Manufacturing and selling devices that store data -- whether chip memory or hard drives -- can be a tough business. Seagate (NYSE:STX) found that out during its fiscal 2007 third quarter ending, when aggressive pricing from competitors and weakness in demand both took their toll.

While revenues of $2.83 billion came in just a little under management's original expectation of $2.9 billion to $3 billion, the earnings were disproportionately affected. Net income was $212 million, or $0.37 per diluted share, well short of the forecast range of $0.49-$0.53. Revenue grew by 24% from the previous year, although the Maxtor acquisition muddies up the comparison. Gross margins also took a hit, falling to 21.3% compared with 24.3% a year ago.

Seagate blamed its woes this quarter on weak demand and price declines for the type of hard drives  used in desktop PCs and digital video recorders -- especially higher-capacity versions storing 400 gigabytes and up. The growth I expected in shipments of high-capacity hard drives is one of my attractions to the stock, so I find this report worrisome. While it is normal for selling prices to decline, profitability takes a hit when they fall too steeply. NAND flash manufacturers such as SanDisk (NASDAQ:SNDK) and Micron (NYSE:MU) have also experienced this problem lately.

There were, however, some positive developments. For one, Seagate claims that its perpendicular products -- drives where bits of data are stored standing straight up from the disk, not lying flat against its surface, increasing capacity -- are ramping well and showing good yields, and sales of hard drives for notebook computers continue to do well. It also seems that inventories are at appropriate levels -- they did rise by 8% sequentially, but that also happened last year.

Nevertheless, one has to be concerned about the competition. I have read that both Hitachi (NYSE:HIT) and Samsung want a stronger presence in the hard-drive market, and although Seagate is a technology leader, the competitive threat has to be taken seriously. These are much larger companies, and they may be willing to sell hard drives for low margins as part of a broader strategy. It remains to be seen whether Seagate can maintain its leadership and, if so, whether it will lead to decent growth. Stay tuned.

Related links:

  • It wasn't long ago that things were looking better for Seagate.
  • Seagate isn't the only company with problems. Micron and SanDisk have both hit speed bumps, too.

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Fool contributor Dan Bloom owns shares in Seagate, but not of any other company mentioned in this column. Although falling hard-drive prices are hurting his investment in Seagate, he plans to take advantage of the situation by buying a big hard drive to back up the family photos and home movies. The Fool has a disclosure policy.