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Seagate (STX) Beats on Q1 Earnings, Revenues Decline Y/Y


Seagate Technology plc STX reported better-than-expected results in first-quarter fiscal 2017. Non-GAAP earnings of 99 cents per share beat the Zacks Consensus Estimate by a dime and surged almost 83.3% on a year-over-year basis.

The massive growth was driven by strong demand for hard-disk drives (HDD) and lower operating expenses. Revenues of almost $2.80 billion surpassed the Zacks Consensus Estimate of $2.77 billion and were in-line with management’s preliminary estimate. However, on a year-over-year basis, revenues declined 4.4%.

Seagate reported non-GAAP gross margin of 29.5% in the quarter, which was better than management’s preliminary estimate of 29%.

Seagate exited the quarter with cash and cash equivalents of $1.5 billion, as compared with $1.13 billion in the previous quarter. Long-term debt was $4.09 billion as compared with $4.13 billion in the previous quarter.

Seagate generated $592 million in operating cash flow and repurchased 3 million ordinary shares for $101 million in the reported quarter.

Concurrent with its fiscal first-quarter earnings release, Seagate declared a cash dividend of 63 cents per share, payable on Jan 4, to shareholders of record as of Dec 21.

Our Take

Seagate’s first-quarter fiscal 2017 results were better than our expectations. However, declining revenue growth remains a major concern.

SEAGATE TECH Price, Consensus and EPS Surprise

SEAGATE TECH Price, Consensus and EPS Surprise | SEAGATE TECH Quote

Seagate is striving to improve its profitability by not getting involved in lower-margin businesses. Instead, the company remains focused on launching innovative products, which will help it to win enterprise customers on continuous basis.

We believe this strategy will eventually drive gross margin expansion in the long haul. Moreover, managing excess capacity by reducing HDD manufacturing is positive for the company. Seagate anticipates manufacturing approximately 35 million to 40 million drives per quarter, which is a significant decline from its capacity of 55 million to 60 million drives per quarter.

Further, benefits of the ongoing restructuring activities will boost bottom-line in fiscal 2017. Additionally, growing demand for Seagate’s products from cloud service providers will continue to boost top-line growth.

However, sluggish macroeconomic conditions, a flattish price environment and competition from Western Digital WDC remain the near-term headwinds. Furthermore, continued cannibalization of PCs by mobile devices could hurt Seagate’s future performance.

Zacks Rank & Key Picks

Currently, Seagate has a Zacks Rank #2 (Buy). A better-ranked stock in the broader technology sector is Extreme Networks EXTR which sports a Zacks Rank #1 (Strong Buy). Estimates of the company for 2016 and 2017 have remained steady at 20 cents and 29 cents, respectively over the last 30 days.

Amazon.com’s AMZN estimates for 2016 and 2017 have surged 9 cents (1.6%) and 31 cents (3%), respectively, to $5.86 and $10.72 over the last 30 days. It also sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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