Seagate Q3 FY15 Earnings: Higher Profit Despite Missing On Revenue Guidance

Seagate Technology (NASDAQ:STX) announced its Q3 FY 2015 earnings on Friday, April 17, reporting a 2% year-on-year decline in net revenues to $3.3 billion as overall shipments stayed declined by 9% over the prior year quarter to 50.1 million units. The hard drive manufacturer saw the average selling price (ASP) per hard disk drive sold stay flat at over the previous year at $62 in the March quarter. Seagate witnessed strong growth in shipments for enterprise-grade hard drives, which were 18% higher than the prior year quarter at 9.1 million units shipped. The company expects the solid demand for enterprise storage units to continue going forward. ^[1]Seagate shipped nearly 55.2 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the quarter, which was a 9% annual rise in capacity shipped.

We have a $56 price estimate for Seagate’s stock, which is roughly in line with the current market price.

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Storage Unit Sales Across Product Categories

Seagate’s enterprise storage unit shipments were particularly high in the latter half of 2014, due to which shipments for the full year rose by 4% y-o-y to 33 million units. ^[2] This trend continued in the March quarter this year, with unit shipments rising by 18% y-o-y to 9.1 million units. The company expects a stable demand for enterprise storage units to continue through 2015, with growth coming from hyperscale deployments. Despite the rise in volumes, the company faced pricing pressure in both the client and cloud enterprise market segments.

On the other hand, Seagate’s consumer electronics units for gaming consoles, DVRs and other media devices, and branded external storage products continued to be underwhelming. Consumer electronics storage units declined by 11% y-o-y to 4.8 million units in the March quarter. This was the first time since Q2 FY 2012 that consumer electronics hard drive shipments fell below the 5 million mark for a quarter. Similarly, branded product sales (which includes external drives, personal cloud and wireless storage drives for end-users) fell by over 13% y-o-y to 5.1 million units. Comparatively corresponding shipments of competing hard drive manufacturer Western Digital (NASDAQ: WDC) witnessed a 30% annual growth in consumer electronics storage units through last year to 40 million units. ^[3] The growth in Western Digital’s consumer electronics storage units was fueled by demand for storage drives for gaming consoles from Microsoft (NASDAQ:MSFT) and Sony, which use 500 GB 2.5” form-factor storage disks. ^[4] Although growth for Western Digital’s consumer electronics division could slow down in the coming quarters, it is likely to continue to outsell Seagate in this domain. Seagate’s management expects shipments for consumer electronic hard drive and branded products to pick up in the latter half of the calendar year due to seasonally higher demand.

Seagate sold 146 million compute storage units (desktops and notebooks combined) in 2014, which was about 2% higher than the previous year. However, there were differing trends in desktop hard drive shipments and laptop/netbook hard drive shipments. Seagate shipped out 72.9 million desktop hard drives in 2014, which was a 5% decline over the previous year, while the 73.1 million laptop units shipped were over 9% higher than 2013 volumes. The trend was similar through the March quarter with desktop hard drive shipments declining by over 27% over the prior year period to 14.3 million units. In terms of laptop and netbook units, Seagate sold 16.8 million units, which was a 2% annual rise.

Low desktop storage unit sales can be attributed to PC sales hitting a six-year low during the March quarter. ^[5] PC sales were exceptionally low as the refresh cycle of XP computer systems bottomed out as customers are now waiting for the launch of Windows 10. As a result, hard drive makers are also eagerly waiting for the Windows 10 release in July this year, which is likely to boost compute storage product sales.

Margins Could Improve Further

Seagate’s consolidated gross margin (GAAP) in the third fiscal quarter improved by over 50 basis points over the prior year period at 28.7%, which was within the company’s targeted long-term margin range of 27-32%. According to our estimates, the company’s adjusted non-GAAP gross margin stood at 33.7% for the quarter, which was about 50 basis points higher than the comparable year-ago quarter. The company expects to work on improving its supply chain efficiency and managing operations better in the coming quarters, which could further expand margins. Consequently, management mentioned that margins could expand by about 50-70 basis points through the calendar year 2015.

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1. Seagate Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
2. Seagate Q3 FY 2015 Supplemental Information, Seagate Investor Relations, April 2015 [↩]
3. Western Digital Q2 FY 2015 Supplemental Information, Western Digital Investor Relations, January 2015 [↩]
4. PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]
5. PC shipments hit a six-year low as XP upgrades slow down, PC World, April 2015 [↩]