Seagate Technology holds firm in fiscal second quarter 2004 results

New Delhi: Seagate Technology (NYSE: STX) the global leader in designing, manufacturing and marketing of hard disc drives and products for a wide-range of enterprise, PC, notebook, and consumer electronics, has reported its 3rd quarter (ended January 2, 2004) net income of $205 million on revenues of $1.76 billion, and diluted earnings per share of $0.41. This is marks a improvement in earnings from the corresponding quarter last year which witnessed a net income of $198 million on revenues of $1.73 billion, and diluted earnings per share of $0.43 in.

For the six months ended January 2, 2004, Seagate reported, net income of $403 million on revenues of $3.50 billion and diluted earnings per share of $0.81, compared to $3.31 billion, $308 million and $0.67 respectively for the six-month period ended December 27, 2002.

"In a challenging December quarter, Seagate recorded one of the highest levels of net income in the company's history and shipped a record 21.7 million disc drives while sustaining strong gross margins of 26.2 per cent," said Steve Luczo, Seagate chairman and chief executive officer. "We met expectations and held market share in the enterprise market and far exceeded our expectations in the notebook market by achieving unprecedented initial market share with our reentry. However, despite a profitable and an overall successful quarter, our financial performance was below our expectations primarily due to unsatisfactory execution in the company's personal storage programs," Luczo added. The predominant variables that affected the company's financial performance in the December quarter were a 1.4 million-unit shortfall in Seagate's personal storage shipment goals, and aggressive pricing in the personal storage market.

The majority of the unit shortfall occurred in the company's OEM customer base and was due to a combination of Seagate's decision not to sell certain products at unacceptable market prices and execution issues. The shortfall in OEM shipments resulted in Seagate's increased dependence on the global distribution channel during the quarter, particularly in December, which is more sensitive to spot market pricing.

Further aggravating this situation was an oversupply of personal storage products that resulted from the broader industry producing to an expectation of 8-10 per cent sequential growth in the total available market for personal storage products, and not to the more modest growth that Seagate forecasted in October.

The company believes total market growth was only 3 per cent sequentially. In addition, consistent with the industry, Seagate observed lower than expected, and lower than previous quarter channel sell through during the quarter, particularly in December. This lower than anticipated sell through was a catalyst for increased price pressure and resulted in higher than anticipated industry channel inventories ending the quarter - which Seagate calculates to be in excess of 6 weeks based on a 13-week rolling average.

The company's broad product offering maximized Seagate's profitability despite the shipment shortfall and greater than expected price competition in the personal storage market.

"We have and will continue to manage our business, our investments in research and development and our operations with the goal of maximizing our industry-leading profitability," said Luczo. "We believe that one of the key determinants of our success in executing this strategy is having an accurate sense of demand and trends. Insight into the dynamics of demand in our various markets is important in helping our stakeholders better understand our business."

Seagate believes that the industry is experiencing several positive factors relative to overall demand including:

• Proliferation of applications in the consumer electronics space that utilize disc drives: The company estimates industry shipments of storage to non-gaming applications grew in excess of 70per cent year-over-year. Seagate shipped over one million drives into the consumer electronics market in the second fiscal quarter and continued to expand its customer base and product offerings.
• A renewed buying cycle for consumer and commercial client computing systems:
• Seagate estimates industry shipments for the quarter of storage for PC desktop and notebook systems grew 20 per cent year-over-year, with desktop approximately 15 per cent and notebook over 50 per cent. Seagate's shipments into compute client applications grew 30 per cent year-over-year. The company is encouraged by this trend and the continuation is an underpinning of Seagate's available market estimates for both the mobile and personal storage spaces.
• Return to double-digit year-over-year unit growth in the enterprise storage space: Second half industry shipments for calendar 2003 were up 15 per cent from second half calendar 2002 levels. In addition, OEM customers continue to indicate renewed strength in corporate purchases of key storage infrastructure.

Business Outlook
"Addressing the Seagate specific performance issues in the personal storage space in our second fiscal quarter, the company has already undertaken a number of actions with both our OEMs and distribution partners that we believe will positively influence our fiscal third quarter results," said Luczo. "However, as a result of current inventory levels in the channel, normal seasonal decline in demand, and the pricing environment established at the end of the December quarter, our revised outlook for the March quarter is $0.20 to $0.30 earnings per share. And given the anticipated environment, we will not achieve our previously stated fiscal year expectations of $1.55 or $1.60 earnings per share.

"Until we have more information about the supply outlook for the industry, it is difficult to provide more specific earnings guidance at this time, as relatively small changes in volume or pricing can result in a broad range of earnings generation, he added.