Manufacturing and selling devices that store data -- whether chip memory or hard drives -- can be a tough business. Seagate
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
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
- 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.
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.