Seagate Stock Up On Favorable Preliminary Numbers, Job Cuts

Storage solutions provider Seagate Technology Public Limited Company (NASDAQ:STX) announced its preliminary results for the fourth quarter of fiscal 2016 yesterday. It expects higher revenues and margins in the quarter due to greater demand for the company’s HDD products and cost cutting initiatives. The company is scheduled to report its full fourth quarter results before the market opens on Aug 2, 2016.

Following the announcement, the company’s shares surged nearly 13% in after-hours trading.

Expected Numbers

Seagate now expects revenues to be $2.65 billion compared with $2.3 billion guided previously. Moreover, non-GAAP gross margin is anticipated to be 25.8% compared with its earlier forecast of 23%. The company cited strong demand for the guidance raise.

Further, operating expenses on a non-GAAP basis are anticipated to be nearly $440 million, in line with the previous forecast.

Also, the company expects unit shipments in the quarter to be roughly 37 million, translating to total average capacity per drive of 1.7 terabytes and average selling price (ASP) per unit of $67.

According to Steve Luczo, Chairman and Chief Executive Officer of Seagate, “We believe the long-term trend of exabyte storage demand growth exceeding HDD areal density growth remains intact for the foreseeable future. Seagate will continue to evolve its product offering, technology investment and manufacturing footprint to best serve our customers with the world’s most advanced and cost advantaged HDD products."

Another factor that boosted the share price was the company’s decision to cut its global workforce further by 14% or about 6,500 positions. The layoffs, expected to be completed by the end of fiscal year 2017, will result in total pre-tax charges of approximately $164 million.

In June, Seagate, in a filing with the Securities and Exchange Commission (SEC) had announced its decision to cut its global workforce by 3% or about 1,600 positions. The retrenchment is anticipated to save about $100 million annually.

The move is a part of the company’s efforts to streamline its operations, maintain competitiveness as well as profit margin and lower costs.

Last Words

These favourable revenue forecasts align with some of the projections by IT research firms IDC and Gartner. According to Gartner, worldwide HDD shipments are expected to grow at a 2.9% compound annual growth rate from 2013 (552 units) to 2018 (635.1 units). Furthermore, IDC forecasts that by 2020 13 ZB data will require storage out of the 44 ZB data created. Storing this enormous amount of data presents traditional storage companies such as Seagate and its prime competitor Western Digital (NASDAQ:WDC) a significant opportunity to grow their revenues.

Also, Seagate is looking to boost its earnings going ahead, which raises investors’ confidence. Reducing operating costs is one of the strategies that the company has undertaken to achieve the same.

Moreover, the company should benefit from the strength in its hybrid drives. Also, Seagate’s cloud-based applications have attracted customers’ interest.

However, whether this Zacks Rank #3 (Hold) stock can succeed in its plans remains to be seen. Moreover, sluggish macroeconomic conditions and a flattish price environment remain the near-term headwinds.

A couple of better-ranked stocks in the broader technology sector include Box, Inc. (NYSE:BOX) and Stratasys Ltd. (NASDAQ:SSYS) , both sporting a Zacks Rank #1 (Strong Buy).