Analyst Call Summary

conference date: October 27, 2014 @ 6:00 AM Pacific Time
for quarter ending: September 27, 2014 (fiscal first quarter, Q1 2015)

Forward-looking statements

Overview: Outstanding quarter, far better than guidance. But margins declined y/y.

Basic data (GAAP):

Revenue was $3.79 billion, up 15% sequentially from $3.30 billion in and up 9% from $3.49 billion in the year-earlier quarter.

Net income was $381 million, up 19% sequentially from $320 million, but down 11% from $427 million year-earlier.

Diluted EPS was $1.13, up 19% sequentially from $0.95 but down 3% from $1.16 year-earlier.

Guidance:

Q4 approximately $3.7 billion revenue. Margins should rise slightly sequentially. Op ex $555 million

Conference Highlights:

Market demand for PC, gaming and Cloud storage products was better than expected. "We remain confident in our cash flow generation and the opportunities ahead for Seagate as evidenced by our recently announced target annual dividend increase of 26% to $2.16.” But most of the unit upside was from the low end of the market, affecting margin.

Shipped nearly 60 exabytes in the quarter, and average unit size exceeded 1 terabyte for the first time. Avago flash assets acquired are performing well.

Sold over 12 million hybrid drives to date.

Believes demand trend to remain healthy across most end markets.

Will be investing in 2015 for growth opportunities in 2016 and beyond.

Inventory is at a manageable level.

Non-GAAP numbers: net income was $453 million, up 22% sequentially from $370 million, but down 4% from $473 million year-earlier. EPS was $1.34, up 22% sequentially from $1.10, and up 4% from $1.29 year-earlier. Gross margin 28.1%.

The decline in net income y/y despite the increase in revenue was due to higher y/y operating costs and cost of goods sold.

GAAP gross margin was 27.8%.

Cash and equivalents balance ended near $2.2 billion. Operating cash flow was $602 million. Free cash flow was $ million. Repurchased shares for $183 million. Paid out $140 million in dividends. Long term debt is $ billion. Inventories ended at $1.07 billion.

Cost of revenue was $2.73 billion. Product development expense was $342 million. Marketing and administrative expense was $216 million. Amortization of intangibles was $31 million, restructuring $6 million. Leaving income from operations of $456 million. Interest and other expense $64 million. Income tax $11 million.

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

A cash dividend of $0.54 will be payable November 25 to shareholders of record on November 11, 2014. Exceeding prior plan for dividend increases, and used some of the Western Digital settlement.

Q&A:

I am calculating flash revenue at over $200 million? We did not break through $200 million [but did with systems business plus LSI acquisition], but the momentum is good. There will be pressure this fiscal year, but next year should be gross margin accretive.

PC market strength? Demand has been pretty good, inventories are pretty good, so we currently don't see any stress on the system.

Hybrid drive color? We were excited to see hybrid success across consumer and enterprise lines. We shipped over 3 million hybrid drives in the reported quarter. It is led by the client end, midrange-desktop, but also in cloud and enterprise. Hybrid gives cloud providers a competitive advantage.

Enterprise, hyper-scalers in 2015? We are cautiously optimistic. We saw very good results from major OEMs into the cloud category.

TAM for December quarter is expected at 145, about the same as September quarter. We would expect gaming to be down a little bit, with consumer up a little bit.

The view that Cloud strength means client storage goes away has been disproved at this point.

Could hyper-scale cloud become less lumpy as you get a larger number of that type of customers? There has been lumpy, but over the years there has been growth. The biggest cloud providers are still driving a lot of storage, but as multiple smaller providers ramp it should smooth out.

Cluster store and stratus store, the high-end business, were up 18% y/y. We see at least 8 quarters of continuous growth at this point.

Controllers from Samsung/Seagate controllers for hybrid? Our hard drive controllers are developed in house, including the ones for hybrid. We do use merchant controllers in other areas. The key to the hybrids is firmware that maximizes flash uses.

Later Chinese New Year this year? Not much of a factor.

Can we get back to a 28.5% gross margin? That would be the sweet spot. The market mix should help move us towards that this quarter, offset by investments in new business.

14 week quarter, how much of a boost for September quarter was that? We did see some tapering off in the last week of the quarter, the OEMs tend to buy by quarter not week, but it does increase the expense.

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