is based on data including that there are:
The company's product lines are very diverse; to wit, the company introduced a helmet for the blind, which will be available soon.
Huawei expects NB-IoT (LTE-based IoT capability) to reach almost full coverage in China in 2018. Additionally, the company expects NB-IoT to reach 100 networks by the end of 2018 (versus 39 in 2017) and to be available on 1.2M base stations (from 0.5M in 2017) and to be connected to 150M connections (versus 10M in 2017).
The company boasted about several developments:
Q&A after keynote:
Mr. Eric Xu, Rotating Deputy Chairman of Huawei dodged several important questions relating to trade tariffs, cloud business unit revenue targets, growth rates of each major business units, specifics about AI full-stack claims made during the keynote, and instead focused generally on the AI theme. Xu did, however, however, answer a handful of questions that were quite interesting: Huawei won't acquire DRAM, Flash companies; and that 5G is not so revolutionary - it is just an evolution following LTE. Additionally, Xu mentioned that in 2H18, Huawei will launch end to end 5G solutions and by 3Q19, it will launch 5G capable phones. Xu said Huawei will continue to work with Intel on x86 for the foreseeable future.
More Q&A specifics:
Trade Tariffs and ZTE. (In a moment of levity, however, Eric Xu smiled when the words ZTE were mentioned - recall that a day earlier, ZTE was penalized by the US). We will focus on our customers and will ultimately survive.
Cloud 1.5B by 2020, will you hit the target? Will offer cloud services to telco service providers. Huawei smartphones will leverage the Huawei cloud. Enterprise customers will consume cloud services such as video, computing. In future, trend will be enterprises will move to hybrid cloud and public cloud will take a major share. Huawei cloud provides compute/storage/networking to enterprises and government. 200K x86 servers in Huawei cloud. Revenue with external customers - won't share it with you - maybe .
AI chipset question: We don't position chipset as a standalone business - won't sell to external customers. Will be used to differentiate Huawei products. Smartphone - we use multi-vendor strategy always; in other worlds; have multiple Qualcomm, NTK and others. Remain committed to multi-vendor strategy. Don't want vendor lock-in, however. If we only have one vendor, what might happen to our smartphone business, Xu asked.
Enteprise business growth? Declined to comment on specifics, but said he encourages each to grow rapidly.
How do customers get to 86% AI usage (the question was asked by an audience member by incorrectly referring to the statistic that was made during the keynote - specifically, Huawei said AI experimentation will be 86%, not AI usage)? Will give clearer answer at Huawei Connect 2018. For now, can share that we will use AI on ourselves first, then help customers on various functions such as finance, human resources, networks, etc.
Supply chain - will you acqire your suppliers? We do joint innovation with suppliers to meet Huawei's needs; push multi-source strategy, however. Will not invest in DRAM, display, flash.
5G wasn't mentioned much in the presentation, why? We don't have as high expectations as some others; 5G is just one of many products we offer and is just a natural evolution from 4G. You don't have a fundamental difference between 4G and 5G - consumers just see faster speed and lower latency. LTE already support autonomous driving. Past couple years, governments have regarded 5G as too important. June 2018, will only address eMBB - faster speeds. 2019 - will have fully 5G compliant system that does low latency. 4G is pretty robust; we don't see 5G as a national coverage network - it'll just focus on city centers. However, once one carrier announces 5G, then all others must. 50% of Chinese have wireless connection capable of 4K but there are still no 4K stations.
2H18, end to end 5G solutions available. 3Q19, will launch 5G capable phones.
Share trends for Huawei at operators. Revenue growth of telecom services is a challenging topic. This revenue growth topic is why titan operators express concern about moving to 5G; instead, Huawei thinks moving to improved intelligence will assist operators. Video will become more and more important as telcos become media companies too.
Will AI become a privacy concern? Any technology has double-sided effects. With AI, some believe it can be dangerous. Xu believes in the wisdom of man. Look back to history of mankind, and our humanity can do same for mankind.
Will Huawei find alternate suppliers for data center products? (Xu also smiled about this question before answering). Today, Intel is dominant player. Our point of view, we look forward to more diversified landscape; but we work with Intel mainly now.