Seagate Tech (STX 45.16, -0.40, -0.88%) is trading roughly flat today after the
company reported earnings and provided guidance. Non-GAAP EPS for Q2 (Dec) fell
5% year/year to $1.41, but the market was expecting an even a bigger drop, so
that EPS result managed to exceed expectations. Non-GAAP revenue fell 6.6%
year/year to $2.71 bln, toward the lower end of prior guidance for revenues of
$2.70-2.75 bln, but still within range. The pairing of in-line revenue with an
upside EPS finish typically means margins were better than expected.
While the DecQ results were largely good, the guidance for MarQ was pretty rough. STX guided on the call last night as follows: non-GAAP revenue of $2.185-2.415 bln and non-GAAP EPS of $0.70, plus or minus 5%, which we compute as $0.67-0.74. Both of those metrics are below market expectations, with EPS being well below.
It did not stop there, as the margin guidance was rough as well. STX expects MarQ non-GAAP gross margins to be "at least 26%,” which is a good bit below the 29.7% level achieved in DecQ. STX went on to explain that the large sequential decline is mostly related to mix and manufacturing under-utilization. Acknowledging that this forecast is outside of its long-term margin range of 29% to 33%, STX discussed that it expects margins to return to that long-term range once demand resumes, overcoming anticipated near-term softness, and other market trends stabilize, but until that time, the company is adjusting its manufacturing plant to a lower build volume and to keep a leaner inventory level.
The market is difficult right now. For the overall HDD industry, the DecQ exabyte demand declined for the first time after six quarters of continued growth. While inventory levels for HDD storage devices and global channels appear fairly healthy, other market dynamics including seasonality, part shortages, and liquidity have created strain for some smaller-end customers. Also, some cloud customers are pausing ahead of next-generation mass storage technology transitions that will deliver significant capacity and performance benefits.
There was some good news: STX believes that these storage demand headwinds will be short-lived and that the demand picture for STX's mass storage product portfolio continues to be strong from a long-term perspective. Data creation and data utilization are forecast to grow rapidly over the next decade. Seagate is a critical supplier to both mature and emerging businesses that are only beginning to derive value from massive application workloads coming in big data analytics, smart cities, and machine learning devices that use both edge and cloud-based architectures.
In sum, though the company’s MarQ guidance may leave investors with some apprehension, STX feels confident that growth will resume in the second half of calendar 2019. It's a difficult time for the storage market right now. The good news is that the need for data storage is not going away, but that does not mean that the industry won’t have its starts and stops. The hope is that the market will improve later this year.
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