Seagate Technology plc (STX - Analyst Report) reported third-quarter fiscal 2016 non-GAAP earnings per share (excluding the impact of tax benefits, amortization of intangibles, restructuring charges and other one-time items) of 22 cents, which lagged the Zacks Consensus Estimate of 38 cents. Also, non-GAAP earnings plunged from $1.08 per share reported in the year-ago quarter. On a GAAP basis, the company posted a loss of 7 cents per share as against earnings of 88 cents in the prior year period.

Quarter Details

Seagate reported revenues of $2.595 billion, down 22.1% year over year from $3.330 billion. Also, quarterly revenues missed the Zacks Consensus Estimate of $2.603 billion.

Seagate’s non-GAAP gross profit plunged 38.6% year over year to $591 million, mainly due to lower revenue base. Moreover, gross margin contracted 610 basis points (bps) year over year to 22.8%.

Non-GAAP operating income came in at $152 million compared with $408 million reported a year ago. Operating margin contracted 640 bps from the year-ago quarter to 5.9%, primarily due to lower gross margin and higher operating expenses as a percentage of sales.

Seagate posted non-GAAP net income (excluding the impact of tax benefits, amortization of intangibles, restructuring charges, gain on arbitration award and other one-time items) of $66 million or 22 cents per share compared with $357 million or $1.08 posted in the third quarter of fiscal 2015.

Seagate exited the quarter with cash and cash equivalents of $1.19 billion compared with $1.26 billion in the previous quarter. Long-term debt was $4.13 billion.

During the first three quarters of fiscal 2016, Seagate generated $1.411 billion from operating activities. The company paid $539 million as dividend and repurchased $1.090 billion shares in the first three quarter of fiscal 2016. The company declared a cash dividend of 63 cents per share during the quarter.

Our Take

Seagate posted lower-than-expected third-quarter fiscal 2016 results. Also, on a year-over-year basis, revenues as well as earnings per share declined significantly.

Nonetheless, the company should benefit from the strength in its hybrid drives. Also, the company is focusing on the enterprise side, where it could acquire higher-margin business. Synergies from acquisitions and product innovations will continue to drive growth.

However, sluggish macroeconomic conditions, a flattish price environment, and competition from Western Digital Corp. (WDC - Analyst Report) and SanDisk Corp. (SNDK - Analyst Report) remain the near-term headwinds. Furthermore, continuing cannibalization of PCs by mobile devices could affect its future performance.

Currently, Seagate has a Zacks Rank #4 (Sell).

A better-ranked stock in the broader technology sector is Intuit Inc. (INTU - Snapshot Report), sporting a Zacks Rank #1 (Strong Buy).