What: Shares of Seagate Technology (NASDAQ:STX) fell as much as 14.2% on Thursday morning. The maker of traditional hard drives and other data storage products released preliminary first-quarter results in the early morning hours, triggering a stampede to the exits.
So what: When the full results are published at the end of the month, Seagate now expects to report revenues of approximately $2.9 billion. Gross margins will land at roughly 24%. These figures are down from Seagate's original guidance, which pointed to sales of $3.0 billion and 27% gross margins. And of course, analysts had been toeing the official sales guidance line, so the final report will most likely fall short of analyst expectations.
Now what: Seagate CEO Steve Luczo blamed the weak margins on low interest in the company's biggest drives at 4 TB and larger. The company sees this market segment as a growth opportunity, and still hopes to see demand picking up in the back half of the calendar year.
On the upside, Seagate also noted that its adjusted operating expenses will come in 3% below original guidance thanks to effective cost controls. But these $15 million in cost savings are just a drop in the bucket, and won't be able to outweigh the negative combination of disappointing sales plus thin gross margins.
Weak preliminary reports are often seen as the canary in the coal mine, signaling larger issues across entire industries and market sectors. Not this one, though. Seagate's only remaining true rival, Western Digital (NASDAQ:WDC), fell as much as 5.7% on Seagate's news, but quickly bounced back to a far smaller overnight decline. Sector neighbor SanDisk (NASDAQ:SNDK), which focuses on high-speed Flash storage rather than spinning magnetic disks, actually rose as much as 3.2% instead, entirely ignoring Seagate's bad news.
It bears mentioning that SanDisk is embroiled in buyout rumors, with Western Digital posited as one of its potential suitors. Seagate's name hasn't come up in the early rumors, even though the company most certainly could use a turnkey Flash drive solution such as SanDisk.