When Al Shugart, chief executive of disk maker Seagate Technology, faced stockholders following the release of his company’s fourth quarter results in July, he was in a confessionary frame of mind. It was a crummy quarter, he admitted. The picture for the year was not too grim. Net profit rose to $658m after charges, up from $213m in 1996, on revenue up 4% to $8.94bn. But for the fourth quarter, the company reported net profit which slid 42% to $59m, on revenue down 2% at $1.98bn. The company was quick to point out that the quarterly results included a charge of $153m relating to an adverse judgement made in the British Courts. Seagate was deemed to have supplied UK PC company Amstrad with disk drives it knew were faulty. There was a further $2.5m in charges from the restructuring of its Seagate Software subsidiary. But even without these charges, say analysts, earnings per share for the quarter would still have fallen short of expectations. In the last couple of years we have seen our fourth quarter go a little flat as consumer demand drops over the summer, says Don Waite, Seagate’s chief financial officer, in mitigation. But slowing consumer demand cannot explain the significant decline in sales of high-end disk drives whose sales fell a 24% to $1.05bn. Seagate has traditionally enjoyed a 60% share of the market for high-end storage, but it is now seeing this sector invaded by other storage vendors, most notably Quantum and Western Digital. In the fourth quarter, Seagate’s market share dropped to 53%. According to Waite, Seagate was always aware that this invasion would happen. However, it had hoped that overall market growth would offset the effect of increased competition.
Bad news kept coming
This never happened. We don’t know why, says Waite. Furthermore, some of Seagate’s OEM partners had been stockpiling inventory for some time. They switched to a just-in-time manufacturing model, which also contributed to slowing demand. As a result of all this, the desktop PC storage market is now of increased importance to Seagate. But there was also a notable drop in sales of disk drives for desktop PCs, down 11% to $703m. These problems were further compounded by the negative effect of foreign exchange rates, and in particular, the devaluation of the Thai Baht. As a result, Seagate says that it may face an additional charge of as much as $25m in the first quarter of 1998. However the company maintains that its forward currency hedging program should compensate for the write-off during the life of forward currency contracts. But beyond the financial results, the bad news just kept coming. Seagate said that it had received notice of potential deficiencies from the Internal Revenue Service (IRS), stating that the company may owe as much as $44m in taxes and penalties pertaining to the financial years 1991 to 1993. Seagate will contest the figures. In a final blow to the company, Amstrad’s chairman, Alan Sugar declared in early July that, following his victory over Seagate in the British courts, he is now considering a new action against the company, this time in the US courts. He is seeking punitive damages for alleged fraud, a matter on which Seagate will not comment. Many of these problems can be simply be attributed to a run of poor luck in a crummy summer. But the squeeze at the high-end of the disk drive market seems set to continue as competitors attack Seagate’s customer base. It will need to fight hard to maintain control of its core market.
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