Acquisitions Coming From Seagate?

Seagate is facing difficult times. Will it tackle the situation via acquisitions? Let’s take a look.

On July 15, Seagate reported results for a disappointing fourth quarter that missed analyst estimates. Revenue was up about 6% to $2.7 billion on shipments of about $43 million. Net income was down 70% to $160 million or $0.32 per share, versus $541 million, or $0.96 per share last year. Non-GAAP net income was $183 million or $0.37 per share.

Analysts had expected earnings of $0.38 on revenue of $2.89 billion. I had earlier covered Seagate as a beneficiary of the online video trend. GAAP gross margin was 23.8%. Cash flow from operations was $395 million. During the quarter, Seagate bought back shares worth $195 million and paid $57 million in dividends. In its enterprise market, Seagate retained its leadership position with 21% y-o-y growth in shipments, to 5.2 million units. It also retained its lead in the desktop market, with shipments up 6% to 25.4 million units. In the consumer electronics market, Seagate extended its leadership position with shipments growing 11% to 5.7 million units. In the mobile market, its shipments were 6.9 million units, up 12% y-o-y.

Seagate’s disappointing performance is mainly related to product execution issues in the notebook and nearline markets. The notebook market is becoming extremely competitive and Seagate has lost some of its first mover advantage. But it is working to get its edge back with new products: the company recently announced that it will be shipping the industry’s first 7200 RPM 320-gigabyte notebook drive to a major OEM.

For the full fiscal year 2008, revenue was up 12% to $12.7 billion. GAAP net income was $1.3 billion or $2.36 per share. Annual shipments grew 15% to 183 million. For the first quarter, Seagate expects revenue of $3.15-$3.3 billion and EPS of $0.18-$0.22. The company expects to see significant improvement in its performance in Q2, when its gross margin is also expected to improve. It expects to save $42 million annually from the closing of the Milpitas media operation. The closure of its Limavady substrate factory should be completed by October, saving about $30 million annually.

Following the disappointing earnings and forecast, Seagate shares dropped to a 52-week low of $14.27 on July 16. Last week, rumors were going round that Seagate might acquire flash memory provider SanDisk as part of its plan to move into the SSD market. Sandisk’s current market cap is $3.5 billion. Seagate is currently trading around $16 with a market cap of about $8 billion.

Seagate is also likely to acquire Fabrik, an online storage and external drive company for digital media, and an offshoot of previously acquired Maxtor.