Seagate Lags Q2 Earnings Estimates - Analyst Blog

Seagate Technology plc ( STX ) reported second-quarter 2014 non-GAAP earnings per share of $1.32, which not only lagged the Zacks Consensus Estimate of $1.40 but were also down 4.7% from the year-ago quarter. Shares slid 6.1% in after-hours trading.

Quarter Details

Seagate reported revenues of $3.53 billion in the second quarter of 2014, down 3.8% from the year-ago period and lagged the Zacks Consensus Estimate of $3.60 billion. Reported revenues were within management's guided range of $3.5 billion to $3.6 billion.

During the quarter, Seagate shipped 56.6 million units compared with 55.7 million units in the previous quarter and 58.2 million in the year-ago quarter. However, average selling price for the quarter stood at $62, flat year over year as well as sequentially.

Seagate's market share in the total addressable market remained flat sequentially, but was down from 43.0% reported in the year-ago quarter.

Seagate's non-GAAP gross margins expanded 90 basis points (bps) on a year-over-year basis to 28.5%. Operating margins for the company also contracted 144 bps from the year-ago quarter to 14.4% primarily due a year-over-year increase in operating expenses as a percentage of revenues (up 234 bps).

Seagate reported non-GAAP net income of $455 million or $1.32 per share compared with $523 million or $1.38 per share reported in the year-ago quarter.

Seagate exited the quarter with cash and cash equivalents of $2.29 billion at the end of the quarter versus $1.92 billion in the previous quarter. Seagate's long-term debt (including the current portion) stood at $3.57 billion.

Seagate generated $856 million from operating activities, up from $682 million in the previous quarter. The company generated free cash flow of $713 million.

The company paid dividends worth $142 million and repurchased 33 million shares for $1.5 billion.

Seagate expects revenues of $3.4 billion for the third quarter, while non-GAAP margins are expected to remain flat sequentially. Moreover, management expects its operating expenses to remain flat on a quarter-over-quarter basis. The company expects total addressable market to remain in the range of 135 million to 142 million.

Our Take

Seagate reported a dismal second quarter wherein the company not only witnessed year-over-year declines in both top and bottom lines, but also missed the Zacks Consensus Estimate. The increase in investments to provide new and innovative products, sluggish macroeconomic conditions and a flattish price environment prompted the company to provide a modest guidance. Despite the company's efforts to manage costs, margin contraction remains a headwind.

Nonetheless, the company is gaining traction with its 5-mm drives and other hybrid drives which is a positive. Moreover, Seagate's cloud-based applications have received ample customer interest. Seagate also has a significant exposure to high-end corporate desktop and enterprise server markets, which will help it to compete with rivals such as Western Digital ( WDC ), SanDisk ( SNDK ) and Fusion-io ( FIO ) in the long run.

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

FUSION-IO INC (FIO): Free Stock Analysis Report

SANDISK CORP (SNDK): Free Stock Analysis Report

SEAGATE TECH (STX): Free Stock Analysis Report

WESTERN DIGITAL (WDC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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