Analyst Call Summary

conference date: May 1, 2013 @ 2:00 PM Pacific Time
for quarter ending: March 29, 2013 (fiscal third quarter, Q3 2013)

Forward-looking statements

Overview: Revenues dropped substantially y/y.

Basic data (GAAP):

Revenue was $3.53 billion, down 4% sequentially from $3.67 billion and down 21% from $4.45 billion in the year-earlier quarter.

Net income was $416 million, down 15% sequentially from $492 million, and down 64% from $1.146 billion year-earlier.

Diluted EPS was $1.13, down 13% sequentially from $1.30 and down 55% from $2.48 year-earlier.

Guidance:

Unit demand in fiscal Q4 (June quarter) expected down slightly sequentially. Revenue range $3.30 to $3.45 billion. Non-GAAP gross margin flat. Operating expenses flat.

Conference Highlights:

Results reflected strong execution. Cloud storage technology is now the leading opportunity. Returning value to shareholders is a top priority. A dividend of $0.38 per share will be payable May 29, 2013 to shareholders of record as of May 15, 2013.

Non-GAAP numbers: net income $464 million, EPS $1.26.

GAAP gross margin 26.9%. Non-GAAP gross margin 27.6%

Visibility is limited due to macroeconomic conditions and technical transitions among core customers. March quarter demand was slightly higher than expected. ASPs increased slightly on better product mix.

Over 47 exabytes of storage shipped in quarter, with 842 GB per drive average capacity.

Spending to be able to cover the storage spectrum including hybrid drives and SSD. But planning cautiously.

Cash and equivalents balance ended near $2.0 billion. Operating cash flow was $678 million. Repurchased 3 million shares for $102 million. Redeemed $379 million of long-term debt. $221 million capital expense.

2013 is on track for total demand to hit 500 exabytes. A a result more investment in heads and disks will be necessary. Believes PCs and mobile devices will continue to drive storage growth.

Cost of revenue was $2.58 billion. Product development expense was $294 million. Marketing and administrative expense was $168 million. Amortization of intangibles was $20 million, restructuring $1 million. Leaving income from operations of $465 million. Interest and other expense $16 million. Income tax provision $14 million.

Q&A:

Pricing? Benign, below historical rates. Mix was helpful with more business-critical drives. Believes pricing will be benign in June quarter. Notebook pricing actually rose.

The industry is bumping up against its capacity. The main trend is the shift of storage to the cloud. There might be tight capacity in the last half of the year.

Aerial density is not growing as fast as demand, which would cause the constraints.

Buy back dynamics? We are committed to the 2014 250 million share target. We are committed to the dividend.

Portable devices with HDD or hybrid? The tablet evolution is resembling the netbook evolution. They keep adding things to the tablets, like keyboards and HDD. So we believe penetration rate will go up in the space.

OEMs 5 mm vs. 7 mm? They are far different devices. Either could go into a thin and light notebook. 5 mm will start in the tablet market.

Lack of cloud visibility may indicate we are going to get a larger buildout. The overall macroeconomic visibility is due to multinational hesitancy over government deficits.

Market research indicates attach rates are going up for mobile devices. We don't see any issues with inventory at hubs or channels.

Cloud share? We believe we are at standard enterprise share against our competitor, and in some cases in a preferred position.

Annualized free cash flow generation? Committed to dividend plan. To get to 250 million shares the repurchases will be somewhat lumpy. Our business will support that level. Cap ex vs. return of capital shift won't be until the end of this year, due to the uncertain environment. If we get a higher-than-expected TAM the cash flow could grow above the current rate.

Interest and taxes? Just take $5 million out of interest due to debt repayment. Tax rate is variable, just use $15 to $20 million. Share count flat for June quarter.

Drivers for above-seasonal performance, are they sustainable? Consumer electronics (CE) and cloud were drivers for performance in the March quarter.

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