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Seagate's hard decisions paying off

Seagate Technology, the world's largest disk drive maker that has been streamlining operations, wallops analysts' earnings expectations by 14 cents a share.

Seagate Technology, the world's largest disk drive maker, walloped analysts expectations today by 14 cents a share.

Seagate reported earnings of diluted net income of $2 million, or 1 cent a share, on $1.68 billion in revenue for its fiscal 2000 first quarter, ended October 1.

This compares to revenue of $1.55 billion a year earlier with a net loss of $30 million, or 12 cents a share.

Excluding restructuring charges and net gains related to the purchase of Veritas Software, Seagate earned 7 cents a share compared to a projected loss of 7 cents a share according to a consensus by First Call.

Analysts attributed Seagate's successful quarter to smart management and good execution, both in streamlining operations and grabbing market share.

"To be able to perform this way in a tough environment is a real statement to the success of plans we initiated two years ago," Steve Luczo, Seagate's CEO told CNET News.com. "Yet our competitors are losing $50 [million] or $100 million .

"We wanted to make changes that were sustainable. Let's just not do something that makes it look good for a quarter, but a quarter later we're in the same box."

Seagate spent much of the first quarter restructuring, in August cutting 1,600 jobs in Singapore, and announcing last month layoffs of 8,000 more, or 10 percent of its workforce. The company also reorganized its software unit.

Analysts initially attributed the layoffs to soft sales brought on by stiff competition at the low end of the PC market. But Luczo said the restructuring was crucial to Seagate producing more drives that cost less.

"The biggest challenge is putting the systems in place to respond to the changing customer demand," said Luczo. "Supply chain management is crucial and being able to be the best company responding to in-quarter changes by our customers.

"Our customers are becoming more volatile as they make those changes with their customers, which means the flow back to us is amplified because our lead times are shorter than our customers in terms of all the components that go into our systems."

Seagate reported it is making 25 percent more drives than two years ago, but with 27 percent fewer people. This has led to a 50 percent reduction in inventory and capital expenditures by 35 percent.

The storage drive maker also benefited from smart execution selling low-cost disk drives, said analysts.

"Seagate has been the industry leader developing low-end desktop drives for low-end desktop computers," said James Porter, president of Disk/Trend, a market researcher covering the storage market.

Seagate introduced in March the U4, a 4.3-GB per platter hard drive well positioned for the boom in low-cost PCs.

"Seagate developed that market quite well and they got out there with a low-cost approach and took a lot of market share starting in the spring time," said Porter.

Seagate shipped 9.7 million drives during its first fiscal quarter, up from 7.1 million drives a year earlier and 8.3 million drives last quarter. PC manufacturers accounted for 68 percent of sales and retail for 32 percent.

Disk drives accounted for $1.56 billion of revenue, followed by removable storage at $74 million, software at $29 million, and $13 million for other components.

North America was the strongest region, with 44 percent of sales, followed by Europe at 38 percent, and Asia-Pacific at 18 percent.

Seagate gained about $151 million in cash during the quarter, ending with a total of $1.4 billion in cash.

Seagate's next challenge will be holding onto its market share and extending its dominance through the U8, an 8.6-GB per-platter drive available in both two-head and single-head versions. Seagate's problem is competitors catching up, said analysts.

"We're going to see another shootout in the month of October as Seagate and its competitors shoot it out at the OK Corral," said Porter. Five other companies have announced 8.6-GB per-platter drives and single-head 4.3-GB per platter versions.

"They'll be going for market share from Dell, Compaq, Gateway, etc., and we'll see who backs away from the table, if anybody, before there are any corpses," said Porter.

This, say analysts, is where Seagate's reorganization may pay off. The company is better positioned to deliver cheaper drives faster than some competitors. Seagate's average price for a drive was $116.70, down from $195 a year earlier.

Seagate is forecasting similar performance for the second quarter as in the first.