Seagate Earnings Preview: Weak Outlook As Revenues Expected To Fall By 20%
Seagate Technology (NASDAQ:STX) is scheduled to announce its fiscal Q2 2016 earnings on Friday, January 29. [1] Seagate has endured weakness in product sales through the first three quarters of calendar 2015, with unit shipments falling by almost 15% y-o-y to 142.6 million units. Low shipments led to revenue declines through the calendar year and weighed on the company’s profits in the same period. The decline was largely driven by a slowdown in the PC market, which resulted in significant year-over-year declines in unit shipments for desktop and laptop hard drives. The trend is likely to continue through the December quarter as well, with the company expecting Q2 FY’16 revenues to lie in the $2.9-$3 billion range, which at the midpoint implies a 20% year-over-year decline.
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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 through fiscal 2015, with shipments rising by 14% y-o-y to 35.2 million units. [2] The company expected stable demand for enterprise storage units to continue through fiscal 2016, with growth coming from hyperscale deployments. However, Seagate reported an 11% annual decline in enterprise HDD shipments for the September quarter. Moreover, the company faced pricing pressure in both the client and cloud enterprise market segments, leading to a decline in revenues for the quarter.
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The PC market has been exceptionally weak in the last few quarters, owing to the anticipated mid-year release of Windows 10 initially. According to IDC, PC shipments fell by almost 11% y-o-y to 276 million units through 2015. [3] This was the first time since 2008 that shipments fell below 300 million units. This translated to low PC and notebook hard drive sales for Seagate through the year. The company shipped about 86.4 million hard drives for desktops and laptops combined for the first three quarters of 2015, which was a 22% year-over-year decline. Moreover, a strong U.S. dollar led to price increases in the PC market, while the option to upgrade to Windows 10 on existing machines further bottled the demand for new computers and laptops. Correspondingly, Seagate could continue to observe weakness in this division, as PC sales could begin to stabilize from 2016 onwards. [4]
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Robust Outlook For The Long-Term
Seagate has witnessed a fall in its gross margins through the year owing to a leaner production schedule and flat operating expenses over the previous year despite a significant drop in revenues. Seagate’s consolidated gross margin (GAAP) for the first three quarters of 2015 stood at 26.3%, which was about 160 basis points lower than the prior year period. Seagate’s non-GAAP gross margin of over 27% was close to the lower end of its targeted long-term margin range of 27-32%. Margins could remain low through the December quarter at under 26% owing to the expected seasonal mix, higher inventory levels and relatively weaker demand. The company expects to be back to its targeted margin range of 27-32% by the June quarter this year. Furthermore, Seagate’s short-term plans for the December quarter included certain additional cost-savings initiatives. [5]
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We have a $45 price estimate for Seagate’s stock, which is significantly higher than the current market price. Seagate’s stock price has fallen by over 40% through the December quarter after a sustained period of weakness in the PC market coupled with surprisingly low enterprise unit shipments by Seagate in the September quarter. Despite the negative market sentiment, we believe that the company is poised for long-term growth.
Read more of our coverage on Seagate describing long-term market trends and the company’s potential in the storage industry:
>> Seagate’s Enterprise Storage: Helium-Filled Drives, New Technology To Drive Future Growth
>> Weakness In PC Market To Continue For Seagate, Stock Worth $45
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- Seagate Technology To Report Fiscal Second Quarter 2016 Financial Results On January 29, 2016, Seagate Press Release, October 2015 [↩]
- Seagate Quarterly Supplemental Information, Seagate Press Release, July 2015 [↩]
- PC Market Finishes 2015 As Expected, Hopefully Setting the Stage for a More Stable Future, According to IDC, IDC Press Release, January 2016 [↩]
- PC Sales Are Imploding, Business Insider, July 2015 [↩]
- Seagate Q1 FY 2016 Earnings Call Transcript, Seeking Alpha, October 2015 [↩]