Seagate: greedy opportunists or unfortunate flood victims?

[intel4eva]

To start, lets take a look at this here article from PCPer entitled "Seagate Technology Provides Updated Financial Outlook"

I will quote the whole article here as it's short and not everyone wants to open another tab, link will be below. Also, I will shamelessly underline the parts that raised my eyebrows.

Seagate Technology Provides Updated Financial Outlook
Subject: General Tech | November 29, 2011 - 12:23 PM | Jeremy Hellstrom
Tagged: Seagate, hdd, earnings

It seems very interesting that Seagate is so upbeat about their earnings with the flooding in Thailand causing huge supply shortages of HDD world wide. Last year at this time they were expecting 170 million units move, whereas this year is is 110-120 million units with demand outstripping supply. That number does reflect some supply issues but perhaps not as bad as the issues faced by Western Digital and other manufacturers with a large presence in Thailand. The profit being higher does show what happens when you have a product people want but cannot find; the price per unit quickly goes up and the business can still make a profit. We can only hope that as supply returns to the chain that the price drops at the same speed it has risen. We still do not have final word on Seagate's absorption of Samsung's HDD business, that will likely be in January.

CUPERTINO, Calif.--(BUSINESS WIRE)-- Seagate Technology plc (NASDAQ:STX) today updated its financial outlook for the December 2011 and March 2012 quarters.

The company continues to believe that, due to the industry impacts caused by the extensive flooding in Thailand, hard disk drive supply will be significantly constrained for several quarters. For the December 2011 quarter, the company believes the industry will ship between 110-120 million units.

The company believes the industry’s ability to manufacture and ship hard disks drives will gradually improve throughout calendar 2012. While this may alleviate some of the unit demand shortfall, it is expected that some companies will optimize unit shipments by manufacturing lower component count/lower capacity hard disk drives; thereby, only modestly offsetting the growing petabyte shortage. Because demand is estimated to significantly exceed supply during this time, pricing is expected to remain stable.

Financial Outlook
The company’s component and disk drive factories in Thailand have not been directly affected by the flood; however, the company’s ability to manufacture hard disk drives has been impacted due to external component supply constraints as first disclosed on October 12, 2011.

For the December 2011 quarter, the company now expects unit shipments of approximately 43 million units and revenue of approximately $2.8 billion. Gross margin as a percent of revenue is expected to be 150-300 basis points above the high-end of the company’s long-term, targeted gross margin range of 22-26%. Operating expenses (R&D and SG&A) are expected to be approximately $400 million. Expenses related to the acquisition of Samsung Electronics Co., Ltd’s (“Samsung”) hard disk drive business and any revenue or operating expenses of the acquired business following the closing date cannot be estimated at this time and are therefore excluded from this outlook. The company continues to expect to close the acquisition of Samsung’s hard disk drive business by the end of December 2011.

The company’s outlook for the March 2012 quarter assumes requisite regulatory approvals are received and the Samsung acquisition closes in December of 2011. The company also continues to work with its external suppliers to restore the component supply chain, and now expects that in the March quarter it will be capable of shipping a mix of products in terms of capacity per drive and expected market similar to pre-flood levels. Currently, for the March 2012 quarter, the company expects unit shipments to increase sequentially. Revenue is expected to be at least $3.75 billion and gross margin as a percent of revenue is expected to be at least 300 basis points above the aforementioned targeted range of 22-26%. The outlook for the March 2012 quarter excludes certain costs related to the integration of the acquired Samsung hard disk drive operations which cannot be estimated at this time.

The financial outlook provided today does not include the arbitration award previously disclosed on November 21, 2011.

http://pcper.com/news/General-Tech/Seagate-Technology-Provides-Updated-Financial-Outlook


As some of you may know, I've had some pretty unkind words for Seagate in a recent news article on Tom's front page there. I actually was really surprised at how many thumbs up I had given the negativity my post was filled with. Now it appears I may have been to kind to this particular company.

So let's look at the key points from the article:
-Seagate is happy about their earnings, which have increased with margins above their best estimates in normal times.
-Seagate apparently has money to buy Samsung's HD division, making the already low number of HD manufacturers even lower (one could argue that the current shortage is made possible by having only a few major HD manufacturers all hogging the same suppliers-> lack of diversity)
-Seagate claims hard drive shortages will last a long time, thus completely justifying keeping current prices, but in the same breath expect to have their HD production back to normal by March
-Seagate claims prices will have to stay up for a long time. I believe the phrase was "prices will remain stable"
-Seagate will slow down production of its high capacity drives and use the components to build more low capacity drives, which are now selling at multiples of what terrabyte-class hard drives used to about a month ago or so

So, I want to see what you think.

 

[4745454b]

My thoughts on the matter. (full discloser, while I normally consider myself a WD fan, I've had a number of their drives die on me over the last few years. While I still have some of their drives in my wifes computer, I run three Seagate 7200.10 drives in mine, along with either an hatachi or samsung. Not sure if this means anything.)

The company’s component and disk drive factories in Thailand have not been directly affected by the flood; however, the company’s ability to manufacture hard disk drives has been impacted due to external component supply constraints as first disclosed on October 12, 2011.

There's a lot of "special stuff" that goes in a harddrive. If you haven't already, do some reading on rare earth elements. China's got them, and is pretty much the only country that is mining then and refining them. If the flooding somehow effected the mining, refining, or transport of these metals, then it will be difficult to make new drives.

-Seagate apparently has money to buy Samsung's HD division, making the already low number of HD manufacturers even lower (one could argue that the current shortage is made possible by having only a few major HD manufacturers all hogging the same suppliers-> lack of diversity)

I could be wrong, but I bet they started trying to buy them before the flood. Buying out your competitors is a normal thing, I'm not sure what the issue here is.

Seagate claims prices will have to stay up for a long time. I believe the phrase was "prices will remain stable"

Lets look at the quote again.

Because demand is estimated to significantly exceed supply during this time, pricing is expected to remain stable.

When demand "significantly exceeds" supply, prices do anything but remain stable. Seeing as prices have already shot up, this must mean Seagate believes that we have seen the end of the rise in prices. Just because Seagate thinks their output will return H1 2012 doesn't mean it will, nor does it mean that everyone else's output will return to normal. They could use their normal output to undercut everyone else and gain market share, but I'm pretty sure the business idea of sell what you have for maximum profit will win out.

Seagate will slow down production of its high capacity drives and use the components to build more low capacity drives, which are now selling at multiples of what terrabyte-class hard drives used to about a month ago or so

Platters. If your ability to make these has been compromised and you can't make as many as you used to, then you need to put less of them in each drive. If you have 500GB platters, you'd need two in a TB drive. But if demand is higher then supply, why make one TB drive when you can make two 500GB? I for one don't think this is a bad idea as more people will be able to get a drive this way. It might not be the drive they wanted, but at least they have something. I would also be willing to bet that everyone else is doing that as well to maximize output.

Unfortunately "greedy opportunist" and sound business strategy can be a fine line.

 

[skytanker2003]

Agreed. I've never been a fan of Seagate, since back about 10 years ago now. This HDD crisis just puts one more nail in the coffin for me. Raising prices to turn a profit by taking advantage of Western Digital's failure by centralizing too much of their production in one location is, in essence, good business sense. Unfortunately, it's not good for human relations...especially when you factor in all the unrest related to the Occupy movement and all. The only thing that could change MY mind about Seagate at this point would be if they set up some sort of Thailand Flood Relief Fund to help the local populace over there...but I DEFINITELY do NOT see that happening!

 

[cumi2k4]

Well, lets just hope wd can be back in production faster than expected. I've been using wd for all my drives due to better pricing, and i sure won't be paying for the price nowadays. Now ssd looks even more attracting.

 

[Rusting In Peace]

Seems to me like they've just turned an unfortunate situation around.

Frankly if they can stay in the game then I don't care. The more manufacturers there are, the better the prices for consumers.

Just as cumi2k4 suggested, SSD are on the rise because of all of this and for a company like Seagate, who don't really have a SSD drive offering (I'm discounting their hybrid drives), this is bad news.

 

[DelroyMonjo]

intel4eva, you cherrypicked that article like a true MSNBC 'journalist', completely skipping over the explanations of your underlined choices.
I believe 4745 points that out.

 

[4745454b]

He did say he isn't found of them. At least he is honest.

 

[chesteracorgi]

Are you objecting to capitalism in practice? What about Apple threatening suppliers with ruin if they do not suply all of their requirements? Do you object to that too? Were you concerned about their margins when 1.5 TB HDDs were going for $50 and 3 TB HDDs were at $110?

Perhaps you should consider joining the occupy freeloaders and demand your share of their (Seagate's) profits.

 

[intel4eva]

Are you objecting to capitalism in practice? What about Apple threatening suppliers with ruin if they do not suply all of their requirements? Do you object to that too? Were you concerned about their margins when 1.5 TB HDDs were going for $50 and 3 TB HDDs were at $110?

Perhaps you should consider joining the occupy freeloaders and demand your share of their (Seagate's) profits.

 

[chesteracorgi]

http://chzmemebase.files.wordpress.com/2011/04/memes-u-mad.gif

So you are objecting to the fact that they are not making a gift to you? WAHHHHH! WAHHHHHH!

Evil profiteers, let's nationalize them all. Then we'll have good Soviet class PCs.

Join the Occupy freeloaders already and quit whinning. Defend your right to lice, and all the free stuff you can get.