Seagate sees red in Q2

A large restructuring charge and slower-than-expected demand for storage products pushes Seagate Technology into the red for the quarter.

3 min read
A large restructuring charge and slower-than-expected demand for storage products pushed Seagate Technology (SEG) into the red for the December quarter.

Although the company recently announced that it would lay off 10,000 workers worldwide as part of its efforts to get spending under control and offset sluggish sales, the cutbacks might not be enough. Seagate still faces increased overseas competition from companies that have been flooding the market with less expensive drives, thus putting pressure on pricing.

The storage drive maker reported a net loss of $183 million, or 75 cents a share, compared with profits of $212.6 million, or 91 cents a share, a year ago. Analysts expected a loss of 33 cents a share, according to First Call.

The company reported revenues of $1.67 billion for the current quarter, down from revenues of $2.4 billion reported for the same quarter last year.

While analysts believe Seagate's fight to get costs under control is a step in the right direction, competition from Asian-based vendors ramping up production in order to gain market share could keep the storage sector as a whole floundering for months to come. Worse still, analysts say that there isn't any new technology on the horizon that might boost the company's sales.

During trading today, Seagate's stock gained 1-7/16 to end the day at 19-15/16, up from yesterday's close of 18-1/2. Since October, when it was trading near $40 a share, the company's stock has lost over 50 percent of its value.

Pricing pressure is still an obstacle for Seagate going forward. As it and others like Quantum (QNTM) and Western Digital (WDC) trim back production, their efforts could neutralize the cutbacks by Asian-based vendors like Fujitsu, Maxtor, and Samsung.

Those Asian companies are increasing production and are pricing products aggressively in hopes of gaining market share, which could hamper efforts to return a supply and demand balance to the storage sector, Gillian Munson, an analyst with Morgan Stanley Dean Witter, said in a research report. She noted that the increased production of Asian companies will continue to wreak havoc on the sector in 1998.

Last week, Seagate announced that it would slash 8,600 jobs worldwide, bringing the storage maker's recent worldwide cuts to a total of 10,000, or 10 percent of its workforce. The layoffs are aimed at getting expenses under control as demand for Seagate products continues to stall, and trimming the company's workforce down to 90,000 worldwide.

The majority of the layoffs will affect the Asia Pacific region, but the company also is consolidating its five U.S. research and development facilities into three.

Seagate took restructuring charges of $205.5 million, special charges of $71.5 million, and a $22 million reduction in the $153 million charge previously recorded for litigation settlement, which was recorded in the company's fourth quarter of fiscal 1997. Excluding those items, the company's net loss would have been 8 cents per share for the quarter. Seagate said that the total restructuring charges will be in excess of $300 million, and that it will take the balance of more than $50 million in the March quarter.