What drove the earnings beat?

  • Seagate reported first-quarter fiscal 2027 revenue of $4.233 billion, up 17% quarter over quarter and 61% year over year, approximately 3% above market consensus. Non-GAAP earnings per share were $7.68, above both the upper end of the company’s guidance of $7.50 and the market consensus of $7.39.
  • Growth came mainly from pricing: the average selling price of nearline hard drives rose approximately 16% quarter over quarter and 31% year over year, while company-wide shipments measured by storage capacity rose less than 1% quarter over quarter. Non-GAAP gross margin rose to 57.8%, up 5.1 percentage points sequentially and above the market consensus of 57.4%.
  • The company guided fiscal 2027 second-quarter revenue to $4.8 billion plus or minus $100 million, and earnings per share to $9.20 plus or minus $0.20. The midpoint of its EPS guidance was above the market consensus of $8.43.

How much further can prices rise, and what is changing in costs?

  • Management said higher selling prices mainly reflected repricing of build-to-order long-term agreements, with market supply and demand tightening further over the past three months. However, part of the increase reflected the pass-through of external component costs to customers, and management believes this quarter’s 16% sequential increase may not be typical.
  • Bernstein expects selling prices to rise at a high-single-digit rate quarter over quarter going forward as contracts are repriced and customers sign long-term agreements to secure capacity allocations for 2028. That is above its previous mid-single-digit assumption. The firm believes price increases can still offset component inflation and leave room for gross margin expansion.
  • Cost improvements suffered a temporary setback: estimated cost per TB rose approximately 3% quarter over quarter and fell only about 6% year over year, a smaller decline than the previous fiscal quarter’s 15.7%. Management said higher prices for external components such as chips and memory were the main drag. Although internal manufacturing costs are falling as planned, persistent external inflation may mean that a return to historical rates of cost decline will take time.

Why did nearline hard drive shipments slow?

  • Nearline hard drive shipment capacity was 198 EB in the first fiscal quarter, up only about 2% sequentially and below expectations. Management said the company built inventory ahead of additional customer qualifications for Mozaic 4, rather than encountering production yield or execution problems.
  • Because the manufacturing cycle takes two to three quarters, early production increased inventory and shifted some shipments from the quarter ending in September to the quarter ending in December. Seagate expects shipments to rebound significantly in the quarter ending in December and reiterated its outlook for long-term shipment capacity growth of approximately 25%.

Why was the price target cut despite higher earnings forecasts?

  • Bernstein raised its forecasts mainly because of stronger pricing: it increased its fiscal 2028 EPS estimate from $64.40 to $72.97, 22.3% above the market consensus of $59.68. The firm also expects fiscal 2028 non-GAAP gross margin of 71.5%, above the consensus of 66.2%.
  • The firm maintained its outperform rating but cut its price target from $1350 to $1100: despite raising its earnings forecast, it reduced the fiscal 2028 price-to-earnings multiple it uses from 21 times to 15 times, reflecting the prevailing multiple of approximately 15.1 times.
  • First-quarter free cash flow was $1.479 billion, up 32% quarter over quarter. Seagate expects to reach a net cash position by the end of the quarter ending in December and to accelerate buybacks significantly starting in the quarter ending in March. Management aims to gradually resume returning approximately 75% of free cash flow to shareholders over the next several quarters.