01—Abstract
Summary
Summary of the 10-K filed August 4, 2017. Cited figures are marked; the original filing is the authoritative source.
Seagate's fiscal 2017 (ended June 30, 2017) was a year of revenue contraction but margin recovery.
Revenue fell 3% to $10.77 billiona from $11.16 billion, driven by price erosion partly offset by exabyte growth (263 EB shipped vs. 233 EB). Gross margin expanded roughly 600 basis points to 29%, reflecting favorable product mix and improved factory utilization from workforce reductions and manufacturing consolidation. Net income rose to $772 million ($2.58 diluted EPS) from $248 million, though operating income was helped by lower operating expenses and the absence of prior-year restructuring-related pressure was offset by $178 million in restructuring charges.
Cash generation and capital return remained substantial. Operating cash flow was $1.9 billionb against capital expenditures of $434 million, leaving free cash flow of roughly $1.5 billion. Seagate paid $561 million in dividends and repurchased $460 million of shares, while issuing $1.25 billion of new senior notes (2022 and 2024) to refinance and redeem higher-coupon debt.
Cash and equivalents rose to $2.5 billionc, but total debt increased to about $5.0 billion, keeping the balance sheet leveraged, with equity of only $1.36 billion. The filing also flags a leadership transition and ongoing cost actions. Stephen Luczo will step down as CEO effective October 1, 2017, becoming Executive Chairman, with William Mosley succeeding him.
A new July 2017 restructuring plan targets roughly 600 additional job cuts and about $50 milliond in charges. Risk factors emphasize continued HDD price erosion, competition from SSDs in notebook and enterprise applications, customer concentration (Dell at 10% of revenue), and covenant compliance on the revolving credit facility.
02—Key points
Key Highlights
- Revenue declined 3% to $10.77 billion, as price erosion offset a 13% increase in exabytes shipped (263 EB vs. 233 EB).
- Gross margin rose about 600 basis points to 29% from 23%, driven by favorable product mix and factory utilization gains from restructuring.
- Net income increased to $772 million ($2.58 diluted EPS) from $248 million, a substantial improvement year over year.
- Operating cash flow was $1.9 billion; after $434 million of capex, free cash flow was roughly $1.5 billion.
- Shareholder returns totaled about $1.0 billion in fiscal 2017: $561 million in dividends and $460 million in buybacks, with $1.3 billion of repurchase authorization remaining.
- Total debt rose to about $5.0 billion after issuing $1.25 billion of new senior notes, and equity fell to $1.36 billion, leaving the balance sheet highly leveraged.
- CEO transition: William Mosley succeeds Stephen Luczo as CEO on October 1, 2017, while Luczo becomes Executive Chairman; a July 2017 restructuring plan adds about 600 job cuts.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Seagate Technology Holdings plc kept $0.07.
- Revenue$10.77B100.0%
- Cost of revenue−$7.60B70.5%
- Gross profit$3.17B29.5%
- Operating costs−$2.12B19.7%
- Operating income$1.05B9.8%
- Interest, other & tax−$282.0M2.6%
- Net income$772.0M7.2%
Where FY2017 revenue went
$10.77B- Cost of revenue: $7.60B, 71% of revenue
- Net income: $772.0M, 7.2% of revenue
- R&D: $1.23B, 11% of revenue
- SG&A: $606.0M, 5.6% of revenue
- Other operating costs: $282.0M, 2.6% of revenue
- Interest, other & tax: $282.0M, 2.6% of revenue
Kept 7.2% as net incomeNet income $772.0M · 7.2%Other operating costs $282.0M · 2.6%Interest, other & tax $282.0M · 2.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed August 4, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $10.77B$11.16B | −3.5% |
| Cost of Revenue | $7.60B$8.54B | −11.1% |
| Gross Profit | $3.17B$2.62B | +21.4% |
| R&D Expenses | $1.23B$1.24B | −0.4% |
| SG&A Expenses | $606.00M$635.00M | −4.6% |
| Operating Expenses | $9.72B$10.71B | −9.3% |
| Operating Income | $1.05B$445.00M | +136.9% |
| Interest Expense | $222.00M$193.00M | +15.0% |
| Net Income | $772.00M$248.00M | +211.3% |
| EPS (Basic) | $2.61$0.83 | +214.5% |
| EPS (Diluted) | $2.58$0.82 | +214.6% |
| Shares Outstanding (Basic) | 296.00M299.00M | −1.0% |
| Shares Outstanding (Diluted) | 299.00M302.00M | −1.0% |
05—Questions
Frequently Asked Questions
Why did gross margin improve even though revenue fell?
Gross margin rose to 29% from 23% because of a more favorable product mix and better factory utilization. Workforce reductions and manufacturing footprint consolidation lowered unit costs, which more than offset ongoing price erosion.
How healthy is Seagate's balance sheet and leverage position?
Total debt increased to about $5.0 billion from $4.1 billion, mainly from the February 2017 issuance of $750 million 2022 notes and $500 million 2024 notes. Cash rose to $2.5 billion, and the company stated it was in compliance with its revolver covenants. Equity is thin at $1.36 billion, and interest expense is significant at $222 million.
What are the main risks to future revenue and margins?
Key risks include persistent HDD price erosion, competition from SSDs in notebook and enterprise compute markets, reliance on a small number of OEM customers (Dell represented about 10% of revenue), volatile demand, and execution risk on restructuring and manufacturing consolidation.
Is the dividend at risk?
The company declared a quarterly dividend of $0.63 per share, payable October 4, 2017, and paid $2.52 per share in fiscal 2017. However, the filing states that dividends are discretionary and depend on financial results, cash flow, covenants, and credit ratings, so a future reduction cannot be ruled out.
What changes in leadership and operations should investors expect?
Effective October 1, 2017, William Mosley becomes CEO and Stephen Luczo becomes Executive Chairman. Philip Brace, President of Cloud Systems and Silicon, departs October 2, 2017. The July 2017 restructuring plan targets about 600 employees and roughly $50 million in pre-tax charges, mostly in the first quarter of fiscal 2018.
06—Continue