Analyst Call Summary

conference date: July 31, 2015 @ 6:00 AM Pacific Time
for quarter ending: July 3, 2015 (fiscal fourth quarter, Q4 2015)

Forward-looking statements

Preview: Preliminary Q4 2015 results release [July 13, 2015]

Overview: Weak revenue and very weak EPS. Weak September quarter guidance.

Basic data (GAAP):

Revenue was $2.93 billion, down 12% sequentially from $3.33 billion, and also down 12% from $3.30 billion in the year-earlier quarter.

Net income was $138 million, down 53% sequentially from $291 million, down 57% from $320 million year-earlier.

Diluted EPS was $0.43, down 51% sequentially from $0.88 and down 55% from $0.95 year-earlier.

Guidance:

September quarter (fiscal Q1 2016) is expected to have a "relatively flat business environment." Revenue $2.9 to $3.1 billion. Margins relatively flat sequentially. Expects to exit quarter with less than 300 million shares outstanding due to buy-backs. Operating expenses near $515 million, and trending lower after that.

Target for EPS growth in 2016 is 10%.

Conference Highlights:

52 Exabytes shipped (up 5% y/y) at average of over 1.1 Terabytes per drive. Reduced inventory by 8% sequentially. PC system demand remained weak.

In the quarter Seagate introduced a 4TB 2.5" external hard drive. Four governmental customers of Cray committed to about 120 petabytes of Seagate storage. HAMR technology was demonstrated. A new facility to produce 2.5" drives was opened in Singapore.

Non-GAAP numbers: net income was $250 million, down 30% sequentially from $357 million, and down 32% from $370 million year-earlier. EPS was $0.77, down 29% sequentially from $1.08, and down 30% from $1.10 year-earlier. Gross margin 27.2%, down sequentially from 28.9%.

Cash and equivalents balance ended near $2.48 billion. Operating cash flow was $228 million. Free cash flow was $27 million. Repurchased 3.2 million shares for $180 million. Paid out $171 million in dividends. Long term debt is $4.16 billion.

Cost of revenue was $2.15 billion. Product development expense was $324 million. Marketing and administrative expense was $203 million. Amortization of intangibles was $34 million, restructuring $9 million. Leaving income from operations of $206 million. Interest and other expense $57 million. Income tax $11 million.

Will give a strategic update on September 2.

Q&A:

Ending share count for the June quarter? 315 million actual shares outstanding.

Gross margin drivers? The biggest change was absorption. We ran the factories lean and had inventories about 35% below the competition. For non-HDD, about $250 million, our margins are below the corporate average, as are our competition's.

Non-HDD, what products were doing better? We saw some softness in the system business. Our flash business is a growth driver in the system space. We are working to improve margins.

Ability to react to any upside in demand? On the client side it is pretty easy, the lead times are within the quarter. On near-line drives the lead times are longer so responses to increased demand are slower.

We are going to take actions so op ex will be under $500 million per quarter by the end of this calendar year.

We believe there will be new classes of clients that will require more storage, so we have no reason to reduce capacity at this time.

Helium need? 10 Terabytes, but we are just leaning into the 6 TB and 8 TB right now.

Exabyte growth view? Client side the next 18 to 24 months will be a tough market. Trend to big phones may benefit notebooks (as tablets are dropped). Then new clients may kick in that need HDD. On enterprise side legacy has marched along at better-than-expected rates. Near-line growth (including cloud) demand is growing rapidly. Datacenters are still showing Exabyte growth. On the whole we see Exabyte growth exceeding increases in areal density.

Controller business, is that a core asset or could it be divested? They are great technologies that result in sticky customer relationships. Our controller technology can be applied to whoever has the best flash.

Hyperscale demand? We are still feeling it is a 60/40 year. It feels flat to us right now for the second half of this year, but with near-line stronger.

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