Morning, everyone. It's great to be here. So rumor has it that Tim Cook's in the building and made me think about the Apple announcement. And the team and I were talking beforehand, how do you top U2 and Bono and how can we get someone or a band or something here to make it exciting for everyone. And Jamie Lerner, our new guy says, well, the New York crowd is really smart.
You should get someone really smart and that's respected intellectually like a Princeton graduate or even a Rhodes Scholar, I mean, we could find someone like that. And Pat being the sports freak said, no, no, no, we need an athlete, an athlete with integrity. So you can get the Princeton guy if you want, but you need an athlete and should be a Hall of Famer and a World Champion. And if you could have it be a New York person like a New York Nick, that would be great. Mosley International guy says, no, no, no, no, no.
We need someone with international gravitas experience, a senator, someone was on the foreign policy commission or even a presidential candidate. And I think, guys, we can't afford that many different people. Bill Bradley is in the house. Ex, Kate was going to introduce him as a former Seagate Board member, Bill Bradley, which I thought that be the pinnacle of your achievements Bill. But thanks for being here and Mike and Chris thanks for being here.
And all of you, thanks for being here. Kate gave a good summary of what we're trying to accomplish today, but we thought we would just start a little bit with what's going on in the business today. It's always a funny time to be doing this event kind of 3 quarters of the way through the quarter and it's always an important quarter September. In the last 2 years, it's been a kind of a tricky time to be here in terms of one was coming out of the flood recovery and last year was still kind of what's going on in the PC industry. There's a lot more relaxing coming here this quarter, because business is really strong across all segments.
And you've heard us talk about this, I think, last couple of conference calls, especially coming out of the March quarter, where we felt like there was real traction beginning in the world. And then on the June quarter, I indicated that I felt it was really the first time in 5 years that it felt like the traction was sustainable through the calendar year. And we were kind of reserving judgment because we're always worried about what was going to happen in May June came very strong. And then September has continued strong and now we're getting good visibility in the December quarter. So I feel even more confident that this is kind of real global growth and sustainable kind of beyond just a 1 quarter event.
So for us, we gave some guidance for the September quarter and the revenue guidance was I think 35, 50. We believe those revenues that will exceed by at least $100,000,000 more than that. And we expect that the good business environment going to continue into the December quarter. So I want to make a little pause because this isn't really about tactical quarter stuff, but we knew those types of questions around people's minds. And just leave it for a couple of minutes of Q and A right now about tactical issues, and then I'd like to shift everybody's attention to the purpose of this meeting, which is more about strategy.
So if there's any questions? Sure. And there's mics actually. So let's
Hi, Katie here, Morgan Stanley. It's somewhat topical because in the last few days, the ODMs are actually talking about order cuts in the PC supply chain for the Q4. And so what do you think the disconnect is between the visibility you see and what might be going on elsewhere in the supply chain?
Well, I don't know what which specific OEMs you're talking about or what they're calling PCs, but across the board, we see pretty good strength across every segment. So there seems to be a resurgence in the notebook space. So they may be calling PCs desktop. I think if you look at the details between the first half of the year and what seems to be playing out in the second half of the year, I think the first half of the year desktop was stronger than people would have expected and notebooks were probably weaker. I think that's reversed.
They're both still growing, but I think maybe what happened with some the OEMs is they trended out the desktop growth for the second half based on what was going on the first half, that's probably not being realized, but the notebook growth is taking off. Net net though, it's growth across the board. So that may be the subtlety if they said PC, you don't know anybody means anymore when they say PC. I tend to think when people say PC, they refer to desktop more often than not as opposed to what we call clients. Client overall has been strong for the year, but there has been a shift between desktop and notebook on relative strength.
To me, what's curious about it is kind of the theme we laid out, which is the death of the PC March that occurred on the tablets where we said, no, this is just an ecosystem that's morphing and notebooks that went to phones, that went to tablets, that went to big phones. And we think that these gaps are sorting themselves out in terms of what kind of appliances the people really need. And that with a larger format phone and maybe even a higher functioning phone, the tablet maybe is taking a less
important role at this moment. And because of the
new designs on the notebooks that of refresh rate. So that may be the subtlety.
Amit Darianani, RBC Capital. I guess maybe just touch on what are you seeing on the enterprise side given the $100,000,000 upside you're talking about between hyperscale and the traditional enterprise guys? And given the revenue upside, do you expect gross margins to be better than the flattish that you've guided for?
Yes. I talked to revenue for a reason and that's the guidance that we're giving is that revenue will be higher. Mix overall is again, it's stronger across the board, but you're getting a balancing between a lot of mix on notebook, which would be lower margin, but we are getting mix up on enterprise as well, which is higher margin. So net net gross margins, I think, are going to probably be where we guided or in that general range, because it's an equal mix, if you will. But we have seen traction in the nearline business that we hadn't seen for of quarters.
And the legacy business has remained strong. And of course, we've been proponents that, again, it's not a net zero sum game about, oh, if the cloud's winning, legacy is losing because there are different applications that are being served and different customers that are being served. And what we're seeing is that the legacy business is strong, but we are seeing a regeneration of the cloud based business kind of to the theme that we talked about. Once people work through their efficiencies around either time to deployment or utilization that the real demand for petabytes was continuing to grow and I think people are starting to fulfill that now. So we're seeing growth across both segments.
Yes, and then we'll go to this side of the room.
Yes, thanks. Aaron Rakers at Stifel. So all of the comments that you've made around the demand environment brings us back to the capacity shift trends in the industry. It's been a little bit slower the last couple of quarters. With the comments that you're saying today, where do you think we reaccelerate to in terms of year over year growth in capacity shift?
And is there any updated thoughts with regard to the potential for the industry to see any tightness on finished media?
The so the capacity shifts are pretty dramatic this quarter. I think we ended fiscal year 2014 at something like just over 900 900 gigabytes for the year, and it was pretty steady throughout the year. I mean, it kind of had its fits and starts. But in that year, we had weeks where we shipped over a terabyte average capacity per drive, but maybe it was a couple of weeks out of a quarter and then it edged back down to average just over 900. We've been solidly over a terabyte this quarter.
I think all but two weeks have been over a terabyte and we'll probably finish that. I don't know what day we think a terabyte and a half or something like that. Yes, but it's pretty strong. In terms of and again, a lot of is because to the other gentleman's point, it's both in terms of what's going on in client and in the cloud. So the cloud companies are pulling a lot more 4 terabytes than they are 2.
But interestingly enough, the notebook business is really strong at 1. And then the client business, Katie is also really strong in 2, 3 and 4 terabytes. So it's interesting in terms of the overall lift of capacity. In terms of media, that's more of an issue around notebook. And because the only the biggest constraints are around glass and well, I guess, there's probably constraints on aluminum ultimately as well.
But on the glass substrate separate, that's where we would see the 1st constraint. And if business stays this strong, I think it's there'll start to be some challenges around glass substrates. And then a couple over here and let's get to the topic.
Yes, Mark Miller Noble. Yes, Mark. Couple of years ago you demonstrate the harm drive. I'm just wondering the status there. I've been hearing talk more from one of your competitors about a transitional new head technology.
I'm just wondering if this new I think you call it dual tracking type, Ed. I'm not sure. Are we going to see density reaccelerate and where is HAARP?
Dave is going to cover both of those topics in his presentation on technology. So I'll just defer to that. Great. And one more over here and then let's get rolling. Yes.
Right up here in front.
Thanks. Sherri Scribner from Deutsche Bank. Hi, Steve. You made some comments that December you expect strength to continue. If you look at the Street estimates, it's assuming that your quarter will be up sequentially in December.
Is that realistic considering we've got the extra week in September at this point?
Yes. I can't wait for the extra week to go away. The extra week thing is, I think, a little bit confusing only in that again, our OEMs don't have an extra week from their perspective. It's just a quarter. And since Seagate is relatively more weighted to OEM than our competitor, We feel that the 14th week net net is not clear to us.
It's a huge advantage. We may pick up incremental revenue in distribution, but of course, we carry the expense for the whole week. So I'm not going to make a big statement either way around it's the extra week, because I think the extra week is kind of irrelevant in both quarters. I think the potential in December is if the strength in the near line continues with this kind of base of client strength, then December is going to be, I think, an okay quarter. The problem with December is you never know if the year is going to end on December 15 or December 31.
And what's tended to happen though in periods of strength is it's carried on pretty solidly through the end of the month, in which case the industry does pretty well. In times of slowness, that's when people kind of shut the doors on 15th and say we'll see what happens. So right now, it's feeling like we'll have a full quarter, in which case December is usually a stronger quarter than September. So the other thing that's going on is Golden Week is at the end of this quarter too and there's lots of speculation around what does that mean. Is it good?
Is it bad? And it's like that's just micro stuff that is frankly irrelevant to the company on a long term basis, but might have some tiny effect one way or the other for this quarter or next quarter. Thanks. Okay. Thanks, everyone.
And then let's get on to the show, which again, what I'd like to do is just set the overall framework for how we're thinking about things strategically. The good news is we've reflected on the presentations over the last couple of years. And the trends that we set out a couple of years ago, we think actually have played out fairly consistently with what we with what we anticipated. The advantage, of course, that we have now is we have 2 or 3 years more data about what's really happening. So I think we have a greater confidence about what the opportunities are for the drive industry and for Seagate specifically.
And that's what we really want to articulate today. And that's really what's driven some of the activity that we've had around either organizational issues like bringing Jamie on to have the cloud business or acquisition activity in the last 6 months, which both Dave and Jamie will talk to both with the LSI acquisition and ZYRA TEX. But just to kind of frame it for you again, what we've tended to do is start this presentation with a review of the last 5 years of performance of the company, a 5 year over year view. So we've done this on a rolling basis effectively. And you can see that overall, the financial results have continued quite strong.
And if we took this back to fiscal 2017 to fiscal 2014, lots of different histories that was occurring in each one of those fiscal years or any one of the rolling 5 years therein. But the company's financial performance has thousand and 2007 and certainly we would say even against a lot of industries and certainly a lot of technology companies. So again, a lot of operating cash flow and good growth in earnings and really the capacity for DRiV issue does seem to be accelerating again, but even at 24%, for that time period that was in excess of aerial density capabilities. So as you all know, if we're driving capacity growth above aerial density, that's a situation that obviously allows us to absorb more heads and disc and for a manufacturing company, a good thing. Okay.
So just to frame what we think is going on strategically, this little visual, which we kind of continue to rework just sets our framework. So again, I just wanted to make sure that everyone in the audience has an understanding of how we think about what's going on in terms of IT trends and what the Seagate and really for the DRiV industry. And if we start at the top, cloud, I think, a few years ago was probably pretty obvious, but hadn't been widely deployed. Clearly, I think at this point, people accept that cloud architectures are going to be the architectures of the future. What does that mean scalable, reliable?
And the debates around is it going to be provided by OEMs, is it going to be provided by just a couple of cloud service providers, is it going to be all public, Is it going to be public and private? I think all these things are starting to resolve themselves fairly clearly now that there will be a mix of hybrid public private clouds. There will be a number of very large cloud service providers. There will be roles for the OEMs to play and there will be roles for distribution to play and there's going to be roles for startups to play. So from a Seagate perspective, it's more about do we have the capabilities both technically and go to market that allow us to engage with all of those players as they formulate their particular strategies for the end customers.
And both Dave's presentation and Jamie's presentations will take you through the details of what we're doing both at the device level or just above the device level or at the systems level to basically facilitate this trend towards a more scalable, reliable and cost effective architecture. Coming to the fore now is what I call software defined XSS that the concept of basically now having this XSS, that the concept
of basically now having this pool of assets whether or
not it's compute or storage or networking or application software and being able to dynamically manage that infrastructure. And that's a huge shift from when you had to deploy some particular rack with server and switch and storage with some piece of software to solve an application and an environment. And so only if an application was kind of at a certain scale that you get big economies and then the problem was if it scaled beyond that, you had a big step function investment that you had to undertake. The advantage that we have now is that those assets are just a pool of assets. With software, you can basically reallocate and re dimension the assets that you have dynamically to then either affect a particular application or workload or time or place.
And the efficiencies around that and the implications that has for cost of compute are significant. Cost of compute, we believe will now come down by an order of magnitude or more, which means application space and application availability explodes. As a device manufacturer, very important. So at the end of the day, if cost of compute comes down, hurdle rates get lower, more systems are basically deployed and basically more parts are needed. And it's not about the cost of the hardware, it's the cost of the running the hardware.
So it's that software and services labor on top of those core components that are really creating the opportunity. And this is why I think a lot of systems and service layer. And it's the integrator that basically has to reposition themselves to take advantage of the new environment. Mobile, obviously, just the ability to access data or entertainment or whatever or communications anywhere, anytime from our pockets, I think that's a fairly obvious trend that's with us, 2,500,000,000 or 3,000,000,000 connected users in the next couple of years is now not out of the question. A couple of years ago, it was a hope where we're going to get from $1,500,000,000 to $2,500,000,000 And again, the implications
dollars And again, the implications for
having these devices that require us to be able to access data readily or to basically do capture of high motion video and high content video and send it all over the world has enormous implications for storage away from what's in that little device. And we've said for a number of years, we continue to say our biggest concern about flash is not that they stay on the aerial density curve or the linear density curve they're on. Our biggest concern is they don't, because if they don't, then they don't continue to sell flash cheaper and cheaper, which means these devices won't have 128 gigs, which mean people won't take 4 ks video and capture it and throw it on a disk drive. The good news right now is people seem to be able to stay on the linear density curve, but it's getting harder. And so we watch that in terms of what is the implications for overall growth, but also is there a role for disk drives to play either in the high end with hybrid drives or in as a caching device throughout a network.
Consumerization of IT is this trend that says the infrastructure that's supporting compute used to be very well defined between what was deployed for commercial versus what was deployed for consumer. Those lines now are eroding rapidly and the infrastructure is being leveraged across both environments. And so that again has an implication for us as a device manufacturer. It has an implication for us now as a systems manufacturer. But again, the advantages of scale and leverage, I think, are the keys and it's one of the reasons that I think the cost of compute is coming down is because you get these applications that can initially be driven by consumers at very large scale and then deployed into enterprise more affordably.
Internet of Things, obviously, is the idea of expanding beyond the devices communications and compute capabilities in any number of devices. And then the explosion that that creates in terms of how do you manage it, how do you measure it, what happens with all the data gets collected, and what does that mean from an overall systems perspective and what does that mean from a device perspective. And then the final one, which we haven't really talked about before, but I think it's a trend that's emerging pretty quickly. World and the tech world are actually really intersecting now. And for those of us who've been doing this for a while, we've seen a couple of fits and starts of this over the last 15 years in terms of what's the role of content or I might even say LA versus what's the role of tech or I might say Silicon Valley and New York and actually New York playing in both areas very well.
What's that intersection all about? What's the benefit of it and what's the implications of it? I think now, it's real. In fact, I argue that there's maybe more interesting things going on in technology in Los Angeles today than there is in Silicon Valley, because the role that content plays, especially on the consumer side of these applications and
infrastructures, which again implicate
ultimately commercial, is so deployed through technology is at a completely new level. And given the academic resources between USC and UCLA, I mean, they're pumping out these engineers that are thinking about this stuff all the time. And this new mantra of how I take technology to distribute old business models is just it's phenomenal and it's what's so different about 2,000. And I think it's important for all of us to start paying closer attention about what is it about Comcast or Time Warner or News Corp that implicates Seagate or Apple or Microsoft. And we're spending a lot of time thinking about that.
We think it's obviously a good thing because that form of content is extremely rich and it moves around the world very quickly. Circling all these trends are these other things machine to machine security and big data analytics. And I think the one that we see Gate continue to underestimate just because the math is so hard is the machine to machine side. But again, as the architectures become more another and how they create data on their own and
analyze it on their own and then suggest changes.
And of course in the trading world this has been going on for a long time.
But in the consumer
world it's starting to
get really interesting. And the potential world it's starting to get really interesting. And the potential for how much data is created by machine to machine versus content that's physically created by us either as entertainment or spreadsheets or other things, as most estimates are saying now as much as anywhere from 30% to 40% of the total zettabyte requirement in 2020 could be machine to machine created content. And so this is an area that we're getting more involved with some of our CSPs and some of the OEMs around what does that mean in terms of the
device technology, where is the CPU,
what does it look like, how does it server. These are really exciting things. Security, obviously, the exciting things. Security, obviously, the implications for security on protecting data at the end of the day has a software implication, has a systems implication, has a device implication, we're getting more engaged there. And obviously, big data analytics at the end of the day to the extent that people get more value out of analyzing this complex unstructured data.
There's a greater need therefore to keep it and that's a good thing for the DRiV industry. And a lot of our efforts are really applications that can come applications that can come off of that that create value. Value can be meaning selling more stuff or it could be meaning keeping the world safe. And to the extent that we can help facilitate those technology transitions, that's a good thing for Seagate, because again it causes models then for people to say there's a reason for me to keep a couple of exabytes of this particular content because I can do something value with it. So this is the world we see.
It's a world that's on trend line to what we described a couple of years ago. It has interesting implications for us in all of our business lines and in our new business lines and it should be the framework that you keep coming back to if you're asking questions about what do we think Seagate is going to look like in the future or why is Seagate doing the things it's doing today. And then just one final slide and then I'll get it to Dave to kind of take into the specifics core technologies is with this explosion of data and compute around data, really every layer of computing is under change, whether or not it's the component layer, the device layer, the systems layer, the data center layer, they're all benefiting and challenged by the new trends and the new architectures. A lot of the focus in the last year or 2 has been more on the data center, I'll say systems like the cloud, there's been an obsessive, the cloud, what does it mean and who's winning, who's losing. And I think that's all great and there's lots of interesting things going on there.
But the client side is also really, really interesting because when you think about the potential of what the client can become in this world of a highly leveraged pool of resources, it's completely different than the opportunity the client had before. And it's super high value, it's complicated, it's technology rich. And so I don't I think it's important for all of us as investors or shareholders and certainly Seagate as a company not to lose focus on the fact that while the current trend is about what's happening in the data center, just like what happened with tablets, it trended up to tablets and then the big phones and now the notebooks. This is going to have an implication for be a trend back to technology and applications and sophistication around the client, which is going to have an implication for us as well. So it's easy kind of to focus on the right hand side of that chart, but we actually think that the device category is getting really interesting.
As a technology owner or what some people call a component owner, we actually think obviously that we're the key building block to making all this happen in terms of fundamental technology. And then again software and delivery of software on the application side and it's the merging of those 2 technologies that we're particularly excited about. We think the drive industry is uniquely, beneficial positioned for in part because our technology is so important, in part because it's a consolidated technology, and in part because unlike most industries that are going through a transition like this, normally your core is challenged, which puts all sorts of pressure on you in terms of can you actually make investments to go to adjacencies that are high growth. In the case of the drive
industry, the core is fundamental to the growth
and it's in a consolidated industry. So you fundamental to the growth and it's in a consolidated industry. So you see WD that made a bunch of announcements this week and even though we don't agree tactically with what doing, I think strategically it talks to the point that the drive industry has a lot of opportunity around how do you take advantage of the shifts in compute and architecture. We happen to have a different tack. It doesn't mean necessarily one's right or wrong.
It just means that both of us see a big opportunity. They're pursuing it with a particular set of objectives that maybe leverage their competencies. We're pursuing it with ones that leverage our competencies. And I think the DRiV industry is uniquely positioned. I think the silicon industry is almost as well positioned.
We're not quite as consolidated as we are, but their technology is fundamental. It gives them a lot of leverage points and their model is again one that's actually growing as a result of these transitions not being challenged. And I think that's what's to minis or minis to PCs or PCs to network. It's why we're excited. It's why we've been able to attract people like Jamie and Phil Brace and a couple of other people that we'll be announcing shortly.
The company is really on a pretty positive trend. We're attracting some incredibly talented people and we think the opportunities in front of us are multibillion dollar opportunities that are accretive. And we think it's absolutely critical that we pursue those in a rational and managed way. So I'm going to introduce Dave, have Dave talk a little bit about the core. Even in the context of the core, that message is getting bigger now that we own a lot of VLSI capabilities, then we'll take a break and then Jamie will talk about systems.
Great. Dave?
Thanks, Steve. Good morning, everyone. It's good to be back in front of this crowd again. Pat and I were talking before the session started this morning and we were kind of saying, what's our message again this year? It's almost the same as last year.
So if you participated last year, welcome back. A lot of the same themes inside of the core business relative to investments in technology, where we see the markets going and so on. My presentation is split into 2 sections. The first one I'm going to talk about storage market dynamics. What we see going on and how it's building inside the industry and what are some of the key watch points and then I'll talk about the technology at the end and answer some of the questions that came up earlier as well.
You saw this slide from Steve. And the way that I would break this down is really to start to say from a market perspective, how do we look at each of these and say how do we forecast how many units, what type of units we're going to actually be able to produce in order to satisfy these trends. There's also a technology angle to it as well. What kinds of technologies do we have to develop to really enable each of these different applications if you will? Or how do we leverage our core competencies to be able to come up with a one size fits all for as many different segments as we can to be as efficient with cash and so on.
So it's a complex world. That's the main point takeaway of this slide. To just start with some IDC data right now, this is not data to tell you where we think we're going in the near future. So 6 years away 2020, there will be about 44 zettabytes of data being created in the world. Today, it's about 4 zettabytes.
So if you believe in this kind of growth, you can see the pressure that's coming at us and why we're seeing exabyte growth that we are that Steve made reference to before. It's the same story. We're actually for the last year there were some doldrums and I could speculate as to why that happened, but we really see that it's going to continue to break north and stay on the curves that we've been on for the last 20 years. 44 zettabytes of data that's actually created in the world. Now how much of that gets stored?
The IDC data says 13 zettabytes. And the install capacity, if you will, the capacity of the hard drive industry and some of the other industries to actually solution this will be about 6.5 zettabytes. You can see the kind of supply and demand break that we have right here. And there's a lot of devil in the details. But one of the biggest trends that's going on and it wasn't true probably 5 years ago is a lot of this is going into cloud drives, right?
So cloud storage is the thing that's really exploding. Not necessarily the number of units then that the hard drive industry would ship, but the number of heads and disks we have to make in our factories, which is roughly 2 third of the capital allocation and 2 thirds of the R and D that we have to do. Those are the metrics that we have to look at as we plan for this. As you break underneath these numbers, now switch a little to Gartner because Gartner doesn't actually forecast out to 2020 and IDC didn't have a chart like this. This is the forecasted growth of 2 different technologies can actually solution that space, the 2 biggest technologies actually will.
So you see the hard drive growth in exabytes up against a pretty big curve. So if you look at calendar year 'fourteen, five thirty five, that's probably trending right, maybe even a little bit low. And then calendar year 'fifteen, you can see that just year over year growth that we're going. Big step up as we see some of the technology transitions forecasted out there in '17. They're looking pretty good right now.
This is the capacity of the industry under normal circumstances with a 6% to 8% capital investments that we would make and so on and so forth. And then you see NAND. So this is the growth of NAND and how many fabs and what technology nodes that they'll be transitioning through as well. Keep in mind that not all of this NAND is actually the same grade, if you will. Some of it's consumer grade and some of it's compute grade N NAND, which is needed in some of the higher end applications.
And I'll talk about that a little bit more. So as we really think about the spaces that we have the solution, I think this gets back to one of the points Steve was making. The cloud is really differentiated from the consumer and the enterprise right now. The hyperscale architectures are dramatically being changed. And it's really hard as a end purchaser of cloud gear right now to find out where exactly things are going.
There's no incumbent architectures, if you will. It's really hard if you're designing in a period of architectural disruption, if you're designing boxes to know exactly the more stable right now. I contend that when we find when we figure out some of these lower cost architectures that will actually come out of what's going on in hyperscale, they will ripple across to these other segments and it will be really interesting. And you can see the way we break these things down, it really comes down to workload and there's lots of different workloads even inside of the cloud. There's an archival workload in the cloud and there's a 20 fourseven banging on the drive all the time workload in the cloud just a lot like mission critical.
There are big block transfers, let's say, object storage transfers with enormous sized blocks that are going down to drives. And yes, there are still those little atomic units that I've been complaining about before, the 5 12 byte block. There are really more memory kinds of byte sizes, if you will, rather than blocks that are more conducive to be stored on rotating storage. So there's a lot of different architectural implications of all these different applications that the cloud is where a lot of these things are happening. I will say just really a couple of key points about big data and high performance computing just to everybody take it away.
The way we see it already is that most of the data that's actually hitting the drives in those applications are already the long sequential data. So the drives that are being used today tend to be in workloads that are streamed onto the device and the device is performing quite well in those environments getting the data back into the host, if you will. The hosts today don't tend to do very small block transfers to the drive. Already people who are doing architectures in these spaces have already taken advantage of memory tiers way above that. So let me talk about storage technologies as we think about those workloads and I will come back to these memory tiers as well.
This is an IDC chart that really says how are we going to solution that they said 6.5 zettabytes worth of data? How are we going to who's going to be able to provide a half a zettabyte, 2 zettabytes, 3 zettabytes? What's the other technology that's in play there? So for example, if you take DRAM, DRAM my estimate would be about 12 exabytes of DRAM is capable of the world what the world is capable of today. It's not growing a whole lot.
The DRAM market is pretty stable. You can do the math on that, but it's not going to go by a factor of 10. I think we all understand that. But DRAM is used even on storage layers for really fast input output from the devices. And then there's NAND and then there's HDD and you can see how big HDD is relative to unit shift and the capabilities that we have.
And then there's optical and tape that are further on the more archival spaces where the data is less active is around these three technologies on the left and the reason is for that is that we actually ship a lot of DRAM today on our box. We actually ship a lot of NAND on our boxes today. So Seagate is pretty active, it has been for many years, managing a little thing that looks a lot like a PC or a compute node. We've got a microprocessor, we've got memory on board and we have the mass storage. At our level, we've been managing that pretty well.
And now in some of the slides that you'll see and some of the discussions Jamie is going to talk about, you'll see we're stepping out with some of the same technologies to the next level. As far as DRAM, NAND and HDD, how they play, how they interact with one another, it's very critical obviously the highest cost of these obviously the highest cost of these three technologies. It's also by far the highest performance if you will into and out of that memory location by far the highest performance. And like I said before, the hard drive industry has been using a lot of DRAM for years, not a lot on each, say, 4 terabyte or 6 terabyte drive, but nonetheless when you aggregate it across 600,000,000 drives, then you get a lot of DRAM use per year. NAND is coming in as a technology just like it is in many other spaces and making it very and depending on the market segment a lot better.
And so we're taking a lot of advantage of that at Seagate. We just did an announcement yesterday, I don't know if you've seen it, that we've shipped over 10,000,000 hybrid disk drives now. This quarter, we talked about this on earlier call. This quarter, we're actually going to ship over 3,000,000. So we're getting good market cheaper and make it make the product, the end product run better.
And cheaper and make it make the product the end product run better, be able to solution if workloads do trickle through and they do that are still the 5 12 at a time that we can use that cache for that and a host of other things to be able to make our devices better, better power, reliability, lower cost, so on and so forth. And then it gets into just plain hard drive technology, which I'll talk about now. Just last year, I said we'd be at 20 terabytes by 2020. We're still on the same plan. I'm going to go into the technology as to why that is, but it's a nice round number to be thinking about.
The change the subtle change this year is that we think it's at least. We definitely think we're on this plan and we think we can actually beat it. As an industry, there's a lot of optimism I think out there right now. At the Magnetic Recording Conference that just happened about 2 months ago, all the companies and capital equipment suppliers and university professors all get together at this TMRC conference and talked about where they thought various technologies would be. There was a question already about how's the hard drive industry solution So let me talk about them.
These are the most popular ones and the ones that the poll of the participants in that consortium actually came up with as the most likely path that we'll be going now. First shingle magnetic recording, so Seagate has been shipping that for a couple of years now. We shipped almost 3,000,000 shingle drives. We talked about that a little in this conference last year. We actually have learned a lot from this segment from being able to ship the shingle magnetic recording drives into the various markets that we participate in, we learned how to properly address the shingle.
So this is a it's a very different world than kind of historically we've been in. We've learned how to properly, if you will, hide that by various layers of tiering and caching from the end user experience that would be that might be have a problem because of shingles. So there's a lot of thought out there about shingles right now and how end users will have a problem. And all the applications we're shipping, we're not seeing complaints. And we think we can even get better at that as we improve our caching and tiering algorithms.
So we're pretty excited about shingled. We'll just call that one done and being used in various market segments, not every market segment, but we may choose to do that over time. And then the question I think specifically was about 2 dimensional magnetic recording and HAMR, what we call heat assisted magnetic recording. So 2 dimensional is really thinking about readers and read channels. How do we actually get a bump by being able to scale our read geometries even smaller using a couple of readers or an array of readers, if you will.
It's actually going quite well. I talked about it in this conference last time. We're still on the same plan about 2016 for this technology. And we're fairly conservative in what we're estimating with what kind of bump we'll get with this. But suffice it to say that the technology demonstrations in the last year actually have been quite good in the labs.
HAMR is the one that the industry has been talking about for a long time. It's the next big speed bump that magnetic recording would go through, then huge investments in this. And all I will say is the last fiscal year was a really good year. It's had its detractors. I've probably even been one of them from time to time as technology development a few years ago was really slow.
But in the last year and we reported this at this conference that I made reference to, in the last year we've actually shown areal density demonstrations that are higher than anything we can do conventionally. And we seem to have made a lot of progress on the reliability aspects. So to put it in a nutshell, you have to get a 20 nanometer laser spot on the disk and then you're writing it as you're flying 80 miles an hour down this track, right? 20 nanometers wide. That's the challenge.
And we were able to do it 5 years ago. The problem is the thing burned up after a few nanoseconds. Now we've been able to demonstrate over 1,000 hours, okay? When we that's not quite productizable yet, so we've got a little bit of work to do still, but it's orders of magnitude of improvement in the reliability of the technology and while demonstrating that we actually can make this progress in aerial density. So we think we're on the cusp and productization is still out there at the back of the year.
We also think that with some other tricks that aren't even on the chart, we're still going to be able to migrate the industry. So that's we're not waiting for a big step function, but we'll be able to continue to release drives in the meantime. Another big piece is the electronics components that we haven't really talked about this very much in the past, but and I don't think people have an appreciation of hard drives, the entire hard drive industry, what Seagate doesn't in particular. But so I'll just have a really quick architectural diagram to just kind of highlight a few this architectural diagram to just kind of highlight a few points. So first of all, if you look at the bottom, we've Seagate's products have almost all been all 2,300,000,000 drives that we've shipped to date have all been hanging off this SATA or SaaS bus, the storage bus that's down at the bottom.
So you look at that HDD that's right in our bailiwick. Now the hybrid drives, the 10,000,000 that I've made reference to earlier, those are off to the right of the diagram. And then there's been SSDs as well. We've shipped some of them. The volumes of SSDs are still pretty low in the industry, but there is a compelling technology play in a lot of different market segments for the SSD.
So if you think about this at a really high level, the electronics that has to service it, let's just talk about what's on the devices themselves. We have these controllers. We have SATA or S the SATA or SaaS bus for many, many years, fiber channel before that, PATA before that, so on and so forth. So we've actually invested a lot in that. As we went off to do hybrid, obviously, we have to be able to control NAND.
And so in order to control NAND, we've had we had to do our own development. And then ultimately, when the LSI acquisition came up, we said we really want to control NAND better than anyone else. So we got an asset inside of the LSI acquisition that was really these what are called flash controller division, the FCD. So if you think about that, it's kind of the orange box that sits over the top of the SSD box. Architecturally, I believe that over time a lot of things are going to go to what we call hybrid.
As a matter of fact, I just we're starting to think about it too much of what's NAND and what's HDD. I think we should think about it as what solution for what's which market that we're actually trying to engineer. And as you think about it that way, there may be more NAND and there may be no NAND, but I think all the architectures have to be able to go anywhere. Another subtle point though is that one thing that the LSI teams had done, which is really compelling business was to take some of these controllers and gang them behind a behind a bigger controller and build what's up in the green labeled PCIe card. And that demonstration is actually in the back of the room.
So if you get a chance on the break, please go ask questions about it and go see it. It's actually a totally different space. So it's a lot more about the compute space. It's a lot more about applications acceleration firmware working with the ultimate partner. It's not just a hardware device.
It's not just a piece of silicon or a printed circuit board with that's stuffed with some silicon. It's actually a lot of firmware and architecture around controllers that you actually have to do to optimize to the specific application that you're in. So companies there like cloud service providers are nitro product that's in the back of the room there and we're working well with them. So if you think about the LSI acquisition in these two phases, if you will, the FCD division, the flash controller division and the accelerator card division, that's a good pictorial way to think about it. And furthermore, so the way we look at it is we at Seagate pull stuff out of Mother Earth and build the technologies from the ground up.
We're talking we actually talk to smelters and we talk to we use 51 elements of the periodic table in today's disk drives and on and on. I can give you those stats. Not a lot of people are doing that kind of base level things and whether it's heads or media or other components, we actually have to care about those kind of core elements, building the devices. All the devices are not the same. So different markets, different devices, different performance requirements, reliability requirements, power requirements, so on.
You can see them across the bottom. And we're actually still doing some very interesting work to develop even those core devices with the hybrid drives that I talked about and then with this Kinetic product where we've actually instead of SATA or SaaS, we've actually put a PCIe sorry, we've put an Ethernet interface. And what's really exciting to that about that to me is we can actually break free of some of the stuff that the host has traditionally done wrong. We can actually talk in a different language, what's called a key value language across that interface and abstract even more some of the things that the host doesn't really need to be doing wrong and we can also take some people out of the value chain that are not providing necessarily value in some of those translating data as it's going down to the drive, time and money, then it's wasted in that application. This key value architecture across an Ethernet bus may be a much better way to do it.
And so we've got some customers that are pretty excited about that. But anyway, we stay kind of focused at the blue level in the core and we've been doing that for a long time. I've made the argument that we've been building systems a long time. They're called hard drives. And so we have a lot of technical skills in that and we have a lot of supply chain and customer relations and so on and so forth that's leveraging that.
We're going to take a break and when we come back, then Jamie is actually going to tell you about what we're building on top of that core foundation. So we'll call you back in a few minutes.
If everyone could please take their seats, we're ready to get started again. Thank you. We'll have more time in the demo area In the reception, we'll have executives back there to speak with you as well. At this time, I'd like to turn the stage over to Jamie Lerner, who's our President of Cloud Systems and Solutions. Jamie, please go ahead.
That's right. Thank you. Hi, everyone. I'm Jamie Lerner. I'm the President of our Cloud Systems and Solutions business.
And I've been at Seagate now for 5 months. And I was joking with Steve that I've had almost an out of body experience. I've been I'm really more excited today than the first day I here because I've gone on a pretty interesting tour, if you will. I first met our board about my 3rd week in the company and the Board asked me to come back in 90 days with the strategy. So the first thing that I did is I went out and did just what comes naturally and I met with our customers.
I sat with the world's largest storage manufacturers, we went out and talked to Tel co's, we talked to cloud startups, we talked to cloud operators, we talked to oil and gas companies, retail companies,
said
the architectures that we use to collect, manage, and analyze data are fundamentally inappropriate. They're just not working, they're not scaling, they're not usable where we have to shift to totally new architectures predominantly cloud based architectures. And the second thing they said is the imperative for them to analyze data is becoming the core competitive plane for their business. So when we talk to retailers it was analytics that they were going to use to compete. When we talk to oil and gas companies it was analytics and data was how they're going to find oil.
When we talk to our defense contractors it was analytics of how they were going to train and operate the next generation of war fighters. And the thing that came out of that is what surprised me the most. Our customers came back with almost an assumption. They came back and said we are assuming there's an implication that we want Seagate to help us solve these complicated business problems. They want us to evolve from supplying core storage technology to helping them solve their most complicated business problems.
And I was so surprised by that I came back from our customers, I dug in internally and what we started finding is we have an unbelievable amount of capability to actually do that. And what I'm going to share with you today is a series of programs that we're going to be running to begin to align with a series of new architectural plays that we're coming out with and a set of market adjacencies that we're going to begin to exploit. I believe I have to tell you I believe more today than the day I joined that we have an unbelievable amount of capability and technology that we've never expressed and a hard disk is probably going to be the wrong way to express that set of capabilities. We're going to continue. I often refer to Dave Mosley as the Michael Jordan of building disks and we are not going to stop that.
We're not going to take our focus off that, but we're going to begin to layer on a series of new adjacencies to build our business. And what I'd like to ask you today is I'm going to ask you to think about Seagate in a very different way. This is a company that is changing and we're not just a component supplier and again we are the Michael Jordan of supplying components, but we're going to begin moving to be a company that helps our customers solve their most pressing business problems. And that's a big change for us and I'm going to walk you through how that's going to develop. This is the model that we as an executive team are thinking about.
This is the model where we are looking at our core business and beginning to find market adjacencies by huge market transitions, the transition from traditional computing plus market transitions and we're getting out of our laboratories, we're getting out of our design centers and we're sitting down with our customers. And in sitting down with our customers we're saying how can we come out and design a new solution with you, whether it's the large storage OEMs and ODMs that we worked with over the last 30 years or the world's largest cloud companies we're sitting down with them and jointly designing totally where we're integrating the disk, the storage enclosure, the firmware, various different expertise and software together and open source components to solve new problems. And when we get that right, we're now working with those huge storage companies that we work with to accelerate across that so that when we build this solution and we're going to show you some today and we'll walk you through some case studies that we can then accelerate tens of thousands of customers across one of these transitions. And the transitions that we are looking at and the use cases are these 6.
And I'm going to walk you through a couple of examples. One of them, one of the core use cases is performance, an imperative where we have to be able to manage process data faster than we've ever done before to solve a very pressing business problem. So there's a system in the back of this room called cluster store. It is used by the 3 largest oil and gas companies in the world to look for oil. And the stories that we're beginning to tell about us as a company are fundamentally different.
We're now engaging with these oil and gas companies and helping them find oil. We're doing that because a drilling platform is actually a gigantic data collection engine. There is a wellhead that is drilling and is sending back petabytes of data. There are as many as 12 boats around a drilling platform that are doing different geospatial analysis. They're very often dropping different forms of explosives, pulling data off the ocean floor, and they are pulling in petabytes of they're partnering with us to do that.
It's a very different body of work for our company. And what we've done with the ClusterStor solution at the back of the room is we've taken our media, our disks and the firmware. We've specially optimized them for that use case. We've then built boxes that you'll see and enclosures with specialized firmware, specialized processing, specialized embedded computers to do analytics work predominantly through using things like MapR, Pig and Hadoop. And then we've built a whole rack system where these racks can be put together as a hive as a completely converged infrastructure that's completely horizontally scalable to help these large oil and gas companies find oil faster and that translates to a very different profitability equation for those companies.
It's very different work that we're doing. We're also we're still doing custom manufacturing. We've acquired the ZYRO Techs business that is a 22 year old business that has been working with the same customers that we work with in our DISH business. We help them build their enclosures. We work with the big 6 or 8 storage companies, but there's something changing there too.
There are large cloud companies that are coming to us saying we have such large data centers. We are processing so much data that we actually have enough volume for you to build a specialized box just for us. And so we're seeing a new breed of customers coming to us saying, I would like you to build a specialized box for a very specialized application in our data center and we can't buy that from the traditional storage vendors. We need you to build that specifically for us. We also have a high performance latest wins is a system called Bluewaters that's doing research for the U.
S. Federal government, going out and doing research about how does disease spread, can we predict earthquakes, can we predict weather patterns so that we can do more economical farming. They're going out and doing research on behalf of our nation to figure out how do we organize as a society more efficiently. Those are fundamentally different types of systems that we're doing, again, using similar technologies that you can see at the back of the room. We're helping companies build clouds.
There are companies coming to us saying a cloud is composed of 3 things, right, storage, network and compute. And the storage piece represents a very large challenge, right. It is an architecture that has to fundamentally change to work in cloud. It has to be multi tenant, it has to be elastic, it has to be able to be stretched, shrunk, moved between locations and the traditional architectures don't support that well. And we're beginning to take technologies like Kinetic, putting it into our systems, working with the new open source vendors, working with the sets, OpenStax, but also commercial vendors, Scality, AmpliData data and others to begin help companies stand up these clouds.
And we're not doing any of this work alone. We're doing all of this with the same co travelers that we've worked with for the last 30 years. They're working with us on all of these solutions. So the same people that we sell this to today, they're partnering with us to build these solutions, partnering with us to take these to the market. So we're in no means and some people often think are we competing with our with our traditional partners?
Not at all. These are just new set of solutions that we're doing to partner with them and bring with them
and
bring our disks inside these systems, but there are cases where some of these people want to make sure there's plurality that there's different vendors in there and we're completely open to that. We have to be as we move into this space. We're also helping companies do backup and disaster recovery. We have 25,000 customers that we back up every day in the Evol cloud. We've been doing that for 12 years, right?
We've shipped 17,000 petabytes of systems through ZYRO text. We're bringing those businesses. We're bringing them into Seagate. We're integrating them, we're moving through that. We've got several more months to do that work.
The back of disaster recovery system you'll see in the back of the room that we've just launched. And we're also doing what I would call data lakes. There is an amazing set of use cases for data lakes where companies are collecting huge amounts of data. And a good example is we have a big box retailer that came to us and say there are people that come into our big box some that spend $70,000 and some that spend $70,000 right? And those people are spending $70,000 are often right?
And those people are spending $70,000 are often general contractors. They're in the construction business, they come in, we want to identify them. Can you help us build a system that identifies basically by their cell phone when they come into our parking lot so we can find them and help them identify them and get them almost a concierge level of service when they come into our big box. That is a fundamentally different type of system and they have a data lake, just huge amounts of data, what's happening in their parking lot, the cars driving around, what's happening in their stores, what products are being bought in these gigantic data lakes. And then we look at we pull data out of that data lake, analyze it and extract it and come turn that data into actionable information that these business leaders can use to run their business.
And so these are the 6 use cases that our customers have come back to us to say not only do we want you to help us solve our problems, these are the problems we think you're best suited to
us solve.
And what the business looks like today is a series of these stacks. What we do is we purpose build the underlying devices that sit within the enclosure for the use case. There are certain devices that we make that are awesome at saving power. So one of the things we're doing is taking notebook drives, putting them inside of huge racks. And it's amazing how much weight they save, how much power they save, how dense they can be.
So looking at moving technologies for different use cases, we have kinetic drives that happen to be very well purpose built for a converged infrastructure that's running an object store, someone building a next generation cloud. We have other infrastructures that are very good at building just gigantic data lakes, right, specialized disks that are just cheap and deep and big and the ability to store very large quantities of data cost effectively. The cost of that system, the heat, the electricity, we just want the fastest performance and we almost have much less sensitivity, the cost of that system, the heat, the electricity, we just want the fastest system that we can get. And we take these underlying devices, we put them into an array. And these arrays are hybrid.
Some of them have disks, some of them have flash, some of them have mixes of those those work those workloads based on a policy to move. Some workloads need to be in the fastest place, some in the cheapest place, some because of security reasons need to be in a very secure place. And we're able to use a variety of different devices that are put into different types of arrays and those arrays are software defined. We can use software and that is the generational change. The software and the hardware are no longer welded together in a rigid system.
By removing those 2, now that you can use the software to take the backup. I want to shape it for performance, I want to shape it for a database application, I want to shape it for just storing photos. And instead of you saying, okay, we're going to spend 3 years and build a box and that box just does backup, we're able to dynamically use software to create backup boxes, database boxes, SAP purpose built boxes, boxes that are really good for Cassandra next generation databases all through software defined arrays. And we then assemble those arrays into racks like the one you see in the back of this room that can be put into a
large
shape of this business, we are in our second quarter as a non synthetic business. We are on target to do 6 $50,000,000 to $700,000,000 in this business this year, and we will move over $1,000,000,000 run rate on this business within 5 to 6 quarters. We'll have our first $250,000,000 quarter within 5 to 6 quarters. So this is a business that is at scale. It is a business that is growing relatively quickly.
It's a double digit growth business. And we're feeling really good about it. It's early days, but this is exactly the type of business that we're going to take our traditional storage business and begin to layer these kinds of multibillion dollar adjacencies on top of that and grow our revenue in ways that we couldn't do as purely a component supplier. But they're all technologies that build off our core. Core strength because what do we do differently that no one
else in the
world can do when it core strength because what do we do differently that no one else in the world can do when it comes to doing this? What is our unique value proposition? Just like Dave said, we dig into the earth, we pull up rare earth metals and we forge that into a disk drive. That is something that only 2 or 3 people in the world can do. And when it comes to people who are doing that and building systems, we're the only one doing that at scale.
And we think that is very unique. So with that, I'd like to introduce Pat. He's going to show us what this means financially. So Pat?
Thanks, Jamie. I won't be able to go down. I've never done this. Finance folks follow rules. So yes, so I have to stay up here, but not Jamie, but I just thought that was kind of cool.
So, you heard from Jamie and you heard from Dave and you heard from Steve that there's a lot of disruption, a lot of changes in the storage ecosystem. And what that does, it gives us a unique opportunity. And what I want to show you in the next few charts is really sort of how we model that out. And why are we doing this? Because if you take a look at Seagate's core business, what are our real strengths?
So we really break it down. 1, we have deep technical expertise. We own the IP. We own the factories. We produce them and we distribute them.
So we can leverage that across these platforms. Extensive go to market capabilities. We have OEM, we have retail, we have partners. So we can take these technologies that we're acquiring and leverage them there. And as you've for the last several years, it's a very resilient financial model.
What does that all mean? We could take these adjacencies and do
in
about, so from some of our M and A and if you take a look at what Dave's talked about from internal investments, all these internal investments
whether it's through our
OpEx, whether it's through M and A, we believe over the next couple of years that's going to generate $2,000,000,000 of revenue. That's from our cloud based and our flash platform businesses. So that's tremendous amount of revenue growth. So that will be the first thing you manifest in the P and L that you see is that we're getting that top line growth at a much higher rate than we would, as Jamie said, traditionally through just HDD. So if you fast forward to 2016, the gross margins probably is accretive level.
But we don't really quite get the scale of 2016. By 2017 you now have an operating margin that is accretive. So I'm going to show those numbers in a little bit, but you take a look at that and say, what does that really mean? These businesses are going to start cash flow and contribute in the business within 2 years. So that's a lower risk equation, but it's a very managed.
As Steve said, it's balanced, it's less risky and it's leveraging existing infrastructure. But while we're here at 15, I'll give you a summary of 15%. The nice thing about this chart that Steve talked about some things have played out amazingly well. When we sat here 2 years ago, we updated our model. We went from a 22% to 24% gross margin to a 27% to 32%.
I can say within those 2, 3 years we have not missed one of those and we think that's going to continue. But this chart looks almost identical for the most aspects. So revenue growth for fiscal 2015 3% to 5%. That's all in business. We'll have 3% to 5% growth.
That's a good top line growth. We haven't seen growth in the last few years. We think that growth is actually coming also HED this year as Steve talked earlier we're seeing that strong in the front end and we see that continue at least through the 1st part of the year. So HDD this year is not a story of non growth. That's a story of growth as well as the new businesses.
The non GAAP gross margins 27% to 32%. We've been last year was sort of the same number all 4 quarters. I know it's boring to some folks. It was amazing to us. But I expect sort of the same this year.
We'll stay sort of in that same range. You might get some depending on some mix as Steve talked about earlier. You might have some a little higher, some a little lower, but on average the gross margin should be somewhat very comparable to fiscal 'fourteen. The only thing that's really changed on this chart from what you've seen a couple of years ago, we expanded a range of OpEx. As you saw from the chart earlier, we're making investments to grow the earnings power of this entity within 2 years.
We think this is a very solid investment. You can see it's not bouncing on lines on a big way, but it's 13% to 15% for 2015, probably with a bias towards the higher end. If we got more scale quicker on some of these other businesses that might play out. But we're integrating 2 companies right now. We're going to shortcut that investment for the sake of just a model, but 13% to 15%.
So we're not changing it drastically, but it's probably on the high end for 15%. And then you can see the resulting operating margin. Capital expenditures, we still believe 6% to 8% is an appropriate level. You might think that with our operations and Dave's team has done such a good job in the last 2 years that there should be a new standard. But what we have been is very cautious of investing into capacity, but we continue to invest in technology.
We continue to invest in facilities. We continue to invest in areas that have the new business we have to do that we think 6% to 8% is still the appropriate level to maintain this business and grow this business. So when we do all that, what does that really mean for capital deployment? And I know one of the big stories of the last several years has been capital deployment. One of the things that most folks should take away from here is that Seagate is not a company that husbands and shepherds cash on the balance sheet.
We deploy it. We put it to use. So if you look at the last few years on the gross cash balance relatively the same because we're going to do it in a form or fashion of 1 of the 4 dividends. That's probably the fixed one of this because we're very committed to our dividend. This year about $550,000,000 We will we're committing to a 10% increase year over year.
We've talked about that for the last couple of years. That's at a minimum. We can foresee that for the next couple of years as well with the cash flow of entity we can see growing that dividend. So that dividend is the fixed part that we would say and we feel very comfortable with the cash flow of the entity that we can continue to grow that dividend. Share redemptions, we're certainly taking a lot of shares off the books in the last couple of years.
A lot of part of that value of that was so the market didn't recognize it. We took advantage of that for our shareholders because we just said we'll take those shares in. Now we'll look at that as value driven. It's a fair we still have an active share redemption program. We still have authorization from the board, but we'll be mindful that now be more value focused as we go through looking at that.
Debt retirement, opportunity dependent. Have you seen the last 3 years what we've done is extended our debt and lower our cost of the debt. So it's amazing story even to the point we've got backdrop that we really want to maintain investment we'll do it. But we in the backdrop that we really want to maintain investment grade solidly. So we'll continue to work that.
In M and A, you've seen us last 120 days make 2 acquisitions. They're opportunity dependent. But at the end of the day, as Steve talked about, they have to really drive value. They have to leverage from the core and they have to really take advantage of the things that Seagate does very, very well. So yes, they might not be the riskiest one, but I don't think that's what you want from us because we're not really transforming it in a big bang.
We're taking steps at it. And like Jamie said, having the building to just take you out to 2017, because I opened up with that chart and saying what the opportunities on the revenue are. And as exciting as the $2,000,000,000 of revenue are on that realize we have a large business of HDD still around 14,000,000,000 So it's not going to shape the financial model overnight. But what it does show is the big takeaway of this chart is we're into a revenue growth scenario in a much bigger way. So revenue growth of 6% to 8% by 2017 that we see in our numbers and that's through the core, that's from the new ancillary adjacency businesses.
And we see that driving. Now we also have a point of view that that's going to drive the margin up. So if you take a look at 27% to 32% it's probably going to move you to the higher end of that range. But at $2,000,000,000 it's not enough to really reshape the whole P L. But over time and as we continue to update this audience in the markets you'll probably see us tend to maybe even break out that because the model that Jamie is going is a lot of customer touch points.
It's going to be a lot of value add, but that probably changes the model both on the margin and to some into our long term model of to our long term model 12% to 14% and probably in the going more down than up. So we see that coming forward and then the resulting non GAAP operating margin. Capital, we're not taking off that. If you look if you see the charts that Dave talked about, about how much zettabytes we need. In fact, a lot of this industry is going to have to step up investment if we there.
But the way we're approaching that we're going to be very cautious. We'll wait till we see it. But we want to do certain smart things to shorten lead times if we get there, but we're not going to go heavily into the lean into that. But we're 6% to 8% for the next couple of years is appropriate. At some level, we 6% to 8% for the next couple of years is appropriate.
At some level we have to make certain investments to meet the zettabyte demand that Dave talked about, we'll address it then. So the net real net of this chart is, there's real three things revenue growth, operating margin growth, cash flow growth, which turns into EPS growth. So the company will be growing earnings and revenue by 2017. And we think it's very structured way to do it, a very balanced way and a very risk balance. So I think we're very, very comfortable with these numbers here.
And in fact, there might be some surprises that could push that up if we get more traction in some of these accounts. So we're really not moving off our long term model. Like you said, the main frameworks there. But as these new businesses develop, it could push that model up, which I think would make everyone in this room including myself and the management team very happy with that. So just closing on this, it really sort of where I started.
And we have deep storage technology expertise as Steve talked about. We're a company that owns IP. We're a company that continues to generate it and we're going to continue investment. So whether it's through the factories, whether it's through development, we're going to do that. We're going to do that with the new business as well.
So that's going to be a strong foundation to grow into. Expanding our cloud systems and solutions, you heard Jamie on that. There's a lot of opportunities there probably more than we can bite off the chew right now, but we'll be metered about that and we'll really attack that pretty aggressively. And then resilient financial model. So not a whole lot of changes like Dave said.
If you were here last year, you probably saw some of the same model. If you were here the year before, you saw the same model. So we're pretty proud that it's been fairly consistently achieved and we'd expect next year for most all vectors being achieved. So at this point, I'm going to turn it over to Steve to be the moderator and invite the management team up for Q and A. And we'll have both with mics and we'll just take your questions.
Okay. I have the first question. Yes, Steve. Well, if that long term model says you might be more towards the high end on gross margin and more towards the low end on operating margin, wouldn't that mean wouldn't that mean that your operating margin should be higher? Can we go to that chart there?
He knows I'm a finance guy, they're not going to give that away.
I'm not going to ask you, I'm going to ask you. Can we go to that chart? Are we
trying to go So what that you go
back one, Steve, I think. I do it. But all I but when I do it, it just doesn't really do anything. Yes. So if we're really going to be 14.
Next one. 7, yes. So we're really going to be maybe more towards the high end on that gross margin and more on that low end on the operating expenses. Shouldn't that mean that your operating margin should be higher than 13% to 15% because if I'm near 32% and I'm near 12%, doesn't I get to 20%, Mr. Lusso?
It's an excellent question. And the answer is, yes, it does. And I think it's the opportunity we see and it's the transition that we're trying to manage and we think we're managing it in a really responsible way that says without really sacrificing EPS when you do the models off of fiscal 'fourteen. We have a multi $1,000,000,000 revenue opportunity over the next 2 years, which we think will result in gross margins trending more toward the high end. And depending on how big that business gets when how big it gets and when it gets big, actually maybe giving us the opportunity to change that range, but also getting a lot of operating leverage, which should actually result in operating margin expansion in the 18% to 20% range.
When that plays out and how that plays out, obviously, is a function of the deployment of the new technologies as well as Jamie's success in taking the technology head, adding whatever we need and being successful in some of these go to market opportunities. So I think the excitement that we see. And again, it's all being leveraged off of a core that's pretty stable. I think the other point is, if you go back even to the core model, which is what fiscal if you go back even to the core model, which is what fiscal 'fifteen is, because again, Jamie's business are the opportunity around these new opportunities is pretty small. The leverage inside that model is enormous.
And we were telling some people yesterday, no matter how much we model increase in volume or change in mix or anything that absorbs more heads and disc, and we obviously have the best models in the world understanding how our factories work at a very detailed level, we're never right. And we're never right in that we never quite understand the full positive impact of what happens in a manufacturing company when volume start to ramp. And so with very, very little marginal changes to either unit growth or mix inside of this model, being a manufacturing company and absorption related to it, the cash flow implications are pretty significant, which is why when you're on the front end of what feels like a period of growth, we get pretty excited about what some of the leverage opportunities could be. So since I know there was a lot of sharp people out in the crowd, someone was going to ask that question and that's the answer. All right.
So other than that question, why don't I start on this side since we've pounded that side early, early and go over here on the edge if we can or to that, John.
Your question was all right. I want to ask a question on Flash, if I could, which I know you get it every year and I appreciate your answer, but I'll just keep asking it anyway. It obviously plays a bigger role in the market and also in your own road map. So two parts, I guess. One is, any updates or anything with the relationship from the flash side with Samsung that went right back to your deal a years ago?
And then looking broadly, and this is the question always comes up, but it's not going to stop coming up, I think, long term. If you look at particularly things that Sandisk is doing, for example, and Samsung themselves, how do you offset the fact that you're not vertically integrated in Flash, you're not going to build fabs? I do realize you said in the past, for example, it's not like the media guys want in hard drives, so it's just one component of
the solution, but it is
a pretty big component of the solution. And it's given that Seagate's own history has been so successfully built on vertical integration given you're not vertically integrating Flash? How do you deal with that?
I was thinking that's really an amazing that was like one question, I had 17 questions. Well, I think first of all, it's I think that the analyst community and frankly, the silicon community has been a little loose with terms about where flash is deployed and why and where is it successful. And there's a lot of mixing and matching of saying flash in is being used between what's being hung off the storage bus versus what's being hung off the compute bus. And SSDs to the extent that they're being hung off a storage bus, it's a pretty expensive solution for a storage problem. And there may be some tier of storage that you would like to have the performance attributes of 100 of 1000 of IOPS.
But as flash has gotten relatively more expensive to HDD again and as the demand requirements for the flash that's required off of the compute bus have increased rapidly, The architectures are actually saying that Tier 0 storage that goes off the storage bus is probably smaller than people thought 3 years ago. When we were here 3 years ago, we thought probably 5% to 7% of the amount of petabytes stored would have to be facilitated by Flash at Tier 0. If you talk to most of the big systems companies today the IT shops themselves and even the silicon companies, that number now people are saying 2% to 3%. And again, 2% to 3% of compute grade flash against 13 zettabytes is like a 10 fold increase over the amount of flash available for that market today and where are those fabs going to come from exactly at $12,000,000,000 a pop. And by the way, they're going into a market that services that revenue at 6% capital per revenue, not 30% capital per revenue.
So I think, again, when you get down into really the real deployment of this stuff, when you think about it off of the storage bus, all the HDD cost and capacity advantages or we play with it with our controller technology, which is why the LSI acquisition was important because we now have a controller technology that's flash agnostic, and it basically allows the people who are integrating SSDs to take a controller, put it on whosever flash is cheapest. And then really a large part of the deployment at the SSD level is done that way today. Even though some of the companies like Samsung or Toshiba have their own devices, a lot of SSDs are still basically people taking a controller, putting it on who's ever got the cheapest flash and then deploying it into a particular application or customer. I think when you move up to the compute bus, it's exactly right. That's a great home for flash.
And really that's where most of these flash based software companies play is off the PCI bus. We have that capability the product back to you, which is from a market share perspective, number 2 to fusion, we think from a performance perspective better. And we also have a controller technology that again can deploy against anyone's product. So I think the story is less competitive and more complementary than people want to make it whether or not that's media or investors. And I think if you were engaged in the type of dialogues that we have with our Flash customers, you would appreciate it because those dialogues are much more strategic about what are we both doing to solve capacity problems that we're both challenged with in order to deliver the performance at the right level for these customer sets.
And that gets to your first question, which is how is those partnerships going. I think the big difference between 3 years ago and today when we forged the Samsung relationship is back then, there was this requirement that said you kind of had to pick your controller technology technology and your underlying flash in order to optimize performance. And it was a risky gain, because if you had the wrong controller technology or the wrong flash partner, you would be behind whatever other competitive product was out there. And it didn't even matter if you control the silicon, because if you control the silicon, but you while. I once in a while.
I think today the difference is that these controllers are flash agnostic. And so you can basically go to the cheapest flash in town and leverage the controller over that. And again, we need to understand how much exabytes are being produced in these fabs, how much of them are allocated to consumer grade flash versus compute grade flash? What's the controller technology goes on top of it? How much of that flash capacity has to go into cell phones and tablets and Internet of Things and then what's left over really for a market today that's a $35,000,000,000 to $40,000,000,000 market.
And if you take 30% of capital requirements on our market, that means you can build 1 fab and 1 fab outputs about 10 exabytes. That's a real big problem when you're trying to solve 13 zettabytes. So we're still I think that the change for Seagate has been where we had a very deep relationship with Samsung, our relationship now is getting deep with all the flash companies. So Hynix, Toshiba, SanDisk and Micron are all companies now that we engage with actively around technology, around supply chain, around optimization at systems level, about where do you use all flash, where do you use hybrid to Jamie's point. We have some customers that say, I need all flash performance.
I have some say, I need hybrid and we have others that say, basically, we just have a bunch of data that we have to make sure is accessible in milliseconds, not picoseconds or whatever your smallest measure was down there. So I think it continues to evolve, but we are definitely still in the camp that this is a complementary technology that has to be solved together as opposed to some marginal competition at the edge. I just think that silliness. Yes. And I think the market has actually proved it out so far.
Keith Bachman from BMO. One for you, Pat, and one for you, Steve. Pat on the metrics that you gave for FY 2015 that were mostly on the income statement. Is there any metrics you can give us around the cash flow and how that might translate either days cycles or how you want to think about it? And on the buyback as part of that, I think your comment was value driven.
Is the bias now more towards the dividend side, over the buyback? Or how should we be thinking about that related to the cash flow?
I would say a bias. I'd say we're committed to the dividend. We're committed to the growth. So that's if you want to say that's a bias, that's a footprint we have that's fixed. So I don't know if that's a bias because there was more cash flow.
I don't think I'd say let's get more dividend. So the dividend is structured payback. When we look at the cash flow from the entity, Leah said, we generated $2,000,000,000 of cash. We're not sit here and say we'll have $4,000,000,000 next year. We're going to deploy it.
We're going to deploy it either in through an M and A, a share redemption or even if it was a debt retirement. So we don't really look at in the sense of what are we doing with the cash because those are the 4 areas. We're going to invest in our business first and then we're going to go deploy that capital as we see fit.
Think of it this way, if you have free cash flow in the 2 to 2.5 depending on again the leverage of the model. The Board directive around deployment was always kind of 30% to 50%. The company executed to over 100%. And so then all of you said, are you going to keep your dividend, your allocation strategy the same? Well, which one, the 100% of the 30% to 50%, 100% was because we're trading at 3 times cash flow.
And yes, if we went back to 3 times cash flow with the same perspective on the future opportunity that we had then, we would do the same thing. We'd buy another 40% of our shares back. Today, the company is trading at whatever 6.5, 7 times cash flow, which in today's capital markets is actually relatively cheap still. Earnings has gone up to 12 or 13 times, which from a PE ratio fundamentally maybe is okay relative to the market seems odd to be the discount to the market when you're a technology company. But there's certainly a long way away from where it was obvious that this company was trading cheap, if you believed in its future.
So I think the point is with $550,000,000 growing at 10% for the next couple of years, that gets to be a big number pretty quick applied against $2,000,000,000 to $2,500,000,000 You're kind of in your 30% range to begin with. And then the question is, what do you deploy? And that's opportunistic. And if we see the stock go to values that we think are attractive, we'll increase the share repurchase. And I think we'd like to make sure that we're offsetting stock option accretion regardless, so at least we're kind of anti dilutive in that sense.
And then we all have the other opportunities around us in terms of are there some relatively small M and A opportunities that we want to advantage of or debt. Again, I think the company, it's remarkable if you think about what the company has done financially in terms of its debt structure over the last two and a half years in terms of extending maturity by 3 years and reducing interest expense by probably something like $100,000,000 a year. Credit markets obviously gave us that opportunity, but so did our performance. And I think we're still on the path to manage things the same way, which we think is very attuned to what the shareholders want, and we have latitude around where the value opportunities is.
Okay. Fair enough. And my follow-up, if I could, was just implicit within your comments, it seems like you're suggesting core grows 3% to 5% for the next couple of years 3% to 5% year over year for the next couple of years. The last 2 years in 2013 2014 total revenue growth was down about 4 percent. You've mentioned that your customers feel better.
What is do you think it's really changing? Is it the tablet fatigue that seems to be setting in, health of the PC market? It's a pretty meaningful change
to I think it's macro growth. I've been saying this for a year. I think it's macro growth. And I also said 2 years before that, that I didn't think it was the death of the PC nonsense. I think it was macro lack of growth.
I mean, look, the world was in a tough place for the last 5 years has been really not fun, not fun for you all so much, well, maybe more fun for the stock market. But for running a business, it's been really hard. And in the last year, I'm not saying it's easy, especially with a couple of Board members here, let's say no comp committee meeting, I don't know, maybe. But it's definitely changed, where I think most CEOs are waking up every day with more confidence about future business opportunities, which just makes it better to think about R and D investment, capital investment and deploying assets in the areas that can produce marginal growth. And I think that's what's happening on a global basis.
U. S. Is strong beyond the coast. China is strong. I think China will remain strong.
And clearly, North Europe is strong. South Europe still spotty, Japan is strong. You're definitely getting pickup around the world. And I think that's what's driving it. And I think the lack of growth in those areas or the spottiness of growth, for example, in the U.
S, yes, there was growth before that, but it was all on the coast. I think that's why things were pretty flat. Are there things going on underneath that like I'm buying tablets this quarter versus PCs versus yes, there are. Are there things going on beneath that like I've increased my utilization or now I can't increase my utilization? Yes.
But I think the general economic environment is better. That creates a better business opportunity. On the technology side though, again, are the trends of population growth is increasing, per capita income is increasing globally, number of connected people is increasing and richness of data is increasing. That all translates into the need to store more data. And again, we're in the business of providing that technology.
I'm going to shift over here to
Rich. Thanks.
Is your name Rich too? Just call yourself Rich. Then I don't
look at that.
This is Rich,
otherwise known as
a non de burrow from Green Capital. This is for both Steve and Pat. M and A was described as being opportunistic as well. We just love to get some context around where you would envision acquiring in the over the next few years and to what extent if any, might the cultivation of the software business, something more along with traditional lines, the traditional lines be included part of that strategy?
I think in the core business, there's always the opportunity, especially if it's against a rising environment, whether or not that's average capacity per drive and or TAM that we look at. And but I don't think that's huge. I mean, I think there are particular areas that if we saw an opportunity that we thought help our costs or our ability to scale or our vertical integration leverage, we would do that. I think in the software area, that's the one area where obviously we need to build the capabilities beyond our VLSI and firmware capabilities and especially as Jamie enters some of these areas where a higher level of software is needed to complement what our go to market partners are doing, that there are acquisitions that we think can help fill that gap. But they're not large, I.
E, they're not $1,000,000,000 multi $1,000,000,000 things. But I think, if we can find the right margin perspective are pretty significant. Relatively short. Okay. And then and operating margin perspective are pretty significant.
Relatively short. Rich?
Good morning. In terms of technology, Dave, you had your chart up there about where you were going to, from a next generation technology perspective, get to the next aerial density points. Obviously, helium was not on there. I know you've talked about that in the past. Can you just update us on your view on that, especially given some of the recent product announcements and whether or not customers could potentially pull you into that space if they do want second sources over time?
Sure.
I think it's markedly the same as what we said last year. So for everyone's perspective, we have a platform that got us 4 terabytes per drive. It's the highest volume shipper that we have in the cloud right now and we really like the platform. So we've extended it to 68. Our competition for a variety of technical reasons that we understand felt it necessary to bring on this helium enclosure.
We didn't feel it was very necessary to do right now. We have other ways to solve the problem that actually get us lower costs and better manufacturing efficiency inside of our own manufacturing operations. So the products are all within a few months of each other. Everybody gets wrapped around the axle about whether it has helium in it or not. It's really not a fundamental enabler for us at this point.
But we like the technology. We said last year, we've had drives running for over a decade as we understand that they would have to. And at some point, we'll deploy it. But we don't think we need it anytime in the near future.
Nagel Chops with Technology Insights Research over here. So I got a question for the ball on from Steve to Steve. So your return on invested capital of 26%. You get that operating margin expansion that you're talking about, would you expect invested capital to proportionally increase? Or are you also expecting the ROCE to expand as well?
And if it does expand, do you are you concerned about customers or existing vendors saying this is a really attractive profile, I'd like to get back into this business?
There is a lot of leverage to the model. And so and the businesses that if the growth is coming from the non core businesses, they're obviously not capital intensive business. They're if anything, they're OpEx expensive businesses in terms of go to market assets the technology. To the extent that growth is coming from the core as well as that business, then clearly that's an ROIC leverage point. Where that gets trickier, more capital more capital.
But again, I think the industry and frankly, I think all technology has been pretty careful about that type of deployment too far in advance of actually being able to fill up the freeways, if you will. So then the question is, do I think our customers or suppliers or someone says, boy, that's a great business to be in. I think actually there's people that are already saying that, but it's how do you be in it. It's a the capabilities of flying a head 3 atoms off the surface of something is not a lot of people know how to do that anymore. Dave didn't talk about wafer technology.
Today, we're probably running on our high our most complex head are probably running close to 1200 100 process steps, 1100 process steps. That's probably 400 process steps at least higher than what the most sophisticated silicon processes are. That's going to step up to 1500 process steps and then probably 2,000 process steps by the end of the decade. I mean, this is tough stuff. So I think there's attributing again down to the component technology owners or up to the service provider software level.
And if I'm in the middle, where do I go? I think a lot of the old technology companies or the major technology companies that started as component owners, they get it like going down would be great. See Bill Bradley left and Berrin Davis came in. We just had to Bradley left BD. So I thanks for answering the phone call because with that whole Tim Cook final thing.
I can't be left without a star of some sort. Love the new hairdo. So I think what's happening is that as that value shift changes, the companies that are massive with capabilities and go to market and integration technology, they understand the advantage of the component level. But from a business model perspective, they can't get there anymore because their margins have already moved into the not necessarily higher operating margin level, but the higher gross margin level. And I think they'll have a tough time explaining to the Street that the right strategic move is let me go back and own component technology.
As much as they may understand that's the right thing to do long term. And there's plenty of big technology companies that we read about in the paper every day today that's announcing, model. It doesn't really necessarily in my mind mean it's the right long term thing to do, but it's the thing they're doing. So I think there's companies that company. Are there other industries or companies that say, I want to make the bet and I want to go into that, especially companies outside the United States.
Potentially, there's companies within countries that say this is not a technology that they want at risk and we'll make the 20 year investment to get there. And obviously, starting with a core asset like Seagate might make a lot of sense. So I don't know, it's going to be an interesting world. And I don't leave it just upon Seagate. I think any core technology provider, whether or not it's in silicon side or the disk drive side or even on the compute side, has these opportunities and also has the challenges.
I guess, I'm not calling on people. So somehow mics get into people's hands and then
This is Monica from Best Digital Securities.
Can you
just stand up because where are you? Oh, great.
So the question is you talked about providing a system maybe oil and gas industry and HPC industry. So do you think at that time you could run into issues that you are competing with other storage OEM customers?
I'll let Jamie answer the question since we have real life examples already.
Yes. I mean all the work we're doing with oil and gas is with a co traveler. So we're not going directly to those companies who are working with HP. We're working with Dell. We've worked with Cray.
And we're just providing a more evolved OEM solution to them than a generic box. It's a box that's deeply integrated with the media and deeply integrated with the software ecosystem around it. But we're going to market with co travelers. We're not out there selling directly. Are they winning business from other storage companies?
Haven't seen that as a conflict. It's really about our engagement with the OEM in terms of are we providing a compelling offering within their portfolio where they see value. That does vary by OEM. And when you look at the deployment of cloud based storage systems, the end deliverable channel between OEM, VAR, systems integrator, CSP and new company is really dynamic. And there's going to be winners and losers in all those categories.
I'm not a subscriber to the theory, all the OEMs are going to lose, all the VARs are going to lose and it's all about the CSPs and the new companies. I think that's ridiculous. First of all, the new companies don't have the technology, they don't have the go to market capabilities and they can't there's no remote way for them to grow into those valuations without being acquired because the scale to compete again someone that has 20,000 salespeople on the ground is just that's multibillion dollars in a decade or more of work. On the other hand, there's OEMs that are pursuing different strategies. Some of them are aggressively challenging their legacy businesses others are trying to protect their legacy businesses.
And the ones that try and protect their legacy businesses are probably going to be less successful than the ones that are being quicker to say, I'm not going to hang up the deployment of my new architectures because I'm trying to protect some old server margin. And the VAR SI channels, I think the one where I'm probably most at odds with the intelligence people, is a lot of people think, oh, that's all going to AWS or whatever version of deployment is targeted towards small, medium business. I just think that's nonsense. I think regional differences, application business differences, capabilities about particular companies, you need people that have specific knowledge that can integrate these technologies. This is still hard stuff to do.
Even if we get to Jamie's disaggregated world of software and hardware, it's not like you can call up the post office and or whoever we're supposed to call today and have drones drop us our equipment and just plugs in at work. It takes lot to deploy this stuff. So I think this VAR SI channel has actually got a better opportunity today than they did historically when they really were just moving product and trying to post up 1.5 percent of margin. Again, but there'll be winners and losers in that mix. From a Seagate perspective, it's about engaging with all of them because we get huge market intelligence by seeing the different models that people are promoting and then leveraging as much of our core technology, whether or not it's the device level, the silicon level, the firmware level or even at the rack level to basically have that be an offering that any one of our customers can use.
Yes, we're going to customize it as they require at the margin, but we're not going to pick winners. We're going to pick everyone and whoever wins, wins and then Seagate benefits from that. So I think it's again, I don't think it's as cut and dry as people love to create the net zero sum game thing and that's just not what we're experiencing right now. Since you guys are deciding, it doesn't make any difference if I say give it to this person, then someone else gets the mic. So just hand the mic to someone with an arm up and try not to give it to the same person 4 times in a row.
Sorry, Steve.
Unless the really easy questions on this, keep giving that one.
Sorry about that, Steve. Mark Allergan. You made mention of this at the beginning, and I'm just wondering if you could give us more color. With flash flow and the 3-dimensional structures, with the problems with FinFETs, the problems with EUV, it's certainly possible we could see a significant delay on that transition. And what how does the storage world do in that situation?
It's a great question. I mean, it would be disingenuous of me not to be consistent, which is if the flash if they can't get to 3 d, we have a problem. I mean, the world has a a problem if they don't get to 3 d, because you can't get to the capacity and cost numbers they're hoping for
without that technology. And you're
right, the calling it 3 d in the calling it 3 d in the meantime. I think that's getting peeled off now. Today though, say you're delivering Flash at something like $0.50 a gigabyte, we can argue if that's the right number. If it's too high or too low, it's directionally correct. To get to $0.15 a gigabyte by the end of the decade, it takes 3 d.
And if you're not at $0.15 then the amount of flash that's available just for mobile, if you will, whatever that means, right, phones, tablets, notebooks and kind of other devices is going to chew up everything. Drive technology drive technology going under going to 0.5¢ a gigabyte by 2020. So we feel great about that margin, if they can deliver to $0.15 a gigabyte. I think there's a lot of ifs. And then if you think about traditional geometries, 16 nanometer is going to 13, yes, looks like it's going to work maybe for a couple, but going below 13 seems tough.
So you're on the right point and it gets back to this question about who's your Flash partner. This is why we think having active deep dialogues with all the Flash partners is really critical right now, because these are going to be massive investments they have to make in order to achieve these cost curves and we want to make sure that we're in dialogue with all of them and we can leverage off that technology with our controller technology and with our systems technology. But it's something to watch closely because the next couple of years, either they make breakthroughs on 3 d or they don't. If they don't, I think we have to kind of rethink what does that mean about our hybrid business because maybe it means actually that a lot of it has to be solved more with hybrid than less. Because again, you kind of get a 10x multiplier on the capacity.
If you throw a 64 gig flash chip on top of a 10 terabyte drive, you basically have 10 terabytes of flash. So but we're watching it closely and it's something I think it's important for all the analysts to watch as well. And I know obviously you're deep into it. Do you want to add anything? No.
Amit Arunani, RBC. Steve, I just had a question on the CapEx side. You guys are talking about explosive data growth. Your aero density doesn't seem like it's going to keep pace with that growth by any means. But you guys are changing your CapEx numbers.
So I'm curious what prevents you from increasing your CapEx given the fact you see this demand growth? And have you had any discussions with your hyperscale customers who are potentially co investing in CapEx?
Well, we don't need co investors because we generate a lot of cash. It's the question of when do we want to increase capital expenditure. And the answer is when we see gross margins moving up, then we'll increase it. We're not going to do it ahead of it. So we manage
our capital closely at 27 to 32 points. We think 6 to
8 is 32 points. We think 6 to 8 is right. We've been running well below that. So if we went to the high end of that, that was that would actually be a fairly significant amount of capital deployment relative to what we've done in the last few years. If we started to answer your question specifically, if we started seeing gross margins pushing consistently in the 30% to 32% range or above, then we would start saying probably makes sense to let more capital out.
Everybody wants to go to the default position of, yes, I invest any more capital because prices will go up. But you leave massive amount of revenues on the table and cash flow. So it's look, it's one of the things that we're paid to manage and I think we do a decent job at it. So when it goes up is when you see gross margins go up. Question is, does it go up slowly over time or is there a disruption, step function change in pricing then we deploy a bunch of capital.
But you have a long lead time on some of this stuff.
And I guess, Jim, as a follow-up, the $2,000,000,000 revenue run rate that you guys aspire from the cloud systems business, dollars 750,000,000 today, do you think that's going to be an organic ramp? Or is it inorganic initiatives that should help you get to that number?
Go ahead.
I mean, it's a combination of both. I mean, right now we have the EVOL business, the ZYRO Tech's business and the LSI, Avago business that are there. Right now the business is growing fast, but I do think there'll be additional inorganic work that we can do. I mean what we're doing is we're blending the margins of a series of different plays, right? When you build a system, there's hardware, there's software, there's services and sometimes they're hosting, and they all have very different margin profiles.
And it's a mix of those things. So the hardware numbers are big, but if you look at the all flash world, the all flash world and the enterprise is totally a software battle, right? You see 4 different companies with the exact same flash inside their box having huge disparity of performance capability. It is all software. The entire software storage stack has to be rewritten for flash, right, because it wears out.
So you have to build very different software that's essentially like a sprinkler, right, wearing out the flash evenly. That's a totally different set of software. So as we look at the architectures that we're building is we have a lot of the hardware components today and that's growing quickly, but we're beginning to think about how do we round out the services capabilities, hosting capabilities and software capabilities around that. And I think you'll see both organic and inorganic development in those areas. But I wouldn't say that we're done.
But on that $2,000,000,000 to be clear that's what we already have in our portfolio. That's our flash platform and our cloud. So we already have that line of sight what's in our activity.
Aaron Rakers at Stifel. Kind of just two questions. Building on that, Jamie, when you build the model or even Pat, can you talk a little about the gross margin assumption you're making in that business? Obviously, moving up the value stack, stripping out the pass through effect of the hard disk drive business that Zyrotech would have recognized. Right.
I'm just curious of why it looks like the gross margin wouldn't actually float higher. And then as a secondary question just real quickly, I'd be curious any update on Mofcom. I know it's immaterial relatively smaller for you guys, but just curious if there's been continued active dialogue there? Thank you. Let me start with the margin and I'll let you do last comment.
Again, it's a shaping, right? If you look at the majority of the $750,000,000 that we'll do this year that is OEM development for the world's biggest OEMs, ODMs, right? So that has a lower margin profile that when we sell a full system like Store to an oil and gas company. So it's about shape. So right now the majority of the sales are OEMs, but the fastest growing part of the business are the solutions that these solution sets, we still go to the market with an OEM, but the OEM derives most of their margin rather than stacking it on top of our margin.
They deliver their margins by selling compute, selling services, selling support contracts around our technology. And as that it. And each
quarter, we're going to learn
how that mix changes. It and each quarter we're going to learn how that mix changes, but the fastest growing part of the business are the higher margin pieces, they're just coming off a smaller base. Just to give you an idea, EVOL, that's a 67% margin business. So $50,000,000 of revenue there has a very different impact than 50 dollars 1,000,000 of hardware OEM manufacturing. And so I'm sitting with my sales teams who are putting a lot of effort into what should the incentive structure look like, right?
I mean the comp plan drives behavior. So what are the behaviors that we want our sellers to have? What are the behaviors we want to put in front of our OEMs? And we're starting to OEM cloud oligarchs today. And so we're coming to them saying, well, hey, don't just OEM hardware from us.
Would you like to OEM some of and white label some of our cloud services? Would you like to white label some of our software so we can begin to play with that mix? Again, we're early days. We've got 2 quarters under our belt.
Yes. And of comm no material changes. We're actively engaged with them. We have a trustee that we feel we're in good stead. We feel we followed everything.
So we'll just keep on working with MofCOM. And when they see the right path to exit that will happen. But right we're actively engaged and no material update.
Let me try and answer some questions over here. This gentleman here has had his hand up for a while. Sorry, I inserted myself.
Steve Fox with Cross Research. First, just a clarification on all the adjacencies. Do you see an EPS crossover point that we should be looking at? Like how dilutive is this currently in terms of
that'd be helpful.
Sure. You guys want to?
First on the EPS, I think with the model we gave on 2015, you're going to find yourself continue to deliver the earnings power that we did last year even taking on the additional OpEx without getting the scale revenue. So if you want to put that in a dilutive that we could have done more if we didn't have it. But I think if you extend it to 2 years, you see the earnings power increase. So we think it's a good bet. But I think that model we gave 2015 you're going to sort of line your way in that sort of zip code.
And as Steve said, if things continue and the macro stays strong through the year, we could have some lift on that. So that's where we're hopeful, but we're just going to manage whatever environment we're in.
2016 looks accretive right now.
Yes.
I
mean based on our assumptions. 'fifteen looks flat. That's why again, what we're excited about is to have that type of opportunity, but really not have an EPS penalty and actually a fairly quick return on it is exciting. And as long as we can take kind of relatively low risk investments to capture that opportunity, we'll continue to do so.
Client side, the exabytes per drive still growing quite healthy actually right now. This time of the year, we talked about PC a lot, but if you break it down to more, I'll call it traditional desktop, understanding that some of those distribution channel drives go into NAS applications or surveillance applications is definitely moving up from 1 terabyte per platter, products that we're starting we're getting out a little bit higher areal density than that. And you've seen the 2s and the 3s and the 4s, 4 terabytes go. And even on the notebook side, what's traditionally been just 500 gigabyte single platter product, you're seeing 750s and 1 terabytes and the market is definitely moving north. So I think a lot of that's around video and what's going on with the client relative to development there.
And so we're pretty excited about it and looking for resurgence, not only in total box count, but also in component count inside the boxes.
Yes. I think in 2 years at this meeting, we could be talking about as much opportunity on new client platforms as we are today about what's going on the back end architectures. That was kind of my opening comments. I mean, I think the potential of what can happen in the client as a function of what's happening with technology and deployment in the back end is really pretty exciting. It's just a question of which technology provider locks onto it and charges ahead.
And there's a couple of them right now that are starting to do some pretty creative things the client side.