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Seagate (STX) Up 16.2% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Seagate (STX - Free Report) . Shares have added about 16.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Seagate due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Seagate Q2 Earnings & Revenues Beat Estimates

Seagate reported second-quarter fiscal 2021 non-GAAP earnings of $1.29 per share, which beat the Zacks Consensus Estimate by 17.3%. However, the figure declined 4.4% from the year-ago quarter’s figure.

Non-GAAP revenues of $2.623 billion beat the Zacks Consensus Estimate by 2.8% but deteriorated 2.7% on a year-over-year basis due to weak but recovering enterprise market, which offset growth in video and image application market and sale of consumer drives.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 129.2 exabytes of hard disk drive (HDD) storage, with an average capacity of record 4.3 terabytes (TB) per drive. This marked year-over-year improvement of 20.9% and sequential growth of 12.9% in total HDD exabytes shipments. Notably, average mass capacity improved to 4.3 TB from 3.3 TB reported in the year-ago quarter but decreased from 4.4 TB reported in the previous quarter.

The company shipped 97.2 exabytes for the mass capacity storage market (includes nearline and video and image applications as well as network-attached storage or NAS). This marked sequential growth of 12.2% and year-over-year improvement of 36.3% in exabytes shipments. Average mass capacity per drive decreased sequentially to 7.9 TB from 8.2 TB.

In the nearline market, the company shipped 71.2 exabytes of HDD, up 45.3% year over year and 16.2% sequentially. Average mass capacity per nearline drive was 11.4 terabytes. This was driven by robust demand for the company’s 16 TB capacity products.

The company shipped 32 exabytes for the Legacy market (includes mission-critical, notebook, desktop, gaming consoles, digital video recorders or DVR and external consumer devices) with an average capacity of 1.8 TB. This marked a sequential improvement of 15.1% in exabyte shipments. Notably, average capacity increased 12.5% on a year-over-year basis.

This can be attributed to improved consumer drive sales, which partially offset sluggishness in enterprise mission critical and PC market.

Revenues from mass capacity storage was $1.5 billion, up 12% sequentially and 15% year over year.

Revenues by Product Group

Total HDD revenues (92.5% of revenues) decreased 2.3% year over year to $2.425 billion in the reported quarter. Mass capacity and legacy verticals contributed 62% and 38% of total HDD revenues, respectively.

Non-HDD segment revenues (7.5%), which include enterprise data solutions, cloud systems and SSDs, declined 7.9% year over year to $198 million.

Margin Details

Non-GAAP gross margin contracted 190 basis points (bps) on a year-over-year basis to 26.8% on lower revenue base. The gross margin takes into account approximately 110 bps impact from underutilization of production capacities, less favorable product mix and operational cost-related coronavirus disruption.

Driven by benefits of remote work trend and earlier restructuring endeavors, non-GAAP operating expenses (12.2% of revenues) were down 8.9% on a year-over-year basis to $319 million.

Nevertheless, non-GAAP income from operations were $385 million, down 9.2% from the year-ago quarter’s figure. Consequently, non-GAAP operating margin contracted 100 bps from the prior-year quarter’s reported figure to 14.7%.

Balance Sheet and Cash Flow

As of Jan 1, 2021, cash and cash equivalents were $1.8 billion compared with $1.66 billion as of Oct 2, 2020.

As of Jan 1, 2021, long-term debt (including current portion) was $5.145 billion compared with $4.163 billion as of Oct 2, 2020.

Cash flow from operations was $473 million compared with $297 million reported in the previous quarter.

Free cash flow for the reported quarter amounted to $314 million compared with $186 million in the last reported quarter.

In the fiscal second quarter, the company repurchased 18 million ordinary shares worth $1 billion and paid out cash dividends worth $167 million.

Notably, Seagate’s board of directors approved a cash dividend of 67 cents per share. The dividend will be paid out on Apr 7 to shareholders of record as of the close of business on Mar 24.

Guidance

Management provided a not-so-encouraging top and bottom-line guidance. Management anticipates third-quarter fiscal 2021 revenues of 2.65 billion (+/- 200 million).

Meanwhile, non-GAAP earnings per share for fiscal third quarter is expected to be $1.30 per share (+/- 15 cents).

Going ahead, management expects increases in uptake of mass capacity storage solutions in the cloud and edge computing verticals.

Seagate also anticipates Lyve Platform and CORTX to fuel demand for its overall mass capacity storage solutions going ahead. Lyve Platform is designed to assist organizations to simplify data management and security.

Notably, CORTX is an open-source object storage software that facilitates developers to gain access to mass capacity data storage architecture. Lyve Rack is a flexible converged storage infrastructure that allows users to implement CORTX and develop mass capacity private storage cloud at lower costs.

Management also added that demand in the cloud data center vertical is likely to improve in fiscal 2021 and this bodes well for its HDD storage solutions. Moreover, gradual recovery in the video and image applications augurs well for mass capacity storage solutions. However, for the third quarter of fiscal 2021, management expects seasonality to result in decline in demand, sequentially, in the VIA space

Seagate expects robust demand for the company’s 18-terabyte capacity products to be a key catalyst in the days ahead as production improves. In November 2020, the company also started shipping 20-terabyte HAMR drives, which augurs well for its mass capacity storage solutions’ portfolio. Per company estimates, mass capacity storage market is expected to be a $24 billion revenue opportunity by 2025.

Moreover, management stated that the enterprise markets began to recover for the first time since the onset of the pandemic. The improvement was most pronounced among large enterprise OEM customers, which led to strong sequential revenue growth for both nearline and mission critical drives. Citing an IDC report, management expects the enterprise IT spending to gather pace in calendar 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Seagate has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Seagate has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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