Seagate Technology Warns of Miss in Revenue, Margin Goals

Seagate Technology 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.