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Seagate: Fiscal 3Q16 Financial Results

As worst as WD and even with net loss

(in $ million) 3Q15 3Q16 9 mo. 16 9 mo. 16
Revenues 3,330 2,595 10,811 8,506
Growth   -22%   -21%
Net income (loss) 291 (21) 1,605 178

Seagate Technology plc reported financial results for the third quarter of fiscal year 2016 ended April 1, 2016.

For the third quarter, the company reported revenue of approximately $2.6 billion, gross margin of 20.2%, net loss of $21 million and diluted loss per share of $0.07. On a non-GAAP basis, which excludes the net impact of certain items, Seagate reported gross margin of 22.7%, net income of $66 million and diluted earnings per share of $0.22.

During the third quarter, the company generated approximately $205 million in operating cash flow and paid cash dividends of $188 million. There were 298 million ordinary shares issued and outstanding as of the end of the quarter. Cash, cash equivalents and short-term investments totaled approximately $1.2 billion at the end of the quarter.

Our quarterly results fell short of our expectations as a result of several near-term demand factors. Despite these challenges, we believe we have the product portfolio, technology roadmap and operational leverage to ensure we are well-positioned for long-term success,” said Steve Luczo, chairman and CEO. “Accordingly, we are aggressively working to position Seagate to respond to new demand levels and are committed to ongoing financial discipline.”

Luczo continued: “Although the short-term dynamics of our industry are challenging, we continue to see significant and growing exabyte demand, particularly as enterprise applications shift to cloud environments. As we look forward, our strategic focus is unchanged – we are broadening our storage portfolio to meet the needs of our growing global customer base, building upon our strong competitive position and optimizing our business for continued financial performance. These focus areas will enable us to build lasting value for shareholders.

Quarterly Cash Dividend
The company’s board of directors has approved a quarterly cash dividend of $0.63 per share, which will be payable on May 24, 2016 to shareholders of record as of the close of business on May 10, 2016. The payment of any future quarterly dividends will be at the discretion of the board and will be dependent upon Seagate’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the board of directors.

Comments

Seagate has been also hit by weak HDD global demand with revenue down Y/Y by 22% (20% for WD) and even a net loss of $21 million (net income of $74 million for WD), the first quarterly one since seven years (!) if our long research is valid.

The firm was planning for revenue to be approximately $2.7 billion, the result being only $2.6 billion.

During the quarter, HDD shipped decreased 15% Q/Q (13% for WD).

It's a little better for the third HDD maker Toshiba registering 18.2 million units chipped, -5% Q/Q, according to Trendfocus.

Here are some comments of chairman and CEO Steve Luczo:
"In the March quarter we initiated targeted pricing increases across our product line.
"We experienced particular weakness in the client desktop as well as the enterprise legacy markets, adding strength in the enterprise cloud markets.
"Our long term business thesis continues to be that there will be a significant transition in the HDD from a historical split. Revenue split of 60% client and 40% enterprise revenue to 40% client and 60% enterprise revenue over the next several years.
"In the March quarter we experienced unexpected weakness for a legacy mission critical HDDs which were approximately 700,000 units below our forecast."

During the first three-month of 2016, Seagate began the process of reducing HDD manufacturing capacity from approximately 55-60 million to approximately 35-40 million drives per quarter. Trendfocus believes that "at least one HDD factory will be closed, probably the Suzhou, China location (from the Maxtor acquisition), this along with the termination of external HDD production (Samsung’s legacy products from SAE)."

Some positive Seagate's figures: FY10 - FY15 5-year CAGR

  FY10 FY15 CAGR
Exabytes shipped 80 228 23%
Including nearline exabytes shipped 6 57 57%
HDD units shipped in million 193 212 2%
Average capacity per drive 0.4 1.1 22%

(Source: Seagate)

"We have had over 200% volume growth of 8TB in the March quarter and we anticipate continued growth in the June quarter. In addition our 10TB product lines shipped a large volume of qualification units in the March quarter and our volume growth is accelerating in the June quarter as well," added Dave Mosley, president, operations and technology.

Seagate now admits clearly the competition of SSDs vs. HDDs, at least in the low and high-performance market. The company has decided not to aggressively participate in certain areas of the low capacity notebook market. In the near future, it's possible to see the end of HDD at less than 500GB. "(...) we began end of life activity on some of the older 500GB and below products that have very low margins," said CFO Dave Morton. He added:" Within the mission critical market approximately 25% of the volumes are 15,000rpm HDDs. This is the primary area where we are seeing a shift in low end servers to lower capacity flash SSDs and we expect it to continue."

The firm expects even lower revenue next quarter, $2.3 billion (-11% Q/Q). Trendfocus wrote: "With both Seagate and WDC guiding to a modestly lower 2CQ16 quarter, it is clear that 2016's HDD TAM will be challenged to reach the forecasted 433 million figure, and a more realistic target is probably in the range of 415 million. Fortunately, 2CQ16 is expected to be the low point of the year, and HDD demand should improve in 3CQ16 and 4CQ16; providing some relief for HDD companies coming off of a very difficult first two quarters of the year."

What's more surprising is that Seagate registered also bad results in non pure HDD business as sales of enterprise systems, flash, and other reach a mere $224 million (9% of global business), down 13% sequentially.

To read the earnings call transcript

Seagate's HDDs from 4FQ13 to 3FQ16
(units in million)

Fiscal period Enterprise Desktop Notebook CE Branded Total

HDD ASP

Exabytes Average
HDDs shipped GB/drive
4Q13 8.2 18.6 16.1 6.1 4.8 53.9 $63 45.9 852
1Q14 8.1 19.1 17.2 6.2 5.1 55.7 $62 48.9 878
2Q14 7.8 19.2 16.9 6.7 6.2 56.6 $62 52.2 922
3Q14 7.7 19.8 16.4 5.4 5.9 56.2 $61 50.8 920
4Q14 7.4 18.4 16.8 5.1 4.8 52.5 $60 49.6 945
1Q15 8.8 18.7 20.2 6.0 5.7 59.5 $60 59.9 1,007
2Q15 9.1 16.0 19.7 6.1 6.0 56.9 $61 61.3 1,077
3Q15 9.1 14.3 16.8 4.8 5.1 50.1 $62 55.2 1,102
4Q15 8.2 11.9 14.6 5.8 4.7 45.3 $60 52.0 1,148
1Q16 7.8 12.4 16.4 5.5 5.2 47.2 $58 55.6 1,176
2Q16 8.1 11.7 13.6 6.2 6.4 45.9 $59 60.6 1,320
3Q16 7.7 10.8 10.6 5.0 5.2 39.2 $60 55.6 1,417

 

 

 

 

 

 

 

 

 

 

 

 

Seagate vs.WD for 2FQ16
(revenue and net income in $ million, units in million)

  Seagate WD % in favor
of WD
Revenue 2,595 2,822 9%
Net income (21) 74 352%
Notebook 10.6 13.6 28%
Desktop 10.8 10.7 -0%
Branded 5.2 5.2 0%
CE 5.0 7.3 46%
Enterprise 7.7 6.4 -17%
Total HDDs 39.2 43.1 10%
Market share 39.0% 42.9% 3.9%
Average GB/drive 1,417 1,443 2%
Exabytes shipped 55.6 62.2 12%
HDD ASP $60 $60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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