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Tickers in this Article: WDC, STX
Seagate Technology plc (STX) reported fourth quarter 2012 earnings per share of $2.41, missing the Zacks Consensus Estimate of $2.51. Revenue

Seagate reported revenues of $4.48 billion in the fourth quarter of 2012, up 56.8% from $2.86 billion in the year-ago period. The company registered record shipments of 66 million units reflecting a market share of around 42%.

Based on the extraordinary efforts of its supply chain units and outstanding execution, the company extended its product portfolio to a large customer base.

Operating Results

Gross profit was $1.48 billion compared with $551.0 million in the prior-year quarter. Gross margin was 33.1% compared with 19.3% in the prior-year quarter. The company was able to control its costs during the quarter, which increased at a much lower rate compared to revenue increase.

Operating income in the quarter skyrocketed 456.3% year over year to $1.06 billion and was 23.6% of revenues from 190.0 million or 6.7% of revenues in the year-ago quarter. This remarkable improvement was on the back lower product development and restructuring costs. This in turn led to lower operating expense, which increased at a lower pace versus revenue increase.

On a GAAP basis, net income was $1.01 billion or $2.37 per share, compared with $119.0 million or 27 cents per share in the comparable quarter last year. Excluding the impact of one-time items, adjusted net income was $1.03 billion or $2.41 per share.

Balance Sheet, Cash Flow

Cash and cash equivalents totaled approximately $1.71 billion at the end of the quarter versus $1.64 billion in the previous quarter. Accounts receivables decreased to $2.32 billion from $2.48 billion in the prior quarter. Seagate's long-term debt declined by $89.0 million to $2.86 billion. The company possesses strong cash generation ability and generated $3.26 billion from operating activities.

Our Take

Seagate reported a modest fourth quarter result, with revenue improving substantially but EPS missing our expectation. We believe that Seagate's weakness is short term. Full recovery in the HDD industry and increasing demand will position Seagate as the leading player in the market. Seagate has a significant exposure to high-end corporate desktop and enterprise server markets compared to its rival Western Digital Corp. (WDC).

Nevertheless, lackluster PC demand and increasing use of SSDs will continue to hamper the demand for HDDs. But Seagate's growing exposure in the Enterprise SSD market will help it generate healthy revenues in fiscal 2012 and beyond, which in turn will improve margins.

Currently, Seagate has a Zacks #3 Rank, implying a short-term Hold rating.

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