Seagate Earnings: Poor Profits, Layoffs, and Legal Settlement Combine for a Disappointing Quarter

We’ve lower our fair value estimate for Seagate Technology STX to $55 per share from $62 after the company missed our fiscal third-quarter earnings expectations and provided poor forward-looking commentary. The ongoing downturn in the hard disk drive market is enduring longer than management anticipated. Though we viewed management’s longer-term recovery expectations as overly rosy previously, the quarter was disappointing. We have pushed out our expectations for an HDD recovery, lowered our short-term forecasts, and we have growing concerns over the firm’s balance sheet. After a promising print for the December quarter, the languid March quarter exhibits the volatility of the HDD market that leads to our no-moat rating for Seagate. A new round of layoffs and a trade violation settlement further soured the print. Shares traded down after results, and we see them as slightly overvalued.

March-quarter sales dropped 34% year over year and 1% sequentially. Seagate is seeing weakness essentially everywhere as a soft macroeconomic environment weighs on spending. Sales came in at the low end of management’s guidance range due to a slower-than-expected recovery for large cloud customers.

Non-GAAP gross margin dropped 270 basis points sequentially to 18.7%, behind lower volume, underutilization charges at factories, and pricing pressure in consumer hard drives. Gross margin was the main culprit behind operating margin compression and a non-GAAP net loss in the quarter.

Seagate has pushed its expectations for a recovery out to late calendar 2023, which is the first half of its fiscal 2024. Fiscal fourth-quarter guidance calls for another sequential sales decline, but improvement on margins and a slight improvement on the bottom line at the midpoint. With one quarter to go, we expect fiscal 2023 to culminate in a 35% sales decline but anticipate a high-single-digit growth rate in the ensuing years as demand for mass capacity HDDs rebounds from the current downturn.