Analyst Call Summary

Seagate Technology
STX

conference date: January 28, 2013 @ 2:00 PM Pacific Time
for quarter ending: December 28, 2012 (fiscal second quarter, Q2 2013)


Forward-looking statements

Overview: Continues to generate cash and had revenues well above prior guidance.

Basic data (GAAP):

Revenue was $3.67 billion, down 2% sequentially from $3.73 billion but up 15% from $3.19 billion year-earlier.

Net income was $492 million, down 15% sequentially from $582 million, also down 13% from $563 million year-earlier.

Diluted EPS was $1.30, down 8% sequentially from $1.42, but up 2% from $1.28 year-earlier.

Guidance:

March quarter (fiscal Q3) revenues $3.25 to $3.45 billion. At low end of guidance can maintain 27% gross margin. Flat non-GAAP operating expenses. Capital expenditures are for maintenance and technology transitions, under 8% of revenue.

Optimistic about second half of calendar 2013.

Conference Highlights:

Operational execution was good within a difficult demand environment. Industry-wide HDD shipments declined 3% sequentially in Q4, mainly in the notebook market. Seagate market share grew. Inventories declined to $800 million from $909 million in the June quarter.

Non-GAAP numbers: gross margin sequentially from 29.0%, net income $523 million, down 12% sequentially from $594. EPS was $1.38 down 7% sequentially from $1.45. Gross margin 27.6%.

GAAP gross margin 27.0%.

58 million units shipped.

Plans to offer solution for the fast growing PCIe market. Continues to invest in SSDs and software.

Cash and equivalents balance ended at $2.0 billion. $844 million operating cash flow. $1.1 billion returned to shareholders through dividends or share buy-backs. The $0.38 per share dividend was paid early, on December 28, 2012, rather than in the March quarter.

There was a $21 million benefit from legal cost reimbursement.

Cost of revenue was $2.68 billion. Product development expense was $277 million. Marketing and administrative expense was $139 million. Amortization of intangibles was $20 million, other expense 1 million. Leaving income from operations of $555 million. Interest and other expense $56 million. Income tax provision $7 million.

Q&A:

Enterprise segment? End demand continues to increase due to cloud deployments. We did execute well in the quarter.

LTA impact? They provided favorable pricing to the OEMs to align longer term purchases to supply. No great impact seen from LTA agreements.

TAM (total addressable market)? Heads and disks are being absorbed on a per platform basis. So a flat TAM is not so injurious. We are not yet considering any reduction in the scale of our production capacity.

We feel very good about our enterprise SAS SSD position, and in PCIe. We want to offer a complete platform for SSD. We have a strong development initiative going forward for everything from the client to massively scaled data centers.

You are guiding revenue 9% down, versus 3% down for Western Digital? For us, we were at high end of market share in December quarter. We may be a touch more conservative in estimating TAM than our competitors, or may see a small market share loss.

Average capacity per drive trends? If we go back 4 years, average capacity has gone mid 30s to mid 50s. We drive density, a mid-60s average capacity would reflect that. "I don't see it slowing down," if the cost of silicon and software continues to decline. We see another billion customers globally, higher video frame rates, etc., all pushing storage need.

Brazil situation effect on margin? It was minor, we put a plan in place to take care of it.

Virident acquisition? We invested in Virident, we did not acquire. Based on 3rd party benchmarks, they can exceed key specs of competition. We can drive their cost structure down.

Shift to hybrids should not affect gross margins, from a manufacturing perspective. Currently a lot of thin and light notebooks have SSDs that could be converted to hybrids, which would be just as fast but much higher capacity and lower-priced. We think tablets will move to hybrid drives because SSDs limit you to storing a couple of movies.

Cloud Builder Alliance revenue? We don't get direct revenue from that, we just help them align technology with the market. The cloud is one of our key initiatives.

Notebook shipments down 2 quarters? We have low notebook inventory, the customer inventory balances are also low, so the question is when will the new OS gain traction.

Dividend plans? Nothing different than we have already disclosed.

By 2015, we believe the petabyte demands will require a resurgence in HDD demand, so we don't want to cut back on our manufacturing infrastructure during this soft period.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2013 William P. Meyers