August 20, 2010 / 1:15 AM / in 7 years

Seagate warns price dip but upbeat for hols

LOS ANGELES (Reuters) - Seagate Technology expects prices for its hard drives to slide in September in the wake of an industry glut, but is hopeful prices will bounce back on solid holiday season spending.

Chief Financial Officer Patrick O‘Malley told Reuters on Thursday that global drive production had overshot demand in past months. To protect its leading market share versus rivals Western Digital Corp and Hitachi, Seagate will likely take a hit on prices, he said in a telephone interview.

But dismissing fears that U.S. consumer spending is not recovering as strongly as expected, O‘Malley said signs pointed to strong demand during the back-to-school and end-year holiday season.

“There was a bigger concern that it was not going to be average because maybe the consumer was not going to show up,” O‘Malley said. But “the consumer is still standing, the consumer is still buying.”

“The commercial refresh is going OK,” he said.

Longer-term, O‘Malley said Seagate plans to focus strongly on enterprise storage solutions.

Some analysts view the popularity of Apple Inc’s iPad tablet -- expected to be a fast holiday seller -- as hurting companies such as Seagate and Western Digital, because the new device with flash storage is seen as eventually cannibalizing PCs with hard drives.

But O‘Malley said Seagate plans to leverage its 60 percent market share in the enterprise segment and market next-generation, flash-based solid-state drives, which are touted as faster than traditional storage but are much costlier.

Still, flash storage is only expected to make up 5 percent to 15 percent of enterprise systems in the next three years, O‘Malley said.

“Enterprise systems are glacial moving, I mean there’s still tape drives in some of these businesses. They’re just very slow moving because CIOs are risk-averse,” O‘Malley said.

“It works for our strategy because ours is a metered approach,” he said.

In the near term, O‘Malley said the hard drive industry has been reassured by indications for back-to-school spending.

Seagate’s ASP on hard drives could fall 4 percent in September compared with the average of the previous quarter, assuming the company maintains its market share and has a gross margin around 22 percent, close to where it has previously guided, O‘Malley said.

He also said that if sales remain solid this quarter, that could help Seagate negotiate better prices for the holiday season from customers that manufacture original equipment. These customers make up more than 70 percent of its business.

Seagate this year saw arch-rival Western Digital become the leading manufacturer of hard drives in total shipments, as opposed to revenue. But O‘Malley said that he expects Seagate to maintain its share this quarter in overall shipments and shipments to the enterprise market.

O‘Malley said he aims to end this quarter with four weeks of hard drive unit inventory, in line with historic averages.

Total hard drive shipments for the entire industry are expected to reach 657 million units this year, an 18 percent increase from 2009, said John Rydning, research director for hard disk drives at IDC.

Total revenue is expected to increase to between $34 billion and $35 billion from $29.6 billion last year, he said.

Reporting by Alex Dobuzinskis: Editing by Gary Hill

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