Seagate Technology warns of revenue miss

A market share loss and supplier issues take a toll on revenue and gross margins.

By Benzinga Jul 6, 2012 10:26AM

By Ilir Shkurti


Hard drive manufacturer Seagate Technology (STX) tempered investor expectations on Thursday when it announced selected preliminary numbers for its fourth fiscal quarter ending on June 29, 2012. The company's earnings call is scheduled for July 30 after the market close.


The company said that while it still expects to report record shipments for the quarter, it would not meet its previously set revenue and margin goals.


Seagate had previously issued guidance for fourth fiscal quarter revenue of at least $5 billion and 34.5% in non-GAAP gross margin. Based on Friday's announcement, the company now expects revenue in the neighborhood of $4.5 billion and a non-GAAP gross margin of 33.6%.


According to the company, the miss is primarily driven by two factors.


In a company release, Chairman Steve Luczo stated, "First, we did not achieve our planned market share growth as we reduced shipments in response to the industry's faster than expected recovery from their supply chain disruption. Second, we experienced an isolated supplier quality issue that affected one of our enterprise product lines. This product issue impacted enterprise product unit shipments by approximately 1.5 million units and drove our non-GAAP gross margin below our targeted plan."


While the second factor appears to have been mitigated and is likely to generate some important lessons for the company, the first issue suggests that the company's business may be exposed to some unsystematic risk. Thailand floods and the severely pressured supply demands constrained the entire sector. It appears Seagate Technology was slower than its peers to pick up its production once supply levels were restored, ceding market share to these faster competitors.


Supply chain disruptions in the past have not only impacted shipments, but also margins. In a note from last year, Morgan Stanley stated this as one of the issues affecting the industry's outlook: "Historically, even in minor situations where supply has exceeded demand, material disruptions have occurred as inventories built up and pricing/gross margins fell."


While the company concedes that it has lost market share, the issue is further exacerbated by hard disk industry-wide trends that suggest the entire market pie is likely to grow at much smaller rates than previously expected.

A research note from Morgan Stanley from last year nailed several factors currently impacting the hard disk drive ('HDD') sector. One such concern is the wide shift to tablets, which do not employ HDD components but use solid-state drives.

Also, with the PC sector expecting to experience slower growth in the future, the shipments of Seagate and peer are expected to be impacted by 2% to 3% in the next three years, according to Morgan Stanley estimates. PC makers are starting to look at solid-state drives for use in PC applications as well, further escalating concerns.


Shares of Seagate Technology fell sharply in Thursday's after-market trading following the announcement to a low of $23.43, or a 7% drop from the session's close. In Friday's morning trading shares are down about 2% to $24.56.


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