Seagate's (STX) Q1 Earnings Beat Estimates, Revenues Miss

Seagate STX reported first-quarter fiscal 2021 non-GAAP earnings of 93 cents per share, which beat the Zacks Consensus Estimate by 6.9%. However, the figure declined 9.7% from the year-ago quarter’s figure.

Non-GAAP revenues of $2.314 billion lagged the Zacks Consensus Estimate by 0.6% and deteriorated 10.2% on a year-over-year basis.

Weakness in enterprise market offset recovery seen video and image application market and the sale of consumer drives.

In addition, management provided not-so-encouraging top and bottom-line guidance. Management anticipates second-quarter fiscal 2021 revenues of 2.55 billion (+/- 200 million). The Zacks Consensus Estimate for revenues is pegged at $2.55 billion, which indicates year-over-year decline of 5.3%

Seagate Technology PLC Price, Consensus and EPS Surprise

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

Meanwhile, non-GAAP earnings per share for fiscal second quarter is expected to be $1.10 cents (+/- 15 cents). The Zacks Consensus Estimate for earnings is pegged at $1.09 per share, which suggests deterioration of 19.3% from the year-ago quarter’s reported figure.

Following bleak fiscal first-quarter performance and a lackluster guidance, shares of Seagate were down more than 2.7% in the pre-market trading on Oct 23.

This overshadowed the company’s announcement of 3% dividend hike and addition of $3 billion to the existing share repurchases authorization.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 114.4 exabytes of hard disk drive (HDD) storage, with an average capacity of record 4.4 terabytes (TB) per drive. This marked year-over-year improvement of 16.4% in the total HDD exabytes shipments. Sequentially, the figure declined 2.2%. Notably, average capacity improved from 4.4 TB and 2.9 TB reported in the year-ago quarter but decreased from 4.5 TB reported in the previous quarter.

The company shipped 86.6 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 decline of 4.3% in exabytes shipments but represented an improvement of 35.5% on a year-over-year basis. Average capacity per drive decreased sequentially to 8.2 TB from 9.2 TB.

In the nearline market, the company shipped 64.3 exabytes of HDD, up 35.7% year-over-year but down 19.1% sequentially. Average capacity per nearline drive was 11.6 terabytes. This was driven by robust demand for the company’s 16 TB capacity products.

The company shipped 27.8 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 1.8 TB. This marked a sequential improvement of 5.3% in exabytes shipments. Notably, average capacity increased 12.5% on a year over year basis.

This can be attributed to improved consumer drive sales which partially offset sluggishness in enterprise mission critical and PC market.

Notably, mass capacity and legacy verticals contributed 58% and 34% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues (92.4% of revenues) decreased 10.6% year over year to $2.137 billion in the reported quarter.

Non-HDD segment revenues (7.6%), which includes enterprise data solutions, cloud systems and SSDs, declined 5.9% year over year to $177 million.

Margin Details

Non-GAAP gross margin contracted 20 basis points (bps) on a year-over-year basis to 26.5% on lower revenue base. The gross margin takes into account approximately 110 bps impact from underutilization of production capacities, favorable product mix and operational cost-related coronavirus disruption.

Driven by benefits of remote work trend and earlier restructuring endeavors, non-GAAP operating expenses were down 10.9% on a year-over-year basis to $320 million.

Nevertheless, non-GAAP income from operations were $294 million, down 10.6% from the year-ago quarter’s figure. Consequently, non-GAAP operating margin contracted 10 bps from the prior-year quarter’s reported figure to 12.7%.

Balance Sheet and Cash Flow

As of Oct 2, 2020, cash and cash equivalents were $1.66 billion compared with $1.72 billion as of Jul 3, 2020.

As of Oct 2, 2020, long-term debt (including current portion) came in at $4.163 billion compared with $4.175 billion as of Jul 3, 2020.

Cash flow from operations was $297 million compared with $388 million reported in the previous quarter.

Free cash flow for the reported quarter amounted to $186 million compared with $274 million in the last reported quarter.

In the fiscal first quarter, the company repurchased 1.5 million shares worth $68 million and paid out dividends worth $167 million.

Notably, Seagate’s board of directors approved a cash dividend of 67 cents per share, up from prior quarterly payouts of 65 cents per share. The dividend is payable on Jan 6, to shareholders as on Dec 23.

Guidance

Going ahead, management anticipates not much disruption from the COVID-19 crisis and expects increases in uptake of mass capacity storage solutions in the cloud and edge computing verticals.

Seagate also anticipates Lyve Platform and CORTX to fuel demand for its overall mass capacity storage solutions going ahead. Lyve platform is designed to assist organizations to simplify data management and security.

Notably, CORTX is an open-source object storage software that facilitates developers to gain access to mass capacity- data storage architectures. Lyve Rack is a flexible converged storage infrastructure that allows users to implement CORTX and develop mass capacity private storage cloud at lower costs.

Management also added that demand in the cloud data center vertical is likely to improve in the fiscal 2021 and this bodes well for its HDD storage solutions. Moreover, gradual recovery in the video and image applications augurs well for mass capacity storage solutions.

Seagate expects robust demand for the company’s 18-terabyte capacity products to be a key catalyst in the days ahead as production to higher volumes improves. Seagate is also optimistic about its 20-terabyte HAMR drives, which will start shipping from December 2020.

However, management also stated that sluggishness in IT spending across small to medium enterprises is likely to take another couple of quarters to recuperate which is likely to dampen demand recovery across the company’s systems solution. However, citing an IDC report, management stated that enterprise IT spending is expected to gather pace in calendar 2021.

Also, management added that the operations will continue to bear the brunt of increases in costs due to COVID-19 but will gradually decline.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Qorvo QRVO, CDW Corp. CDW, and Avnet AVT. All three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Avnet is set to report quarterly results on Oct 28, while CDW and Qorvo are set to report quarterly earnings on Nov 2 and Nov 4, respectively.

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