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Merger Charges Hit Seagate Profit

But the company beats estimates, and guidance is weak.

Updated from 4:54 pm EDT


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grew first-quarter revenue by 34%, but charges related to the acquisition of a rival hard-drive maker pushed net income down 78% year over year.

The company's guidance for the second quarter was weaker than analysts expected, largely because of heavy price cutting that started near the end of the September quarter.

Even so, Wall Street's initial reaction to the earnings report was positive. In after-hours trading Tuesday, shares gained 77 cents, or 3.6%, to $21.90. CEO Bill Watkins said he expects margins to improve by the March quarter, but he indicated the company will continue to compete aggressively on pricing.

"We are not going to give up any more market share," the CEO said during a call with analysts.

The improvements in margins will come as the company closes out its legacy line of


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products and introduces new drives that can be manufactured more efficiently, Watkins said.

Including $82 million in charges related to the takeover of Maxtor, Seagate posted a profit in the first quarter of $59 million, or 10 cents a share, compared with last year's profit of $272 million, or 54 cents a share. Revenue increased to $2.79 billion from $2.09 billion last year.

Without the Maxtor charge and a $4 million one-time gain, Seagate would have earned $137 million, or 23 cents a share.

The top and bottom lines beat estimates of analysts polled by Thomson First Call who expected a profit of 17 cents a share on sales of $2.7 billion on the same basis.

Carrying two product lines has hurt Seagate's efficiency. Inventory increased sequentially by 5.4% to $939 million, including more than $600 million in finished goods, and inventory turns came in at 11, which was flat with the June quarter and below the company's target of 12 turns.

For the second quarter, Seagate expects to report revenue of $2.8 billion to $3 billion and non-GAAP earnings per share of 30 cents to 34 cents. Analysts were looking for 41 cents a share on revenue of $3 billion.

The company lowered full-year revenue guidance, saying sales will likely range from $11.4 billion to $11.8 billion. Earlier in the year, the company put out a revenue target of $11.8 billion to $12.3 billion.

On a non-GAAP basis, Seagate expects to earn $1.70 to $1.80 a share. Earlier the company forecast an EPS of $1.90 to $2.

Analysts were forecasting sales of $11.7 billion and an EPS of $1.75.

"The company's adjusted revenue and earnings outlook for fiscal 2007 reflects a pricing environment in the desktop and notebook markets that became more aggressive at the end of the September quarter, thus impacting pricing for subsequent quarters," the company said in its earnings release.