Good afternoon, and welcome to the Seagate Technology Fiscal Third Quarter 2013 Financial Results Conference Call. My name is Ayesha, and I will be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference is being recorded for replay purposes.
At this time, I would like to turn the call over to Kate Skolnick, Vice President, Investor Relations. Please proceed, Kate.
Thank you. Good afternoon, and welcome to today's call. Joining me today in Cuspertino are CVS' executive team are CEO, Steve Lusso CFO, Pat O'Malley EVP of Sales and Marketing, Rocky Timantel EVP of Operations, Dave Mosley our CTO, Bob Whitmore and EVP and General Counsel, Ken Maserone. We've posted our press release and detailed supplemental information about our fiscal Q3 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 include 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 found on the company's 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 ks as filed with the SEC on August 8, 2012, and in the company's quarter report on Form 10 Q filed with the SEC on January 29, 2013.
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 were made. I would like to turn the call over to Steve Lusso. Please go ahead, Steve.
Thanks, Kate. Good afternoon, everyone, and thank you for joining us today. Seagate's 3rd fiscal quarter results again reflect strong operational performance. For the March quarter, we reported revenues of $3,500,000,000 and on a non GAAP basis achieved gross margin of 27.6 percent, net income of $464,000,000 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 $678,000,000 in operating cash flow in the quarter and paid $379,000,000 for the early redemption of a portion of our long term debt.
We ended the quarter with approximately $2,000,000,000 in cash and investments. Returning value to our shareholders remains a priority. And in the March quarter, we redeemed 3,000,000 ordinary shares for the approximately $102,000,000 and paid a dividend of $0.38 per share. And as a reminder, this payment was accelerated to the December quarter. Over the 1st 9 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 8 42 gigabytes per drive. For the 1st 9 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 aerial density growth rate. Non GAAP gross margins for the March quarter were 27.6 percent 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 non GAAP operating expenses in the March quarter were $446,000,000 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 $221,000,000 representing approximately 6% of revenue. We continue to target capital expenditures at 6% to 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 and D footprint. The HDD industry continues to evidence a lack of consistent visibility from our customers across most of our markets. As a result, 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 $3,300,000,000 to $3,450,000,000 non GAAP gross margins consistent with our performance over the last two quarters non GAAP operating expenses to remain relatively flat and lastly, remaining on track to return at least 75% of operating cash flow 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 density growth rate. Than expected areal density growth rate. As a result, continued investment in heads and disc 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% to 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 150,000,000 heads with an average capacity of 180 gigabytes per head against a total industry TAM of 180,000,000 HDD units. In the March 2013 quarter, against the total industry TAM of 135,000,000 HDD units, Seagate also produced 150,000,000 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. And these are the key areas where we are investing in our R and 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 100 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 3rd generation solid state hybrid drives in the March quarter and 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 growth and 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 PCI 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. Ayesha, we're now ready to open up the call
Your first question comes from the line of Ananda Baruah with Berenberg. Please proceed.
Hi, guys. Good afternoon. Congratulations on a solid quarter and Tay thanks for taking the question. I guess Steve and Pat, I guess the first question is around ASPs. Can you just walk through the dynamics that led to the flat pricing for the quarter?
It feels like it was sort of like you said benign like for like and then some mix, but just the specifics would be helpful. And then I have a I guess it seems like you're guiding to down 2% blended for the June quarter. And if you could just walk through those dynamics as well? And then I have a quick follow-up. Thanks.
So on the pricing, like we said, it is benign. We haven't gotten into specifics on what that is, Anand, but it was below historical rates and that's what we expect sort of be the operating model going forward as long as supply 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. But all in all, it played out as much.
Now for the next quarter, we have still benign price and we don't have excessive price in there by any stretch of imagination. It's very benign, but the mix is probably somewhat offset due to seasonality.
Yes. I think the other thing in that is that in the notebook space, we definitely felt that there was opportunity in the need to increase pricing margin and we did do that and that pricing has held so far.
Got it. Thanks a lot. And Steve, how should we think about, I guess, the new pricing dynamic, at least this quarter and next quarter, manifesting itself on the margins? I guess longer term you gave guidance for the June quarter obviously on the margin. But 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.
Okay. A couple of 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 Moseley in a second to talk on that. But 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 and the client.
We're pretty excited about some of the things that we see in the notebook space for example. And 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 in the back half of the year. And 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.
Yes. To the comments that Steve made earlier, the industry is relatively constrained at, let's say, roughly 500 exabytes of capacity. And we'll put capital online sparingly as we talked about earlier. But the growth of the cloud primarily continues to drive a lot of capacity into the industry. And so we as we see that, we talk about areal density growth, our ability to deliver that capacity relative to the sheer capacity growth.
I think that's those are the two vectors that are diverging. And as we look to invest in the future, I think we need to make sure that we see the requisite return on that capital investment. But the the areal density is not growing nearly at 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 Wittigstein with Longbow Research. You may
proceed. Hi. Thank you. First question, I wanted 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?
And then 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. So On the 2014, we're certainly still committed to that even with share price today.
Yes. And then near term thoughts on capital deployment?
Continue the dividend as stated and buy back shares within the limitations that we have today on $382,000,000 If that were to change for any reason, we certainly modify our plan to that. But as Pete and I commented, we're still good for the 2014 of the 250,000,000 shares.
Thanks. And then Steve in your prepared comments, you talked about being settled 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 will be carrying or will be initiated with HDDs or hybrid HDDs? Thanks.
I mean, I think over time, the penetration is going to be pretty high. I mean, 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 sudden what are those going to look like again? It's going to look like a lot like a notebook. So 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 and some of them not and some of them with flash and some of them with HDD. But if you think of the super mobiles, we think of tablets today, I mean, I honestly think I could I believe that penetration rate is going to probably go into the 30% to 40% range because if you can deliver 500 gigabytes 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. So but I think it's a ramp that begins hopefully I think sometime this year and then continues to accelerate.
Yes. This is Rocky. I think with that, 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. And you're looking at look at the total TAM between classic PC desktop and the tablet, You got 80,000,000 to 85,000,000 units a quarter on the classic PC notebook desktop side and then you have another to 45,000,000 tablets. So you have a total market of like 130,000,000 to 40,000,000 devices.
I think based on the product platforms we'll see over the next 6 to 9 months easily serviceable market probably is north of 100,000,000 units, which is a positive because we've been dealing with a serviceable market that's been 80,000,000 units. So, I mean, certainly, it still has to be proven, but 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 the line of Rich Kugel with Needham and Company.
Well done on the quarter.
Thanks, Rich.
So just a few questions. I guess first when it comes to the 5 millimeter rollout, I know you showed it last September at the analyst event, but 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. And I expect that you'll see something in the not too distant future about our product positioning and what the engagement has been like at the customer level.
Do you get the sense that the OEMs are leaning more towards the 5 millimeter versus the 7 millimeter? Is there going to be a learning curve before they're willing to adapt their designs for 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. 5 millimeter to me ultimately at least initially is it could go into a thin and light, but a 7 millimeter can go into a thin and light And especially if you can do a 2 disc thin and mill 7 millimeter, again, you have a lot of capacity of opportunities. And I think that's the bigger play for hybrid as well basically. 5 millimeter, I think initially is probably going to be targeted more towards what we think of as the tablet market today. And 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 algorithms. So we have the capacity to leverage off of the flash that's in the system. But I think ultimately, again, as you kind of think of what that product class looks like a couple of 3 years out, it's just really going to be a function of capacity because there's no scenario that we can think of says you get 2 disk and a 5 millimeter, so you're going to limit yourself to 500 gigs or 7.50 or whatever is the point after that. Whereas 7 millimeter of course you're going to have 2x that. And there's going to be plenty of need for that amount of storage on portable computing devices.
So I think they're kind of separate markets and they're both going to be big platforms for us Rich.
Okay. That's helpful. And then in terms of just your ability to take costs down, can you just update us on where you are in the aerial density transition for the what is it 1 terabyte per platter, right? And then any comments on the Chinese regulatory body's approval on fully integrating the last bits of Samsung?
Dave, you want to talk about the trends?
Yes, relative to areal density transitions 1 terabyte of bladder, Rich, we still have some of the 500 gigabyte per bladder technology around, but it's more of a convenience thing for us. I think we could transition if we wanted to. So I consider that transition complete. Certainly 1, 2, 3 terabytes and on up that's all in that new product family.
And then Yes. On the Opcom situation, we continue to work with the regulatory agency there. And as we said before, we view it as a constructive relationship. And we don't have any current thinking about when that relationship is going to alter its current course and direction. But we think it's been a positive relationship and
question comes from the line of Jason Nolan with Robert 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 constraints in the back half potential constraints in the back half of the year?
Yes. It's really it'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 just there's still a hesitancy, I think, certainly among multinationals to kind of 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 and 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 and build outs as guys start as company starts 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. So the kind of the scale of that infrastructure I think is potentially going to be bigger than what maybe people thought just 6 months ago.
It seems like we would see blended ASPs start to mix shift upwards at some point?
Yes. I mean not just that, but to Dave's point, it also says that and disabsorption as well as other factors such as test are dramatically different. And that's just a different economics for us. So we're watching it closely.
Thanks, Steve.
Your next question comes from the line of Rob Sarra with Evercore Partners. You may proceed.
Hi, great. Thank you very much. Two questions if I could. One just on the kind of a I guess a vanilla question, but lots of people I guess always wonder with the TAM being 136 in 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 were flash when PCs were down?
And then I guess following on that the any ability 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 3.5 inches drives or even the 2.5 inches drives, they just don't go into PCs. There's other lots of devices that they go into, including DAS devices. And one thing I think that we have seen through some of our market research is that with the increase of tablets and smartphones that the if you will, the attach rate of DAS devices has gone pretty dramatically. In some market segments, it's increased from like 20% attach rates to 50% attach rates.
So 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 has been really flat the last several quarters actually and certain measures probably got lower in the March quarter. And we manage our hub inventory really closely. So and again, I'm a little suspect of the data, Rob, in terms of when people cite PC shipments being down, are 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. So you could see a decrease at the ODM level, but that doesn't necessarily assume a one for one relationship to what the PC industry is shipping. So 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 it's to me, it's going to be more influenced probably by macroeconomic issues.
But if the macro situation stays the same or gets better then yes I do believe the back half of the year shows firmness over where we're at today. And $140,000,000 isn't a whole lot higher than $137,000,000 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 targeting the low end and chasing the upside. And that's the smart thing for the industry to do.
So I'm not worried about it breaking out away from us other than Dave's point that if it breaks above probably 150,000,000 or 155,000,000 units and there's a mix shift, the industry is going 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.
Yeah. Thanks for taking the questions. First question just going and looking at the enterprise piece of your business and 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. So I guess my question is, how do we look at that data and triangulate that relative to what you're seeing from the cloud?
And maybe you can give us a contribution from what you're seeing directly from those type of data centers at that point and kind of help us understand that up 7% relative to some of the other demand data points we've seen?
Yes. Well, 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. I mean, one of the architectural features that the 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. So 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, Eric? Yes. In
in overall at least equal to what the standard enterprise share is against our competition and in some cases in a preferred position.
Okay. And then the final question for me as 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
dividend plan in place and we're certainly committed to that. So that will be part of the return to shareholders in the course of the one item we said to go into 250,000,000 shares, you could model that any way you want. It's going be somewhat lumpy as we go through some of our 3 82 issues, but 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 shareholders. And then clearly our business would support that level.
So you could sort of back in that way where we're
helping to
support that. But if you're I know attorneys aren't supposed to do this. But I mean 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. And then 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, yes, in this uncertain environment.
I guess what I'm asking is you're doing about $1,800,000,000 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. You gave us 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% to 10%, I think is what you've talked about in the past, but you haven't really been been you've been below that. How should we think about taxes? And what type of share count are you thinking about for June?
Thanks. Sure. On the interest, you just take the $5,000,000 out of that. That's it's a simple number there. So just take that at some level, we'll be taken that down, but it's going to be relative all big numbers is going to be still relatively flat.
So it's just a tranche of debt and a smaller tranche of debt, but it was a significant tranche on getting the security out. So that's all I do there. Tax rate, it is variable. It's somewhat I always tell folks just use $15,000,000 to $20,000,000 as opposed to tax rate because you're going to drive yourself crazy trying to do a tax rate with all things. I think that's fair.
And 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 $5,000,000 out of interest expense sequentially?
Yes. I'd take around that level.
Okay, great. Thank you.
Yes.
Your next question comes from the line of Neil Chulsky with Technology Insights Research. Please proceed.
Yeah, thanks. I'd like to get 2 questions in. One is that the gross margin looks like you had a positive mix shift in terms of enterprise and non compute versus client. Your GM was flat Q over Q and the ASPs were also flat Q over Q. I know that the volume was down 4% Q over Q.
So the question is, is it purely volume that drove the effective higher cost per drive up pure Q? 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. So it was primarily driven through the mix.
Okay. And staying on a sequential compares theme here. Mission critical, consumer electronics and branded hard drives, they all seem to have trended above seasonal. So can you discuss what were the drivers of Seagate's above seasonal performance there? Was that industry or was that Seagate specific?
And importantly, do you see those drivers being sustainable?
Yes. I think on the mission critical or on the enterprise class drives, there was some again some unique advantage that we had in product that we took advantage of. And then 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, etcetera. So I think those were probably the 2 key changes in what you saw in those lines of product.
Okay. Thank you. Hey, Anishu, we'll take one more.
Your last question comes from the line of Keith Bachman with Bank of Montreal. Please proceed.
Yes. Thank you. 2, number 1, 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%. And then my follow ups on the TAM, but I wanted to kind of go through that is why was there such a disparity? And what do you think that portends if anything?
I guess I'm 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. I mean, we went in there fairly as I stated in my comments, we were fairly benign our pricing.
Right.
And in certain capacity points, we were just not willing to move a market. So 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. But probably the largest driver of that was price positioning both in the channel and with OEMs.
Okay. Well, let's shift to the TAMs. Steve, you mentioned let's just say for argument's sake the TAMs call it $145,000,000 in the September and perhaps even December quarter. How are you thinking about the contribution within those numbers if they turn out that way both from hybrids and or all spending 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 hybrid. But as a percentage of what we ship, it will still be pretty small. And I would say in terms of tablets, the same thing. I mean you could go from 0 to 100 of 1000 or make a bigger number by the end of the year, which is 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 wanted to draw, but you're at least getting into a marketplace that up until that moment we weren't participating 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 or sorry I beg your pardon 2.5 inches drives? Would hybrids you think make up 5% of that notebook shipment or 10% of the 2.5 inches category?
You have to look at of the notebook systems today, how many of them are flash based? Yes. The number is flash based notebooks are 10% or less?
Yes. It's a little it's less than 10%.
And so if you're saying could we be half of that is what 5% would be?
Good.
Okay. All right. Thank you.
Good. Yes, good.
There are no further questions in the queue at this time. I would now like to turn call over to Steve Lusso for closing remarks. Please proceed.
Okay. Great. And well, I guess just on behalf of the management team and 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.