Global PC shipments maintained a declining trend in 2013, and storage vendor Seagate (NASDAQ:STX) continued to be one of its biggest victims. Seagate recently released its second-quarter 2014 results that failed to meet investor expectations. Let’s take a closer look at some of the details.
Second Quarter Highlights
Seagate posted adjusted earnings per share (EPS) of $1.32, down 4.6% year over year, which was well below analysts’ expectations of $1.38. The company’s quarterly performance was adversely affected by declining revenue and higher operating expenses.
Second-quarter revenue dropped 3.8% to $3.53 billion due to weakening hard disk drive (HDD) demand, reflecting the continuous slump in the PC industry. And even though low-cost and reliable HDDs are demanded by the burgeoning cloud storage space, Seagate’s high-margin HDD sales were poorer than expectations. On the flip side, demand for HDDs from consumer electronics, external storage and network-attached storage areas progressed well.
- Warning! GuruFocus has detected 6 Warning Signs with STX. Click here to check it out.
- STX 15-Year Financial Data
- The intrinsic value of STX
- Peter Lynch Chart of STX
Further investment in R&D drove operating expenses, which rose to 15.4% compared to the normal range of 12.0% to 14.0%. As a result, operating margin declined 250 basis points to 12.6%.
Total HDD shipments recorded for the quarter were 57 million units, a million lower than the year-ago period. Units sold to original equipment manufacturers (OEMs), its largest sales channel, dropped a percentage point year over year to 66.0%. Average selling price remained flat at $62.
Regarding its regions, America showed positive growth, though sales in Asia-Pacific, Europe, Middle East and African markets slowed down.
With the PC market stuck in the doldrums along with diminishing support from cloud businesses, Seagate expects revenue of $3.4 billion for the third-quarter, which is lower than analyst expectations of $3.46 billion. Operating expenses will continue to remain high sequentially reflecting Seagate’s commitment to continue investing in research and development.
Heading into the Clouds
With the increasing use of smart phones and tablet devices, Solid state media is taking the center stage rather than the bulky HDDs that are required in PCs and data centers. Nevertheless, hard disks still play a key role in the enterprise and cloud storage space.
In order to excel in HDD sales, Seagate needs to better understand the needs of Cloud and enterprise customers because that’s the best way it would be able to realize higher volumes. In addition, the acquisition of Xyratex (in December 2013) — a company that has served the likes of Dell and IBM — should aid Seagate to enhance its expertise in Enterprise data and improve overall supply chain economics.
The Xyratex buy could put Seagate ahead of archrival Western Digital (NASDAQ:WDC), which reported better-than-expected second-quarter earnings last week and posted a 3.9% revenue growth.
Despite the decline in hard drive shipment volumes, Seagate’s sales in terms of storage capacity hit a record of 52.2 exabytes, up by 8.3% from the previous year’s quarter. But, the sad fact is that this doesn’t necessarily bode well for the company. A steady growth in the high-margin cloud storage space will be crucial for Seagate to boost overall profits and compensate for the slump in the PC space. So it will be interesting to see how things pan out post the Xyratex acquisition. What are your thoughts?