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Seagate Technology (STX) Up 5.6% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Seagate Technology PLC (STX - Free Report) . Shares have added about 5.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is STX 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 catalysts.

Recent Earnings

Seagate delivered impressive fiscal third-quarter 2018 results. Non-GAAP earnings per share came in at $1.46 per share, surpassing the Zacks Consensus Estimate of $1.36 per share, surging 32.7% on a year-over-year basis. However, the figure declined 1.4% sequentially.

Revenues of $2.80 billion outpaced the Zacks Consensus Estimate of $2.76 billion and also grew 4.8% from the year-ago quarter but declined 3.6% sequentially.

Both the top and bottom lines witnessed year-over-year improvement, owing to robust adoption driven by strong demand of Seagate’s storage drives. Moreover, increasing traction for mass storage solutions across company’s edge and enterprise markets remained a tailwind.

Performance in Detail

During the reported quarter, Seagate shipped 87.4 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.4 terabytes per drive.

The company shipped 43.8 exabytes for the enterprise HDD market, each with an average capacity of 4.8 terabytes.

Total HDD revenues went up 6.7% year over year to $2.59 billion during the quarter primarily due to advancement and accelerated growth of cloud storage technologies. Management believes that the HDD product suite is ready to cater to the demands of the market.

In the nearline market, the company shipped 41.3 exabytes of HDD, nearline products’ average capacity per drive reached 6.5 terabytes. Management noted that the company’s 10-terabyte helium nearline product was one of the top revenue generators in the quarter. Growth in the 12-terabyte helium nearline product line was also encouraging. Given the impressive customer feedback, Seagate anticipates capitalizing on the market adoption of these products.

Within the edge and customer verticals, the company witnessed year-over-year exabyte growth in all end markets, including PC compute, consumer, surveillance, gaming, and NAS markets.

Non-HDD segment (cloud systems and silicon group) revenues declined 13.2% year over year but gained 1.9% sequentially to $217 million. Per management, year-over-year decrease was “primarily due to the planned end of life of some legacy OEM cloud systems products and the divestiture of high-performance computing assets.”

Margin Details

Non-GAAP gross margin which came in at 30.8% declined 60 basis points (bps) on a year-over-year basis but expanded 40 bps sequentially.

Non-GAAP operating expenses were down 13% on a year-over-year basis to $385 million. This decrease in expenses can be attributed to certain cost improvement initiatives undertaken since past two years.

Balance Sheet and Cash Flow

Seagate ended the March quarter with cash and cash equivalents of $2.93 billion up from $2.56 billion in the quarter ending December. At the end of the quarter, the company had a long-term debt (excluding current portion) of $4.34 billion compared with $5.02 billion in the previous quarter.

The company’s board has approved a quarterly dividend payment of 63 cents for the March quarter to be paid on Jul 5, 2018. Further, in the quarter, Seagate redeemed senior notes due November 2018 for $57 million.

Cash flow from operations was $558 million for the third quarter and was $1.65 billion for the first three quarters of fiscal 2018. Free cash flow for the quarter and first nine months of the fiscal came at $489 million and $1.4 billion, respectively.

Guidance

Management anticipates fourth-quarter revenues to grow approximately 17% on a year-over-year basis due to strong cloud demand and seasonality in other markets. However, the company projects revenues to remain flat sequentially. The company notifies that Exabyte demand is increasing on a year-over-year basis across most of the markets it caters.

Seagate projects gross margins to be flat on a sequentially basis and come within the company’s long-term range of 29–33%. It projects to generate an operating cash flow of at least $500 million in the fourth quarter.

Seagate anticipates additional variable compensation for its employees in the fourth quarter. However, management believes that its ongoing cost management initiatives operational efficiency will enable the company to reduce non-GAAP operating expenses by 1-2% from the prior quarter.

For fiscal 2018 revenues are expected to grow 4% and the company envisions generating an operating cash flow greater than $2 billion.

For second half of 2018, the company expects solid capacity demand, robust exabyte growth in its edge markets along with seasonal strength in other markets to boost the top line.

Conclusion

With the huge transformations in the storage industry, mobile cloud is taking the center stage. This in turn has bolstered the deployment of high-capacity mass storage products which is beneficial for Seagate.

In January this year, Seagate entered into a long-term NAND supply agreement with Toshiba. The agreement will help the company in its innovation of HDD, solid state drives (SSD) and hybrid solutions, consequently expanding its product portfolio.

The company is trying to focus less on the mission-critical 15K and sub-1-terabyte client consumer markets. Management anticipates these markets to eventually converge with either silicon-based memory or cloud storage, where it is already expanding footprint. Notably, as a percentage of total revenues, the products accounted for lesser than 8%.

Favorable macroeconomic environment and rising global investments in cloud will continue to work as key catalysts. Further, hints of PC market stabilization as reflected in the latest reports from Gartner and IDC are a positive.

The company’s efforts in the improvement of areal density with the ramping up of its heat assisted magnetic recording (“HAMR”) technology, which is expected be shipped in 2019, is yet another positive. This move will not only reinforce company’s leadership in areal density but also boost nearline drive capacity points by at least 24 terabytes per drive.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter.

VGM Scores

At this time, STX has a strong Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was also allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise STX has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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