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Cost Cutting Lifts Earnings at Seagate in Fiscal 1Q17

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Earnings per share beat expectations

On October 19, Seagate (STX) reported that its fiscal 1Q17 earnings increased from fiscal 1Q16. The boost in earnings was due to the success of its cost-reduction efforts, which have included mass layoffs.

For fiscal 1Q17, Seagate posted EPS (earnings per share) of $0.55, higher than $0.11 in fiscal 1Q16. On an adjusted basis, its EPS came in at $0.99, handily beating the consensus estimate that called for EPS of $0.89. The improvement in EPS was supported by a 9.3% year-over-year (or YoY) decline in operating expenses to ~$2.6 billion for the latest quarter.

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Top-line pressure persists, but cost cuts offset the weakness

The chart above shows Seagate’s EPS trend in the last several quarters. Earlier this year, Seagate announced the layoff of more than 14% of its global workforce as it pursues cost-saving measures.

Although Seagate (STX) is succeeding in trimming its costs to lift its bottom line, pressure on the top line seems to persist. The company reported a 4.4% YoY decline in revenue to $2.8 billion for fiscal 1Q17. Seagate is battling a wave of challenges, including intense competition from rival Western Digital (WDC), which recently acquired SanDisk to strengthen its position in the memory market.

Soft demand for personal computers

The top line pressure that Seagate and peers are facing can also be attributed to weak demand for personal computers or PCs. As makers of PCs such as HP (HPQ) and Dell Technologies (DVMT) are struggling to make sales as smartphones and tablets cannibalize the PC market.

Cloud computing saving the day

However, the shift to cloud computing is offsetting the weakness in the PC storage market. In addition to cost cuts, strong demand for high-capacity cloud storage products also played a role in boosting Seagate’s (STX) fiscal 1Q17 earnings.

As cloud computing providers such as Amazon (AMZN) and Oracle (ORCL) add capacity, strong demand for high-capacity cloud storage drives has resulted.

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