STX Falls 6%: FYQ2 Beats, Q3 Revenue View Light on Notebook Weakness

Shares of disk drive maker Seagate Technology (STX) are up 89 cents, or 2.4%, at $38.30 in late trading after the company this afternoon reported fiscal Q2 revenue and earnings per share consistent with a January 8th pre-announcement, topping consensus estimates,

Revenue in the three months ended in December rose to $3.7 billion, yielding earnings per share of $1.38, excluding some costs, on a non-GAAP gross margin of $1.38.

Analysts had been modeling $3.58 billion and $1.27.

The company shipped 58 million disk drives.

CEO Steve Luczo said the company operated well “in an environment where customer demand forecasting is challenging.”

Seagate management with hold a conference call�with analysts at 5 pm, Eastern time, and you can catch the webcast of it here.

Update: During the conference call, Luczo projected revenue this quarter of� $3.25 billion to $3.45 billion, below the average $3.5 billion estimate on the Street, adding, “�Our outlook reflects an addressable market that is flat to down sequentially.” The shares have given up earlier gains and are now down $2.15, or almost 6%, at $35.26.

Shares of competitor Western Digital (WDC) are down $1.19, or 2.5%, at $47.45.

During the call, Luczo said the decline of 3% in total industry shipments, quarter to quarter, to 135 million units rested primarily with uncertainty in the PC market. He said the company was managing to take market share:

Industry shipments declined 3% sequentially in the December, quarter to approximately 135 million units. This decline was primarily driven by the notebook market, as all other segments demonstrated quarter-over-quarter growth. The overall industry demand environment was slightly lower than what we had expected. By executing effectively in response to in-quarter upsides from our customers, our market share grew to near the higher end of our market share expectations. We effectively balanced supply and demand with finished goods inventory levels decreasing over 10% from the prior quarter. For the December quarter, we shipped over 47 exabytes of storage with an average of approximately 823 gigabytes per drive. This reflects a 59% year-over-year exabyte growth which is well over twice the current rate of aerial density growth. Gross margins for the December quarter were 27.6%, within both our expectations, and our long-term margin range target.

In the December quarter, there was some overhang in inventory, leading to deterioration of pricing for drives, by a greater-than-historical amount, CFO Pat O’Malley told me during a phone call following the report. The company managed to stay within its targeted gross margin range nevertheless by throttling back on output.

But he said the current pricing environment is “relatively benign” and that no one was slashing prices to move units. “We’re sliding our capacity output to match demand.” The company has been able to use lead times “to execute very well,” said O’Malley, to cut back during a quarter on what it sees. O’Malley said that OEMs are saying they will introduce new PC models later this year. “Our OEMs feel fairly confident on the second half of this year” about new kinds of PCs that better support Microsoft’s (MSFT) Windows 8 and that take advantage of hybrid disk drives that meld conventional spinning drives with flash media.