Seagate Earnings Preview: Can Enterprise HDD Sales Offset The Impact Of Low PC Shipments?

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Seagate Technology (NASDAQ:STX) is scheduled to announce its Q4 FY 2015 earnings on Friday, July 31. [1] The company has witnessed a slowdown in its PC and notebook hard drive unit shipments over the last few years. This trend could reverse in the coming quarters with the expected rise in the number of PC shipments owing to the release of Windows 10 by Microsoft (NASDAQ:MSFT). On the other hand, Seagate has reported mixed results in terms of sales of consumer electronics and branded hard drives over the last few quarters. The company recently unveiled the world’s first 2.5″ form factor 4TB external hard disc drive in June in an attempt to boost branded product sales. Furthermore, Seagate’s enterprise storage has contributed significantly to growth in sales volumes over the last few years. The company has outperformed its closest rival Western Digital (NASDAQ: WDC) in terms of enterprise storage shipments over the last few quarters.

Seagate initially gave revenue guidance of about $3.2-$3.3 billion for the June quarter, which it has subsequently revised to about $2.9 billion. [1] This difference is attributable to a lower than expected demand for storage products through the quarter. Correspondingly, the company expects expenses to be about $25 million lower than prior expectation of about $555 million. In the most recent quarter, Seagate reported a 2% year-on-year decline in net revenues to $3.3 billion as overall shipments stayed declined by 9% over the prior year quarter to 50.1 million units. Although the company witnessed strong growth in shipments for enterprise-grade hard drives, which were 18% higher y-o-y at 9.1 million units shipped, the total compute units shipped for PCs and notebooks combined fell by 15% over the prior year quarter to 31.1 million units. [2]

We have a $56 price estimate for Seagate’s stock, which is about 15% higher than the current market price. Seagate’s stock price has fallen by over 15% since the company reported its Q3 FY 2015 earnings in April.

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See Our Full Analysis For Seagate’s stock

Storage Trends Across Divisions

Seagate’s enterprise storage unit shipments were particularly high in the latter half of 2014, due to which shipments for the full year rose by 4% y-o-y to 33 million units. Comparatively, rival Western Digital sold about 30 million enterprise hard drives through 2014, which was flat over previous year levels. The trend continued in the March quarter this year, with unit shipments rising by 18% y-o-y to 9.1 million units, while Western Digital witnessed only a 5% y-o-y rise in shipments to 7.5 million units. The company expects stable demand for enterprise storage units to continue through 2015, with growth coming from hyperscale deployments. Despite the rise in volumes, the company may continue to face pricing pressure in both the client and cloud enterprise market segments.

Seagate sold 146 million compute storage units (desktops and notebooks combined) in 2014, which was about 2% higher than the previous year. However, there were differing trends in desktop hard drive shipments and laptop/netbook hard drive shipments. Seagate shipped out 72.9 million desktop hard drives in 2014, which was a 5% decline over the previous year, while the 73.1 million laptop units shipped were over 9% higher than 2013 volumes. The trend was similar through the March quarter, with desktop hard drive shipments declining by over 27% over the prior year period to 14.3 million units. With Microsoft releasing Windows 10 this year, PC shipments could pick up in the coming quarters. [3] On the other hand, laptop and netbook units sales stood at 16.8 million units in the March quarter, which was a 2% annual rise.

Seagate’s consumer electronics units include hard drives for gaming consoles, DVRs and other media devices, and branded external storage products. Consumer electronics storage unit sales continued to be underwhelming through the March quarter, with shipments declining by 11% y-o-y to 4.8 million units. This was the first time in over three years that consumer electronics hard drive shipments fell below the 5 million mark for a quarter. Additionally, branded product sales (which includes external drives, personal cloud and wireless storage drives for end-users) fell by over 13% y-o-y to 5.1 million units. Western Digital’s corresponding unit shipments witnessed a 30% annual rise in consumer electronics storage units through last year to 40 million units. [4] The growth in Western Digital’s consumer electronics storage units was fueled by demand for storage drives for gaming consoles from Microsoft and Sony, which use 500 GB 2.5” form-factor storage disks. [5] Seagate’s management expects shipments for consumer electronic hard drive and branded products to pick up in the latter half of the calendar year due to seasonally higher demand.

Storage Capacity, ASPs And Margins

Seagate shipped nearly 55.2 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the March quarter, which was a 9% annual rise in capacity shipped. The fall in storage price per GB was evident by the average selling prices (ASPs) of hard drives through the quarter. The company’s ASP per hard disk drive sold was flat compared to the previous year at $62 in the March quarter despite the rise in capacity shipped. [6]

Seagate’s consolidated gross margin (GAAP) in the third fiscal quarter improved by over 50 basis points over the prior year period at 28.7%, which was within the company’s targeted long-term margin range of 27-32%. According to our estimates, the company’s adjusted non-GAAP gross margin stood at 33.7% for the quarter, which was about 50 basis points higher than the comparable year-ago quarter. The company initially expected its gross margin (non-GAAP) for the June quarter to be around 28.5%. However, lower than expected demand and low ASPs have led the company to revise its margin outlook for the quarter. Seagate’s gross margin (non-GAAP) for the June quarter could be closer to the lower end of its long-term margin range of 27-32%.

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Notes:
  1. Seagate Announces Preliminary Financial Information For Fiscal Fourth Quarter 2015, Seagate Press Release, July 2015 [] []
  2. Seagate Q3 FY 2015 Supplemental Information, Seagate Investor Relations, April 2015 []
  3. PC Sales Tank, And Microsoft Windows 10 May Not Rescue The Market This Year, Forbes, July 2015 []
  4. Western Digital Q2 FY 2015 Supplemental Information, Western Digital Investor Relations, January 2015 []
  5. PS4 Selling Faster Than Xbox One, Forbes, January 2014 []
  6. Seagate Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []