Seagate Earnings Takeaways: Expense Reduction Helps Drive Profits Despite Limited Revenue Growth
Seagate (NASDAQ:STX) announced its fiscal Q2 results on January 24, reporting a 3% annual decline in revenues to $2.9 billion. [1] Weakness in the compute segment (consists of hard drives for notebooks and desktops) continued through the December quarter, which was a key driver for the overall revenue decline. Comparatively, revenues from other product lines were up on a y-o-y basis. A higher mix of enterprise hard disk drives and consumer electronics sold during the quarter helped improve Seagate’s gross margin (non-GAAP) to over 31%, up from a slump in margins through few quarters in the previous years. As a result, Seagate’s non-GAAP gross margin was close to the upper end of the long-term projected margin range of 27-32%. Additionally, Seagate managed to restrict increase in non-GAAP operating expenses, attributable to increased operating efficiency and a workforce reduction. This further helped improve the company’s diluted non-GAAP EPS by 68% year over year to $1.38 for the quarter.
We are in the process of revising our $33 price estimate for Seagate Technology, which is signifcantly lower than the current market price. Seagate’s stock price has jumped 15% since the company released Q2 FY’16 results.
Trends Across Segments
In terms of unit shipments, Seagate shipped 39.6million units for the quarter, a 10% decline from the prior year level. Combined desktop and notebook (or compute segment) unit shipments were down 26% on a year-over-year basis for the September quarter, to 17.1 million hard drives. [2] Resulting revenues from this segment were down 26% to $670 million.
On the other hand, enterprise hard drive sales were up roughly flat over the year-ago period to 8.1 million units. Revenues from enterprise HDD sales were up 4% y-o-y to just over $1 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 HDD unit shipments were up 7% year over year to 4.8 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.
Revenues from consumer electronics and branded hard drive sales were up 7% y-o-y to almost $1.1 billion, as shown above. Combined unit shipments in this segment were up 1% to 14.4 million units through the quarter. Despite a limited increase in unit shipments for the “non-compute” segments (consumer and enterprise segments), revenues generated by product sales were up due to higher average selling prices. A favorable product mix helped drive revenues as well as gross margins as a result.
Outlook For Q3 FY’17
Seagate has given an overall positive outlook for the March quarter, with revenues expected in increase 4% year over year to $2.7 billion. A favorable mix of high-margin enterprise hard drives and other high-end products could help sustain high gross margins. Seagate expects its non-GAAP gross margin to stay at around 30% in the March quarter — almost 7 percentage points higher than third fiscal quarter last year. Back in June last year, 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%. [3] The company further announced that it has shut its factory in Suzhou, China in order to cut down over 2,000 jobs. [4] This is likely to further reduce operating expenses and improve profitability.
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- Seagate Technology Reports Fiscal Second Quarter 2017 Financial Results, Seagate Press Release, January 2017 [↩]
- Seagate Q2 FY 2017 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]
- Seagate to cut 6,500 jobs worldwide as PC market continues to slide, Silicon Republic, July 2016 [↩]
- Seagate closes Chinese factory, cuts 2,000 jobs, ZD Net, January 2017 [↩]