Analyst Call Summary

Seagate Technology

conference date: July 24, 2013 @ 5:15 AM Pacific Time
for quarter ending: June 28, 2013 (fiscal fourth quarter, Q4 2013)

Forward-looking statements

Overview: Revenues dropped substantially sequentially and y/y.

Basic data (GAAP):

Revenue was $3.42 billion, down 3% sequentially from $3.53 billion, and down 24% from $4.48 billion in the year-earlier quarter.

Net income was $348 million, down 16% sequentially from $416 million, and down 66% from $1.01 billion year-earlier.

Diluted EPS was $0.94, down 17% sequentially from $1.13, and down 60% from $2.37 year-earlier.


For fiscal 2014, capital expenditures planned to 6 to 8% of total revenue, with mobile and cloud as the R&D priorities.

For September quarter expects moderate sequential increase in demand. Revenue $3.5 to $3.6 billion. Flat non-GAAP gross margin.

Conference Highlights:

"Looking ahead, we believe the market trends of data growth driven by cloud, mobile and open source advancement will present new and significant opportunities for Seagate." Revenue and gross margin were at the high end of expectations. Believes is now well-positioned with competitive products.

A quarterly cash dividend of $0.38 will be payable on August 21, 2013 to shareholders of record on August 7, 2013. The board also authorized a further $2.5 million for share repurchases.

Non-GAAP numbers: net income $447 million, EPS 1.20.

GAAP gross margin 27.4%. Non-GAAP gross margin 28.0%

Cash and equivalents balance ended near $2.2 billion. Operating cash flow was $394 million. Free cash flow $266 million. Repurchased shares for $42 million. Redeemed $700 million of long-term debt. $221 million capital expense. Paid out $137 million in dividends. Used $128 million for capital additions. Depreciation and amortization were $222 million. Long term debt is $2.8 billion.

Units shipped by market: enterprise storage 8.2 million; client compute 34.7 million; client non-compute 10.9 million. Average capacity per drive rose to 855 gigabytes.

In May Seagate launched its first client SSDs and its next generation of enterprise SSDs. It announced Terascale HDD, a 4 TB enterprise SATA HDD for cloud and data centers.

Cost of revenue was $2.49 billion. Product development expense was $294 million. Marketing and administrative expense was $176 million. Amortization of intangibles was $20 million, restructuring $1 million. Leaving income from operations of $448 million. Interest and other expense $145 million. Income tax benefit $45 million.

The rather large other expense item was mainly from losses recognized on early redemption and repurchase of debt.

Annual interest expense has been reduced by about $40 million during the past year.


Enterprise hybrid launch? We know a lot about enterprise workloads. We don't see any massive changes coming in server or operating system architectures. We see most drives shifting over to hybrid as people see their value and performance.

Total addressable market (TAM) in June quarter? 132 or 133.

Court of appeals decision? Remanded with order to find on our behalf, but WD has indicated they will appeal.

Enterprise drive 9% sequential increase, color on? There is a big buildout of cloud infrastructure that is continuing. The growth rate has tended to accelerate, and that could continue for a few years, but with spikes. We also filled in some of our product portforlio slots, which helped.

Flat margin guidance, if enterprise stronger? In second half you usually get a stronger notebook and gaming market, with those lower margins offsetting any growth in enterprise.

With the new 4 GB product and consumer 2 TB products we should be near 1 TB average per drive by the end of the year.

September quarter TAM? 135 to 140, which is reflected in our guidance and assumes moderately positive game console shipments. We would expect December to be up from that.

SSD drive commercialization, possible acquisitions? We are still very intested in making investments in SSD and working with Samsung. Our organic efforts in SSD are greater than any of the companies acquired in the open market. We are confident in what we are doing internally right now.

5mm drive design wins? We see 7 mm for thin and light notebooks. 5 mm is more appropriate for tablets. Most OEMs are incorporating 7 mm into upcoming notebooks. We are pleased with engagements with OEMs for 5 mm drives. We will be shipping a meaningful amount of 5 mm in the September quarter, and will build volume in the December quarter.

Do you felt perhaps you underspent in fiscal 2013 on capital expense? Spend was appropriate given visibility and tech transitions. We will hit capacity issues at some time, and then we will revisit capital expenditures.

We still want to drive the price of products down, but expect relatively stable prices this coming year.

Free cash flow puts and takes? We hope to return 70% of operating cash flow to shareholders, a goal we achieved last year. We have a $250 million target exiting calendar 2014. Free cash flow was reduced by $111 million in the quarter in premiums to reduce debt, but then we will save $40 million per year.

PC industry, end of Microsoft support for XP? We are more positive than the doomsday scenario that the PC is dead. We believe PCs will have an important continuing role on the client side. We think the long term trends are still positive for the PC industry.

Mission critical and enterprise SSD? There is a balance, we are addressing customer needs even as some customers migrate to enterprise SSD. We can fulfill the needs of our customers, whatever they may be.

NAND companies moving into enterprise SSD? Satisfying the customers and their workloads is key. It is a very complex market. SSDs may be used more as memory devices than as storage devices. A lot depends on application specifics. Random access favors SSDs, but you still need high availability of data. Only about 1% of mission critical drives were boot drives, where SSD had obvious advantages. Big Data ultimately needs to sit on a disk drive.

Share gains in quarter? We don't chase prices on the client side, where we might have had some share loss. On the enterprise side there are a lot of short-term variables, so what we saw in the quarter was just noise.

Openstack? We are working on making changes at the device level to move us up the openstack stack.

What is happening with tablets is no different than prior tech transitions. We are positive on the future of client devices [Seagate expects to see HDDs in tablets].

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Copyright 2013 William P. Meyers