Declining PC Demand Weighs on Seagate Revenues

Seagate reported a 9.3% fall in revenue to $2.7 billion

s1Data storage company Seagate Technology PLC (NASDAQ: STX) reported its Q4 FY16 and full year FY16 on August 2nd, 2016.

The Cupertino, California-based Company is a provider of a range of electronic data storage products, including solid state hybrid drives (SSHD), solid state drives (SSD), peripheral component interconnect express (PCIe) cards and Serial AT Attachment (SATA) controllers. The Company’s storage technology portfolio also includes storage subsystems, high performance computing (HPC) solutions and data storage services. The Company’s products are designed for enterprise servers and storage systems for applications, client compute applications and client non-compute applications. The Company’s product and solution portfolio for the enterprise data storage industry includes storage enclosures, integrated application platforms and high performance computing (HPC) data storage solutions. Its data storage services provide online backup, data protection and recovery solutions for small to medium-sized businesses. The Company designs, fabricates and assembles a number of components found in its disk drives, including read/write heads and recording media.

Seagate Technology operates under three segments: Enterprise, Client Compute, and Non-compute. Read more about Seagate’s financial results below.

Q4 FY16 financial highlights

s2For Q4 FY16, Seagate reported a 9.3% fall in revenue to $2.7 billion versus the prior year period. Seagate’s non-GAAP gross profit fell 13.8% year over year to $685 million, mainly due to a lower revenue base. Moreover, gross margin contracted 140 basis points to 25.8%.

Non-GAAP operating income came in at $242 million, compared to $280 million reported a year ago. Operating margin contracted 50 basis points to 9.1% primarily due to lower gross margin, which was partially offset by lower operating expenses as a percentage of sales.

Seagate posted non-GAAP net income (excluding the impact of tax benefits, amortization of intangibles, restructuring charges, gain on arbitration award and other one-time items) of $209 million, or $0.69 per share, compared to the year-ago net income of $250 million, or $0.77 per share.

During the reporting quarter, Seagate generated $269 million in operating cash flow and paid cash dividends of $188 million.

Source: Seagate
Source: Seagate

Segmental highlights

s4Enterprise:

In the Enterprise segment, Seagate’s capacity increased by 58% Y-o-Y to 27 exabytes during the reporting quarter, while units increased by 5% to 8.5 million. Average capacity per drive increased by 64% to 3,174 gigabytes compared to the prior-year period.

Client Compute:

In this segment, units decreased by 36% to 17.1 million due to the falling global demand for computers during the reporting quarter.

Non-Compute:

In this segment, units increased by 7% to 11.2 million in Q4 FY16 versus the prior-year period.

FY16 financial highlights

s5For FY16, Seagate reported revenue of $11.2 billion, gross margin of 23.4%, net income of $248 million and diluted EPS of $0.82. On a non-GAAP basis, Seagate reported gross margin of 24.6%, net income of $684 million, and diluted EPS of $2.26 for the full year FY16.

In FY16, Seagate generated about $1.7 billion in operating cash flow and paid cash dividends of $727 million. Cash, cash equivalents, restricted cash, and short-term investments totaled approximately $1.1 billion at the end of FY16.

Other highlights

Dividend: Seagate’s Board of Directors approved a quarterly cash dividend of $0.63 per share, which will be payable on October 5th, 2016, to shareholders of record as of the close of business on September 21st, 2016.

Job cuts: Seagate also said it would cut about 6,500 jobs, or 14% of its global workforce, by the end of FY17. The total pretax charges for the restructuring plan will be about $164 million in FY16. Seagate, which has more than 52,000 employees worldwide, said in June 2016 that it would cut 1,600 jobs as part of its plans to rein in costs amid waning demand.

Innovations: At the Flash Memory Summit conference on August 9th, 2016, Seagate launched two new flash innovations that helps extend the limits of storage computing performance in enterprise data centers. The new products include a 60 terabyte (TB) Serial Attached SCSI (SAS) solid-state-drive (SSD), the largest SSD ever, and the 8TB Nytro® XP7200 NVMe SSD. These two new products represent the high performance end of Seagate’s Enterprise portfolio – a complete ecosystem of hard disk drives (HDD), SSD and storage system products designed to help customers manage and effortlessly move huge amount of data generated where it is needed to meet rapidly evolving business priorities and market demands.

Partnerships: Seagate announced a partnership with Sugon, China’s leading information system integrated service provider, under which Sugon will incorporate Seagate’s latest 4TB Enterprise Performance 3.5 HDD into its new TC4600T line of server products.

Future outlook

Seagate expects higher revenues and margins in the coming months on the back of rising demand for the company’s HDD products and cost cutting initiatives.

Steve Luczo, Chairman and Chief Executive Officer of Seagate, said:

“We believe the long-term trend of exabyte storage demand growth exceeding HDD areal density growth remains intact for the foreseeable future. Seagate will continue to evolve its product offering, technology investment and manufacturing footprint to best serve our customers with the world’s most advanced and cost advantaged HDD products.”

Seagate is also expected to benefit from the strength in its hybrid drives. Also, the Company is focusing on the enterprise side, where it could acquire higher-margin businesses. Synergies from acquisitions and product innovations will continue to drive growth. However, the waning demand for PCs due to highly functional mobile devices could dent its future revenue.

Stock Performance

s6Seagate’s stock ended the day at $31.87, slipping 1.42%, at the close on Monday, August 22nd, 2016, having vacillated between an intraday high of $32.33 and a low of $31.35 during the session. The stock’s trading volume was at 2,806,929 for the day. The Company’s market cap was at $9.44 billion as of Monday’s close.

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