Seagate Technology Inc. (STX) reported fourth-quarter 2010 earnings per share of 70 cents (excluding one-time items), missing the Zacks Consensus Estimate of 78 cents per share.
The company was badly hit by the struggles in Europe, where not just currency but also a slowdown in demand, particularly in the consumer market, impacted results.
Seagate has been reporting earnings surprises on a regular basis and despite the miss, the average positive surprise remains at 21.69%.
However, given the macro concerns, analyst sentiment on the stock has changed drastically over the last 30 days, with 11 analysts lowering estimates for the September quarter and 10 for the December quarter of 2010. Estimates for fiscal years 2011 and 2012 are also down significantly.
Seagate reported revenue of $2.66 billion in the last quarter, up 13.2% from $2.35 billion in the year-ago period, but was down 12.8% from $3.05 billion in the prior quarter. Quarterly revenue came in below the guided range of $2.85–$3.05 billion. The company shipped 46.8 million disk drive units in the fourth quarter, representing a 22% year-over-year growth fueled by steady hard-drive demand. Seagate ended the quarter with four weeks of inventory in the distribution channel, with the inventory well balanced across all product lines.
Operating Results
Gross margin in the fourth quarter rose to 27.4% from 17.4% in the year-ago quarter. The improvement was supported by a stable pricing environment for its products, partially offset by lower pricing from channel partners.
GAAP operating income was $380.0 million, a substantial improvement over the operating loss of $11.0 million reported in the year-ago quarter. GAAP operating margin was 14.3% in the fourth quarter, compared with an operating loss margin of 0.5% in the year-ago quarter. The improvement in operating results may be attributed to a slight increase in operating expenses, which was more than offset by higher revenue and gross margin.
GAAP net income was $379.0 million or 76 cents per share, up from a net loss of $83.0 million or 17 cents per share in the comparable quarter last year. Excluding the impact of purchased intangible amortization expense, restructuring charges, expenses relating to termination of its revolving credit facility, recovery of previously impaired long-lived assets and an income tax benefit, adjusted net income was 70 cents per share.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents, restricted cash and short-term investments totaled approximately $2.63 billion at the end of the June quarter, up $58.0 million from the year-earlier quarter. The net cash position (cash, cash equivalents and short-term investments as reduced by debt) was approximately $13.0 million. Cash flow from operations was $324.0 million. Excluding capital investment of 267.0 million in the fourth quarter, free cash flow was $57.0 million. Seagate repurchased its common share worth $333.0 million during the quarter.
Guidance
For the first quarter of fiscal 2011, the company expects revenue of $2.7 billion to $2.9 billion. Research and development as well as selling, general and administrative expenses are expected to be flat sequentially. Gross margin is expected to range between 22% and 26%.
Conclusion
Seagate announced the launch of some important products by the end of calendar year 2010. Moreover, the company stated that it has successfully entered into the Enterprise SSD market with its innovative storage products. The launch of the new products is expected to beef up its existing portfolio and boost revenue growth in fiscal 2011 and beyond.
We consider hard-drive unit growth and improvement in its enterprise business line to be positives for Seagate. However, Seagate’s European exposure is a concern, and hence we have a short-term Zacks #5 Rank (Strong Sell) on Seagate’s shares.
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