Seagate Technology (NASDAQ:
STX
) tempered investor expectations on Thursday when it
announced
selected preliminary numbers for its fourth fiscal quarter ending
on June 29th, 2012, prior to the company's earnings call
scheduled for July 30 after market close.
The company said that while it still expected to hit record
shipments for the quarter, it would not meet its previously set
revenue and margin goals.
Seagate had previously issued guidance of fourth fiscal
quarter revenue of at least $5 billion and 34.5 percent in
non-GAAP gross margin. Based on its latest report, revenue looks
to be down 11 percent, in the neighborhood of $4.5 million. The
company's new non-GAAP gross margin revision of 33.6 percent
misses the mark by 2.7 percent in absolute terms.
According to the company, the miss was 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 unsystemic risk. Thailand floods and the
severely-pressured supply demands constrained the entire sector.
It appears Seagate Technology was slower than other peers to pick
up its production once the supply levels 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 prevailing in 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 in 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.
An additional concern for the industry is the wide
shift to tablets
, which do not employ HDD components in favor of solid-state
drives. With the PC sector expecting to experience slower growth
in the future, Seagate and peer shipments are expected to be
impacted by 2 percent to 3 percent 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,
thus further escalating concerns.
Shares of Seagate Technology fell sharply in Thursday's
after-market trading following the announcement, to a low of
$23.43, a 7 percent drop from the session's close. Shares have
since rebounded about halfway leading up to Friday's market
open.
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