Seagate Matches EPS, Misses Rev. - Analyst Blog

Seagate Technology plc (STX) reported second quarter fiscal 2011 earnings per share of 33 cents, which was in line with the Zacks Consensus Estimate. However, revenue of $2.72 billion missed the Zacks Consensus Estimate of $2.73 billion.

Following the earnings results, Seagate's share price dropped 5.17% in after-hours trading.

Revenue

Seagate reported revenue of $2.71 billion in the second quarter, down 10.2% from $3.03 billion in the year-ago period. The company shipped 48.9 million disk drive units in the second quarter, compared to 49.2 units in the previous quarter. The decline was due to slowing demand in the Asia-Pacific distribution channel. The total available market (TAM) was approximately 168 million units, which was in line with the company's expectations.

Operating Results

Gross profit was $529.0 million in the second quarter, down from $923.0 million in the prior-year quarter. Gross margin went down to 19.5% from 30.5% in the prior-year quarter.

Operating income on a GAAP basis was $206.0 million, down 64.4% from $578.0 million reported in the year-ago quarter. The GAAP operating margin was 7.6%, compared to 19.1% in the year-ago quarter. Excluding restructuring charges and amortization of purchased intangible assets, non-GAAP operating income was $214.0 million, down 63.5% year over year. Non-GAAP operating margin was 7.9%, down from 19.4% in the year-earlier quarter.

On a GAAP basis, net income was $150.0 million or 31 cents per share, down from $533.0 million or $1.03 per share in the comparable quarter last year. Excluding the impact of restructuring charges and amortization of purchased intangible assets, adjusted net income was $159.0 million or 33 cents per share.

Balance Sheet, Cash Flow & Share Repurchase

Cash, cash equivalents, restricted cash and short-term investments totaled approximately $2.91 billion at the end of the December quarter, up from $2.17 billion in the previous quarter. Accounts receivables decreased by $12.0 million from the previous quarter to $1.39 billion and inventories increased by $137.0 million from the previous quarter to $808.0 million. Seagate carries a long-term debt of $2.93 billion, which grew $76.0 million from the prior quarter. The company generated operating cash flows of $507.0 million, compared to $753.0 million in the prior-year quarter. Capital expenditure was $222.0 million, compared to $358.0 million in the comparable period last year.

On January 18, 2011, Seagate and its subsidiary Seagate HDD Cayman entered into a Credit Agreement to provide a $350 million senior secured revolving credit facility. Though the facility is currently unavailable, the fund is expected to provide the company with flexibility to continue with investments in a broad range of storage technologies.

Seagate also returns cash to shareholders. In November, the company received the authorization to buy back additional $2.0 billion common shares. During the quarter, Seagate repurchased 21 million shares worth $305.0 million.

Guidance

For the third quarter of 2011, Seagate expects TAM to be between 155 million and 165 million units. Revenue is expected to range between $2.55 billion and $2.7 billion and gross margin to range between 18% and 19%. The guidance reflects less visibility over demand. Moreover, Seagate believes that gross margin would remain under pressure as higher material costs will complement the continuing price erosion.

However, management remains somewhat positive about increasing demand for consumer and commercial mass storage as is indicated by introduction of real-time data consuming devices.

To Conclude

Seagate posted disappointing second quarter results, missing the Zacks Consensus Estimate on the top line. Additionally, the guidance indicates another sequential downfall.

Despite these concerns, we believe that Seagate's firm footing in the Enterprise SSD market will enable it to generate revenue growth in fiscal 2011 and beyond, which could help grow margins. We also believe that the company's decision to buy back shares could turn investor sentiment. But weakness in the consumer segment, price erosion, falling demand  and  competitive pressure from Western Digital Corporation (WDC) keep us on the sidelines.

Currently, Seagate has a short-term Hold rating, as indicated by the Zacks #3 Rank.

 
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