Does Seagate really need to cut 6,500 jobs?

Storage vendor Seagate has announced plans to chop 14 per cent of its workforce – some 6,500 jobs – by the end of its 2017 fiscal year.

This will consolidate its global footprint across EMEA, Asia and the US, and will cost the business around $164 million in restructuring.

While seeing people’s jobs taken away is not nice, these kind of cuts by big businesses have almost become the norm in today’s tech market. However, I can’t get my head around this one.

Seagate expects to report revenue of $2.65 billion and gross margin of 25 per cent for the fiscal fourth quarter ending July 1st. A year prior, it delivered revenue of $2.9 billion during Q4 and gross margin of 26.5 per cent.

In terms of hard drive sales, Seagate expects to report HDD unit shipments of approximately 37 million for its most recent fourth quarter, down from 45.9 million in Q4 2015. This was also 20 per cent less than the number of shipments in Q4 2014.

While this is a drop, it’s arguably not a huge one. Seagate is still generating substantial revenues and gross margin, which makes the decision to announce further job cuts seem rather drastic.

These 6,500 fresh job cuts are on top of the 1,600 axed positions which Seagate announced back in May, bringing the total headcount reduction to more than 8,000.

The other thing worth noting is that Seagate’s latest preliminary results are actually better than the company previously expected.

Its previous forecast for the fiscal fourth quarter 2016 included revenue of approximately $2.3 billion and non-GAAP gross margin of approximately 23 per cent.

"The difference in the company’s revenue from its forecast was driven primarily by better than expected demand for the company’s HDD product portfolio," Seagate said in a statement.

"The difference in the company’s gross margin from its forecast was driven by better than expected demand for the company’s enterprise HDD portfolio and cost containment execution. Non-GAAP operating expenses for the fiscal fourth quarter are expected to be approximately $440 million, in line with forecast expectations."

So why on Earth is Seagate cutting so many jobs?

It seems it’s scared of further declines in hard drive sales over the coming years, though it doesn’t really make this clear.

Steve Luczo, chairman and CEO, said: "The evolution of mobile and cloud data driven environments continues to define itself as requiring significant amounts of mass storage. HDD devices are where most data bits ultimately reside and our record HDD exabyte shipments in the June quarter, particularly due to enterprise demand, continue to support this thesis.

“We believe the long-term trend of exabyte storage demand growth exceeding HDD areal density growth remains intact for the foreseeable future. Seagate will continue to evolve its product offering, technology investment and manufacturing footprint to best serve our customers with the world’s most advanced and cost advantaged HDD products.”

Seagate says its restructuring activities ‘should’ enable it to be operating within its targeted non-GAAP product gross margin range of 27 to 32 per cent by the December 2016 quarter.

But for a company that says one of its core corporate values is its people, I find the sheer number of job cuts strange and drastic.

Back in May, Seagate confirmed that 70 jobs would be axed from its Londonderry operation, but it’s not yet clear if this will rise further or not in light of the latest news.

Seagate will report its fiscal fourth quarter and year-end 2016 financial results on Tuesday, August 2nd.