Why Is Seagate (STX) Down 6% Since Last Earnings Report?

It has been about a month since the last earnings report for Seagate (STX). Shares have lost about 6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Seagate due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Seagate Q2 Earnings Top, Revenues Lag Estimates

Seagate reported second-quarter fiscal 2020 non-GAAP earnings of $1.35 per share, surpassing the Zacks Consensus Estimate by 3%. However, the figure declined 10.6% from the year-ago reported figure.

Non-GAAP revenues of $2.696 billion lagged the Zacks Consensus Estimate of $2.722 billion. The figure also declined 0.7% from the year-ago quarter.

Exabyte Shipments in Detail

During the reported quarter, Seagate shipped 106.9 exabytes of hard disk drive (HDD) storage, with an average capacity of record 3.3 terabytes (TB) per drive. This marked year-over-year and sequential improvement of 22.3% and 8.7% in the total HDD exabytes shipments, respectively. Notably, average capacity improved from 2.9 TB and 2.4 TB reported in the prior quarter and the year-ago quarter, respectively.

The company shipped 71.3 exabytes for the mass capacity storage market (includes nearline and video and image applications as well as network-attached storage or NAS). This marked a sequential increase of 11.6% in exabytes shipments. However, average capacity per drive declined sequentially from 6.8 TB to 6.4 TB.

Particularly, in the nearline market, the company shipped 49.0 exabytes of HDD, up 3.4% sequentially.

The company shipped 35.6 exabytes for the Legacy market (includes mission-critical, notebook, desktop, gaming consoles, digital video recorders or DVR, and external consumer devices) with an average capacity of 1.6 TB. This marked a sequential improvement of 3.2% in exabytes shipments. Notably, average capacity improved from 1.4 TB reported in the prior quarter.

Notably, mass capacity and legacy verticals contributed 49% and 43% to total revenues, respectively.

Revenues by Product Group

Total HDD revenues declined 0.3% year over year to $2.482 billion in the reported quarter.

Non-HDD segment (enterprise data solutions, cloud systems and SSDs) revenues were down 4.4% year over year to $215 million.

Margin Details

Non-GAAP gross margin contracted 120 basis points (bps) on a year-over-year basis to 28.7%.

Non-GAAP operating expenses were up 1.7% on a year-over-year basis to $350 million.

Non-GAAP income from operations came in at $424 million, down 9.4% from the year-ago quarter. As a percentage of non-GGAP revenues, the figure contracted 150 bps year over year, and came in at 15.7%.

Balance Sheet and Cash Flow

As of Jan 3, 2020, cash and cash equivalents were $1.74 billion compared with $1.78 billion, as of Oct 4, 2019.

Seagate ended the fiscal second quarter with a long-term debt (including current portion) of $4.141 billion, almost flat sequentially.

Cash flow from operations was $480 million, compared with $456 million reported in the previous quarter.

Free cash flow for the reported quarter amounted to $286 million, compared with $309 million reported in the prior quarter.

Guidance

Management anticipates third-quarter fiscal 2020 revenues to be 2.7 billion (+/- 7%).

Non-GAAP EPS for the third quarter is expected to be $1.35 (+/- 7%).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 6.52% due to these changes.

VGM Scores

Currently, Seagate has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Seagate has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.