Seagate released selected preliminary financial information for its fiscal 2016 fourth quarter. The results are surprisingly positive, with revenue estimated at $2.65 billion. The revenue guidance represents a 9.6 percent year-over-year decline but beats Seagate's original $2.32 billion projection by $330 million. The earnings are a positive sign for the company, especially considering that Seagate's woes began earlier this year when it missed its projections by $100 million.
The gains stem from increased HDD demand, which is a ray of sunshine in an otherwise gloomy HDD market. Seagate, like the other HDD vendors, is beholden to the rocky desktop PC market that has plunged relentlessly for years. The most recent quarterly Gartner report indicated that desktop PCs declined 5.2 percent globally, but actually grew by 1.4 percent in the U.S.
This is the first time the U.S. has experienced growth in five quarters.
The future looks upbeat, as well; most PC purchases traditionally occur in the third and fourth quarters. Any sign of recovery in the desktop PC market is good news for the HDD vendors, as most desktop PCs still do not ship with SSDs.
The rocky desktop PC market continues to suffer globally, but Seagate found some relief in better-than-expected enterprise HDD demand. The company is now selling a competitive 10 TB helium-based HDD, which might have improved its position. The company sold approximately 37 million drives, or 62 exabytes of storage, with an average capacity of 1.7 TB and an average selling price of $67.
Seagate announced that it was relieving itself of 1,600 workers last week as part of "The Plan," which is the creative name for the company's restructuring efforts. In tandem with its preliminary financials, Seagate announced that it is laying off an additional 6,500 employees, or 14 percent of its global workforce, which brings the layoff casualties to 8,100. Seagate projected that it will cost $164 million to send the employees packing by the end of the fiscal year 2017, but that the reductions will allow it to increase its margins to the 27-32 percent range. Seagate currently employs more than 46,000 people.
The company also predicted a gross margin of 25 percent, and the encouraging words sent Seagate stock skyrocketing; it is currently trading up more than 20 percent. Many of Seagate's investors divested their stock due to what they perceived as Seagate's poor visibility into future supply and demand, but its preemptive cuts and restructuring efforts appear to be consoling the skittish.
Seagate sees a glimmer of hope, but it is going to take much more to recover fully from the beating it took earlier this year when its shipments cratered and it announced a $100 million shortfall. Investors punished Seagate's stock as the company shed value by the billions ($10.39 to $7.58 billion).
Seagate is refocusing on its high-margin and high-density enterprise HDD offerings, which should provide a welcome shelter from the increasingly hostile SSD penetration in the notebook segment.