Could This Be the Next Tech Bankruptcy?

There's just no end to the bad news for Seagate (NYSE: STX  ) .

Yesterday, the ailing disk drive maker reported $2.3 billion in second-quarter revenue, down nearly one-third from last year's $3.42 billion. Per-share earnings swung to a $1.02 loss from a $0.73 gain in the year-ago quarter. More than $380 million in write-offs and acquisition and restructuring charges contributed to the free fall.

And it may be what cost Bill Watkins the top job. Even so, investors don't see new management, led by incumbent chairman and new CEO Stephen Luczo, doing much better, even if he's been involved in earlier turnarounds at Seagate; following Seagate's announcement, shares dropped by more than 15% and haven't recovered since.

"[Seagate] is a prime candidate for bankruptcy," wrote CAPS All-Star dividendgrowth in response to my recent article about the company. He may be right. Seagate's problems aren't merely born of a temporary drop in demand.

When an innovator doesn't innovate
But demand is dropping. Luczo told analysts in a conference call that the pricing environment in the last quarter kept with trends from earlier months in 2008, which he said were some of the worst in the company's history.

A short-term recovery isn't likely in the offing. Seagate has suffered a rash of failures of its higher-end Barracuda drives and is offering free data recovery to those afflicted. Management will pay for that and other ongoing restructuring efforts by shaving costs, like Seagate's dividend, for example. The board approved a 75% cut to just $0.03 per share quarterly.

Maybe that'll help for a while. Trouble is, the disk drive industry is in the midst of an upheaval. Solid-state drives from Intel (Nasdaq: INTC  ) , Samsung, and SanDisk (Nasdaq: SNDK  ) are the disrupters; they're becoming more affordable with each passing day. Already, Apple (Nasdaq: AAPL  ) and Sony (NYSE: SNE  ) have equipped high-end laptops with SSDs. Seagate has yet to take advantage of this opportunity.

Luczo, meanwhile, told analysts that he's committed to returning Seagate to profitability over the long run.

Glad to hear it, sir. If you're serious, there's one very easy (yet also difficult) way to show it: Boost research spending now. Invent the next great drive technology. The one that'll make today's solid-state innovators look like tomorrow's data storage lightweights.

The market has left you with no other choice.

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Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has no juicy bankruptcy stories. Sorry.


Read/Post Comments (3) | Recommend This Article (24)

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  • Report this Comment On January 25, 2009, at 10:04 PM, ExSTXer wrote:

    What a disastrous past 6 months this has been for STX. They have stumbled so many times in this market and missed so many opportunities. That's what happens when you have no vision at the top. Don't expect much more from Steve Luzco. He is strictly a numbers guy.

    As far as SSD goes, it isn't all what people think it is. Yes, it is faster under most applications. But at 10x the cost of head and platter HDDs you would really have to justify the need for the extra performance. An option of an SSD with an Apple laptop will run you a whopping $900! You could buy another laptop for that!

    Plus, SSD technology has issues with limited number of writes to the flash-based memory. This means a much shorter lifespan and most buyers are not aware that they will be FORCED to purchase a replacement drive in a year or two.

    Lastly, none of the operating systems are optimized for SSD and unless the market is overwhelmingly supportive for making that leap of commitment from the likes of Apple, Microsoft and Red Hat, don't expect streets of gold just yet.

    In the meantime, most people are staying with their current technology as newer is not necessarily better. Example: Microsoft's Vista . . . nuff said.

  • Report this Comment On January 26, 2009, at 11:34 AM, boutaghou wrote:

    Steve Luczo is a visionary, very inspiring leader, and a cool guy and is not just a number cruncher. Seagate technical communitte has not been truly challenged to outperform ; most of the power shifted to the product integrators and left the technologists on the side with very little influence on the direction of the company especially with the departures of Tom Porter and Mark Kryder. If Steve Luczo can change this dynamic and re-introduce the importance of technology - I really believe that Seagate can be a leader within the next 9 months. Do not dismiss Seagate because it still has all the right ingredients and has been awaiting for a master chef to put them together - go for it Steve.

  • Report this Comment On January 26, 2009, at 11:54 AM, ExSTXer wrote:

    I've seen no evidence that Luczo is a visionary. What innovative product offerings can he hang his hat on? None. He comes from Bear Stearns. He is a smart financial strategist, but innovator? NOT. In other words, he is no Steve Jobs. Where are the new products? Don't get me wrong, I hope for the best, for the sake of the employees, but I've seen this movie before and already know the ending. Seagate needs something that will blow the doors off the CE market. I thought they had something with DAVE. What ever happened to that product? Wireless HDD. I can think of a thousand applications for that! Where did that disappear to? Yet, ANOTHER missed opportunity.

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