Good afternoon, and welcome to the Seagate Technology fiscal second quarter 2013 financial results conference call. My name is Keith, and I'll 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'd like to turn the call over to Kate Scolnick, Vice President, Investor Relations. Please go ahead, Kate.
Thanks, Keith. Good afternoon, and welcome to today's call. Joining me today in Cupertino are Seagate CEO, Steve Luczo, CFO, Pat O'Malley, and EVP of Sales and Marketing, Rocky Pimentel. On the line, we also have EVP of Operations, Dave Mosley, CTO, Bob Whitmore, and EVP and General Counsel, Ken Massaroni. We've posted our press release and detailed supplemental information about our fiscal second quarter 2013 on our investor relations site at seagate.com. During today's call, we will review the highlights from the December quarter and provide the company's outlook for the March quarter. 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 related 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 for disk drive 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, 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 quarterly report on Form 10-Q, as filed with the SEC on October 31st, 2012. These forward-looking statements should be relied upon as representing the company's view of any subsequent date, and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made. I would now like to turn the call over to Steve Luczo. Please go ahead, Steve.
Thanks, Kate. Good afternoon, everyone. Thank you for joining us on the call today. Seagate's second quarter results reflect strong operational performance as we continue to manage through a challenging demand environment. For the December quarter, we achieved revenues of $3.7 billion, non-GAAP net income of $525 million, non-GAAP diluted earnings per share of $1.38. We generated $844 million in operating cash flow and returned $1.1 billion to shareholders through share redemptions and dividends. In December, we raised our quarterly dividend 19%. In the first half of fiscal 2013, Seagate has returned over 95% of operating cash flow and over 100% of free cash flow to shareholders. Our business environment continues to be impacted by a wide range of macroeconomic spending and demand challenges. Industry shipments declined 3% sequentially in the December quarter to approximately 135 million units.
This decline was primarily driven by the notebook market, as all other segments demonstrated quarter-over-quarter growth. The overall industry demand environment was slightly lower than what we had expected. By executing effectively in response to in-quarter upsides from our customers, our market share grew to near the higher end of our market share expectations. We effectively balanced supply and demand with finished goods inventory levels decreasing over 10% from the prior quarter. For the December quarter, we shipped over 47 exabytes of storage with an average of approximately 823 gigabytes per drive. This reflects a 59% year-over-year exabyte growth, which is well over twice the current rate of areal density growth. Gross margins for the December quarter were 27.6%, within both our expectations and our long-term margin range target.
The pricing environment and the benefit we've received from cost improvements from product transitions were also within the expected ranges for the quarter. Product mix improved slightly in the quarter. Operating expenses in the December quarter were $437 million, including a $21 million benefit from legal cost reimbursements. We are focused on effectively aligning our operating expense to support a broader product portfolio of storage devices, including hybrid and solid-state drives, software, other devices, and services. We believe these additional investments will support our continued leadership in the storage market and effectively align us with the rapid advancements in mobility, cloud, and open source initiatives. We also continue to make strategic investments that position us for the future success in new storage applications. As an example, today we announced a strategic relationship with Virident Systems, Inc., a performance leader in Flash-based storage class memory solutions.
The companies plan to jointly deliver solutions for the fast-growing PCIe storage market. Most immediately, we will offer a complete line of Flash-based PCIe solutions to our OEM and distribution partners, powered by Virident. Longer term, we plan to jointly create next-generation hardware and software solutions for the solid-state storage market. We also made a strategic equity investment in Virident. Virident products are highly regarded for their industry-leading performance, reliability, and capacity. This is another example that accelerates our strategy to offer our customers a complete line of solid-state products across all markets. I'll provide our view for the March quarter and some context related to our outlook. Based on current planning indications from a broad base of customers and our assessment of the global macroeconomic conditions, we are continuing to manage our business cautiously.
While customer demand visibility remains challenging, we expect the industry to continue to balance supply effectively and maintain relatively stable pricing. For the March quarter, unit shipments the first few weeks of the month of January have been linear and have trended higher than the beginning of the December quarter. Our outlook reflects an addressable market that is flat to down sequentially. We are currently forecasting March quarter revenues of approximately $3.25 billion-$3.45 billion. We continue to focus on the quality of our business versus absolute unit shipments. At the low end of our revenue guidance, we have a conservative view of in-quarter upsides. We expect to maintain gross margins at the lower end of our long-term range of 27%-32%. Seagate remains focused on sustaining profitability in the current demand environment and investing to continue to be a storage leader.
We are targeting non-GAAP operating expenses to be relatively flat sequentially, which should then directionally decline in the June quarter. As we've said over the last few quarters, Seagate is maintaining capital expenditures to meet nearer-term demand signals as opposed to deploying capital in anticipation of a recovery of demand. The vast majority of our capital expenditures continue to be used for maintaining our existing operations and our current technology transitions. We expect to maintain capital spending at or below our long-term targeted range of 6%-8% of revenue. In light of the gap between areal density growth and petabyte growth, and the resultant upward pressure this puts on average capacity per drive shift, we believe that this approach to capital provides support for our long-term gross margin expectations. Delivering value to our shareholders continues to be an important objective at Seagate.
Through the share redemptions we have made this fiscal year and through our quarterly dividends, we are on track to return approximately 70% of operating cash flow and 100% of free cash flow to shareholders in fiscal 2013. The next few years in the storage industry will present new and significant opportunities for Seagate. Data consumption and creation, along with the increase of global internet connectivity, continue to drive petabyte growth at rates that are significantly greater than the areal density growth rate. At the same time, open source software, cloud infrastructure and architectures, and mobility are fundamentally reducing the overall cost of computing and extending its deployment. In addition, the new touch-enabled thin and light systems, along with Windows 8, should be increasingly compelling in the client market. These dynamics should provide significant benefits for Seagate and the storage device industry.
As such, we remain optimistic about the second half of calendar 2013 and beyond. Keith, we're now ready to open up the call to questions.
Certainly. Ladies and gentlemen, if you would like to ask a question, press star one on your phone's keypad. If your question has been answered or you wish to withdraw for any reason, you can press star two. Again, that is star one if you'd like to ask a question. Your first question is from the line of Rob Cihra with Evercore Partners. Please go ahead.
Hi. Thanks very much. I was just wondering, with the enterprise, was clearly better than expected in the quarter versus when you went into the quarter. I know we're going through inventory correction that really hit in the September quarter. Did you think that the upside, particularly in Nearline, was reflecting better end demand? Was it really just a timing, we're coming out of an inventory correction, and we just started correcting a little better and quicker than we thought? Do you think, I guess, end demand was stronger than expected? Thanks.
I think demand continues to increase in the Nearline space. That's where the vast majority of the companies that are providing cloud infrastructure purchase those types of devices. As the cloud deployments continue, that market continues to grow. I think in Seagate's case, we did execute well in terms of in-quarter upsides there as well.
Okay. If I get a follow-up, I'm not sure if I do, but I'll ask one. B, I'm curious with LTAs as they run through here into the beginning of calendar 2013, any expectation that they impact your pricing or market share, or do you think they really don't have as much impact as maybe people think, or do you think they do? Thanks.
I have no idea what people think, the LTAs, again, provided favorable pricing to the OEMs in a supply-constrained environment, a substantially lower price than the spot market would have provided at the time, and it was to align the longer-term purchase requirements of those customers with our supply situation. A number of those agreements have been extended. Others originally extended beyond this calendar year, or last calendar year and this calendar year. I don't see any big changes as a result of the constant evolution of the LTA agreements.
All right, great. Thank you very much.
Your next question is from the line of Monika Garg with Pacific Crest Securities. Please go ahead.
Hi, thanks for taking my question. The question is on the TAM. If I compare the peak industry TAM about four or five quarters back, and with this quarter or the guided quarter for the March, it seems industry and Seagate is operating less than 80% utilization. I would like any comments, thoughts about right-sizing the capacity?
Well, our business isn't as simple as just taking a TAM and a number of units. You have to take into consideration the nature of the devices, the split between client and enterprise, and then the capacity per drive. With average capacity per drive increasing the way it is, that's absorbing heads and disks, which is a very good thing for a vertically integrated drive company. With average capacity per drive continuing to increase, that also absorbs test capital. Our most expensive capital deployments are in heads and disks and test, and our most expensive R&D is in heads and disks. As we continue to drive more heads and disks per platform, it's actually not a terrible situation in terms of being a flat TAM or a slightly eroding TAM.
That being said, clearly TAM growth would be a good thing in terms of the final assembly. With the average capacity per drive right now, our factories are running at levels, obviously, that allow us to maintain these margins, and we're not considering any sort of reduction in scale just because our longer-term outlook obviously is different than what this situation looks like today. As you know, we believe that by the end of the decade, there's going to be a significant demand for petabyte shift, and that'll evidence itself in unit growth as well as average capacity per drive. We don't want to take the capital out right now.
Okay, thanks. Just the last question on the Virident acquisition, very interesting acquisition here. Could you maybe talk about Virident's current customers and the traction Virident is seeing in the market?
Yeah, it was an investment.
Yeah, sorry. Yeah, I missed that.
I'll let Rocky talk to the details of it. I'll just provide a brief little overview that it's consistent with how we've approached the emerging solid-state market, which is developing nicely. We believe that we have to participate in a variety of segments there. We feel very good about our position on the enterprise SAS side with our partnership with Samsung. The PCIe space is clearly an attractive one, and we feel that this partnership is going to allow us to address the needs of our OEM and distribution customers, and then we're doing things on the client space that we've talked about in prior calls.
Yeah, I think Steve just covered it. It's really another step in completing the platform for solid-state storage that Seagate wants to offer alongside of its traditional magnetic core storage. I think we're pretty excited about this engagement with Virident. Not only do we have a strong go-to-market initiative, but also a strong development initiative as we go forward. As a result, we'll have a stack of SSD solid-state solutions that span from the client all the way through to the flash server, high application data demands of the massively scaled data center.
Thank you.
Your next question is from the line of Shebly Seyrafi with FBN Securities. Please go ahead.
Very much. It looks like you're guiding revenue down 9% sequentially, and that's worse than what I have for Western Digital, down 3% sequentially. Maybe you can talk about why you think you're going to go down more. Are you being more price-aggressive than them? Also related to this, on the gross margin, do you expect to get a mixed benefit in the March quarter? You had one in December just now, and with lower revenue and perhaps no mixed benefit, is there a possibility that it goes below your target of 27%?
I'm sorry, what was the last part of that?
The possibility that the gross margin goes below the 27% low end of your target range.
I think we already indicated what we thought our gross margin was going to be, so I'm not going to repeat that. On the first one, I'm not sure what Western Digital's revenue decline was. I thought at the midpoint it was closer to 6%, not 2%. For us, I'm not sure if you were on the first part of the call, where we indicated that we were also at the near the high end of our market share in the December quarter as a result of some really good end quarter execution to customer upsides. At the low end of our range, we haven't modeled that type of performance again. We typically don't model that. I think that the outlook for the markets, we may be a touch more conservative in TAM than our competitors.
Coming off of the higher market share, we may have some small market share loss if we don't get the importer upside like we did. In general, I think it's a fairly consistent.
Just a quick one on Virident. Can you talk about the opportunities with Web 2.0 customers?
Well, we definitely think there's a huge opportunity with Web 2.0 customers. When you actually look at the index that we manage two of our direct cloud-based customers, that share of the business or that portion of our business grew strong double digits quarter-over-quarter. Certainly, the Virident product solution is a very pertinent solution for the hyperscale cloud providers.
Okay, thanks.
Your next question is from the line of Steven Fox with Cross Research. Please go ahead.
Thanks. Good afternoon. Just one question from me. Steve, I was wondering if you could talk a little bit about your average capacity per drive. The recent trends are up again from about 832, I think you said in a release, from 802. You exited fiscal 2011 at less than 600. I'm just curious, can you talk about what's different between the first half of this fiscal year versus maybe the first half of last fiscal year, and then how you see that progressing and what are the key drivers over the next few quarters? Thanks.
I think if we go back further than that, Steven, I think of it kind of over a four-year trend, average capacity per drive has kind of gone from mid-20s to mid-30s to mid-40s to mid-50s. Whether or not it goes to mid-60s, I guess we can argue about, but even at these rates, given where aerial density is, it's a good thing for the drive industry because what we do is we ship petabytes. How we package them is probably the easiest thing that we're faced with. Driving aerial density, of course, managing our capital deployment and matching up with our customer needs architecturally is where a lot of our work goes. I don't see it slowing down.
I just think if the silicon folks can keep on track in terms of reducing the cost of silicon, and the software people can continue to develop nice, portable, easy open code, then we're going to see device proliferation on the client side, especially in the mobile space, continue to grow. Hopefully we go from 1.7 billion people connected to 2.7 billion people connected and sharing all sorts of rich content, which is what we care about. We do believe that to give people the user experience that they probably deserve at the edge, that there is an opportunity for HDDs to play a greater role in some of the mobile devices, and we're pursuing those discussions. Clearly, the back-end infrastructure to support that type of data growth is a big opportunity for us. I don't see it slowing down. If anything, I see it accelerating.
Do you think?
You go to high frame rate video, you go to 4K video. These imply movies today in HD are 20-30 gigabytes, and 4K at just average frame rates is 100-200 gigabytes. It just gives you a feel for the challenges we have going forward to provide the storage people are going to need.
All that implies, and given some of your previous comments, that you're thinking that both the enterprise and the client side can grow capacities at a similar rate going forward, or is there one that's going to grow faster?
Depends on the application. Enterprise has to be split, I think, in the mission-critical enterprise versus maybe a cloud service provider or content. If you're in an archiving mode, clearly, we believe that there are architectures we can deploy that drive capacity for drive. If you're in the pure mission-critical, you have a performance constraint there that always has to be thought about. It just depends on the application.
Fair enough. Thanks very much.
Your next question is from the line of Aaron Rakers with Stifel Nicolaus. Please go ahead.
Yeah, thanks for taking the question, guys. One on gross margin and a follow-up on the Virident acquisition. First, on the gross margin line, can you just clarify how much benefit you got back from the Brazil situation last quarter? Also, as you think about people looking at these models on a capacity ship versus a unit TAM assumption, can you provide us an update on where you stand with regard to the industry supplying enough media as you expect, obviously, this possibly to accelerate in terms of capacity per drive?
I'll take the first one, Aaron. On the first one
Yeah. Aaron, this is Rocky Pimentel. Let's clarify. You said acquisition. We made it a strategic investment in Virident.
Fair enough. Sorry. I'll ask on that a little bit.
Sure.
On the Brazil issue we highlighted last quarter, we said it would be at least half the impact, and it was even less than that this quarter. It was measurable, but not in any frame that we worry about. We put a plan in place to correct where we saw some over-provision in inventory, and I think that's working well. We think we have largely taken care of that issue.
Then on the media in terms of continued increase in capacity per drive?
Dave, Mosley is on the call. I'll let Dave talk to that.
Just real quick, I think with the TAM being down, yeah, we are putting more disks into each drive, but I think the industry's probably okay for the next couple of years, depending on how you view the overall growth of petabytes and the box count. After, say, 2015, there could be significant challenges if we continue on the rates that Steve just illustrated. That's the way I'd answer it, Aaron.
Okay. Then on Virident, maybe it'd help me if you compare and contrast maybe this solution relative to the primary competitor in the market being Fusion-io, either from an architectural perspective and also on a cost per gigabyte perspective, if you can.
Yeah. Aaron, this is Rocky Pimentel again. Obviously, they actually have benchmarks that you can refer to on their website, but based on the benchmark, the external third-party benchmarking that's been done with their product against other leaders in quote, "the category" out there, they demonstrate the ability to exceed many of the key specs like IOPS, et cetera, against the incumbent competition out there. Secondly, another thing that we can bring to our relationship is the ability to drive their cost structure down from a product standpoint, given our scale and our involvement in other areas of solid-state storage.
No quantification on cost per gig right now, though?
No.
Okay. Thank you.
Your next question's from the line of Maynard Um with Wells Fargo. Please go ahead.
Hi, thanks. Some in the industry have talked about hybrids accounting for about half of the two-and-a-half-inch notebook drives by 2015. Just curious what your expectations are for that and whether there are any shifts in capacity or utilization effects to think about in a market transition that could impact gross margins. I have a follow-up as well, please.
Sorry, were those I got the first part of that question. Was the second part of that question related to the first part, or was that a second question?
It was. It was related to the first part.
Okay. Well, the first part is, yeah, I think that those types of estimates are possible. Then what was the second part of it?
Just in terms of, as that starts to ramp up and the HDD side starts to quote, unquote, "ramp down", just in terms of any sort of shifts in that market impacting your gross margins.
No. A hybrid is an HDD. It's just also got flash embedded in it, along with a bunch of software that makes that flash work well. From a manufacturing perspective, we don't see that shift as being problematic because, again, it's still lots of heads and disks. I think the trend of where we're at on single disk and two-disk solutions is probably not necessarily influenced by hybrid. It's really a performance play. I think it's a big deal. I think as you kind of get the SSD performance, for example, I was down at CES last month or whenever it was now, earlier this month, hard to believe. It's just shocking the number of thin and light machines that are packed with expensive SSDs when you can use a hybrid drive for a lot less money with the same performance.
I think as the industry has now become aligned around the right chipset and the right performance measures, we're going to see a lot of thin and lights that roll out with hybrid because you can pick up 10 times the capacity at one-fifth the cost, that probably will help the notebook market that's probably more price sensitive than other markets. I think it's a big transition ahead of us.
Along those lines, can you just talk about the opportunities in the tablet market? I'm referring primarily to the ARM-based market that's using flash today. Maybe if you could just talk about if and where discussions currently are. Thanks.
I think it's a big opportunity. Again, we indicated that we believe to deliver the user experience that you probably deserve as a mobile user, there's lots of reasons that you need more storage capacity in that device. Not citing anyone's product, but just calling something a tablet. If you only have 16 or 32 gigs, then you have to decide which three or four movies you're going to take with you. Seems kind of silly when you can take every movie you own for less cost and actually the same battery performance in the same Z height. We think there's a big opportunity coming down the pipe for tablets as well. We're engaged on multiple fronts.
Your next question is from the line of Ananda Baruah with Brean Capital . Please go ahead.
Hi. Good afternoon, guys. Thanks for taking the question. Steve, let me just ask one on pricing here. I believe that earlier comments, you guys are looking for March quarter pricing to be more flattish blended. I think if I just worked in the point of the guides, it seems like down mid-single digits. Is that accurate? If so, can you just sort of walk through the puts and takes? Maybe it's mix, you talked about some of the mix issues, not issues, but the mix situation in the December quarter that maybe is unwinding. Just love to get your thoughts and have a follow-up. Thanks.
I think where we had some share gain in the December quarter was spread across all the markets, but probably a little heavier on the enterprise and on the Nearline. That's partially influencing the AUP discussion. In general, the pricing that we've entered into was pretty much what we expected and pretty benign.
Got it. Thanks. I guess just to that end, gross margins are still pretty solid in the March quarter, I guess even with, I'm sort of inferring that maybe some of the market share gains in enterprise, those are some of the share givebacks that you're talking about, the normalization, and you're still guiding to 27% gross margins in the March quarter. Not to get too far ahead, but could we infer that going post the March quarter with sort of more of a normalized mix, you'd expect margins to still be pretty stable?
Yes.
Great. Thanks a lot.
Your next question is from the line of Nihal Chokshi with Technology Insights Research. Please go ahead.
Thanks. I calculate that your ASP for the December quarter was down quarter-over-quarter. You didn't divulge your segment numbers. If you're not divulging your segment numbers, could you at least take us through which segments drove that? If you don't mind, do divulge your segment numbers?
No, we don't have segments. Pat, you can talk to what the AUP. The AUP decline was pretty minimal, as I recall, off the September quarter.
Yeah. The AUP was managed mainly with mix. We had talked in the September call in October that the pricing was negotiated in the backdrop of their head access, we were heavier on pricing than historically in the December quarter. Even with that, they were able to stay in the target margin range, we highlighted that we'd be going with a fairly benign pricing going forward, and that's been the case across the board.
Okay, thanks. I'd also like to ask a question about the Virident investment. Note that I got that right. As you guys help to get this product out to market, do you expect this to be margin neutral, margin accretive, or margin dilutive? This sounds like this is more of a distribution relationship and that the technology relationship is to come.
Yeah. The first phase is definitely a go-to-market phase. The next phase will be joint development on product, our intention is to make it margin neutral to margin accretive overall.
What about initially?
Initially it'll be pretty minor amounts of money, but by the time it becomes visible, it should be margin neutral to margin accretive.
Okay, thanks.
Yeah, just on your first question, we just looked up the AUP. The AUP decline was only 3% quarter-to-quarter. That was a lot less than the price erosion that we had talked about.
Right. Okay.
Your next question is from the line of Cindy Shaw with Discern. Please go ahead.
Oh, hi. Thank you. I was wondering if you could talk about LaCie, which you had for the first time in the full quarter, any impact for that on revenue and earnings, as well as the SSD business, sort of the nontraditional businesses, any impact on revenue and earnings? I have a follow-up.
LaCie is accretive to us. It's been a good investment. We're in the process of still integrating that, but that's been accretive, and so it's as we'd expect. Obviously, it added some OpEx, but for what they're bringing us for breadth and depth on our portfolio is in expectations. Your second part of the question?
Yeah. I was also asking about SSDs and other sort of nontraditional contributions. Then I had a follow-up after that.
No big changes from the prior quarter.
Okay. Then the follow-up, the Cloud Builder Alliance, when would you be expecting to see revenue and really meaningful revenue out of that?
The what?
The Cloud Builder Alliance.
We're helping engage the Cloud Builder Alliance. We're not going to get revenue from that. We're just engaging with them to help align the architectures and our products to contribute to that. The 2 tier and directs could build our architectures and approach the market. We're not going to get any direct revenue other than enabling the folks help enable the folks in that alliance to better attack the market.
When do you think can you measure really when or how that's going to impact revenue, or is it just too disconnected?
I think over the course of the back half of this year, we're definitely going to be able to measure it as cloud overall is one of our key initiatives. We'll be able to articulate the details of what that program is delivering. Like Pat said, it's really a market creation engagement vehicle. It's not a direct sales vehicle at this point.
Great. Thank you.
Your next question is from the line of Jun Park with BMO Capital Markets. Please go ahead.
Hi. Thank you very much. The notebook market has been down for two consecutive quarters. Where do you think inventory is with the OEMs in the channel for the notebook market, and what are your views for the notebook HDD shipments for the next quarter or two? Thanks.
I think the inventories are better-
Yeah
certainly over the last two quarters and probably closer to where the customers want them. You'd have to ask the customers that. I think from our perspective, no one's really commented on it, but our inventories are quite low, running almost a half a billion dollars of inventory less than our competitors. We feel really good about our inventory balances. As far as we can tell, the customer inventory balances are pretty well managed right now. I think the demand on the notebook side is really just a function of, did the new platforms gain traction, which is partially dependent on the touch-enabled technology and Win8 deployment. We're kind of in a wait and see mode, but we're optimistic that things improve from here.
Whether or not that happens in the March quarter or the June quarter or the September quarter, we'll see. I think we're probably skipping along the bottom here, and I also think as hybrids start showing up in these devices, it's going to be a value add to the notebook market because like I said, you can get a lot more capacity and the same performance with a lot lower cost.
Your next question is from a line of Erik Woodring with Barclays. Please go ahead.
Hey, thank you. Given the limitations on the buyback throughout 2013, can you discuss your plans for the dividend?
Nothing different than what we've already said and disclosed in our filed documents. It's something we continue to look at every quarter. We don't really have a limitation on the buybacks. It's just that if we buy back too much stock, we run into a Section 382 issue. It's just something to consider as we think about whether or not we want to pursue buybacks, but it's not a direct limitation.
Okay, thank you.
Your next question is from the line of Sherri Scribner with Deutsche Bank. Please go ahead.
Hi, thank you. I think that in December you anniversaried one year on the Samsung acquisition, and if I remember correctly, there were some limitations on you combining the business with Samsung for at least a year. I was hoping you could give us an update on where you are with combining the business, and do you expect to see any cost savings as we move through the year?
Well, for us, we integrated pretty much most of the areas where there were cost savings on the R&D side and on the operating side. Our limitations were, and are really geared around the go-to-market side, sales, customer engagement, pricing. You're right that on December 19th or 20th or 21st, we had the right to ask the regulatory authorities to relax those. We haven't done that. We continue to have a positive and constructive dialogue with MOFCOM and other regulators in China. We're going to continue those dialogues, when appropriate, we'll seek relief from the requirements.
Okay, great. Thank you.
Thank you. I think we have time for one more question.
Okay, your final question will be from the line of Scott Craig with Bank of America. Please go ahead.
Hey, thanks. Good afternoon. Just 2 questions around OpEx, Steve, maybe from a longer-term perspective. Is there a revenue target or timing or something we could think around when you would reach the OpEx target of sort of 8%-10% of revenue? Secondly, with regards to an earlier question on capacity, if the PC market is as challenged as what some people think, and I believe the consensus is sort of for a decline this year, how does that impact what your capacity thoughts are for the back part of calendar 2013? Thanks.
Yeah, I kind of answered the 2nd question already. We manage our capacity more around our capital deployment as opposed to brick and mortar. As we look out to 2015, 2016, we believe that this constant disconnect between petabyte growth rate and areal density growth rate is going to put extreme shortages in front of the drive industry at current capital deployment rates. We don't want to walk away from brick and mortar. It's really how we manage the inside of the walls in the meantime. That's what we're doing very conservatively. I don't think it changes any of that. I don't know that I agree with all the naysayers anyhow. I kind of like the term What's the Lenovo term on PC? Not post PC, but whatever it is.
It's really what's the PC evolving to. I think these convertible platforms that become tablets and notebooks and have onboard storage are very compelling. I expect there'll be a resurgence in the client side of the market here in the not too distant future. We'll watch it. In terms of the OpEx question, we just see big opportunities on the mobile side, on the cloud infrastructure side, where there's a lot of device-level technology, software technology, and even system-level technology that really only a drive company can provide. We don't want to miss the opportunity to invest in some of those fundamental technologies as these markets develop. I think for the incremental $, it's the prudent thing to do now. We'll see where the revenue flows with it.
Clearly, we think these are multi-billion dollar opportunities when you take mobile and cloud and think about the evolution of computing over the next 5-10 years. We want to position Seagate to participate, not just as a device company, which will be our core, but some of the other opportunities that go along with it. We'll manage it prudently and hopefully start to show some revenue associated with it in the next year.
Okay, thanks, Steve.
Okay. Thanks very much. On behalf of the management team, I want to thank our employees, customers, partners, suppliers, and our shareholders for your support and commitment. We look forward to speaking to you next quarter. Thank you.
Ladies and gentlemen, that'll conclude today's call. Thank you very much for joining us. You may now disconnect. Have a great day.