Note: All New Or Revised Material Since the Last Report Is Highlighted

March 19, 2018

Seagate Technology (STX- NASDAQ) $60.40

Note: All new or revised material since the last report is highlighted.

Reason for Report: Changes in Estimates

Prev. Ed.: Feb 12, 2018; 2Q18 Earnings Update

Brokers’ Recommendations: Neutral: 73.91% (17 firms); Positive: 13.04% (3); Negative: 13.05% (3)

Prev. Ed: 16, 3, 3

Brokers’ Target Price: $48.55 (↑$0.92 from last edition; 20 firms) Brokers’ Avg. Expected Return: (19.6%)

Portfolio Manager Executive Summary

Seagate Technology Plc (STX) is a leading provider of hard disk drives (HDDs), which can be found in desktops, notebook PCs, game consoles, and enterprise storage systems. The company primarily sells its products to original equipment manufacturers (OEMs), distributors and retailers. The company reported revenues of $10.77 billion in FY17. Dell Inc. accounted for almost 12% of the company’s revenues.

Key factors for evaluating an investment strategy for Seagate are as follows:

 Seagate’s vertically integrated model provides it with a competitive advantage over non-integrated HDD suppliers (Samsung, Fujistu, and Toshiba).  Seagate’s lead in PMR (perpendicular magnetic recording) will likely narrow as its competitor Western Digital (WDC) ramps up its PMR efforts.  The HDD industry is poised to benefit from data growth in the cloud.

Competitive Environment: The disk drive market is highly competitive and in the past has experienced drastic pricing pressure to more products. Certain competitors (such as Hitachi and Toshiba) are divisions within larger OEM organizations that are better able to support aggressive pricing and may prefer to source their hard disk drives in house rather than from an outside supplier such as Seagate. The fierce competition in the disk drive market (especially from Western Digital) is largely driven by the commodity-like nature of hard disk drives.

Of the 23 firms covering the stock in the Zacks Digest Group, 17 firms provided a neutral rating, three firms assigned a bullish rating and three firms rated the stock negatively. Target prices range from $32.00 to $60.00, with the average price being $48.55. The firms’ average expected return over the current share price is (19.6%).

Cautious (Neutral or equivalent outlook) – 17 firms or 73.91% – These firms anticipate headwinds such as weakening demand for PCs that account for around half of HDD shipments to negatively impact the company. But the company is shuffling its product line to meet the requirements of enterprise and

© Copyright 2018, Zacks Investment Research. All Rights Reserved. data center applications. Additionally the increased use of data oriented applications like artificial intelligence and Internet of Things (IoT) is likely to be beneficial for the company’s products. However, the firms expect HDDs that contribute more than 90% of the company’s revenues to decline in the near term due to the shift to solid state drives (SSD) from HDD. But Seagate’s entry into the SSD market is a positive and so is the acquisition of Toshiba’s NAND flash memory unit.

Bullish (Buy or equivalent outlook) – 3 firms or 13.04% – These firms believe that artificial intelligence (AI), robotics, and Internet of Things (IoT) are taking center stage and can drive HDDs, which form the building blocks of these applications. These will eventually boost the top line of the company. NAND prices are expected to decline in the near term, which will be beneficial for the company as it shifts to SSDs from HDDs. Additionally, they believe that if Toshiba, which holds around 15% of the HDD market exits, it will be a positive for the company. The firms are also positive about Seagate’s additional headcount restructuring, which will lower expenses and aid the bottom line.

Bearish (Sell or equivalent outlook) – 3 firms or 13.05%

Conclusion: The firms believe that Seagate’s broad product portfolio is a key catalyst. They believe that the company can flexibly and efficiently address the vast majority of existing and emerging applications in the Enterprise, Desktop, Mobile, and Consumer Electronics segments. However, shift of the storage market to SSD is a major threat to the company’s growth. Nevertheless, the company’s entry into the SSD market is expected to be a positive. Additionally, the stake at Toshiba’s flash memory unit is expected to assist the company with NAND supply. Moreover, the company’s product mix witnessing a move toward enterprise and data center applications in an era when demand for PCs is weakening will be a tailwind. However, the anticipated decline in HDD revenues that comprise more than 90% of the company’s top line is a headwind. Feb 12, 2018

Overview

Key investment considerations as identified by the firms are as follows:

Key Positive Arguments Key Negative Arguments  Seagate has an enriched product portfolio and  Demand for SSDs is growing as the drives are non- higher mix of OEM business. volatile (unlike HDDs), shock resistant, high-speed  Strong demand for Nearline drives. and relatively power efficient.  Seagate is now focusing on the fast-growing PCIE  The market for disk drive products is concentrated in (Peripheral Component Interconnect Express) a selected number of OEMs. The hard disk drive storage market. sector is inherently volatile and subject to market share battles and aggressive price declines.  HDDs are much less expensive than SSDs.  Seagate faces customer concentration risk. The  The HDD industry is poised to benefit from data company is over-dependent on Hewlett-Packard and growth in the cloud. Dell. Both the companies are facing a slowdown in  The company keeps on launching new products with the PC business. This may lead to market share loss higher capacities to remain competitive. for Seagate.

Headquartered in Dublin, Ireland, Seagate Technology Public Limited Company is a worldwide leader in the design, manufacturing, and marketing of hard disk drives, providing products for a wide range of Enterprise, Desktop, Mobile Computing, and Consumer Electronics applications. Seagate sells its disc drives primarily to original equipment manufacturers (OEMs), dealers, system integrators, and retailers worldwide through distributors. The company’s business model leverages

Zacks Investment Research Page 2 www.zackspro.com technology leadership and world-class manufacturing to deliver industry-leading innovation and quality to its global customers.

Seagate offers its products under three heads — Enterprise Storage, Client Compute and Client non- compute.

Further information about the company is available at: www.seagate.com.

Note: STX’s fiscal year ends in June; all calendar year references differ from the fiscal year. Feb 12, 2018

Long-Term Growth

Seagate is the second largest manufacturer of HDDs in the United States with approximately 40% market share. Long-term EPS growth rate for the company is projected to be 18.9%.

According to the firms, the notebook and CE segments offer substantial growth opportunities. Notebooks are growing at the expense of desktop computers, while the consumer market for HDDs is also growing rapidly. Although unit, volume, and gigabytes have steadily increased, the firms note that HDD manufacturers have not been able to manage ASP declines well enough to translate this increase into significant sales and earnings growth.

The disk drive market is highly competitive and has experienced drastic pricing pressure due to supply/demand volatility. Moreover, hard disk companies might be vulnerable to additional pressure as customers such as tablet PC makers choose flash cards for storage purposes instead of the customary hard disks. The situation may compel companies to cut hard disk prices, which will hurt margins. In such a situation, companies can go for acquisitions to further consolidate their market and counter competition.

Management foresees a continuing shift in demand trends toward higher-capacity storage, indicating robust global demand for digital storage in both the consumer and commercial markets.

Emergence of SSDs - Seagate has been expanding into the SSD storage market due to the decline in the PC market. SSDs are faster and more energy efficient than traditional hard drives. These also occupy less space and are thus more suitable for mobile computing devices. The emergence of thinner laptops and tablets over the past few years has created an ideal market for SSDs, which are therefore entering the higher end of the market.

SSDs are also being used in servers due to lower latency, which in turn facilitates faster response to real- time applications. E-commerce and financial enterprises need quicker response time and thus data centers serving these clients are opting for SSDs. The secular growth of digital data, modest growth in TAM and higher demand for storage will drive growth for storage in general, and especially for SSDs. This is what led TechNavio to project CAGR of 17% for the enterprise SSD market during 2016–2020.

The SSD segment’s growth potential is a major positive for Seagate because this could offset the losses incurred due to the secular decline in the PC market. The company’s stake at Toshiba’s flash memory chip unit in association with a consortium led by Bain Capital is anticipated to be a positive. This way the supply of NAND flash components will be taken care of.

Aggressive Acquirer - Seagate has been active on the acquisition front. The acquisitions have not only helped the company to expand its product portfolio but also strengthened its small-to-medium sized business solutions. The acquisitions of Accelerated Solutions Division (ASD) and Flash Components Division (FCD) from Avago Technologies in 2014 not only boosted Seagate’s enterprise-class PCIe flash offerings but also enhanced its SSD controller capabilities.

Zacks Investment Research Page 3 www.zackspro.com Seagate is poised to gain from the acquisitions as PCIe-based SSDs are in demand from enterprises dealing with online transaction processing and data warehousing. Moreover, in 2015, the company acquired Dot Hill Systems to boost its enterprise side business further. These takeovers are expected to provide the company with a competitive edge.

Expanding Enterprise Business - Seagate is focusing more on the enterprise side, which is the key growth area in the IT sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), the company is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. We believe that the acquisition of Dot Hill is in line with the company's strategy to focus more on the enterprise side, where it could gain higher-margin business.

Seagate also believes that higher demand for cloud storage will lead to improved pricing for enterprise- class drives, mainly due to supply constraints. The company expects cloud-based solutions to drive revenue growth in the near term. Seagate’s expectations stem from the fact that IDC expects 60% of the 13 ZB data produced to be stored in the cloud. Apart from this, the focus shift toward enterprise would reduce the company’s dependence on the PC market.

Seagate’s leading position in the sector, increased focus on research and development (R&D), product launches, and synergies from vertical integration are expected to strengthen its profitability in a competitive environment. Feb 12, 2018

Target Price/Valuation

Provided below is the summary of rating and valuation as per Zacks Research Digest:

Rating Distribution Positive 13.04%↓ Neutral 73.91%↑ Negative 13.05%↓ Maximum Target Price $60.00↑ Minimum Target Price $32.00↑ Avg. Target Price $48.55↑ No. Firms with Target Price/Total 20/23

According to the firms, risks to the achievement of the target price include the inherent cyclicality of the drive market and the possible introduction of new storage technologies such as flash memory in Seagate’s primary markets. Also, lower-than-expected growth in the overall PC industry, competitive pricing, technology risks, a slowdown in the growth rate of PC shipments, slowing demand in the enterprise market, and general economic factors may increase the risks.

Recent Events

On Jan 29, 2018, Seagate reported fiscal 2Q18 results. Highlights are as follows:

Zacks Investment Research Page 4 www.zackspro.com  Total revenues increased 0.7% y/y to $2.91 billion.  Non-GAAP EPS increased 7.2% y/y to $1.48.  Seagate exited the quarter with cash and cash equivalents of $2.56 billion compared with $2.54 billion in 1Q18.

On Jan 25, 2018, Seagate appointed Judy Bruner and Dylan Haggart to its board of directors.

On Jan 8, 2018, Seagate joined forces with JD.com to unveil Seagate Joy Drive, which allows Android users to increase storage capacity and battery usage.

On Jan 8, 2018, Seagate unveiled the 5U84 high-density enclosure built with a next-generation operating system. The new launch enhances performance, capacity and reliability.

On Sep 19, 2017, Seagate and Tencent Technology signed a strategic partnership agreement for co- operated advancements in information technology.

On Sep 18, 2017, Seagate and Baidu signed an agreement with a focus on big data analysis and development and implementation of advanced storage systems.

Revenues

According to the 2Q18 press release, revenues of $2.91 billion increased a marginal 0.7% from the year- ago quarter. Further, both the top and the bottom-line figures witnessed a sequential improvement, owing to strong demand and adoption of Seagate’s storage drives.

Provided below is a summary of total revenue as compiled by Zacks Digest:

Revenues ($ in 2Q17A 1Q18A 2Q18A 3Q18E 4Q18E FY17A FY18E FY19E million)

Digest High $2,894.0 $2,632.0 $2,908.0 $2,746.3 $2,657.7 $10,771.0 $10,944.0↑ $10,762.0↑

Digest Low $2,893.0 $2,631.6 $2,908.0 $2,740.0 $2,594.0 $10,770.0 $10,874.0↑ $10,712.5↑

Digest Average $2,893.2 $2,632.0 $2,908.0 $2,743.2 $2,625.9 $10,770.7 $10,909.0↑ $10,737.3↑

Y/Y Growth -3.1% -5.9% 0.5% 2.6% 9.1% -3.5% 1.3%↑ -1.6%↓

Q/Q growth 3.4% 9.4% 10.5% -5.7% -4.3%

In January this year, Seagate entered into a long-term NAND supply agreement with Toshiba. The agreement will help the company in its innovation of hard disk drives (HDD), solid state drives (SSD) and hybrid solutions, consequently expanding its product portfolio.

During the quarter, Seagate shipped a record 87.5 exabytes of HDD storage, with an average capacity of 2.2 terabytes per drive. The company shipped 37.4 exabytes for the enterprise HDD market, each with an average capacity of 4.3 terabytes.

Total HDD revenues went up 2% y/y during the quarter. Notably, the advancement and accelerated growth of cloud storage technologies are tailwinds. Management believes that the HDD product suite is ready to cater to the demands of the market.

Zacks Investment Research Page 5 www.zackspro.com In the nearline market, the company shipped 35.1 exabytes of HDD. Nearline products’ average capacity per drive was 5.9 terabytes. Management noted that the company’s 10-terabyte helium nearline product was one of the top revenue generators in the quarter. Growth in the 12-terabyte helium nearline product line was also encouraging. Given the impressive customer feedback, the company anticipates to bank on the market adoption of these products.

Within the edge and customer verticals, the company witnessed y/y exabyte growth in all end markets, including PC compute, consumer, surveillance, gaming, and NAS markets.

Non-HDD segment (cloud systems and silicon group) revenues declined 12% y/y and 11.9% sequentially to $213 million. The decrease was primarily due to the divestiture of the major portion of its high performance computing assets OEM legacy system during the quarter.

Guidance

Management anticipates 3Q18 revenues to decrease 5-7% compared with 2Q18 due to strong cloud demand and seasonality in other markets.

Firms’ Outlook

Data storage is undergoing a paradigm shift away from laptop and desktop PCs to mobile devices and tablets. Due to the limited storage capacity offered by mobile devices and tablets, a good deal of this data is expected to go on to the cloud. The firms believe that Seagate’s high-capacity drives are capable of storing data and hence the company may witness a demand ramp for its drives, going forward. Cloud Service Providers are expected to be the strongest growth drivers. They are also encouraged as growing demand for Seagate’s high-capacity enterpise drives will reduce its dependence on the PC market at a time when the latter is weakening. Some of the firms believe that if Toshiba exits the HDD market it might be a boon for Seagate.

However, with the shift from HDD to SSD, the decline in HDD revenues that comprise more than 90% of the company’s total revenues will be a headwind. The firms forecast industry-wide revenues in the HDD market to decline roughly 5.1%, which can prove to be a headwind for the company. However, the company’s growing efforts in the SSD market can offset the downfall. The combination of NAND and 3D XPoint resulting in high-performing storage stacks will be another threat for the HDD market. Nevertheless, Seagate is slowly entering the SDD market, which is a positive. The company’s acquisition of Toshiba’s flash memory chip unit is considered beneficial for NAND supply. However, the market is already highly competitive, which is concerning. They also believe that Seagate should ramp its product portfolio in nearline drives, including 10 TB and 12 TB drives. Any delay in this regard will affect its market share.

Please refer to the Zacks Research Digest spreadsheet on STX for more details on revenue estimates.

Margins

Non-GAAP gross margin was 30.4% compared with 31.8% reported in the year-ago quarter and 29% in the previous quarter. Non-GAAP operating expenses were down 14.8% on a y/y basis to $390 million. This decrease in expenses was primarily due to certain cost improvement initiatives.

Zacks Investment Research Page 6 www.zackspro.com Provided below is a summary of margins as compiled by Zacks Digest Research:

Margins 2Q17A 1Q18A 2Q18A 3Q18E 4Q18E FY17A FY18E FY19E Gross 31.8% 29.0% 30.4% 30.4% 30.4% 30.5% 30.1%↑ 30.4%↑ Operating 15.9% 13.5% 17.0% 16.5% 16.1% 13.8% 15.8%↑ 16.4%↑ Pretax 14.7% 10.9% 15.0% 14.5% 14.0% 11.9% 13.7%↑ 14.3%↑ Net 14.2% 10.6% 14.8% 13.9% 13.3% 11.4% 13.2%↑ 13.7%↑

Guidance

The company expects gross margins to be flat on a sequential basis. Non-GAAP operating expenses are expected to decrease 2-3% from the prior quarter with further cost stringent approaches.

Firms’ Outlook

The firms anticipate that gross margins could improve pertaining to the restructuring process.

According to the Zacks Digest model, in FY18, marketing & administrative expense is expected to decline 9.3% and revenues are expected to decrease 2.9%. For FY19, marketing & administrative expense is expected to decrease 14.5%, while revenues are expected to decrease 0.2%.

Please refer to the Zacks Research Digest spreadsheet on STX for more details on margin estimates.

Earnings per Share

According to the 2Q18 press release, non-GAAP EPS was $1.48, which increased 7.2% on a y/y basis.

Provided below is a summary of EPS as compiled by Zacks Digest Research:

EPS 2Q17A 1Q18A 2Q18A 3Q18E 4Q18E FY17A FY18E FY19E Digest High $1.38 $0.96 $1.48 $1.33 $1.25 $4.13 $5.01↑ $5.19↑

Digest Low $1.38 $0.96 $1.48 $1.30 $1.17 $4.12 $4.91↑ $5.00↑

Digest Average $1.38 $0.96 $1.48 $1.32 $1.21 $4.12 $4.96↑ $5.10 ↑

Y/Y Growth 68.8% -3.5% 7.1% 19.8% 86.9% 81.9% 20.4%↑ 2.7%↑

Q/Q Growth 39.3% 47.8% 54.7% .11.2% -8.0%

Firms’ Outlook

Zacks Investment Research Page 7 www.zackspro.com The firms believe that increase in the top line driven by product mix shifting to data center related HDD products and the company’s entry into the SSD market coupled with improving gross margins due to restructuring will be positives for the bottom line. However, a highly competitive SSD market and an anticipated decline in HDD revenues will be headwinds.

Please refer to the Zacks Research Digest spreadsheet on STX for more details on EPS estimates.

Research Analyst Anurag Gupta Copy Editor Debasmita Banerjee Content Ed. Awantika Poddar QCA Aniruddha Ganguly Reason for Update 2Q18 Earnings

Zacks Investment Research Page 8 www.zackspro.com