Everyone is focused on the $300M Huawei BIS settlement and missing the bigger and more immediate cash crisis. The BIS settlement is $15M per quarter for 5 years. The real reason Seagate is in a cash crunch and trying to sell anything they can find a buyer for is that $540M of their $6B in debt comes due on June 1. If they issue new debt now the interest rate would be easily over 10%. The note ending had an interest rate of 4.3%. Seagate also needs comply with the debt covenants of their existing debt, so rolling over this debt may not be an option. According to the conference call, management plans to pay this note and lower the debt. Where will this cash come from? Can you say fire sale?
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Sell more drives to Huawei and include the fines in finance models. Harvest, win, and grow at all costs!
What if we sold $3.3 billion worth of drives to Huawei? Fine would be $900 million. Profit would be $450 million. We should have continued this revenue stream. We can call it Seagate Durian - the king of drives.
Meet BoD. Drop dividend temporarily. Watch stock crash.
Don't forget about the next and perhaps the last for a while dividend payment on July 5. That's another $140 million that will be painful to come up with.
most important comment and this is the debt which will bite us the hardest.
It was obvious then and it's even more obvious now - Seagate should have suspended their dividend 2 years ago when WDC dropped their dividend. This clearly was a strategic blunder. Seagate management has been managing the company as though there would never be a downturn, but in data storage there is alway a slow down right around the corner. Shugart said it best, "success is fragile."
serving any refinanced debt may finally drive dividend suspension, or DM is betting it all on a HAMR miracle
The least bad option is to refinance the debt at 10%. The additional interest cost (over what they are paying now) is $85 million per quarter. They still need to sell off any liquid assets, but it buys them time for a miracle to happen.
Seagate is next FAANG at least for me in Longmont
The challenge is that the dividend is the only thing keeping the company alive. With the burden of debt, with negative EBITA, no free cashflow and a loss making business STX is a sub $10 stock. So yes, they will destroy the company and keep paying the dividend until there is nothing left. The actual value of seagate is not in the technology or the business, its in the dividend. Its like the parasites who will suck on the host until the host dies, and then they move on.
If your financials are built around a house of cards, eventually it only takes a small breeze to bring it all crashing down.
Apparently, they would rather destroy the company than cut the dividend.
As Jim Cramer likes to say, Seagate is "the house of pain" right now. Good observation... too many headwinds now.