While rival, Western Digital (WDC), is trading modestly lower on earnings, Seagate Tech (STX) is actually trading higher after reporting earnings and providing guidance.
Non-GAAP EPS for Q3 (Mar) fell 43% yr/yr to $0.83, but the market was expecting an even bigger decline, as prior guidance was $0.67-0.74. So that was much better than expected.
Non-GAAP revenue fell 17.5% yr/yr to $2.31 bln, which was in-line with prior guidance of $2.185-2.415 bln. In terms of guidance for Q4 (Jun), STX expects non-GAAP EPS of $0.83 and revenue of $2.32 bln, both metrics are plus or minus 5% and are roughly in-line with market expectations.
Whenever revenue is in line and there is EPS upside, that typically means margins came in better than expected. The opposite was true for WDC this quarter as revenue was in line but EPS was much worse than expected which means margins were light of expectations.
Both companies concede that they are facing near term headwinds in terms of demand. However, there does seem to be a light at the end of the tunnel as both companies expect demand to improve as the year progresses. Unfortunately, both companies only guide for the next quarter and not the next fiscal year. As such, we do not have hard number estimates beyond the next quarter but it is good to hear that the market is improving.
In terms of products/end markets, one thing that stood out to us on the call is that STX said it's seeing some weakness from OEM and other global cloud customers. Cloud is a key industry for storage device makers like WDC and STX, so to hear about weakness here is a concern to us. Specifically, CEO David Moseley said "demand for its nearline drives began to slow in DecQ as cloud service providers work through the inventory buildup during calendar 2018."
The good news is that STX expects this pause to be short-lived. Also, Moseley said on the call that it believes "some of the slowdown... in nearline product demand is attributed to cloud customers anticipating the transition to our next generation high-capacity drives." So, the weakness may just be due to timing as it makes sense for these customers to wait for the next generation to become available. On that note, STX announced today that it began shipping its 16 terabyte drives in late March as planned.
Overall, this was a good quarter for STX. It was a sizeable EPS beat and in-line revenue. The in-line guidance was quite a bit better than what WDC provided last night. STX tends to be pretty cyclical, and while it's currently in a downturn, there are signs that there is a light at the end of the tunnel.