Seagate Technology plc (STX) is scheduled to announce its third quarter 2011 results on April 19, 2011, after market closes and we see major revisions in analyst estimates at this point.
Second Quarter Overview
Seagate posted disappointing second quarter results, missing the Zacks Consensus Estimate on the top line. Seagate’s second quarter revenue decreased 10.2% from the year-ago period due to weak demand in the Asia-Pacific distribution channel, as well as a slight drop in the shipment of disk drive units. The total available market (TAM) was approximately 168 million units, which was in line with the company’s expectations.
Margins too were disappointing. Net income per share dropped 69.9% year over year to 31 cents.
Despite reporting a weak quarter, Seagate was on track to return shareholder value through share repurchases. Moreover, the company opted for a new $ 350.0 million senior secured revolving credit facility, which is expected to provide it the flexibility needed to continue with investments in a broad range of storage technologies.
Third Quarter Outlook
For the third quarter of 2011, Seagate expects the TAM to be between 155 million and 165 million units. Revenue is expected at between $ 2.55 billion and $ 2.70 billion and gross margin of between 18% and 19%. The sequentially weak guidance reflects less visibility over demand. Moreover, Seagate believes that the gross margin would remain under pressure due to higher material costs and price erosion.
Agreement of Analysts
Out of the 24 analysts providing estimates for the third quarter, 11 revised their estimates upward while only 1 made a downward revision.
Out of the 25 analysts providing estimates for fiscal 2011, 10 revised their estimates upward in the past 30 days while 3 moved their estimates downward.
The past seven days saw no upward movement in estimates for the third quarter and fiscal 2011. However, one analyst made a downward revision.
Last week, Seagate announced that it expects third-quarter revenues to meet its own guidance. Accordingly, Seagate now expects third quarter revenue of $ 2.7 billion, which is higher than the Street’s expectation of $ 2.62 billion.
Moreover, Seagate reinitiated its dividend policy and approved the payment of a quarterly cash dividend of 18 cents per share. This payout translates into a 5% dividend yield, putting STX above many dividend paying tech players and making it more attractive to mutual funds.
However, some analysts expect the upside in the enterprise to be offset by weak consumer demand, tablet cannibalization and near-term demand/supply imbalances.
Magnitude of Estimate Revisions
Over the past 30 days, we noticed upward movements in the Zacks Consensus Estimates for the third quarter and fiscal 2011 by 2 cents each to 27 cents and $ 1.24, respectively.
Recommendation
In the near future, hard disk companies might be vulnerable to pressures as customers such as tablet PC makers choose flash cards for storage purposes instead of the customary hard disks.
The situation may compel companies to cut prices for hard disks, which in turn may hurt margins. In this situation, companies can go for acquisitions further consolidate the market to lessen competition. Seagate’s rival Western Digital Corporation recently safeguarded its position with the acquisition of Hitachi Global Storage Technologies. We think similar actions from Seagate would be good for the company.
We believe that Seagate’s firm footing in the Enterprise SSD market will enable it to generate revenue growth in fiscal 2011 and beyond, which could drive margins. Improving supply-demand balance in the HDD industry will also act as a catalyst.
We also believe that the company’s decision to buy back shares and pay out dividend could be seen positively by income-seeking investors. But weakness in the consumer segment, price erosion, falling demand and competitive pressures from Western Digital Corporation (WDC) keep us on the sidelines.
Currently, Seagate has a Zacks Rank of #3 implying a short-term Hold recommendation.
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