Seagate: Margins Crunched, No Demand Issues

Seagate (STX) has a margin problem. But it also thinks it has a fix.

As I noted earlier, the disk-driver maker today reported disappointing profits for the June quarter, along with weaker-than-expected EPS guidance for the September quarter. The issue, according to Patrick O’Malley, the company’s senior VP for finance, has been a lagging position in two drive categories: notebooks and “nearline,” which are high-speed high capacity drives used by Internet content aggregators. O’Malley, who takes over as CFO of the company later this month, said this is a three-quarter problem, with one left to go.

The issue in notebooks, he says, primarily has been in 160 GB drives, where Seagate had been selling drives with two platters and four heads, while competitors were offering comparable storage with a single platter. The results: Seagate’s costs have been higher than those of rival drive makers. O’Malley said in an interview with Tech Trader Daily this afternoon that the company is now “going through qualification” on a single-platter solution, and that the problem goes away by the end of the September quarter.

Meanwhile, the company is taking some steps to realign costs; Seagate last week disclosed plans to stop production of magnetic media at its facility in Milpitas, a move which he says will shift 600 jobs to Singapore by early October.

O’Malley says the earnings shortfall has nothing to do with demand. “It’s still good across the board,” he says. “That’s not something we are unhappy with. We’re getting revenue, but not the margin structure we want.”

Meanwhile, O’Malley says the company isn’t likely to make any significant moves into the flash-memory based solid-state drive market in 2009 - nor does he expect Seagate’s business to be affected by other companies expanding production of SSDs. “I would not model anything in the next as months that would have any impact on us,” he said.

After hours, STX is down $1.74, or 10.1%, to $15.56, the stock’s lowest level since 2005.

Note that while this would appear to be a Seagate-specific problem, Western Digital (WDC) shares after-hours are down $1.63, or 4.8%, to $32.25.

Comments

[Urbane Gori...:]

Hard to accept the constant chatter about how "PC sales" are the only real bright spot in tech right now ... I mean, are they selling computers without hard-drives these days??? jegan ;-)

2008 Jul 16 01:46 PM