Seagate Posts Mixed Q3 Results Amid Stagnating Product Sales

| About: Seagate Technology (STX)

Seagate Technology (NASDAQ:STX), a leading provider of electronic data storage products, announced mixed results in its its Q3 FY 2014 earnings call on April 29. The company shipped 7.7 million enterprise storage units during the quarter – a 2.5% increase over the previous year quarter, despite growing by over 7% in 2013. Desktop and notebook hard drive unit shipments for the quarter stabilized to just over 36 million units after facing a year of decline. On the other hand, unit shipments of Seagate’s non-compute products, which include consumer electronics and branded hard drives, declined by 2% to 11.3 million units, offsetting the growth provided by enterprise storage unit shipments.

Stagnating shipments meant a decline in overall revenues owing to a decline in the average selling price (ASP) per drive from $63 in Q3 FY 2013 to $61 for the 2014 period. Consequently, Seagate’s net revenues for the March quarter declined by over 3%, to $3.4 billion, compared to the prior year period. The company has given revenue guidance of $3.3 billion for the coming quarter, which would be a 4% year-on-year decline. However, Seagate expects its latest acquisition, Xyratex, to contribute about $100 million to its top line during the coming quarter. Not taking Xyratex’s contribution into consideration, the company’s guided revenues are 6% lower than the previous year’s June quarter revenues. Seagate expects demand to pick up in the latter half of the calendar year.

We have a $50 price estimate for Seagate’s stock, which is slightly below the current market price.

Limited Growth In Enterprise Storage

Seagate sold 7.7 million enterprise storage units during the quarter, a 2.5% increase compared to the prior year quarter. Comparatively, enterprise units shipments increased by over 7% in 2013. The company attributed the slowdown in growth to the increasing utilization rates of customers’ in-house inventory, which led to an increased product cycle time. Additionally, management mentioned that the slowdown in enterprise storage growth in the last six months was unlikely to last, and that they expect it to pick back up starting from the September quarter. Given the expected growth of end-user data, Seagate’s enterprise storage unit shipments could pick up growth to early 2013 rates in the latter half of the year.

Seagate is likely to see continued strong demand for its new storage platforms such as Kinetic Open Storage and Xyratex Big Data storage products. The mix of products sold via the retail channel has been increasing in the last few quarters, and the company expects it to marginally increase further in the coming quarters. Looking ahead, the company expects solid growth in products sold via the retail channel such as network-attached storage (NAS) based products, especially for small and medium businesses, and its recently launched surveillance storage drives.

Margins Improve, Outlook Remains Conservative

The company’s non-GAAP gross margins improved by almost a percentage point over the same period last year to 28.5% for the quarter, attributable to a higher mix of solid state drives (SSD) and enterprise storage units. However, Seagate’s non-GAAP operating margins were lower than the prior year period at 14.7% due to a 13% increase in marketing and administrative expenses. Management mentioned that the company’s operating margins for the quarter were still slightly better than the company’s guidance due to lower-than-expected expenses in variable compensation. Looking ahead, the company expects it sales figures and margins to sequentially decline further in the June quarter, partially attributable to seasonal trends in consumer and branded hard drive sales. Additionally, the company expects stronger sales in customer and enterprise units in the second half of the calendar year rather than the June quarter, due to new product launches targeted for that period.

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