Hard disk drive maker Seagate Technology's (STX) outlook for the near term looks sluggish due to weak PC shipment growth and the increasing adoption rate of tablet PCs among the consumers. Aside from this, the outlook provided by the company and its peer Western Digital (WDC) for the December quarter is also not encouraging.
Seagate reported a surge in net income to $582 million or EPS of $1.42 for Q1 from $140 million or EPS of $1.40 in the last year. On a Non-GAAP basis, net income was $594 million or EPS of $1.45 versus $146 million or EPS of 34 cents in the prior year. Revenues grew to $3.73 billion from $2.81 billion in Q1 last year. Analysts expected the company to earn EPS of $1.67 and revenues of $3.75 billion. The first quarter revenues were below its guidance of $4.0 billion. The company guided Q2 revenues of $3.5 billion, which is lower than the analysts' predictions of $3.74 billion.
Revenue in $ Billion
Net income in $ Million
EPS in $
Adj. Profit in $ Million
Adj. EPS in $
Gross Margin in %
The above table indicates the falling gross margin in the last two quarters suggesting the pricing pressure the company is facing after reaping bumper profits in the second and third quarter following the floods in Thailand in October 2011. Seagate's profit and gross margin are dipping not only due to the weak PC shipment but also because of the easing of hard disk supply. The company and the industry benefited from the Thailand floods as the production was lower than the demand. Thailand accounts for 40% to 45% of global HDD production. However, as the supply started easing in April, the prices of HDD got stabilized. This has resulted in sequentially reduced gross margin for the company.
The outlook provided by Seagate and Western Digital are also not encouraging. Western Digital provided outlook for the December quarter that was below the analysts' expectations. The company guided adjusted EPS of $1.65 - $1.86 and revenues of $3.55 - $3.7 billion, whereas analysts' initial prediction of EPS was $2.40 and revenues of $4.08 billion. Currently, the Street is estimating EPS of $1.88 and revenues of $3.71 billion, which are still lower than the company's forecast.
Meanwhile, the International Data Corp. or IDC disclosed recently that the global PC shipments contracted 8.6% in the third quarter. This was worse than the IDC's August outlook of a 3.8% year-over-year fall. IDC's senior research analyst Jay Chou added, "While ultrabook prices have come down a little, there are still some significant challenges that will greet Windows 8 in the coming quarter." However, the analyst is hopeful of the consumers responding favorably to the new products during the tail end of the fourth quarter. But the guidance provided by two leading HDD makers dispel any hopes of a revival of fortunes at the year end.
Interestingly, ahead of the Q1 results, S&P Capital IQ analyst Jin Yin has cut his rating on the shares of Seagate to Sell from Hold and also reduced his price target to $25 from $35. The analyst added, "We believe demand for hard disk drives will worsen due to a weaker global economy and a secular shift toward tablets. We think the adoption rate of hybrid drives will slow, given the falling prices of solid-state drives. We believe STX will be less aggressive in repurchasing its shares due to increased economic uncertainty."
Given the industry situation, Seagate will continue to face pressure on margins. Therefore, the stock is likely to see more downside pressure in the near term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.