UPDATE 4-Seagate sales, profit fall; shares decline

Wed Jan 19, 2011 8:36pm EST

* Sales fall 10 pct to $2.7 bln as Asia demand flags

* CEO sees profit margin declining

* Considering quarterly dividend

* Shares fall 5.1 pct after hours (Adds byline, CEO interview comments)

By Bill Rigby

SEATTLE, Jan 19 (Reuters) - Seagate Technology Plc (STX.O) reported sharply lower quarterly profit on flagging demand for its computer hard drives and forecast a dip in profit margins this quarter as selling prices continue to erode.

The world's largest hard drive disk maker, which was in ultimately unfruitful discussions with private equity firms over a potential $9 billion takeover late last year, said it was considering a regular dividend, in addition to a massive share buyback plan announced in November, to reward shareholders.

The company, which makes a range of disk drives for computers and external storage devices, said fiscal second-quarter net profit fell to $150 million, or 31 cents per share, compared with $533 million, or $1.03 per share, in the year-ago quarter.

Sales fell 10 percent to $2.7 billion, hurt by a slowdown in demand for hard drives, especially in Asia.

Excluding some items such as restructuring costs, it reported earnings of 33 cents per share, matching Wall Street's average estimate.

Seagate's shares fell 5.1 percent in after-hours trading, after falling 3 percent in regular trading on Nasdaq.

EXCESS CAPACITY

Chief Executive Steve Luczo said the hard-drive industry has "marginal" excess capacity and faces "muted consumer demand" for PCs but strengthening demand for PCs from companies.

For the current quarter, Luczo forecast revenue of $2.55 billion to $2.7 billion, and gross profit margin of 18 percent to 19 percent, citing some uncertainty in the market and the cost of materials not declining in step with hard drive selling prices. Wall Street is estimating $2.6 billion in sales this quarter and gross profit margin of 19.9 percent. In the last quarter, it was 19.5 percent.

Seagate's report comes a day after rival Western Digital Corp WDC.N, the world No. 2 hard-drive maker, warned that 6 million to 8 million unused hard drives in the personal computer supply chain could cause a glut and hurt sales of new drives. [ID:nSGE70H0D3]

In the long term, Luczo argued that the increasing amounts of data being downloaded and stored mean that his company's magnetic disk drives are not obsolete, even though many people are using new portable devices such as Apple Inc's (AAPL.O) iPad and iPhone that work on solid-state flash memory rather than Seagate's hard drives.

"There's a lot of reasons disk drives will play a significant role, especially with high definition video and now 3-D video -- it's just such a massive amount of storage," he said in an interview. "There's no more reliable alternative than magnetic disk for storing mass amounts of data."

CONSIDERING DIVIDEND

After the failed buyout talks last year, Seagate announced a $2 billion share buyback plan and a debt restructuring, including a $750 million debt offering. Luczo said the company used $305 million to purchase 21 million shares in December alone. He added that he is still looking at other ways to boost shareholder value, including introducing a quarterly dividend.

The former investment banker declined comment on Seagate's future as a public company, but stressed he was focused on operations and strategy rather than trying to do a deal.

"I didn't come here to pursue a particular transaction," he said. (Reporting by Bill Rigby; Editing by Bernard Orr)

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