On the day that Seagate Technology PLC (NASDAQ:STX) released its earnings, the stock ticked up on a surprising earnings beat. The good times did not last, though, as the next day brought a precipitous drop based on weak guidance apparently not digested the prior day. As we've all known for the last few years, PC demand is shrinking -- this is not a new trend. Naturally, Seagate's PC hard drive business faces continued adversity moving forward. But taking the entire company into account, did Seagate deserve its double-digit drop this week? Let's take a closer look at the company's fiscal second quarter results to determine whether you should buy, hold, or sell shares.
In the past Seagate, along with its competitor Western Digital Corp. (NASDAQ:WDC) , has a rather predictable cycle when it comes to earnings season. The company typically shows great free cash flow, strong growth in its cloud business, an aware and cautious management discussion, and tepid guidance due to PC demand. The stock takes a dive as analysts and investors decry the PC business, and then the stock later rebounds because, at its core, it's a beautiful, cash-generating business that consistently trades at bottom-level multiples.
Was this quarter any different? Well, yes and no.
The numbers For the December quarter, the company hauled in about $3. 7 billion in revenue. That's a 14.7% climb over last year's same-quarter revenue of $3.2 billion. Not bad considering the company is facing "a challenging demand environment." Moving down the income statement, the company achieved net income of $492 million. So how did the boom in top-line revenue lead to lower profits? It looks like it was a combination of higher expenses and weakened margins. Costs and expenses were roughly 20 % higher than last year's, and gross margins look pressed at 27% versus 31 .6% the year before.
Now, keep in mind, a year ago the company was still experiencing pricing power due to the floods in Thailand that left competitor Western Digital with a supply issue. Seagate was able to dominate the market for some time, selling nearly 100 % of its products at full retail price. Naturally, as the environment normalized, those margins have clawed back some.
On the bottom line, EPS still managed to beat expectations at $1.33 per share.
All in all, the numbers look... fine. They aren't thrilling, yet it is nice to see the company able to boost sales in this environment. If they can get some of the costs under control, I believe Seagate can clearly establish itself as the market leader.