Seagate Technology (STX) is trading sharply lower today (-16%) after reporting 4Q17 (Jun) results last night. Before getting into the earnings, a little background would help. STX is primarily a manufacturer of hard disk drives (HDDs) used to store data. Its drives are used in systems ranging from DVRs and portable storage devices to high-end servers and mainframes. In addition to HDDs, STX makes a broad range of storage products including solid state hybrid drives (SSHD), solid state drives (SSD), PCIe cards and SATA controllers.
Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, and most SSDs use NAND-based flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.
There is a major transformative shift for storage away from client servers and toward the mobile cloud. As such, STX is focusing much more on cloud and mobile storage. STX also announced a major restructuring in 2016 which consolidated its global footprint across Asia, EMEA and the Americas in order to better match its production capacity with demand. The plan included 6,500 job cuts, or 14% of its global headcount by the end of FY17. Finally, it's worth noting that STX pays a big quarterly dividend, $0.63/sh, that computes to an annual yield of approximately 7.6%.
Turning to the JunQ earnings report, non-GAAP EPS came in at $0.65, which was well below market expectations. Revenue fell 9.3% year/year to $2.41 bln, which also was below expectations. STX also announced that COO Dave Mosley has been named as CEO, effective October 1, 2017. Current CEO Steve Luczo will transition to the role of Executive Chairman on October 1.
That's not all, STX also announced an additional restructuring plan to reduce its cost structure. The company intends to reduce its global headcount by approximately 600 employees by September 30. This should result in approximately $90 mln in annual savings.
So why did STX miss EPS by so much? On the call, management said revenue was approximately 5% below plan with approximately half of that shortfall from its cloud storage systems and half from HDD enterprise weakness and channel inventory management. STX believes some of these factors, particularly China CSP demand and NSA / surveillance market demand, are temporary and supply chain-related while some of the OEM declines are more structural.
Also, non-GAAP gross margin of 28.9% was approximately 210 basis points below guidance. Within this, approximately 2/3 of the impact was due to operational issues in its CSSG business and approximately 1/3 was due to lower than expected enterprise and surveillance HDD portfolio mix.
Looking ahead, STX said the overall macroeconomic environment continues to exhibit stability and this should continue through the rest of the calendar year and well into 2018. STX remains cautiously optimistic that this will translate into moderate IT spending growth. However, some supply chain issues that the company identified last quarter will persist at least through the end of the year. At the same time, STX is expecting a stronger back half of the calendar year for exabyte growth.
In sum, this was a tough end to STX's fiscal 2017 year. In fact, it has been a difficult few months for the stock. After running from below $20 in May 2016 to above $50 by April 2017, the stock has since been under pressure and it's currently in the $33 range. The good news at least is that STX is maintaining that big dividend which has a current yield around 7.6%. Of note, STX's main rival Western Digital (WDC) reports Thursday after the close.