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3 Things Seagate Technology PLC Management Wants You to Know

By Ashraf Eassa - Jul 25, 2017 at 6:30PM

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The hard disk drive maker explained key business trends after posting disappointing quarterly results.

On July 25, hard disk drive manufacturer Seagate Technology (STX) reported its fourth-quarter earnings. Unfortunately, the results were well below expectations, and shares plummeted in response.

As my Foolish colleague Evan Niu explained in his excellent write-up explaining the drop, Seagate's revenue came in at $2.4 billion for the quarter, missing expectations of $2.56 billion, and earnings per share was $0.65, missing consensus of $0.98.

Seagate's logo.

Image source: Seagate.

Additionally, the company announced a leadership transition. Dr. Dave Mosley, previously president and COO of the company, will take over from Steve Luczo as CEO beginning on Oct. 1, 2017, and Luczo will become executive chairman.

Seagate management also hosted a conference call to discuss the results. Here are three items from the call that I found particularly interesting.

What drove the miss?

Luczo said that the company "saw strength in the quarter from [its] largest nearline U.S.-based [cloud service provider] customers and relative seasonal demand in the compute and branded markets."

Seagate defines "nearline applications" as "those which require high capacity and energy efficient storage solutions."

"We expect such applications, which include storage for cloud computing, content delivery and backup services, will continue to grow and drive demand for solutions designed with these attributes," the company said in its most recent form 10-K filing.

Additionally, the company defines "compute" applications in its 10-K as "solutions designed for desktop and mobile compute applications ranging from traditional laptops, tablets and convertible systems."

Continuing with this quarter's results, Luczo said that the previous factors were offset by "weakness in [Seagate's] enterprise storage customers, including traditional OEM nearline and mission critical demand, China [cloud service provider] nearline demand, and [Seagate's] own Cloud Storage systems business."

"In addition," Luczo added, "there was weakness in the surveillance and [network attached storage] markets due to some intra-quarter channel inventory management."

Short-term versus long-term?

Luczo said that the company's revenue results, driven by the above dynamics, "were approximately 5% below plan."

The executive indicated that "approximately half" of the revenue miss came from the company's cloud storage systems business and the other half came from enterprise hard disk drive "weakness and channel inventory management."

Luczo then explained that "some of these factors" -- he cited the China cloud service provider and network attached storage (NAS) issues as examples -- "are temporal and supply chain related."

In other words, they don't appear to be issues with the underlying markets; it's an issue with Seagate's execution.

However, Luczo also conceded that "some of the OEM revenue declines are more structural."

10 TB and 12 TB ambitions

"We continue to ramp our 10TB nearline product and shipped approximately 300,000 units in the June quarter," Seagate CFO Dave Morton said.

He added that Seagate's "sales for this capacity point have almost doubled over the last two quarters," and that the company is planning to ship a million 10 TB drives in the current quarter.

"In addition, our 12TB product shipped for revenue in the June quarter with excellent feedback," Morton said. "And we are confident that our qualification process is competitive."

All told, Morton says that the company expects to capture "approximately 50% of the exabyte share within the 10 TB and 12 TB market by the end of the calendar year."

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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