Analyst Call Summary

Seagate Technology

conference date: January 26, 2015 @ 6:00 AM Pacific Time
for quarter ending: January 2, 2015 (fiscal second quarter, Q2 2015)

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Forward-looking statements

Overview: Good quarter demonstrating y/y revenue growth. Gain on arbitration award of $620 million, taken off operating expenses, skews some GAAP numbers.

Basic data (GAAP):

Revenue was $3.70 billion, down 2% sequentially from $3.79 billion in and up 5% from $3.53 billion in the year-earlier quarter.

Net income was $933 million, up sequentially from $381 million, up from $428 million year-earlier. But inflated by $620 million legal settlement.

Diluted EPS was $2.78, up sequentially from $1.13 and up from $1.24 year-earlier.


Optimistic overall for demand in 2015, despite global volatility including exchange rates. The March quarter is expected to be seasonally down. There are some supply challenges. There is some pricing pressure in enterprise.

March quarter revenue expected to be at least $3.45 billion, with at least a 28.5% gross margin. Op ex $570 million. Investing in new products and market adjacencies.

Conference Highlights:

Good quarter was result of "consistent execution and our solid competitive positioning in the storage technology marketplace," said CEO Steve Luczo. Revenue was in line with expectations.

Rebranding Seagate as the "Living Logo." Launched world's slimmest drive at 7mm. Also introduced new devices for the Cloud and NAS markets.

Hard drive average unit prices increased sequentialy to $61 from $$60, but were down from $62 year-earlier. Storage in bytes grew 17% y/y. Share of HDD market was 40%, about in line with past results. The number of desktop units declined y/y while notebook units rose.

Non-GAAP numbers: net income was $452 million, down slightly sequentially from $453 million, but down 1% from $455 million year-earlier. EPS was $1.35, up slightly sequentially from $1.34, and up 2% from $1.32 year-earlier. Gross margin 28.2%, up sequentially from 28.1%. Major adjustments to GAAP were: $620 million arbitration award, $181 million income tax expense, $104 million other excluded income; $32 million amortization expense; and $14 million excluded cost of revenue.

Adjusted EBITDA was $682 million.

The arbitration award amount from Western Digital was $630 million. Litigation costs were 10 million. Accrued interest was $143 million. A partial payment of $773 million was received from Western Digital.

Cash and equivalents balance ended near $3.3 billion. Operating cash flow was $1.4 billion (including the legal award). Free cash flow was $1.23 billion. Repurchased shares for $18 million. Paid out $177 million in dividends. Long term debt is $3.9 billion. Inventories ended at $1.13 billion.

Cost of revenue was $2.67 billion. Product development expense was $341 million. Marketing and administrative expense was $218 million. Amortization of intangibles was $32 million, restructuring $3 million. Gain on arbitration award $620 million. Leaving income from operations of $1.05 billion. Interest and other income $73 million. Income tax $193 million.

The dividend of $0.54 per share wil be payable on February 24 to shareholders of record on February 10.


Pricing environment in enterprise? It is not just the cloud space. It is relationships between the client and cloud space. Client pricing is aggressive. There is not room for price reduction in parts in client. Long term the shift to high end requires more testing and heads per device, which requires higher margins to fund the changing mix. The pricing competition does not seem sustainable, given the need to invest for future production.

We have a couple of cloud products that are effectively sold out already for the rest of the year. There has been some firming of cloud pricing in the last few weeks.

Client space, desktop vs. notebook? It is in flux. As we left December we were discouraged by the lack of momentum in the client space. At this point it seems desktop demand is doing better than notebook, reversing the trend of last year. "I think the price erosion has got to stop."

In Cloud they would take higher capacity drives if we made them. But our cloud business is dilutive to gross margin.

Will TAM in calendar 2015 grow, and where? Low single digit growth over the year, but March will be the worst, due to the client segment. In 2016 we will see a smarter client; the machines of value creators have to get more powerful.

We need a higher margin to make the investments necessary as demand shifts from the cloud to the client.

Why so little stock buy back in December quarter? With the stock at sub-$60 we were buying. We are opportunistic buyers. We will continue to do buy backs in 2015. Below $60 is pretty attractive.

Two of our competitors are battling for share in the retail space; we are walking away and selling elsewhere.

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Copyright 2015 William P. Meyers