Hard-drive storage manufacturer Seagate Technology (STX) announced that it will not meet its revenue and gross margin guidance for its fourth quarter of 2012. The company will post revenue of about $4.5 billion, far lower than its guidance of at least $5 billion. Additionally, the firm announced gross margins will be in the neighborhood of 33.6%, below the firm’s prior expectation of 34.5%. The downward revisions will lead to lower-than-expected earnings for the fourth quarter as well as its full year, in our view.
Management cited an isolated supplier issue in one of its enterprise product lines as weighing on revenue, in addition to weaker-than-expected market share gains, which remained flat at 42%. During the quarter, the company bought back $1.2 billion of stock, bringing the firm’s share-count down to 396 million shares outstanding. With a dividend yield in excess of 4% at current prices, Seagate remains focused on returning cash to shareholders.
However, the future of Seagate and the DRAM (dynamic random access memory) industry remain in question. With more computing time moving to mobile devices such as tablets and smartphones, NAND flash is becoming increasingly more popular. As the technological capabilities of NAND increase and become more affordable, we think NAND flash will inevitably replace DRAM in larger devices. Intel’s (INTC) Ultrabooks, for instance, will have NAND flash rather than DRAM. NAND flash is non-volatile and boots faster than DRAM, and it appears to be the superior technology.
Though the industry continues to undergo change, future consolidation should help support generally weak pricing and mitigate issues of overcapacity, which remains a key threat now that companies have worked through supply-chain issues related to flooding in Thailand. We think the industry could only become attractive with a few players that are satisfied with existing market share, thereby avoiding competitive price wars.