Is Seagate’s Operational Efficiency Improving As Revenue Growth Stagnates?

IT hardware manufacturers have witnessed a slowdown in the market over the last few years due to falling prices and low demand in the consumer market. Hard drive manufacturers such as Seagate (NASDAQ:STX) have not been immune to this transition. Falling hard drive prices have led to revenue declines as well as low profit margins over the last two years for Seagate. In the wake of this trend, it has become important for the company to manage its operating expenses to diminish the impact of falling revenues on net cash profits. To quantify the operational efficiency of the company, the revenue generated per dollar spent on sales, general and administrative (SG&A) expenses can be regarded as a key indicator.

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Seagate’s generated roughly $24 per dollar spent on SG&A expenses in 2013, which went down to around $20.20 in 2015 as shown below. Similarly, Seagate’s adjusted gross profit per dollar of SG&A expenses stood at just under $8 in 2013, which dropped to $6.30 in 2015. It should be noted that the figures mentioned below are calendar year figures while Seagate’s fiscal year ends in June. Additionally, the gross profit and SG&A figures are adjusted for depreciation, amortization, share-based compensation and other non-GAAP reconciliation measures reported by the company.

Seagate’s SG&A expenses (GAAP) through the first three quarters of the year have been around 25% lower on a year-over-year basis. Moreover, Seagate announced its intention to reduce the global workforce by 6,500 employees by the end of fiscal 2017, which would reduce its global workforce by 14%. ^[1] As the company aims to control its operating expenses, its operational efficiency should improve in the short term. As a result, the revenue generated per dollar spent on SG&A could improve slightly to around $20.30 in 2016, according to our estimates. In the long run, we expect the rate of decline in revenue per unit SG&A and gross profit per unit SG&A expenses to taper down, as shown below. It would take more than just controlling operating expenses (i.e. strong revenue growth) to improve this metric.

You can modify the interactive charts in this note to observe the impact a change in the Gross Margin (below) and SG&A as a Percentage of Gross Profit (top) can have on our price estimate for Seagate. We have a $34 price estimate for Seagate, which is roughly in line with the current market price.

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See our complete analysis for Seagate Technology

1. Seagate to cut 6,500 jobs worldwide as PC market continues to slide, Silicon Republic, July 2016 [↩]