Analyst Call Summary

Seagate Technology

conference date: January 27, 2014 @ 2:00 PM Pacific Time
for quarter ending: December 27, 2013 (fiscal second quarter, Q2 2014)

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Forward-looking statements

Overview: Solid quarter, some impact from increased operating costs.

Basic data (GAAP):

Revenue was $3.53 billion, up 1% sequentially from $3.49 billion and down 4% from $3.67 billion in the year-earlier quarter.

Net income was $428 million, slightly up sequentially from $427 million but down 13% from $492 million year-earlier.

Diluted EPS was $1.24, up 7% sequentially from $1.16 but down 5% from 1.30 year-earlier.


March quarter revenue at least $3.4 billion revenue. Flat non-GAAP margins sequentially. Demand has been good this quarter and inventories are relatively low. Operating expenses sequentially flat.

Conference Highlights:

A positive emerging trend is strategic work with customers. Investing for an expanding customer landscape, while carefully managing capital investments. Gross margin was 28.0%. Cash flow was very strong.

Non-GAAP numbers: net income was $455 million, down 4% sequentially from $473 million. EPS $1.32. Gross margin 28.5%. Operating margin 14.4%.

Cash and equivalents balance ended near $2.3 billion. Operating cash flow was $856 million. Free cash flow was $713 million. Repurchased shares for $1.5 billion. Paid out $142 million in dividends. Long term debt is $3.6 billion. Inventories ended at $948 million.

52.2 exabytes of storage shipped in quarter, a record. 922 gigabytes per drive average, also a record.

Cost of revenue was $2.54 billion. Product development expense was $312 million. Marketing and administrative expense was $190 million. Amortization of intangibles was $25 million, restructuring $16 million. Leaving income from operations of $444 million. Interest and other expense $2 million. Income tax $14 million.

Returning value to shareholders through share buy backs and dividends remains a priority.

In December agreed to acquire Xyratex for $374 million. This should close in June quarter and be accretive in its first full year.

5 mm drives are now being shipped by multiple OEMs for tablets. SMR technology is being deployed across the drive portfolio.

Customers are interested in a deeper strategic engagement with Seagate.

Capital investments are currently being managed to the lower end of our 6% to 8% target range. Production is being managed cautiously.


Looks like 12% y/y growth, but sequentially declining shipments in the quarters? The industry did see some softness in December due to timing of cloud build-out. The process of cloud rollout will be lumpy, but the category is very strong and represents a tremendous growth opportunity. Customers have made an effort to shorten the time from purchase to deployment, which is working its way through the industry.

TAM (total addressable market) expectations? We guided to at least $3.4 billion.

Inventory build in quarter? Finished goods was relatively flat. Inventory in the system and at the customers is very lean. We expect to get our inventory back down.

Unit growth lagged Western Digital for enterprise segment? We think there are lots of opportunities in enterprise, like cloud. We will be releasing a 6 TB drive next quarter which will be very interesting to customers.

HDDs in PC category? The client business was stronger than we expected in the quarter, could be desktop or notebook. Most of the world is not at a $1000 price point, but even at the high end for notebooks hybrid penetration has been going well. The 5 mm drives in convertibles and even tablets should do well. SSDs are complementary technology to HDDs, and help to grow the need for storage. 4K video eats up a lot of storage.

How is the high-end client environment for hybrids? We have been surprised at how well hybrid has done on desktop. High-performance drives have their role. We believe eventually the majority of our portfolio will be hybrid drives.

Hyperscale drive opportunity? Investors should understand that various drive types have various lead times, profit margins, etc. In cloud, it is not about in-quarter demand, it is about how much demand did you predict three quarters ago. But the time to deployment seems to be decreasing. Again, 4K is driving the need for more capacity. It is easier to respond to increased demand for notebook HDDs than high-end cloud HDDs.

Capacity mix changes? We are confident the data growth rates are in excess of 30%. The industry keeps good track of the exabytes shipped, but it is harder to know how quickly they go online at the cloud. Consumers also drive the average capacity per drive.

PC demand feels better, particularly in client, but also across-the-board. On the other hand in the past 5 years it has felt better a few times, then dampened. So we remain cautious about production plans; we can always flex to the upside.

Expenses this quarter? We expect expenses to come back down, but we want to continue to make some investments. There were some expenses this quarter that should normalize in the future.

SSD? We look at it as a portfolio, with both pure SSD and hybrids. We are making serious investments in our organic SSDs and are getting design wins. We can't announce new wins yet for competitive reasons.

Cash priorities in calendar 2014? Both dividend and buy-back programs will be active, but we note our stock price has gone up substantially. We still are committed to a 70% return (of operating cash flow) this year, but have not decided on the ratio between dividends and buy-backs, and may want to invest in strategic IP.

Cash flow? Should stay in the same range as the last several quarters.

If storage demand grows as we expect, at some point the industry will have to invest to create more production capacity. Density is increasing at about 20% per year, vs. a 30% increase in storage demand.

SMB and NAS markets? Strength in branded NAS in quarter. We were late in one critical ramp, the high end, which would have helped. We have now got that up.

Consumer branded personal cloud? Consumers are very interested in NAS solutions at the home level. There will be product announcements around that. We announced a wireless drive and expect that category to continue to grow. Direct attached storage is still the bigger part of that segment. The attach rate for tablets is growing, one study showed at 50%. Mobile devices obviously need some external storage, even for those who can afford high gigabyte tablets.

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Copyright 2014 William P. Meyers