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Storage manufacturer Seagate Technology LLC on Tuesday said it had shipped a record number of hard drives in its second fiscal quarter and that net income had climbed slightly. Still, its revenue was flat year-to-year after disappointing sales in its personal storage business.
A combination of price erosion and quality issues dragged Seagates fourth-quarter sales well below the $1.8 billion to $1.84 billion range company executives forecast at the end of Seagates first fiscal quarter in October. Instead, the company reported revenue of $1.76 billion and net income of $205 million for its second fiscal quarter ended Jan. 2, 2004. Revenue in the year-ago quarter was $1.73 billion, with a net income of $198 million.
While the companys expectations were met in its enterprise and mobile storage groups, problems cropped up for its personal-storage business. It experienced a 1.4 million-unit shortfall in its sales projections for personal storage drives. Seagate shipped a total of 21.7 million disk drives for the quarter: 16.1 million desktop drives, 1.90 million mobile drives and 2.74 million enterprise drives, with the remainder going into consumer electronics products.
“Our financial performance was hindered by a combination of execution issues and accelerated price erosion for personal storage products that resulted in financial results for the quarter that were below our expectations,” said Steve Luczo, chairman and CEO, during a conference call with analysts.
Seagate officials said for the second straight quarter they were forced to retool one of their drives to satisfy a customer. The drive was not named, although company executives said the platform could not handle humidity. The drive had to be redesigned and requalified, and OEM sales suffered.
“Were not happy about quality,” Luczo said. “We had two specific issues in each of the last two quarters, and were not happy about it at all.”
However, Seagate executives also said OEMs began leaning on Seagate and other suppliers at the end of the fourth quarter, pressuring them to sell drives at what Seagate executives called “unacceptable market prices.” Luczo said customers of the companys enterprise drives leaned harder still, forcing prices down.
Next page: Oversupply of personal storage products.
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In addition, the company pointed to a general oversupply of personal storage products on the market. Instead of the expected modest growth in the production of personal storage products, competing manufacturers had ramped up to a 10 percent growth rate, which then boosted inventories and marketwide pressure on prices.
Inventory levels of finished goods climbed by about $22 million to $250 million from the prior quarter, or $383 million in total inventory, according to Charles Pope, the companys chief financial officer. After its reseller channel partners began feeling the strain, Seagate began putting in place processes and programs to help boost the companys image in the channel, stabilize pricing and minimize gray market reselling, said Brian Dexheimer, executive vice president of worldwide sales and marketing at Seagate.
However, managing this inventory will be the keystone of the companys financial health—or lack thereof—until the fall, when new products are scheduled to be introduced.
Until then, the industry will enter “a tactical period where seasonal patterns and longer product lifecycles make industry profitability more sensitive to supply-driven pricing dynamics,” Dexheimer said. “Therefore the largest single influence on our performance for this period will be the responsible management of industry supply of current products.”
Prices may well fall for the current quarter, executives warned, leaving the industry in a wary détente where price moves will be carefully watched. Seagate may well be the only company that actually slowed production in the fourth quarter to manage inventory, executives said.
In the first calendar quarter, the “total available market” will be about 47 million to 48 million units, Dexheimer said; the company believes that it can regain market share, ending up with its traditional share of between 32 percent to 34 percent of the total desktop market, he said. Shipments of Serial ATA drives totaled less than 5 percent of all shipments during the quarter, and will remain a minority until midyear, when more chipset makers add the technology to their products.
However, President Bill Watkins called the launch of the Momentus 2.5-inch mobile drive an “unprecedented success,” and executives said new, smaller form factors are planned. Rival Toshiba Ltd. has announced a 0.8-inch disk drive, and Hitachi Global Storage Technologies sells the Microdrive, a 1-inch drive that the company acquired through a merger of storage assets with IBM last year.