Seagate Technology plc (STX) reported third quarter 2011 earnings per share of 25 cents, which missed the Zacks Consensus Estimate of 27 cents. However, revenue of $ 2.70 billion surpassed the Zacks Consensus Estimate of $ 2.62 billion.
Following the earnings results, Seagate’s share price inched up 0.17% in after-hours trading.
Revenue
Seagate reported revenue of $ 2.70 billion in the third quarter, down 11.6% from $ 3.05 billion in the year-ago period. The quarter’s revenue was in line with the higher end of the company’s guided range. The company shipped 49.0 million disk drive units in the third quarter, compared to 50.3 million units in the year-ago quarter. The decline in shipments could be due to preferential shift toward flash drives from the traditional hard drives.
Operating Results
Gross profit was $ 516.0 million in the third quarter, down from $ 901.0 million in the prior-year quarter. Gross margin decreased to 19.1% from 29.6% in the prior-year quarter.
Operating income on a GAAP basis was $ 179.0 million, down 68.0% from $ 560.0 million reported in the year-ago quarter. The GAAP operating margin was 6.6%, compared to 18.4% in the year-ago quarter. Excluding restructuring charges and amortization of purchased intangible assets, non-GAAP operating income was $ 182.0 million, down 68.2% year over year. Non-GAAP operating margin was 6.8%, way below 18.8% in the year-earlier quarter.
On a GAAP basis, net income was $ 93.0 million or 21 cents per share, down from $ 518.0 million or $ 1.00 per share in the comparable quarter last year. Excluding the impact of the loss on debt redemption, restructuring charges and amortization of purchased intangible assets, adjusted net income was $ 113.0 million or 25 cents per share, compared to $ 452.0 million or 95 cents in the year-ago quarter.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents, restricted cash and short-term investments totaled approximately $ 2.58 billion at the end of the March quarter, down from $ 2.91 billion in the previous quarter. Accounts receivables remained flat sequentially at $ 1.39 billion and inventories increased $ 26.0 million from the previous quarter to $ 834.0 million.
Seagate carries a long-term debt of $ 2.91 billion, down from $ 2.93 billion in the prior quarter. The company used $ 313.0 million in cash for operations, compared to cash flow generation of $ 507.0 million in the prior-year quarter. Capital expenditure was $ 105.0 million, compared to $ 222.0 million in the comparable period last year.
During the quarter, Seagate repurchased 29.5 million shares worth $ 405.0 million. Earlier this month, the company’s board of directors approved a quarterly cash dividend of 18 cents per share. The establishment of the quarterly dividend is a milestone for the company as it reflects its balance sheet strength and cash generation ability.
Guidance
The impact of the earthquake and tsunami in Japan last month is still affecting the PC supply chain, while constraining supply of hard disk drives due to specific component shortages, power issues and transportation issues.
Though management asserted that the company was unscathed by the catastrophe in Japan, it believes that the situation could remain volatile for some quarters. The company expects fourth quarter 2011 to be flat or slightly down sequentially.
For the fourth quarter, revenue and operating expenses are expected to remain flat sequentially. Management expects a tax rate between 3% and 10% and non-GAAP EPS between 19 cents to 23 cents.
Seagate also seeks to maintain enough cash reserve so that it can respond suitably to changes in market dynamics, capitalize on sudden opportunities and be ready for future investments.
To Conclude
Seagate posted disappointing third quarter results, missing the Zacks Consensus Estimate for the bottom line. Additionally, the guidance indicates another sequential downfall.
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 may in turn hurt margins. In this situation, companies can go in for acquisitions to further consolidate the market and alleviate competition. Seagate’s rival Western Digital Corporation (WDC) recently safeguarded its position with the acquisition of Hitachi Ltd.'s (HIT) hard disk drive business.
With the earnings announcement, Seagate also announced that it will be acquiring Samsung Electronics Company's loss-making hard disk drive (HDD) business for a whopping $ 1.4 billion. We believe this move will help the company remain at par with its rivals.
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 favorably by income-seeking investors. But weakness in the consumer segment, price erosion, rising demand for flash drives and competitive pressures from Western Digital Corporation keep us on the sidelines.
Currently, Seagate has a Zacks #3 Rank implying a short-term Hold recommendation.
HITACHI (HIT): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
WESTERN DIGITAL (WDC): Free Stock Analysis Report
Zacks Investment Research
Be the first to comment