Seagate Technology Revenue: Driven by Product, Cloud Storage?

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1 Seagate Technology Revenue: Driven by Product, Cloud Storage? By Adam Rogers Apr 03, :24 PM Seagate Technology Stock since Fiscal 2Q18 Results Seagate stock has risen 4% since its fiscal 2Q18 results Seagate Technology (STX) stock has increased more than 4% since the company announced its fiscal 2Q18 results on January 29, In the quarter ended December 2017, it reported revenue of $2.9 billion with a gross margin of 30.1% and an operating margin of 17%. Non-GAAP (generally accepted accounting principles) net income was $431 million with EP S (earnings per share) of $1.48. Gross profit was $884 million, and its operating profit was $494 million in fiscal 2Q18. Comparatively, the S& P 500 (SPY) and PowerShares QQQ ETF (QQQ) have generated returns of -8.5% and -6%, respectively, since January 29, Seagate reported revenues of $2.9 billion in fiscal 2Q17, with net income of $412 million and EPS (earnings per share) of $1.38. Gross profit was $919 million with an operating profit of $462 million. While Seagate s revenue was flat YoY (year-over-year), its gross profit fell 3.8% in 2Q18. C omparatively, operating profit and EP S rose 7% and 7.3% respectively, in 2Q18. What analysts expect from Seagate in 2Q18 Analysts expected Seagate Technology to post revenue of $2.9 billion with EP S of $1.35. It marginally beat revenue estimates by 1.8% and its earnings estimate by more than 9.5% in fiscal 2Q18.

2 Seagate has beaten median analyst earnings estimate in three of the last four quarters. It beat estimates by 11.6% in 1Q18 when it reported EPS of $0.96. It also beat the estimates by 2.8% in fiscal 1Q18 with EPS of $1.10. Seagate: Analysts Expect Marginal Revenue Growth in Fiscal 2018 Revenues estimated to rise 2.2% in fiscal 2018 Analysts expect Seagate Technology s (STX) revenues to rise 2.2% YoY (year-over-year) to ~$2.73 billion in 3Q18, from ~$2.67 billion in 3Q17. Its revenues are estimated to rise 7.7% YoY (year-over-year) to ~$2.6 billion in 4Q18, up from $2.4 billion in 4Q17. That indicates a YoY revenue of $10.9 billion in fiscal 2018, a growth of just 0.8%. In the first six months of fiscal 2018, Seagate s revenue fell 2.5% to $5.5 billion. Analysts expect the company s revenue to decline nearly 2% to $10.7 billion in fiscal Seagate s non-gaap (generally accepted accounting principles) EP S (earnings per share) is estimated to rise 18% YoY to $1.30 in 3Q18 and 80% YoY to $1.16 in 4Q18. Analysts expect its EPS to rise 18.5% in fiscal 2018 to $4.89 and 1% YoY to $4.94 in fiscal 2019, despite a fall in revenue. Seagate s EPS is estimated to rise at a CAGR (compound annual growth rate) of 8.4% in the next five years. Revenue for peer storage companies Western Digital (WDC), International Business Machines (IBM), Hewlett P ackard Enterprise (HP E), and NetApp (NTAP) are estimated to rise 7.5%, 1.2%, -12.5%, and 6.3%, respectively. HP E s revenue decline is primarily due to the various spin-off activities the company has undertaken. Profit margins Analysts expect Seagate s operating margin to rise to 15.6% in fiscal 2018 from 13.8% in fiscal

3 2017. Its operating margin is estimated to rise to 16% in 2019 with a net margin of 11%. Analysts expect the company to post an operating margin of 15.8% in 2020 with a net margin of 11.9%. Cloud Continues to Drive Exabyte Shipments for Seagate Technology HDD exabyte shipments rose in fiscal 2Q18 In the quarter ended December 2017, Seagate Technology (STX) stated that its HDD (hard disk drive) exabyte (or EB) shipments rose 28% YoY (year-over-year) to 87.5 EB. Average capacity per drive across the company s HDD portfolio rose 29% YoY to 2.2 terabytes per drive with an average selling price of $68 per unit, a rise of 3% YoY. Seagate is optimistic about its storage product portfolio, driven by demand from cloud-based environments. It continued to gain traction in mass storage solutions across the enterprise, edge, and consumer verticals in fiscal 2Q18. Enterprise HDD market As you can see in the above table, Seagate shipped a record 37.4 EB with an average record capacity of 4.3 terabytes per drive. It shipped 35.1 EB in the Nearline market during 2Q18, a significant rise of 62.5% YoY compared to 21.6 EB in 2Q17. Average capacity per drive for Nearline rose 31% YoY to 5.9 terabytes per drive, a 75% increase compared to 2Q16. HDD revenue rose 2% YoY in 2Q18. During Seagate s fiscal 2Q18 earnings call, chief financial officer David Morton stated, The growth in hyperscale and cloud storage deployments continues to represent an important opportunity for Seagate, and we are confident in our Nearline HDD portfolio designed to serve these environments. Seagate is one of the major players in the global storage market with a market cap of $16.3 billion. In comparison, peers Western Digital (WDC), Toshiba (TOSYY), Dell Technologies (DVMT), and NetApp (NTAP) have market caps of $27.4 billion, $18 billion, $14.5 billion, and $16.4 billion, respectively. Seagate Technology in Component Supply Agreement with Toshiba

4 Seagate part of consortium that bid for Toshiba chip business Seagate Technology (STX) is part of the consortium that acquired Toshiba s (TOSYY) memory business. The other companies in the consortium are Apple, Bain C apital, and Dell Technologies (DVMT). The bid for the acquisition was $18 billion. That means that Seagate and Toshiba have entered into a long-term NAND (negative AND) supply agreement that will provide a continuous NAND supply for the former s expanding product portfolio. Seagate will pay ~$1.3 billion of the $18 billion to acquire the chip business. The NAND supply agreement will also expand margin contributions across Seagate s silicon storage products. Seagate is not a major player in the NAND flash memory space. The agreement with Toshiba could help it gain traction in NAND. According to Statista, Samsung leads the NAND flash memory market with a share of 37.2%. Other top players include Western Digital, Toshiba, Micron Technology (MU), Intel, and SK Hynix with shares of 17.5%, 17.5%, 12.9%, 6.6%, and 9.9%, respectively, at the end of 3Q17. NAND market starting to normalize

5 The global NAND market has started to stabilize after a constrained supply scenario last year. That has historically led to a fall in memory chip prices. Western Digital (WDC) and other storage companies estimate that the NAND average selling price will decline later this year. Many companies expect the first half of 2018 to see a seasonally lower demand with demand picking up in the second half of the year. WDC expects the NAND market to grow between 35% and 45% this year. Here's What's Expected to Drive Seagate s Long-Term Revenue Nearline product As we ve already seen, Seagate Technology (STX) shipped 35.1 exabytes (or EB) for Nearline with an average capacity of 5.9 terabytes per drive in fiscal 2Q18. Total EB shipments rose 65%, and average capacity rose 30% in the quarter ended December Seagate s 10-terabyte Nearline product continued to be the company s leading enterprise revenue SKU (stock keeping unit) in 2Q18. Seagate also achieved volume and revenue growth QoQ (quarter-over-quarter) in its 12-terabyte Nearline product vertical since Seagate continues to ramp up for material revenue contribution in fiscal 3Q18. The increase in demand for Nearline products is expected to create opportunities for Seagate s mass storage portfolio. According to chief financial officer David Morton, Use cases will cause capacity points to span from 2 to 4Tb for certain applications and up to 16Tb for other customer needs. In 1Q18, Seagate shipped 1 million 10-terabyte units, a rise of 300% YoY (year-over-year). Seagate is optimistic that it is well poised to cater to cloud customer requirements with its portfolio of products. While Seagate is banking on Nearline storage to drive revenue, Western Digital (WDC) has been able to lead the capacity enterprise market, driven by its helium-based products. WDC s HGST (Hitachi Global Storage Technologies) brand was the first to launch a helium hard drive resulting in a significantly lower cost of ownership. These hard drives reportedly reduce energy consumption by 23% and the weight-to-data ratio by 30%, which results in an improvement in product performance and an extension of the product s lifetime.

6 Flash-based products Seagate also has several flash-based products that are ready to scale and gain traction across multiple markets. Seagate aims to diversify and expand its competitive HDD (hard disk drive) mass storage portfolio with SSD (solid state drive) and enterprise storage solutions. That s likely to drive Seagate s revenue growth and profit margins over the next few years. Seagate Expects Data to Support Demand for Storage Products Focus on mass storage solutions Seagate (STX) continues to see demand from the cloud-based enterprise market. A lot of infrastructure spending among large-scale cloud service providers and hyperscale companies has driven enterprise demand. The massive growth in data has led to the demand for reliable mass storage solutions. Seagate is one of the major storage players globally and has introduced several new products over the last two decades that cater to the dynamic storage environment. Data creation is expected to grow at a significant pace over the next few years and provide an opportunity for P urestorage (P STG), Western Digital (WDC), NetApp (NTAP), and Dell Technologies (DVMT). The value of data is also rising, driven by the advancement of fast-growing technologies such as cloud computing, AI (artificial intelligence), IoT (Internet of Things), and mobility. Workloads expected to move to mobile During Seagate s fiscal 2Q18 earnings call, chief financial officer David Morton stated, In addition to positioning ourselves for growth in the silicon business, we continue to minimize our alignment with the 500 GB client consumer and mission-critical 15K hard drive markets as we believe these workloads will over time move to mobile, silicon cloud storage. These products accounted for less than 8% of Seagate s total revenue in fiscal 2Q18. In the last five years, Seagate has led the storage market with aerial density solutions such as SMR (Shingled Magnetic Recording) and TDMR (Two-Dimensional Magnetic Recording). Seagate

7 also introduced HAMR (Heat-Assisted Magnetic Recording) technology and expects the product to launch in A Look at Seagate Technology s Financial Metrics Operating expenses fell 15% YoY in fiscal 2Q18 Seagate Technology (STX) reported non-gaap (generally accepted accounting principles) operating expenses of $390 million in fiscal 2Q18, a fall of 15% YoY (year-over-year). Seagate stated that it is on track to exit fiscal 2018 with non-gaap operating expenses of $375 million per quarter. It expects its gross margins to be 29% 33% in fiscal 3Q18, with a decline of 2% 3% QoQ (quarter-over-quarter) in operating expenses. Capital expenditure and cash flows In fiscal 2Q18, Seagate reported capital expenditure of $77 million, driven by the ramp-up of its new high-capacity HDD (hard disk drive) products. In fiscal 3Q18, Seagate has estimated capital expenditure of $120 million to address a strong demand in its cloud verticals. C apital expenditure is estimated to account for 5% of its total revenue in fiscal Seagate s cash flow from operations in 2Q18 was $850 million with free cash flow of $773 million. That includes $34 million in cash payments related to restructuring charges announced earlier. In the first six months of fiscal 2018, Seagate generated $1.1 billion in cash flow from operations and $900 million in free cash flow. It ended 2Q18 with $2.6 billion in cash and cash equivalents. How Is Seagate Improving Shareholder Value? Share repurchases and dividend yield In fiscal 2Q18, Seagate Technology (STX) repurchased shares worth $361 million and paid dividends worth $366 million. In fiscal 2Q17, it repurchased shares worth $248 million and dividends worth $188 million. That indicates a YoY (year-over-year) growth of 46% for share repurchases and 95% for dividends.

8 Seagate has a dividend yield of 4.4%, indicating a quarterly payout of $0.63 and an annualized payout of $2.52 per share. It has a dividend payout ratio of 51.7% and has increased its dividend in the last seven years. In 2017, Seagate paid $1.5 billion in dividends and $1.2 billion in share repurchases. Dividend yields for peer companies Western Digital (WDC), International Business Machines (IBM), NetApp (NTAP), and Hewlett Packard Enterprise (HPE) are 2.2%, 4%, 1.3%, and 1.7%, respectively. Focused on operational efficiency Seagate has focused on operational efficiency to improve its bottom line and offset stagnant revenue. Its revenue has fallen from $15 billion in fiscal 2012 to $11.2 billion in fiscal Its revenue then fell to $10.8 billion in fiscal 2017 and is expected to rise marginally to $10.9 billion. Seagate s C EO Dave Mosley stated, Our supply chain from suppliers to factories to sales and fulfillment are now entirely focused on agility and flexibility for our customers. Seagate is optimistic about capturing future opportunities and achieving sustainable revenue growth. It s staying positive about the macro environment, driven by enterprise cloud spending. It expects year-over-year growth in exabyte shipments for fiscal 3Q18 with a revenue decline of 5% 7% quarter-over-quarter. How Seagate Is Trading Compared to Analyst Price Target Estimate Seagate s stock returns Seagate Technology (STX) has returned 27% in the trailing-12-month period, 7.4% in the past month, and -4.2% in the trailing-five-day period. Seagate stock rose 13% in 2016 and generated returns of just less than 17% in Seagate stock, however, has risen more than 37% since the start of 2018, despite the technology sell-off in early February and the week that ended March 23, 2018.

9 In comparison, Western Digital (WDC), International Business Machines (IBM), Hewlett P ackard Enterprise (HP E), and NetApp (NTAP) have generated returns of 20%, -4%, 9%, and 60%, respectively, in Analysts recommendations and price targets Of the 29 analysts tracking Seagate stock, three have recommended a buy, 21 have recommended a hold, and five have recommended a sell. Analysts 12-month average price target for Seagate is $52.91 with a median target estimate of $52. Seagate is trading at a premium of 9% to analysts median estimate. Moving averages On March 27, 2018, Seagate closed the trading day at $ Based on that price, the stock s moving averages are as follows: 21% above its 100-day moving average of $ % above its 50-day moving average of $ % below its 20-day moving average of $57.93 Seagate is now trading 87% above its 52-week low of $30.60 and 6% below its 52-week high of $ RSI and MACD Seagate s 14-day MAC D (moving average convergence divergence) is 1.8. A stock s MAC D marks the difference between its short-term and long-term moving averages. Seagate s positive

10 MAC D indicates an upward trading pattern. Seagate has a 14-day RSI (relative strength index) of 55, which shows that the stock is trading close to overbought territory. An RSI of above 70 indicates that a stock has been overbought, while an RSI of below 30 suggests that a stock has been oversold.