Analyst Call Summary

conference date: July 17, 2014 @ 2:30 PM Pacific Time
for quarter ending: June 27, 2014 (fiscal fourth quarter, Q4 2014)

Forward-looking statements

Overview: Slight revenue and net income decline from year-earlier, but still generating a lot of cash flow. EPS was up y/y due to share buy backs reducing share count.

Basic data (GAAP):

Revenue was $3.30 billion, down 3% sequentially from $3.41 billion in and down 4% from $3.43 billion in the year-earlier quarter.

Net income was $320 million, down 19% sequentially from $395 million, and down 18% from $348 million year-earlier.

Diluted EPS was $0.95, down 19% sequentially from $1.17 but up 1% from $0.94 year-earlier.

Guidance:

Q1 (September quarter) revenue is expected to be at least $3.55 billion. Product gross margin about flat sequentially. $550 million operating expense, slightly above target range, with $35 million in expense due to 14 week quarter and other charges, including integrating acquisitions.

Conference Highlights:

Seagate believes the storage industry is being disrupted, but that will "continue to create more opportunities for Seagate." Optimized Seagate's capital structure in the fiscal year.

Continues to make investments and acquisitions to build out Seagate storage offerings. First quarter for cloud storage and solutions business, exceeded the internal revenue plan. Introduced new NAS devices, Kinetic Open Storage, ClusterStor, OneStor, and Wireless Plus mobile storage devices in the quarter.

Demand trends strengthened, and are continuing to strengthen, across multiple segments. This includes a higher capacity per drive in July. In the September and December quarters Seagate expects strength in the cloud market, the enterprise market, and the notebook market, as well as the usual seasonal boost in demand for gaming and branded. Industry estimates for market demand are 142 to 146 million units in the September quarter. Plans to ship over 2.5 million hybrid drives in the September quarter.

Non-GAAP numbers: net income was $370 million, down 18% sequentially from $453 million. EPS was $1.10, down 18% sequentially from $1.34. Gross margin 28.5%. Adjusted EBITDA was $613 million.

GAAP gross margin was 28.0%.

Cash and equivalents balance ended near $2.63 billion. Operating cash flow was $577 million. Free cash flow was $446 million. Repurchased shares for $ million. Paid out $ million in dividends. Long term debt is $3.92 billion. Inventories ended at $985 million.

Weighted average interest rate on debt is now 5%.

Cost of revenue was $2.38 billion. Product development expense was $323 million. Marketing and administrative expense was $161 million. Amortization of intangibles was $27 million, restructuring $4 million. Leaving income from operations of $410 million. Interest and other expense $126 million. Income tax benefit $36 million.

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

Completed Xyratex acquisition for $374 million on March 31. This should be accretive in its first full year. Announced acquisition of Avago SSD assets.

A cash dividend of $0.43 will be payable on August 22 to shareholders of record on August 8.

Q&A:

Debate about sustainability of PC strength, demand in July for commercial desktop? We are seeing strength across all the segments.

What is driving the expected strength in the back half? Most of our customers would attribute it to global macroeconomic strength.

Stock buy back plans in second half of year? We will talk about that at our strategic update in September.

The $35 million of the $550 million in the guidance is one-time; it would not be included in the run rate. By fiscal Q2 we should have a better idea of the run rate, with the acquisitions somewhat integrated by then.

The 14th week ads operating expense, but not 1/14 revenue increase because most of our customers order quarterly without regard to the number of weeks.

Mass market, SOHO opportunity? To be a significant contributor the software would have to be easier to use. We are trying to solve that problem. It is an attractive market, it is something like a billion dollar market.

How is the acquired SSD technology complementary to Seagate? The knowledge you get from integrating with various customers is powerful, helping us to address both spaces (HDD and SDD). This is really a NAND Flash controller that would help us on our hybrid drives.

We will be introducing additional, more complex NAS devices that address the difference between consumer and small home business needs.

Xyratex revenue contribution in the quarter? We are doing well with ClusterStor. We are winning some very big contracts with governments and oil & gas companies. We are also doing well with cloud storage providers. We are certified for the most secure storage products for the U.S. intelligence industry. E-Vault also did well. It is fair to say that the contribution in the quarter was greater than $100 million, but we are not breaking it out yet.

We expect branded retail pricing to remain relatively stable as price competition has become less aggressive.

Better visibility you reported from customers? There is a greater degree of confidence globally about what demand will be in the next few quarters. We have not seen that in years. We are seeing more efficient shipping patterns and inventory systems by our key partners.

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