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Seagate Technology plc (STX - Analyst Report) reported first-quarter 2014 non-GAAP earnings per share of $1.29, which not only lagged the Zacks Consensus Estimate of $1.31 but were also down 11.5% from the year-ago quarter. Shares slid 4.8% in after-hours trading.

Quarter Details

Seagate reported revenues of $3.49 billion in the first quarter of 2014, down 6.5% from the year-ago period and lagged the Zacks Consensus Estimate of $3.56 billion. The company’s revenues declined primarily as a result of modest price declines.

During the quarter, Seagate shipped 55.7 million units which increased from 53.9 million units in the previous quarter but were down from 58.0 million in the year-ago quarter. However, average selling price for the quarter was down $1 from $63 in both the previous and year-ago quarters.

Seagate’s market share in the total addressable market remained flat sequentially, but was down from 42.0% reported in the year-ago quarter.

Seagate’s non-GAAP gross margins contracted 45 basis points (bps) on a year-over-year-basis to 28.5%, primarily due to a lower revenue base and weaker pricing.

Operating margins for the company also contracted 290 bps from the year-ago quarter to 15.1% primarily due a year-over-year increase in operating expenses as a percentage of revenues (up 245 bps).

Seagate reported non-GAAP net income of $473 million or $1.29 per share compared with $594 million or $1.45 per share reported in the year-ago quarter.

Cash and cash equivalents were approximately $1.92 billion at the end of the quarter versus $2.19 billion in the previous quarter. Accounts receivables decreased to $1.62 billion from $1.67 billion in the prior quarter. Seagate’s long-term debt (including the current portion) stood at $2.77 billion.

Seagate generated $682 million from operating activities, up from $394 million in the previous quarter. The company generated free cash flow of $521 million.

The company paid dividends worth $135 million and repurchased 4 million shares for $182 million. Moreover, Seagate repurchased 32.7 million shares from Samsung Electronics for an estimated $1.5 billion.

Additionally, Seagate increased its quarterly dividend from 38 cents to 43 cents. The dividend is to be paid on Nov 12, 2013.

Seagate expects revenues in the range of $3.5 billion to $3.6 billion for the second quarter while non-GAAP margins are expected to remain flat sequentially.

Our Take

Seagate reported a dismal first quarter wherein the company witnessed year-over-year declines in both top and bottom lines. The lack of visibility in the hard disk drive industry and declining price environment are headwinds for the company.

Despite the ongoing cost control measures, the company has not been able to support its margins. Moreover, Seagate is coming up with customized products to cater to new customers and penetrate markets. Seagate also has a significant exposure to high-end corporate desktop and enterprise server markets, which will help it to compete with rivals such as Western Digital (WD - Snapshot Report), SanDisk (SNDK - Analyst Report) and Fusion-io in the long run.

Currently, Seagate has a Zacks Rank #3 (Hold).

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