Seagate (STX) Stock Rises on Q2 Earnings & Revenue Beat

Seagate Technology plc STX reported impressive second-quarter fiscal 2017 results. Non-GAAP earnings of $1.38 per share beat the Zacks Consensus Estimate by 31 cents and surged almost 68.3% on a year-over-year basis. The massive growth was primarily driven by margin expansion.

Shares were up almost 12% in pre-market trading following the announcement of results.

We note that shares of Seagate have underperformed the broader Zacks Computer Storage Devices industry over the last one year. While the industry gained 45.9%, the stock gained 35%. We believe that the impressive result will help the stock to rebound in the rest of fiscal 2017.

Quarter Details

Revenues of $2.89 billion easily surpassed the Zacks Consensus Estimate of $2.81 billion but declined 3.1% on a year-over-year basis. HDD segment revenues declined 2.8%, while Enterprise Systems, Flash and Other revenues fell 6.6% from the year-ago quarter.

Total HDD shipment in the quarter was 68.2 exabytes (EB), while total HDD units were 39.9 million. Average capacity per drive was 1.7 terabytes (TB), up 30% from the year-ago quarter. Average selling prices (ASP) of $66 were sequentially flat but up 12% year over year.

HDD enterprise revenue was up 5% year over year and represented 37% of total revenue. Nearline product revenues were up 15% year over year. Mission critical product sales remained stable and were up slightly, sequentially.

According to the management consumer, surveillance, DVR and NAS markets are growth opportunities for HDD client high capacity product. These markets represent approximately 30% of total revenue.

In second-quarter, revenues from these markets grew 19% year over year and average capacity per drive was approximately 1.9 terabyte per drive, up 20% over the same time frame. Moreover, PC client shipments continue to represent 24% of consolidated HDD revenues.

Seagate reported non-GAAP gross margin of 31.8% in the quarter, which expanded a massive 620 basis points (bps) from the year-ago quarter. The expansion reflects lower component costs as well as structural cost improvements in manufacturing operations. The company noted that manufacturing costs have narrowed to $200 million on a year-over-year basis.

Non-GAAP operating expense as percentage of revenues increased 70 bps in the quarter. The modest improvement was primarily owing to lower variable compensation expense, which decreased $300 million on a year-over-year basis.

As a result, non-GAAP operating margin expanded 550 bps on a year-over-year basis to 15.9%.
 

Seagate Technology PLC Price, Consensus and EPS Surprise

 

Seagate Technology PLC Price, Consensus and EPS Surprise | Seagate Technology PLC Quote

Balance Sheet & Cash Flow

Seagate exited the quarter with cash and cash equivalents of $1.72 billion, as compared with $1.49 billion in the previous quarter. Long-term debt was $4.09 billion as compared with almost $4.10 billion in the previous quarter.

Seagate generated $656 million in operating cash flow and repurchased 4.1 million ordinary shares for $147 million in the reported quarter.

Guidance

Seagate believes that almost 80% of its storage products have revenue growth opportunities in fiscal 2017. Management believes that increasing manufacturing efficiency along with a refreshed product portfolio that comprises new high capacity and cost advantage products will continue to expand gross margins and overall profitability in fiscal 2017.

Seagate is confident that it will be able to touch the higher-end of its long-term targeted margin range of 27–32%. Moreover, operating margin is expected to be in the range of 13–15% for fiscal 2017.

Management expect overall EB demand to grow double digits in calendar 2017 over 2016. However, third-quarter unit shipment is expected to decline due to seasonality. Revenues are forecasted to be $2.7 billion, margins at the mid to higher-end of long-term range at approximately 30% and operating expenses to decline sequentially to $440 million.

For fiscal 2017, Seagate anticipates revenues to grow over 2016 and earnings of at least $4.50 per share.
 
Our Take

Seagate is striving to improve its profitability by not getting involved in lower-margin businesses. Instead, the company remains focused on launching innovative products (10 TB and 12 TB), which will help it to win enterprise customers on continuous basis. Moreover, managing excess capacity by reducing HDD manufacturing is positive for the company.

Further, benefits of the ongoing restructuring activities will boost bottom-line in fiscal 2017. Additionally, growing demand for Seagate’s products from cloud service providers will continue to boost top-line growth.

However, sluggish macroeconomic conditions, a flattish price environment and competition from Western Digital WDC remain the near-term headwinds. Furthermore, continued cannibalization of PCs by mobile devices could hurt Seagate’s future performance.

Zacks Rank & Key Picks

Currently, Seagate sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Applied Optoelectronics AAOI and Nic Inc EGOV are two stocks with the same rank in the broader sector. Nic and Applied Optoelectronics are expected to report earnings results on Feb 1 and Feb 23, respectively.

Zacks' Top Investment Ideas for Long-Term Profit

How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Western Digital Corporation (WDC): Free Stock Analysis Report
 
Seagate Technology PLC (STX): Free Stock Analysis Report
 
NIC Inc. (EGOV): Free Stock Analysis Report
 
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research