Seagate Earnings: Weakness In PC Market Leads To Fall In Revenues

Seagate Technology (NASDAQ:STX) announced its Q4 FY 2015 earnings on Friday, July 31, reporting an 11% year-on-year decline in net revenues to $2.9 billion. Correspondingly, Seagate’s net shipments through the quarter were down by nearly 14% over the prior year quarter to 43.1 million units. ^[1] The hard drive maker saw the average selling price (ASP) per hard disk drive sold stay flat at over the previous year at $60 for the June quarter.

Seagate continued to witness strong momentum in sales of enterprise-grade hard drives, which were 11% higher than the year-ago period at 8.2 million hard drives sold. On the other hand, weak demand for PC and notebook hard drives led compute shipments (PC and notebook HDDs combined) to decline by nearly 25% y-o-y to 26.5 million units. ^[2]

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Enterprise Storage Continues To Grow

Seagate’s enterprise storage unit shipments were particularly high in the latter half of 2014, with unit shipments rising by 13% y-o-y to 17.9 million units. This trend has continued in 2015 thus far, with unit shipments rising by 15% y-o-y to 17.3 million units in the first half of the year. As a result, the company has witnessed a solid 14% rise in the number of enterprise-grade HDDs sold through fiscal 2015 to 35.2 million units shipped. The company expects the demand for enterprise storage units to continue through the coming fiscal year, with growth coming from hyperscale deployments for data science applications and machine-to-machine data creation in addition to unstructured data in the form of high-definition video and other content created globally. ^[3]

Massive Slowdown In The PC Business

Seagate has witnessed an annual decline in the number of PC shipments in each of the last ten quarters, with the exception of the March quarter in 2014, where unit shipments grew by a modest 1% on a y-o-y basis. The company witnessed a 27% y-o-y decline in the number of PC HDD shipments to 14.3 million units in the March quarter. The trend continued through the June quarter, with unit shipments falling by over 35% y-o-y to 11.9 million units. With Microsoft releasing Windows 10 this year, PC shipments could pick up in the coming quarters. ^[4] However, it is likely that PC shipments don’t pick up immediately and begin to stabilize from 2016 onwards. ^[5]

On the other hand, Seagate sold about 73.1 million laptop HDDs in calendar year 2014, which was 9% higher than 2013 volumes. The trend continued through the March quarter with a 2% annual rise in shipments to 16.8 million units. However, shipments fell by 13% y-o-y to 14.6 million units in the most recent quarter. The company expects the weak market environment for client side to continue in the near term. However, in the long run the company expects notebook sales to pick up.

Storage Capacity, Margins And Outlook

Seagate shipped over 117 exabytes (1 exabyte = 1 billion gigabytes) of data via hard drives in the first half of fiscal 2015, which was a 16% y-o-y rise in capacity shipped. The growth in storage capacity shipped slowed down to a 9% annual rise in capacity shipped to 55.2 exabytes in the March quarter. The trend continued through the June quarter, with the total capacity shipped rising by only about 5% y-o-y to 52 exabytes. A similar trend was observed by competing hard drive manufacturer Western Digital (NASDAQ:WDC) in its Q4 FY 2015 earnings reported on July 29.

Seagate’s consolidated gross margin (GAAP) in the fourth fiscal quarter stood at 26.5%, which was about 150 basis points lower than the prior year period. Seagate’s non-GAAP gross margin at 27.2% was just within its targeted long-term margin range of 27-32%. The company initially expected its gross margin to lie around 28.5%, which it later revised to about 27% owing to lower than expected demand and lower inventory levels as a result. This contributed to a decline of about 100 basis points from the earlier expectation. ^[3]

Seagate expects revenues to lie in the $2.9-$3.1 billion range for the September quarter, which at the midpoint implies a 20% year-over-year decline. The company expects margins to be roughly flat over the previous year period, owing to the expected seasonal mix and a relatively leaner production schedule. The company is targeting operating expense to be flat sequentially at about $515 million. Furthermore, Seagate’s near term plans include certain additional cost-savings initiatives, due to which operating expenses could be under $500 million a quarter in the second half of its fiscal year 2016.

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1. Seagate Technology Reports Fiscal Fourth Quarter And Fiscal Year 2015 Financial Results, Seagate Press Release, July 2015 [↩]
2. Seagate Supplemental Financial Information, Seagate Press Release, July 2015 [↩]
3. Seagate Q4 FY 2015 Earnings Call Transcript, Seeking Alpha, July 2015 [↩] [↩]
4. PC Sales Tank, And Microsoft Windows 10 May Not Rescue The Market This Year, Forbes, July 2015 [↩]
5. PC Sales Are Imploding, Business Insider, July 2015 [↩]