Take your tech recession and stuff it

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.

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.

If solid-state demand takes off, does that, at all, impact your hybrid-drive plans?
Watkins: Well, we think hybrids are nice solutions for notebooks. We think solid-state drives kind of play in the enterprise fairly well. The real opportunity in notebooks is power and boot-up time. The power in a notebook--the storage is less than 10 percent of the total power used. So you can't make a lot of power savings with the solid state or hybrid, and in fact we can make within a minute or two with a hybrid the same power usage. We can cache the operating system to a hybrid, to a solid-state chip on the drive, and we can get the boot-up time fairly close to what you could get with a solid state.

Are companies like SanDisk going to play more prominent roles in your segment of the business?
Watkins: I think they hope they will. But we just don't see them making major penetrations unless there's some really fundamental issues resolved, and that's just cost per gigabyte.

Speaking of cost per gigabyte, what should consumers expect to be able to get for their money when they walk into a retail store to buy storage later this year?
Watkins: You'll be able to go in there with 150 bucks and probably by the end of the year, you're going to be looking at stuff over 500 gigabytes. I mean price has dropped 5 percent to 10 percent every quarter, boom, boom, boom! It'll keep doing that.

You mentioned Vista. What impact has Vista had on your business since Microsoft introduced the product?
Watkins: I think it's driving higher capacity. The operating system itself is 20 to 25 gigs once you kind of get it all in there. But there are other trends driving higher capacity besides Vista. There's more content and distribution things, and a lot more video.

You wrote a column for us last year about how the flaw with current legislation is that it fails to specify how to encrypt data. Do you still expect a big security breach that would bankrupt a company or threaten the country's national security?
Watkins: Well, obviously, I've got my own spin here because I want to sell you encrypted drives, but you see this every day, where someone's losing files or losing a notebook with important material on it. When you throw away your PC, personal stuff is still there. It's very hard to get rid of it. One of the things that people don't think about is that someone could get that data back if they wanted to.

So, lastly, what do you think? Hillary or Barack?
Watkins: I don't know. I can't make up my mind. I really can't and I've supported both of them. The problem is they are not all that different. I think there's more diversity in the Republican race than there is in the Democratic race.

From a tech perspective, do any of the candidates seem particularly attractive or particularly unconcerned about the issues that most affect your industry?
Watkins: No. I think because of California being a fairly strong Democratic state, we tend to get a lot of mind share from even the more liberal side of the Democratic party on tech issues, probably less on the Republican side. But that may have to do with politics and things like that.

Our biggest issue, or one of the big issues, is the H-1B and this whole immigration thing, about getting green cards to people who will get Ph.D.s from our universities. My frustration with the Republican party is they've been so focused on the immigration issue as relates to the border, with Mexico, that we're hurting ourselves in training these Ph.D.s. I mean, 60 percent of our Ph.D.s last year were foreign-born; we train them and we send them all back home. The problem I have with that is that we're outsourcing our most important talent.

If all our research people are now being sent offshore, we're going to have to do that. So I think every (foreign-born) Ph.D. graduate should get a green card. Keep them here, keep those sorts of high-tech jobs here in the U.S.

The second step you need is to get government to start putting programs back together like we used to have between universities. Let's get kids back in science and engineering so we will keep these jobs. It's a long-term view of what we have to do.