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Seagate (STX) Q2 Earnings Beat Estimates, Revenues Miss

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Seagate Technology PLC (STX - Free Report) delivered mixed fiscal second-quarter 2019 results. Non-GAAP earnings per share came in at $1.41 per share, surpassing the Zacks Consensus Estimate of $1.27 per share. However, the figure decreased 4.7% from the year-ago period and 17.1% sequentially.

Revenues of $2.715 billion marginally missed the Zacks Consensus Estimate of $2.739 billion. Further, the figure declined 6.9% from the year-ago quarter and 9.3% sequentially.

Both the top and bottom line witnessed year-over-year decline, owing to unfavorable product portfolio mix and decline in the overall sales of nearline volumes. Notably, exabyte shipments during the reported quarter decreased 4% year over year.

Shares of Seagate fell more than 5% in after-hours trading, on account of second quarter results and near-term headwinds.

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. This marked a sequential decline of 11.5% in the total HDD exabytes shipments.

The company shipped 36.4 exabytes for the enterprise HDD market, each with an average capacity of 4.5 terabytes.

Total HDD revenues went down 7.8% year over year to $2.490 billion during the reported quarter. The company is facing challenges owing to NAND flash pricing, which is currently on the decline on account of oversupply and weaker-than-expected growth in end-market demand.

In the nearline market, the company shipped 33 exabytes of HDD, nearline products’ average capacity per drive reached 6.5 terabytes. Management noted that the company’s 12-terabyte helium nearline product was one of the top revenue generators in the second quarter. Growth in the 14-terabyte helium nearline product line was also encouraging. Notably, the company will also start shipping its highest capacity 16-terabyte products in the first half of 20198.

However, demand from OEM enterprise customers for nearline drive during the reported quarter was not so encouraging.

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 up 8% year over year and 18.4% sequentially to $225 million.  The year-over-year increase was primarily due to higher SSD revenue.

However, the end of legacy OEM cloud system products decreased year over year.

Notably, synergies from supply agreement with Toshiba Memory Corporation along with higher investment in the SaaS, NVMe, consumer and gaming markets were positive during the reported quarter.

Margin Details

Non-GAAP gross margin which came in at 29.7% contracted 70 basis points (bps) on a year-over-year and 130 bps sequentially. The decrease can be attributed to unfavorable product portfolio mix and decline in the overall sales of nearline volumes.

Non-GAAP operating expenses were down 6.4% on a year-over-year basis to $365 million. This decrease in expenses can be attributed to certain cost improvement initiatives, operational efficiency and reduced discretionary spending.

Non-GAAP operating margin during the reported quarter came in at 16.2% compared with 17% reported in the year-ago quarter.

Balance Sheet and Cash Flow

Seagate ended the December quarter with cash and cash equivalents of $1.36 billion down from $1.94 billion in the previous quarter. At the end of the quarter, the company had a long-term debt (including current portion) of $4.32 billion compared with $4.82 billion reported in the previous quarter.

Cash flow from operations was $875 million during the quarter under review. Free cash flow for the quarter amounted to $161 million.

During the reported quarter, the company repurchased 3.2 million shares. The company’s board has approved a quarterly dividend payment of 63 cents for the December quarter to be paid on Apr 3, 2019.

Guidance

Management anticipates third-quarter revenues to be 2.3 billion (+/- 5%). The Zacks Consensus Estimate for revenues is pegged at $2.43 billion.

Total exabyte shipments are projected to be down 10% to 15%, sequentially.

Seagate projects gross margins to be approximately 26%, much lower than the company’s long-term range of 29-33%, primarily due to lower-than-expected demand for nearline HDDs.

Non-GAAP EPS for the third quarter is expected to be 70 cents (+/- 5%). The Zacks Consensus Estimate for revenues is pegged at $1.04 per share.

Zacks Rank & Stocks to Consider

Currently, Seagate carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the broader technology sector are Symantec Corporation (SYMC - Free Report) , salesforce.com, inc. (CRM - Free Report) and Guidewire Software, Inc. (GWRE - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Symantec, salesforce and Guidewire have a long-term earnings growth rate of 7.9%, 24.2% and 8%, respectively.

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