The Good, The Bad And The Bottom Line From Seagate's Strong Quarter

Seagate Technology PLC STX reported strong results for the December quarter, with significant strength in the gross margin, upside in non-GDD sales and notebook HDD sales ahead of the estimate.

Wells Fargo’s Maynard Um maintains a Market Perform rating on the company.

Robust Quarter

The analyst mentioned that the robust results were partly offset by a decline in Nearline drives and marginally higher opex, while expecting Nearline drives to remain flat sequentially in the March quarter.

“STX has outperformed expectations for three consecutive quarters and upside potential from here could be from 10TB ramp, pricing, opex or ability to keep utilization high, but we believe visibility is low,” Um stated.

The Good

Among the positives, the analyst listed gross margins of 31.8 percent, which represented a 230bps sequential improvement, ahead of the guidance and driven by increased demand and structural cost cuts in manufacturing.

Seagate Technology’s revenue guidance was better than expected, since the company expects lower seasonal sequential decline.

In addition, notebook HDD shipments recovered during the quarter, coming in above the estimate, while mission-critical enterprise drive shipments were sequentially stable and again slightly above the estimate.

The company now expects calendar year 2017 EPS of at least $4.00, as compared to the earlier guidance of $3.75–$4.00.

The Bad

On the other hand, Seagate Technology guided to gross margin of 30 percent, which is about 2 points lower sequentially, driven by seasonality and factory underabsorption.

There was also an increase in inventories in the December quarter, driven by higher builds due to expectations of site closures.

“Nearline HDD shipments of 4.8 million were down 13 percent sequentially in the Dec. qtr and are expected to be flat in March,” Um went on to say.

Also, the analyst does not expect an improvement in the cash conversion cycle to be sustainable, presenting a potential headwind to cash flow.

In Wednesday's pre-market, shares of Seagate were up 13.27 percent at $42.41.