Why did results beat market expectations when shipments barely grew?

  • Seagate reported revenue of 4.233 billion dollars for the September quarter, up 61% year over year and above market expectations of 4.149 billion dollars. Earnings per share were 7.68 dollars, also above the market forecast of 7.45 dollars. However, results fell short of Citi’s own expectations.
  • Total capacity shipments were 220 EB, up just 1% quarter over quarter and 21% year over year, below the Visible Alpha market consensus of 235 EB; around nine-tenths of capacity went to data-center customers. Management attributed the slower sequential growth to the timing of product transitions and customer qualification.
  • Stronger pricing offset the shipment shortfall: quarterly gross margin was 57.8%, up 5.1 percentage points sequentially and above market expectations of 56.9%; operating margin was 50.7%, also above the market forecast of 50%.

Can price increases cover rising costs?

  • Management said demand is growing faster than industry supply and the supply-demand gap widened further during the quarter. Most capacity has been committed through purchase orders and customer agreements, and the company primarily allocates available supply to customers.
  • Tight supply and strong demand drove pricing improvements, while customer negotiations also account for rising costs of purchased components such as electronic components and DRAM. Management believes these cost pressures will persist, but margin expansion in the September quarter substantially exceeded the related cost increases.
  • Most nearline hard-drive supply has been allocated through calendar year 2028, and visibility into customer-committed demand extends beyond 2030. However, build-to-order contracts currently specify pricing terms and configurations through calendar year 2027; pricing for 2028 will be negotiated over the coming quarters.

What will drive growth in the December quarter?

  • The company guided to revenue of 4.8 billion dollars, plus or minus 100 million dollars, for the second quarter of fiscal 2027, the December quarter, above market expectations of 4.548 billion dollars. Its earnings-per-share guidance of 9.20 dollars, plus or minus 0.20 dollars, was also above the market forecast of 8.66 dollars.
  • Management expects capacity shipments to increase in December and the following quarters. In September, some 40 TB hard drives were built ahead of time while awaiting customer qualification; the company expects those shipments to contribute in the December quarter once qualification is complete. Management said the 40 TB products have higher margins.
  • The company expects revenue, gross margin and operating margin to improve sequentially each quarter throughout fiscal 2027; long-term demand for nearline hard-drive capacity is expected to grow by about 25% annually.

Why did Citi raise earnings forecasts but cut its price target?

  • Citi raised its fiscal 2027 earnings-per-share forecast from 38.24 dollars to 39.87 dollars and its fiscal 2028 forecast from 64.77 dollars to 65.83 dollars. But changes in peer valuation multiples led it to cut its price target from 1300 dollars to 1050 dollars; it maintained its buy rating.
  • Citi’s assessment depends on a recovery in demand from enterprise and large cloud customers, AI-driven storage demand and cost improvements from HAMR technology. Its valuation uses a multiple of 15 to 16 times forecast fiscal 2028 earnings per share; lower capacity sales, steeper price declines or delays in ramping HAMR capacity would affect revenue and margins.