Seagate Posts Strong Second Quarter


Seagate Technology reported fiscal second-quarter results that were modestly above expectations but gave investors a soft third-quarter outlook.

Seagate generated $3.7 billion in revenue on 58.2 million hard-drive units, implying an average selling price of roughly $63. This represents a 3% sequential decline from last quarter’s average selling price of $65, reflecting the ongoing pricing pressures faced by hard-disk-drive suppliers. Unit shipments increased 1% sequentially as sales to enterprise customers jumped 16% sequentially. On the operations front, Seagate’s second-quarter gross margins fell 140 basis points sequentially to 27.0%, which is still above the firm’s long-run historical averages as low margin PC sales give way to higher-margin enterprise sales.

Solid operating expense control allowed the firm to generate $844 million in operating cash flow and produced an operating margin of 17%, which is a sequential decline of 160 basis points from the prior quarter. Additionally, the firm returned more than 95% of operating cash flows to shareholders and increased its quarterly dividend to $0.38 from $0.32 in the previous quarter. Seagate’s share count fell to 377 million, down 30 million shares sequentially and down 60 million shares from the year-ago quarter.

Seagate’s forecast indicated that unit shipments would be flat to down in the third quarter and average selling prices would decline sequentially by 6% to 11%, yielding roughly $3.25 billion to $3.45 in third-quarter revenue. The company’s forecast is in line with Western Digital’s WDC third-quarter estimates (flat to slight decline in unit shipments and sales down 5% to 7%), and are in line with our expectations. Seagate has a stronger presence in the enterprise market than Western Digital, which we believe contributes to the firm’s relatively better profitability.

More, Seagate has done a solid job of controlling costs despite a challenging environment, and analysts think the company is well positioned to generate outsized profits in the event of a global economic recovery in the near term.


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