Seagate revenue slides, CEO Luczo says ‘see ya later’

Seagate revenue drops

The Cupertino, Calif., storage vendor’s $2.4 billion in revenue for its fiscal fourth quarter came in below the Wall Street analysts’ consensus estimate of $2.56 billion and the $2.65 billion the company reported for the same quarter a year ago. Seagate revenue was also down for the full 2017 fiscal year, with $10.8 billion compared to last year’s $11.2 billion.

Luczo said the overall Seagate revenue results were about 5% below plan. He said roughly half the shortfall came from its cloud storage systems and the rest from weakened demand for enterprise hard disk drives (HDDs) and channel inventory management in the NAS and surveillance markets.

Seagate shipped 23.4 exabytes (EB) of enterprise HDD capacity in its fiscal fourth quarter — off from the 26.9 EB in the same quarter a year ago. The shipped capacity for mission-critical enterprise HDDs was constant at 2.2 EB, but the near-line enterprise HDD capacity fell to 21.2 EB from 24.7 EB a year ago.

Seagate’s enterprise HDD capacity reached a high-water mark in the first fiscal quarter of 2017 at 28.1 EB, including 25.7 EB for near-line and 2.4 EB for mission-critical HDDs. In the second fiscal quarter, the shipped enterprise mission-critical HDD capacity hit 2.6 EB, but the near-line HDD capacity plummeted to 21.6 EB and has declined slightly with every subsequent quarter.

Another cloud hanging over storage vendors is the ongoing NAND flash shortage. Although solid-state drives (SSDs) aren’t its main business, Seagate sells enterprise SSDs to server and storage OEMs and includes flash in the storage systems it sells.

Luczo did not specifically mention NAND flash, but he noted the end-to-end storage supply chain continued to experience price increases of two times to three times in the memory market. Seagate anticipates the situation will improve over the next several quarters, he said.

CFO Dave Morton said he was optimistic about the enterprise HDD market, due to expected growth in hyperscale and cloud storage. He said he remains confident about Seagate’s near-line HDD portfolio across a variety of capacity points, including 10 TB and 12 TB HDDs that are ramping up in production.

Seagate to cut jobs

To cope with the current Seagate revenue drop, the company’s global headcount reduction should produce approximately $90 million in annual savings.

The company expects to complete the job cuts by the end of September, according to Seagate’s Form 8-K filing with the U.S. Securities and Exchange Commission.

Morton said the restructuring would help reduce operating expenses to about $400 million per quarter by the end of the year, with a long-term target of roughly $375 million per quarter.

The CEO change follows a series of other executive changes during the last 18 months. Those include Morton’s shift to CFO and Jeff Nygaard’s move to oversee all manufacturing in his role as senior vice president of operations. Other recent appointments included Jim Murphy as executive vice president of worldwide sales and marketing, Kate Schuelke as chief legal officer and Ravi Naik as chief information officer.

Luczo says Seagate revenue not the whole story

Although Seagate failed to achieve its main targets in Luczo’s penultimate quarter as CEO, he noted that the company had “effectively achieved” its operating margin and gross margin profitability targets for the full 2017 fiscal year that ended on June 30.

Luczo corrected an analyst who congratulated him on his retirement during the earnings call. “Much to my children’s chagrin, I have not retired,” he said, pointing out he will remain on as chairman to focus on strategic growth initiatives and other opportunities.

He quickly added, “I suppose I did retire from the CEO job,” and sounded like he will not miss it.

“As I said to someone the other day, running a disk drive company is a little bit like driving in stop-and-go traffic,” Luczo said. “Sometimes you’re going 15 miles an hour and sometimes you’re going 85 miles an hour. But you usually get to your destination on time and no one’s hurt. But it’s stressful for the driver and oftentimes for the passengers, too. So I think we have a younger driver with better reaction times now.”

Rival Western Digital will likely produce much less surprise when it reports earnings Thursday. Western Digital a month ago confirmed its previous guidance of $4.8 billion for last quarter and upgraded its profit forecast.