Seagate profit down as demand slows

Revenue is lower than expected, but CEO says it's a "short-term fluctuation" and remains upbeat about 2007.
Written by Michael Kanellos, Contributor
Seagate Technology on Tuesday reported lower-than-expected revenue and income for the quarter, but the company's CEO said that doesn't mean 2007 will be a bear of a year for the PC crowd.

The hard-drive maker's revenue for the third fiscal quarter, which ended in March, came to $2.8 billion, while net income and earnings per share, respectively, came to $212 million and 37 cents a share. Excluding expenses associated with the acquisition of Maxtor, net income came to $274 million and 47 cents in earnings per share.

The company expected revenue to come in around $2.9 billion to $3 billion, Seagate CEO Bill Watkins said in an interview, and profits were expected to be higher.

"Profit was down quite a bit. As we got into March, demand slowed down, and it wasn't as big as expected," he said. "Our sense is that it is more of a short-term fluctuation."

But it's been a dismal earnings season so far for a lot of companies in the tech world. Advanced Micro Devices earlier this month said revenue and profits would be below expectations for the quarter just ended because of declining prices and slow shipments. AMD will report its earnings later this week. Yahoo on Tuesday missed its financial projections, and Samsung said income dropped 15 percent and price pressure would continue during the year.

Intel, meanwhile, reported a slight decline in revenue and profits, excluding a tax item, for the recent quarter. The results, however, were within expectations.

Flash memory makers, which experienced an unprecedented few years of expansion, started feeling the pinch last August from a combination of slowing sales and increased competition.

Seagate's shortfall came with declines in shipments and prices in 3.5-inch diameter desktop drives. When PC sales became sluggish in March, disk drive makers slashed prices. Price cutting was particularly acute at the top end of the market. Some prices were cut nearly in half, and Seagate has 43 percent of the high-end market.

The desktop slowdown occurred, Watkins theorized, because of a price war between AMD and Intel. "Our sense is that people saw the Intel and AMD cuts and pushed PC purchases into April," he said.

Shipments of notebook drives were up, but price cuts modulated some of the gains there. Seagate also saw increased business in the consumer market, in part because it makes the hard drives for the Sony PlayStation 3.

Rather than stuff the channel with excess inventory, Seagate took its lumps now, he said.

Although business is expected to pick up in the second half of the year, Watkins said the picture isn't completely clear. June is often a choppy time for the PC industry, and consumers remain unsure about the direction of the U.S. economy, although Europe seems more upbeat. It is also unclear whether competitors will flood the market with cheap hard drives. Watkins noted that Hitachi Global Storage Technologies has lost money in recent quarters but also has said it plans to gain market share.

Last year, Seagate reported revenue of $2.3 billion and net income of $274 million for the same period last year.

Following the third-quarter results, Seagate now expects revenue for the fiscal year to come in at $11.3 billion to $11.4 billion and earnings per share to come to 92 cents to 96 cents. A quarter before, Seagate said that revenue for the year was expected to come in between $11.5 billion and $11.7 billion with $1.27 to $1.32 in earnings per share.

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