A month has gone by since the last earnings report for Seagate (STX Quick QuoteSTX - Free Report) . Shares have lost about 4.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Seagate due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Seagate's Q2 Earnings Beat Estimates

Seagate reported second-quarter fiscal 2025 non-GAAP earnings of $2.03 per share, beating the Zacks Consensus Estimate by 7.98%. Also, the figure was toward the high end of management’s guidance of $1.85 per share (+/- 20 cents). The figure surpassed $2 for the first time in 12 quarters, highlighting its continued focus on profitability. The company reported non-GAAP earnings of 12 cents per share in the year-ago quarter. The strong uptake of its high-capacity nearline drives, consistent price optimization and disciplined cost management drove the bottom line.

Non-GAAP revenues of $2.325 billion beat the Zacks Consensus Estimate by 0.64%. The figure increased 49.5% year over year and 7.2% sequentially. For the fiscal second quarter, management projected revenues to be $2.3 billion (+/-$150 million). The upside resulted from strong momentum in the nearline cloud segment and significant improvements in the enterprise markets.

Higher mass capacity revenues were driven by stronger nearline cloud demand. Mass capacity revenues surged 79% year over year to $1.894 billion. Its exabyte shipments now represent 93% of total HDD exabyte shipments.

Nearline revenues almost doubled in the fiscal second quarter from the previous year. The figure grew 60% for 2024, driven by strong demand from both cloud service providers (CSPs) and Enterprise/OEM customers. Management noted that the uptick in demand for nearline products aligns with the roughly 50% growth in cloud capital investments by its customers in 2024, with their CapEx projected to continue rising throughout the calendar year 2025.

Seagate’s technological roadmap continues to align with evolving market demands. The company has taken significant strides in its cutting-edge HAMR technology. During the December quarter, Seagate began ramping up HAMR-based Mozaic products for its lead cloud customer. The company has already reached a milestone by sampling products with capacities of up to 36 terabytes (TB).

Exabyte Shipments in Detail

In the reported quarter, Seagate shipped 150.8 exabytes of HDD storage, up 59% year over year and 10% sequentially. Our estimate was pegged at 143.8 exabytes of HDD storage. Average capacity per drive increased 41% year over year and 9% sequentially to 11.6 TB.

The company shipped 140 exabytes for the mass-capacity storage market (including nearline, video and image applications, and network-attached storage). This recorded a year-over-year increase of 68% in exabyte shipments and 9% sequentially. Our estimate was pegged at 134.1 exabytes of mass-capacity storage. Average mass capacity per drive increased sequentially to 15 TB from 14.3 TB.

Seagate shipped 10.8 exabytes for the legacy market (which includes mission-critical notebooks, desktops, gaming consoles, digital video recorders or DVR and external consumer devices), down 10% year over year but up 13% sequentially. Average capacity increased 15% year over year to 3 TB.

Revenues by Product Group

Total HDD revenues (93.3% of total revenues) rose 57% year over year to $2.169 billion in the reported quarter. On a sequential basis, revenues were up 8%.

Systems, SSD & Other segment’s revenues (6.7%), including enterprise data solutions, cloud systems and solid-state drives, were $156 million, down 9% on a year-over-year basis and 5% sequentially.

Seagate's Margin Details

Non-GAAP gross margin increased to 35.5% from 23.6% in the prior-year quarter. This expansion was driven by price adjustment, cost discipline and a favorable product mix shift to mass-capacity products. 

Non-GAAP operating expenses were up 19.6% on a year-over-year basis to $287 million, primarily due to higher variable compensation.

Non-GAAP income from operations totaled $538 million, up from $127 million a year ago. Non-GAAP operating margin increased to 23.1% from 8.2% in the year-earlier quarter.

Balance Sheet and Cash Flow

As of Dec. 27, 2024, cash and cash equivalents were $1.238 million compared with $1.239 million as of Sept. 27, 2024.

As of Dec. 27, 2024, long-term debt (including the current portion) was $5.679 billion compared with $5.676 billion as of Sept. 27, 2024.

Cash flow from operations was $221 million compared with $169 million in the previous quarter. Free cash flow amounted to $150 million compared with $99 million in the previous quarter. Management anticipates sequential improvement in free cash flow generation throughout the remainder of the fiscal year.

Seagate's Guidance

Management anticipates third-quarter fiscal 2025 revenues of $2.1 billion (+/- $150 million). It anticipates strong cloud demand to partly offset seasonal declines in VIA and legacy markets, alongside supply constraints. It expects to meet build-to-order commitments, but its capacity to handle in-quarter volume increases will be limited, with an estimated $200 million revenue impact from supply woes included in its guidance. Amid supply constraints in the fiscal third quarter, sustained demand for its latest nearline products, including Mozaic, presents an opportunity for sequential growth in gross margin performance.

Non-GAAP earnings are expected to be $1.7 per share (+/- 20 cents).

For the quarter, non-GAAP operating expenses are expected to be $290 million. At the midpoint of the revenue guidance, management expects the non-GAAP operating margin to grow in the low-20s percentage range of revenues. 

It continues to expect fiscal 2025 capex to be at or below the low end of its long-term target range of 4-6% of revenues.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -17.11% due to these changes.

VGM Scores

Currently, Seagate has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Seagate has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.