Seagate Technology Holdings plc — Q3 FY2024 Form 10-Q
Reporting period: Fiscal quarter and nine months ended March 29, 2024; comparative periods ended March 31, 2023. Unless stated otherwise, amounts are U.S. dollars.
Business context
Seagate supplies data-storage products and solutions, principally hard disk drives (HDDs), with SSD, storage-system and Lyve offerings. Management reported continued recovery in cloud demand as customer inventory adjustments were mostly complete, and described the industry as being in the early stage of a demand recovery. The quarter included 99 exabytes of HDD shipments, including 88 exabytes in mass-capacity markets.
Financial performance and liquidity
| Metric | Q3 FY2024 | Comparable period / context |
|---|---|---|
| Revenue | $1.655 billion | Down 11% year over year from $1.860 billion; up from $1.555 billion in the December 2023 quarter |
| Gross profit and margin | $425 million; 26% | Up from $319 million and 17% a year earlier; prior quarter margin was 23% |
| Operating income (loss) | $143 million | Compared with a $315 million loss a year earlier |
| Net income (loss) | $25 million; diluted EPS $0.12 | Compared with a $433 million loss, or $2.09 per share, a year earlier |
| Operating cash flow | $188 million for the quarter | $484 million for the nine months, versus $724 million in the prior-year nine months |
| Capital expenditures | $200 million for the nine months, versus $266 million in the prior-year period |
For the nine months, revenue was $4.664 billion, down 19% year over year; gross margin was 20% versus 18%, and net loss was $178 million versus $437 million. Nine-month results included a $104 million gain on termination of interest-rate swaps and a $29 million loss on early debt redemption. The prior-year nine-month period included a $207 million gain on early debt redemption.
At March 29, cash and cash equivalents were $795 million; total debt carrying value was $5.671 billion, including $479 million current, and shareholders’ deficit was $1.889 billion. The company had $1.5 billion available under its revolving credit facility, with no borrowings outstanding. It reported $484 million of operating cash flow and $319 million of cash used in financing for the nine months. Dividends paid were $438 million; the quarterly dividend was $0.70 per share.
Changes and notable items
- Sequential revenue growth reflected higher mass-capacity shipments and favorable pricing, partly offset by lower legacy-market shipments. Year-over-year revenue decline primarily reflected lower shipments amid weaker broad-based demand.
- Gross-margin improvement reflected pricing actions and, year over year, lower depreciation and nonrecurring accelerated depreciation. Factory underutilization charges increased by $7 million sequentially as some production lines transitioned to new products.
- A change in estimated useful lives for certain manufacturing equipment increased net income by approximately $30 million in the quarter and $70 million for the nine months; reported EPS increased by $0.14 for the quarter and the nine-month loss per share decreased by $0.33.
- In September 2023, Seagate issued $1.5 billion of 3.50% exchangeable notes due 2028 and used proceeds to repay its term loans. The notes’ estimated fair value exceeded principal by about $408 million at quarter-end; the notes were not then exchangeable.
- After quarter-end, on April 23, 2024, Seagate agreed to sell certain System-on-Chip operations assets to a Broadcom subsidiary for $600 million. The filing does not state that the transaction had closed.
Outlook, risks and contingencies
Management said it expects the macroeconomic environment to remain dynamic and continues to monitor demand and customer inventory levels. It stated that cash sources should be sufficient for operations and requirements for at least 12 months, and expected FY2024 capital expenditures to be lower than FY2023. The filing provides no specific revenue or earnings guidance.
Key risks include demand and pricing volatility, customer concentration and order timing, manufacturing utilization and supply-chain constraints, successful qualification and ramp of new products including HAMR-based drives, and the company’s substantial debt. Debt principal totaled $5.729 billion, with $479 million due in FY2025; estimated future interest payments were approximately $2.1 billion. Financial covenant tests were not applicable for the reported quarter; covenant requirements apply under specified conditions in subsequent periods.
The company must pay the $300 million BIS settlement in quarterly installments of $15 million over five years beginning October 2023 and complete required compliance audits. It paid $30 million during the nine months; $270 million remained accrued at quarter-end. Failure to comply could jeopardize the suspended denial order. Other disclosed matters include a pending securities class action, patent litigation and environmental contingencies; the filing does not provide a clear estimate of potential losses for these cases. Unconditional purchase obligations were approximately $3.4 billion, including $926 million expected within one year; unpaid order-cancellation fees were $134 million.
Important facts for investors to verify
- Whether the reported recovery in cloud demand, customer inventory normalization and favorable pricing persist, and how they affect HDD shipment volumes and margins.
- How much of the quarter’s earnings and margin improvement reflects the manufacturing-equipment useful-life estimate change rather than underlying operating performance.
- Cash generation, liquidity and compliance with future credit-facility covenant tests, alongside the $479 million FY2025 debt maturity and scheduled BIS payments.
- Completion, timing and net proceeds of the announced $600 million System-on-Chip asset sale, and any effects of the related purchasing-agreement restructuring.
- Execution of new-product transitions, particularly HAMR, and the potential impact of supplier commitments, factory utilization and the $134 million of unpaid cancellation fees.