Seagate just reported its best annual results ever, with $2.66 billion in revenues and $387 million in net profits and if you exclude stock repurchases, the company would have generated 1.4 billion in cash after repaying creditors. Seagate has now more than $2 billion in cash and only a small portion of its debt is in the short term, everything else is long term. With such a bright picture why is the market hitting so hard their stock after showing those numbers?
In April, demand for Seagate products was rebounding and the company was predicting that the market was going to be supply constrained for the next quarter. With the debt crisis wreaking havoc in Europe, the European companies postponed their investments, which slowed down the demand growth. As that demand faded, Seagate had to cede some market share to keep their margins.
This resulted in a drop to 46 million of HDDs shipped in FYQ4, against 50 million in FYQ3, which likely resulted in a drop in market share. To make things worse, their margins dropped, from 29.5% in Q3 to 27.1% in Q4, which resulted in a annual average of 28.1%.
Q4 for itself would not be too bad, but it did not end here. In the investors conference Seagate’s Management predicted for Q1 gross margins between 22 and 26%, and management expects the final margin to be in the lower end of the spectrum, which means to slash a between a third and a fourth of their net profits for the next quarters.
This also raised concerns that the market players will soon stage a price war, which coupled with rising production costs does not bode well for Seagate. The market does not predict problems at Seagate or in their ability to compete, but does predict a tougher market environment. Cloudy skies ahead.S|A