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Why Is Seagate (STX) Down 9.5% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Seagate (STX). Shares have lost about 9.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Seagate due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Seagate Q3 Earnings Beat Estimates, Revenues Down Y/Y

Seagate delivered fiscal third-quarter 2019 non-GAAP earnings of 83 cents per share, surpassing the Zacks Consensus Estimate by 15.3%.

However, the figure decreased 43.2% from the year-ago period and 41.1% sequentially.

Revenues of $2.313 billion slightly outpaced the Zacks Consensus Estimate of $2.311 billion. However, the figure declined 17.5% from the year-ago quarter and 14.8% sequentially.

Both the top and bottom line witnessed year-over-year decline, owing to uncertain macroeconomic environment, CPU shortages and declining PC shipments. Further, soft demand witnessed from cloud service providers (CSPs) and OEM enterprise customers impacted results negatively.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 76.7 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.4 terabytes per drive. This marked year-over-year and sequential decline of 12.2%, each, in the total HDD exabytes shipments.

The company shipped 32.9 exabytes for the enterprise HDD market (including nearline and mission critical). This marked a sequential decline of 9.6% in exabytes shipments in the domain. However, capacity improved sequentially from 4.5 terabytes to 4.9 terabytes.

Particularly, in the nearline market, the company shipped 30 exabytes of HDD, down 9.1% sequentially. However, average capacity per drive of 7.2 terabytes improved 11% on a quarter-over-quarter basis. Management noted that the company’s 12-terabyte helium nearline product was one of the top revenue generators in the third quarter.

Notably, the company has commenced shipping of its highest capacity 16-terabyte products in the reported quarter. The company anticipates the offering to be a notable revenue driver going ahead, as production ramps to higher volumes in later 2019.

The company shipped 29.2 exabytes for the edge non-compute HDD market, with an average capacity of 2.4 terabytes. This marked a sequential decline of 10.4% in exabytes shipments.

Edge non-compute domain comprises consumer electronics (which includes sales of surveillance, DVR, gaming, NAS applications), and consumer applications. Particularly, in the consumer electronics market, the company shipped 17.6 exabytes of HDD. Sequential growth in gaming, DVR and NAS end markets couldn’t offset the decline witnessed in consumer verticals owing to seasonality.

Coming to edge compute domain (which includes notebook and desktop markets), Seagate shipped 14.6 exabytes of HDD, with average capacity of 1.2 terabytes. This marked a sequential decline of 20.6% in exabytes shipments. Declining trend in PC shipments and CPU shortages impacted results negatively.

Notably, enterprise, edge non-compute and edge compute verticals contributed 39%, 32% and 20% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues declined 17.9% year over year to $2.124 billion in the reported quarter.

Non-HDD segment (enterprise data solutions, cloud systems and SSDs) revenues were down 12.9% year over year to $189 million, primarily due to lower SSD sales.

Margin Details

Non-GAAP gross margin came in at 26.6% contracting 420 bps on a year-over-year basis. The decrease can be attributed to decline in the overall sales of nearline volumes.

Non-GAAP operating expenses were down 9.4% on a year-over-year basis to $349 million. This decrease in expenses can be attributed to certain cost improvement initiatives, operational efficiency and reduced discretionary spending.

Income from operations during the reported quarter came in at $236 million, down 46.5% from the year-ago quarter. Operating margin came in at 10.2%, compared with year-ago figure of 15.7%.

Balance Sheet and Cash Flow

As of Mar 29, 2019, cash and cash equivalents were $1.39 billion up from $1.36 billion, reported at the end of the previous quarter.

Seagate ended the third quarter with a long-term debt (including current portion) of $4.52 billion compared with $4.32 billion reported in the previous quarter.

Cash flow from operations was $438 million, compared with $875 million reported in the previous quarter.

Free cash flow for the quarter amounted to $291 million, compared with $161 million reported during the second quarter.

In the third quarter, the company returned $505 million to shareholders, which includes dividends worth $178 million and repurchase of 7.2 million shares worth $327 million.

Notably, Seagate’s board of directors approved a cash dividend of 63 cents per share payable Jul 3, 2019.

Guidance

Management anticipates fourth-quarter fiscal 2019 revenues to be 2.32 billion (+/- 5%).

Seagate projects gross margins to be approximately 26.5%. Non-GAAP EPS for the third quarter is expected to be 83 cents (+/- 5%).

In fiscal 2020, management expects exabyte TAM to witness a CAGR above the long-term range of 35-40% for nearline drives.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Seagate has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Seagate has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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