UPDATE 2-Seagate outlook beats Street, demand improving

Tue Oct 20, 2009 9:56pm EDT

* Seagate non-GAAP EPS of 58 cts beats Street 47 cts

* Seagate sees FY2010 non-GAAP EPS $2.20, Rev $10.5 bln

* Shares down 2.6 percent on profit taking (Updates, adds further analyst comment, byline)

By David Lawsky

SAN FRANCISCO, Oct 20 (Reuters) - Seagate Technology (STX.O) posted better-than-expected quarterly earnings as hardware demand continued to rebound, but its shares slid 2.6 percent after investors cashed out of a stellar rally since the year's start.

Seagate's results and outlook exceeded expectations with disk drive demand -- pummeled in 2008 and earlier this year as corporations and consumers curtailed spending to conserve cash -- showing signs of sustaining its gradual recovery.

The company projected fiscal 2010 non-GAAP earnings of $2.20 per share -- above an average estimate for $1.90 -- and revenue of $10.5 billion, matching expectations.

But its stock, which has more than tripled since the start of 2009 and hit a year's high of $16.40 last week as expectations grew of a tech industry recovery, slid to $15.15 from a close of $15.55.

"This is at the higher end for bullish expectations -- very, very good numbers," said Kevin Hunt, an analyst with Hapoalim Securities USA.

One analyst said the stock went down because of premature profit taking in after-hours trading.

"No one knows when the music stops so they head for a seat too soon," said Rich Kugele, an analyst at Needham & Co. "They are unwilling to stick around and see what the fundamentals are over the next six to 12 months."

Seagate, Western Digital Corp WDC.N and other storage makers are riding an economic recovery that is propelling demand for everything from computers to cellphones.

The company's gross margin has more than tripled since the March 2009 quarter, hitting 24.5 percent, and Kugele said it could hit 27 percent by the December 2010 quarter as enterprise IT spending picked up.

Seagate pledged to hold capital spending to 10 to 12 percent of revenue. The company's factories are near capacity and Chief Financial Officer Patrick O'Malley told Reuters it must soon purchase additional test equipment.

Seagate had profit of 58 cents a share, excluding certain items, beating analysts' average forecast of 47 cents, according to Thomson Reuters I/B/E/S estimates.

The company had revenue of $2.66 billion, below last year's $3.03 billion for the quarter but above analysts' average forecast of $2.62 billion, according to the estimates.

John Chen, senior director at Trend Focus, estimates the Seagate and arch-foe Western Digital are now neck-and-neck in market share, with Seagate at 30.9 percent share against Western Digital's 30.4 percent.

Both compete with Hitachi Ltd (6501.T) and Toshiba Corp (6502.T), which this month took over Fujitsu Ltd's (6702.T) loss-making hard drive business. (Reporting by David Lawsky; Editing by Gary Hill)

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