The following is excerpted from a recent note to clients:
Seagate (STX) reported sales of $3.03B and EPS of $0.26 (see conference call transcript). Revenues came in below our previous expectations on lower shipments as strength in notebook units was more than offset by deterioration in 3.5” demand. Aggressive cuts in opex as well as lower taxes allowed the company to surpass our previous earnings estimates even with lower gross margins. As we previewed, a combination of deteriorating demand and falling pricing is expected to lead to a revenue decline in December.
However with units and gross margins below our previous expectations, the company’s forecasts for revenue of $2.85B - $3.05B and earnings of $0.19 - $0.23 are both below are lowered numbers. The HDD makers including Seagate are now trading at multiples that previously have been associated with the threat of bankruptcy. Seagate is still operating at profitable levels.
In addition we see a strong likelihood for both consolidation and competitive disruption within the next 6 months, which creates potential for ASP stabilization even in a deteriorating market. As such, we are retaining our positive view on the name, even though we see little prospect for better end market demand conditions in the next 6 months.
Finally, we would note that Seagate lowered planned capex for 2009 to $750M, down from previous expectations of $1B. The new capital expectations have negative ramifications for both Intevac (IVAC) and Xyratex (XRTX).