Seagate CFO: 'It's All About the Second Half'

NEW YORK (TheStreet) -- Seagate (STX) CFO Pat O'Malley said that 2014 is all about the second half of the year, predicting a ramp up in demand for the company's hard drives as customers launch new products.

The Cupertino, Calif.-based firm reported its fiscal third-quarter results after market close on Tuesday, bringing in revenue of $3.41 billion, down from $3.53 billion in the prior year's quarter, but in line with analysts' forecast of $3.42 billion.

Excluding items, Seagate earned $1.34 a share on net income of $453 million, compared to $1.26 a share and $464 million in the prior year's quarter. Analysts surveyed by Thomson Reuters were looking for earnings of $1.25 a share. The company's gross margin was 28.5% and its free cash flow, crucially important for generating healthy dividends, was $319 million.

"This quarter was a challenging quarter," said O'Malley, during a post-earnings phone interview with TheStreet. The company's customers, he added, are working their way through product transitions and using up their existing supplies of hard drives.

"It's all about the second half of the year," he noted, highlighting Seagate's own efforts to manage its supply chain. "The back half will see the fruits of these efforts - we really look forward to that."

For its fiscal fourth quarter, Seagate expects revenue of at least $3.3 billion and a gross margin of approximately 28%. The hard drive specialist did not offer earnings guidance. Analysts surveyed by Thomson Reuters had predicted revenue of $3.4 billion and earnings of $1.25 a share.

Seagate shares, which have gained 46.95% over the last 12 months, rose 1.8% to $54.44 in early trading on Wednesday

Speaking during Seagate's earnings conference call on Tuesday evening, CEO Steve Luczo highlighted two of the company's major customers who are about to launch new storage products for the second half of the year.

"When they do that, they typically bleed down all the inventory they have inside of their company in various labs," he said. "When they get to the end of a product cycle, they basically are able to flush through all that technology as they prepare for the next generation of technology."

The advent of products running Microsoft's (MSFT) Windows 8 operating system and containing new Intel (INTC) processors impacted demand for Seagate's products, according to O'Malley. "That confluence is happening, where folks are managing their old systems out and bringing new systems in," said the CFO. "This means that customers use the drives that they have in house - they are not buying, but by the September/December quarter they will really turn it on."

O'Malley is also confident that new Seagate products will lift the company's business. These include a 6-Terabyte cloud drive which is expected to deliver "significant" September quarter revenue, an ongoing refresh of Seagate's 10K and 15K drives and a new Kinetic storage drive that will be going through "qualifications" with customers by September.

In a note released on Wednesday, Pacific Crest Securities analyst Monika Garg said that the June quarter could be a bottom in demand for Seagate, maintaining her 'outperform' rating on the stock.

"STX trades at attractive valuation; we remain buyers," she wrote. "We believe downside in the stock is limited due to high free cash flow yield of 11% and a good capital allocation strategy."

On Tuesday, Seagate's board approved a quarterly cash dividend of 43 cents a share, which will be payable on May 28.

Barclays analyst Eric Sterling, who has an 'Equal Weight' rating on the stock, also expects better things from Seagate. "With expectations for an improvement in enterprise demand in the 2H of CY14, we believe that Seagate can benefit from improved mix and stable pricing as we move throughout the year," he wrote, in a note. "Given the consistency of earnings and the stability of cash flow, we believe that shares of Seagate can continue to trade in-line with current levels and above long-term historical averages."

During his interview with TheStreet, O'Malley said that there's plenty of positive sentiment about the broader U.S. economy. "When I talk to a lot of economists, I think they feel that the back end of the year stays strong - there's a view that job creation in the U.S. is happening," he said.

Seagate increased its U.S. headcount during the quarter, according to O'Malley, ending the quarter with about 6,400 stateside employees, up from approximately 5,700 a year or two ago.

O'Malley, however, noted that some overseas markets are not as robust at the U.S. "In the BRIC countries, it's still slow," he said. "To me, China is a wildcard, it blows hot and cold."

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--Written by James Rogers in New York.

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