Why is Seagate (STX) price down 9.5% since its last earnings report?

It’s been a month since Seagate’s (STX) last earnings report. Shares have lost about 9.5% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Seagate poised for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the key drivers.

Seagate’s third quarter earnings exceeded estimates, revenues fell y/y

Seagate posted third-quarter fiscal 2019 non-GAAP earnings of 83 cents per share, topping the Zacks Consensus Estimate by 15.3%.

However, this number decreased by 43.2% compared to the year-ago period and by 41.1% sequentially.

Revenues of $2.313 billion slightly topped the Zacks Consensus Estimate of $2.311 billion. However, this number decreased by 17.5% compared to the year-ago quarter and 14.8% in subsequent quarters.

Both revenues and profits declined year-over-year due to an uncertain macroeconomic environment, processor shortages and declining PC shipments. Moreover, weak demand from cloud service providers (CSPs) and enterprise OEM customers had a negative impact on results.

Detailed information about exabyte shipments

During the reported quarter, Seagate shipped 76.7 exabytes of hard disk drive (HDD) storage, with an average record capacity of 2.4 terabytes per drive. This represented a significant year-over-year and sequential decline in total exabyte hard drive shipments of 12.2% each.

The company shipped 32.9 exabytes to the enterprise hard drive market (including Nearline and Mission Critical drives). This represented a sequential decline in exabyte shipments across the domain of 9.6%. However, the capacity increased sequentially from 4.5 terabytes to 4.9 terabytes.

In the Nearline market specifically, the company sold 30 exabytes of hard drives, down 9.1%. However, average capacity per disk of 7.2 terabytes increased 11% quarter-over-quarter. Management noted that the company’s 12-terabyte Nearline helium-based product was one of its largest revenue sources in the third quarter.

Notably, the company started shipping its highest-capacity 16-terabyte products during the reported quarter. The company anticipates that the offering will be a significant revenue driver in the future as production ramps up to higher volumes in late 2019.

The company shipped 29.2 exabytes to the edge non-compute hard drive market with an average capacity of 2.4 terabytes. This represented a sequential decline in exabyte shipments of 10.4%.

The non-computing edge domain includes consumer electronics (including sales of surveillance solutions, DVRs, games, NAS applications) and consumer applications. Specifically, for the consumer electronics market, the company shipped 17.6 exabytes of hard drives. Sequential growth in the gaming, DVR and NAS end markets could not offset the decline seen in consumer verticals due to seasonality.

As it enters the edge computing space (comprising the notebook and desktop markets), Seagate shipped 14.6 exabytes of hard drives with an average capacity of 1.2 terabytes. This represented a sequential decline in exabyte shipments of 20.6%. The downward trend in PC shipments and processor shortages negatively impacted results.

Notably, enterprise, edge non-compute, and edge compute verticals contributed 39%, 32%, and 20% of total revenues, respectively.

Revenue by product group

Total hard drive revenue declined 17.9% year-over-year to $2.124 billion in the reported quarter.

Non-HDD segment revenues (enterprise data solutions, cloud systems and SSDs) declined 12.9% year-over-year to $189 million, primarily due to lower SSD sales.

Margin details

Non-GAAP gross margin was 26.6%, down 420 basis points year-over-year. The decline can be attributed to a decline in overall sales of Nearline volumes.

Non-GAAP operating expenses decreased 9.4% year-over-year to $349 million. The decline in spending can be attributed to certain initiatives to improve costs, operational efficiency and reduced discretionary spending.

Operating income for the reported quarter was $236 million, down 46.5% compared to the same quarter last year. Operating margin was 10.2% compared to the prior year of 15.7%.

Balance sheet and cash flow

As of March 29, 2019, cash and cash equivalents were $1.39 billion, compared to $1.36 billion at the end of the prior quarter.

Seagate ended the third quarter with long-term debt (including current debt) of $4.52 billion, compared to $4.32 billion reported in the prior quarter.

Cash flow from operations was $438 million, compared to $875 million reported in the prior quarter.

Free cash flow for the quarter was $291 million, compared to $161 million reported in the second quarter.

In the third quarter, the company returned $505 million to shareholders, which included a $178 million dividend and the repurchase of 7.2 million shares worth $327 million.

Notably, Seagate’s board of directors has approved a cash dividend of 63 cents per share, payable on July 3, 2019.

Conductivity

Management anticipates fourth quarter fiscal 2019 revenues of 2.32 billion (+/- 5%).

Seagate expects gross margin to be approximately 26.5%. Non-GAAP EPS for the third quarter is expected to be 83 cents (+/- 5%).

In fiscal year 2020, management expects exabyte TAM to record a CAGR above the long-term range of 35-40% for nearline drives.

How have estimates changed since then?

The latest estimates have been on an upward path for the past two months.

VGM results

At this point, Seagate’s average growth rating is a C, but its momentum rating is slightly better with a B. Plotting a somewhat similar path, the stock was rated an A on the value side, putting it in the top 20% for this investment strategy.

Overall, the company’s Total VGM Score is A. If you’re not focused on one strategy, this score should interest you.

Perspectives

Seagate carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

Want the latest recommendations from Zacks Investment Research? Today you can download the top 7 stocks for the next 30 days. Click to get this free report

Seagate Technology PLC (STX): Free Stock Analysis Report

To read this article on Zacks.com click here.