How Will Slowdown In Hard Drive Business Impact Seagate This Year?

Hard drive manufacturer Seagate (NASDAQ:STX) reported a 14% decline net revenues in 2015, owing to stagnant demand for storage hardware complemented by falling hard disk drive prices. Much of the decline was attributable to extremely low demand in the compute space – which includes hard drives for laptops and desktops. Seagate’s annual shipments fell by over 24% in the compute space, while unit shipments in the enterprise segment and the consumer electronics segments were roughly flat over the previous year. The trend is expected to continue in 2016, with revenues expected to fall by 15% through 2016.

Low demand is likely to translate to a decline in cost of goods sold – from $8.4 billion in 2015 to around $7.4 billion in 2016. However, the decline in cost of goods is only about 11% for the year as compared to the 15% decline in revenues. As a result, Seagate’s gross margins could also suffer through 2016. According to our estimates, Seagate’s gross profit for 2016 could be 23% lower on a y-o-y basis to just over $2.9 billion. This translates to a gross margin of 28.1% for the year compared to 31.2% in 2015.

On the other hand, Seagate’s management has taken measures to improve the company’s supply chain efficiency, manage inventory levels better and cut down operating expenses to improve profitability. Resulting cash operating expenses (adjusted for depreciation, amortization and share-based compensation expenses) for the full year could be over 20% lower on an annual basis through 2016. Despite the fall in operating expenses, we forecast Seagate’s adjusted EBITDA to decrease by 24% through 2016 to around $1.7 billion mainly due to the revenue decline and pressure on gross margins. Correspondingly, Seagate’s adjusted EBITDA margin could be around 2 percentage points lower than 2015 levels at 16.1%. In the table above you can see the impact of individual items impacting Seagate’s EBITDA decline.

Have more questions about Seagate? See link below:

• Why Has Seagate’s Stock Price Plummeted By 20% This Week?
• What’s Seagate’s Fundamental Value Based On Expected 2015 Results?
• Seagate’s Revenue & EBITDA Growth in The Next 5 Years: Trefis Estimate
• How Will The Composition Of Seagate’s Unit Shipments Vary From 2015 Through 2019?
• Seagate: Weak Storage Demand To Continue Through First Half Of 2016
• Here’s Why We Revised Seagate’s Price Estimate To $29

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