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Can Seagate Q2 Results Weather PC Downturn?

 January 28, 2013 11:13 AM

(By Mani) Hard disk drive maker Seagate Technology Plc (NASDAQ: STX) is expected to report lower profit, when it announces its second-quarter results on Jan.28, on lower PC demand.

However, the quarterly results of peer Western Digital Corp. (NASDAQ:WDC) showed some promise and hope that results of Seagate would not be that bad as PC demand seems to have stabilized.

Irvine, California-based, Western Digital reported second-quarter net income of $335 million or $1.36 per share, compared to $145 million or 61 cents per share for the year-ago quarter. The year-ago quarter results included $199 million of charges related to flooding in Thailand. Excluding items, it earned $2.09 per share. Net revenue for the second quarter jumped 91 percent to $3.82 billion.

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The company had shipped 59.2 million hard-drives during the second quarter, up 108 percent from 28.5 million units in the prior year quarter.

Both Seagate and Western Digital control about 85 percent of HDD market, which is on a decline as flash-storage-based smartphones and tablets have eaten in to the demand for PCs, which use disk drives. In addition, the industry is still recovering from the heavy floods in Thailand in early October.

Wall Street expects Dublin, Ireland-based Seagate to report earnings of $1.28 a share, a drop of 3 percent from last year's $1.32 a share. Seagate may want to meet or beat the consensus to end the streak of missing estimates in the past two quarters.

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Meanwhile, the consensus estimate has fallen heavily by 50 cents in the past three months from $1.78 a share. In the past two months, it dropped by 5 cents.

However, quarterly revenues are expected to rise 12 percent to $3.58 billion from $3.20 billion in the same quarter last year.

Earlier this month, Seagate said it expects to report second quarter revenue of at least $3.6 billion and gross margin of more than 27 percent, reflecting unit shipments of approximately 58 million and maintaining market share. These preliminary results compared to the company's previous expectations for revenue of approximately $3.5 billion and gross margin at the lower end of the company's long-term non-GAAP gross margin range of 27 to 32 percent.

The company's pre-announcement suggests that HDD makers were able to limit ASP declines and maintain margins within their targeted ranges in the December quarter.

For the first quarter ended Sept.30, Seagate earned $582 million or $1.42 per share, up from $140 million or 32 cents per share in the year-ago quarter. On a non-GAAP basis, net income was $594 million or $1.45 per share. Revenues increased to $3.73 billion from $2.81 billion in the prior-year quarter.

Seagate investors remain concerned with the fact that the Street outlook for the third quarter appears to be weak. On average, Wall Street analysts, polled by Thomson Reuters, expect March quarter earnings to decline about 52 percent to $1.27 a share on 22 percent revenue drop at $3.48 billion.

Given industry consolidation, the HDD industry would be better equipped to manage the supply-demand balance, which should result in more stable pricing and margins in the future. However, pricing concerns and weak PC demand remain near-term challenges.



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