Seagate's Profitability Skyrockets Due to Constraints in Hard Drives Shipments

Seagate: HDD Industry Will Never Be the Same as Before

by Anton Shilov
01/31/2012 | 09:28 PM

Seagate on Tuesday reported financial results for the quarter ended December 30, 2011. Shipments of hard disk drives (HDDs) dropped only 3.1% in terms of units, but at the same time the Seagate's earnings increased by 18.5%, whereas the company's profitability rose whopping 375%. With increased pricing and long-term supply agreements, the HDD industry will change for a long time.

 

The company shipped 47 million disk drives and reported revenue of $3.2 billion, gross margin of 31.6%, net income of $563 million and diluted earnings per share of $1.28. At the same time a year ago the company shipped 48.9 million disk drives and on a GAAP basis reported revenue of $2.7 billion, gross margin of 19.5%, net income of $150 million and diluted earnings per share of $0.31.

The company's increased revenues and profitability are conditioned by substantially boost of hard disk drive pricing due to supply constraints at Hitachi GST, Western Digital and Seagate itself. According to Seagate, its average selling price per unit increased $13 compared to the previous quarter. The HDD makers did not compete for demand, but rather PC makers competed for supply and makers adjusted their business models.

"Seagate dramatically reduced product configuration complexity and moved the vast majority of our fulfillment process to direct factory shipments. These efforts have fundamentally altered demand planning dynamics with our customers and have resulted in a much better alignment of supply and demand. We expect that these improvements to supply chain management will become standard practice as our industry fully recovers over the course of calendar 2012, benefiting our industry, suppliers and customers," said Stephen Luczo, chief executive officer of Seagate.

Seagate notes that during the second quarter of fiscal 2012 it signed a number of long-term supply agreements (LTAs) with its partners among PC suppliers and OEMs. The executed LTAs are expected to account for an excess of 60% of Seagate's total production capacity during the calendar year. Seagate believes that long-term agreements improve forecast accuracy, unit volume and pricing visibility, product build planning and logistics.

Essentially, Seagate implies that the hard drive industry will never be the same and HDDs will not become commodity products like dynamic random access memory (DRAM) where customers dictate pricing.