Seagate (STX) Q3 Earnings Beat Estimates, Revenues Up Y/Y

Seagate STX reported third-quarter fiscal 2020 non-GAAP earnings of $1.38 per share, which surpassed the Zacks Consensus Estimate by 7% and surged 48.4% from the year-ago quarter’s reported figure.

Non-GAAP revenues of $2.718 billion beat the Zacks Consensus Estimate by 4.6%. The figure also increased 17.5% from the year-ago quarter’s level.

Notably, shares of Seagate have returned 7.9% in the past year compared with the industry’s decline of 32%.

Seagate Technology PLC Price, Consensus and EPS Surprise

 

Seagate Technology PLC Price, Consensus and EPS Surprise

Seagate Technology PLC price-consensus-eps-surprise-chart | Seagate Technology PLC Quote

 

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 120.2 exabytes of hard disk drive (HDD) storage, with an average capacity of record 4.1 terabytes (TB) per drive. This marked year-over-year and sequential improvement of 70% and 26% in the total HDD exabytes shipments, respectively. Notably, average capacity improved from 3.3 TB and 2.4 TB reported in the prior quarter and the year-ago quarter, respectively.

The company shipped 91.1 exabytes for the mass capacity storage market (includes nearline and video and image applications as well as network-attached storage or NAS). This marked a sequential increase of 28% in exabytes shipments. Average capacity per drive increased sequentially from 6.4 TB to 8.2 TB.

In the nearline market, the company shipped 76.4 exabytes of HDD, up 55.9% sequentially and with an average capacity of 10 terabytes. This was driven by strong demand from cloud and hyperscale customers.

Management anticipates robust demand for the company’s 16-terabyte capacity products to be a key catalyst in the days ahead, as production to higher volumes improves. Notably, the 16-terabyte nearline drive witnessed more than double revenue growth sequentially.

The company shipped 29.1 exabytes for the Legacy market (includes mission-critical, notebook, desktop, gaming consoles, digital video recorders or DVR and external consumer devices) with an average capacity of 1.6 TB. This marked a sequential decline of 18% in exabytes shipments. Notably, average capacity remained flat sequentially.

This was due to the initial outbreak in China and longer New Year impacting demand for consumer electronics.

Notably, mass capacity and legacy verticals contributed 57% and 36% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues (92.9% of revenues) increased 1.8% year over year to $2.526 billion in the reported quarter.

Non-HDD segment revenues (7.1% of revenues), which includes enterprise data solutions, cloud systems and SSDs, declined 10.7% year over year to $192 million.

Margin Details

Non-GAAP gross margin expanded 120 basis points (bps) on a year-over-year basis to 28%. This includes an approximate 100 bps impact from higher logistic, underutilization and operational cost-related coronavirus disruption.

Non-GAAP operating expenses were up 4% on a year-over-year basis to $340 million.

Non-GAAP income from operations came in at $422 million, up 43.5% from the year-ago quarter’s figure. Non-GAAP operating margin expanded 280 bps from the year-ago quarter’s reported figure to 15.5%.
 
Balance Sheet and Cash Flow

As of Apr 3, 2020, cash and cash equivalents were $1.61 billion compared with $1.74 billion as of Jan 3, 2020.

Seagate ended fiscal third quarter with a long-term debt (including current portion) of $4.103 billion, compared with $4.141 billion in the last reported quarter.

Cash flow from operations was $390 million compared with $480 million reported in the previous quarter.

Free cash flow for the reported quarter amounted to $260 million compared with $286 million in the last reported quarter.

In fiscal third quarter, the company repurchased four million shares at $195 million and paid out dividends worth $170 million.

Notably, Seagate’s board of directors approved a cash dividend of 65 cents per share, payable on Jul 8, to shareholders as on Jun 24.

Guidance

Management anticipates fourth-quarter fiscal 2020 revenues to be 2.6 billion (+/- 7%). The Zacks Consensus Estimate for revenues is pegged at $2.55 billion, which indicates year-over-year growth of 7.7%

The company expects solid traction for its nearline products, driven by growing investments from cloud and hyperscale customers.

Moreover, Seagate is witnessing demand recovery in China in areas like video and image application. However, volatility and business uncertainty in the market remain concerns. The company anticipates cost impact of the pandemic to be higher in fiscal fourth quarter.

Non-GAAP earnings per share for fiscal fourth quarter is expected to be $1.28 (+/- 10%). The Zacks Consensus Estimate for earnings is pegged at $1.24 per share, which suggests growth of 44.2% from the year-ago quarter’s reported figure.

Zacks Rank & Stocks to Consider

Currently, Seagate carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Avid Technology, Inc. AVID, Netlist, Inc. NLST and OSI Systems, Inc. OSIS, which sport a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Avid, Netlist and OSI Systems is currently pegged at 20%, 15% and 18%, respectively.

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