Seagate (STX) Q2 Earnings Beat, Revenues Miss Estimates

Seagate (NASDAQ:STX) reported second-quarter fiscal 2020 non-GAAP earnings of $1.35 per share, surpassing the Zacks Consensus Estimate by 3%. However, the figure declined 10.6% from the year-ago reported figure.

Non-GAAP revenues of $2.696 billion lagged the Zacks Consensus Estimate of $2.722 billion. The figure also declined 0.7% from the year-ago quarter.

Notably, shares of Seagate have returned 37.1% in the past year, outperforming the industry’s rally of 7.6%.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 106.9 exabytes of hard disk drive (HDD) storage, with an average capacity of record 3.3 terabytes (TB) per drive. This marked year-over-year and sequential improvement of 22.3% and 8.7% in the total HDD exabytes shipments, respectively. Notably, average capacity improved from 2.9 TB and 2.4 TB reported in the prior quarter and the year-ago quarter, respectively.

The company shipped 71.3 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 increase of 11.6% in exabytes shipments. However, average capacity per drive declined sequentially from 6.8 TB to 6.4 TB.

Particularly, in the nearline market, the company shipped 49.0 exabytes of HDD, up 3.4% sequentially.

Management anticipates robust demand for the company’s 16-terabyte capacity products to be a key catalyst in the days ahead, as production to higher volumes improves.

The company shipped 35.6 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 1.6 TB. This marked a sequential improvement of 3.2% in exabytes shipments. Notably, average capacity improved from 1.4 TB reported in the prior quarter.

Notably, mass capacity and legacy verticals contributed 49% and 43% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues declined 0.3% year over year to $2.482 billion in the reported quarter.

Non-HDD segment (enterprise data solutions, cloud systems and SSDs) revenues were down 4.4% year over year to $215 million.

Margin Details

Non-GAAP gross margin contracted 120 basis points (bps) on a year-over-year basis to 28.7%.

Non-GAAP operating expenses were up 1.7% on a year-over-year basis to $350 million.

Non-GAAP income from operations came in at $424 million, down 9.4% from the year-ago quarter. As a percentage of non-GGAP revenues, the figure contracted 150 bps year over year, and came in at 15.7%.

Balance Sheet and Cash Flow

As of Jan 3, 2020, cash and cash equivalents were $1.74 billion compared with $1.78 billion, as of Oct 4, 2019.

Seagate ended the fiscal second quarter with a long-term debt (including current portion) of $4.141 billion, almost flat sequentially.

Cash flow from operations was $480 million, compared with $456 million reported in the previous quarter.

Free cash flow for the reported quarter amounted to $286 million, compared with $309 million reported in the prior quarter.

In the fiscal second quarter, the company repurchased 2.5 million shares worth $150 million and paid out dividends worth $165 million.

Notably, Seagate’s board of directors approved a cash dividend of 65 cents per share, payable Apr 8, 2020, to shareholders as on Mar 25, 2020.

Guidance

Management anticipates third-quarter fiscal 2020 revenues to be 2.7 billion (+/- 7%). The Zacks Consensus Estimate for revenues is pegged at $2.53 billion.

The company is witnessing higher HDD demand from mass capacity storage vertical compared with legacy domain, primarily driven by data growth at the edge and in the cloud.

Management is banking on growing clout of high capacity nearline drives and strength in 16-terabyte to drive revenues and profitability in the remaining of fiscal 2020.

The company notes that revenues in the second half of fiscal 2020 to be marginally higher, when compared with the first half.

Non-GAAP EPS for the first quarter is expected to be $1.35 (+/- 7%). The Zacks Consensus Estimate for earnings is pegged at $1.26 per share.

Zacks Rank & Other Stocks to Consider

Currently, Seagate sports a Zacks Rank #1 (Strong Buy).

Alteryx (NYSE:AYX) , Cirrus Logic (NASDAQ:CRUS) and Garmin (NASDAQ:GRMN) are some other top-ranked stocks in the broader computer and technology sector, each flaunting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alteryx, Cirrus Logic and Garmin is pegged at 39.85%, 15.27% and 7.35%, respectively.

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