Seagate: Fiscal 4Q12 Financial Results

(in US$ million)	4Q11	4Q12	FY11	FY12
Revenues	2,859	4,482	10,971	14,939
*Growth*		57%		*36%*
Net income (loss)	119	1,013	511	2,862

Seagate Technology plc reported financial results for the quarter and fiscal year ended June 29, 2012.

During the fourth quarter, on a GAAP basis the company reported revenue of approximately $4.5 billion, gross margin of 33.1%, net income of $1.0 billion and diluted earnings per share of $2.37.

On a non-GAAP basis, which excludes the net impact of certain items, it reported gross margin of 33.6% and diluted earnings per share of $2.41.

In the June quarter, Seagate generated approximately $1.4 billion in cash from operations, paid cash dividends of $106 million and used approximately $1.2 billion to redeem approximately 45 million ordinary shares. Through the first half of the 2012 calendar year, Seagate has redeemed approximately 88 million ordinary shares, representing approximately 19% of the company’s market capitalization.

Cash, cash equivalents, restricted cash, and short-term investments totaled $2.2 billion at the end of the fourth quarter, a sequential increase of approximately $67 million.

For the fiscal year ended June 29, 2012, on a GAAP basis Seagate reported revenue of $14.9 billion, gross margin of 31.4%, net income of $2.9 billion and diluted earnings per share of $6.49. On a non-GAAP basis, the company reported gross margin of 31.7% and diluted earnings per share of $6.75. In fiscal year 2012, Seagate returned over 85% of its operating cash flow to shareholders in the form dividends and share redemptions.

"As we announced previously, we were disappointed not to meet our revenue and margin plan for the fourth quarter as a result of the industry’s faster recovery from the supply chain disruption and an isolated supplier issue that we experienced," said Steve Luczo, Seagate chairman and CEO. "Nevertheless, we are pleased to have achieved record revenue and unit shipments for the June quarter, which enabled Seagate to continue to return significant value to shareholders through dividends and share repurchases."

Quarterly Cash Dividend
The board of directors has approved a quarterly cash dividend of $0.32 per share, which will be payable on August 29, 2012 to shareholders of record as of the close of business on August 14, 2012. The payment of any future quarterly dividends will be at the discretion of the board and will be dependent upon Seagate’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the board.

Comments

Seagate continues to be ≠2 worldwide storage company with annual revenues of $15 billion for the year ended June 2012, behind leader EMC (dominating the industry since 2004) with $20 billion for its fiscal year period ended December 2011. Note that EMC grew only 18% Y/Y compared to 36% for Seagate.

WD, ≠3, records a better June quarter with revenue of $4.8 billion, ending its fiscal year at $12.5 billion and the firm has a good chance to surpass Seagate for the first time during the current fiscal year in the history of the WW HDD industry.

During it most recent quarter, Seagate saw net income exploding and shipped a record of 65.9 million HDDs representing around 45EB of storage (71 million and 48EB for WD respectively).

The HDD industry has been historically a low-margin activity. If you add the losses of the hundred of firms that enter into this market in the past, the final result is probably negative in term of global profitability. But it's changing following the Thai flood. The manufacturers largely increase their prices and keep them at a high level even if their facilities are not far to be back to full production. Seagate and WD, representing around 85% of the HDD market, apparently don't want anymore to compete on price. The third maker, Toshiba, could try do it but it's a small actor in this field and a huge enterprise looking at its financial bottom line, not a start-up supported by VCs and trying to boost market share.

Units shipped by Seagate

(in million)

3Q12

4Q12

% growth

Enterprise

7.4

8.5

14%

Client compute

43.8

46.3

Client non-compute

9.5

11.2

18%

Total

60.7

65.9

Seagate's revenue
by channel

3Q12

4Q12

OEM

73%

74%

Distribution

21%

19%

Retail

Abstracts of the earnings call transcript:

Steve Luczo, chairman, CEO and president:
"In our enterprise business, we had a strong year-over-year growth, reflecting demand for cloud infrastructure build-outs and enterprise storage. Our shipments to cloud applications grew faster than the market, increasing 70% year-over-year.
"Offsetting some of this strength in the quarter was an isolated supplier issue in one of our mission-critical products that impacted our enterprise business. From an operations standpoint, it was a unique problem that required a thorough and timely investigation in order to determine the root cause. Given the nature of the problem, which was a particle contaminant coming from a supplier 3 levels down in the supply chain, determining the root cause was a challenging endeavor. Once we identified the issue, we were able to switch to an alternate supplier, and we resumed shipping the product within the June quarter.
"Despite our efforts to solve this issue quickly, the time we were out of the market impacted enterprise sales by approximately 1.5 million hard drives. As a result, our earnings were impacted by approximately $0.48 per share.
"Our notebook drive sales were up 12%, resulting in nearly twice the sequential growth of the market due to the strength of the 7-millimeter product line and the successful ramp of the Samsung product line.
"In the fall, we will be introducing our third-generation client hybrid drives, which will be in the 7mm form factor. We will also be shipping demonstration units of our enterprise hybrid drives later this calendar year.
"For the September quarter, we expect to maintain market share, achieve revenue of approximately $4 billion, deliver gross margins exceeding 30% and have operating expenses that remain relatively flat. At this time, we believe the December quarter's addressable market will improve for the September quarter, and these conditions will put us on a path to revenues of at least $17 billion in calendar 2012 and exiting the year with margins above 30%. For fiscal 2013, assuming modest market growth, we are planning to maintain market share and deliver at least 25% annual growth in non-GAAP earnings.
"So with the pricing overall being relatively high compared to pre-flood, a lot of the OEMs have mixed down in order to preserve the budgets that they have going towards storage."

Pat O'Malley, CFO:
"We look at all technology product providers (for M&A) but what I would say is that on the enterprise SSDs, there's probably only one of them that really makes any significant money."