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Seagate Technology plc (STX - Analyst Report) reported third-quarter 2014 non-GAAP earnings per share of $1.34, which not only beat the Zacks Consensus Estimate of $1.26 but also increased 6.6% from the year-ago quarter.

Quarter Details

Seagate reported revenues of $3.41 billion in the third quarter of 2014, down 3.4% from the year-ago period and marginally missing the Zacks Consensus Estimate of $3.42 billion.

During the quarter, Seagate shipped 55.2 million units compared with 56.6 million in the previous quarter and 55.7 million in the year-ago quarter. Average selling price for the quarter stood at $61.0, down from $63.0 in the year-ago quarter and $62.0 in the previous quarter.

Nonetheless, Seagate’s market share in the total addressable market remained flat sequentially at 40%, but was down from 41.0% 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 24 bps from the year-ago quarter to 14.7% primarily due a year-over-year increase in operating expenses as a percentage of revenues (up 115 bps).

Seagate reported non-GAAP net income of $453 million or $1.34 per share compared with $464 million or $1.26 per share reported in the year-ago quarter.

Seagate exited the quarter with cash and cash equivalents of $2.26 billion at the end of the quarter versus $2.29 billion in the previous quarter. Seagate’s long-term debt (including the current portion) stood at $3.51 billion.

Seagate generated $443 million from operating activities compared with $856 million in the previous quarter. The company generated free cash flow of $319 million.

The company paid dividends worth $140 million and repurchased 3.5 million shares for $184 million.

Seagate expects revenues of $3.3 billion for the fourth quarter, lower than the Zacks Consensus Estimate of $3.4 billion. Non-GAAP gross margins are expected to be 28%, down marginally on a sequential basis primarily due to seasonality and market mix. The company expects prices to remain stable at current levels and expects its market share to be within 40% to 42%.

Moreover, management expects operating expenses to be $505 million, which includes the Xyratex acquisition.

Our Take

Seagate reported a mixed third-quarter results wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.

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 new products focused on surveillance and video analytics market, and other hybrid drives remain 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 #2 (Buy).

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