Seagate Sails Into Rough Seas

The future might look even bleaker for Seagate Technology Inc. (NYSE: STX) than the hard-drive company admitted two weeks ago when it reported disappointing second-quarter earnings and lowered its guidance for the March quarter and the fiscal year.

In a filing with the Securities and Exchange Commission (SEC) this week, Seagate admitted its net income and gross margin will likely decline for the next two quarters.

Considering… the normal seasonal pattern of declining unit demand and pricing in the third and fourth fiscal quarters and given the level of product pricing generally entering the third fiscal quarter, we expect that our gross margin as a percentage of revenue and our net income will decline in the next two quarters materially below the levels of this quarter as well as the levels of the comparable quarters of the prior fiscal year,” the company lyrically expresses in its latest SEC filing.

Seagate’s income of $205 million, or $0.41 per share, on revenue of $1.76 billion reported January 20 were significantly below analysts’ expectations. The company lowered its guidance for the current quarter to between $0.20 and $0.30. Previously, analysts expected Seagate to report earnings of around $0.39 per share. Seagate also said it would not hit its fiscal year 2004 projection of $1.55 to $1.60 per share.

Most of Seagate’s problems last quarter came from a sharp decline in desktop drive sales as it maintained its lead in the enterprise segment with 47 percent market share. There could be trouble in the enterprise as well because of pricing pressures and oversupply caused by competition with Fujitsu Laboratories Ltd., Maxtor Corp. (NYSE: MXO), and Hitachi Global Storage Technologies (Hitachi GST).In a research note released today, Goldman Sachs & Co. analyst Laura Conigliaro said her previous estimate of $0.28 per share for the current quarter may be too high. “Industry comments are for the most part negative, consistent with our recent checks,” Conigliaro wrote. “Seagate also made numerous comments about pricing, inventory levels, and the competitive environment that suggest a difficult environment at least through mid year.”

In its filing, Seagate said it could get hurt by the merger of the disk drive businesses of IBM Corp. (NYSE: IBM) and Hitachi Ltd. (NYSE: HIT; Paris: PHA) into Hitachi GST (see IBM, Hitachi Finish Merging Disk Units). “Because IBM is one of our most significant customers and Hitachi is one of our most significant competitors, there is a significant risk that IBM will decrease the number of rigid disk drives purchased from us,” the filing states.

Seagate admitted to “certain execution issues” related to product quality with its personal storage disk drives. There was no mention of problems with its enterprise drive that Byte and Switch reported in December (see Seagate Drives Dinged).

— Dave Raffo, Senior Editor, Byte and Switch