Seagate Reports Strong Earnings, Ups Guidance (STX)

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 |  Includes: STX, WDC

Leading hard drive maker Seagate (NASDAQ:STX) is trading up over 10% today after reporting strong F2Q06 earnings last night that beat analyst estimates handily, then raising guidance for next quarter and the upcoming year. Competitor Western Digital (NASDAQ:WDC) is also up 6.5% on the news. The key numbers:

  • Net income: $287 million or 57 cents/share -- beat estimates by 5 cents (F2Q05: $144 million or 29 cents/share)
  • Revenue: $2.3 billion (up 25% y/y) -- beat estimates by $100m
  • Guidance for F3Q06: EPS 'about 55 cents' excluding expenses, on revenue of 'about $2.25 billion'. (Analysts had been expecting revenue of $2.06 billion)
  • Fiscal 2006 EPS raised to $2.20 - $2.25 excluding charges (earlier forecast: ~$2 per share)
  • In Seagate's earnings conference call, CEO William Watkins commented:

    The most exciting growth area continues to be the consumer electronics space, where new applications are constantly emerging and software makers are building new business models designed to unlock digital content for consumers to use in their home or hand or in the car. Hard drives are central to these new models, where storage-intensive applications require high capacity, cost effective solutions to store, protect and access these new flow of digital content...

    As you are all aware Seagate entered into a definitive agreement to acquire Maxtor. As previously stated, we believe the combinations of the two companies will leverage to strength Seagate's significant operating scale, to drive product innovations, increase operational efficiencies and realize significant cost synergies. These capabilities will enable the combined company to compete more effectively as the higher competitive data storage industry addresses the challenges and opportunities for significant growth that lie ahead...

    Briefing.com provided sell-side responses this AM:

    Deutsche Bank raises their estimates and price target for STX based on stronger unit growth, a stable pricing environment, and upside from new technologies. Firm maintains their Buy... Susquehanna is confident STX will continue to grow revenue while holding margins stable in the near term. Longer term, they believe STX can successfully integrate MXO's manufacturing capacity in the acquisition that is expected to close 2HCY06... Kaufman says that their chief concern is that STX's capital expenditure forecast is expected to increase to $950 mln-$1 bln from a prior expectation of $700 mln-$800 mln in fiscal 06. This could put some additional pressure on gross margin longer term as STX capex % of rev goes above 10%. They raise their fiscal 2006 and 2007 EPS estimates from $1.89 and $1.87 to $2.20 and $2.26, respectively, and increasing their tgt to $28 from $25... Needham says that their positive outlook for the co can best be defined by the following points: 1) industry-leading technology translating into potentially the longest areal density lead in the history of the drive industry; 2) a component cost advantage that has a greater likelihood of appearing as a gross margin benefit than lower prices; and 3) a prime beneficiary of an overall supply/demand balance that has been (and will be for at least C2006) enhanced by component constraints.

    STX 1-yr chart: