It has been about a month since the last earnings report for Seagate (STX - Free Report) . Shares have added about 0.3% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
Seagate Tops Earnings and Revenues Estimates in Q1
Seagate Technology PLC delivered stellar fiscal first-quarter 2019 results. Non-GAAP earnings per share came in at $1.70 per share, surpassing the Zacks Consensus Estimate of $1.55 per share. The figure also improved 96 cents from the year-ago period and 4.9% sequentially.
Revenues of $2.992 billion outpaced the Zacks Consensus Estimate of $2.959 billion and also improved 13.7% from the year-ago quarter and 5.5% sequentially.
Both the top and bottom lines witnessed year-over-year improvement, due to robust adoption on the back of 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. Notably, exabyte shipments during the reported quarter increased 41% year over year.
Performance in Detail
During the reported quarter, Seagate shipped 98.8 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.5 terabytes per drive.
The company shipped 45.5 exabytes for the enterprise HDD market, each with an average capacity of 5.2 terabytes.
Total HDD revenues went up 17% year over year to $2.801 billion during the quarter under review 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 42.5 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 first quarter. Growth in the 12-terabyte helium nearline product line was also encouraging. Notably, the company also started shipping its highest capacity 14-terabyte products during the quarter. 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 down 21% year over year but increased 3.8% sequentially to $190 million. The end of legacy OEM cloud system products and lower-than-expected supply of few products during the reported quarter drove year-over-year.
Silicon revenues were up 38% 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.
Non-GAAP gross margin which came in at 31% expanded 200 basis points (bps) on a year-over-year basis but contracted 140 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 6.4% on a year-over-year basis to $382 million. This decrease in expenses can be attributed to certain cost improvement initiatives, operational efficiency and lower compensation expenses.
Non-GAAP operating margin during the reported quarter came in at 18.2% compared with 13.4% reported in the year-ago quarter.
Balance Sheet and Cash Flow
Seagate ended the September quarter with cash and cash equivalents of $1.94 billion up from $1.85 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 $587 million during the quarter. Free cash flow for the quarter came at $410 million.
The company’s board has approved a quarterly dividend payment of 63 cents for the September quarter to be paid on Jan 2, 2019.
Management anticipates second-quarter revenues to be in the range of $2.7 billion to $2.75 billion.
Seagate projects gross margins to be at the lower-point of the company’s long-term range of 29-33%, primarily due to lower-than-expected demand for nearline HDDs.
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.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -21.58% due to these changes.
At this time, Seagate has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was 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.
Seagate has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.