Apr 13, 2009
Seagate Technology (NASDAQ: STX) today announced selected preliminary financial results for its third fiscal quarter, which ended on 3 April 2009 and an initial business outlook for its fourth fiscal quarter ending 3 July 2009.
Preliminary Fiscal Third Quarter 2009 Results
Seagate expects to report unit shipments of approximately 39 million and revenue of approximately US$2.1 billion, exceeding the Company’s original outlook of US$1.6 – US$2.0 billion. The Company believes that the total available market (TAM) for hard disc drives was in the region of 110-112 million units for the March quarter. Unit demand for Seagate’s 2.5 inch and 3.5 inch ATA products was better than planned and the Company gained significant share in each of these markets. The Company’s leadership position in the enterprise market remained substantially unchanged from the prior quarter; however, the TAM for enterprise class products decreased by an estimated 20%, sequentially. In addition, the Company shipped a higher mix of lower capacity desktop and notebook products than planned. Cash, cash equivalents and short-term investments increased by US$200 million to approximately US$1.5 billion.
Gross margin as a percentage of revenue (“gross margins”) is expected to be approximately 7 – 7.5%, which is better than the Company anticipated due to higher volumes and effective spending controls. Compared to the prior quarter, gross margins decreased by approximately 700 basis points due to like-for-like product price reductions, an estimated 20% reduction in the TAM for enterprise class products, and lower factory usage and fixed cost absorption as the Company continues to manage inventory aggressively and align production with demand.
Product development and marketing/administrative costs are expected to be approximately US$380 million, including approximately US$10 million of accelerated depreciation, which is favourable compared to the original outlook of US$395 million.
“I’m encouraged by our progress during the quarter in identifying and addressing a number of key strategic issues that are critical to the success of our business model,” said Steve Luczo, Seagate Chairman and Chief Executive Officer. “Specifically, we are realigning our business processes and optimising our product portfolio to maximise profitability. These actions allow us to fund our technology development more effectively, drive product leadership and create value for our customers by delivering the industry’s best products. We expect to see the effects of these actions in our product transitions, resulting in an ongoing improved margin profile. We are encouraged with the ramp up of our new 250GB and 500GB 2.5 inch products and 500GB and 1TB 3.5 inch products as they transitioned to volume this quarter. Additionally, we are addressing the near- to mid-term liquidity requirements through the recently announced amendment to our credit agreement and the announcement today of our anticipated financing.”
Initial Fiscal Fourth Quarter 2009 Outlook
Current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters and makes it more likely that Seagate’s actual results could differ materially from current expectations.
For the June quarter, the Company expects the TAM, on a unit basis, to be flat as compared to the March quarter in contrast to the historical norms of a slight decrease, with pricing consistent with previous June quarters. The Company sees no significant increase in the TAM for the enterprise market and expects to maintain its leading share position in this market in the June quarter. Accordingly, the Company expects revenue to be in the range of US$1.9 - US$2.2 billion and gross margins to improve by 300 - 400 basis points as products based on the 2.5 inch 250GB/disc and 3.5 inch 500GB/disc product platforms continue to ramp up and replace less cost-efficient product platforms. The Company believes that the ongoing transition to these new product platforms, coupled with targeted cost structure reductions, provides the foundation for the continued improvement of gross margins into its fiscal year 2010. Product development and marketing/administrative costs are expected to be approximately US$340 million for the June quarter, with the targeted run rate being less than US$300 million per quarter, which is expected to be achieved during fiscal year 2010.
As part of the Company’s ongoing cost structure alignment, additional restructuring actions are currently being addressed. The Company believes opportunities exist to reduce operating costs in product development, marketing/administrative and manufacturing areas to target a cost structure that generates positive cash flow and earnings within its fiscal year 2010. The estimated cost of any additional restructuring activities has yet to be determined.
The fiscal fourth quarter 2009 outlook does not include the impact of any future mergers, acquisitions, dispositions or other business combinations, financing or potential new restructuring activities that the Company may undertake. The Company is continuing to evaluate various financing options to manage the retirement and replacement of existing debt and associated obligations, including the issuance of new straight debt securities, exchanging existing debt securities for new equity or other debt securities and retiring existing debt securities pursuant to privately negotiated transactions, open market purchases or otherwise.
Cash, cash equivalents and short–term investments as of 3 April 2009 totalled approximately US$1.5 billion compared to US$1.3 billion in the prior quarter. Approximately US$90 million of cash restructuring payments were made during the March quarter.
To further enhance liquidity, management has recommended, and the board has adopted, a policy of not paying a quarterly dividend. This action is expected to reduce cash outflows by approximately US$60 million annually.
As disclosed on 6 April 2009, the Company has amended the terms and financial covenants relating to the existing revolving credit facility. The company believes the new financial covenants provide adequate flexibility for the remaining term of the credit facility.
Fiscal Third Quarter 2009 Financial Results
Seagate will report full fiscal third quarter financial results on Tuesday, 21 April 2009 after the close of the market. A subsequent conference call for the investment community will take place at 2:00 p.m. Pacific Time. The conference call can be accessed online at www.seagate.com or by telephone as follows:
USA: (877) 223 6202
International: +1 (706) 679 3742
Conference ID: 90458329
A replay will be available beginning 21 April at 6:00 p.m. Pacific Time through to 28 April at 8:59 p.m. Pacific Time. The replay can be accessed through Seagate’s website at www.seagate.com or by telephone as follows:
USA: (800) 642 1687
International: +1 (706) 645 9291
Conference ID: 90458329
Seagate is the worldwide leader in the design, manufacture and marketing of hard disc drives and storage solutions, providing products for a wide range of applications, including Enterprise, Desktop, Mobile Computing, Consumer Electronics and Branded Solutions. Seagate's business model leverages technology leadership and world-class manufacturing to deliver industry-leading innovation and quality to its global customers, with the goal of being the time-to-market leader in all markets in which it participates. The company is committed to providing award-winning products, customer support and reliability to meet the world's growing demand for information storage. Seagate can be found around the globe and at http://www.seagate.com.
Cautionary Note Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements related to the Company’s preliminary results for the March quarter and its future operating and financial performance, including expected revenue, net loss and product competition, customer demand for our products, the impact of our recent and anticipated cost reduction efforts and general market conditions. These forward-looking statements are based on information available to Seagate as of the date of this press release. Current expectations, forecasts and assumptions involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond the company's control. In particular, uncertainty in global economic conditions pose a risk to the overall economy, as consumers and businesses may defer purchases in response to tighter credit and negative financial news. Such risks and uncertainties also include the impact of the variable demand and the aggressive pricing environment for disc drives, particularly in view of current business and economic conditions; dependence on Seagate’s ability to qualify, manufacture and sell its disc drive products successfully in increasing volumes on a cost-effective basis and with acceptable quality, particularly the new disc drive products with lower cost structures; the impact of competitive product announcements and possible excess industry supply with respect to particular disc drive products; and our ability to achieve projected cost savings in connection with our anticipated and announced restructuring plans. Information concerning risks, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements is contained in the Company's Annual Report on Form 10-K, as filed with the US Securities and Exchange Commission on 13 August 2008 and in the Company’s Quarterly Report on Form 10-Q, as filed with the US Securities and Exchange Commission on 10 April 2009, whose statements are incorporated into this press release by reference. These forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date on which they were made.
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