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Can Western Digital and Seagate Reduce Costs and Improve Profits?

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Product, cost, and revenue synergies

Western Digital (WDC) expects to achieve total savings of $800 million on an annualized run-rate basis from its HGST integration by the end of 2017. This amount compares to the company’s earlier estimated savings of $650 million.

WDC’s savings from operating expenses are expected to be $450 million. The company should see savings of ~$300 million by the end of fiscal 2Q17. It expects a balance of $150 million by the end of fiscal 2Q18.

For the cost of goods sold, WDC expects to achieve savings of $350 million on an annualized run-rate basis, compared to its earlier estimate of $250 million. Of this amount, 50% should be achieved by the end of 2016, with the balance being achieved by the end of 2017.

Cost reductions improve EPS for Seagate

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For fiscal 1Q17, Seagate (STX) posted GAAP 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.

Seagate’s EPS rise was due to the success of its cost-reduction efforts, which have included mass layoffs. Earlier this year, Seagate announced the layoff of more than 14% of its global workforce as it pursues cost-saving measures.

In fiscal 1Q17, Seagate recognized approximately $82 million in pre-tax charges, driven by cost reduction activities. In July this year, the firm announced cost reduction activities of $164 million in pre-tax charges.

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