Despite reporting upside fourth quarter earnings and sales and
giving strong first quarter revenue guidance on the call, shares of data
storage firm Seagate Tech (STX 53.30, -1.39, -2.54% ) trade places
between gains and losses this morning. The stock found resistance on Friday in
the 50-day simple moving average (57.44). Despite opening Monday with 5%
losses, the stock recoups a portion of its opening declines despite broader
The stock, instead, seems to be reacting to news that Seagate’s CFO, David Morton, Jr., would be leaving the company effective August 3, 2018, for a senior finance executive role at another company. As expected, Seagate gave commentary that Mr. Morton’s departure was not based on any disagreement with the company’s accounting principles, practices or financial statement disclosures. The company also announced the initiation of a search for Mr. Morton’s successor and has named Kathryn Scolnick as interim CFO. Ms. Scolnick has been a senior finance executive at Seagate for six years leading the company’s investor relations and treasury operations.
As far as the fourth quarter report was concerned, Seagate didn’t disappoint. Fourth quarter earnings of $1.62 per share and revenue growth of 17.8% year/year to $2.84 bln both came in ahead of market expectations. On a non-GAAP basis, which excludes the net impact of certain items, Seagate reported gross margin of 32.4%. Both GAAP and non-GAAP operating expenses were $399 mln, with non-GAAP down 5% year/year.
The sequential upside in gross margins was due in part to better mix from the company’s enterprise portfolio, linearity, and some product cost benefits. Year/year Seagate’s margins have benefited from the enterprise mix shift in its business higher capacity points mix shift across the rest of its mass storage solutions portfolio and high utilization of its vertical integrated factories.
The growth in hyperscale and cloud storage deployments continues to represent an important opportunity for Seagate. The company highlighted it saw some intraquarter upside demand for its mission critical portfolio that resulted in 18% year/year exabyte growth with the average capacity per drive over one terabyte. Cloud based enterprise storage demand continues to be extremely persistent and supply remains a bit constrained.
Non-hard disk drive revenues in the June quarter were $183 mln, relatively flat year/year. Within this silicon revenues were up 53% year/year and the company is bullish about its opportunities to leverage its supply agreement with Toshiba Memory Corporation as Seagate invests in developing a broad-based silicon product portfolio in the SAS, NVMe, consumer, and gaming markets for significant revenue growth and expanding margin contributions.
As to the upside guidance, the company expects total revenues in the September quarter to be up approximately 5% sequentially, demonstrating year/year revenue growth of over 10%. This rate of sequential growth should continue through the December quarter as well. Cash from operations for the September quarter are forecast to be approximately $500 mln, up significantly year/year. Management expects gross margins for the September quarter to be at the midpoint of its 29-33% long term range as the company competitively participates in the seasonal demand for HDD gaming, consumer, and compute products continued to ramp -- to yield its highest capacity products within its HDD enterprise portfolio and ramp its SSD business revenue.
Additionally, Seagate continues to manage its day to day operating expenses tightly and work to align its organization with future opportunities. The latest of these efforts include a voluntary retirement plan, which beginning in the September quarter will increase the company’s overall operating expenses by approximately 5% sequentially. Beyond September, overall operating expenses will then decline to approximately $385 mln a quarter, providing further leverage to the company’s fiscal year 2019 financial model and at the low end of its long term financial model range of 13-15%.
Lastly, to address the high capacity mass storage HDD demand signals and the product transitions the company has planned for FY2019 and beyond, they are increasing their capital expenditures in the September and December quarters to approximately 6% of revenue. For the fiscal year, the company forecasts capital expenditures to remain below its long term targeted range of 6-8% of revenue.
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