It has been about a month since the last earnings report for Seagate Technology PLCSTX . Shares have added about 11% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? 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 important catalysts.
Seagate reported impressive second-quarter fiscal 2017 results. Non-GAAP earnings of $1.38 per share beat the Zacks Consensus Estimate by $0.31 and surged almost 68.3% on a year-over-year basis. The massive growth was primarily driven by margin expansion.
Revenues of $2.89 billion easily surpassed the Zacks Consensus Estimate of $2.81 billion but declined 3.1% on a year-over-year basis. HDD segment revenues declined 2.8%, while Enterprise Systems, Flash and Other revenues fell 6.6% from the year-ago quarter.
Total HDD shipment in the quarter was 68.2 exabytes (EB), while total HDD units were 39.9 million. Average capacity per drive was 1.7 terabytes (TB), up 30% from the year-ago quarter. Average selling prices (ASP) of $66 were sequentially flat but up 12% year over year.
HDD enterprise revenue was up 5% year over year and represented 37% of total revenue. Nearline product revenues were up 15% year over year. Mission critical product sales remained stable and were up slightly, sequentially.
According to the management consumer, surveillance, DVR and NAS markets are growth opportunities for HDD client high capacity product. These markets represent approximately 30% of total revenue.
In second-quarter, revenues from these markets grew 19% year over year and average capacity per drive was approximately 1.9 terabyte per drive, up 20% over the same time frame. Moreover, PC client shipments continue to represent 24% of consolidated HDD revenues.
Seagate reported non-GAAP gross margin of 31.8% in the quarter, which expanded a massive 620 basis points (bps) from the year-ago quarter. The expansion reflects lower component costs as well as structural cost improvements in manufacturing operations. The company noted that manufacturing costs have narrowed to $200 million on a year-over-year basis.
Non-GAAP operating expense as percentage of revenues increased 70 bps in the quarter. The modest improvement was primarily owing to lower variable compensation expense, which decreased $300 million on a year-over-year basis.
As a result, non-GAAP operating margin expanded 550 bps on a year-over-year basis to 15.9%.
Balance Sheet & Cash Flow
Seagate exited the quarter with cash and cash equivalents of $1.72 billion, as compared with $1.49 billion in the previous quarter. Long-term debt was $4.09 billion as compared with almost $4.10 billion in the previous quarter.
Seagate generated $656 million in operating cash flow and repurchased 4.1 million ordinary shares for $147 million in the reported quarter.
Seagate believes that almost 80% of its storage products have revenue growth opportunities in fiscal 2017. Management believes that increasing manufacturing efficiency along with a refreshed product portfolio that comprises new high capacity and cost advantage products will continue to expand gross margins and overall profitability in fiscal 2017.
Seagate is confident that it will be able to touch the higher-end of its long-term targeted margin range of 27-32%. Moreover, operating margin is expected to be in the range of 13-15% for fiscal 2017.
Management expect overall EB demand to grow double digits in calendar 2017 over 2016. However, third-quarter unit shipment is expected to decline due to seasonality. Revenues are forecasted to be $2.7 billion, margins at the mid to higher-end of long-term range at approximately 30% and operating expenses to decline sequentially to $440 million.
For fiscal 2017, Seagate anticipates revenues to grow over 2016 and earnings of at least $4.50 per share.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been ten revisions higher for the current quarter In the past month, the consensus estimate has shifted by 25.65 % due to these changes.
Seagate Technology PLC Price and Consensus
At this time, Seagate's stock has a nice Growth Score of 'B', though it is lagging a bit on the momentum front with a 'C'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for value investors while also being suitable for those looking for growth and to a lesser degree momentum.
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.