Analyst Call Summary

conference date: July 30, 2012
for quarter ending: June 29, 2012 (fiscal fourth quarter, Q4 2012)

Forward-looking statements

Overview: Record fiscal Q4 revenue. Increased the dividend.

Basic data (GAAP):

Revenue was $4.48 billion, up 57% from $2.86 billion in the year-earlier quarter.

Net income was $1.01 billion, up drastically from $119 million year-earlier.

EPS was $2.37, up from just $0.27 year-earlier.

Guidance:

In September quarter, conservatively aligning business for relatively flat demand sequentially, with continued improvement in the average capacity per drive. $4.0 billion revenue. Believes December quarter is expected to improve over September quarter.

Conference Highlights:

Did not meet their revenue and margin plan for the quarter because the hard disk drive industry recovered faster from supply chain disruption that expected. There was also an isolated supplier issue for an enterprise product that caused 1.5 million lost unit sales, or $0.48 per share. Despite that revenue and unit shipments of 66 million were a record for the June quarter. Demand was lower than expected and so supply and demand came back into balance earlier than expected.

Cash and equivalents balance ended at $2.2 billion, up $67 million in the quarter. Cash from operations was $1.4 billion, free cash flow was $1.3 billion, dividends paid were $106 million, and $1.2 billion was used to repurchase shares.

A dividend of $0.32 per share will be paid on August 29 to shareholders of record on August 14. The prior dividend was $0.25 per share.

Non-GAAP numbers: gross margin 33.6%, net income $1.03 billion, EPS $2.41.

During the quarter Seagate shipped about 65.9 million drives, or 42% of the total global shipments of 157 million. Enterprise class shipments increased 9% y/y driven by cloud infrastructure build outs. Client compute shipments were up 30% y/y, including 22.4 million mobile and 23.9 million desktop hard drives. Non-compute units increase 24% y/y to 11.2 million.

In May Seagate introduced the first 12 Bb/s SSDs. For HDDs as well there has been a transition to newer technologies, including 7 mm, and Seagate believes it is leading that transition. 3rd generation hybrid drives will be introduced in the fall.

Units shipped by market: enterprise 8.5 million, client compute 46.3 million, client non-compute 11.2 million. Believes will regain enterprise market share now that the supplier problem is solved.

OEMs accounted for 74% of revenue, distribution for 19% and retail for 7%.

Revenue by geography: 26% North America, 18% Europe, 56% Asia Pacific.

Cost of revenue was $2.998 billion. R&D expense was $269 million, marketing and administration $140 million, and amortization of intangibles $18 million. Leaving GAAP income from operations of $1.06 billion. Interest and other expense was $44 million. There was no provision for income taxes.

Reducing share count through buy backs to 350 million shares by the end of the year, and 250 million by end of 2014, and planning to continue to increase the dividend over time.

Q&A:

$0.48 per share due to supplier problem? We caught the problem in extensive stress tests, so we protected our customers. But it will take two or three quarters to regain share.

Capital expense? We are through most of the technology transition and don't see a need to supply capacity given the current economy.

Market share? We don't see any major disruption of the current market share situation. Of course we would like more market share.

Reason for low revenue guidance for September quarter? Pricing has been relatively benign. It is more of a mix issue. OEMs have mixed down to maintain their budgets in this higher post-flood price environment.

SSD strategy? We feel good about our approach. It is not a terribly attractive market so far on a profit basis. We believe it is a 2015 story in the enterprise market. We are happy with the Samsung controller we are developing with them. DenseBits controller technology has the potential to reduce the Flash costs in both enterprise and client SSDs.

ASP [price] declines assumed in guidance? Less than 5%.

Samsung contribution? We were operationally integrated by December. For sales it is a separate entity. We are not breaking out Samsung units.

Our goal with hybrid drives is to increase hdd performance. There will be all sorts of different versions of Flash plus hdd.

Inventory management is going to be important in the next couple of quarters, but it is about matching supply and demand. Our inventory is new technology that should be good for a couple of years.

If there is more demand than we are projecting we can easily chase the upside.

OEMs have asked for exclusivity for the hybrid drives, so they can't get both that and redundancy with a second supplier.

Can you reconcile the $17 billion full year, which would imply just $4 billion in December quarter, with your statements about a stronger quarter? I said "at least" 17 billion.

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