Seagate Technology Inc. (STX) reported first quarter fiscal 2011 earnings per share of 37 cents, missed the Zacks Consensus Estimate of 45 cents. Revenue of $2.69 billion also missed the Zacks Consensus Estimate of $2.75 billion.
Revenue
Seagate reported revenue of $2.69 billion in the first quarter, up 1.3% from $2.66 billion in the year-ago period. The quarter’s revenue came in below the guided range of $2.7 billion to $2.9 billion. The company shipped 49.2 million disk drive units in the first quarter, representing a 5.12% sequential growth fueled by a moderate hard drive demand.
The company witnessed weakness in consumer markets especially in the United States and in Europe early in the quarter. This weakness led to a reduction in the total available market to approximately 165 million units, which was at the low end of the company’s expectation. However, Seagate is experiencing an improvement in consumer activity. Moreover, pricing remained aggressive across all product lines, customers and geographic regions, which impacted both the top and bottom line numbers.
Operating Results
Gross margin in the first quarter went down to 20.4% from 27.4% in the previous quarter. Gross margin was below the target range of 22% to 26% due to the aforementioned factors and a higher cost structure.
Operating income was $231.0 million, up 4.5% from $221.0 million reported in the year-ago quarter. GAAP operating margin was 8.6% in the first quarter, compared to 8.3% in the year-ago quarter. The improvement in operating results was driven by higher revenue, offset by a slight increase in operating expenses.
On a GAAP basis, net income was $149.0 million or 31 cents per share, down from $179.0 million or 35 cents per share in the comparable quarter last year. Excluding the impact of purchased intangible amortization expense, restructuring charges, amortization of purchased intangible assets, impairment of long-lived assets and an income tax benefit, adjusted net income was $180.0 million or 37 cents per share.
Balance Sheet, Cash Flow & Share Repurchase
Cash, cash equivalents, restricted cash and short-term investments totaled approximately $2.17 billion at the end of the October quarter, down from $2.63 billion in the previous quarter. The company generated operating cash flows of $245.0 million during the quarter and exited the quarter with a total debt balance of $2.17 billion.
In Conclusion
Seagate is slated to launch some important products by the end of calendar year 2010. Moreover, the company stated that it has successfully entered 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 the improvement in its enterprise business line to be a positive for Seagate. However, the company’s European exposure and recent weakness in the consumer segment are worrying. Hence we have a short-term strong Sell rating on the shares, as indicated by the Zacks #5 Rank.
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