Seagate Technology Holdings plc — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 29, 2023; the three- and six-month statements are unaudited. Seagate is a data-storage provider whose principal products are hard disk drives (HDDs), alongside SSDs, storage systems and related services.
Financial performance and liquidity
| Metric | Q2 FY2024 | Comparison |
|---|---|---|
| Revenue | $1.555 billion | Up $101 million sequentially; down $332 million (18%) year over year |
| Gross profit and margin | $362 million; 23% | Margin was 10% in Q1 FY2024 and 13% in Q2 FY2023 |
| Operating income (loss) | $124 million | Compared with losses of $129 million sequentially and $160 million year over year |
| Net loss | $19 million; $0.09 per diluted share | Net loss was $184 million sequentially and $33 million a year earlier |
- For the six months, revenue was $3.009 billion versus $3.922 billion a year earlier; gross margin was 17% versus 19%, and net loss was $203 million versus $4 million.
- Six-month operating cash flow was $296 million, compared with $496 million in the prior-year period. Capital expenditures were $140 million; operating cash flow less capital expenditures was $156 million.
- At quarter-end, cash and cash equivalents were $787 million and debt, net of issuance costs, was $5.669 billion. Cash less debt was approximately negative $4.882 billion. Current assets of $2.628 billion were close to current liabilities of $2.529 billion; shareholders’ deficit was $1.814 billion.
- The company reported $1.5 billion available under its revolving credit facility, with no borrowings outstanding. Management said available resources were expected to fund operations and cash requirements for at least 12 months.
Changes and operating trends
- Sequential revenue growth reflected higher mass-capacity and legacy HDD shipments, gradual improvement in the U.S. cloud market and consumer seasonality. HDD capacity shipped rose to 95 exabytes from 90 exabytes in the prior quarter, but was below 113 exabytes a year earlier. Average HDD price per terabyte was $14, unchanged sequentially and below $15 a year earlier.
- Management attributed year-over-year revenue declines to weaker demand and lower shipments. Asia Pacific represented 50% of quarterly revenue, Americas 35%, and EMEA 15%; mass-capacity products represented 68%.
- Management cited sequential gross-margin improvement from the non-recurrence of substantial order-cancellation fees recorded in Q1, lower factory underutilization and depreciation costs, and pricing actions. For the six-month comparison, gross margin remained lower, with product mix and cancellation fees among the factors.
- Cost reductions from restructuring lowered product-development and marketing and administrative expenses compared with the prior year.
Outlook, significant items and risks
- Management described the industry recovery as being at an early stage. It noted persistent macroeconomic headwinds and customer inventory adjustments, while reporting gradual U.S. cloud-market recovery and more stable end-market demand. The filing provides no quantitative revenue or earnings guidance.
- For fiscal 2024, management expects capital expenditures to be lower than in fiscal 2023. It continued to emphasize cost discipline, production levels aligned with demand and pricing actions.
- A change in estimated useful lives for certain manufacturing equipment increased reported net income by approximately $30 million in the quarter and $40 million for six months; loss per share was reduced by $0.14 and $0.19, respectively. The quarter also included a $30 million gain on a property sale-and-leaseback. These items affect comparability.
- Six-month results included a $104 million gain from terminating interest-rate swaps, a $29 million loss on early debt redemption, and approximately $43 million of losses on equity investments in the December quarter. The $1.5 billion, 3.50% exchangeable notes issued in September were used to repay approximately $1.3 billion of term loans.
- Seagate reported $5.7 billion of future debt principal payments and estimated $2.2 billion of future interest payments. Its credit agreement’s leverage and interest-coverage tests are suspended through the March 2024 quarter; specified covenants apply thereafter, subject to a testing condition. The $1.5 billion 2028 notes may require cash settlement of principal if exchanged.
- Unconditional purchase obligations totaled approximately $3.7 billion, including $1.1 billion expected within one year and $2.6 billion thereafter. The company had $144 million of unpaid order-cancellation fees, expected to be paid within one year.
- The $300 million BIS settlement penalty is payable in quarterly $15 million installments over five years, beginning October 2023; $60 million was classified as current and $225 million as non-current at quarter-end. Compliance audits and timely payments are required to maintain the suspended denial order.
- Other material risks include demand and customer concentration, pricing and technology competition, supply-chain and manufacturing constraints, export-control compliance, high leverage, and pending securities and other litigation. The securities class action’s motion to dismiss was pending. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- The board declared a $0.70-per-share dividend in January 2024. The share repurchase program remained paused; approximately $1.9 billion remained authorized but unused.
Important facts for investors to verify
- Whether revenue, HDD shipment volumes and gross margin continue to recover, and how much improvement is attributable to underlying demand versus cost, pricing or accounting-estimate changes.
- Whether operating cash flow can support debt service, dividends and substantial supplier commitments; monitor covenant requirements as testing resumes.
- The effect of the extended equipment useful lives and property sale-and-leaseback on reported results and future depreciation and lease costs.
- Progress on the BIS settlement payments and audits, the securities litigation, and any material developments in other legal matters.
- Whether customer demand, supplier commitments and factory utilization lead to further cancellation fees, inventory charges or underutilization costs.