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Seagate Technology plc (STX - Analyst Report) reported second-quarter 2014 non-GAAP earnings per share of $1.32, which not only lagged the Zacks Consensus Estimate of $1.40 but were also down 4.7% from the year-ago quarter. Shares slid 6.1% in after-hours trading.

Quarter Details

Seagate reported revenues of $3.53 billion in the second quarter of 2014, down 3.8% from the year-ago period and lagged the Zacks Consensus Estimate of $3.60 billion. Reported revenues were within management’s guided range of $3.5 billion to $3.6 billion.

During the quarter, Seagate shipped 56.6 million units compared with 55.7 million units in the previous quarter and 58.2 million in the year-ago quarter. However, average selling price for the quarter stood at $62, flat year over year as well as sequentially.

Seagate’s market share in the total addressable market remained flat sequentially, but was down from 43.0% reported in the year-ago quarter.

Seagate’s non-GAAP gross margins expanded 90 basis points (bps) on a year-over-year basis to 28.5%. Operating margins for the company also contracted 144 bps from the year-ago quarter to 14.4% primarily due a year-over-year increase in operating expenses as a percentage of revenues (up 234 bps).

Seagate reported non-GAAP net income of $455 million or $1.32 per share compared with $523 million or $1.38 per share reported in the year-ago quarter.

Seagate exited the quarter with cash and cash equivalents of $2.29 billion at the end of the quarter versus $1.92 billion in the previous quarter. Seagate’s long-term debt (including the current portion) stood at $3.57 billion.

Seagate generated $856 million from operating activities, up from $682 million in the previous quarter. The company generated free cash flow of $713 million.

The company paid dividends worth $142 million and repurchased 33 million shares for $1.5 billion.

Seagate expects revenues of $3.4 billion for the third quarter, while non-GAAP margins are expected to remain flat sequentially. Moreover, management expects its operating expenses to remain flat on a quarter-over-quarter basis. The company expects total addressable market to remain in the range of 135 million to 142 million.

Our Take

Seagate reported a dismal second quarter wherein the company not only witnessed year-over-year declines in both top and bottom lines, but also missed the Zacks Consensus Estimate. The increase in investments to provide new and innovative products, sluggish macroeconomic conditions and a flattish price environment prompted the company to provide a modest guidance. Despite the company’s efforts to manage costs, margin contraction remains a headwind.

Nonetheless, the company is gaining traction with its 5-mm drives and other hybrid drives which is a positive. Moreover, Seagate’s cloud-based applications have received ample customer interest. 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 (WDC - Analyst Report), SanDisk (SNDK - Analyst Report) and Fusion-io in the long run.

Currently, Seagate sports a Zacks Rank #1 (Strong Buy).

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