Analyst Call Summary

Seagate Technology

conference date: October 28, 2013 @ 2:00 PM Pacific Time
for quarter ending: September 27, 2013 (fiscal first quarter, Q1 2014)

Forward-looking statements

Overview: Still a cash cow, and there is an argument for future growth. Increased the dividend.

Basic data (GAAP):

Revenue was $3.49 billion, up 2% sequentially from $3.42 billion, but down 6% from $3.73 billion in the year-earlier quarter.

Net income was $427 million, up 23% sequentially from $348 million, but 27% down from $582 million year-earlier.

Diluted EPS was $1.16, up 23% sequentially from $0.94, but down 18% from $1.42 year-earlier.


Revenue and unit demand similar to past quarters. Expects revenue between $3.5 to $3.6 billion. Non-gaap gross margin flat sequentially.

Conference Highlights:

"Demand for exabytes of storage continues to increase," but managing the business conservatively through challenging technological transitions. Opportunities exist in mobile, cloud, and open-source. Developing new products is a high priorty.

Non-GAAP numbers: net income $473 million up 6% sequentially from $447 million; EPS $1.29, up 7.5% sequentially from $1.20.

The dividend was increased to $0.43 per share, payable on November 26 to shareholders of record on November 12, 2013.

After the quarter closed, Seagate repurchased 32.7 million shares from Samsung Electroncis for $1.5 billion.

GAAP gross margin 28%. Non-GAAP gross margin 28.5%. 15.1% non-GAAP operating margin.

Cash and equivalents balance ended near $2.5 billion. Operating cash flow was $682 million. Free cash flow $521 million. Repurchased shares for $182 million (Samsung shares were in following quarter). $161 million capital expense. Paid out $135 million in dividends. Depreciation and amortization were $228 million. Long term debt is $2.8 billion.

Shipped a record 48.7 exabytes of storage, up 14% y/y. Average capacity per drive rose to 875 gigabytes, up 19% y/y.

Seeing traction in hybrid drives and SSD offerings.

Cost of revenue was $2.51 billion. Product development expense was $294 million. Marketing and administrative expense was $181 million. Amortization of intangibles was $20 million, restructuring $2 million. Leaving income from operations of $478 million. Interest and other expense $38 million. Income tax $13 million.

During the quarter S&P raised its rating on Seagate to DD+.


Buy back program now? We have flexibility going forward; the Samsung purchase did not apply to the 382 rule. Future buy backs will be a function of cash flow.

SMR drives, competition? We are pretty confident that our cloud portfolio is competitive and we are looking forward to new launches this year.

Margins? We emphasize quality of revenue now; we did not pursue low-margin revenue. On operating side the factories performed extremely well.

Cloud and enterprise direct sales? Cloud and Internet service provider buys can be very choppy. Sometime they buy from our OEMs and sometimes direct. It is too early to see how it will play out, but OEMs may re-establish themselves. There was some softness over all in the cloud market, but we gained market share, so it is now 15% to 20% of revenue. There is a lot of interest in our Kinetic drive.

Hybrid enterprise drive? We had a limited release with key OEMs. It is benchmarking well. We are increasing our marketing effort and expect volumes to grow.

Are segments expected to be as flat as overall guidance? There is limited visibility. We are in a flat on units, growth of exabytes world.

SSDs? We are hitting SSD targets from the analyst update.

ASPs (prices) down? This is a mix issue. We had a higher mix of client vs. enterprise drive sales.

4TB drives, what is the next step? We will launch on the cloud first. We are working hard on it. Platter counts would be competitive information.

Supply chain investments to fill exabyte expansion needs, especially heads? We like the head partner TDK, we don't plan to change that.

Share count 328 million 346 diluted.

We have a lot of interest in ultra-mobile 5 mm drives. We don't know what form factors will lead, it is slow so far, it should develop this next year.

We committed to returning 70% of operating cash flow. The stock was at $19 when we started this program. We will weigh between dividends and buy-backs depending on effectiveness.

Capital expense plans? Still in line with 6 to 8% this year. We might be able to go below 6% at times, but are ready to invest as the exabyte march goes on.

New SSDs were introduced in May, how have you done? We were pleased with selling over $100 million of SSD in the quarter. We are still working on our technology roadmap for SSD. We hope to have a handsome share of the SSD market, but it is early on. The PCI part is very competitive, so low margins. We are focused on margins, our targets are where we can maintain good margins.

Branded business? The low end was very competitive, but we executed well in the segment that made sense for our quality of business. We are now shipping a 2TB product that we hope will do well.

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Copyright 2013 William P. Meyers