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Weak Demand and Inventory Drove Seagate’s Lower Guidance

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Revenues of $2.6 billion expected in quarter ended March 2016

Recently, Seagate Technology (STX) announced its preliminary earnings results and lowered its revenue and margin estimates for fiscal 3Q16. The company cited weaker-than-expected demand and inventory falls of enterprise disk drives as the primary reasons for this guidance. The company will announce its detailed earnings on April 29, 2016.

Seagate expects its revenue to be $2.6 billion compared to its earlier guidance of $2.7 billion. It also expects its non-GAAP (generally accepted accounting principles) gross margin to be 23% compared to its earlier forecast of 25.6%.

The CEO of Seagate, Steve Luczo, stated, “We are disappointed that we did not anticipate the weaker demand in the March quarter. There are many complex issues impacting the traditional go to market channels in our market, which are reducing our forecast visibility.”

Luczo continued, “Despite the disruption of the shifts in our traditional mission critical HDD business in the near term, we believe the long term benefit of cloud architectures for end users, and the related need for very high capacity drives, is a net positive for Seagate and the HDD industry.”

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Shares of Seagate fell 20% on April 13, 2016

As shown in the above chart, shares of Seagate fell by over 20% after the above announcement on April 13, 2016. In the last week, shares of the company have fallen by 25.3%. In comparison, shares of peer companies NetApp (NTAP), SanDisk (SNDK), and Western Digital (WDC) have fallen by 8.5%, 1.3%, and 7.8%, respectively, since the announcement.

The above companies account for 1.2% of the Technology Select Sector SPDR ETF (XLK).

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