STX Seagate Technology Holdings PLC

Seagate Technology plc (STX) reported first quarter 2012 earnings per share of 34 cents, surpassing the Zacks Consensus Estimate of 31 cents. Seagate shares rose 11.19% during the after market trade.

Revenue

Seagate reported revenues of $2.81 billion in the first quarter of 2012, up 4.5% from $2.69 billion in the year-ago period. The company shipped 50.7 million units during the first quarter, compared with 52 million units in the year-ago quarter.

The company lost 3 percentage points of market share in the September quarter as the company restrained from participating in aggressive pricing in the mission-critical market, especially at a time when the company is looking to evade costs associated with the rare earth increases.

Moreover, the company’s strategy to increase the price of its notebooks back fired as the demand for the same reduced considerably. Aggressive pricing in the Asia-Pacific region led to market-share loss, partly mitigated by market share gains in North America.

During the quarter, demand supply agreement and cross licensing agreements with Samsung have been executed. Moreover, the company also expects to execute the HDD supply agreement with Samsung in the near future. This apart, the company will begin the integration of Samsung's HDD business in March 2012 and expects to complete it by the end of the calendar year.

Operating Results

Gross profit inched down to $549.0 million from $550.0 million in the prior-year quarter. Gross margin was 19.5% compared with 20.4% in the prior-year quarter.

Operating income in the quarter was $236.0 million or 8.39% of revenues, up 2.16% from 231.0 million or 8.6% of revenues in the year-ago quarter. The decline in operating income was due to higher operating expenses (up 4.42% year over year).

On a GAAP basis, net income was $140.0 million or 32 cents per share compared with $149.0 million or 31 cents per share in the comparable quarter last year. Excluding the impact of total operating expenses and other expenses, adjusted net income was $146.0 million or 34 cents per share compared with $180.0 million or 37 cents in the year-ago quarter.

Balance Sheet

Cash and cash equivalents totaled approximately $2.47 billion at the end of the September quarter versus $2.67 billion in the previous quarter. Accounts receivables decreased to $1.45 billion from $1.49 billion in the prior quarter.

Seagate has a long-term debt of $2.92 billion, up from $2.95 billion in the prior quarter.

Our Take

We believe that Seagate’s strong foothold in the Enterprise SSD market will help it to generate healthy revenue growth in fiscal 2012 and beyond, which in turn will help improve margins. Improving supply-demand balance in the HDD industry will also act as a positive catalyst.

Moreover, both Seagate and Western Digital announced that EU intends to conduct a more in-depth review of their proposed acquisitions of Samsung and HGST. Despite the additional review, the deals remain on track to close by the end of this year.

We also believe that the company’s decision to maintain a stable pay out ratio will appreciated by income-seeking investors. But weakness in the consumer segment, price erosion, rising demand for flash drives and competitive pressures from Western Digital Corporation (WDC) are headwinds for the company.

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

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