Afternoon, and welcome to the Seagate Technology Fiscal 4th Quarter and Year End 2014 Financial Results Conference Call. My name is Kathleen, and I will be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference is being recorded for replay purposes.
At this time, I would like to turn the call over to Kate Skolnick, Vice President, Investor Relations. Please proceed, Kate.
Thank you. Good afternoon, everyone, and welcome to today's call. Joining me today from Seagate's executive team are Steve Lusso, Chairman and CEO Pat O'Malley, EVP and CFO Jamie Lerner, President, Cloud Systems and Solutions Dave Moseley, President, Operations and Technology and Rocky Pimentel, President, Global Markets and Customers. We've posted our press release and detailed supplemental information about our fiscal Q4 year end on our Investor Relations site at seagate.com. During today's call, we will review the highlights from the June quarter and fiscal 2014 and then provide the company's outlook for the 1st fiscal quarter 2015.
We will refer to non GAAP measures, which are reconciled to GAAP figures in our supplement. After that, we will open up the call for questions. As a reminder, this conference call contains forward looking statements, including, but not limited to, statements related to the company's historical and currently anticipated future operating and financial performance in the September quarter and thereafter and include statements regarding customer demand and general market conditions. These forward looking statements are also based on information available to Seagate as of the date of this conference call and are based on management's current view and assumptions. These forward looking statements are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward looking statements.
Information concerning risks, uncertainties and other factors that could cause results to differ are contained in the company's quarterly report on Form 10 Q filed with the U. S. Securities and Exchange Commission on April 30, 2014, in the supplemental information posted to our website. These forward looking statements should not be relied upon as representing the company's view of subsequent date, and Seagate undertakes no obligation to update forward looking statements to reflect events or circumstances after the date they are made. I would now like to turn the call over to Steve Lusso.
Please go ahead, Steve.
Thanks, Kate. Good afternoon, everyone, and thank you for joining us today. Seagate demonstrated strong operational performance in the June quarter, achieving revenues of $3,300,000,000 and on a non GAAP basis gross margin of 28.5 percent, net income of 3 $70,000,000 and diluted earnings per share of 1 point quarter generating $577,000,000 in operating cash flow and $446,000,000 in free cash flow. Full year fiscal 2014 revenues were $13,700,000,000 and on a non GAAP basis, we achieved gross margin of 28.5 percent, net income of $1,800,000,000 and diluted earnings per share of $5.04 Operating cash flow generated for the fiscal year was over 2 $500,000,000 and free cash flow was approximately $2,000,000,000 We exceeded our shareholder capital return goals for the year returning $2,500,000,000 in the form of dividends and share redemptions to our shareholders. We ended the fiscal year with approximately $2,700,000,000 in cash and investments and 327,000,000 ordinary shares outstanding.
1 of our strategic priorities for fiscal year Over the course of the fiscal year, we successfully raised $1,800,000,000 in investment grade debt, while retiring $700,000,000 These actions decreased our weighted average interest rate to 5% and extended our debt maturity profile out to 2025. We continue to be focused on making investments and acquisitions to build out Seagate storage offering, enter new market adjacencies and expand our core technical capabilities. The Q1 for our Cloud Systems and Solutions business, which includes the 1 store systems, cluster store and EVOL product lines was strong and we exceeded our internal revenue plan. The traction we are achieving with existing and new customers is encouraging and we believe this momentum will create new revenue opportunities in the future. At the end of May, we announced our plan to acquire the SSD controller and PCIe assets from Avago to further build out our integrated flash technology portfolio, expand our customer base and drive new revenue opportunities.
The transaction is on track to close at the end of August or the beginning of September and we look forward to talking more broadly about our strategic plans post close. Our fiscal year capital expenditures were $559,000,000 below our long term planning range of 6 percent to 8 percent of revenue. We continue to plan cautiously and focus on deploying capital towards the maintenance of our existing operations, increased technical R and D capabilities and improvements to our global facilities footprint. Looking ahead to fiscal 2015 and beyond, the significant changes in economics and architectures taking place in the traditional storage industry continue to create opportunities for Seagate. As we plan for our next fiscal year, we remain focused on investing in our storage technology product portfolio to deliver high quality storage products and solutions that create advantages for our customers.
Some of these investments will have immediate benefit to our business, while others will take more time, but we believe will create important strategic advantages for Seagate in the storage marketplace. As noted on our last call, we talked about demand momentum building towards the back half of the year. Based on the June quarter activity and as a result of ongoing conversations with customers, we continue to see demand trends strengthening across multiple segments. This is the first time we've seen this kind of sustained traction during the last 4 years. In addition, while it is early in the quarter, we are seeing higher than normal pull rates for July and a significant increase in capacity per drive thus far.
Turning to our outlook. We believe market demand in September December quarters are being driven by a few key factors, improving sequential momentum in the cloud market and the traditional enterprise market consistent with product refreshes sequential strength in the notebook market and seasonal demand for gaming and branded. Taking these factors into account, industry estimates are for market demand to be approximately 142,000,000 to 146,000,000 units in the September quarter. Given the current outlook for notebook demand, we anticipate the addressable market will be at the higher end of that range. In this demand environment, we believe Seagate's product portfolio is well positioned competitively.
This product has many industry leading features in terms of capacity, performance and cost. We have also delivered 8 terabyte customer development units to major customers and cloud service providers and the initial customer feedback has been very positive. While it's still early in the development of our Kinetic object based storage platform, we are in deep technical discussions with a very broad base of enterprise customers. We believe our focus on developing key values for object based storage will make the Kinetic platform a differentiated offering in the cloud storage marketplace. In conjunction with improving dynamics in the client market, we have been focusing on optimizing our client product portfolio and reinforcing our competitive position.
This past quarter, we finished qualification of our 7,200 RPM notebook product at all major OEMs and we expect to quickly ramp volume in this critical space and win share that is in line with our segment averages. We are encouraged by the adoption we are achieving with key OEMs for our hybrid drives and the top 3 worldwide PC manufacturers now offer our hard drive in their mainstream product lines. We have seen a significant acceleration in demand and plan to ship over 2,500,000 hybrid drives in the September quarter. And finally, we expect to maintain share in the gaming market and have a fully refreshed portfolio for the branded space for Seagate and LaCie products. Based on industry forecast at this time in the quarter and the competitive positioning of our product portfolio, we are planning to achieve revenue of at least $3,550,000,000 in the September quarter.
We are targeting product gross margins to be relatively flat, recognizing we have margin pressure associated with the integration of Cyrotex and the Avago Flash technology assets. Operating expenses will be approximately $550,000,000 slightly above our long term targeted range of 12 percent to 14%. We are planning for our core businesses expense to be relatively flat and approximately $35,000,000 in one time expenses from our planned 14 week quarter and other charges. In summary, Seagate is very well positioned for continued success. And while our forecasting continues to maintain a sense of caution due to macroeconomic conditions and industry dynamics, The trends we are seeing in the marketplace are continuing to align with our long term expectations for exabyte demand and the growing need for economical and efficient storage.
We are optimistic about our storage technology leadership position and we look forward to updating you on our vision and strategic plan at our strategic update on September 12. On behalf of the entire management team, I want to thank our employees for meeting our operational goals for the fiscal year and positioning Seagate for ongoing success in fiscal year 2015. I also want to thank our customers, partners, suppliers and shareholders for their continued support and commitment. And we can now turn it over for Q and A.
Our first question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.
Yes, thanks. Good afternoon. There's still some debate in the market around the sustainability of PC strength post WinXP. And I think your comments in the back half, you mentioned cloud and notebooks and gaming, but not desktop. So can you just talk about what you've seen in July around commercial desktop and whether that strength is continuing?
I think it's early Katie, but I mean what we're seeing right now is strength across all the segments.
Okay. And then as it relates to the constructive comments on the back half, what do you think is driving that? Is that just global improvement in macro? Is that catch up in capacity demand as data has grown and orders have not over the last year? Just curious what you think is driving the strength?
I'd say most of our customers would attribute it to just general macroeconomic strength. I do think there is as we've said these changes between the deployment of storage and the demand for storage and those can fluctuate based on either time to deployment or utilization rates and those are going to constantly flex over the period of years or quarters. But right now I think the strength is being driven by macroeconomic factors.
Okay. And then just lastly, given the potential for better fundamentals in the half, what should we expect on the buyback in the first half of fiscal twenty fifteen?
We'll talk about our capital allocation plan as a strategic update in September.
Okay. Thank you.
Yes. Thanks.
Our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is open.
Thanks a lot. Good afternoon, guys. Two questions. One, maybe you could just talk a little bit on the enterprise drives. What do you expect in the back half between the measured critical and the capacity optimized drives?
Do you expect both of them to see robust strength? Is one better than the other?
Yes. Rocky, you're right.
Yes. This is Rocky Pimentel. So on the enterprise side, we expect consistent improvement based on our OEM customers' anecdotal and forecasted data. On the cloud side, I think our anticipation is the capacity driven products go in more into the cloud side and we see probably a stronger sentiment in the cloud side as we go through the remainder of the back half of the year.
Got it. And if I could just clarify the second part, the $550,000,000 of OpEx that you guys are talking about for the upcoming quarter, $35,000,000 of that is related to the extra weeks. So ex that, we should think about a $5,000,000 $15,000,000 run rate on a quarterly basis go forward?
It's $35,000,000 in other charges this is Pat, I'm sorry. This is Pat. It's $35,000,000 in other charges whether it's integration and other activities as we try to knit the companies together. But above that $22,000,000 to $25,000,000 is going to be the 14th week. So you can't attribute all the 14th week.
But it's that plus other things is that 35 one time that disappears after Q1.
And then at the strategic update, we'll provide a better annual and quarterly outlook on OpEx because at least we'll be 2 quarters in on the Cyrotech business and kind of a couple of months in at least on the knowledge of what LSI looks like. So we're going to give you more transparency about what the overall OpEx looks like at that time.
Got it. And I guess Pat just to clarify the extra week is that a net neutral or a bit of a drag to your operating margins and EPS?
It's a good question. I've been around this business a long time. It's probably my 5th cycle, 14 weeks. We certainly expect to get some marginal uplift on that 14th week, but the way OEMs negotiate on a quarter to quarter basis, you can have some debate on that. There's not too much debate on the OpEx or the other costs and they're fixed and we know those.
So, but we model it.
It's a net negative on operating margin to answer your question because you get the full week of expenses obviously, but you don't get a 1 14th increase in revenues because the OEMs don't they just negotiate quarterly and as you know we're heavily weighted towards OEMs. So you get a revenue pickup, but you don't get a 114 revenue pickup, but you certainly get a 114 operating expense pickup. So
That's helpful. Thanks a lot guys.
Our next question comes from the line of Joe Yu with Citi Research. Your line is open.
Thank you. So I wanted to ask a more of a longer term strategy question and more specifically to the NAS market. And obviously you announced some products and I wanted to ask that question because the SOHO market that targeting, it appears to be fairly sizable. I mean, there's I think over 5,000,000 firms just in the U. S.
With 20 employees or less. So and also your major storage customers don't really participate in that market. So could you help us maybe size that opportunity and how soon it could become a meaningful contributor to the P and L?
I think the key to it being a significant contributor to the P and L revolves around software. I think still to date the main inhibitor to that market really achieving its full potential is that the software is difficult to use. And it's an area where we've been making investments and are trying to solve that problem. But to your point, the market is attractive. I want to say I shouldn't guess at this, but I want to say this is a $1,000,000,000 market or something like that when you take all the companies that we know and hear about often and then maybe some of what goes through integration.
I think the difficult part is what goes through the VAR channel and SI channel that ends up being a NAS product. We lose visibility on things like that. But I do think that this is a substantial market that like the DAS market as the drive industry started delivering more integrated products with software and hardware that's opportunity for us on the NAV side. And again, our distribution channel really knows how to reach into VARs and SIs that have storage expertise. So I do think it's a potential, but until the software gets a little easier to use, I don't think it's going to be as addressable as it probably should be.
Got it. Thank you, Steve for the color. And Dave, I believe in the past you've talked about various cost levers like scrap, warranty and freight. And where do you see opportunities in the second half to maybe further optimize costs?
I think we'll continue to pull those levers as much as we possibly can. There are some product transitions going on for example the 6 terabyte and things like that. So as we get up the initial ramp and then are able to get our yields up and work those issues we can continue to take costs out. So I think product transitions and more efficient use of internal components, high number, high component counts that cover fixed costs things like that. There's a lot of opportunity there.
Also there's some synergies that we get from some of the acquisition stuff that we've done like for example, ZYRIOTEX making the supply chain flow better up and down. I think there will be some cost opportunities there as well.
Great. Thank you.
Our next question comes from the line of Joe Witteen with Longbow Research. Your line is open.
Hi, thanks. If you're willing to just had a question on the rationale behind the OSI acquisition. I think the warp drive piece, the PCIe is self explanatory. It gets you closer to the hyperscale guys. But I really wanted to ask you on the core SandForce, the standard FSPs.
I know those standard controllers are typically focused on kind of the channel SSD and replacement SSD market. So just curious on your quick thoughts how that second piece is complementary to Seagate?
Yes. First of all, we have a lot of controllers ourselves. Every hard drive has a controller as well. So there's complementary technology development that's going on that can be used back and forth. But I think germane to just how do you go to market if you will.
The knowledge that you get from integrating with the various customers is pretty powerful. And I think insofar as those are the same customers that we're going out and talking to with hard drives, I think there's and we understand the market segments really well and we can address both spaces. I think that's fairly powerful also. The I think everybody needs to keep in mind that this is really a flash controller. The interface side, we have a lot of expertise in anyway whether it's SaaS or SATA or something else.
And then some of those can plug into your point about the PCIe cards. We can also plug those into that interface and go to market that way. But the NAND control piece is something obviously we've been doing a lot on for our hybrid drives. Steve talked about how that market is growing quite a bit. So I think there's of synergies there.
So hope that answers your question.
Great. Thanks. And then switching gears to branded quickly. You said you have some work to do on the product introductions coming up here. I don't know if you can give any more details there.
And second, what is a reasonable expectation of kind of go forward unit growth for branded? And I only ask because units grew only a point last year. I know Toshiba kind of aggressively grabbed some share early in the year, which didn't help. But if you can give us your updated thoughts on what the long term, mid term secular growth rate is? Yes.
This is Rocky Pimentel. So I think we're still looking at a single unit direct attached storage market for branded for the next couple of quarters, that being the dominant product. But like Steve talked about, today the branded has pretty much serviced the small home office type category of products and then demands. But I think as we see our product roadmap over the next 18 to 24 quarters, we'll start to be introducing additional more complex products in the NAS with a focus on the user experience and the software offerings. So we've totally recognized the opportunity as the segmentation between traditional between real consumer and true small business emerges that it's an opportunity for us to continue to offer low end complex NAS storage to that segment?
I think a lot of the where the real research on the market side and Jamie can weigh in on this as well is this line between prosumer to small business to medium business and which of those segments are going to be serviced through HDDs, through cloud offerings, whether or not it's A hybrid. An AWS type solution or a hybrid solution where there's local storage as well as some cloud based storage. And so we're working on architectures that in partnership with some of our cloud customers, there's utilizations where by having a hybrid product on prem storage as well as cloud based has some overall advantages either in terms of security or cost or bandwidth. So I think how that flushes out and which one of those kind of sub segments you're talking about will have different offers. But that notwithstanding that animal that is a pure NAS product for a lower end less technically competent customer the software has to get a lot easier.
Our next question comes from the line of Aaron Rakers with Stifel. Your line is open.
Yes. Thank you. I think it kind of dovetails a little bit with the comments that you just made. Can you talk a little bit more about your ZYRA TEX business and in particular your ability to position a solution sale into the cloud opportunities. Has that started to materialize?
How much was the ZYRIOTECH's revenue contribution this last quarter relative to the 100,000,000 dollars And maybe talk about how we should think about the trajectory of that opportunity going forward?
Yes. Jamie why don't you handle it?
Sure. Hey, Aaron, this is Jamie. Maybe I'll take a moment and highlight some of the accomplishments this quarter. ClusterStor, which is our high performance computing business, is gaining a significant amount of traction in the oil and gas and healthcare verticals, especially genomic sequencing, as well as seeing a lot of scale of these projects, our team closed a 65 petabyte, 3 petaflop deal with the European weather service as well as we recently won a 82 petabyte deal in partnership with Cray that's delivering 1 point 7 terabytes per second for immense data processing to the U. S.
Government. Of the Fortune 5, 2 of those oil and gas cloud scale folks that you talked about, as a sign of that pipeline, we are responding to
a half zettabyte and a full zettabyte
storage operators. Few other points that are worth mentioning is also with ClusterStor, we have an item called the Secure Data Appliance, which is the world's fastest data analytics engine. And this product achieved the intelligence community directive ICD-503 this quarter. And for those who don't know what that is, this is a group that oversees the analytics work for the intelligence community and has certified us for the world's most secure data projects with the U. S.
Intelligence community. In addition, that ClusterStor business grew at over 2 10% this quarter. The Evolp business had its largest quarter in the last 10 years. Was we had 5 deals that were over $500,000 So we're seeing the average sale price go up as we're able to in working with ZYRA Tech meet the needs of much larger organizations. And in our OSS and OEM business, which a lot of cloud providers are saying, will you actually build a custom box for us?
We saw for the first time in over 10 quarters that bookings was significantly ahead of revenue in that business. So all three businesses over performed this quarter.
Right. And so when I think about that opportunity or that business trajectory materializing and considering that you're stripping out the pass through effect of what Zyrotech would have been historically selling on hard disk drive content, how do I think about the margin profile and how that could progress and play into the Seagate story? And I'll cede the floor.
So let me take that. Aaron, this is Pat. And if Jamie wants to add color, please Jamie add more color. But when we made the acquisition, we knew it was the first thing we're going to stabilize the asset. And I think what you're hearing from Jamie is we stabilized it and start to reinvigorate the product lines.
That's the good thing. As we go through the fiscal year, we really the only thing we really said was the revenue would be $500,000,000 to 600,000,000 dollars I could tell you here we'll probably give more color, but we really don't want to break this business out till it gets about $1,000,000,000 But with that $1,000,000 to $600,000,000 I could say we're trending to the high part of that. But it won't be accretive during the 1st fiscal year, but it will there after. I think the margins have a slight drag, but should trajectory through the course of the year get equal to and above. So we like the path, but there's a bit of reinvigorating that product line to drive that and Jamie stabilizing the existing and growing with the new.
Very good. Thank you.
Yes.
Our next question comes from the line of Steven Fox with Cross Research. Your line is open.
Thanks. Good afternoon. First of all, could you just expand on your comments about the significant increase in average capacities that you're expecting for the second half of the year? Where exactly you're seeing it? What's driving it from the customer end?
And then secondly, can you help us put the 8% growth in exabytes versus the 4% decline year over year in revenues? What's making up the difference there? Thanks.
Well, on the growth thus far, it's just we're just using an average capacity per drive across the board, which is up from where it's been the last several quarters. And that's across all customers. And so we're not going to talk about customer specific or market
specific. Clearly, the high capacity drives are getting higher capacity and the lower end drives are going up in capacity. So there's multiple right. And data, right.
Okay. And then just putting the
Can you restate the second half of the question? Yes.
I think you said in your prepared remarks that exabyte growth was up 8% year over year for the quarter. Your revenues were down 4% year over year. So how would we foot between the 2?
I think as we highlight the back half of the year where the cloud was somewhat muted, where they're the drives. We saw the average capacity drive go up, but we saw as we talked about in the last two quarters where we had some whether it's enterprise or cloud that was somewhat muted, we see that accelerating. So what we saw were growth in a lot of the in the notebook drives which are per unit a lot lower capacity. But even as those units go out their capacity for drive is increasing. So I think you have to look at the whole portfolio.
But if you look at it individually, you'll see an increase of every drive capacity across the board. So every segment is getting richer. It's just a mix that's sort of covering that story up.
Thank you.
Thanks.
Our next question comes from the line of Sherri Scribner with Deutsche Bank. Your line is open. Hi, thanks. Just going back to the ZYRETEX revenue question. I think you had said in this quarter you thought that revenue would be about $100,000,000 in this quarter.
It sounds like you guys think that it was higher than that base in the $500,000,000 to $600,000,000 annual revenue run rate at this point. Is that fair?
Yes, that's fair. Like I said, we're not breaking it out until we get to a significant more scale, but that's probably a fair assessment.
Okay. And then just looking at the guidance for $3,550,000,000 Amot, is it fair to assume that you are not including any revenue benefit from the 4th quarter I'm sorry the extra week in the quarter?
We're some marginal, but not as Steve said, it's not a 1.14 percent, very small.
Okay. And then just looking at your guidance versus the TAM guidance, it looks like revenue is going to be up at the midpoint about 8% versus units up maybe 6% to 7%. Is that because of better mix? Why do you expect the ASPs to go up? Thanks.
That's all mix. As we've talked about in the last call where we see the strengthening of the back half of the enterprise and the cloud, classic enterprise and cloud that's being fueled by that. And it's also being fueled by richer content and richer mix up of every segment drive.
Thank you.
Yes.
Our next question comes from the line of Rich Gugel with Needham and Company. Your line is open.
Thank you. Good afternoon. Actually just taking on that last comment Pat, what are you seeing in terms of pricing dynamics in the retail segment? Are you expecting prices to go up there as well? And then I have a follow-up.
As I look at the
whole portfolio, it's relatively benign. It has been relatively benign for a while and we expect it to stay that way. We don't we're not a company that plays quarter end deals. We sort of just run a long term business model and we expect pricing to be relatively stable what we've seen over the last year.
But are you and when you say retail, Rich, are you talking about branded?
Yes. So
we don't see price rises, but we see relatively price stability.
I'd say that the price competition has been less aggressive than it was Yes.
Yes. And I would say this is Roxy Pimentel. We see a benefit of a mixing up of capacities in the retail portfolio strength in the 1 terabyte, 2 terabyte offerings and as we continue to go out over the next few quarters. So certainly that's going to be positive impact to the retail business across the industry basically.
Okay. And secondly on margins, as you look at the balance of the year taking into account Avago and what you're doing with the ZYRETEX business, do you think that there's greater leverage on the gross margin side or on the on the operating margin side?
For the fiscal year, I think we have more leverage on the gross margin. The operating leverage will be a little more difficult during fiscal 2015 until we get scale and as we knit these companies together to get more efficiencies as Dave highlighted on the supply chain as we look at all the facilities, we got to knit those in. But that's going to be the challenge if you want to think of it that way for us in fiscal 2015 to set up a good 2016. But the gross margin leverage, I think we're going to have tools to optimize that better than the operating for the 1st 12 months.
Okay. And then just lastly, Steve, you mentioned that for the first time in 4 years, you're starting to see a little bit better demand and visibility out of the OEMs. I'm just interested, are you seeing any changes in behavior regarding inventory or hubs or how they want to manage the business this time around? Or do you think you can maintain the same supply demand discipline that's been in place for a few years?
No, I didn't say OEMs. I said customers.
For customers.
And I think I'll do a quick answer and then I'll let
Dave talk on the operational side, which is
really what you asked. But I would say across the customer base globally, there's a greater degree of confidence about what's ahead of us for the next four quarters than what I've felt anytime in the last since the debacle of 2,008 September. And we've had a couple of starts before as I mentioned on the last call, but this is I think the first time it's actually sustained itself here into the summer. And I think that's encouraging. And then in terms of the operational side, I think things just continue to get better in terms of people understanding that as my friend John Monroe says inventory is not an asset.
Velocity is important. And therefore lean supply chains are where people make money. But I'll let Dave talk to that because we've made a lot of good progress with some of our key customers there. And in that it has been mostly OEMs.
Right. To that end Rich, we've had a lot of success optimizing freight lanes using the right kind of freight whether it's ocean or rail not air and using super hubs rather than individual JIT hubs for everybody to do late stage postponement and things like that has really helped our inventory positions. And that's helped by the fact that some of the big OEMs are working complexity across every segment. They're doing a really good job there. We can always redeploy those drives out of the channel or whatnot if they don't have the demand.
And I think just in the last few years that's been a market change in our industry. We'll continue to work on that and systems that enable that with our key partners.
Great. Excellent. Thank you very much.
Our next question comes from the line of Monika Garg with Pacific Crest. Your line is open.
Thanks for taking my question. Just a quick just the market share was just a bit lower in the quarter about 39 points, usually it's still 40% around. Any particular reason or you think it's just quarter over quarter noise?
No, I think it's quarter to quarter noise. Again, the industry still has behaviors competitively at the end of the quarter that Seagate tends not to participate cycle with that gaming company, and where you're at in the cycle with that gaming company, you could see share point moves of a point. So half point moves are noise level to us. We believe we're going to win with good solid product execution, better performance, better reliability. And we're not worried about where the share is at these levels.
This is our revenue share, our exabyte share has been relatively flat for the last 4 or 5 quarters. And we really focus probably more right now on revenue share and exabyte share than we do on unit TAM share as long as we're getting enough absorption. Because of the shift to the higher capacity per drive that we've seen across the portfolio, we're absorbing heads and disc and that's what we need to
Then just as a follow-up. Seagate currently uses much higher external media and head capacity. Do you think you will move more of it in house just maybe it could help the margins more?
If we were really short term focused that would be something we could do. But our thesis is that there will be long term constraints in the supply of storage versus the demand of storage. And therefore, we believe the partnerships that we have with our head vendors and our DISH vendors and other parts vendors will be well served over a longer term view where we can more efficiently use our capital and frankly more efficiently use our R and D dollars as we are with some of our partners right now.
Thanks a lot. That's all for me.
Our next question our last question comes from the line of Ananda Baruah with Green. Your line is open.
Hey, thanks guys for squeezing me in. Hey, 2 if I could. The first, Steve, is for you with regards to your comments around, I guess, 12 month visibility. I guess, 12 month visibility is sort of increased demand to go along with this customer visibility there. Does that include your hyperscale customers?
And I guess really what my question is, do we have maybe longer than a 2 quarter deployment cycle here with Hyperscale?
Again, my comments were about what customers are saying across the board in terms of the macro trends in the world and the confidence it gives them in their business models. You can't draw 1 to 1 correlations on what does that mean of this hyperscale customer or that hyperscale customer. Every one of those companies that are providing public cloud services are operating under different business models with different architectures, different applications, different deployment rates. So I'd hate to paint a big broad stroke other than the general confidence level of people running technology companies or that are involved in the business of technology is as strong as I've seen it in 4 or 5 years.
Okay, got it. Got it. That's helpful. And then my follow-up is with regards to gross margins. You're forecasting flat gross margin even with the cost load of the acquisitions, which would suggest gross margins, I guess, up year over year without that load.
And then your I guess, there is some commentary around having leverage through the year with regards to the acquisition to get some gross margin leverage. So my question is, we had a few quarters of year over year gross margin increases sort of on an apples to apples basis without the acquisitions. Do you think we're in sort of an environment now where that kind of dynamic is more or less continue for the foreseeable future? And then the second part is, given you have levers on gross margin from the acquisition, should we expect a little bit more expansion even on top of that over a reasonable period of time?
I think Well, we're going to talk about the long term gross margin model in September. I think viewing the company without the acquisitions at this point is irrelevant. I think the trends are again that if the fundamental demand is towards higher capacity per drive subject to a benign relatively rational pricing environment where we match supply and demand closely and don't do silly things to take a point of share for no obvious reason, then yes, the general margin structure improves from the industry, but it has to. For us to hit the demand profiles that we see out in 2016 or 2017, we will not be able to do it on capital to revenue of 6% to 8% and I don't think we're going to be able to do it on 28 points of gross margin. I mean, there's just to deploy the amount of capacity that we have to hit the multiple zettabytes of demand out in 2017 or 2018, we're going to have to establish more consistent business models.
So if it isn't moving in that direction, the industry is going to be even more challenged.
Got it. Appreciate that.
All right. Look, I want to thank everybody for taking time on the call today. We will see many of you prior to the next call because we have the Analyst Day on September 12. And in the meantime, we thank you for your continued support.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a good day.