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Seagate Technology plc (STX - Analyst Report) reported fiscal first quarter 2013 earnings per share (EPS) of $1.45, falling way behind the Zacks Consensus Estimate of $1.69.

Revenue

Seagate reported revenues of $3.73 billion in the first quarter of 2013, up 32.7% from $2.81 billion in the year-ago period. The company’s hard disk drive shipments into the client market took a hit during the quarter and declined 12% sequentially, which is more or less at par with the declines faced by other technology companies.

The company also witnessed a weak enterprise market, which moved down 26% on a sequential basis. Even after considering the weak Enterprise market, Seagate’s unit shipments increased by 14% and average capacity per drive increased by 17% to 738 gigabytes.

Operating Results

Gross profit was $1.06 billion up from $549.0 million in the prior-year quarter. Gross margin was 28.4% versus 19.5% in the prior-year quarter. The gross margin was benefited by better pricing environment and cost savings from product transitions and they are in line with other players from the same segment. However, margins generated by the company’s products at Brazil were materially lower than the company’s expectation, thereby hurting the gross margin by 100 basis points.

Operating income in the quarter skyrocketed 164.4% year over year to $624 million. This was a result of operating expenses increasing at a slower pace than increase in revenue.

On a GAAP basis, net income was $582 million or $1.42 per share, compared with $140.0 million or 32 cents per share in the comparable quarter last year. Excluding the impact of one-time items, adjusted net income was $594.0 million or $1.45 per share, compared with $146.0 million 34 cents per share.

Balance Sheet, Cash Flow

Cash and cash equivalents were approximately $2.37 billion at the end of the quarter versus $2.21 billion in the previous quarter. Accounts receivables decreased to $1.68 billion from $2.32 billion in the prior quarter. Seagate’s long-term debt remained flat at $2.867 billion. The company possesses strong cash generation ability and generated $1.13 billion from operating activities, down from $3.26 billion in the previous quarter. STX has returned around 70.0% of operating cash  to shareholders through share repurchase.

Our Take

Seagate reported modest first quarter result, with revenue improving substantially but EPS falling short of our expectation. Full recovery in the HDD industry and increasing demand will position Seagate as the leading player in the market.

The company has been able to control costs and increase the sale of high-margin products. Moreover, Seagate is coming up with new products to woo customers and address other segments, and has a significant exposure to high-end corporate desktop and enterprise server markets compared to its rival Western Digital Corp. (WDC - Analyst Report).

Moreover, PC demand is yet to pick up substantially and increasing use of SSDs will continue to hamper the demand for HDDs. Moreover, the Enterprise SSD market did not grow as per the company’s expectation, but did not impact margins negatively.

Currently, Seagate has a Zacks #3 Rank, implying a short-term Hold rating.

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