Seagate: Fiscal 2Q12 Financial Results

Water skiing on Thai flood

This is a Press Release edited by StorageNewsletter.com on February 1, 2012 at 3:08 pm

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(in US$ millions)	2Q11	2Q12	6 mo. 11	6 mo. 12
Revenues	2,719	3,195	5,417	6,007
*Growth*		18%		*11%*
Net income (loss)	150	563	299	703

Seagate Technology plc reported financial results for the quarter ended December 30, 2011.

The company shipped 47 million disk drives and reported revenue of $3.2 billion, gross margin of 31.6%, net income of $563 million and diluted earnings per share of $1.28. On a non-GAAP basis, which excludes the net impact of certain items, Seagate reported net income of $581 million and diluted earnings per share of $1.32 for the quarter ended December 30, 2011.

For the six months ended December 30, 2011, the company reported revenue of $6.0 billion, gross margin of 26.0%, net income of $703 million and diluted earnings per share of $1.61. On a non-GAAP basis, which excludes the net impact of certain items, Seagate reported net income of $727 million and diluted earnings per share of $1.67. Seagate returned $151 million to shareholders in the form of a dividend and repurchased $191 million of Seagate ordinary shares which equates to approximately 13 million ordinary shares.

Acquisition of Samsung’s Hard Disk Drive Assets
Seagate announced on December 19, 2011 the closing of the acquisition of the hard disk drive business of Samsung Electronics Co., Ltd. Related to this transaction, amortization of acquisition-related intangibles of $5 million (non-cash expense) is included in the GAAP basis net income for the fiscal second quarter and six months ended December 30, 2011. For Seagate’s third fiscal quarter, which ends on March 30, 2012, it is expected that amortization of acquisition-related intangibles will be approximately $35 million.

Comments

Following the Thailand flooding that impacted its entire quarter ending December 31, Seagate is surfing: revenues, net income, gross margin, average selling price, all the figures are increasing compared to the former quarter excluding HDD shipments (-8%).

ASP is up quarterly $13 at $68, as average price of to produce units increased by only $2.50.

WD, with the majority of its manufacturing capacities in Thailand, suffered much more in the December quarter, only gross margin and ASP going up, with sales, net income and units shipped down drastically.

For this last quarter, Seagate continues to be - and now largely - the number one WW manufacturer of HDDs in term of revenues, with 60% more than WD, and is back - and once more with ease - as the leader in units shipped, with 65% more devices shipped than its rival. But this situation is going to change. WD will be finally the number one in these two categories when the acquisition of Hitachi GST will be completed.

Note two new business change at Seagate
to further increase selling prices:
(read below the earnings call transcript)

Customers have now to sign binding long-term agreements to be sure to get their drives.
The company is launching a new way to sell its devices to the other ones: sales by auction!

Since many years, everybody remarked that Seagate prefers shareholders to customers, at the expense of its global corporate image, as some other public companies.

Seagate (with Samsung)

HDD shipped*	FY1Q12	FY2Q12	Growth
Notebook	12.6	15.6	24%
Desktop	20.7	17.1	-17%
Enterprise	6.9	6.4	-8%
CE	6.3	4.8	-24%
Branded	4.2	3.0	-29%
Total	50.8	46.9	-8%
ASP	$55	$68	24%

* In thousands

WD

HDD shipped*	FY1Q12	FY2Q12	Growth
Notebook	19,6	9,8	-50%
Desktop	21,6	11,4	-47%
Enterprise	2,4	1,7	-27%
CE	7,2	2,4	-67%
Branded	7,1	3,2	-55%
Total	57,8	28,5	-51%
ASP	$46	$69	+50%

* In thousands

Abstracts of the earnings call transcript:

Steve Luczo, chairman, president an CEO:
"For the December quarter, the industry shipped approximately 119 million units, which was within our expected range.
"(...) our non-GAAP gross margin was 31.7%. We ended the quarter with $2.3 billion in cash.
"(...) while many observers tend to believe that mid to late October was the low point of industry production, we believe the low point was closer to mid-December.
"Our average selling price per unit for the quarter was approximately $13 higher than they were in the September quarter.
"As a result of improvements in supply-demand alignment and our approach to pricing, nearly all of our largest customers have entered into binding long-term agreements or LTAs to ensure continuity of their hard disk drive supply. Some of these LTAs extend for multiple years. LTAs of this nature are new to the disk drive industry and represent a structural change in the way we do business. These agreements are mutually beneficial and improve the strategic alignment between Seagate and its customers by improving forecast accuracy, unit volume and pricing visibility, product build planning and logistics.
"The executed LTAs are expected to account for an excess of 60% of our total production capacity during the calendar year.
"Finally, in order to provide our customers another channel to access Seagate products, we are planning to auction approximately 200,000 drives later this week. (...) We have over 50 customers already committed to participate in the first auction.
"In the final weeks of 2011, Seagate shipped approximately 700,000 Samsung drives using Seagate's global systems.
"We believe that the exabyte demand is growing at 40% per year, while areal density growth is increasing at less than 25% per year. We continue to expect that calendar 2012 unit demand will exceed supply, that the exabyte shortage will be more pronounced than the unit shortage, and that price declines on a like-for-like basis will be relatively benign throughout the year. We believe the industry will likely exit the calendar year with approximately 100 exabytes of unmet demand.
"Based on Seagate's average capacity per drive shipped last quarter, which was the highest in the industry, this exabyte shortfall equates to approximately 150 million units. For the March quarter, we are expecting drive shipments of at least 60 million units, revenues to be at least $4.3 billion, gross margins to exceed 33% and operating expenses of approximately $405 million.
"For the June quarter, we expect that our supply chain capabilities will continue to improve, which will result in revenues of at least $5 billion and gross margins comparable to those expected for the March quarter. In light of the persistent supply-demand imbalances that we believe will exist throughout the calendar year, combined with greater visibility due to our LTAs, we currently expect a relatively benign pricing environment resulting in revenues of at least $20 billion for calendar year 2012."

Dave Mosley, executive VP ops:
"(...) our average unit costs went up approximately $2.50 in the December quarter."