Seagate Technology (STX, Financial), the global leader in data storage solutions and having a market capitalization of about $18.67 billion, announced its earnings for the second quarter, on the 26th of January, 2015. The company deals in an array of device storage devices, as is widely known. Let us analyse the results by the Cupertino based dominator in the HDD market and see whether it is an ideal investment option for your portfolio.
Decoding the results
In terms of volume, the shipments grew 17% Y-o-Y to 61.3 Exabytes (a large unit of computer data storage), with storage increasing sequentially and continuing to average over one terabyte per drive. Seagate demonstrated strong financial performance in Q2 achieving revenues of $3.70 billion, shy of $3.74 billion consensus estimate (on a non-GAAP basis), and up approximately 5 percent when compared with the prior year period. On a sequential basis though, the top line declined by 2.35%.
However, there was barely any movement on the bottom line. Seagate’s net income witnessed a decline of about 0.22% to $452 million from $453 million Q-o-Q, after adjusting for the net arbitration award of $763 million (inclusive of $630 million as the award amount, accrued interest worth $143 million calculated @10%, and litigation charges of $10 million) ruled in favour of Seagate in the lawsuit against Western Digital Corporation for the misappropriation of Seagate’s trade secrets.
The quarterly cash dividend of $0.54 per share declared by the company is a major hike from the $0.43 dividend per share declared in the previous quarter (26% Q-o-Q). This represents a strong commitment towards shareholder value generation. On the 23rd of January, 2015, the share closed at $63.98, and opened at $59.34 on the day of the big announcement, it fell by 7.25%. Post announcement, the stock trajectory was highly volatile for a short period. However, the impact of the earnings report took a toll on the share price on the 27th, when it closed at $57.06, down by almost 3.34% from the previous day. The company successfully met the expectations of Wall Street in the second quarter, but a soft guidance for the coming quarter disappointed investors. To quote the CEO of Seagate, Steve Luczo, "Seagate's second fiscal quarter performance is the result of consistent execution and our solid competitive positioning in the storage technology marketplace.”
The reason for Seagate’s weak guidance for the current period, can be attributed to the economic turmoil in the European region which contributes for almost 20% of the revenues for the company. Historically, Seagate experiences a gain of 5% in the December quarter from Europe, however, for this particular year, it faced a decline of 5%.
Conclusion
The guidance for the current period announced by Seagate seems to have taken a minor push back as they expect sales of $3.45 billion, as compared with analyst estimate of $3.58 billion. The other reason behind this shortfall is the commodity and currency volatility around the world. However, according to the general consensus on the performance of the stock, there seems to be equal number of analysts who have given Seagate a ‘Buy’ rating, and ‘Hold’ rating.
Owing to the resurrection in funds from the arbitrary winnings, Seagate can focus more on refreshing nearly their entire HDD and SSD product portfolio this calendar year, as well as bumping up investment to meet rising demand for cloud-based storage products. Given the economic volatility, the investments and revamping platform Seagate is currently on, let’s just say that it will be more feasible to hold onto the stock, to see some solid gains in the near future.
