Good day, ladies and gentlemen, and welcome to the Seagate Technology fiscal third quarter 2014 financial results conference call. My name is Jackie, 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 Scolnick, Vice President, Investor Relations. Please proceed, Kate.
Thank you. Good afternoon, everyone, and welcome to today's call. Joining me today from the Seagate executive team is our Chairman and CEO, Steve Luczo, EVP and CFO, Pat O'Malley, President, Global Markets and Customers, Rocky Pimentel, President, Operations and Technology, Dave Mosley, President, Cloud Systems and Solutions , Jamie Lerner, and EVP and General Counsel, Ken
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Information concerning risks, uncertainties, and other factors that could cause results to differ materially from the expectations described herein are contained in the company's annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on August 7, 2013, and in the supplemental information posted to our website. These forward-looking statements should not be relied upon as representing the company's view of any 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 Luczo. Please go ahead, Steve.
Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. Before I begin our quarterly overview, I'd like to welcome Jamie Lerner, who has recently joined Seagate and is our President of Cloud Systems and Solutions. Jamie is leading the integration of the storage systems business we have recently acquired with Xyratex, in addition to other cloud initiatives within Seagate. We expect Jamie to provide more details about these initiatives on next quarter's call. Now I'll review the key figures from our fiscal third quarter. Seagate demonstrated solid execution this quarter, achieving revenues of $3.4 billion, net income of $395 million, and diluted earnings per share of $1.17. On a non-GAAP basis, we recorded gross margins of 28.5%, net income of $453 million, and diluted earnings per share of $1.34.
During the March quarter, we shipped 50.8 exabytes of storage and averaged 920 gigabytes per drive across our portfolio. Our non-GAAP operating margin for the quarter was 14.7%, and operating expenses were $470 million, slightly better than our plan due to lower variable compensation and cost containment efforts. Inventory turns, day sales outstanding were within our targeted ranges. We continue to manage our capital investments closely and our production cautiously, and we are pleased with our performance against our metrics for manufacturing efficiency and operational excellence. For fiscal year 2014, our capital investments are running below our long-term targeted range of 6%-8% of revenue, and they will most likely be below the range for the full fiscal year. Operating cash flow for the quarter was $443 million, and free cash flow was $319 million.
There were various reasons operating cash flow was impacted this quarter, some of which were non-recurring in nature and some front-end linearity. We expect to be back to our normal level of operating cash flow in the June quarter, and we anticipate achieving operating cash flow of at least $2.7 billion for the fiscal year. Our balance sheet remains healthy and the end of the quarter, with $2.3 billion in cash and investments. We continue our focus on returning capital to shareholders, and during the March quarter, we returned $324 million, including $184 million to redeem 3.5 million shares and $140 million for a quarterly dividend of $0.43 per share. We are planning for a similar level of cash return in the June quarter, which will keep us on track to exceed our shareholder capital allocation goals for the fiscal year.
We are currently in the early stages of planning for fiscal year 2015, and we will update our capital allocation plans on the July call. We closed our acquisition of Xyratex on March 31st, slightly earlier than planned. The addition of Xyratex will further ensure uninterrupted access to important capital equipment for our integrated supply chain and expand Seagate's storage solutions portfolio with their enterprise data storage systems business and high-performance computing business. We are in the initial stages of integration planning, and we expect the acquisition to be slightly EPS accretive in fiscal year 2015. We continue to believe that this decade will be transformational in the amounts of data created, as well as where and how data will be stored.
Economics of storage infrastructures are changing as utilization of public and private hyperscale storage and open source solutions are working to reduce the total cost of ownership of storage, while increasing the speed and efficiency with which customers can leverage massive computing and storage power. Growth in mobile, personal devices, video surveillance, and big data analytics are all trends that we believe will continue creating significant demand for next-generation storage systems and solutions. Through our technology investments, we are aligning our storage product portfolio with these emerging trends, which we have categorized as mobility, cloud, and open source computing. We believe the significant investments we are making at the drive device level can bring even higher capacities, faster access time, increased reliability, and improved overall efficiency to storage systems.
Examples of these investments are reflected in the new products we introduced this quarter, including our six terabyte nearline enterprise drive, which is our highest capacity self-encrypting product for server and storage systems and the fastest nearline drive on the market. We believe we will see a strong ramp for this product in the second half of the calendar year, as enterprise cloud customers continue to push for higher density drive technology. Our seventh generation surveillance drive, which can store over 500 hours of high-definition video, is specifically designed for the high write workloads of surveillance applications. It is estimated that surveillance cameras worldwide are producing over 400 petabytes of data each day, and we believe this market will continue to be a high-growth opportunity for Seagate. In addition, market interest for Seagate's object-based Kinetic Open Storage platform continues to grow across many industry verticals.
We believe the Kinetic platform will be a fundamental underpinning for next-generation cloud architecture. We continue to actively cultivate an ecosystem of system integrators and software developers. We plan to have further technology development and customer announcements later this year. Turning to our outlook, the market environment in the tech sector remains dynamic with visibility somewhat limited. We therefore continue to plan conservatively for the near term, while providing flexibility to meet in-quarter upsides and make investments for the longer-term opportunities we have discussed. For the June quarter, we are planning for revenues of at least $3.3 billion and operating expenses of $505 million, including the acquisition of Xyratex. As we just closed the acquisition, we are not modeling synergies assumptions at this time.
Non-GAAP margins of approximately 28%, down slightly from the March quarter, reflecting seasonality, market mix, and with relatively stable pricing, and maintaining overall market share of approximately 40%-42%. Our June outlook assumes unit demand to be down a few points, with negotiated pricing having been relatively benign. The outlook also assumes exabyte growth will be modest due to seasonality in the client and branded markets, as well as due to a few specific temporal factors in the enterprise and nearline market this quarter. These factors include a few significant enterprise customers are absorbing in-house drive inventory and reducing disk drive purchases in the June quarter as they prepare for the new product introductions planned for the second half of the calendar year.
A number of cloud service providers have accelerated their time to deployment and have improved overall utilization in existing cloud infrastructures during the last three to four quarters, thereby absorbing their in-house drive inventory over the last two to three quarters. Based on current customer sentiment, we are planning for a stronger market demand in the second half of the calendar year as these entities deploy new build-outs. As we look ahead at the second half of the calendar year, we are anticipating the stronger seasonal demand in the client and branded markets that we have seen historically and for the temporal issues in the enterprise and nearline market to be resolved. Given these factors, we would expect market demand at the higher end of the range we've seen over the last several quarters, with continued benign price erosion.
On behalf of the entire management team, I'd like to thank our employees for their performance this quarter and thank our customers, partners, suppliers for the support and commitment, as well as our shareholders. At this time, we'd like to open up the call for questions.
Ladies and gentlemen, if you have a question, please press star on your telephone. If your question has been answered or you would like to withdraw your question, please press star two. Your first question comes from the line of Rich Kugele with Needham & Company. Please proceed.
Thank you. Good afternoon. Just a couple of questions. I guess first
Just to follow up, Steve, on your last comment there on pricing. Your indication is from conversations with the OEMs that you think that the second half, if the demand profile plays out, that you can maintain this or even a lower level of price erosion quarterly?
Yeah. If we break it down by market, Rich, I think, on the client side, both notebook and desktop, those markets have stabilized, I would say, over the last year. I think we've been pretty consistent in saying we thought it was kind of a flattish market year-over-year, and it seems to continue to be so. I think for the rest of the year, we're probably thinking the same, which would imply maybe low single-digit growth for the second half of this year relative to the first half, but flattish year-over-year. That pricing has been pretty stable overall. There's been shifts by the OEMs in terms of capacity points that they've been purchasing. Nearline, I think, has been aggressive the last couple or three quarters, and I just don't see those price erosions sustaining themselves.
Given the capacity points that we have to deliver over the next year, going from six to eight to 10 terabytes, that's a lot of technical investment. As you know, it's also a lot of test investment, and therefore, I think that the margin profile on those drives is about where they can be in order to sustain the investment that we have to make going forward. Yeah, I would say that I would see a reduction in that price erosion to something closer to what we've seen on the client side.
Okay. Just lastly, I don't know if Jamie wants to handle this or Pat, but how should we be modeling the progression to neutral to slight accretion from Xyratex? How long do you think it'll take to get to a more efficient operating model for that business?
This is Pat. Jamie could add color to it, Rich. Obviously, we haven't started the synergies. Jamie and his team and Dave and his team could look into the capital equipment group have already started that. I'd imagine you see incremental improvements quarter to quarter. Obviously, we want to drive the top line growth as well and not just the OpEx, but I would expect you to see OpEx reshaping over the next two quarters and start seeing signs of that in the P&L as Jamie reshapes the top line. That'll probably take a little longer.
Will the EVault business be rolled up into that entity?
Jamie has responsibility for EVault as well, and we're going through the work right now to figure out how we're going to integrate our EVault business, Xyratex, our data center operations business, and some of the efforts that we had focused on devices aimed towards hyperscale inside both the product management and the design center. All of that will be under Jamie.
Excellent. Thank you very much.
Thanks.
Your next question comes from the line of Aaron Rakers with Stifel. Please proceed.
Thanks for taking the question. The first question, just to build on Rich's question on the Xyratex transaction. As we build our models, I've got a lot of questions around how we think about the gross margin of bringing Xyratex into the fold relative to what Xyratex would have looked like on a standalone basis to gross margin on that systems business. Maybe you can help us understand, at least albeit early, how we should think about that gross margin trajectory from that revenue stream, and are you still targeting $500 million-$600 million in revenue for the first fiscal year of combined, that being in the model?
This is Pat. I think the $500 million-$600 million is where we're targeting. Whether we can achieve that, obviously, we engage with customers, it's been pretty positive. That would be the model we're aiming to. Even with that, with the gross margins, probably it's a 10-20 basis points drag on overall HDD. We'd hope to even neutralize that as the year. That's what we're modeling out.
Okay. As a quick follow-up, can you talk a little bit about how you guys are thinking about capacity shipment trends in the overall hard disk drive industry? I think, obviously at 8% year-over-year growth, that's a little bit off the pace that we saw outlined at the analyst event back in 2013 at, I think, 26%. Maybe you can help us understand, are we changing at all from that growth trajectory in terms of capacity shift, or are you still comfortable that that's the progression we're working towards?
Yeah. I think we're still working towards that projection. It's an interesting discussion between capacity shift versus capacity deployed, i.e., end-user demand of petabytes versus ability to deliver areal density. I do think that there's been a lot of inventory absorbed over the last six months as, again, on the cloud side, as utilization rates have bumped, and deployment times have been brought down, and we know at least of one major customer that also kind of redeployed a bunch of drives into "cold store or warm store." All those customers have kind of said that that one-time event or series of one-time events is kind of over, and they're looking at second-half demand that more reflects the end-user growth in data.
Their end-user growth in data has actually probably accelerated, not decelerated over the last six months. That's why I'm still fundamentally encouraged by the overall delta, which is what's petabyte growth at the demand level versus areal density growth, and I still believe it's running 2x at least.
Okay. Thank you.
Yeah, thanks.
Your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed.
Hi, thanks. I just wanted to ask a quick question about your expectations for Xyratex in terms of how much revenue they add next quarter. I guess I would have thought the revenue would have ticked up some based on the benefit of having Xyratex in the business.
Yeah, about $100 million. It's really hard to say right now because again, they had a big test business, which we now own, and we don't really know what the order profile of that business is going to look like yet. Obviously, their customers are still deciding which orders to place when, then, of course, we have to be able to fulfill those, and that timing isn't completely understood yet either. I think right now we're thinking about $100 million. I think you also have to recognize that the systems business was declining fairly rapidly over the last year. The good news is that the traction that we've had with our OEMs has been quite positive in terms of their perspective on what they might do with us now that it's owned by Seagate.
Of course, the lag time on that is fairly long as well. It's not like they make an order, and we ship it this quarter. I think we have to recognize that those revenues were falling, and we're kind of offsetting the fall of that revenue as quickly as we can. All in all, I think about $100 million, which kind of speaks to a seasonal decline in the June revenue numbers for the HDD business. Then we'll just see what happens with the test business or whether or not the Xyratex business picks up a little bit. The good news on the Xyratex business is they do a lot of the integration for some of the new storage architectures as well, and we've seen a lot of encouraging signs from those customers by Seagate's ownership as well.
I think we just have to get a little more time under our belts to be able to be more articulate about what that revenue profile looks like, and we hope to do that in the call for the June quarter.
Okay. That's very helpful. Thank you, Steve. I just wanted to follow up with a question about your expectations for PCs. You were generally pretty positive in your comments earlier about the PC market, but I think some people are concerned that maybe the XP refresh impact is starting to wane, so wanted to get your updated thoughts. Thanks.
In general, I think, versus last quarter, where it felt like business was getting some traction, and I was a little bit cautious about are we going to be really disappointed in April or May like we were kind of the last two cycles this happened. I actually have to say that I'm more encouraged in terms of what I think is going on a global basis in terms of economic activity and what that means for technology spending in general. I think that we've stabilized the decline, and I think we're going to see some modest growth really across all segments here going forward. June quarter is mostly always seasonally down except for when we've been recovering from floods or huge cutbacks by the industry.
Where we're at in June, I actually feel okay about, and the back half of the year is we're starting to get some good indications from customers about stronger shipment scenarios.
Great. Thank you.
Thanks.
Your next question comes from the line of Steven Fox with Cross Research. Please proceed.
Thanks. Good afternoon. Two questions from me. First of all, I don't know if there's any more detail in terms of what the initial steps are that you have to tackle in terms of integrating Xyratex, it'll be great to get some more color on that. Secondly, Steve, in terms of some of the temporal issues you mentioned, you did mention that higher utilization of HDDs. I guess is that something that we should think of as an ongoing impact as some new technologies have been sort of ramped into some service provider capital models?
Not as I've heard the conversation, which has been directly with two of the largest CSPs. Again, I think people need to understand that for the big CSPs today that are buying directly mostly from the drive industry, they're all employing very different architectures. I'm not sure everybody grasps this yet, that those architectures are in fact their proprietary competitive advantages for the application set that they're serving. The Google implementation is very different than Microsoft's, is very different than Amazon's, and different than AWS' versus the rest of Amazon versus eBay. What's happening is that as they are pursuing different architectures to achieve those application sets, they have breakthroughs every once in a while, whether or not they're on how quickly they can get a server up and running and active with storage to how they get utilization rates.
In a couple of cases over the last couple of quarters, a couple of those really big providers have either dramatically pulled in time to deployment, in one case, because I think they were probably not competitive, and/or kind of step function improvements in utilization. The conversations that I've had pretty much from those technical leads have pretty much concluded that that's it for a while, then in another year or two, maybe there's another step function change. I just think that's the nature of the business with those big CSPs that are plowing multiple billions of dollars into their infrastructures. I don't think it was some magic of some new technology. By the way, I wouldn't say it was disk drive related. I think it's overall system related that those are utilization rates and deployment rates that have improved, not just targeted towards disk drives.
I think it's across the board.
Great. That's very helpful. Then just any other color on what are the first steps in terms of what you got to get a handle on with Xyratex?
I'll let Jamie talk to it because he's been into it the most.
Hey, Steve, this is Jamie. I think we're thinking about the acquisition of Xyratex in terms of putting together both a technical architecture and a business architecture. On the technical architecture side, we're looking at ways and drilling in with our customers into ways that we can combine the storage devices that we have into the enclosures and appliances that Xyratex builds and working with our customers to say, are there architectures that we can come up with that allow us to achieve synergies or technical breakthroughs by combining those technologies? Essentially, Seagate on Seagate methods. On the business architecture, we're looking at can we provide greater operations, manufacturing, and logistics synergies between the disk business and the enclosure business to pull cost out of the model as well. We're working through both those, and next quarter, we should be able to come back with a strategy.
Great. That's all very helpful. Good luck going forward with that.
Yep. Thank you.
Your next question comes from the line of Amit Daryanani with RBC Capital Markets. Please proceed.
Yep, thanks a lot. Good afternoon, guys. Two questions for me. One on the enterprise side, Steve, you talked about a couple of the temporal issues that are impacting the enterprise business. Sounds like enterprise units, both mission-critical capacity will be down sequentially in June. I'm curious if you're seeing incremental conversations about SSDs becoming a more of a replacement option on the enterprise side, and if that's playing any part, especially from the nearline drives.
No, again, the architectures aren't really about replacing HDDs. We've kind of been over this a whole bunch of calls. SSD deployment is about acceleration and fast data processing. HDDs is about storing data, and they complement one another. It's not that architectural shift. What's happening is we have two big customers who are both about to release new products on the storage side, which are mostly HDD-based storage products for the second half of the year. When they do that, they typically bleed down all the inventory they have inside of their company in various labs. People don't realize the scale of what some of these customers do in terms of the drives that they hold for a number of years as they test these systems.
When they get to the end of a product cycle, they basically are able to flush through all that technology as they prepare for the next generation of technology. It's related to that.
Fair enough. Then I guess the $505 million of OpEx that was mentioned for June, how much of that incremental $35 million is Xyratex centric versus some of the organic Seagate dynamics? If you break that out, that would be helpful.
The vast majority of that, you could probably model in $40 million for Xyratex, $35 million-$40 million, almost all of it. You might have little puts and takes, but you just model all of it.
All right. Thanks a lot.
Yeah. Thank you.
Your next question comes from the line of Katy Huberty with Morgan Stanley. Please proceed.
Yeah, thanks. How do the shorter cloud deployment times impact your order visibility? In other words, when will you have certainty around whether those orders come through? Is it a few weeks ahead of time, or is it months?
I disassociate the two things. It's not so much about visibility on orders. It's about how much are they guessing about what they need. I think how I view it, Katy, is that we have way better alignment between supply and demand, because with the longer deployment periods, what was happening is that the customers were having to predict out in the future how much capacity they would need, server capacity, storage capacity, and they would buy all that, and then sometimes they were right, and sometimes they were wrong. Of course, being wrong was probably a really bad thing because then they couldn't bring servers online. With the ability to deploy quicker, it just means that the forecasts that we get are more accurate.
In terms of our ability to respond to that's a completely different dynamic, which is actually becoming more challenging, I think, for the customers. One of the reasons why we think some of these pricing issues are going to kind of have to stabilize is that as you get to the six and the eight and the 10 terabyte drives, the lead time on those drives is going to be pretty significant, whether or not that's wafer related or whether or not that's test related. You're not going to be able to call up and say, "Oh, by the way, I need an extra 500,000 ATBs I forgot to order" because they're just not going to be there, and the industry can't respond that quickly.
I think we're going to get better linkage on supply and demand, and I think we're probably going to get more accurate forecasts because people are going to realize that the lead times on these drives are longer, much longer than they're used to.
Okay, thanks. That's helpful. Any update on expected timing or results of MOFCOM deciding whether the industry can begin taking out costs?
Ken talk to that.
Yeah, we continue to have a positive dialogue with MOFCOM regarding market dynamics that gave rise to the original conditions that were attached to approval of our Samsung transaction.
We're going to continue to have those discussions with MOFCOM. We continue to expect that in due course, the conditions will be released. Unfortunately, I can't tell you it'll be this day or that day. It continues to be something that they're paying close attention to, we'll continue to cooperate with them on.
Okay. Thank you very much.
Your next question comes from the line of Ananda Baruah with Brean Capital. Please proceed.
Hey, thanks guys for taking the question. Two, if I could. The first maybe for Pat, the second for Steve. Pat, I believe last quarter, you guys were talking about HDD-related OpEx starting to soften at least as a percentage of revenue in the June quarter and beginning to drive some leverage and having some of that going forward. Was just wondering if you could give us some context around what to expect now.
I think you saw it manifest in this quarter where we basically went from the $490+ down to the $469. We started shaping that at the end of activities in December, which showed up in this quarter. We expect those to stay at the same level from an HDD level and all the increases from Q3 to Q4 are really driven by the integration or just the addition of Xyratex OpEx. As we look to integrate the organization in Xyratex, we expect to get some synergies there. Many of the modes that we're looking to reshape right now, Ananda, is reshape and deploy. Obviously, with Jamie's initiatives to drive cloud, we want to make the appropriate level investments there with the SSD appropriate level there.
Probably going to stay at the high end of that 12%-14% for a period of time with the expectation to drive revenue growth with those investments. For the short period of time, in that high end of HDD, then we have to figure out how to integrate Xyratex, as Steve said, EVault, look at the whole holistic picture and say, how do we reallocate that? That's going to be at the high end of the range. As Steve talked about the capital allocation, we'll talk further about the OpEx model for 2015 as we finalize our plans going into next year.
Yeah, thanks, Pat. That's really helpful. Steve, just a follow-up for you on your TAM comment with regards to the second half. I guess you said sort of the high end of what current quarters have been. Should we expect September and December to be sort of towards the high end of what recent quarters have done, which would be more in the 142 range? Are you saying September quarter will be sort of at the high end of what recent September quarters have been and December quarter at the high end of what recent December quarters have been? Just clarification there. Thanks.
Yeah, sorry. I wasn't trying to be confusing. Yeah, I think we think that September and December are probably in the 140-145 range.
Thanks a lot.
Your next question comes from the line of Andrew Nowinski with Piper Jaffray. Please proceed.
Okay, thanks for taking the question. I understand the weakness in the enterprise, but can you discuss the initial uptake of your new 6-terabyte drive by the cloud providers? I have a follow-up. Thanks.
Hi, this is Albert Pimentel. The 6-terabyte drive is in late evaluation with the customers, and we see clearly very positive response from all the cloud customers. They're definitely interested in higher capacity or higher density per drive products, and we've done some really good engineering work on that product. We think it's a real value leader in performance and design margins, so we're pretty optimistic about how it's going to play in the marketplace when we start production shipments probably towards the back half of this quarter, but certainly building strongly as we go into the second half of this current calendar year.
Okay, got it. I know you'll update your capital allocation next call, but can you tell us how much cash you need on hand to run the day-to-day operations and what's your appetite for taking on more debt to maintain the current level of repurchases if needed?
We think we have the appropriate level of leverage. We certainly could take on more leverage, but we look at that leverage more as monetizing it through investments in business. I think returning the level of capital we've been has been appropriate for where we've been in the investment stage in our company. We're still committed to our dividend and growing the dividend, and we'll continue an active buyback program, but we want to look at everything that's available to us. We'll monitor that, and like Steve said, we'll come back in July with further updates on that. We certainly will continue a buyback and a dividend program. With the debt, like I said, I think the levels we have today, even though we have the capacity for some additional debt, but I think the levels are fine today.
The minimum cash level?
Oh, I'm sorry. Minimum cash level, $1 billion to $1.5 billion. We could run the business at level. More comfortable with $1.5 billion for strategic elements that may pop themselves up, but we feel comfortably at the $2.3 billion that we have plenty of cash to run the business.
Got it. Thank you.
Yep.
Your next question comes from the line of Monika Garg with Pacific Crest Securities. Please proceed.
Thanks for taking my question. Just kind of first on the September and December TAM, which you talked 140-145 range, maybe could you elaborate which particular segment you see the more pickup for the demand?
I think it's across the board.
Thanks. Then, you kind of talked about some inventory digestion at your customers at enterprise and hyperscale. Do you think it is possible that you are seeing the pause because people are waiting for the six terabyte drives, or it is more to do with some products at their end?
No, it's just to do with our own products.
Okay. Just kind of the last one on the NAND side, maybe could you talk about the NAND strategy? Do you think you need any more M&A in this space, or do you think you would like to grow the business more in-house? Thanks.
Hi, this is Rocky Pimentel. On the NAND side, certainly we have our organic efforts on SSD, as we've said in the past, we're definitely always on looking at inorganic activities we can do, whether it's acquisition or investment. We continue to have a pretty disciplined filter. Needless to say, we see ourselves pushing forward the initiative from both an organic and an inorganic standpoint.
Thank you. That helps me.
Your next question comes from the line of Scott Craig with Bank of America Merrill Lynch. Please proceed.
Hey, thanks. Good afternoon. Hey, Pat, I was wondering if you can go over the OpEx again on the quarter because it came in a bit better than you guys had thought originally. You mentioned cost containment, given you expected some of the comp stuff to go away. Is there anything specific you guys are doing on the cost side that perhaps continues moving forward here? Secondly, just a cleanup item on our models. On the tax rate, there was a credit there as opposed to an expense. Can you help us understand what that was, and is that something that is more one time in nature? Thanks.
Yeah. Starting backwards on the tax, there was some tax adjustments, every periods from time to time, audit periods expire, time. You take a look at that, you make the appropriate level adjustments. That was a $14 million one-time item, and that's why I think planning the tax rate about $60 million on a go-forward basis, spread equally through quarters is probably your best model for that. On the OpEx, were some actions of reshaping some of the activities throughout the company. We had some cutbacks over the last several months, so we certainly reshaped some investments through actions inside the company and then through slowing down some investments on pieces. We talked about SATA for SSD, where we thought that wasn't probably the appropriate place, so you saw some expenses come out of there.
It was looking across the board, not just core, but some of these new investments where we thought the best chances for get the adequate level return on investment. That was done. That activity will continue to keep ourselves flat through on the HDD through Q for the June quarter. As Steve and Jamie talked about from a business process, we'll continue to look to how to integrate further, and maybe harvest some of that, but like I said, probably with the appetite to redeploy in other areas. I would, like I said, model that high end of 14%, and we'll get more clarity on the Xyratex, EVault, everything else optimization in the July timeframe.
Okay, thank you.
Sure thing.
Your next question comes from the line of Joe Wittine with Longbow Research. Please proceed.
Hi, thanks. With the weakness in enterprise, I'm curious, Pat, if there's an impact, a noticeable impact on gross margin from that, just on a mixed basis, and if so, how much?
You're right, gave you our gross margin outlook of 28%.
Yeah, I'm sorry. Just to clarify, talking to the current weakness we've seen over the last couple of quarters, is that driving a noticeable level of weakness in the company-wide consolidated gross margin that you're reporting?
Yes. Enterprise drives to have higher gross margins than the corporate average.
Okay. Then maybe just on market share, with the big swings in enterprise to the downside and client, especially desktops at the upside, is there anything you'd like to note in market share that's been happening over the last quarter?
No. Market share has been pretty consistent the last four or five quarters. If I think back the last six quarters, I think the biggest swing in market share has been a couple of points overall, and I think half a point shifts here and there are kind of to be expected, and those seem to be mostly a function of either product gaps from either us or the competitors, or maybe someone has access to a customer that happens to be doing better, and sometimes that advantages us and sometimes it advantages one of our competitors.
I'd say the only kind of significant trend, if I think back over six or eight quarters, is that Toshiba has picked up a lot of share on the branded side, which was done through relatively aggressive pricing three or four quarters ago, and that seems to have been resolved in the last couple of quarters as well. No, I don't see any huge market share shifts. Some at the fringe, but that's mostly either product related or maybe something specific customer related.
Okay, helpful. Thanks.
Yeah, thanks.
Your next question comes from the line of Rob Cihra with Evercore Partners. Please proceed.
Hi. Thanks very much. Two questions as well, if I could. One on just your internal head and media, mostly the head side. Just without necessarily asking for a number, but just where you are now, and if you think that's changing over the next couple quarters in terms of more internal head mix? Or do you think it'll stay similar? On the enterprise side, I know it's been picked apart 50 times, but out of the 7.7 million enterprise units, if you could give us any kind of mix between mission-critical and nearline. All the dynamics you're talking about, Steve, in terms of the OEM product cycles and the hyperscale, I assume those apply across both mission-critical and nearline, or are they mostly mission-critical on the OEM side and mostly nearline on the hyperscale side? Thanks.
Rob, let me answer that before I forget, then Dave can talk about the sourcing stuff. Yeah. Most of the mission-critical stuff is I would call legacy system, which is obviously still an enormous market, and that's where you see a big rotation on the architectures, the new product offerings from a few of the customers that's causing the soak up in inventory that they have in-house. The deployment and utilization rate stuff that we've seen over the last few quarters has been mostly on the hyperscale side. That can show up either in the OEMs or it can obviously just show up directly to the drive companies and to the server companies or the white box server companies. As you know, the CSPs for the most part are buying direct, although from time to time, they're still buying through certain OEMs.
There's more of a mix on that side of whether or not it's impacting OEMs or if it's impacting the component industries directly.
Rob, to answer your question on the heads, internal versus external, we're fairly happy with the mix, also the technology access that we're getting across various platforms. Right now, I don't foresee any changes in internal versus external strategy for the coming few quarters.
All right, Dave. Thanks very much.
Your next question comes from the line of Nihal Sheth with Technologies Insight. Please proceed.
Yes. Thank you. I got a couple of questions. First is, to pick apart guidance a little bit more. $3.3 billion includes about $100 million from the Xyratex. Hard drive operations revenue sounds like that's about $3.2 billion. Probably about a 6% quarter-to-quarter decline in hard drive revenue. Can you help parse out the two factors that you have cited, the inventory correction and the seasonality?
On the inventory correction, that'd probably be-
Seasonality is usually 4%.
Yeah. That's seasonality. Right. The inventory correction would be the other piece and probably the bigger drag on the margin.
Okay. Very good. My other question is on the branded. That has had two consecutive quarters of unit growth, but more importantly, two consecutive quarters of ASP growth. The question is, are you seeing this growth coming from higher ASP offerings? More importantly, where is this mix shift at this point in time, and where do you think it will go two years from now?
Hi, this is Albert Pimentel. Yeah. I think we've been pretty pleased this last quarter with the execution on our retail side, and that is a mix to higher products, higher capacity products, particularly our momentum built in the two terabyte category in the channel. We continue to see higher capacity products playing a bigger role in the mix as we go out over the foreseeable future in the branded side, as well as the emergence of more NAS-centric products in both the small, medium-sized business as well as consumer NAS.
Okay, thank you.
Your next question comes from the line of Bill Shope with Goldman Sachs. Please proceed.
Okay, great. Thanks. Looking at the demand outlook you discussed, how should we think about exabyte shipment growth in the second half of the year, given that the strength, I believe you said, was going to be broad-based across the segment?
Yeah, I think it's going to accelerate. I think what I said is I expect growth across all segments, but I do think that on a relative basis, the growth will be better on the nearline side, where it's been pretty flat the last three quarters. I think we're going to see some exabyte growth acceleration. Keep in mind, obviously, on the client side, we have large capacity drives too. Lots of people gobbling up one and two and three terabyte drives on notebook and then two threes on desktop. It doesn't really hurt you so much, even if you get it on notebook and desktop. I do think the weighting will be more towards nearline mission-critical.
Okay, great. That's helpful.
Thank you.
Second question on MOFCOM. Can you remind us of the potential benefits you would expect to see if all the restrictions were lifted? Obviously, we don't know how it'll play out, but just how are you thinking about that today?
Yeah. Obviously for Seagate, we picked up a product line, we picked up a good engineering team that we'd still utilize post-MOFCOM and continue to invest there. If you take a look at the total operating synergies on the OpEx, you could make that case for $40 million. Like I said, what we would do with that, whether we redeploy it, but that would be probably a magnitude for us. Obviously, just given our customers would like to have one access point, so the customers would prefer it as well. Maybe customer set and that yields something, but from an OpEx, about $40 million.
Okay, great. Thank you.
Yep.
Ladies and gentlemen, that concludes today's question and answer session. With that, I would like to hand the call back to Mr. Steve Luczo for closing remarks.
Okay. Just want to thank everybody for being on the call today, and then we look forward to speaking with you again in July. Thanks.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.