Seagate Technology (STX) Tops Q3 Earnings, Revenues Up Y/Y

Seagate Technology plc (NASDAQ:STX) reported non-GAAP earnings of $1.10 per share in the third-quarter fiscal 2017, which beat the Zacks Consensus Estimate by four cents and fared much better than 22 cents per share reported in the year-ago quarter.

The massive growth was driven by strong demand for hard-disk drives (HDD). Revenues of almost $2.67 billion increased 3% from the year-ago quarter and were almost in line with management’s guidance of $2.7 billion. However, revenues missed the Zacks Consensus Estimate of $2.69 billion.

Shares were down more than 8% in pre-market trading following the result. We note that Seagate has underperformed the Zacks Computer Storage Devices industry on a year-to-date basis. While the industry gained 21.3%, the stock returned 16.9%.

Quarter Details

Seagate reported non-GAAP gross margin of 31.4% as compared with 22.7% reported in the year-ago quarter.

Operating expense as percentage of revenues increased 50 basis points (bps) from the year-ago quarter to 17.7%. Product development as percentage of revenues increased 60 bps, which was partially offset by 20 bps decline in marketing and administrative expense.

Seagate exited the quarter with cash and cash equivalents of $3.02 billion, as compared with $1.72 billion in the previous quarter. Long-term debt was $5.07 billion as compared with $4.09 billion in the previous quarter.

The company generated $426 million in operating cash flow and paid cash dividends of $186 million in the reported quarter.

Concurrent with third-quarter earnings release, Seagate declared a cash dividend of 63 cents per share, payable on Jul 5 to shareholders of record as of Jun 21.

Our Take

We believe that improving PC shipment – per latest data from Gartner and IDC – bodes well for Seagate. The company is the second largest manufacturer of HDDs in the U.S., which are still extensively used in PCs and Seagate derives the bulk of revenues from these devices.

Moreover, strong demand for hybrid drives also augurs well for the company. Further, it is striving to improve profitability by not getting involved in lower-margin businesses. Instead, the company remains focused on launching innovative products, which will aid it to win enterprise customers on continuous basis.

However, intensifying competition from Western Digital (NASDAQ:WDC) in the storage space is likely to remain an overhang on the stock.

Zacks Rank & Other 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.

Extreme Networks (NASDAQ:EXTR) and Applied Optoelectronics (NASDAQ:AAOI) are other top-ranked stocks worth looking in the broader sector as they have the same rank as of Seagate. Extreme Networks and Applied Optoelectronics will report earnings results on May 3 and 4, respectively.

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