Seagate Earnings: Strong Demand For Enterprise Products, Weakness In PC Market Remains

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Seagate ( STX ) announced its fiscal Q4 results on Tuesday, August 2, reporting revenues of $2.65 billion - in line with the preliminary results declared by the company in last month. Seagate's net revenues were down 9% on a year-over-year basis, with weakness in the compute segment (consists of hard drives for notebooks and desktops) being the primary driver of the revenue decline. On the other hand, a higher mix of enterprise-grade hard drives sold during the quarter helped push the company's gross margin (non-GAAP) to almost 26%, up from 23-24% in previous quarters. However, Seagate's non-GAAP gross margin for the quarter remained short of its long-term projected margin range of 27-32%.

The company managed to cut down its operating expenses by 14% y-o-y to $443 million for the quarter, attributable to operational efficiency and workforce reduction. Seagate also 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%. This is likely to further reduce operating expenses and improve profitability.

In terms of unit shipments, Seagate witnessed a 19% annual decline in total shipments to just under 37 million units for the quarter. Both desktop (-28%) and notebook (-41%) unit shipments were down on a year-over-year basis through the June quarter, to 8.6 million hard drives and 8.5 million hard drives, respectively. Seagate's management mentioned that it has been a strategic decision to not sell certain low-margin notebook hard drives, which has led to low sales figures but should help in long-term margin improvement. Comparatively, enterprise HDD sales were up 5% y-o-y to 8.5 million units. Within enterprise units, mission critical HDD sales were down 19% y-o-y to 3 million units, presumably due to higher demand for enterprise-grade SSDs sold by competitors. On the other hand, nearline enterprise HDD sales were up 25% over the year-ago period to 5.5 million units sold, with Seagate's 8 TB hard drives and 10 TB Helium drives witnessing solid demand. 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.

Seagate has given an overall positive outlook for the coming quarter, despite expected revenues to be down 8% y-o-y to $2.7 billion. Despite the continued decline in revenues, a higher mix of enterprise hard drives and high-end products could help improve margins. Seagate expects its non-GAAP gross margin to touch 27% in the September quarter - almost 3 percentage points higher than the September quarter last year. Moreover, Seagate's operating expenses are expected to by flat over the year-ago period at $500 million.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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