Afternoon and welcome to the Seagate Technology Fiscal Second Quarter 2014 Financial Results Conference Call. My name is Jason and I will be your coordinator for today. 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 the Seagate executive team is our Chairman and CEO, Steve Lusso EVP and CFO, Pat O'Malley President, Global Markets and Customers, Rocky Pimentel President, Operations and Technology, Dave Mosley and EVP and Counsel, Ken Mastaroni. We have posted our press release and detailed supplemental information about our fiscal Q2 2014 on our Investor Relations site at seagate.com. During today's call, we will review the highlights from the quarter and provide the company's outlook for the fiscal Q3 2014.
We'll refer to non GAAP measures, which are reconciled to GAAP figures in our supplement. After that, we will open up for questions. Please note that our announced acquisition of ZYRIOTEX is in the regulatory approval process, and we will not be taking questions about the transaction on this call. 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 December quarter and thereafter and include statements regarding customer demand and general market conditions. These forward looking statements are based on information available to Seagate as the date of this conference call and are based on management's current views and assumptions.
These forward looking statements are subject to a number of known and unknown risks, uncertainties and other factors that 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 materially from the expectations described in this report is contained in the company's annual report on Form 10 ks filed with the U. S. Securities and Exchange Commission on August 7, 2013, and the quarterly report on Form 10 Q filed with the U. S.
Security and Exchange Commission on October 29, 2013, the Risk Factors section of which are incorporated into this report by reference. These forward looking statements should not be relied upon as represented in 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 Lusso. Please go ahead, Steve.
Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. Seagate demonstrated solid execution this quarter, achieving revenues of $3,500,000,000 net income of $428,000,000 and diluted earnings per share of $1.24 On a non GAAP basis, we recorded gross margin of 28.5 percent, net income of $455,000,000 and diluted earnings per share of $1.32 We had a very strong cash flow quarter, generating operating cash flow of $856,000,000 and free cash flow of 713,000,000 During the December quarter, we shipped a record 52.2 exabytes of storage and averaged a record 9.20 gigabytes per drive across our portfolio. Our non GAAP operating margin for the quarter was 14.4 percent and operating expenses, inventory turns and day sales outstanding were within our turns and day sales outstanding were within our targeted ranges. Our balance sheet remains healthy as we ended the quarter with $2,300,000,000 in cash and investments.
As part of our capital allocation strategy, returning value to shareholders through share redemptions and dividends remains a top priority for Seagate. During the December quarter, we redeemed 33,000,000 shares, which put us a few quarters ahead of our fiscal 2014 plan and raised our quarterly dividend by 13% to $0.43 per share. Through these activities, we expect to meet our goal of returning approximately 70% of operating cash flow to shareholders this fiscal year. We have talked about strategic acquisitions as a potential area of capital deployment and at the end of December we announced that we entered into an agreement to acquire ZYRA Tech for $374,000,000 ZYRA Tech is a leading provider of data storage technology including hard disk drive test equipment and modular solutions for the enterprise data storage industry. The addition of Cyrotech will further enhance Seagate's vertically integrated supply and manufacturing chain for disk drives and ensure unrepid access to important capital equipment.
The acquisition also expands Seagate Storage Solutions portfolio by adding ZYRO Tech's industry leading enterprise data storage systems and high performance computing business. We expect to close this transaction sometime in the June quarter and for the acquisition to be slightly accretive in its 1st full fiscal year of operation or sooner. As the trends in exabyte growth and technology shifts continue to develop over time, we focus on a few main areas that we believe will allow us to continue to deliver solid results in the near term and position us well for long term success. These areas include expanding and innovating our storage product portfolio to align with emerging trends in mobility, cloud and open source computing. In the mobile space, we are leading the industry in hybrid technology and our 5 millimeter drives are now being sold by multiple OEM manufacturers in tablets.
For cloud based applications, we've launched our Kinetic platform for object based storage with strong interest from developers, customers and end users. And we are continuing to expand our offering of high capacity drives with our 6 disk, 6 terabyte drive shipping early next quarter. Investing in improving aerial density and advanced storage technologies. We are shipping in volume drives that utilize shingle magnetic recording or SMR and we'll continue to deploy this technology advancement across our portfolio in the coming months. We also continue to invest in advancing our HAMR technology development and our hybrid and flat technology initiatives.
We are deepening our customer engagements. 1 of the most positive emerging opportunity to add more value for our customers and help them advance in areas such as big data analytics, hyperscale data management and high density content management are new opportunities for the disk drive industry. We are making investments in our go to market capabilities and product development and technology to engage more strategically with an expanding customer landscape including OEMs, service providers, enterprise information technology functions and consumers. And we are managing our capital investments. We are currently running our capital investments at the lower end of our long term targeted range of 6% to 8% of revenue and it will most likely be below the range for the full fiscal year.
Excellence. Turning to our March quarter outlook, we expect to achieve at least 3 point $4,000,000,000 in revenues and to maintain non GAAP margins approximately flat sequentially. Demand so far has been at a solid pace this quarter and industry inventory remains low. We are planning for operating expenses to be relatively flat sequentially, which would result in OpEx that is slightly higher than our targeted range of 12% to 14% of revenue for the Q3, but it's still within the targeted range for the fiscal year. Over the last year and a half, industry exabyte shipments have grown approximately 30%, while units have remained in a manageable range of between 130,000,000 and 145,000,000 units per quarter.
Based on macroeconomic conditions, we expect these market dynamic characteristics to continue as customers remain cautious with their forecast and the project based nature of cloud build up represents challenges for them in terms of purchasing timing of purchase timing. Given these dynamics, we are running our business consistent with what we've done the last several quarters by managing production slightly lower than forecast with the ability to flex up if additional demand warrants. On behalf of the entire management team, I'd like to thank our employees for their performance this quarter and thank our customers, partners and suppliers for their support and commitment. Seagate is well positioned in the storage technology markets we serve and we will continue to focus on executing to our financial model and delivering strong operating results for Seagate shareholders. We're now ready to take questions.
And the first question comes
from the line of Aaron Rakers with Stifel. Please proceed.
Yes. Thanks for taking the question. So I guess I want to go back to 2 things really. The comment on the capacity shift. If I look at your guys' capacity shift and also what Western Digital had reported, it looks like we saw about 12% year over year growth.
So I'm kind of curious of what underneath of that you're seeing be it on the enterprise side, I guess in the context of that given the decline sequentially that we saw in this last quarter?
Decline? I'm not sure what you're referencing in decline.
The enterprise shipments sequentially declined in the December quarter.
Okay. So this is Rocky Pimentel. I think it addresses actually which I think our competitor referred to in the Q4, I think the industry saw a bit of a softness in the cloud side of the enterprise drives the capacity centric enterprise drives. And that was really just due to the timing of the build outs and planning of CapEx. And this continues to be a category that offers substantial long term growth.
But I think as others have pointed out, it will be a situation where it will be lumpy until processes improve at the cloud service providers to create a more smooth and linear approach to how they deploy their resources in the data center. But and I think that was just what you saw in the December quarter. But fundamentally, the category is very strong and represents a tremendous growth opportunity as we go forward.
And one of the things that we've noticed in terms of conversations with some of the customers and in case sometimes it's through the OEMs and sometimes it's directly with the customers that are deploying. There's been a lot of effort to reduce the time between purchase and deployment of these assets that are going into the cloud infrastructure, I mean, especially the folks that are in the multibillion dollar range per year. So deployment being reduced from in excess of 9 months to more best in class deployment rates that are probably in 3 to 4 month rate now are still working their way through the industry. And so I think that does create a situation where there's inventory that's basically being absorbed as people reduce that deployment time.
That's helpful. Thank you.
Yes. Thanks.
The next question comes from the line of Amit Mehroianni with RBC Capital Markets. Please proceed.
Thanks a lot. Good afternoon guys. A couple of questions for me. One I guess just for the March quarter, it sounds like you guys are expecting sales to be down about at least 3.5%, 4%
or so. Can you tell
me what are you expecting from a TAM basis and then on the pricing as well? Because it sounds like enterprise can actually pick up for you guys a bit in the March quarter.
Yes. Again, I think what we right now the outlook is for revenues to be at least 3,400,000,000 dollars So it's in the least. So I mean I don't know what percentage you want to apply to that. It kind of depends how the quarter fills out, but it's off to a good start. In terms of TAM, that's why we try to make the comments that we did that the industry seems to have been operating in the $130,000,000 to $145,000,000 range and we expect it will continue to operate in that range.
And then I think as we've said in the last few calls within that range arguing about whether or not it's an extra 1,000,000 or 2,000,000 units isn't what drives the business models of the company.
Fair enough. And then just inventory, it looks like it was up about 9% sequentially for you guys. Can you talk about what drove that in the quarter? And how do you expect inventory to track in the March quarter going forward?
Yes. I'll let Dave talk about it. Yes. A couple of things on inventory. So finished goods was relatively flat, although there's some of the, I'm going to call it, hold it across the finish line, especially in the cloud space because the lead times are very long for those product lines, I think as people know.
But finished goods was relatively flat out of those with WIP and raw materials and some of that was just staging for this early linearity that we've seen pretty healthy up against Chinese New Year, I think. So that's the general trend there. I think we can get it back right down and check to where we've been running the last 4 quarters.
So I'm not too worried about inventory.
Perfect, Wink. And inventory in the system and at the customers is very lean.
Thank you.
Thank you. And your next question comes from the line of Andrew Nowinski with Piper Jaffray. Please proceed.
Okay. Thanks a lot. So just following up again on those enterprise comments. I guess your overall enterprise unit growth lagged Western Digital this quarter, but your capacity optimized drive certainly performed nicely despite not having a 6 terabyte drive in the market. So I guess were you surprised by that growth?
And do you think that will accelerate when you have more competitive product on the market next quarter?
Yes. This is Rocky Pimentel again. I think we definitely think there's lots of opportunities still some drawing out in some of the cloud service providers demand, but certainly as we go out over the year, strong growth. And in terms of next generation capacity centric drive, we're very positive because we'll be releasing a 6 disk, 6 terabyte drive early in the June quarter, which we think will be very interesting to the customer demand.
Okay. Well, maybe then on the performance optimized side, I guess, what's going on there? Is there any sort of competitive dynamics impacting your growth there?
No. I think it's pretty much as it's been in the last number of quarters. Nothing unusual there.
Very good. Thank you.
And your next question comes from the line of Joe Witten with Ladenburg Research.
Hi, thanks. Steve, I'm hoping you could talk about the within the PC category, the mix of hard disk drives within PCs. And really it's kind of where they're trending. Is the rate of share loss, let's say, easing? From what I said, I guess, on the low end, we're starting to see some $300 ish type PCs with traditional HDDs and Windows, etcetera that seemingly makes sense for the category that has faced some headwinds from Chromebooks.
And then on the high end you've obviously put out the press releases on the 5 millimeter getting into 2 in ones and some tablets. So really just kind of curious on your comments sort of the rates of share movement of HDDs within the PC category?
Yes. I mean, I think the client business was stronger than we would have expected in the December quarter and it was stronger throughout the quarter. And client
can be desktop and or notebook. And
continuing into this quarter. So in that sense, I think there's a stabilization and I'm glad you pointed out most of the world is not at a $1,000 price point. I think the one thing in your comment though I think is to point out too in terms of even the high end about 6,000,000 notebook units a year a quarter going out with SSDs, but the hybrid penetration on that has been actually growing as well. I think last quarter we did something like 1,700,000 or 1,500,000 hybrid drives. So almost 20% of that market that was prior to that time SSD only has already been penetrated by HDD, which I think a lot of people aren't really focused on.
And then as you point out, the traction of the 5 millimeter drives in thinner wider either direct tablets or even convertibles. We do think it's going to be a decent product category, especially for people that have high density content that they want to have on those devices. So I do think that there is plenty of role for disk drives to play in this ecosystem. But again, as you've heard me say many times, whether or not it's about mobility or whether or not it's about SSDs, these are all complementary technologies that are ecosystem, whether or not there's lighter devices that are across the ecosystem whether or not there's lighter devices that are helping it make people capture things in 4 ks like the Samsung Note 3 has 4 ks capture capability that eats up a lot of video in an hour or the network effect of being able to share that stuff. At the end of the day, it all ends up on a disk driver, usually 3 or 4 of them.
So I don't want to make it seem like it's this net zero sum game because I don't think is at all. I think these are just technologies that are growing ecosystem, but we do believe there's a role for high density caching, which is really what we do with the 5 millimeter drives. And we believe those opportunities are expanding, not decreasing.
Great. That's really helpful. And then I'm glad you brought up hybrids. That was my follow-up. Just kind of curious where are we in innings or however you want
to talk about it on
the high end client environment taking a look at hybrids and adopting them? I would assume we're still in the early innings, but kind of curious
if you could talk through that? Yes, early innings and actually we've been surprised a few times over the last 5 or 6 quarters in terms of some of the traction that we see with hybrid on desktop. And it's not just gamers. So I think the hybrid drive, it's probably not a great name for
it.
It's probably come up with a different name instead of hybrid, but I think high performance drives have their role. And I think we're still in the mode of thinking the majority of our portfolio is going to be hybrid drives, whether or not it's for aerial density or performance as we look out over the next 3 or 4 years.
Thank you.
And your next question comes from the line of Jade Noland with Robert Baird. Please proceed.
Okay, great. I wanted to follow-up on the scale drive opportunity. Steve, it sounds like it's been lumpy and a certain degree of limited visibility right now. I wonder if that's a function of just the product cycle at this point and or maybe R and D that's involved, but your outlook, your thoughts on the full year calendar 2014 as it relates to this part of the market?
Well, I mean, we're still encouraged by the outlook for the full year. And I think this is a market where small unit TAM variances can have big implications. I mean, the community, the investor community sometimes views a drive as a drive as a drive and a 1,000,000 notebook drives is just like a 1,000,000 nearline drives and that's not at all the case in terms of lead time, ability to respond, revenue or profits associated with and some of that is related to the technology and some of it's related to the test. So I think we're still confident that 2014 is going to be a positive year in terms of deployment of cloud infrastructure and what it means for the growth related to nearline drives. I do think that there is this added variable that the big users of this technology realize that they can't take 9 or more months to deploy the assets because they get into this very difficult situation where they're making estimates about required infrastructure, not just storage, right, but everything that goes into the infrastructure.
Required infrastructure is 9 months out to satisfy a quality of service for users and that's just too long of a lag. And so you get this thing of it's not really about in quarter demand, it's about how well did you predict demand was going to be 3 quarters ago. And it's costly. I mean that's all inventory that they've laid out capital for and they haven't started generating revenue for it. So there's an intense focus clearly at the big buyers of this capital, especially if you're spending $1,000,000,000 $2,000,000 $3,000,000 $5,000,000,000 $7,000,000,000 $3,000,000,000 $7,000,000,000 $7,000,000,000 ,000 a year on it to get that stuff into production much quicker.
And I think there's been successes. I think as we look at our customer base and the big purchasers of those systems, and again, whether or not it's through OEM or of those systems. And again, whether or not it's through OEM or direct, I think that time to deployment is actually compressing, which is allowing them I think to use some of that inventory that they bought a couple of quarters ago to bring it online quicker. And we'll see if that thesis holds out, but we're still bullish about the rest of the calendar year, especially actually when you think about the 4 ks deployment and a lot of the technologies that were shown down at CES whether or not it was actual high density captured equipment or high density viewing equipment or some of the technologies being shown to assist big data analytics, biometrics and various other technologies. It just it all talks to an increasing need for people to keep the data.
So we're still bullish about it and that's why we're not pulling back on how we invest in that infrastructure because I think it's going to be the situation where again if the industry is faced with 1,000,000 or 2,000,000 unit upside on nearline in the quarter, the industry can't respond to that. If it's faced with 1,000,000 or 2,000,000 unit upside on notebook, we could probably respond to that in 2 weeks. That's how different those two markets are. So we're going to stay focused on making sure that we can deliver to those upsides if they come.
Thanks for the color, Steve.
The next question comes from the line of Steven Fox with Cross Research. Please proceed.
Thanks. Good afternoon. Just a couple of questions from me. First of all, looking at this current calendar year in terms of exabyte growth, how confident are you in achieving a 30% type of growth rate for those shipments? And any color on how the mix might be changing between on an average capacity?
And then secondly, I know you're not talking about ZYOTECH specifically, but can you just sort of outline your plans for say moving upscale into more of a storage systems offering over time and how that fits with your strategy? Thanks.
Yes. We're not going to respond to the second question because that could be too closely related to the ZYRO TEK acquisition and I'd rather just tread that land while we're under review. On the first one, I think we are confident that the data growth rates are still in excess of 30%. And again, I think it comes back to infrastructure that's being installed and deployed relative to original expectations. So we'll have to keep an eye on it.
The industry does a great job obviously of keeping track of the exabytes it ships, but that's not quite the same as the exabytes that have been put in production by the various cloud companies and we're trying to get a better handle on that directly with some of the relationships we have and through our OEMs. But we still believe data growth rates are in excess of 30% a year. I would expect that the average capacity per drive crosses over a terabyte sometime this year. And we always think about the cloud, but again one of the biggest drivers of the average capacity per drive calculation is what's going on in the consumer front where people are taking 234 terabyte drives into their homes pretty readily and we see that continuing as well. So we're still confident that we have good growth in average capacity per drive and that we have petabyte growth rates in excess of aerial density growth rates, which puts pressure on us from an ability to deliver the petabytes required.
Great.
And then just real quick, in terms of the PC industry sort of this bottoming phase that we've
all been talking about, is there any
from your PC any differences in terms of client versus enterprise that we should pay attention to over the next couple of quarters? Thanks a lot.
I mean, it's been bottoming for a while, hasn't it? I'm not sure what a bottom is when it's been bottoming for 5 or 6 quarters. It does feel overall, I would say, it feels better. Demand feels better. And maybe on a relative basis, it feels better in client than it has.
But I'd say across the board, business feels a little better. The caveat I would put on it is in the last 5 years, it's felt better 3 or 4 times and it seems to have always felt better right about now. And then right about May or June, it feels not as better. So I'm hopeful because it hasn't felt like this in a while, I guess. I don't know that last year it felt better at this time.
So I think in that sense, I'm encouraged or we're encouraged. But expect to the upside. Again, the industry in this range of whether or not it's 132 or 144, that's easy for the company, the industry to respond to. So and I don't think we're going to break out from that one way or the other this quarter or probably next. So we're pretty cautious in terms of how we're going to plan our production.
That being said, it probably feels better than it has in the last couple of years. And maybe the relative strength is in the client and that might reflect a better macroeconomic condition for regular people instead of just big governments and big companies that could borrow at 0% and buy the stuff they need to keep their companies and governments running.
Great. Thank you very much.
And your next question comes from the line of Sherry Scribner with Deutsche Bank. Please proceed.
Hi, thanks. I just wanted to dig into the expenses this quarter a little bit higher than I think at least I was expecting. I know you commented Steve that they're going to be up a little bit, they're going to be flat next quarter. Can you give us a little detail on why they were up and do you expect them to come back down into your targeted range of 12% to 14% of revenue in the next couple of quarters?
Thanks. Yes. I'll let Pat handle that.
Yes. So Sherry, I do expect to come back down. As you see in the financials, we talked about last quarter doing a little reshaping. So we're certainly went off to reshape the P and L where we took minor restructuring charge, but we continue to shape that to stick in the 12% to 14%. But we do want to continue to make some investments as Steve and Rocky comment on getting deeper relationship with the customers.
That's not in a go to market, but that's also in a technology engagements, whether it's IP, whether it's working with them or whether it's product offerings, that's all in front of us. So I think there's good opportunity. So we're going to keep those investments. The other small piece about it was we have a deferred comp trust that you had some about $5,000,000 to $6,000,000 more in OpEx this quarter than you normally would have as offsets in OIE. So that all disappears, so that'll be normalized in the future.
So that was a little hotter, but that wasn't really a P and L hotter, that was just a category. So what we do, we're committed to that 12% to 14% and we see some of these investments were a good business model or revenue stream in the future. That's why we want to keep those investments.
Okay. Thank you. And then just I just wanted to get a little more detail on your SSD strategy. I know we talked about hybrids, but maybe you could give us some detail on what you're seeing with your SSDs and how that's going?
Thanks. Sure. This is Rocky Pimentel. So we continue to make great progress on our organic SSD initiatives. We also have a very robust portfolio of inorganic initiatives on the SSD side.
We look at our solid state storage business as a portfolio. So it's the pure SSDs plus the success in the hybrid. And on the hybrid side, we've been succeeding in not just the client level, but also at the low end of the enterprise level on hybrid adoption. So we're looking at it as a complete portfolio. But believe me, we're making serious investments in our organic efforts on the Pure SSD side.
We continue to make progress, get design wins and some of our inorganic portfolio opportunities are really looking interesting. And as they mature, we plan to share a little bit more detail about them. But at this point, I think we feel a need for some confidentiality due to competitive concerns. And so we'll keep those things under tap until a future date.
Okay, great. Thank you.
The next question comes from the line of Ananda Maruah with Green Capital.
Hey, thanks for taking the question. Hey, congratulations on a really strong cash flow quarter by the way. I would say I was wondering if you could just give us your view on cash priorities for calendar 2014 And maybe talk a little bit about what we should expect for allocation between dividend and buybacks in 2014? And then maybe just lastly comment on sort of how we should think about share repurchases as you move through the year? Thanks a lot.
Thanks, Dan. So obviously, our biggest message there is returning the best fashion form of capital to shareholders. And given as Steve talked about, we're pretty much on target for the 7% this year. So that's important. Now given guidance for next year, obviously the dividend and the buyback program will be active.
We do have an active buyback program, authority to do so and they'll remain active. Now the split in how we're going to manage that, we'll probably look over the course of the remaining part of this fiscal year through June and we'll get more clarity. But I think what you're referencing is we had a goal of $2.50 Obviously, that was put in place when the stock price was well different from where to say, but we're still committed to the stock buyback program and the dividend and both of them will be vehicles. As Steve also alluded, we'll continue to look at opportunities, whether it's an IP or other assets that we will look at, but that's why we'll probably be metered on it and we'll stay committed to the 70% for this year and we'll probably come with greater clarity in due time on how we want to break up the dividend and the back.
Got it. Thanks, Pat. That's helpful. I guess then just the second one for me. How should we think about free cash flow generation?
Or how are you thinking about it in 'fourteen cash conversion cycle, things you can do to grow free cash flow?
I think right now we're at cash conversion cycle. We're pretty comfortable. Could we move it for a couple more days? We could. But as Dave said, we're managing the inventory on not just a tactical, but a strategic where we want to set up some things.
So I think we have a good understanding of the cash flow on the margin might change a couple of days. But for the cash flow, I don't think you should plan it much different than you've seen recently. As Steve talked about, we're living in a world of sort of a set range and we're committed to stay in our target margin range and offer the products that continue to generate the cash flow you've seen over the last several quarters.
Great. Thank you.
Your next question comes from the line of Monika Garg with Pacific Securities. Please proceed.
Hi. Thanks for taking my question. First question on the Kinetic solution. Maybe can you talk about it is sampling or is it solution in the prototype stage? And when do you expect the revenue recognition?
And also since the solution competes with off and coming storage OEMs, do you think it can impact your relationship with the storage OEMs?
Yes, Monica, this is Dave. I'd say a couple of things. So first we're shipping this as a technology development platform right now. So we're shipping it largely to a developers community. There is a lot of interest amongst customer base, but we ship I'll say thousands of CTUs now so that people can get developing on these platforms and it's not usually one drive at a time since it's a network drive.
They're daisy chaining a number of these things together. But there's a lot of software host level development that has to happen in order to enable this solution. So it's there's a the cycle, if you will, the development cycle will be very long for that host side. A lot of people have a lot of interest because they see the opportunity to save money on the host side. Is it does it host side.
Does it challenge our customers? Architecturally it challenges, but I think at the end of the day some of those architectures need to be challenged for lower and lower cost, the host enabled architectures and also the drive architectures. So I think the customers ultimately once the whole development platform matures then those customers will be able to take advantage
of it and
deploy it as they see fit.
Yes. This is Rocky Pimentel. I'll just add on to Dave's comments. Our existing cloud service provider customers and our OEM customers are clearly very interested and have test units as Dave mentioned. I think also an emerging set of customers in the telecom space and the content delivery network space are also coming to the forefront seeing this as a big opportunity for their future infrastructures as well.
So it's a pretty exciting space for us to get new customers. Yes.
A lot of work left to do I think. So it's going to be quite some time before it before we monetize it.
Then as a follow-up, I mean on the Analyst Day when you talked about organic revenue growth target 3% to 4%. If the TAM is kind of in the units which you talked about 130 to 140 ish million units, do you think it is still possible to realize that revenue growth?
This is Pat. Over time, absolutely, because we fundamentally believe in the data storage trends out there that as Steve talked about, the deployment may be somewhat soft up 1 quarter, stronger than next, but over a period of time, it will show up. And as folks deploy this capital and start utilizing and filling these up, and that's going to drive more growth. And so as it sits today, we're probably living in this range and we'll continue to live in this range. But longer term, we do think it breaks out eventually, clearly in the storage, how much storage we're going to ship.
And eventually, the industry is going to have to make some investments in capacity that we haven't made in the last several years.
Thank you. That's all for me.
Your next question comes from the line of Rich Kugel with Needham. Please proceed.
Good afternoon. Just a couple of questions for me. In terms of share count, Pat, for the fiscal Q3, what should we be assuming? And then on the OpEx side, is the guidance a flat in absolute dollars relative to the Q2? Or should we be backing out the incentive comp?
So you could back out the incentive comp, Rich, and then outside that would be relatively flat. And then on the diluted shares the next quarter, I'd use $3.41 Okay. And then lastly, just Steve, conceptually, as you look at your exabyte shipments and the growth of that relative to your aero density improvements within Seagate, would you expect that you'll be able to outpace the 6th terabyte? Is that what the extra OpEx is going to? Any thoughts on over the next 4 quarters how Seagate trends relative to aerial density growth on the Xpex side?
No, I don't think I think the industry is competitive across the board in terms of how it invests in aerial density, it would be a little obnoxious for me to say, yes, we're better than those guys. I think the industry is working as hard as they can to drive aerial density in this 20% range, which is not enough to keep up with the demand side. We hope to do it better than our competitors, whether or not that shows up in aerial density or quality or costs or all three or responsiveness, which is where we tend to be quite good as responsiveness in the quarter. I think the OpEx investments are in some of these areas, other areas that we pointed out Rich related to the mobile and cloud and open source side. You saw some of what we've been doing on the mobile side both with our own technology as well as some of the announcements made at CES.
So I think those opportunities are a little different. I think the storage industry is in this beneficial phase right now where the opportunities in providers of storage devices are pretty significant and they're pretty broad.
And I
think each company will probably pursue them a little bit differently As a result, it may not be as easy to say, well, WD Hitachi looks like this and Seagate looks like that and Toshiba looks like that. I think each of these companies is going to take advantage of their own skills and leverage those into an opportunity set that's pretty broad. And so for us, we are investing in some OpEx areas that relate again. We've been transparent about that they relate to mobile cloud and open source, but we haven't been so transparent because we feel it is highly competitive in terms of how we're going about taking advantage of the long term trends. But to your base question, we believe it's absolutely fundamental that we remain competitive and hopefully the leader in our core technology of HDD, hybrid and SSDs.
So yes, we have a lot of investment going into that area and then we have others investments surrounding those areas that as we're successful there, will allow us to broaden our value proposition to a widening customer base.
Okay. Thanks for the clarification. Thank you. The next question comes from the line of Scott Schmitt with Morgan Stanley.
Thanks for taking the question. Just aside from the test equipment with ZYRA text, do you see other areas of opportunity to further vertically integrate or make further supply chain improvements? And maybe as a follow on to that, I think a while back if you go post the flood, there was a certain amount of components that you were sourcing externally. Is there just an update on that? Anything else that could drive further margin improvement?
I think what we focus on more is continuity of supply. And obviously if the market went up a lot then have to ask ourselves those questions. Right now the model is not going to change relative to how much we outsource. It'll be more discussions about continuity supply. We've made I think the lessons of the flood and the tsunami earthquake before that really has to do with the systems that we put in place with our suppliers and with our customers.
And those have been big investments we'll continue to make. I mean, we do believe that we've driven a fair amount of operational efficiency as a result of some of those programs and we think there's more to come. So accelerating the flow of the technology from our supplier base through our factories to our customers saves everyone a lot of money. And I think Seagate's made real progress, but it's also it's taken big investments in people and technology and systems and even investments in our suppliers and our customers from an engineering perspective and IT perspective and time spent. So I think that will continue.
Got it. And then just if I can follow-up on the branded business. Can you just talk about whether the strength came from more of the retail side of things or if you're seeing some strength in the SMB and NAS market and what the kind of margin profile of that is or implication of that is?
Sure. So definitely this is Rocky Pimentel again. Definitely strengthened in the NAS side of the business in retail or in branded. I would say we did well in the December quarter despite the fact we felt we could have had a stronger portfolio. We were late in one of our critical ramps in the branded business.
It's a high capacity product end, which could have brought better margins to the portfolio for branded. And as we enter this quarter, that weakness has been remediated. And so I'm looking forward to seeing how we can compete in the marketplace at the high end, which is a margin rich sector of the branded retail business.
Thank you.
Can we take one more question?
Your last question comes from the line of Technology Insights Research.
Yes. Thank you for taking my question.
I want to follow on, on the
branded here and focusing more on the consumer side than the NAS side. Are you seeing an appetite for consumers upgrading to what is effectively a personal cloud offering rather than backup drive? And I might have a follow-up question based on that answer. Yes. This is Rocky Pimentel again.
No question, consumers are very interested in NAS solutions at the home level. So I mean this is an opportunity for growth in the future, which we're pretty excited about and you'll see more and more of our product announcements around that. We talked about the release of our most recent wireless drive at CES under the LaCie brand, which is a really great product. So no question that that's a category that will continue to grow in the branded retail space. So what do you feel can be the incremental TAM opportunity as consumers take up the wireless product and effectively personal cloud?
I mean, we don't put specific numbers on it. It's still an emerging segment of the branded retail TAM. I mean, direct attached storage is still a bigger segment of that TAM, but we still we see definitely shifts more towards NAS capable retail solutions. And I don't think we're going to declare 1,000,000 to units next quarter or this quarter, but it's a growing demand by the consumer that we'll try to service to the best of our ability.
And it does appear that as people expand the ecosystem with tablets and use those devices more and more that the tax rate for tablets is much higher than it was for desktop or high capacity notebooks. There's some market data that shows those attach rates are in the 50% range versus rates I think more in the 10% to 15% rate for the desktop side. Notebook side maybe was 15% to 20%. So we do see a big shift in attach rates there. And then what becomes a NAS versus a DAS is an interesting question when you have a bunch of wireless devices.
So yes, we think there's opportunity there. But again, for us, I think it's just part of the expanding ecosystem and these mobile devices obviously need storage because there's not a lot you can do even if you're a rich person and you buy a 64 gig tablet, you can gobble that up pretty quickly and you have to store all that great high def video somewhere. So it's our job to make sure that the technology we deliver is easy to use. And I think that's where the industry probably hasn't done well. And competitively where you probably see both of the major players, WD and Seagate focusing a lot of energy, Seagate through both LaCie and our own brand, WD through both of their brands.
But I think clearly the ease of use issues around managing storage for your connected devices is a big opportunity for all of us. And to the extent that we're successful, it should drive significant amount of revenues and profits, if not tens of millions of units.
Fantastic. All right. Thanks.
I want to thank everyone for taking time to be on the call today and we look forward to talking to you next quarter. Thanks a lot.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.