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Seagate (STX) Q4 Earnings and Revenues Surpass Estimates

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Seagate Technology PLC (STX - Free Report) delivered impressive fiscal fourth-quarter 2018 results. Non-GAAP earnings per share came in at $1.62 per share, surpassing the Zacks Consensus Estimate of $1.45 per share. The figure also improved 97 cents from the year-ago period and 10.9% sequentially.

Revenues of $2.835 billion outpaced the Zacks Consensus Estimate of $2.711 billion and also grew 18% from the year-ago quarter and 1.1% sequentially.

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

Seagate’s stock has surged 61.8% in the past year, substantially outperforming industry’s rally of 21.9%.

Performance in Detail

During the reported quarter, Seagate shipped 92.9 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.5 terabytes per drive.

The company shipped 47.1 exabytes for the enterprise HDD market, each with an average capacity of 5.3 terabytes.

Total HDD revenues went up 19% year over year to $2.65 billion during the reported 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 44.5 exabytes of HDD, nearline products’ average capacity per drive reached 7 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 were almost flat year over year but declined 15.7% sequentially to $183 million.  Silicon revenues were up 53% year over year, primarily due to synergies from supply agreement with Toshiba Memory Corporation along with higher investment in the SaaS, NVMe, consumer and gaming markets.

Cloud systems revenue declined 21% year over year, primarily attributable to unfavorable business mix.

Margin Details

Non-GAAP gross margin which came in at 32.4% expanded 350 basis points (bps) on a year-over-year basis and 160 bps sequentially. The increase was primarily due to better mix of enterprise portfolio, product cost benefits, higher capacity points mix shift across mass storage solutions portfolio and better utilization of vertically integrated factories.

Non-GAAP operating expenses were down 5.5% on a year-over-year basis to $399 million. This decrease in expenses can be attributed to certain cost improvement initiatives undertaken over the past two years.

Balance Sheet and Cash Flow

Seagate ended the June quarter with cash and cash equivalents of $1.85 billion up from $2.93 billion in the previous quarter. At the end of the quarter, the company had a long-term debt (including current portion) of $4.82 billion, almost flat on a sequential basis.

Cash flow from operations was $468 million for the fourth quarter and was $2.11 billion for the fiscal year ended Jun 29, 2018. Free cash flow for the quarter and 12 months of the fiscal came at $372 million and $1.7 billion, respectively.

The company’s board has approved a quarterly dividend payment of 63 cents for the June quarter to be paid on Oct 3, 2018.

Guidance

Management anticipates first-quarter revenues to grow approximately 10% on a year-over-year basis due to strong cloud demand and seasonality in other markets. Further, the company projects revenues to grow 5% 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 at the mid-point of the company’s long-term range of 29-33%. It projects generating an operating cash flow of at least $500 million in the first quarter.

For fiscal 2019, the company anticipates 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.

The company had entered into a long-term NAND supply agreement with Toshiba. The agreement will help Seagate 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.

Zacks Rank & Other Stocks to Consider

Currently, Seagate sports a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader technology sector worth considering are Intel Corporation (INTC - Free Report) , Mellanox Technologies, Ltd. (MLNX - Free Report) and Micron Technology, Inc. (MU - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Intel, Mellanox and Micron are projected at 8.4%, 15% and 8.2%, respectively.

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