Higher ASP Drives Seagate's 2Q

Seagate Technology plc (STX - Snapshot Report) reported second quarter 2012 earnings per share of $1.32, comprehensively beat the Zacks Consensus Estimate of $1.09, on the back of higher average selling price (ASP) of hard disk drives (HDD) arising from the supply-chain disruption post the Thailand flood.

Revenue

Seagate reported revenues of $3.19 billion in the second quarter of 2012, up 17.5% from $2.72 billion in the year-ago period. The company shipped 47 million units during the quarter down from 50.7 million units in the previous quarter.

Seagate’s diversified factory footprint and broad supply chain management system mitigated the impact of the floods on the company’s operation. However, many of the company’s external component suppliers are still trying to recover from the effects of flood.

The company has secured positive response from its suppliers who have successfully navigated through the negative effects of the flooding. However, several challenges still remain for the company to stabilize its supply chain process. To achieve this target, Seagate has been working with its customers and suppliers on various issues.

Operating Results

Gross profit was $1010.0 million compared with $529.0 million in the prior-year quarter. Gross margin was 31.6% compared with 19.5% in the prior-year quarter. The company was able to control its cost of production, which reduced from the year ago quarter, whereas revenue increased on a yearly basis.

Operating income in the quarter was $605.0 million or 18.9% of revenues, up 193.7% from 206.0 million or 7.6% of revenues in the year-ago quarter. Operating income improved as revenue increased at a substantially higher rate than operating expense.

On a GAAP basis, net income was $563.0 million or $1.28 per share compared with $150.0 million or 31 cents per share in the comparable quarter last year. Excluding the impact of total operating expenses and other expenses, adjusted net income was $581.0 million or $1.32 per share compared with $727.0 million or $1.67 in the year-ago quarter.

Balance Sheet, Cash Flow

Cash and cash equivalents totaled approximately $2.23 billion at the end of the December quarter versus $2.47 billion in the previous quarter. Accounts receivables increased to $1.63 billion from $1.45 billion in the prior quarter. Seagate’s long-term debt remained flat year over year at $2.92 billion. The company has a strong cash generation ability and generated $879.0 million from operating activities.

Our Take

Seagate reported better than expected second quarter, with revenue growing year over year, and EPS exceeding Zacks Consensus Estimate. Seagate’s position in the HDD vertical looks impressive, though we think that the uncertainty in the PC market will pose a serious threat. The growth of tablets is cannibalizing the usage of HDDs, while increasing the usage of SSDs (solid state drives).

We believe that Seagate’s strong foothold in the Enterprise SSD market will help it to generate healthy revenue growth in fiscal 2012 and beyond, which in turn will improve margins.

Currently, Seagate has a Zacks #2 Rank, implying a short-term Buy rating.

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