Seagate Technology Reports Fiscal First Quarter 2005 Results@ 2004/10/20
"Near record unit shipments, continued leadership in established enterprise and desktop markets, and our significant and increasing presence in growth markets are a result of Seagate's continued design and manufacturing strength," said Bill Watkins, Seagate's president and chief executive officer. "Even in a challenging industry environment, we met or exceeded our overall performance targets.
"During the quarter, our new 1-inch drive was selected by some of the industry's most prominent OEMs for integration into their high-profile portable digital audio players. Our mobile market presence continued to expand with the beginning of qualifications of our new 2.5-inch disc drive at all major OEMs. We shipped a record 3 million enterprise units, further strengthening our leadership position in this space. We maintained our leadership position in the desktop market and increased our shipments for consumer electronics applications sequentially and year-over-year. With additional products yet to launch during the course of this fiscal year, we believe that our broad market presence combined with one of the industry's most operationally efficient and cost-optimized business models position us well for the future."
The company believes the total available market (TAM) for enterprise storage products was approximately 6.0 million units in the September quarter. Seagate shipped in excess of 3 million units, which included its new Cheetah 10K and 15K rpm disc drives.
Based on current customer data, historical demand patterns and recent market growth rates, Seagate believes the TAM for enterprise storage products for the December quarter will be approximately 6.4 million units.
The company believes the TAM for desktop storage products was approximately 47-48 million units in the September quarter. Seagate shipped 15.0 million units. This TAM estimate includes all ATA disc drives used in a computing environment, excluding disc drives used in consumer electronics applications. Of the 15.0 million units Seagate shipped during the September quarter, approximately 56% were sold to OEM customers and 44% were sold to distribution customers.
Based on current customer data, historical demand patterns and recent market growth rates, Seagate believes the TAM for desktop storage products for the December quarter will be approximately 50-51 million units.
Mobile Computing Products:
The company believes that in the September quarter the TAM for mobile computing storage products was approximately 13-14 million units. Seagate shipped 677,000 units. This market includes 2.5-inch and 1.8-inch disc drives used in notebook and other portable computers. During the September quarter, Seagate began qualifications of Momentus 5400.2, its newest disc drive for notebook PCs. With capacities up to 100GB, Momentus 5400.2 significantly expands Seagate's offerings in the growing notebook systems market.
Based on current customer data, historical demand patterns and recent market growth rates, Seagate believes the TAM for mobile computing storage products for the December quarter will be approximately 15-16 million units.
Consumer Electronics Products:
The company believes the TAM for consumer electronics storage products was approximately 12 million units in the September quarter. Seagate shipped 2.9 million units during the September quarter, which included approximately 400,000 units of ST1, Seagate's first 1-inch hard disc drive. This TAM estimate includes disc drives in all form factors used in portable and in-home consumer electronics applications.
Net Income: Net income for the September quarter of $54 million included a favorable impact of $14 million related to the discontinuation of certain benefits associated with Seagate's post-retirement medical plan. Cost of revenue was reduced by approximately $6 million and the balance of $8 million reduced product development and marketing and administrative expense. In addition, Seagate recognized a gain of approximately $4 million associated with the sale of a surplus building which is reflected in other income/expense.
Gross Margin: Gross margin for the September quarter was 17.7%, compared to 17.1% in the previous quarter. Gross margin for the quarter was favorably impacted by $6 million due to the discontinuation of certain benefits associated with Seagate's post-retirement medical plan. Margin improvement over the prior quarter was due to higher overall unit shipments, cost reduction actions recently implemented and improved product mix offset by the price declines normally experienced in the disc drive industry and a reduction in finished goods inventory, which negatively impacted fixed cost absorption.
Average Selling Price: The average selling price (ASP) during the September quarter on a blended basis for all Seagate products declined by 1.3% to approximately $72. The ASP for desktop products was flat from the prior quarter, reflecting a better than expected pricing environment for most of the quarter and an improving mix of products shipped. Mobile computing products experienced a 10% decline in ASP from the prior quarter. The ASP for enterprise products experienced a decline of only 2% as compared to the prior quarter, significantly less than any of the last four fiscal quarters.
Channel Inventory: The distribution channel inventory for Seagate desktop products, using a 13-week rolling average for distribution sales out, was about 4.6 weeks of supply. For the industry, excluding Seagate, the company believes inventory levels in the distribution channel are approximately 6.5 weeks of supply.
Revenue Breakdown: Revenue by channel for the September quarter was 71% OEM and 29% distribution, compared to 74% and 26%, respectively, in the prior quarter. Revenue by geographic region was 33% for North America, 29% for Europe, and 38% for Asia Pacific.
Cash Flow: Cash flow generated from operations was $116 million in the September quarter, compared to $74 million in the previous quarter.
Cash Balance: As of October 1, 2004, the last day of the September quarter, the company had cash, cash equivalents and short-term investments totaling $1.2 billion, an increase of $19 million from the prior quarter.
Inventory Turns: Inventory turns for the September quarter were 13.5, an increase from 9.9 in the prior quarter. The total inventory balance at the end of the September quarter was $379 million, down $70 million from the prior quarter, reflecting a $104 million decrease in finished goods offset by a $34 million increase in raw material and work in progress.
Capital Investment: Capital investment for the September quarter was $97 million. Capital investment for fiscal year 2005 is still expected to be $500-550 million.
Dividend: The company has declared a quarterly cash distribution of $0.06 per share to be paid on or before November 19, 2004 to all common shareholders of record as of November 5, 2004.
Seagate believes the industry benefited from the expected seasonal demand increase during the September quarter; however, the challenges of longer product cycles, aggressive pricing and multiple competitors still exist. As a result, the company continues to look at opportunities for further cost reductions which may result in additional restructuring activities and restructuring charges in the future.
Recent actions taken by the company to align its cost structure with the current business environment, coupled with the normal seasonal increase in customer demand usually seen in the second half of the calendar year and the ramp of the company's new 1-inch disc drive resulted in improved financial results for the company as compared to the June quarter. Due essentially to the factors mentioned above plus additional shipments of new products, the company anticipates continued improvement in its financial performance for the December quarter. Assuming an historical seasonal pattern throughout the remainder of the calendar year, the company expects the December quarter's revenue to be in the range of $1.58 to $1.65 billion, and diluted earnings per share to be in the range of $0.11 to $0.14, excluding any restructuring charges. During the week of December 6, 2004 Seagate will provide a business update at which time additional information regarding the company's financial expectations will be discussed.
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