Seagate delivered some good news with its fiscal fourth quarter earnings: Storage demand is just swell. The bad news: Seagate is lagging with its product line--especially for notebook drives--and that's killing margins and hurting profits in the current quarter.
For the quarter ended June 27, Seagate reported earnings of 37 cents a share, excluding items. That's six cents below Wall Street estimates. But the outlook was the real kick in the teeth. Seagate projected first quarter earnings of 22 cents a share to 26 cents a share. The problem: Wall Street was expecting 58 cents a share.
Needless to say Seagate shares got a good whack afterhours. So what's the problem? Seagate's product execution hasn't been so hot and instead of leading it has been following. The company's conference call (see transcript) delivered the following takeaways.
Seagate lost its first mover advantage on drives. CEO Bill Watkins said:
We focused considerable effort over the past few quarters, successfully getting our product execution back on track, particularly in the notebook arena, where we have lost some of the first mover advantage we have historically enjoyed. We are gaining traction now with a new product lineup that will serve all markets, including the notebook market, and we expect to see significant improvement in Seagate's performance in the December quarter and continue that throughout the remainder of fiscal year 2009.
Seagate thinks it has a fix and the economy isn't the issue. Officials said demand in the enterprise is strong, consumer electronics is doing well and HD products are promising. Eric Savitz at Barrons has more on Seagate's corrective measures.
The problem is that Seagate is lagging on notebook drives. For instance, Seagate's operating chief David A. Wickersham said:
For the notebook market, the ramp of the 250-gig notebook drive has been completed and our participation in the 250-gigabyte capacity point in the June quarter was reflective of our overall notebook market share.
Qualification of our 320-gigabyte notebook product is in process, with some of the early movers already completed. For example, we announced during the quarter that we were shipping to a major OEM the industry’s first 7200 RPM 320-gigabyte notebook drive. The notebook market is expected to be highly competitive during the balance of calendar 2008, as most HDD suppliers are shipping comparable products.
Our checks indicate that we are making progress restoring our time to market competitiveness in the notebook market and we expect to begin volume shipments of our 5400 and 7200 RPM 500-gigabyte notebook drives in the December quarter.
Simply put, Seagate's rivals have beat it to the punch in the fastest growing part of the PC market. Take a commodity market, products that are second movers and you get squeezed hard.