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Seagate Revises 4Q Guidance

Zacks Equity Research

Seagate Technology PLC (STX) has lowered its revenue and gross margin guidance for the fourth quarter ending June 30, 2012 citing lower volumes.

Last week, the hard disk drive (:HDD) manufacturer provided a financial update, indicating shipments of around 66 million units for the month of June with revenue being $4.50 billion and gross margin 33.6%. During its third quarter 2012 conference call, Seagate projected revenues of roughly $5.0 billion and gross margin of 34.5% for the June quarter. The fourth quarter results will be announced on July 30, 2012.

The unit shipment could have been better, but Seagate stated that a recovering phase in the HDD sector (post the Thailand flood) and an enterprise-class drive quality issue led to lower shipments. Other factors that affected shipments were slower-than-expected market share gains and weak demand stemming from macro-economic uncertainties.

Concurrent with the negative pre-announcement, Seagate issued a conservative outlook for the September quarter (the first quarter of fiscal 2013). Given the number of customers affected by the macro slowdown, Seagate now expects the addressable market to be relatively flat sequentially. It is therefore adjusting its production and inventory planning accordingly. Average selling prices are expected to remain relatively stable, however, most likely on account of the improving product mix.

Apart from providing a gloomy outlook, Seagate also announced to return shareholder value. The company announced that it bought back the targeted 45 million shares during the quarter for $1.2 billion. This indeed, would boost Seagate’s earnings potential as well as investor sentiment.

We believe that Seagate’s weakness is short term. Full recovery in the HDD industry and increasing demand will position Seagate as the leading player in the market. Seagate has larger exposure to high-end corporate desktop and enterprise server markets than its rival Western Digital Corp. (WDC).

Nevertheless, lackluster PC demand and increasing use of SSDs will continue to pressure HDDs. But Seagate’s growing exposure in the Enterprise SSD market will help it generate healthy revenues in fiscal 2012 and beyond, which in turn will improve margins.

Currently, Seagate has a Zacks #3 Rank, implying a short-term “Hold” rating.

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