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Why Seagate Technology PLC Stock Popped Today

By Steve Symington – Jul 12, 2016 at 6:14PM

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The data-storage company revealed an encouraging quarter and additional restructuring plans.

Image source: Seagate

What: Shares of Seagate Technology PLC (STX) were up 21.8% as of 12:35 p.m. Tuesday, after the data-storage solutions company announced an ambitious restructuring plan and preliminary fiscal fourth-quarter 2016 results ended July 1.

So what: More specifically regarding the latter, Seagate now expects to report revenue for the quarter of roughly $2.65 billion -- or down roughly 9.6% year over year -- along with gross margin of 25%, and adjusted gross margin of 25.8%. By contrast, Seagate's previous guidance called for quarterly revenue of $2.3 billion, and adjusted gross margin of 23%.

These results were driven by better-than-expected demand for enterprise hard drives as well as Seagate's cost containment initiatives. Hard drive unit shipments overall came in at roughly 37 million, good for a total of 62 exabytes of storage, average capacity per drive of 1.7 terabytes, and an average selling price of $67 per unit.

"The evolution of mobile and cloud data driven environments continues to define itself as requiring significant amounts of mass storage," explained Seagate CEO Steve Luczo. "HDD devices are where most data bits ultimately reside and our record HDD exabyte shipments in the June quarter, particularly due to enterprise demand, continue to support this thesis."

In addition to Seagate's restructuring actions announced two weeks ago, Seagate also revealed an expanded restructuring plan to further consolidate its global footprint. Namely, that will come in the form of reducing its global headcount by 14%, of roughly 6,500 employees. This will result in pre-tax charges of roughly $164 million in fiscal 2017, but it should allow Seagate to achieve its operating goal of adjusted product gross margin in the range of 27% to 32% by the December 2016 quarter.

Now what: However unfortunate those layoffs are, it's no mystery that Seagate has struggled to keep pace with competitors in today's fast-changing data storage industry. Shares were down more than 30% through the first six months of 2016 alone, and the company's lofty dividend looked unsustainable after Seagate reported its first quarterly loss in years this past April.

So while I'm not eager to dive in after today's pop, it's hard to blame investors for applauding Seagate's encouraging quarterly results and taking drastic action to realign the size and cost structure of its business. 

Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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