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Why Is Seagate (STX) Up 2.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Seagate (STX - Free Report) . Shares have added about 2.8% 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 Q1 Earnings & Revenues Beat Estimates

Seagate reported first-quarter fiscal 2020 non-GAAP earnings of $1.03 per share, surpassing the Zacks Consensus Estimate by 3%. However, the figure declined 41.5% from the year-ago reported figure.

Non-GAAP revenues of $2.578 billion beat the Zacks Consensus Estimate of $2.550 billion. However, the figure declined 13.8% from the year-ago quarter.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 98.3 exabytes of hard disk drive (HDD) storage, with an average capacity of record 2.9 terabytes per drive. This marked year-over-year decline of 0.5% but sequential improvement of 16.3% in the total HDD exabytes shipments.

The company shipped 50.6 exabytes for the enterprise HDD market (includes nearline and mission critical). This marked a sequential increase of 34.2% in exabytes shipments. Further, capacity improved sequentially from 5.5 terabytes to 6.3 terabytes.

Particularly, in the nearline market, the company shipped 47.4 exabytes of HDD, up 36.2% sequentially.

Management anticipates robust demand for the company’s highest capacity 16-terabyte products to be a notable revenue driver in the days ahead, as production to higher volumes improves.

The company shipped 33.1 exabytes for the edge non-compute HDD market, with an average capacity of 2.5 terabytes. Both the figures remained flat on a quarter-over-quarter basis.

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 22.0 exabytes of HDD.

Coming to edge compute domain (which includes notebook and desktop markets); Seagate shipped 14.7 exabytes of HDD, with an average capacity of 1.2 terabytes. This marked a sequential improvement of 7.3% in exabytes shipments.

Notably, enterprise, edge non-compute and edge compute verticals contributed 45%, 31% and 17% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues declined 14.7% year over year to $2.39 billion in the reported quarter.

Non-HDD segment (enterprise data solutions, cloud systems and SSDs) revenues were down around 1.1% year over year to $188 million.

Margin Details

Non-GAAP gross margin came in at 26.7% contracting 440 bps on a year-over-year basis.

Non-GAAP operating expenses were down 2.7% on a year-over-year basis to $359 million.

Non-GAAP income from operations came in at $329 million, down 41.6% from the year-ago quarter. As a percentage of non-GAAP revenues, the figure contracted 600 bps year over year, and came in at 12.8%.

Balance Sheet and Cash Flow

As of Oct 4, 2019, cash and cash equivalents were $1.78 billion compared with $2.22 billion, reported at the end of the previous quarter. Seagate ended the first quarter with a long-term debt of $4.14 billion compared with $4.25 billion reported in the previous quarter.

Cash flow from operations was $456 million, compared with $448 million reported in the previous quarter. Free cash flow for the reported quarter amounted to $309 million, compared with $297 million reported in the prior quarter.

In the first quarter, the company repurchased 9.2 million shares worth $450 million and paid out dividends worth $170 million.

Notably, Seagate’s board of directors approved a cash dividend of 65 cents per share, up from 63 cents, payable Jan 8, 2020.

Guidance

Management anticipates second-quarter fiscal 2020 revenues to be 2.72 billion (+/- 5%).

Non-GAAP EPS for the first quarter is expected to be $1.32 (+/- 5%).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Seagate has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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