Analyst Call Summary

conference date: April 17, 2014 @ 6:00 AM Pacific Time
for quarter ending: April 3, 2015 (fiscal third quarter, Q3 2015)

Forward-looking statements

Overview: Revenue decline y/y as PC industry continues to shrink. Missed guidance, but beat the Street's expectations.

Basic data (GAAP):

Revenue was $3.33 billion, down 10% sequentially from $3.70 billion in and down 2% from $3.41 billion in the year-earlier quarter.

Net income was $291 million, down 69% sequentially from $933 million, down 26% from $395 million year-earlier. But sequential drop inflated by $620 million legal settlement in Q2.

Diluted EPS was $0.88, down 68% sequentially from $2.78 and down 25% from $1.17 year-earlier.

Guidance:

Overall trends are good, but expects Europe to be a challenge in 2015. Visibility is poor.

June (fiscal Q4) quarter addressable market (TAM) is expected to be flat compared to the March quarter. Revenue target is $3.2 billion to $3.3 billion. If back to school demand is better than expected, there could be upside to the forecast. Margins about 28.5%.

Believes demand will improve in the second half of the calendar year.

Conference Highlights:

“Near-term macro uncertainty is affecting certain areas of our addressable market however we remain optimistic that market demand for exabytes of storage will continue to increase over the long-term. Looking ahead, we are focused on aligning our storage technology portfolio effectively to capitalize on market growth opportunities, demonstrating operating profitability and returning value to shareholders.”

Decline of PC unit sales in the quarter was greater than Seagate's earlier expectations, particularly in EMEA (Europe, Middle-East and Africa). Demonstrated expense discipline and the result was sequential margin improvement. Inventories are within manageable levels.

55 exabytes total storage shipped in quarter. Average over 1 terabyte per drive and up sequentially.

Seagate is refreshing its HDD and SSD product portfolio. Density improvements in HDDs are continuing. SSD adoption is good, including application-specific tuning for datacenters. Seagate is helping to build the fastest storage system in the world for one customer.

Non-GAAP numbers: net income was $357 million, down 21% sequentially from $452 million, and down 21% from $453 million year-earlier. EPS was $1.08, down 20% sequentially from $1.35, and down 19% from $1.34 year-earlier. Gross margin 28.9%, up sequentially from 28.2%.

Cash and equivalents balance ended near $2.6 billion. Operating cash flow was $374 million. Free cash flow was $215 billion. Repurchased shares for $706 million. Paid out $176 million in dividends. Long term debt is $3.9 billion. Inventories ended at $1.1 billion.

Cost of revenue was $2.38 billion. Product development expense was $346 million. Marketing and administrative expense was $219 million. Amortization of intangibles was $33 million, restructuring $14 million. Leaving income from operations of $343 million. Interest and other expense $39 million. Income tax $13 million.

Q&A:

TAM in March quarter? We believe we held share of 40% in the quarter, so TAM would be 125 or 126.

PCIE market vs. SAS and SATA? We are finding the people who buy PCIE drives want their applications accelerated in a very specific way. Getting design wins requires working closely with customers. The market for SATA and SAS is also healthy. Going forward just plugging something new into old slots is not going to work; you need tuning for the application. Past projections for PCIE were probably over-optimistic for the industry as a whole, but we are doing well.

Cloud expense optimization? Over one to three quarters we will see what the potential is on the CSS business. Margins can be improved because the business was not that efficient when we bought it. We believe we can improve margins in this particular business for another one to two years.

Pricing, given the weakness of the market vs. expectations? Pricing was about as expected in the quarter, and the mix improved. Cloud was up y/y, and enterprise was stable.

Any acquisition activity would be likely to improve internal efficiency, or margins, or broaden our markets.

Margin decline in guidance? We are operating the factories leanly, which leads to higher margins. But we can quickly respond to better than expected demand, which would mean higher utilization and margins. "We are just going to manage supply really tight this quarter."

Flat TAM for Q4, breakdown? All the segments look flat to us. If there is upside, it is probably in PCs, depending on OEM confidence in back to school sales. OEMs appear to have drawn down their inventories in the March quarter, so they may need to increase production in the June quarter. Cloud demand can be lumpy, but we expect it to be flat.

Windows 10? It should be a benefit, but the timing is unknown right now.

Hyperscale customer visibility in second half? The major global providers are strong in their plans for capital expansion in the second half of the year.

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