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Struggles at Seagate, SanDisk

Posted on Tuesday, Feb 17th 2009

Seagate and SanDisk, both storage solutions companies, are having a hard time in this economic environment. Both are leaders in their markets, but need massive restructurings to stay afloat.

On January 21, Seagate Technology (NASDAQ: STX), the leader in hard disk drives and storage solutions with annual revenue of $12.7 billion, reported dismal results for the second quarter that missed analyst earnings estimates by huge margins.

Q2 revenue was down 34% to $2.3 billion on 37 million disk drive unit shipments that were down 23% q-o-q. Net loss was $496 million or $1.02 per share including charges of $383 million or $0.79 per share. Excluding charges, net loss was $113 million or $0.23 per share. Analysts had expected loss of $0.05 on revenue of $2.495 billion.

Cash and cash equivalents and short-term investments at the end of the quarter were $1.3 billion, an increase of $156 million compared with the previous quarter. Total debt was $2.4 billion.

Seagate is reducing its quarterly dividend by 75% to $0.03 per share from $0.12 per share in order to reduce annual cash outflows by approximately $175 million. It has announced 2,950 layoffs, or 6% of its workforce, as well as salary cuts and expects to save about $130 million annually. On January 14, its chief executive, Bill Watkins, was replaced by Chairman Stephen Luzco. Seagate recently completed the shutdown of the finished media operations in Milpitas, CA and the aluminum substrate operations in Limavady, Northern Ireland.

For the third quarter, Seagate expects revenue to be approximately $1.6 to $2 billion. The stock is currently trading around $4 with market cap of about $2 billion. It hit a 52-week low of $2.98 on January 23.

Chart for Seagate Technology (STX)

In August 2008, there was speculation that Seagate might acquire SanDisk. Let’s now take a look at SanDisk’s results.

SanDisk Corp. (NASDAQ: SNDK), the leading flash memory chipmaker, reported its fourth quarter and fiscal 2008 results on February 2. Q4 revenue was $864 million, down 31% and up 5% q-o-q and at the higher end of its guidance of $725 to $875 million due to better-than-expected retail sell through in North America and EMEA. Net loss in the quarter was a staggering $1.86 billion or $8.25 per share compared with net income of $106 million, or $0.45 per share in Q407. SanDisk recorded an asset impairment charge of $1.02 billion due to a sustained decline in its market cap. Excluding charges, net loss was $372 million or $1.65 per share. Analysts were expecting a loss of $0.60 per share on revenue of $766.8 million.

For fiscal 2008, revenue declined 14% to $3.35 billion from $3.90 billion in fiscal 2007. Net loss was $2.07 billion, or $9.19 per share, compared with net income of $219 million, or $0.93 per share in fiscal 2007.

Product revenue in the quarter was $742 million, down 34% y-o-y and up 8% q-o-q. Retail sales were up 25% sequentially across the imaging, USB flash drive, mobile card and MP3 player end markets. However, OEM revenue declined 21% sequentially and 48% y-o-y and unit sales to mobile handset vendors were down both sequentially and year-over-year.

License and royalty revenue was down 5% y-o-y and 8% q-o-q to $122 million. Total megabytes sold increased 123% y-o-y and 49% q-o-q. The average price per megabyte sold declined 70% y-o-y and 28% sequentially.

Cash flow from operations in Q4 was $65 million, compared with $149 million in Q407. Total cash, short-term, and long-term investments at the end of fiscal 2008 was $2.5 billion, compared with $2.9 billion at the end of fiscal 2007. The company cannot afford to lose close to $2 billion a quarter with $2.5 billion cash in the bank. Most certainly not in this tight credit situation.

For Q1, SanDisk expects the seasonal decline in revenue to be deeper due to the economy and expects revenue to be in the range of $475 to $575 million.

SanDisk expects to reduce 2009 operating expenses to $750 million through a 12% headcount reduction, a freeze on salary hikes, elimination of bonus payments, curtailed benefits and selective shutdown periods. To strengthen its cash position and to reduce inventory commitments, the company is selling more than 20% of its captive fab capacity to Toshiba for about $890 million. Last October, Samsung withdrew its $5.85 billion takeover bid due to SanDisk’s deepening losses and uncertain outlook.

SanDisk is currently trading around $11 with a market cap of about $2.4 billion. The stock hit a 52-week low of $5.07 on November 21.

Chart for SanDisk Corp. (SNDK)

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