Good afternoon, and welcome to the Seagate Technology Fiscal First Quarter 2013 Financial Results Conference Call. My name is John, 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 Skolnick, Vice President, Investor Relations. Please proceed, Kate.
Good morning and welcome to today's call. I'm joined today in Cupertino by Seagate's CEO, Steve Lusso CFO, Pat O'Malley Dave Mosley, EVP of Operations and Rocky Pimentel, EVP of Sales. We have posted our press release and detailed supplemental information about our fiscal Q1 2013 on our Investor Relations site at seagate.com. During today's call, Steve will review the highlights from the September quarter and provide the company's outlook for the December quarter. After that, we will advance the call to questions.
As a reminder, this conference call contains forward looking statements included, but not limited to statements related to the company's historical and currently anticipated future operating financial performance in the September quarter and thereafter and include statements regarding customer demand for this 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 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 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 is contained in the company's Annual Report Form 10 ks as filed with the SEC on August 8, 2012. These forward looking statements should not be relied upon as representing the company's views 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 Lusso. Please go ahead, Steve.
Thank you, Kate. Good morning, everyone, and thank you for joining us today. I'd first like to express our concern and sympathies to those that have been impacted by the storm on the East Coast and are enduring difficult times. I also want to thank all past and present Seagate employees as well as local and central government officials in China, as we just celebrated the production of our 1,000,000,000 drive from our China operations. We accomplished this remarkable feat in just years and we expect that the company will ship its 2,000,000,000 disk drive this quarter.
Congratulations to all involved. Seagate's 1st quarter results reflect strong operational performance as the company responded quickly to demand and products mix shifts in a challenging environment. We effectively adjusted production and maintained inventory turns in our target range and ended the quarter with inventory levels lower than the June quarter. For the September quarter, we achieved revenues of $3,700,000,000 non GAAP net income of $594,000,000 and non GAAP diluted earnings per share of $1.45 We maintained our commitment to returning value to shareholders with over 70% of the $1,100,000,000 in operating cash flow generated during the quarter returned to shareholders through share redemptions and dividends. Over the last three quarters, Seagate's ordinary share count has been reduced by 17% and dilution from options and equity awards has been reduced by 45%.
As with most Global Technology Companies, our financial performance is being impacted by a wide range of factors including sluggish macroeconomic growth in all major markets as well as a slowdown in the Brick Economies business spending restraint related to the U. S. Federal deficits and the upcoming fiscal cliff in the United States supply chain and systems inventory adjustments by our major PC OEMs weaker enterprise demand in Europe adjustments to PC systems related to the Windows 8 release changes in PC demand related to tablets and lastly, the lack of significant product innovation in the notebook space. Due to these factors, the September quarter was more than seasonally back end loaded and the overall industry demand environment was approximately 10% lower than we had expected going into the quarter. Despite the reduced addressable market, we effectively balanced supply and demand, shipping approximately 43 exabytes of storage and maintaining market share.
Our shipments into the client market declined 12% quarter over quarter, which is in line with unit declines reported by other technology companies in the PC space and slightly better than the decline reported in tablet sales. The enterprise market was weaker than we expected this quarter, down 26% sequentially. Despite the sequential reduction in the addressable market, on a year over year basis, Seagate grow unit shipments by 14% and increased average capacity per drive by 17% just to 7 38 gigabytes. Non GAAP product margins for the September quarter were 29%, which was at the midpoint of our long term margin range of 27% to 32%, but was slightly below our expectations. The pricing environment and the benefit we received from cost improvements from product transitions were within the expected ranges for the quarter.
However, sales volumes and mix from enterprise products were below expectations. In addition, margins on the sale of our products in Brazil were materially lower than we expected impacting gross margins by approximately 100 basis points. As we discussed at our strategic update in New York a few weeks ago, as the hard drive industry has evolved and matured, it has improved its alignment of supply and demand, particularly in an environment such as the one we are in now, where demand is less than what the industry forecast and the industry and each company is capable of producing more drives than current demand requires. Seagate will continue to adjust in quarter production to align to the demand requirements we are experiencing and we will manage our inventory aggressively as evidenced in the September quarter. Further, we will reduce our capital expenditures and align our investments to meet near term demand signals as opposed to deploying capital in anticipation of a recovery of demand.
As a result, Seagate is in a better position to focus on effective supply and demand balances and financial model resiliency in both the near term as well as with respect to long term return on our ARP research and development and capital investments. Looking ahead, we are approaching the December quarter conservatively based on current planning indications from a broad base of customers and on our current assessment of the following issues I previously outlined. In general, we remain concerned with global macroeconomic conditions. While we do see some signs of China stabilizing, we do not anticipate significant improvements to the current growth rates in China until late spring 2013. In the United States, it is uncertain that the fiscal cliff will be avoided.
Regardless, large federal state and local budget deficits will continue to weigh on growth prospects. We expect continued economic weakness in Europe. In addition to these economic concerns, we remain cautious in OEM demand as many customers are still working through client systems inventory balances. We expect enterprise demand to remain weak, particularly due to the enterprise market's exposure to the European economies. We believe that tablet offerings will continue to evolve and may result in the notebook refresh cycle depending on macroeconomic conditions and competitive product offerings.
We are optimistic that the wide variety of new notebook offerings, including thin and light systems, will result in renewed growth in this market over the next 12 months. We also remain optimistic about the long term impact of Windows 8 and other operating systems that enhance the user experience by incorporating touch, keyboard, pen, voice and gesture. Based on all these considerations, our forecast for the December quarter assumes inventory. Based on already completed negotiations associated with the current quarter, we expect that the ASPs will decline about 5%. We are currently forecasting 2nd fiscal quarter revenues of approximately $3,500,000,000 with margins at the lower end of our new long term range of 27% to 32%.
For the December quarter, we are planning for our operating expenses to increase slightly sequentially and reflect a full quarter of expenses from the acquisition of Lucie in our retail business. The vast majority of our capital expenditures continue to be used for maintaining our existing operations, including investments related to technology transitions as opposed to installing new capacity. We expect to maintain capital spending at or below our long term targeted range of 6% to 8% of revenue, including a replacement of our media are planning to return approximately 70% of our operating cash flow this fiscal year through our share redemption program and dividends. We are maintaining our target for approximately 350,000,000 ordinary shares outstanding at the end of the December quarter. In conjunction with our purchase of the Samsung hard drive business line last year, our shareholder agreement requires us to file an S3 and S3 and register the 45,200,000 shares we issued to them by September 19.
Samsung has indicated that they intend to maintain position in Seagate for the foreseeable future. And as a reminder, these shares are already reflected in our ordinary share count. Given the flat demand environment we are experiencing as well as the uncertainty around the issues we discussed impacting demand, we expect to be in a better position to update our financial expectations for the fiscal year and calendar year when we report our Q2 fiscal results in January. With respect to price negotiations that will occur this quarter related to the March quarter, we expect that ASPs will remain relatively flat. We currently expect macro unpredictability rapid technology and computer industry change to continue.
And we continue to implement investment and business processes designed to build a business model with higher margins to withstand fluctuations in demand. We believe the best reflection of this effort is represented by the low end of our gross margin range being higher than the high end of our previous gross margin range. Data consumption and creation and global Internet connectivity growth continue to be very robust. At the same time, computing is changing fundamentally and at a rapid place driven by open source software, cloud infrastructure and architectures and mobility. Because of our leadership position in storage, we have a high degree of engagement with a wide spectrum of customers from end users to OEMs to cloud service providers.
We are now on our 3rd generation solid state hybrid notebook drives and we are expanding this technology into desktop and enterprise products. We also have new 7 millimeter and 5 millimeter products at customers for qualification and evaluation, which position us very well for the new Fin and Light notebook systems. In summary, we believe Seagate is well positioned to sustain strong financial performance in this challenging economic environment as well as to address the opportunities associated with the needs of cloud computing and mobile connectivity. John, we're now ready to open up the call to questions.
Thank you. We will now begin the question and answer session. Our first question comes from Rob Schira from Evercore Partners. Please go ahead.
Hi. Thanks very much. I just want to ask a question on the I guess the enterprise weakness or shortfall in the September quarter and then continuing into the December quarter, maybe Steve or whomever, how much of that you think is the market because you did cite Europe? And how much of that was sort of inventory drawdown and where we are in that inventory drawdown process? Thanks.
Yes. It's 3rd
element see, because I think the 3rd element that's probably playing into that is the architectural changes as well, where we're definitely seeing more customers that are building various types of either private or public cloud infrastructures that are purchasing systems maybe away from the traditional OEMs, whether or not they're going directly or whether or not they're maybe buying architectures from smaller startups. So but I think it's the right combination between people that acquired inventory in the March June quarters in anticipation or concern around recovery still in enterprise from the supply chain disruptions caused by the flood combined with a slowdown. So I think there is an inventory overhang that's still being addressed. And then there's also I think some competitive issues where certain of the OEMs maybe just aren't having the sell through that they thought they were which may be related to macro or may be competitive issues. But it's definitely a combination of the three things of a changing customer base that's responding to a new architecture and then inventory absorption as well as I do think the macro impact is significant though.
I've been a little surprised that the European situation hasn't kind of shown its head earlier just because as you know most of the enterprise companies still have somewhere between 25% 40% of the revenue exposure in Europe, which is different than the client side or consumer technology companies.
Okay. And I guess just everything you just said, do you think that applies equally to mission critical and business critical? Or is most of that more mission critical?
I think it applies equally. I think probably the comments around cloud service providers and architecture is probably more of a near business critical point than mission critical. But I think there basically was inventory buying on nearline as well. Again, a lot of the OEMs feed the cloud market as well, right? So I think it applies to both of them.
Great.
All right. Thanks very much.
Yeah. Thanks.
Our next question comes from Keith Bachman from Bank of Montreal. Please go ahead.
Hi. Thank you. Excuse me. Steve, I just want to try to get your take about the OEM inventory. I know you talked a little bit about inventory more broadly, but specifically at the OEM and the channel?
And then I had a follow-up please. Well, I
think there's 2 levels of inventory obviously at the OEMs, right? 1 is the device level inventory and then the other is the system level inventory. And I think the comments I just made, I think at the device level, I think there was probably a fair amount of buy in really in the June quarter with still some concerns around the recovery of the drive industry. And then I think that buy in happened to coincide with the slowdown that really started at the tail end of the June quarter. I mean this to me 2012 feels a lot like 2010 where we start getting this rollover in May and then things never recovered for the rest of the year.
And I think for the OEMs they were buying in inventory and then things started to slow down. And it's always a little confusing in June when things slow down because it's the summer and that's a typically slow period anyhow and you hope it recovers in September. We really didn't see that recovery. And I think people clearly are grasping the macroeconomic issues a little better now as being more significant than maybe we thought 3, 4, 5 months ago. So I think at the OEM level, it's a combination of a lot of system inventory and initially in the summer and device inventory.
And then I think probably trying to bleed down that inventory in anticipation of Windows 8. Clearly, people are trying to get lean on how many of the old systems they're carrying in order to be prepared to ramp as Windows 8 is released. And then depending on the robustness of demand for Windows 8, I think they'll be able to respond. So I think it's again, I think it's a similar story. Just different reasons maybe more related to Windows as opposed to cloud architecture changing.
But in terms of just run rates, do you feel like their finished goods inventory and or channel is at a point where the ships of your drives will match whatever their end demand is? So do you think things are kind of even out? I know it's hard to see.
Well, I think the channel actually feels better to me if you talk the distribution channel with respect to device level technology feels better. Our position is about 1,000,000 units less than it was last quarter and within our range of 4 to 6 weeks. I'm not that concerned about the distribution channel. I think in the OEMs, there's depending on the customer, there's probably still some work to be done. I would say at the margin I feel I wish inventories at the customer level were a little lower, both on the systems side probably and the device side.
So again, that's one of the reasons that's weighing on our flat TAM assumption. I think probably end user TAM is actually probably going to grow by low single digits or maybe even mid single digits, but I still think there's inventory adjustments to be had.
Okay. My follow-up and then I'll see the floor is just Steve you mentioned you thought ASPs in the March quarter would be flat. I just wanted to see if you could flush that out a little bit. It would be unusual relative to history for those March quarter ASPs to be flattish. Just curious a little bit of feedback.
And thanks very much.
Yes. No, thank you. Well, yes, the difference in history, I suppose, is industry. So, I think the major point that we're trying to convey is in this quarter is when we negotiate prices for next quarter. So if you think about it in reverse for the quarter we're in now, we negotiated those prices in September or late August.
And I would say that I kind of feel that the December pricing probably got away from us just a touch with the demand falling off as much as it did in September and trying to I think recognize what was the real TAM going to be for December quarter. I think the industry and probably our customers were hoping that it was going to be more in the $150,000,000 or $155,000,000 range. So I think the industry has probably recognized that the March quarter is likely to be pretty flat too or maybe marginally up and that we're really not going to buy TAM with pricing. And so I think we've obviously gotten the pricing levels that are as low as we want to see them if we're bumping on the bottom end of our range. And so it's important for us to make sure we maintain discipline going forward, so we can get our R and D and capital investments where we want for the long term.
So that's the way we're going to approach the March quarter.
Okay. Thank you, Steve.
Yeah. Thank you.
Our next question comes from Steven Fox from Cross Research. Please go ahead.
Thanks. Good morning. A couple of questions. First of all, just further on the March pricing and looking forward, can you just sort of describe what kind of mix you anticipate in March? How much that's helping the overall ASP?
And then secondly, Steve, you talked a lot about macro pressures that are hard to figure out when they're going to end and so on. If this goes on say for 9, 12 months, is there plans to take capacity down? Or do you think you're comfortable operating in these margins on the capacity levels you've got currently? Thank you. Okay.
Thanks.
Let me just make some notes, so I don't forget. Let me ask someone for a crutch here. But on the first thing, on March pricing, I think, Stephen, the mix assumptions look, we've been kind of off on mix for a couple of 3 quarters in a row here where the mix assumptions we've had basically don't come to fruition. In part I think is that's just because of the pressure that the systems vendors are under to maintain margins. I think mix is the assumptions for mix are basically pretty conservative for for the March quarter.
So if there was actually an improvement in mix, which would be what we would hope, especially if there's any sort of recovery in March on the enterprise, then I think that the relatively flat ASPs hopefully will prove to be conservative. So we have tried to at least this time assume a pretty conservative view on mix to say relatively flat ASPs because as you know obviously with new products coming on and mix improving it probably increase ASPs. On the macroeconomic situation and how long does it have to last for it to be really painful. That's a good question. And I would say if we had I guess the question is do you have clarity on that it's going to be 9 to 12 months.
If we knew it was going to be flat and weak for the next 9 to 12 months, we'd probably do one side of things. But if you're kind of making that decision quarter to quarter, you have a little bit less flexibility obviously. But to answer your question, I think the good news is for the drive industry or certainly for Seagate, and I guess getting to be that way for WD and Hitachi is for us it's about absorbing heads and discs really. It's where most of our R and D and where most of our capital is deployed. And as long as we're absorbing heads and discs at these levels, we're okay.
And if we had to reduce drive output, that's actually fairly easy capital for us to address in part because a lot of it is test capacity which we can actually increase test times and also with the areal density sorry, with the average capacity for drive increasing test times are increasing anyhow. So in a certain sense, as challenging as the environment is, I'd say for the tribe industry given the aerial density and the petabyte growth, it's manageable. Now if TAMs dropped 120,000,000 units, that's a different story. Then the industry would probably have to take a hard look at a lot of things with respect to internal components and supply as well as drive level capacity. But I'd say right now for us, while we're operating well below our theoretical capacity, we can maintain the margin structures and the cost objectives that we have at this level of demand even if it lasted 9 or 12 months.
Great. Thank you very much.
Yes. Thank you.
Our next question comes from Ananda Baruah from Breen Capital. Please go ahead.
Thank you for taking the question and good morning guys. Good morning. Steve, 2 if I could. I guess the first one is regarding the gross margin and ASP guidance for the December quarter. I guess I was thinking if prices were coming down about 5% that gross margins would be able to be stable more or less.
I mean is that just sort of typically not the right sort of assumption? Or is there something going on with mix that's baked into that into the gross margin guidance as well? And then I have a follow-up. Thanks.
Yes. Like I said, I think we've been pretty conservative on mix. But again, price erosion is a tricky little term in the drive industry that's unfortunately got a legacy that went back to when there was only about 5 different products as opposed to 700 different products. So we like to talk more in terms of ASPs. So you're generally right though that if it was a 5% price erosion that the ASPs probably wouldn't erode by 5% and gross margins would be healthier.
So price erosion is higher than 5%, ASP erosion will be about 5 percent. And if mix improves either within each category, right, mix meaning capacity per drive, if you will, or heads and disc per drive, or if the mix improves in terms of enterprise nearline versus client and notebook and desktop. Those are all things obviously that boost ASPs. We've taken a pretty conservative approach as I said on the enterprise market opportunity in part because of the inventory and in part because of European concerns.
Got it. Thanks. Very helpful. And just as a follow-up, you've been pretty consistent or very consistent I should say on capital allocation through this calendar year. Can you give us some sense of what capital allocation could look like as we get into 2013?
I believe you have some stipulations around some NOLs. So I was interested in sort of getting your thoughts on how that might impact any of the capital allocation. Thanks.
Well, it doesn't change the long term capital allocations where we still believe that we're going to target a heavy return of cash to our shareholders in the form of dividends or redemption. And of course, we've got the 20 14 end of year target of 250,000,000 ordinary shares outstanding. So what happens in 2013 though as you pointed out is we do run into a Section 382 problem where if we redeem too many shares, it could trigger a loss of our NOLs, which are fairly substantial. And we'd rather avoid doing that, not that we've used NOLs or necessarily see any need to use NOLs, but it's nice to have them in case you need them. So we'll probably be reasonable in sidestepping that problem unless the value proposition is just too great in which case obviously then we'll go ahead and buy our stock and deal with losing NOLs that we may or may not need.
So what that would mean obviously is a slowdown in redemption in 2013 and then an acceleration in 2014 to get to our target. And in the meantime obviously maintaining our dividend policy, which is as we said a minimum increase targeted increase of 10%
year. Got it. Is there any sort of level that we should expect the redemptions to sort of settle in at as we get into 2013?
They're pretty minimal for 2013. It's really for 9 months of 2013. In the December quarter of 2013, some of the limitations ease. But for the remainder the 1st 9 months of calendar 2/13 will be pretty minimal. The only thing that can also change that is there are certain holders of securities that we can buy from and not trigger a 382 problem, if you will.
Not to imply that anything our government does to us is a problem, but one of those would be Samsung. So if Samsung decided to sell any shares we could acquire from Samsung and not run into a 3 82 problem, there are also a couple of institutional holders that we can buy shares from and also not trigger. So we have a couple of our options, but we'll just have see how it unfolds.
Got it. Thank you very much.
Yes. Thanks.
Our next question comes from Sherry Scribner from Deutsche Bank. Please go ahead.
Hi. Thank you. I appreciate the detail on the hybrid drive progress. I know you mentioned the 5 millimeter and the 7 millimeter being in the process of being qualified with some OEMs. Can you give us an update on where you are with hybrids?
Have you shipped any into new products? Or is this really more of a 2013?
Thanks. It's calendar 2013. 2013. So I think by the end of this calendar year, we're going to have hybrid offerings at CTE level at least with a lot of major customers. So that would surely include desktop and enterprise.
The 7 millimeter hybrid is getting a lot of attention, which would be a drive that would be used in thin and light. 5 millimeter is not a hybrid, the first version that would be later. And but we think there's lots of interesting applications for 5 millimeter regardless. And I'd say where I'm most excited is the attention that the hybrid in enterprise is getting at a couple of accounts because you basically can boost IOPS performance by 2x to 3x, which in a lot of applications IOPS is the measure that they're most concerned about. So we have a couple of large enterprise customers that are very interested in the product and that's probably the one I'm most excited about.
So that's all stuff that we would expect to be ramping in calendar 2013, but some of those even in the first half.
Okay. And then just a quick question on share count. I think the share count was a bit different this quarter than at least we had expected. What is the assumption for share count in the December quarter? I know you've given the $350,000,000 by the end of the year, but what type of average should we use for the quarter?
Thanks.
I'd use 390,000,000 shares. That may be slightly conservative depending on the pace we buy to get to 350,000,000 but I plan for that share.
Okay, great. Thank you.
Great.
Our next question comes from Aaron Rakers from Stifel Nicolaus. Please go ahead.
Yeah. Thanks for taking the question. 2 if I can. I just want to go back to the March discussion, understanding that you are going to be more disciplined relative to December on pricing. Is your assumption also as we work through the OEM inventory that what's your assumption around the industry demand TAM or the shipment numbers going into the March quarter?
Are we to assume a flat sequential TAM? Or do we expect I think it's hard to try and judge what normal seasonality is anymore?
Yes, I mean flat. I mean, again, people can get all hung up on 10,000,000 units these days. But the reality is 10,000,000 units when you think about our 42 percent market share is 4,000,000 units, which I think we could probably respond to in about a day and a half. So it's not a big deal, right? Whether or not I'd say $140,000,000 or $150,000,000 while some analysts may get all exercised about that, the reality is it's the same number from an operations Like I said, I think the December system sales will Like I said, I think the December system sales will probably actually be up.
My guess is 3% to 7%, but I think we're not going to see it just because of inventory absorption. So that may mean the real TAM for December in terms of sales out of systems is in the $150,000,000 range, in which case then March probably for us sales in will be like that. So that's what we're assuming. But it doesn't really matter. The point is capacity is way above that, right?
Capacity is 170, so you're not going to pick up anything. You're not going to pick up 30,000,000 units with pricing. The issue is not pricing of systems. The issue is macroeconomic conditions. So the TAMs 140,000,000 will build whatever it is 56,000,000 drives and we're going to price them so we can maintain the margins that we need to invest in our business long term.
Very helpful. And then as a follow-up, you guys had the Analyst Day on September 21. You talked about roughly a 30% gross margin. I'd like to understand, I know it's just a week or so left in the quarter, what changed relative to that? And I think you also had made a comment about Brazil having a 100 basis point impact.
I don't know if that was really the driver. I'd like to understand why that changed in the final week or so of the quarter.
Sure. Yes. I don't know if you had heard the earlier comments that I made, but the quarter was really back end loaded much more so than even is typical for September and September is a pretty back end loaded quarter anyhow as you know. July is usually very weak. August is weak almost through the entire month and then it's this race to the finish and it was even more seasonally back end loaded.
So we had a lot of drives to ship. We looked at historical seasonality and basically the quarter didn't come through. So part of it was related to the overall weakness in demand that basically never really kind of resolved itself. And what's the other? In Brazil.
The Brazil issue? Yes. So part of it was mix. Again, enterprise mix at the end didn't come in where we thought it would. So again, we have a lot of historical data about what happens with enterprise shipments through the quarter.
They're typically even more back end loaded than client. And so they didn't resolve as much and the mix wasn't as good. So that was the second thing. And then, yes, Brazil was like 100 basis points. So I mean, even with the first two items, we would have hit the 30% if it was for the Brazil issue.
And that was basically a function of it's a fairly complicated story. But in Brazil, there is a requirement that if you are building computer systems in Brazil, a certain number or a certain percentage of the components have to be purchased in country. And we've invested a fair amount of money in part as an extension of the investments that Samsung had to make sure that we can actually provide in country built drives. Our estimation of what that business should have been in the last couple of quarters was high and we're still digging into why that is. But as a result, the pricing that we deployed was too aggressive because we didn't get the absorption that we should have.
So we made the adjustments in terms of our expectations. We'll make adjustments in terms of pricing. And we won't get all of that 100 basis points back next quarter, but we think this quarter, but we'll probably get half of it back and then we should kind of be through that not whole.
Okay. Perfect. Thank you.
Yes. Thanks.
Our next question comes from Ben Reitzes from Barclays. Please go ahead.
Yes. Thanks. I was wondering 2 things. You said OpEx is going to be up sequentially slightly. I was wondering how you were thinking about that particularly difficult, what are you thinking about the OpEx lever?
And what could you do? And I have a follow-up. Thanks.
Well, we could do a lot on OpEx, as you know, Ben. I think the only thing that's really driving and that would again be if we had a forecast of a sustained environment that's a lot worse than this. Again, I'm not going to cut OpEx when we're running at margin levels like I said that are higher than what the high end of our old range was. So this is what that is. We can live with it and continue to invest.
The biggest thing driving the increase in the OpEx right now is we hadn't done a focal increase really for a couple of years and so we're doing a focal increase on comp. And the second is, let's see acquisition bring some OpEx into the model that wasn't there previously. Acquisition bring some OpEx into the model that wasn't there previously. So we know how to manage OpEx if things get bad and stay bad, but I don't think we're near that right now. But we do planning all the time.
We're planning all the time. We're planning all the time. We're planning all the time. We're planning all the time. We're planning but I don't think we're near that right now.
But we do planning all the time.
Okay. My follow-up is on Enterprise. Within your TAM estimate, I think you're saying there's continued pressure into the Q4. And just within Enterprise, if you wouldn't mind, what are you seeing into December and then into March in terms of TAM and how we balance the inventories there just in Enterprise in particular?
Yes. Again, we're maintaining a pretty conservative outlook in December March. Our issue around enterprise are I think the technology industry's issue around enterprises in my opinion more related to European situation and weakness in economy just because Europe plays a big role in enterprise purchases as do governments. And there's obviously more and more policies around austerity, which ultimately means fewer purchases by government. So I think we're just being conservative.
There's not going to be much of a recovery then for a couple of quarters.
So it's like in line with your TAM estimate just flat and flat kind of is best guess for now?
Yes, that's right.
Okay. Thanks a lot.
Yes. Thank you.
Our next question comes from Jason Noland from Robert Baird. Please go ahead.
Great. Thank you. I wanted to ask about Steve your comment on balancing supply and demand, strong inventory management and gross margin performance relative to pre consolidation, especially considering linearity, if you can talk about balancing supply with these conditions? It just seems like Seagate and the industry are more
to have less inventory than we did in June in a quarter that fell off pretty dramatically relative to expectations, I feel that the company responded pretty well. I think linearity is a different issue. I think I still think that we and our customers have a lot of work to do around linearity and velocity. And Dave Mosley can talk to us a little bit with Rocky. I mean, we're doing a lot of it's funny.
The flood for all of its challenges also I think resulted in some really good business process improvements between us and our customers in order to reduce inventory and increase velocity. Some customers are continuing with that. Others are going back to their lazy ways that basically process problems. And I just don't think that's healthy. I think our industry's got to address that with our customers that at the end of the day that's not good for anybody.
So the only way we can really do that is keeping really tight control on builds. Dave's done a lot of work in this area on the supply chain side both all the way through demand fulfillment. So maybe I'll just ask Kim to talk to it a little bit and then Rocky can weigh in on what he's seeing on the customer side in terms of those that are kind of moving towards a model that is maybe more focused on velocity versus inventory? First of all product simplification happens which we've been working really hard especially through the product transitions that we went through. So that helps it straight out of the spread all spread all over the place where we can late stage postpone some of the configuration issues that they need out in the field.
With product simplification that's helping us quite a bit. And then once you get those hubs set up, you can take advantage of Ocean Lanes. So I think there's a lot of things that we're doing around that working with some of the customers that have really kind of come to the table after the flood that Steve talked about that's really paying good benefits efficiency wise. So, Brock, you go ahead.
Yes. And I think that cross functionally, Dave and I working together on the business process. I think on the sales side, the management of customers, week to week demand and pulls etcetera, we've made a lot of improvements to really get down and focus on those key customers that really move the needle and working with manufacturing. I think we've really improved the business process of the supply chain with the customers and holding the customers accountable for their commitments. And I think it's resulted in that efficiency you've seen in inventory.
And it's a continued battle every week to week in the volatility to the market we're in. But I think that, again, we've made some really fundamental advancements in our cross functional management of the supply chain through customer fulfillment.
And we just have to be more disciplined. One of the things we're doing internally Jason is we're actually changing our sales comp programs to be rewarded on basically forecast accuracy and linearity, which is not something that typically we have done not certainly at the level or priority that we're going to do it now. And the other again is just working with customers. I mean we had a customer last week that made a big change order on enterprise from one product to another and we tried to explain to them why that was difficult and the response was, well, it's just a mix change. As if you just wave a wand over these drives and somehow make them something different.
So it's just a different dialogue. It has to occur that, look, if you order one of these things, then we're building it for you and you're buying it. If you're not then there's going to be a penalty associated to it not that we'll just swap these things out like you can go to hardware store and decide you want quarter inch screws instead of 3 eighths. So a lot of work the industry has to do I think to get the right discipline in.
Thanks for the color Steve. I'll leave it there.
Great. Thanks. John, we have time for one more question.
Our final question comes from Cindy Shaw from Dasekeren. Please go ahead.
Hi. Thank you. Yes, I've been hearing from some
of my industry contacts that they're seeing the enterprise systems ship with just less capacity of drives and more empty drive phase. And you can speculate just to a number of reasons as to why that might be going on. But I was wondering if you can comment on are you seeing that? And if you are, what do you think might be behind it?
I don't know that we're seeing that. But what I guess would be behind it is customers that hope that they can buy directly instead of buying racked out systems that they're paying a huge markup on disk drives for. But I don't know if they can really do that, because if they're buying from OEMs, the OEMs really control that through their maintenance and service contracts. So you can't really buy a system and then buy drives from Seagate, if you're buying a system from a traditional OEM because then your service contract typically is invalidated. So no one's willing to do that.
So we haven't really seen that. But I do think that if you weren't talking about OEMs, I mean, I do think architecturally that's happening that people are starting to design systems where they can incrementally add the storage need, but those aren't really necessarily through the OEMs. I think it's that's more some of the new architectures.
Great. Thank
you. Yes. Thanks. All right. Well, on behalf of the entire management team, I'd like to thank all of our employees and customers and partners, suppliers and shareholders for your support and commitment.
And best of luck to everyone on the East Coast as you recover from the storm. Thanks a lot.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.