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Seagate (STX) Up 8.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Seagate (STX - Free Report) . Shares have added about 8.5% 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 catalysts.

Seagate Surpasses on Q4 Earnings Estimates, Revenues Down Y/Y

Seagate delivered fiscal fourth-quarter 2019 non-GAAP earnings of 86 cents per share, surpassing the Zacks Consensus Estimate of 83 cents. However, the figure declined from $1.62 per share reported in the year-ago period.

Revenues of $2.371 billion marginally outpaced the Zacks Consensus Estimate of $2.313 billion. However, the figure declined 16.4% from the year-ago quarter.

Both the top and bottom line witnessed year-over-year decline, owing to uncertain macroeconomic environment and regulatory impediments. Further, soft demand witnessed from cloud service providers (CSPs) and OEM enterprise customers impacted results negatively.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 84.5 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.7 terabytes per drive. This marked year-over-year decline of 9% but sequential increase of 10%, in the total HDD exabytes shipments.

The company shipped 37.7 exabytes for the enterprise HDD market (includes nearline and mission critical). This marked a sequential increase of 14.9% in exabytes shipments in the domain. Further, capacity improved sequentially from 4.9 terabytes to 5.5 terabytes.

Particularly, in the nearline market, the company shipped 34.8 exabytes of HDD, up 16% sequentially. Moreover, average capacity per drive of 8 terabytes improved 11.1% on a quarter-over-quarter basis. Management noted that the company’s 12-terabyte helium nearline product was one of the top revenue generators in the fourth quarter.

Notably, the company has commenced shipping of its highest capacity 16-terabyte products in the reported quarter. The company anticipates the offering to be a notable revenue driver going ahead, as production improves to higher volumes later in 2019.

The company shipped 33.1 exabytes for the edge non-compute HDD market, with an average capacity of 2.5 terabytes. This marked a sequential increase of 13.4% in exabytes shipments.

Edge non-compute domain comprises consumer electronics (which includes sales of surveillance, DVR, gaming, NAS applications), and consumer applications. Particularly, in the consumer electronics market, the company shipped 22.7 exabytes of HDD.

Coming to edge compute domain (which includes notebook and desktop markets), Seagate shipped 13.7 exabytes of HDD, with an average capacity of 1.2 terabytes. This marked a sequential decline of 6.2% in exabytes shipments owing to seasonality.

Notably, enterprise, edge non-compute and edge compute verticals contributed 41%, 34% and 18% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues declined 16.9% year over year to $2.204 billion in the reported quarter.

Non-HDD segment (enterprise data solutions, cloud systems and SSDs) revenues were down 8.7% year over year to $167 million, primarily on account of to lower enterprise SSD sales.

Margin Detail

Non-GAAP gross margin came in at 26.8% contracting 560 bps on a year-over-year basis. The decrease can be attributed to “underutilization cost” incurred during the quarter.

Non-GAAP operating expenses were down 12.3% on a year-over-year basis to $350 million. This decrease in expenses can be attributed to certain cost improvement initiatives and operational efficiency.

Income from operations during the reported quarter came in at $286 million, down 44.9% from the year-ago quarter. Operating margin came in at 12.1%, compared with year-ago figure of 18.3%.

Balance Sheet and Cash Flow

As of Jun 28, 2019, cash and cash equivalents were $2.22 billion up from $1.39 billion, reported at the end of the previous quarter.

Seagate ended the fourth quarter with a long-term debt (including current portion) of $4.25 billion compared with $4.52 billion reported in the previous quarter.

Cash flow from operations was $448 million, compared with $438 million reported in the previous quarter.

Free cash flow for the quarter amounted to $297 million, compared with $291 million reported in the prior quarter.

In the fourth quarter, the company repurchased 7.8 million shares worth $350 million. At the end of the quarter, the company had $2.2 billion remaining under the share repurchase authorization.

Notably, Seagate’s board of directors approved a cash dividend of 63 cents per share payable Oct 9, 2019.

Fiscal 2019 highlights

Seagate delivered fiscal 2019 non-GAAP earnings of $4.82 per share, down from $5.51 per shares reported in fiscal 2018.

Revenues of $10.391 billion in fiscal 2019 declined 31% year over year.

Guidance

Management anticipates first-quarter fiscal 2020 revenues to be 2.55 billion (+/- 5%).

Seagate projects gross margins to be approximately flat on a sequential basis. Non-GAAP EPS for the first quarter is expected to be 90 cents (+/- 5%).

In fiscal 2020, management expects exabyte TAM to witness a CAGR above the long-term range of 35-40% for nearline drives.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -19.34% due to these changes.

VGM Scores

Currently, Seagate has a subpar Growth Score of D, though it is lagging a bit 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 D. 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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