Seagate’s First Quarter Results Driven By Strength In Enterprise Segment, Strong Outlook For Fiscal 2017

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Seagate (NASDAQ:STX) announced its fiscal Q1 results on Wednesday, October 19, reporting revenues of $2.9 billion — in line with the preliminary results declared by the company earlier last week. [1] (Fiscal years end with June.) Seagate’s net revenues were down 4% on a year-over-year basis, with enterprise segment revenues rising by 19% year over year to $1.1 billion. Comparatively, weakness in the compute segment (consists of hard drives for notebooks and desktops) continued with revenues declining by 30% year over year to $670 million. A higher mix of enterprise hard disk drives sold during the quarter helped improve Seagate’s gross margin (non-GAAP) to over 29%, up from 23-24% in the previous fiscal year. As a result, Seagate’s non-GAAP gross margin remained well within long-term projected margin range of 27-32%.

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In line with the guidance, Seagate managed to cut down its non-GAAP operating expenses by 6% year over year to $472 million for the quarter, attributable to increased operating efficiency and a workforce reduction. This further helped improve the company’s diluted non-GAAP EPS by 83% year over year to $0.99 for the quarter. At the end of the June quarter, Seagate management announced its intention to reduce the global workforce by 6,500 employees by the end of fiscal year 2017, which would reduce its global workforce by 14%. [2]  This is likely to further reduce operating expenses and improve profitability.

Unit Shipments For The Quarter

In terms of unit shipments, Seagate shipped 47.3 million units for the quarter, a 4% decline from the prior year level. Combined desktop and notebook (or compute segment) unit shipments were down 23% on a year-over-year basis for the September quarter, to 16 million hard drives. [3] Resulting revenues from this segment were down 30% to $670 million.

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On the other hand, enterprise hard drive sales were up 13% year over year to 8.7 million units. This led to a 19% increase in revenues from the enterprise segment to $1.15 billion. The company attributed this increase to a higher addressable market for enterprise grade hard drives helping improve both revenues and margins for this segment. Within the enterprise segment, nearline enterprise products primarily drive demand, with unit shipments rising 41% year over year to 5.5 million units. The nearline enterprise market caters to high capacity storage requirements, particularly in the surveillance, gaming, DVR (TV digital video recording) and NAS (network-attached storage) markets.

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Positive Outlook For Q2’17

Seagate has given an overall positive outlook for the December quarter, despite the fact that expected revenues are to be down 3% year over year to $2.9 billion. A favorable mix of high-margin enterprise hard drives and other high-end products could help post high margins. Seagate expects its non-GAAP gross margin to stay at around 29% in the December quarter — almost 4 percentage points higher than second fiscal quarter last year.

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Notes:
  1. Seagate Technology Reports Fiscal First Quarter 2017 Financial Results, Seagate Press Release, October 2016 []
  2. Seagate to Cut 1,600 Jobs in Restructuring Plan, Fortune, June 2016 []
  3. Seagate Q4 FY 2016 Earnings Call Transcript, Seeking Alpha, August 2016 []