Good morning. Welcome to the Seagate Technology fiscal fourth quarter and year-end 2013 financial results conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are on 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 morning. Welcome to today's call. Joining me today in Dublin, Ireland are Seagate's executive team, our CEO, Stephen Luczo, CFO, Patrick O'Malley, EVP of Sales and Marketing, Rocky Pimentel, EVP of Operations, Dave Mosley, and EVP and General Counsel, Ken Massaroni. We've posted our press release and detailed supplemental information about our fiscal fourth quarter and year-end 2013 on our investor relations site at seagate.com. During today's call, we will review the highlights from the June quarter and provide the company's outlook for the fiscal first quarter 2014. After that, we will open up the call to questions. As a reminder, this conference call contains forward-looking statements, including, but not limited to, statements relating to the company's historical and currently anticipated future operating and financial performance in the September quarter and thereafter, and includes statements regarding customer demand and general market conditions.
These forward-looking statements are based on information available to Seagate as of the date of this conference call and are subject to a number of known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties, such as global economic conditions and other factors, may be beyond the company's control and may pose a risk to the company's operating and financial performance. Information concerning additional factors that could cause results to differ materially from those projected in the forward-looking statements are contained in the company's annual report on Form 10-K, as filed with the SEC on August 8th, 2012, and in the company's quarterly report on Form 10-Q, filed with the SEC on May 2nd, 2013.
These forward-looking statements should not be relied upon as representing the company's view of any subsequent date. Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made. I would now like to turn the call over to Stephen Luczo. Please go ahead, Steve.
Thanks, Kate. Good morning, everyone, thank you for joining us today. Seagate demonstrated strong operational performance in the June quarter, achieving revenues of $3.4 billion, on a non-GAAP basis, gross margin of 28%, net income of $447 million, and diluted earnings per share of $1.20. Both of our revenue and gross margin results for the quarter were at the higher end of our expectations, primarily driven by nearline market demand as a wide variety of customers deployed cloud infrastructure and applications. Full year fiscal 2013 revenues were $14.4 billion, on a non-GAAP basis, we achieved gross margin of 28%, net income of $2 billion and diluted earnings per share of $5.31. We met our shareholder capital return goals for the year, returning 70% of operating cash flow and 90% of free cash flow in the form of dividends and share redemptions.
In addition, we successfully restructured our debt profile this quarter to optimize Seagate's capital structure and to support the long-term growth of the company, reducing our annual interest expense by over $40 million. We ended the fiscal year with approximately $2.3 billion in cash and investments and 359 million ordinary shares outstanding. Going forward, we remain committed to return cash to shareholders through dividends and share redemptions. We have nearly completed our share redemption plans for the September quarter, purchasing approximately 4 million shares in the month of July. For fiscal 2014, we are targeting to return up to 70% of operating cash flow and up to 90% of free cash flow to shareholders. Our senior management is pleased that Seagate executed well in a time of change, uncertainty, and opportunity over the course of fiscal year 2013.
In addition to meeting the vast majority of our financial goals, we successfully enhanced and expanded our storage technology portfolio through organic growth, partnership, and acquisition to position us for future success with an expanding base of customers. For the cloud market, we introduced several new enterprise products and features designed to specifically address the manageability, performance, total cost of ownership, and security requirements for these environments. We are particularly excited about the opportunities of our new 4 terabyte nearline product with the competitive combination of capacity and energy efficiency that customers are demanding. We expanded our SSD solutions over the last several months to include our newest enterprise SSD that we developed with Samsung, and we have made strategic investments focused on the emerging enterprise PCIe market and key architecture advancements in next-generation SSD technology.
In the mobile market, we have introduced our 7-millimeter hybrid drives and 5-millimeter disk drives for thin and light and tablet computing. As the mobile market continues to evolve and expand, we believe we are well-positioned with competitive products that are high capacity, high performance, and cost-effective storage solutions. In the branded market, our acquisition of LaCie and new products such as Seagate Wireless Plus and Seagate Central has significantly boosted our external drives and personal cloud offerings for easy-to-use home storage solutions that we believe will continue to be in strong demand. Over Seagate's history, we have successfully invested in our technology portfolio to deliver the industry's highest standard of security, reliability, and performance. Coupled with these efforts, we've worked to make cost-effective and well-timed capital investments to support our global manufacturing operations.
In fiscal year 2013, our capital expenditures were less than 6% of revenue and focused on maintenance investment for our existing infrastructure and improvements to our global manufacturing and R&D footprint, including the Korean Design Center for our Samsung acquisition and planning for our improved media R&D center in Fremont, California. In fiscal year 2014, we expect our capital investments to remain within our long-term targeted range of 6%-8% of revenue. Mobile and cloud will continue to be the priority areas where we are investing in our R&D efforts and aligning our technology portfolio, and we expect our operating expenses to remain relatively flat. At the same time, maintaining our product gross margin is a key priority at Seagate, which will enable us to make the investments required for advancement of our technology portfolio.
For the past several quarters, our model has proven to be effective for us to leverage both market opportunities and manage through uncertainty. We will continue to work to balance near-term financial performance with long-term strategic development while maximizing shareholder value. We remain mindful of the uncertainties affecting our industry, including macroeconomic factors, monetary policies, government spending, and the technology transitions taking place, particularly in mobile computing. For the September quarter, we believe the demand environment will be up moderately sequentially, and we expect revenues of approximately $3.5 billion-$3.6 billion, and non-GAAP gross margins to remain relatively flat. In summary, we believe Seagate is well positioned for this era of data growth and technology transformation. We are optimistic about our leadership position in product portfolio and technology, and we look forward to updating you on our vision and strategic plan at our investor meeting on September 10th.
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 2014. I also want to thank our customers, partners, suppliers, and shareholders for the continued support and commitment. We're now ready to open up the call for questions.
Ladies and gentlemen, if you wish to pose a question, please press *1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press *2. Please press *1 to begin, and please stand by while we compile a list. Your first question comes from the line of Rich Kugele representing Needham & Company. Please proceed.
Good morning. Just a couple of questions from me. I guess first on the long-term trajectory for your business, it seems you've intentionally focused on the enterprise and some of the other higher capacity opportunities. Can you just talk about perhaps long term, Steve, what you think two years out, your mix might be between enterprise and all of its flavors, retail, and client?
I think it's probably more appropriate we talk about that at the Investor Day, Rich, where we're talking about our longer-term strategic vision.
Okay. I'll hold off for that. Then, more near term, the enterprise hybrid that you launched, can you just talk about how you think that that'll work into the product line and the customer interest? Would you expect most of your OEMs to move to that, or is that for a specific subset of the customer set?
Yeah, Rich, this is Dave. I can give you some flavor of that. Obviously, we know a lot about enterprise workloads because we've been studying the drives and the markets for the better part of 15 years as people have integrated into the high-performance servers that we develop today. As we look at those workloads, what we see is that sometimes the drives get used as, I'm going to call them, almost memory devices. The data is spread all over the place in the drive. Oftentimes, the systems level, operating systems, the applications layer, so on, have been able to aggregate into more sequential workloads. What the hybrid drive does is it allows the drive to shift from one to the other really well.
We foresee that there's not really any massive changes coming in server architecture or the operating systems architecture that's going to address the drive. This is going to be a good value proposition for the high-performance drive for some time to come, and we think that most of the market will move over to these kinds of drives as people see that value for performance that they pay for.
Okay. Just two last housekeeping. One on the TAM. Can you just give us your sense of what you thought the TAM was in June? Lastly, if you can make any comments on the Court of Appeals process that was announced yesterday.
Yeah. It seems like the TAM in June was 132, 133, Rich. I'll let Ken answer the question about The Court of Appeals?
Yeah, Rich, the company is pleased that the Court of Appeals reversed and remanded the judgment back to the district court with an order to enter the findings on our behalf. WD has indicated that it will appeal it to the Supreme Court in Minnesota, which is a discretionary appeal. The Supreme Court's not compelled to take it. Seagate will do everything that we have to defend the judgment that we've received at this point in time. We'll see what the Supreme Court elects to do.
Okay. Thank you very much.
Thank you very much.
Congrats on the quarter.
Thanks, Rich.
Your next question comes from the line of Ananda Baruah representing Brean Capital. Please proceed.
Hi, guys. Good morning, and thanks for taking my question. A couple if I could. Hey, Steve, big acceleration. Nice acceleration in enterprise drives this quarter, you referenced it as well. I was interested in seeing if you could give us some of the dynamics behind the 9% sequential increase. Also, just commenting on, I guess, if you think this is sort of the signal of some of the stronger growth to come that you mentioned on last quarter's call as well. I have a follow-up. Thanks.
Yeah, I think I'll let Rocky follow up. Generically, it continues to be what we see as big build-out of cloud infrastructure, whether or not that's CSP related or ISP related or even private cloud related. Clearly architecturally, there's a big change going on in terms of how people are storing and managing their data. I think it is a continuation of that trend. Those growth rates have tended to be accelerating. It is an extension of what I think is going to happen over the course of the next several years. I think what's going to be interesting about this business is it will be spiky, I think, from time to time, and I mean that more from an upside perspective.
I think that the general trend is positive. I think on top of that, you're probably going to have these spikes where either big ISPs or CSPs decide that they have to do some big build-out competitively or geographically. That's what we kind of manage our way through. You don't see that in the normal quarterly or maybe multi-quarterly planning process. In quarter all of a sudden, you can get these opportunities, and the ability to respond to them is important. I think it is the continued trend of an overall architectural change that is certainly driving higher capacity drives in the infrastructure. Rocky, want to finish?
Yeah, to add on to Steve's comments, it definitely was the strength of the quarter-to-quarter growth in what we would define as a cloud customer class. As Steve mentioned, between each account, characteristics differ, but the overall group continues to grow very robustly on a quarter-to-quarter basis. I think also, this last quarter, we filled in some of our product portfolio on the nearline, which gained a lot of momentum, particularly in our four terabyte drive class category. A couple of very positive drivers in the whole nearline data center class products. That's what we benefited from.
Got it. That's helpful. Then I guess just part and parcel of that, gross margin guidance is flattish in the September quarter. Can you just walk through, I guess, the puts and takes on the flash margin guidance, in the face of seeing improved mix as we get into the second half of the year? Thanks.
Well, you actually, in the second half of the year, usually don't get improved mix, but you get a stronger notebook play, and you get a smaller gaming play. Actually, the mix works against you the second half of the year, and that's being, in this case, offset against, we think, continued growth on the cloud side.
Got it. Thanks a lot.
Your next question comes from the line of Aaron Rakers representing Stifel. Please proceed.
Yeah. Thanks for taking the question. The first question on looking at your 855 average capacity per drive. As we look forward through this next fiscal year, where do you think that exits this next fiscal year? I think last quarter you had alluded to the possibility of tightness on finished media if the industry were to get towards a 500 exabyte level. We're about 420 right now. What's your updated view on that dynamic?
Carl, why don't you go, Dave, and answer the second question first?
We're not quite there yet. I think it really does depend on the growth of the cloud specifics, Aaron, to the extent that five-disk drives are in the norm. Rocky mentioned the four terabytes, for example. If that continues to grow, so I won't talk about box count, but I'll just talk about exabyte growth, then that really starts to strain the media. I don't think we're going to be there in FY 2014, but it'll be more of an FY 2015 commentary.
On the first question, I think if you look at the product offerings, the 4 TB product that we mentioned and the demand we're seeing for that, in the consumer marketplace, which is really where the higher capacity drives are going, obviously, there'll be a bunch of 2 TB products coming on. I think exiting the fiscal year will be certainly cresting or near 1 terabyte on an average capacity per drive. Again, you got to remember that the classic enterprise drives are lower capacity drives, but they're in a much higher performance. It's really what's going on in cloud and what's going on in consumer, both those trends are quite positive from a capacity perspective.
Great. The final question for me, what assumption are you making as far as the TAM through the back half of this calendar year, and how does that reflect the new game console cycle?
Well, we've only talked to the September quarter, we're not really talking quote to the back half of the year. Again, we'll give you a little better clarity about what we think some of the longer-term trends are for the December quarter, to Rich's question earlier, a little bit of our insight about two or three years out. I think that the market estimates are implied in our moderately sequential number. We're kind of thinking that if it was 132 last quarter, you could see 135-140 in the September quarter, we'd expect December to be up from that.
Okay. Game console?
In terms of what? Absolute numbers or?
Yeah, in terms of just the new game console cycle with the Xbox One and then the PS4.
Yeah, it should be positive.
Okay. Thank you.
Your next question comes from the line of Stephen. Please proceed.
Hi. Good morning. Can you hear me okay?
Yes.
Okay. Just following up on some of the comments around solid-state drive developments that you had with Samsung. Then secondly, any comments around there was a couple of acquisitions that were relatively high profile in that area, and I was curious where you guys stand on buy versus build, given those acquisitions and given your own internal developments. Thanks.
Yeah. I think based on the activities that this is Rocky, by the way, that we've done over the last year, we're still very interested in making strategic investments in SSD and PCIe category products. Organically, we've been utilizing our Samsung partnership as well as our internal development efforts. Right now, based on our forecast, as we would exit this year, our organic efforts in SSD would be greater than any of those companies that were recently acquired in the open marketplace. I think we feel pretty positive about the evolution of our SSD initiatives.
Yeah. Obviously, there's nothing secret about any of the acquisitions that occurred, and it was our decision not to participate, and we're confident in what we're doing internally right now.
Great. That's very helpful. Just secondly, just looking at the notebook market for second half, can you maybe talk about where you stand in terms of five-millimeter drive design wins? How much momentum you think that can contribute to your business as the year progresses?
Sure. I don't know that I view five millimeter necessarily as a notebook drive. I think we view seven millimeter as probably the right platform for thin and light notebooks. Five millimeter probably is a more compelling drive for something even more mobile, like a tablet. We are happy with the engagement that we have on the seven millimeter side. Most OEMs are incorporating seven millimeter and seven millimeter hybrid into their next generation thin and light offerings, and we're pleased to date with the engagement we've had on the five millimeter side going into tablets. We do think that high capacity, high performance, and much lower cost on a per gigabyte basis is compelling to mobile users. We'll see how it plays out the rest of this fiscal year, but so far, I'd say we're encouraged by what we're seeing from the OEMs.
Rocky, you want to add anything?
Yeah. I was going to say, this quarter, we'll be shipping a meaningful amount of five millimeter drives as we launch into our initial program. We're pretty positive. We have several major OEM commitments on the five millimeter that we'll be pursuing as we exit the September quarter and then continue to build that volume in the December quarter.
Great. That's very helpful. Thanks again.
Your next question comes from the line of Rob Cihra, representing Evercore. Please proceed.
Hi. Thanks very much. Two questions, I guess, if I could. One on gross margin. It was actually solid in the quarter, 28%, even in a weak PC market. I'm just wondering, though, if you look at your target range, what you think you need to see to get higher up that? Is it simply better capacity utilization, or are there more drivers to that? I have a follow-up if that's all right.
This is Pat. Rob, clearly volume would be beneficial to us. Given the world that we're seeing with the moderate growth rates right now, we're really managing on the price stability as much as we can because we need these margins to continue to invest. Also just the mix. As Steve talked about with the cloud build-outs, that's certainly been helpful to maintain it, but to drive to the middle of the range, you'd need either greater mix or some volume because I think we're doing a pretty good job on maintaining the economics on the drives being sold.
Okay. Thanks, Pat. Then just in CapEx, you've obviously been running lean, and you said running at sort of whatever operational levels. I know you gave the guide for fiscal 2014 to stay in your target range. Do you feel like you're almost running too low? You're running nicely conservative, but was fiscal 2013 almost too low when you start looking at new technologies and that sort of thing? Is there a chance we're higher up in that range as we get into fiscal 2014, or do you think you can still sort of run at maintenance levels? Thanks.
I think the answer to your question is no, I don't think it was too low. I think it was appropriate for the visibility that we have around demand, which is both, again, a technical transition issue on the client side, offset by a technical transition on the enterprise side, offset by very squishy macroeconomic conditions. Not a lot of that has changed. We're going to run the capital pretty tight. If the trends continue, where the client side shows little or no growth and cloud continues to grow, we do think we'll hit capacity issues, which then will probably evidence themselves in shortages and a different margin structure, at which point then we can consider what we do on the capital side. We're not going to lean into it other than maintaining what we need to do for technical advancements. Dave, you want to add?
No, I think that's right.
All right. That makes sense. Thank you very much.
Your next question comes from the line of Sherri Scribner representing Deutsche Bank. Please proceed.
Hi, thank you. I just wanted to get a little bit of detail on your thoughts on ASPs as we head into the back half. I know, Pat, you said that you're managing to have good economics, and you guys had good gross margins in the quarter. I think some of the OEMs have said they've seen HDD pricing starting to come down. Can you give us some sense of your expectations for ASPs as we move into September?
Our position has been as the last several quarters remaining relatively flat. Obviously, our view is we still want to drive the cost of storage down by delivering compelling products through technology and cost management. Our view on the price is going to be relatively stable, and that's our plans for the rest of this calendar year.
Okay, that's helpful. You also talked about having, I think the commentary was meaningful amounts of 5-millimeter drives in the September quarter. Are you going to start breaking out the hybrid and the SSD products at any time over the next couple of quarters? It seems like it's becoming a more important piece of your business.
I think we'll be able to give some level of guidance as that market develops for us.
Okay.
Probably a little premature right now. As Rocky said, we're going through a lot of OEM qualifications. We're feeling fairly positive, once it starts taking traction, that's probably a fair breakout for a period of time.
Okay, great. Just my final question, I know you guys anniversaried the Samsung acquisition in the beginning of the year or last year, December. Have you had any progress in terms of integrating that business? I know a couple of quarters ago you said you weren't really focused on that, just wanted to get an update. Thanks.
We're still under MOFCOM agreement, which we're working very positively with the agency. We don't view it as a huge challenge, but we're operating these two entities on the interface to the customers very independently still today.
Yeah, the R&D side and the op side has been integrated for a while, but it's just the customer-facing activities that we're managing separately, and we'll continue to do so until we're released from those restrictions by MOFCOM.
Okay, great. Thank you.
Your next question comes from the line of Katy Huberty representing Morgan Stanley. Please proceed.
Thanks for taking the question. Guys, can you just run through some of the puts and takes on the free cash flow side and when you expect to get back to levels that allow you to meet your repurchase goals?
Maybe on the repurchase goals, I don't know what you're referring to, but from our standpoint, Steve, in his prepared comments, talked about returning 70% of operating cash flow, which was our goal last year, and we met it, and we're continuing to try to target up to that this year as well, and is also as much as 90% cash flow. For fiscal 2013, we had never had a stated goal other than to continue to return a large amount of the cash flow to the shareholders.
Yeah, I guess I'm just referring to the $250 million target exiting 2014.
Yeah. Okay. That's calendar 2014. That's still a target with us. Obviously, the share price does have an effect on it, so we'll manage the business, and we'll continue in the meantime to return significant amounts of capital cash flow to the shareholders. That's the fiscal 2013 goal.
Pat, just on the free cash flow this quarter, I think there was a large other item. Can you just run through what drove the lower free cash flow in the quarter?
The redemption of the debt. We issued $1 billion, but we also redeemed $700 million, so we had $111 million of basically premium and charges to accelerate that redemption. In the period, we're going to save over $40 million a year, extended our debt maturities over two years and dropped overall portfolio by 130 basis points. That was a one-time charge of the whole restructuring of the debt profile.
Great. Thank you.
Your next question comes from the line of Andrew Nowinski representing Piper Jaffray. Please proceed.
Good morning. It's Dan Garofalo on for Andy. Thanks for taking the questions. Just wanted to focus on the enterprise side. I know there's been a few questions. Obviously, another strong quarter, especially in the nearline category. I guess as you look at that category with, it looks like 21% year-over-year unit growth in fiscal 2013, given the increasing capacity that is getting shipped into cloud applications, how should we think about unit growth in that category? Is it fair to think that it could accelerate?
It's tended to have accelerated over the last two years. I think the conditions that are causing that acceleration are still in their early stages. I think as cloud continues to build out, we still expect growth in that area.
Okay. I guess just one follow-up, if I could, focusing on the PC industry. In addition to talk about second half catalysts related to new product intros, there's also been talk of Microsoft ending support for Windows XP next April, potentially being a catalyst for the PC industry. I just wonder, how are you looking at that event, as well as any color you could provide on your view of the PC pipeline for the second half of the year? Thanks.
Well, we have our own perspective on it, which is we're more positive than the doomsday scenario of the PC is dead. As you know, we steal YY's line about PC plus, not post PC. We believe that the PC has an important role to play in the computing environment for sure, as do the mobile devices that connect to it and around it, as does the cloud that everything is going to ultimately connect to. Our view is positive on the client side in all of its forms. I wouldn't want to specifically identify an action by Microsoft, but we think the long-term trends are still positive for the PC industry. There's no reason for us to plan to that right today. We have the capacity and ability to address that marketplace that's in front of us.
As it stabilizes or recovers, we'll be in a position to, I think, have a good product offering to fit all the different segmentations that are occurring around how people use technology to make their lives better.
Great. Thank you.
Your next question comes from the line of Monika Garg, representing Pacific Crest Securities. Please proceed.
Hi. Thanks for taking my question. My question is on the enterprise SSD market. We are seeing strong adoption of enterprise SSD, and Seagate has also made investment in this field. Could you maybe talk about the impact of enterprise SSDs on the mission-critical drives?
Yeah. This is Rocky Pimentel. Clearly there's an emerging evolution of what's the high-performance layer in the data centers, which is a blend between mission-critical and enterprise SSD, and I think it's important that we have both sides of that equation covered. Certainly there's, again, ebbs and flows of the transition between somebody wanting mission-critical elements of HDDs and their topology versus SSDs. I think with the growing success of our enterprise SSD initiatives, we're less concerned about what does that mean for mission-critical drives than it means about our kind of high-performance element of the enterprise overall. Certainly we see some customers migrating more to enterprise-class SSD solution, but still the mission-critical is an important element in the overall architecture.
Both elements are important, and the fact that we're succeeding at both kind of gives us confidence that whatever the customer wants, we can fulfill their need.
We like the Gartner characterization that these are complementary technologies. I know I heard that somewhere before.
Then, if I may, just to follow up on the same question, we are seeing the NAND companies moving a lot in the enterprise SSD space. Given that more than 80% of the cost of enterprise SSD is just raw flash, the question is how you think HDD industry or Seagate competes against with NAND vendors when given they are increasing the offering in this space too?
Obviously, understanding the customers and integrating with the customers is a key point of how successful you're going to be. Pointing back to Seagate's experience in the enterprise space, understanding customer workloads is really important. I will say that the market itself is very complex. Some places the SSDs are being used as storage devices, and some places they're actually storage class memory or memory-like devices, and different buses that it might be hanging off of. It's a really complex space to then paint it with one brush and say 10K or 15K HDDs belong here and SSDs belong here, especially given the plethora of applications in the servers is really complicated.
Yeah, I think the reality is that the workload and application aspects that either favor SSD or HDDs are different, and those that favor SSDs weren't really being served by HDDs. It's actually opening up an entirely new application set, and the front end of that set has advantages to SSD, if it's random. If it enables, therefore, the analysis of more and more data, we think that obviously supports the need for
High availability data to run through that front end. We actually think warm store and things like that are becoming very important as well. Again, the replacement aspect of i.e., I use an SSD drive to replace a boot drive, that's a three-year-old story that was about 1% of the mission-critical drives that we sold. I think the reality is just like phones that aren't using disk drives are driving the creation and sharing of content that's impacting the need for more HDD in the infrastructure. SSDs on the enterprise side are doing the same thing with basically big data analytics. We are, one, having products that will participate in that category directly.
We do it with partners, we do it with our own products. It also benefits us on the HDD side or on the hybrid side to one of the earlier questions I think Rich Kugele asked about the nature of that customer, which seems to be the big data customers that need an accelerator into the SSD. We think, again, this is just part of an overall architectural change that favors big data growth. Big data needs to sit on a disk drive ultimately.
Thank you. That's all for me.
Your next question comes from the line of Joe Wittine, representing Longbow Research. Please proceed.
Hi. Thanks. I hate to look at market shares on a short-term basis, but any comments you can make on whether the strength in enterprise reflects any share gains during the quarter, and conversely, the softness in client reflects any share losses or anything you walked away from? Thanks.
We've tended not to chase prices much on the client side, which may have resulted in some share loss. I would say on the enterprise side, again, it's the ability to execute in quarter. Those could either be architectural issues where we happen to be qualified at some OEM or with some particular CSP and someone else isn't, or it could be product related. We do feel good about, this is probably more of a Q1 story than a Q4 story, but we do feel good about the positioning of our new 4-terabyte drive. I think in general, I think any market share shifts in the 1% range is pretty much noise level at this point, and I wouldn't read too much into it.
I think the industry is fairly stable in its market share right now, I don't see any big shifts occurring there one way or the other.
Thanks, Steve, then a quick follow-up on OpEx. We've crept up as a % of sales for a few quarters now. Maybe it's not surprising given all the new products you've introduced, you got it flat again. What changes going forward that enables you to keep at this current level?
Yeah, no, it's an important question. I think with the gross margin change that we've seen over the last couple of years, anywhere from 800-1,000 basis points of additional gross margin, and of course, the company has been good about returning a big % of that to our shareholders. I also think given all the opportunities in storage, both on the mobile and the cloud side, that it's important for us to invest in some new technologies and products that are resulting from that change in marketplace. That's where we've been making some investments, and it has pushed the OpEx up marginally. It's obviously tied to our expectations of revenues and profits downstream. Some of that is SSD related. Some of that is core technology related to make sure that we can keep areal density growing at the rates that we need to.
Some of it's specifically to mobile, and some of it is to cloud. Again, at the September meeting, we'll continue to update you on what our views are about these investments and the particular markets, and the technologies that we're deploying. I do think it's important for the company to make those investments and position itself to generate revenue growth and margin growth downstream from those investments. We watch it closely. As you know, OpEx is something that we fight hard for every day, and it's one of the nice DNAs of Seagate. We are actively managing it, but I do think it's important for us to take some of that gross margin expansion and position our company for growth because there's so much growth related to the storage that we'd be remiss not to.
Fair point. Thanks.
Thank you.
You have time for one final question. That question comes from the line of Cind Shaw, representing Discern. Please proceed.
Thank you. Several questions. First, you talked at your investor meeting last year about going after the cloud storage by trying to really go up the stack and go more directly. There was talk about potentially getting higher margins and prices through that value add. As you look at what you're getting in terms of cloud business now, is that what's happening, or is it more of a classic nearline drive?
No, it's a classic nearline drive.
Is there still a thought that you can, with some of these folks that are trying to use more commodity-like drives, go up the stack and get those higher margins?
We think about it very differently. With OpenStack deployment, there's the opportunity for a disaggregation of the software and services level that exists today. Many companies are pursuing architectures that say, how do you take our devices and deploy it with OpenStack to achieve their storage goals? To do that, there are many changes that we may need to make at the device level that effectively move us up the stack. Yes, we have those discussions ongoing with a wide variety of technology providers.
Any thought as to when that might actually start to happen in the marketplace? Are we talking quarters, years?
Quarters.
Okay. Following up on a couple of the earlier questions, there was some discussion about potential for capacity constraints if demand did start to improve and the constraint being media. Do you feel like you've got a lot of capacity in other areas, such as heads, and spindles, and things like that? Would you start to bump into other things pretty quickly after the media?
It really depends on how it comes at us, Cindi. If it's the cloud drives that are obviously heads media rich, if they're client devices, which as Steve said earlier, we're not really leaning into, then those are more box count related where we'd have to go procure individual parts and test time and things like that. There's a balancing act. I think right now we've got enough capacity for what we see in FY 2014, and we're going to be cautious with our CapEx.
Okay. One final clarification. When you answered one of the earlier questions, I wanted to see, was talking about PC long-term trends, and you used the word stabilize and recover. Is it your view that the year-over-year declines in PCs we've been seeing in the last few quarters are a somewhat temporary phenomenon and that PC units are going to actually start to grow, or is that factored in potentially getting hard drives into tablets?
Yeah, I think it's maybe closer to the second half. I think that we need to stop viewing the world as defining it as a technology that's 10 years old. When someone says PC, I don't know what they think about that giant desktop thing or the notebook thing. Look, our technology market has continued to evolve over the 35 years I've been in it. What's happening with tablets is, in my mind, not any different than what happened when we went from mainframe to mini, to client server, to PC, to now phones. It's a constant evolution of technology that's basically becoming more and more available to more and more people, which allows more people to share and create. At the end of the day, that's driving more storage.
Yes, we are positive on the future of client devices, if client devices are the things that go in individuals' hands, and they'll take the form of something I carry in my pocket or something that I can carry in my briefcase or something that's in my home or something that's in my workplace, that it's all connected. Some of it may also be in a shared services that many people connect to. I just think we need to change our thinking about what's happening to the PC. The PC's evolving. Just like it has for the last 30 years, it's going to continue to evolve. Yes, I'm positive on it. Okay. I think that's the last question. Again, we want to thank everybody for your time this morning and for accommodating our early call.
We look forward to seeing you in September and then talking to you on the next call. Thank you.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.