Good afternoon, and welcome to the Seagate Technology fiscal third quarter 2013 financial results conference call. My name is Aisha, and I will be your coordinator for today. At this time, all participants are in 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, and welcome to today's call. Joining me today in Cupertino are Seagate's executive team, our CEO, Steve Luczo, CFO, Pat O'Malley, EVP of Sales and Marketing, Albert Pimentel, EVP of Operations, Dave Mosley, our CTO, Bob Whitmore, and EVP and General Counsel, Ken Massaroni. We've posted our press release and detailed supplemental information about our fiscal third quarter 2013 on our investor relations site at seagate.com. During today's call, we will review the highlights from the March quarter and provide the company's outlook for the June quarter. After that, we'll open up for questions. As a reminder, this conference call contains forward-looking statements including, but not limited to, statements relating to the company's historic and currently anticipated future operating and financial performance in the March 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 that filed with the SEC on August 8th, 2012, and in the company's quarter report on Form 10-Q, filed with the SEC on January 29th, 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 like to turn the call over to Steve Luczo. Please go ahead, Steve.
Thanks, Kate. Good afternoon, everyone. Thank you for joining us today. Seagate's third fiscal quarter results again reflect strong operational performance. For the March quarter, we reported revenues of $3.5 billion on a non-GAAP basis, achieved gross margin of 27.6%, net income of $464 million, and diluted earnings per share of $1.26. On behalf of the entire management team, I'd like to thank our employees, customers, partners, and suppliers for their support and commitment. Our balance sheet remains healthy as we generated $678 million in operating cash flow in the quarter and paid $379 million for the early redemption of a portion of our long-term debt. We ended the quarter with approximately $2 billion in cash and investments.
Returning value to our shareholders remains a priority. In the March quarter, we redeemed 3 million ordinary shares for approximately $102 million and paid a dividend of $0.38 per share. As a reminder, this payment was accelerated to the December quarter. Over the first nine months of fiscal 2013, Seagate has returned 75% of its operating cash flow to shareholders. Our focus over the last few quarters has centered on effectively optimizing our business model in an environment with limited visibility due to uncertain macroeconomic conditions and technical product transitions among our core customers. In the March quarter, overall demand was slightly higher than our expectations, primarily driven by the continued build-out of cloud infrastructure and applications. During the quarter, we shipped over 47 exabytes of storage with an average capacity of 842 gigabytes per drive.
For the first nine months of the fiscal year, Seagate has shipped over 138 exabytes of storage, reflecting 33% year-over-year growth, which is well above the current areal density growth rate. Non-GAAP gross margins for the March quarter were 27.6%, within both our expectations and our long-term margin range target. The pricing environment in the quarter was benign and blended ASPs increased slightly, driven by product mix. Non-GAAP operating expenses in the March quarter were $446 million, representing a 4% sequential increase, which is primarily due to increased employee-related expenses and investments in our new storage technologies. These investments support our continued focus on effectively aligning our operating structure to support a broader product portfolio of storage devices, including hybrid, solid-state drives, and other devices and services, which we believe will be critical to the cloud mobile compute environment.
Capital expenditures for the March quarter were $221 million, representing approximately 6% of revenue. We continue to target capital expenditures at 6%-8% of revenue. On a year-to-date basis, approximately 4% of revenue has gone towards maintenance of our existing operations, while 2% of revenue has gone towards improving our global R&D footprint. The HDD industry continues to evidence a lack of consistent visibility from our customers across most of our markets. We continue to plan cautiously, which we believe will effectively position us to continue to optimize our financial and business performance. For the June quarter, we expect a unit demand environment that is flat to slightly down sequentially. Revenue of approximately $3.3 billion-$3.45 billion. Non-GAAP gross margins consistent with our performance over the last two quarters. Non-GAAP operating expenses to remain relatively flat.
Lastly, remaining on track to return at least 75% of operating cash flow to shareholders in fiscal 2013. Looking ahead, we believe the next few years in the storage industry will present new and significant opportunities for Seagate. For calendar 2013, the growth trajectory of data driven in part by cloud and mobile applications, has our industry on pace to deliver close to 500 exabytes of storage and is advancing at a rate which is more than two times greater than expected areal density growth rate. As a result, continued investment in heads and disk technology and the continued absorption of capacity will be required to meet storage demand in all of our product segments. This trend, in part, supports the overall gross margin target of 27%-32% that we have discussed previously.
As an example, in the June 2011 quarter, which was before any market share shifts attributable to the flood or industry consolidation, Seagate produced 150 million heads with an average capacity of 180 gigabytes per head against a total industry TAM of 180 million HDD units. In the March 2013 quarter, against the total industry TAM of 135 million HDD units, Seagate also produced 150 million heads. However, these heads had an average capacity of 280 gigabytes per head. The growth in mobile computing and more affordable, secure, and available cloud information infrastructure is driving the need for storage across a wide variety of systems and products. These are the key areas where we are investing in our R&D efforts and aligning our technology portfolio. In the mobile space, full-featured devices capable of sharing and displaying content-rich data have already grown to hundreds of millions of units.
IBM recently estimated that there's approximately 5 petabytes of mobile data created each day from phones and tablets and from other machine learning exchanges. We believe that with the number of connected people, availability of rich content, and increasing bandwidth, mass storage will continue to expand across a variety of devices in the PC plus environment. In the client space, while PC unit demand has flattened over the last several quarters, the demand for heads and disk and average capacity per drive continues to increase. Some of the innovative products we have introduced this year that have been well-received by leading OEMs include our 7 millimeter 500 gigabyte for ultra-mobile devices and 2 terabyte desktop hybrid products. We began shipping our third generation of solid-state hybrid drives in the March quarter. We have additional performance-based and high-capacity client products on our roadmap for this year.
In the branded space, we believe personal clouds, wireless access, and SSD performance-based products are catalysts for continued growth. Our acquisition of LaCie is proving to be a successful investment for our consumer and small business technology offerings. In the enterprise business, the expansion of cloud infrastructure and cloud applications requires high capacity, high-quality products. We will continue to provide a portfolio of enterprise products that meet the needs of the cloud environment, including hard disk drives, solid-state drives, hybrid drives, and a complete line of flash-based PCIe solutions to our OEM and distribution partners through our strategic investments. In summary, Seagate is optimistic about our storage technology roadmaps as it relates to current technology implementations, as well as the advancing mobile, cloud, and open-source environments. We look forward to updating you in more detail at our strategic forum in September.
Aisha, we're now ready to open up the call to questions.
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. Please press star one to begin. Your first question comes from the line of Ananda Baruah with Brean Murray. Please proceed.
Hi, guys. Good afternoon. Congratulations on a solid quarter and Kate, thanks for taking the question. Steve and Pat, I guess the first question's around ASPs. Can you just walk through the dynamics that led to the flat pricing for the quarter? It feels like it was, like you said, benign, like for like, and then some mix, but just the specifics would be helpful. Then I have, I guess it seems like you're guiding to down 2% blended for the June quarter. If you could just walk through those dynamics as well, and then I have a quick follow-up. Thanks.
On the pricing, like we said, it is benign. We haven't gone into specifics on what that is, Anand, but it was below historical rates, and that's what we expect to sort of be the operating model going forward, as long as supply and demand stays relatively in check. The mix was a positive element for the quarter. The business-critical nearline drives clearly were a growth segment for us, and that helped the mix. All in all, it played out as much. For the next quarter, we have a still benign price, and we don't have excessive price in there by any stretch of the imagination. It's very benign, but the mix is probably somewhat offset due to seasonality.
Yeah, I think the other thing in that is that in the notebook space, we definitely felt that there was opportunity and the need to increase pricing marginally, and we did do that, and that pricing has held so far.
Got it. Thanks a lot. Steve, how should we think about, I guess, the new pricing dynamic, at least this quarter, next quarter, manifesting itself on the margins? I guess, longer term, you gave guidance for the June quarter, obviously, on the margins. If we think about sort of what might allow the margins to move up into the upper half or towards the middle of the longer-term gross margin guidance range, what are the dynamics that you sort of envision that they get it there over time? Thanks.
Yeah. Okay. A couple things. I think one is, if you get TAM expansion in the back half of the year, from a capacity perspective, the industry is kind of bumping up against its limit. I'll turn it over to Dave Mosley in a second to talk on that. If we do have TAM growth, that I think is actually more related to macroeconomic conditions and also I think to some of the new product offerings by the OEMs on the client. We're pretty excited about some of the things that we see in the notebook space, for example. Then I think the other big trend is just the shift to the cloud. As the cloud continues to build out, and it's our belief that we're going to see a fairly dramatic acceleration of that exiting this year and going into the next calendar year.
Given the number of heads and disks that get absorbed into that product area, I think there's going to be some pretty tight supply situations the back half of the year, we have already been signaling to our customers that the current pricing may even look favorable relative to what we see the last half of the year, because I think we could start seeing some constraints in nearline even exiting this quarter. I'll let Dave talk to some of the math behind it.
Yeah. To the comments that Steve made earlier, the industry is relatively constrained at, let's say, roughly 500 exabytes of capacity. We'll put capital online sparingly as we talked about earlier. The growth of the cloud primarily continues to drive a lot of capacity into the industry. As we see that, we talk about areal density growth, our ability to deliver that capacity relative to the sheer capacity growth, I think those are the two vectors that are diverging. As we look to invest in the future, I think we need to make sure we see the requisite return on that capital investment. The trend lines definitely hold that areal density is not growing nearly the rate as the capacity growth is, and that's what's ultimately going to become the constraint.
Thank you very much.
Your next question comes from the line of Joe Wittine with Longbow Research. You may proceed.
Hi, thank you. First question, I want to talk about capital deployment, I guess, with the near-term piece of debt taken out. Do you still estimate, I guess, a pause on the buyback this year? Maybe just as important, is that share count target for the end of calendar year 2014 still possible in your view with the appreciation in the share price? Thanks.
Yes. On the 2014, we're certainly still committed to that, even with the share price today.
Yeah, near-term thoughts on capital deployment.
Continue the dividend as stated, buy back shares within the limitations that we have today on 382. If that were to change for any reason, we'd certainly modify our plan to that. As Steve and I commented, we're still good for the 2014 of the 250 million shares.
Thanks. Steve, in your prepared comments, you talked about being excited in growth in new form factors in the second half of the year here. Intel recently said they think 30% of the client PC environment could be these new form factors, ultra-thins, convertibles, detachables. Just curious, from your point of view, how many of those products do you think we'll be carrying or will be initiated with HDDs or hybrid HDDs? Thanks.
I think over time, the penetration's going to be pretty high. It's kind of funny watching the tablet evolution. It reminds me of the netbook evolution in a certain way. It's just that the tablet started with really great screens and no keyboards. Now they have keyboards, and you can take them apart, and I think shortly here, you're going to see tablets with HDDs in them as well, and all of a sudden, what are those going to look like again? They're going to look a lot like a notebook. I think it's just really a question between the breakdown overall of what's a super thin notebook, what's a slightly thicker notebook, what's a higher performance notebook, some of them with detachable keyboards, some of them not, and some of them with Flash and some of them with HDD.
If you think of the super mobiles, we think of tablets today I honestly believe that penetration rate's going to probably go into the 30%-40% range because if you can deliver 500 GB of storage with the same performance that you get off of Flash, for all those people that want to watch something through those pretty pieces of glass, you can at least store it somewhere. I think it's a ramp that begins, hopefully, I think sometime this year then continues to accelerate.
Yeah, this is Rocky. I think we've said, Steve and Dave talked about some of our emerging form factor and product solutions on the client side over the second half of the year. You look at the total TAM between classic PC desktop and the tablet, you've got 80 million-85 million units a quarter on the classic PC, notebook, desktop side, then you have another 40 million-45 million tablets. You have a total market of like 130 million-140 million devices. I think based on the product platforms we'll see over the next six to nine months, easily serviceable market probably is north of 100 million units, which is a positive because we've been dealing with a serviceable market that's been 80 million units.
Certainly, it still has to be proven, I think we're optimistic about the opportunity to extend or expand the serviceable TAM on the client side.
Great. Thanks for the comments. Congrats on the quarter.
Thank you.
Your next question comes from line of Rich Kugele with Needham & Company.
Well done on the quarter.
Thanks, Rich.
Just a few questions. I guess first, when it comes to the five-millimeter rollout, I know you showed it last September at the analyst event, can you just update us on your timing on that side for both the standard version and the hybrid?
The marketing people really hate it when I do product announcements on an earnings call. That being said, as you point out, we showed you what we were up to back in September. We've continued along with a great deal of positive momentum on our product offering, I expect that you'll see something in the not too distant future about our product positioning and what the engagement's been like at the customer level.
Do you get the sense that the OEMs are leaning more towards the five-millimeter versus the seven? Is there going to be a learning curve before they're willing to adapt their designs to that or take full advantage of that form factor?
I think right now they're for different devices like we were just saying in the prior question. Five millimeter to me ultimately, at least initially, it could go into a thin and light, a seven millimeter can go into a thin and light, especially if you can do a two-disc thin and seven millimeter, again, you have a lot of capacity of opportunities, and I think that's the bigger play for hybrid as well, basically. Five millimeter, I think initially is probably going to be targeted more towards what we think of as the tablet market today. There, whether or not you need a Flash-based device or not is a function, I think, of your algorithms, in hybrid. Seagate's fairly well advanced in our hybrid algorithm, we have the capacity to leverage off of the Flash that's in the system.
I think ultimately, again, as you think of what that product class looks like a couple or three years out, it's just really going to be a function of capacity because there's no scenario that we can think of that says you get two disc in a five millimeter so you're going to limit yourself to 500 GB or 750 or whatever is the point after that. Whereas seven millimeter, of course, you're going to have 2x that, there's going to be plenty of need for that amount of storage on portable computing devices. I think they're separate markets, they're both going to be big platforms for us, Rich.
Okay. That's helpful. In terms of just your ability to take costs down, can you just update us on where you are in the areal density transition for the, what is it, one TB per platter, right? Any comments on the Chinese regulatory body's approval on fully integrating the last bits of Samsung?
Dave, you want to talk about the transition?
Yeah. Relative to areal density transitions, one terabyte of platter, Rich, we still have some of the 500 gigabyte per platter technology around, but it's more of a convenience thing for us. I think we could transition if we wanted to. I consider that transition complete. Certainly one, two, three terabytes and on up, that's all in that new product family.
On the MOFCOM situation, we continue to work with the regulatory agency there. As we said before, we view it as a constructive relationship and we don't have any current thinking about when that relationship's going to alter its current course and direction. We think it's been a positive relationship and we continue to move forward.
Okay. Thank you.
Your next question comes from line of Jayson Noland with Robert W. Baird. You may proceed.
Great. Thank you. Steve, your comment on visibility not being very good broadly is understood. Wondering if the cloud storage part of your market provides better visibility, given your comment on potential constraints in the back half of the year.
Yeah, that's an interesting question. It does, but I think the lack of visibility overall is, in my mind, clearly just a function of what I'll call macroeconomic conditions. I think maybe more explicitly deficit-related issues. That there's still a hesitancy, I think certainly among multinationals to extend too far out until some of the structural issues around spending are understood a little better. That being said, inside of the cloud build-out area, I actually think the lack of visibility is one where what we're seeing is what's probably going to be below what really gets rolled out.
There's been a bit of an uptick in the cloud build-outs, build-outs have been consistently growing for a while, but it's certainly our sense from engaging with either our OEM customers or directly to the companies that are doing the cloud build-outs directly, that we may be on within 12 months of some step function changes in build-out as companies start to go global in their footprint and start to recognize some of the issues around bandwidth, as well as some of the issues around in-country storage requirements. The scale of that infrastructure, I think, is potentially going to be bigger than what maybe people thought just six months ago.
It seems like we would see blended ASPs start to mix shift upwards at some point.
Yeah. Not just that, but to Dave's point, it also says that we probably have those products mispriced right now just because the capacity issues around it from a heads and disk absorption, as well as other factors such as tests, are dramatically different, and that's just a different economics for us. We're watching it closely.
Thanks, Steve.
Yeah.
Your next question comes from the line of Rob Cihra with Evercore Partners. You may proceed.
Hi. Great. Thank you very much. Two questions if I could. One just on the, kind of, I guess, a vanilla question, lots of people, I guess, always wonder with the TAM being 136 in the quarter versus PCs that were down, and recognizing, I know that the drive market undershipped PCs in the back half of last year. Just how comfortable you are in terms of inventories out there, both in terms of channel and at OEMs, given the fact that at least mathematically, more drives shipped than, or at least drives or flash when PCs were down. Then, I guess, following on that, any ability or I know you say visibility is bad, and it is, but if you look in the September quarter, WD talked about kind of maybe a first take at like 140-type TAM.
Is that something that you think is reasonable at this stage? Thanks.
Well, I think, the first question is interesting. First, obviously, our drives, whether or not they're the desktop three-and-a-half inch drives or even the two-and-a-half inch drives, they don't just go into PCs. One thing I think that we have seen through some of our market research is that with the increase of tablets and smartphones, if you will, the attach rate of DAS devices has gone up pretty dramatically, and some market segments have increased from 20% attach rates to 50% attach rates. Part of it may be that, but with respect to your specific question, we don't see any issues in inventory and whether or not that's what we can see inside the hubs or clearly in the channel.
Channel inventory's been really flat the last several quarters, actually, in a certain measure, probably got lower in the March quarter. We manage our hub inventory really closely. Again, I'm a little suspect of the data, Rob, in terms of when people cite PC shipments being down, if they're talking about individual companies or what ODMs are saying, because I think there's also a shift between what the PC manufacturers are doing in terms of their mix of internal build versus ODM build. You could see a decrease at the ODM level, but that doesn't necessarily represent a one-for-one relationship to what the PC industry is shipping. I think there's more work to be done by everyone in terms of this kind of disconnect, and we're certainly working with all the industry analysts and trying to resolve it, but we certainly don't see any inventory buildups.
In terms of back half of the year, again, I think to me, it's going to be more influenced probably by macroeconomic issues. If the macro situation stays the same or gets better, yes, I do believe the back half of the year shows firmness over where we're at today, and 140 isn't a whole lot higher than 137, so I might be saying numbers slightly above that, but we're just going to have to wait and see what happens. The industry is well geared right now to operate very efficiently between 130 and 150 million units, by just targeting the low end and chasing the upside, and that's the smart thing for the industry to do.
I'm not worried about it breaking out away from us other than to Dave's point, that if it breaks above probably 150 or 155 million units and there's a mix shift, the industry's going to be tapped out of exabyte capacity, and there's no way to address that in the short term.
All right. Good problem to have. All right. Thanks very much.
Your next question comes from the line of Aaron Rakers with Stifel. You may proceed.
Thanks for taking the questions. First question, just going and looking at the enterprise piece of your business, I guess as the industry in total. By my calculations, the industry grew shipments by about 7%. Clearly, we've seen some weak data points out of some of the OEMs. I guess my question is, how do we look at that data and triangulate that relative to what you're seeing from the cloud? Maybe you can give us a contribution from what you're seeing directly from those type of data centers at that point.
Help us understand that up 7% relative to some of the other demand data points we've seen. Again, I don't know what other demand data points you're referring to exactly, but if you're asking me, do we see demand increases from cloud service providers? The answer is, of course. In one of the architectural features that cloud service providers are pursuing are architectures that allow them to buy drives directly and put their own software on top of that, as opposed to buying that software stack from someone else. We believe that's the beginning of a trend that's probably going to sustain itself for many, many years. Any idea of contribution or share position that you have in that environment today?
In the cloud environment, Aaron?
Yes.
We feel that we're, overall, at least equal to what the standard enterprise share is against our competition, and in some cases, in a preferred position.
The final question for me is we look at your capital return strategy, and we look at free cash flow generation. How should we think about the model progressing and that in context of how we should think about annualized free cash flow generation? On the capital returns, obviously, we have a dividend plan in place, and we're certainly committed to that. That will be part of the return to shareholders now and in the future. On the course of the one item we said to go into 250 million shares, you could model that any way you want. It's going to be somewhat lumpy as we go through some of our 382 issues.
We're committed to the deployment of that capital, so you can certainly put those two numbers in and see the level of cash that's going to be returned to the shareholders. Clearly our business would support that level. You can sort of back in that way where, how we support that. I know attorneys aren't supposed to do this, but if your question is, when do we see a shift in CapEx as a relative to the return of capital, the answer is, not until the bathtub is full, which we don't think that happens till the end of this year. We'll slowly address the capital needs that we see in the marketplace as they're confirmed. We're not going to lean into capital yet in this uncertain environment.
I guess what I'm asking is, you're doing about $1.8 billion of annualized free cash flow in this most recent quarter. Is that the right level to think about, or do we go higher? Are there drivers higher of that?
We believe we're slightly higher than that. We certainly, as Steve said, as business evolves and if you get some TAM upside and we think this is going to shift more and more to the cloud, we certainly believe our cash flow should be at least that and grow. Okay. Thank you.
Your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed.
Hi. Thanks. Pat, I just wanted to round out the guidance a little bit. Steve, you gave us a lot of detail, but just thinking about interest expense, I know you bought back some debt this quarter. How should we model interest expense? In terms of the tax rate, you guys have a pretty wide range, 3%-10%, I think, is what you've talked about in the past, but you've been below that. How should we think about taxes, and what type of share count are you thinking about for June?
Sure. On the interest, you just take the $5 million out of that. It's a simple number there. Just take that. At some level, we'll be taking that down, but all big numbers, it's going to be still relatively flat. It was just a tranche of debt, and it was a smaller tranche of debt, but it was a significant tranche on the getting the security out. That's all I'd do there. Tax rate, it is variable. I always tell folks, just use $15 million-$20 million as opposed to a tax rate because you're going to drive yourself crazy trying to do a tax rate with all things. I think that's fair. I'd use the share count what we had this quarter, relatively flat for next quarter, given what the level of shares we'll be buying.
Just to clarify on the interest expense, are you saying take $5 million out of interest expense sequentially?
Yeah, I'd say around that level.
Okay, great. Thank you.
Yep.
Your next question comes from the line of Neil Chulski with Technology Insights Research. Please proceed.
Yeah. Thanks. I'd like to get two questions in. One is with the gross margin. Looks like you had a positive mix shift in terms of enterprise and non-compute versus client. Yet your GM was flat QOQ, and the ASPs were also flat QOQ. I know that the volume was down 4% QOQ. The question is it purely volume that drove the effective higher cost per drive up QOQ, or is there something else going on there?
It's much more the mix driven than anything else. The cost structure, whether from input cost to the factory and delivery, was relatively flat and somewhat better. It was primarily driven through the mix.
Okay. Staying on a sequential compares theme here. Mission-critical, consumer electronics, and branded hard drives, they all seem to have trended above seasonal. Can you discuss what were the drivers of Seagate's above-seasonal performance there? Was that industry or was it Seagate specific? Importantly, do you see those drivers being sustainable?
Yeah. I think on the mission-critical or on the enterprise class drives, there was, again, some unique advantage that we had in product that we took advantage of. On the CE, it was strong in winning more market share at some of the CE customers that we've underserved in the last several quarters, et cetera.
I think those were probably the two key changes in what you saw in those lines of product.
Okay. Thank you.
Okay. Aisha, we'll take one more.
Your last question comes from the line of Keith Bachman with Bank of Montreal. Please proceed.
Yes. Thank you. Two, number one, why was there such a disparity on the client side between yourselves and WD this quarter? In particular, desktops, WD had 4% sequential growth and yours was down, I think 11. My follow-up's on the TAM, but I wanted to go through that is, why was there such a disparity and what do you think that portends, if anything?
I guess I'm not sure what data you're citing right now.
Just on the client side sequentially, sorry.
What are you calling the client? Sorry.
Well, we just focus on the desktop, if we could.
I would say it's as much as price positioning, Keith. We went in there fairly, as I stated in my comments, we were fairly benign on our pricing.
Right.
In certain capacity points, we were just not willing to move a market. That's clearly one aspect of it. I don't think it's necessarily anything to do with the portfolio or attributing anything to our position going forward. Probably the largest driver of that was probably price positioning, both in the channel and with OEMs.
Well, let's shift to the TAMs. Steve, you mentioned, let's just say for argument's sake, the TAMs, call it 145 in the September, and perhaps even the December quarter. How are you thinking about the contribution within those numbers, if they turn out that way, both from hybrids and/or all spinning media into tablets? Is there much contribution, you think, in the back half of the year from those type of products as we look out?
On an absolute basis, I think there'll be some decent growth on the hybrid. As a percentage of what we ship, it'll still be pretty small. I would say in terms of tablets, the same thing. You could go from zero to hundreds of thousands or maybe a bigger number by the end of the year, which those are big numbers, but obviously on a percentage basis, they're tiny. I think the more significant thing is that once the penetration starts, then you decide what's the slope of the curve you want to draw, but you're at least getting into a marketplace that up until that moment, we weren't participating in, and I think that's what we're more excited about.
Steve, if you looked at just notebooks, would hybrids, you think, say, in the December quarter, make up Sorry, I beg your pardon, 2.5-inch drives. Would hybrids, you think, make up 5% of that notebook shipment or 10% of the 2.5-inch category?
I think you have to look at of the notebook systems today, how many of them are flash-based?
Yes.
I think the number is flash-based notebooks are 10% or less.
Yeah. It's less than 10%.
If you're saying, could we be half of that, is what 5% would be. Could.
Okay. All right. Thank you.
Could. Yeah, could.
There are no further questions in the queue at this time. I would now like to turn the call over to Steve Luczo for closing remarks. Please proceed.
Okay, great. Well, I guess just on behalf of the management team, I want to thank you for joining us today. We look forward to talking to you next quarter.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.