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October 12, 1999

Seagate Sails In $0.14 Above Wall Street’s Q1 Forecast

By CBR Staff Writer

By Stephen Phillips

Disk drive maker Seagate Technology Inc confounded pessimistic Wall Street earnings forecasts yesterday by announcing earnings for its first fiscal 2000 quarter a full 14 cents-a-share above what the market had expected. Analysts had pegged Seagate to a pro-forma loss of seven cents-a-share for the three months to September 30 amid fierce price competition in the disk drive market. But the Scotts Valley, California-based company reported a seven cents-a-share profit for the quarter, trumpeting sharply- increased, record disk shipments and productivity gains from a paired-down workforce.

Factoring in a $112m charge from laying off 8,000 staff, $102m costs from investment in Veritas Software Corp and a $193m gain from selling Veritas stock, Seagate still showed a net profit of $2m or one cent-a-share on sales of $1.68bn for the quarter.

Seagate, the world’s leading independent maker of storage devices for computers, said it had shipped a record 9.7 million disk drives in the quarter – up 1.5 million units on the previous quarter. It said it also reaped economies and productivity improvements from a rolling program to cut 10% of its workforce, announced last month at a cost of $200m. Seagate chairman and CEO, Stephen Luczow said across all product lines Seagate had produced 25% more drives using 27% less staff during the quarter.

The firm showcased the fruits of a strategy to draw closer to channel reseller partners which has slashed the cost of its inventory, or stockpiled good awaiting sales, from $461m in the year-ago to $404m. Over the same period Seagate has ramped up inventory turn, or the number of times it ships its entire inventory to customers per quarter, from 10.7 times last year to 13.7 times this year.

Despite increased sales of disks, year-on-year the company’s gross profit margin declined from 20.7% to 16.5%. One of the reasons for declining profit as a proportion of revenue is the aggressive pricing which has gripped the commoditized disk drive market, with Seagate as the chief proponent. The firm’s tactics to offer below-cost prices on PC drives was cited by rival disk drive manufacturer, Quantum Corp, in August, in its decision to shed up to 800 staff to cuts costs. Seagate’s Luczow said the firm’s own restructuring efforts was what you do to stay out of trouble … in extremely difficult market conditions. Seagate had warned of a $200m charge from the job cuts last month, but said yesterday that Securities and Exchanges Commission guidelines governing the booking of charges meant that it could only include $112m charges because it had not finished implementing the changes. The firm said the restructuring would be rolled out during the fiscal year, it made no fresh announcements about this or the likely further cost. Seagate has previously said that the restructuring will save $150m a year.

The firm disclosed that it had spent $639m on buying back about 21.3 million of its common shares, contributing to a reduction in the number of outstanding shares from 245m in the same period last year to 224.1m.

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One disappointment for the firm was worse-than expected sales of its business-intelligence software through subsidiary Seagate Software. Sales for the unit stood at $29m compared to $43m in the previous quarter, which CEO Luczow attributed to poor execution in operations and sales management.

Before the results announcement yesterday, Seagate’s share price closed at $31.37 – down 1.18% for the day.

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