Shares of Seagate Technology plc (STX - Analyst Report) plunged 7.6% to close at $35.10 on Oct 11, after the company announced its preliminary first-quarter 2017 results. The plunge in share price reflected an unexpected increase in operating expenses for the quarter. The company is set to report first-quarter 2017 results on Oct 19.
A higher variable compensation expense is estimated to drive non-GAAP operating expenses sequentially, which is now pegged at $470 million. The company had reported non-GAAP operating expenses of $443 million in fourth-quarter 2016.
However, both revenues and gross margin are expected to increase in the quarter. Seagate now estimates revenues to be $2.8 billion compared with $2.7 billion guided previously. Moreover, non-GAAP gross margin is anticipated to be 29% compared with its earlier forecast of 27%.
Seagate cited strong demand for its high capacity enterprise HDD product portfolio behind this guidance raise. The company now expects HDD shipments of approximately 67 exabytes and unit shipments to be roughly 39 million, which translates to total average capacity per drive of 1.7 terabytes for the quarter.
Although the increase in operating expenses is a concern, Seagate is striving to improve its profitability by not participating into lower-margin businesses. Instead, the company remains focused on launching innovative products, which will help it to win enterprise customers on continuous basis.
We believe this strategy will eventually drive gross margin expansion in the long haul. Moreover, managing excess capacity by reducing HDD manufacturing is positive for the company. Seagate anticipates manufacturing approximately 35 million to 40 million drives per quarter, which is a significant decline from its capacity of 55 million to 60 million drives per quarter.
Further, benefits of the ongoing restructuring activities will boost bottom-line in fiscal 2017. Additionally, growing demand for Seagate’s products from cloud service providers will continue to boost top-line growth.
However, sluggish macroeconomic conditions, a flattish price environment and competition from Western Digital (WDC - Analyst Report) remain the near-term headwinds. Furthermore, continued cannibalization of PCs by mobile devices could hurt Seagate’s future performance.
Zacks Rank & Key Picks
Currently, Seagate has a Zacks Rank #2 (Buy). A better-ranked stock in this space is NetApp (NTAP - Analyst Report) which sports a Zacks Rank #1 (Strong Buy). Estimates for 2016 and 2017 have surged 23 cents (16.5%) and 32 cents (20.8%), respectively, to $1.62 and $1.86 over the last 60 days.
Intel Corp (INTC - Analyst Report) also sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.. Estimates for 2016 and 2017 have surged 9 cents (3.6%) and 13 cents (4.8%), respectively, to $2.61 and $2.83 over the last 60 days.
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