Seagate’s Stock Tumbles After Lackluster Results, Tepid Guidance

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Seagate Technology

Seagate (NASDAQ:STX) announced its fiscal Q4 and full year results on Tuesday, July 25, reporting a 9% year-on-year decline in revenues to $2.4 billion. Seagate’s Enterprise and Client Compute segments witnessed revenue declines, which led to the company missing the lower end of its revenue guidance by 4%. While the company’s gross margin expanded by more than 3 percentage points over the year-ago period, it was mainly due to easy year-over-year comparisons after an exceptionally weak prior year period.

Seagate’s stock price fell by around 16% after the company missed revenue and margin guidance for the quarter. Additionally, the company provided lackluster guidance for the September quarter, leading to further negative sentiment among shareholders. We have a revised $36 price estimate for Seagate Technology, which is around 10% higher than the current market price.

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See our complete analysis for Seagate Technology

Trends Across Segments

Weakness in the Compute segment (consists of hard drives for notebooks and desktops) and the Enterprise Storage segment has been the prevalent trend over the last couple of quarters. While a higher mix of enterprise hard disk drives and consumer electronics sold during the quarter helped improve Seagate’s gross margin (non-GAAP) to almost 29%, it was much lower than the guided range of around 31%. Seagate’s non-GAAP gross margin for the comparable prior year period was exceptionally low in the latter half of FY’16, leading to easier year-over-year comparisons.

On a capacity shipment basis, Seagate reported flat demand over the year-ago period for mission critical enterprise drives at 2.2 exabytes for the quarter while nearline enterprise hard drive capacity demand remained strong at over 21 exabytes. The nearline enterprise market caters to high capacity storage requirements, particularly in the surveillance, gaming, DVR (TV digital video recording) and NAS (network-attached storage) markets. Combined enterprise hard drive sales were up down 18% y-o-y over the year-ago period to $890 million for the quarter.

On the other hand, Compute segment revenues were down 2% y-o-y to $630 million with capacity shipments rising by over 14% to 16.8 exabytes. This was the first quarter in almost two years in which the company reported an increase in capacity shipments in this segment.

For the full year, Seagate’s net revenues fell 3% to $10.8 billion while exceptionally low margins in FY’16 meant that the gross margin (non-GAAP) for FY’17 was considerably higher. Over the last few quarters, Seagate has managed to restrict increase in operating expenses, attributable to increased operating efficiency and a workforce reduction. As a result of improved margins and lower operating expenses, Seagate reported an 82% annual increase in non-GAAP diluted EPS to $4.12, as shown above.

Outlook For September Quarter

Seagate’s guided net revenues for the September quarter would imply a decline of around 9% on a year over year basis at $2.55 billion. Despite lower revenues, a favorable mix of high-margin enterprise hard drives and other high-end products could help sustain high gross margins. Seagate expects its non-GAAP gross margin to stay at around 31% in the September quarter, which is around 150 basis points higher than the first fiscal quarter last year.

Over the last few quarters, Seagate has managed to restrict the increase in its operating expenses, attributable to increased operating efficiency and workforce reduction. The company’s diluted non-GAAP EPS is expected to remain roughly flat over the prior year period at around $1.00 for the September quarter.

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