Good morning, everyone. Thank you for joining us here for Seagate's strategic update. My name is Kate Spolnick, Vice President of Investor Relations. Just a few things we'd like to cover here before we get started. 1st and foremost are forward looking statements.
We will be making forward looking statements today and we refer you to the risks and uncertainties we have filed with the SEC on our Form 10 ks most recently filed in August. Right now, I'd like to bring on the executive management team to join me on stage, Steve Lusso, Pat O'Malley, Dave Mosley, Bob Whitmore, Rocky Pimentel. All front and center. Based on the feedback that we have had from a lot of folks over the last several months, we formulated an update today and we really purposely called it a strategic update because we've had a lot of questions about next steps for Seagate technology, both from a technology framework as well as a financial framework. And we've designed our discussion today with 2 main speakers covering a vast majority of the information, but also having the executive team here to be available for questions and answers.
So your job was to come prepared with questions for them, and we hope to make this very interactive. This session is also being webcast, and the session will be available via archive shortly after the presentation. We will start off the meeting with a strategy update from Steve Lusso, then open up to questions, take a quick break. We'll be at 10:30. An overview from Pat O'Malley on Seagate's Financials and then some more time for Q and A with the entire team.
Before we get started with the entire intention of what we're here to do today, we do want to make a few comments about the current demand environment. We know everyone is very interested in that. As others have made comments about in our industry, we are seeing more muted demand and some rebalancing of inventory that is causing our expectations for the addressable market opportunity to be more muted than originally expected. We do think that's going to be approximately 10% lower than we originally thought in the July timeframe. The impact to that to our top line will be less than that, probably approximately 5% to 7% lower than we originally expected and margins around approximately 30%.
We'd like to take a few questions right now and then head into the full intention of the presentation. So with that, I'd like to turn the stage over to Steve Busso, our President, Chairman and CEO.
Sorry, I didn't know all these people were going to be up here. I thought I was going to have 5 empty seats of fictitious analysts that I could talk to. You want me to do what? Yes. So look, the purpose of this meeting isn't really to drill into this quarter.
But just in light of the announcements by Intel, HP, Dell, last week WD, it maybe makes sense just to answer a few questions to provide a little more color about what we're seeing right now. So maybe just a few minutes on that if there's any question. Rob? Can everybody hear the questions in the back? Christian, did you hear okay, so the question was, given kind of the weakness in demand, what's going on with market share?
Are people using pricing to basically gain market share in light of the weaker demand? Yes, I'd say no. I think the market share figures are going to probably come in pretty consistent to what we saw last quarter. I think it leads to I think a bigger question, versus maybe what happened pre consolidation. I'm going to talk to consolidation here shortly.
But look I think one of the biggest benefits of consolidation is really alignment of supply and demand. And if you look at the consolidation that's happened in the supply chain as well as in the industry, it just means that there's less chance of error that either parts and or products get built ahead of recognizing what's going on with demand. So it's harder to slow the system down. So then you have excess inventory that you have to figure out how you're going to get rid of. I think with the consolidation and also the efficiencies of supply chain that certainly have evolved over time and even upstream with our suppliers and then through the customer base, there's just a much quicker response time, fewer players, less component people over producing, less drive companies over producing and therefore it comes into alignment quicker.
So you don't get basically stuck with as much excess inventory that you might have to aggressively price. So I think the pricing mechanism is a much smaller factor than it would have been, say in a similar case 3, 4 years ago. You still have absorption issues. And I think I'll let when we get into Q and A, Dave talk a little bit about what's it like running a factory when you think you're making X number of drives and halfway through the quarter turns into some percentage of that and still challenging. But I think the impact in terms of gross margin impact is much less than it was historically.
And I don't see anyone in the industry trying to buy share to make up for the fact that demand appears to be down for some period of time. So far I'd say the industry has behaved pretty well there. Rich?
Good morning. Does the 140 TAM then reflect your reaction to the demand? And does that correct the rebalancing inventory for the next quarter? Or do
you think that we need
to have a little bit more of a pull back even or flat quarter sequentially in December to really solve the inventory issue for the 1 quarter phenomenon?
I think it's hard to say, Rich. I mean, it's I think the one I think down 10% is probably bigger decrease than what end user demand is, which means, yes, I think there's an inventory correction going on, not necessarily maybe at the drive level, but we're not just at the drive level, but probably at the drive level and the systems level. I think that exiting the June quarter, the computer companies probably were carrying more inventory than they typically would out of June and then it and was into an environment that was worse than they thought. So I think there's a lot of systems inventory that had to be worked through as well as maybe excess driving inventory depending who the customer was actually that was probably not an issue at all on one end of the scale to being a bigger issue on the other end of the scale. But I think it is a rebalancing.
So I do think all things being equal, you're going to see an uptick in the December quarter. I think if 140 is the answer, whether that's 142 or 143 or I think you're going to see a TAM in December that's probably more in the 150 to 155 range. And I think most of the inventory issues are probably resolved at the customer level, but we only have certain visibility on that. Rick?
When you look at the trends that are going on in the marketplace, whether it's tablets or ultra books or what have you, what makes you so confident that the demand that you're seeing is cyclical in other macro in nature versus secular as you look forward this quarter and beyond?
Well, yes, I didn't I don't know what I said I was confident about that. But I don't know. It's the right question. I think what all of us are thinking a lot about and planning around is what is this all about? Is it macro?
Is it something to do with a change in computing lifestyle? Is it something in between? My assessment is probably as follows. And so my confidence is, I don't know, I think most of it is macro. And if I think about say this quarter or the December quarter, I think when we were looking at this back in the early part of calendar 2012, we were thinking that the December quarter was going to be about 185
100 and 80 5,000,000 unit TAM. Seagate was on the
low end by the way. I mean there was a lot of people that were in the 200 to 205 range. And so if you're at 155 or we're going to get 30,000,000 units off, I look at that and if I had to splice it off, I think most of it is macro, maybe what does that mean? I don't know 15,000,000 or 20,000,000 units. I think at the margin is there cannibalization, pure cannibalization of tablets versus notebooks.
I'm not as convinced. I mean, there could be some at the margin, it could be maybe it's 5,000,000 units even, which would actually a fair amount. So the question you have to ask yourself is did someone buy a tablet and they threw their notebook away or they're never using their notebook again. I just don't know that happens. It seems to me that tablets is another form of accessing data that has certain advantages versus a notebook and certain disadvantages.
But it's another device in the ecosystem, which from a storage perspective, by the way, is a really good thing because it's generating a lot of demand for petabytes. We like to think of all these things because people love the razor razor blade analogy. To me notebooks and tablets and smartphones and those are just razors and we're the razor blades. So the more devices that are out there that connect people and have them share data and have to deal with bandwidth issues through caching means lots of disk drives. Interestingly, our retail business actually feels pretty good this quarter, which would be a little counterintuitive to the general theme of consumers being down.
But it may be driven in part by because obviously tablets have no real memory on them. So if you want to do something with me, you probably need a storage device. So I think that cannibalization is probably not that great. There's another type of cannibalization that might be greater. So another 10,000,000 units, let's say of the 30, which is, is it possible that in a weak macroeconomic environment that because I bought a tablet, I didn't buy a new notebook.
I didn't I delayed a purchase of a notebook. I have a notebook. It's 2 years old. It's 3 years old. It's 4 years old.
I normally would have replaced that notebook by now and I didn't because I bought a tablet. I think that is going on. Now if you want to call that cannibal I don't call that cannibalization yet because I think it actually probably gets replaced once either the notebook offerings become more compelling or the economy gets better. On the first point, it's a fair criticism that if you look at the notebook offerings from the computer companies over the last 3 or 4 years, there's not a lot of compelling reasons to buy a new notebook unless you're buying one from Apple. And I think that's about to change.
I do think the thin and light, I do think I'm not saying this as a Microsoft director, I do think Win 8, I think touch and keyboards is definitely where the world is going. It actually kind of surprises me that that Lion didn't do that. I think that this is the front end of what's probably going to be a multi year trend of more compelling notebooks coming out. So I think that's probably a big part of it. But I think the majority is macro.
I think it's whether or not it's Intel or FedEx, I mean there's a lot of data out there that's just saying that globally there's a pretty substantial slowdown going down, which obviously governments are trying to address with by pushing rope. And so who knows how it gets resolved and when. To me the most telling one was Intel. And for those of you who've been around for a while, you know that look Intel is the last company that's going to see an order cut for a lot of reasons. They have long lead time request.
They have penalties when you cut. You can't get back in the queue if you want to without paying a lot of money. And it's not hard inventory to hold. It's chips, take them and throw them in a drawer. They're not going to get outdated.
If I don't use them this quarter, I'll use them next quarter. So if they're getting cuts, that to me was really significant. So for the drive industry though, we counter that against petabyte growth that's very strong. And if you've been listening to us, we view ourselves not as shipping units, but as shipping petabytes. The form that those petabytes take in a certain sense is irrelevant to us.
The majority of our R and D and capital is in heads and disc not in drives. Our easiest to move or change or flex is our drive capital and factories. So if units are flattening, but heads and disc are growing, which they are because of petabyte growth, that's really good for Seagate, because we're absorbing heads and disc and that's really what we need to do. So the management team I think has to stay close to is it $150,000,000 is it $160,000,000 is it $140,000,000 is it long term is it just for the next six months? But it doesn't fundamentally change the bigger issue, which is petabyte growth is 2x aerial density growth, which means there's going to be without more capital going into our industry, there's going to be some sort of supply demand imbalance the other way because we can't just we can't make enough petabytes on the path that we're on right now if you do an intersection around 16 or 2017.
So for us it's how we package it. And yes, we need to be smart about it. You don't want to have 100,000,000 notebook drives ready if there's only demand for 72 of them. But we're pretty smart about that. We see the shift to the cloud.
We see the shift to higher capacity per drive. People now will say, if you could give me 7 or 8 or 10 terabytes under a spindle, I know how to manage it. Well, for us, that means that there could be 6 or 7 disk under a spindle with 12 or 14 heads. That's a really, really good thing for Seagate, right? We would rather make 3 times as many of those versus 6 times as many single headed or just 2 headed drives.
So that's just kind of where I'm thinking and we have to watch it. We'll see. But I still think it's more macro right now. I'll take one more question. Yes.
Yes, thanks. Given the demand environment in the and the TAM being weaker, you talked about 185. Can you also talk a little bit about how this has had any impact on what's been the long
term purchase agreements that you've
been able to sign? Has there been any flexibility in that given the demand environment? Any update on those?
The question was does the did the change in demand impact the LTAs anyway? No, I mean, it's still the LTAs were again, the design of the LTAs was more about in a highly constrained environment, we wanted to align with customers who were more interested in auctioned drives for 9 months and frankly probably made a lot more money than we did. But we felt that because we had a lot of customers who actually really were strategic with us even before the flood and then a whole bunch that became strategic with us the day after the flood. We decided that we would turn that into an agreement that said how do we work with each other over a longer period of time to manage our businesses to focus more on velocity than on saving $0.50 a drive. Look, there's a set of customers out there that believe that supply chain means buying a part as cheap as possible.
And then there's a set of customers that believe supply chain is how do I get as much velocity through the system as possible to generate revenue. And what's the difference? The difference is I have a procurement organization that's really crafty that makes Rob and I compete against each other and I buy a disk drive $0.50 cheaper. And on the other hand, Drew is running a company that's saying no, what I want to do is take a disk drive and turn it into revenue in 3 days instead of 12 days. That's $800,000 to $5,000 of revenue versus saving $0.50 on a district.
So what happened with the LTAs is it made people focus on where were their priorities and they realized that the ones that were focused on velocity were going to take a lot of share. So the agreements were not just about providing supply, it was what's the underlying relationship that's going occur through the supply chain to their end customer demand. Some companies are better at demand shaping than others. Some have a lot more SKUs than other, which makes it very hard to change. If my orders change, you all think these things are kind of straight commodities, but they really aren't, if you have more flexibility around that, obviously, you can generate a lot more revenue.
If you have more flexibility around that, obviously, you can generate a lot more revenue. So the LTAs were more about that. I think that Street viewed it more as this kind of thing about guaranteed revenues or guaranteed prices or whatever, which was part of it. And that hasn't changed. I mean, we had flexibility around share or units.
We obviously work with our customers. We're not going to make them buy inventory they don't need. But I think consistently we've over shipped to the LTA volumes. My guess is we'll do the same this quarter. And I don't really see any change through the end of the year as a result of the softening demand.
And we've had a couple of customers that have actually extended the LTAs. And I expect that there'll probably be a couple more. So these things are mutually beneficial to customers that think of us strategically. So my guess is they kind of stay in existence in various forms for a number of years now. Okay.
So let's move on to this presentation and then gives you a little more time if you want to a couple more questions when we get to Q and A. Again, I'd rather not have this all be about what's going on right this half a second, but because the story is a little bit bigger than that we believe. So what I'd like to do is first just give a quick snapshot for fiscal 2012. I have to make a pitch for my Hungarian friends at Prezi. This presentation is done off of a cloud service called Prezi, which is pretty cool.
The only reason I mentioned it is that I may have to tell my friend in the back every once in a while that I need another chart up because this is all like kind of beta stuff, but hopefully you like it. Anyhow, fiscal year 7 was kind of as it turns out it was the last time we did an Analyst Day, which is shocking to me that it's been 5 years. And it was also a record year and you can kind of see what the year was like. And then fiscal year 2012, obviously was a very strong year and some of that was just related to obviously flood issues and some of it obviously just to the industry dynamic. I mean average capacity per driver petabyte shift if anything obviously in fiscal year 'twelve were constrained by the flood and not helped by the floods.
You can see just the massive growth that's occurring in the demand for storage. And yes, there's all sorts of different devices that need to be used in the storage hierarchy. But clearly at the end of the day, everything goes on a disk drive in some form or fashion and usually multiple copies go on disk drives. So you'll see the petabyte growth rate at over 40% over that 5 year period of time, which drives a revenue growth rate of over 5%, and which is what we think will continue to happen. So a little bit higher than the long term forecast that WD gave.
And but good net income growth and cash flow and gross margin. So it was a good year obviously. And again, as you all know, we're very focused on returning value to the shareholders. I can't remember what the story was that someone was telling me once about I don't know. I was somewhere and someone was saying something about maybe it was one of the employees that's what it was.
It was one of the employee feedback questions. And I guess it's probably the I'm looking at Bob because it was probably the engineers. How come we can't just take that money and spend more on R and D? Or another one was why can't we just get bigger? Why can't employees just get paid more?
And I had to say because it's their money. There's a funny attitude by companies that sometimes I think they forget like it's their money. And we're big believers that obviously you need to be disciplined, you have to have enough money and manage your cash flow in a way to invest in R and D and capital to take advantage of all the opportunities that you have. But if you're wildly successful at what you do, by definition, you should create more value than it costs to develop and market that technology. And the question is what you do with excess profits.
And we just believe that a lot of it should go back to the people who actually own it and then they can decide what to do with it. So we're going to keep that mentality up and maybe we're blazing a little bit of a trail as technology companies slowly start to creep down the dividend path or other creative ways returning shareholders. So we're going keep doing it. Pat's going to talk about that a little bit later in terms of how we think about it. Company's got 55,000 employees.
We're spread all over the world as you know. A little map that kind of shows you the different locations and what we do there. And but a couple of things I would like to point out on the management team because maybe people haven't kind of thought about this holistically other than announcement by announcement. But of our senior leadership team, which is say it's 20 people, really 6 or 7 are new people to the company with broad industry experience. And it's one of the things I'm most proud of as CEO.
I think it's really important to continue to bring in new talent and to attract people from leading companies and help us think about ways that we move forward, not just in our core business, but take advantage of some of the real opportunities that are presenting themselves as storage becomes more fundamental to all of our lives as users. And same thing on the board side, we have 5 new directors out of the 11 or 12 directors that we have with a bunch of great experience in terms of either Asia focused. We have a board member from Samsung Korea. We have one who's been based in China for 35 years from Chairman of Ford in China and Siemens China and he started his career at GE. So interesting career, I think he's worked for 3 of the Fortune 10 companies.
And Jay Gelmacher from Emerson Electric. So I mean, we just have a really strong Board. Bill Coleman joined us from DEA, so we're getting a really good sense of some of the issues that are going around virtualization and software. So I'm really proud of my Board. And I think it's honestly, I think it's one of the strongest boards that I've been associated with in terms of all the different technology companies I'm aware of.
And I think it's a big advantage for us. So today we'd like to just make sure that you leave with a few things. One is I just want to go quickly through our view of what's going on in technology and how it led to our strategy to provide a basis for your questions about what we're doing and why. So the biggest thing is we believe mobility and cloud is real. It's happening.
It's happening quickly and it's going to fundamentally change computing. And there's all sorts of implications for us, for our customers, for our customers' customers. And it's basically one that is driven around more storage and different types of storage devices and hierarchies that Seagate can play a role in. The second is that Seagate because of its position in storage in general and clearly in enterprise storage, we have a high degree of engagement and capabilities around working with end users or with OEMs that are addressing these new architectures to say what can happen at the device level in order to make some of these new architectures more scalable, cheaper or more reliable. And then finally, again, we think that the financial model for the company is quite strong.
On a relative basis, our capital needs for petabyte shipped are quite low really. Whether or not it's 5% or 6%, we think of it more in terms of dollars, somewhere around $700,000,000 per year. When you compare that to alternative technologies like silicon, where it's 30% of the revenues have to go into capital, this is a pretty cheap way to provide storage, which again at least for mass storage is why we believe that there's such a big opportunity for us. And same thing on the R and D side, we have obviously plenty of margin to fund R and D and to position ourselves for new markets that might develop. So those would be the 3 things we'd like to leave with.
All right, I'm going to go through this fairly quickly because I think most of you are probably grounded in this anyhow. But just so you know where we're coming from in terms of our view of what's happening from a technical perspective and then therefore how we get positioned. First, I'd like to talk quickly about consolidation. This is an industry that's had 247 companies at the drive level that have been in existence since 1957 or whenever it was nice year I was born. So, yes, 1957 whenever IBM first came up with this idea, which Schubert has a great story about, but I'll tell you that in the after story.
And 2 47 companies now consolidated down to 3. And that's obviously for those of you who've been along like Dan Benton in the crowd and Schutte, I mean, been along for the ride for 30 years or whatever. It's been an interesting ride, but it's one that we've always said, this is where it's headed because this technology is really hard. And in order to generate the R and D and capital to be successful, the biggest ones are going to win. And it's now down obviously to an industry structure that again allows us to align supply and demand, I think much more reasonably.
And it also makes us I think much more conservative about capital deployment in response to think that's one of the biggest changes that's occurred as the industry has been able to consolidate. But interestingly also, so what's happened in the upstream suppliers, I think people are less focused on this because if you look at heads and medias and motors and heads and medias are clearly the 2 most important. There's been massive consolidation here. In fact, that consolidation occurred prior to the DRiV industry consolidation. And the importance of that is, this is really where the core of the technology is.
Yes, I'm not trying to negate the difficulties of firmware and integrating heads and disk because it's really hard to do too and make that stuff manufacturable. But the core technology is really heads and disk. And as that industry is consolidated, it means that there's less parts out there for people to take and integrate into drives. And again, so the balance around how much capacity there is or how many available products there are, what's the pricing of those technologies has changed dramatically in the last 10 or 15 years. So really, TDK is the only external head company as you know, a couple of media companies, even on substrates where it says there's 6, there's really only one glass substrate company, which is the one that makes most of the substrates for notebook drive.
So big consolidation there along with consolidation at the drive level, again, means throughout the supply chain, supply demand alignment is a lot easier than it was historically. So I think there's going to be long ranging implications for that. Okay. Architecturally, lots of people talk about lots of things. And in my little simple world, I tried to break it down to how do I explain this to myself or to friends who aren't in technology.
And to me, it's just cloud mobility open source. No matter what vector someone wants to talk about something, to me it comes down to its cloud, its mobility and its open source. And for those of us who've been in this industry like I have since 19 76, the cloud is timeshare updated to 2012 with lot lower cost computing and a lot better interfaces and all that kind of stuff. But it's basically the concept that says, look, if you can share an infrastructure, then it gets cheaper. And that's good for people that need to use technology.
And it's just doing it with different tools now that are a lot easier to use. They're more scalable, meaning that if you want to add infrastructure, you can do it more incrementally instead of massive hunks, which again means you can address computing needs easier. You don't have to get in front of it with big investments, but then you have to hope it gets filled up. Leverageable meaning that once you have that investment, you can do a lot of things in terms of different applications that can run on that Mobile,
clearly means connected, social,
Mobile clearly means connected, social, democratic. I just view it as the more people that we can get talking and sharing and creating information and sending it all over the world. That's a good thing for a lot of reasons. We've seen some of the positive benefits of that in terms of some of the social changes that have occurred in the world, but clearly it provides for a richer human experience and notwithstanding maybe the bad map offering on the new Apple phone that at the end of the day drives more storage up and down the pipe because that end device needs to have fast response time, bandwidth is expensive, bandwidth is slow and therefore caching has to occur. So it's not just that all this stuff has to be stored somewhere as an endpoint.
I think it's lost on people that this stuff actually to be stored up and down the pipe as well to get the user experience that you really want. You don't want to deal with latency issues. And then open source, I think is the other big one. There's so much effort that is going into looking at the gross margin stacking that happens between the device offering and the end user purchase and that new technologies and new companies are basically going in and saying, how do I disaggregate that software and services stack and offer it much cheaper than it's being offered by a lot of the big companies today. And they're doing this obviously through open source platforms.
And the implications for us and the opportunity for all of us as computer users is really astounding because again it means that we can think about architectures that are much less expensive company, anything that's going on in the world that breaks the technology hold that other companies have that effectively constrain the deployment of your device is a good thing. A lot of people talk about the commoditization of storage and they I think as investors sometimes it gets confused about all that must be bad for far from it. It's not the disk drive they're commoditizing. I mean, it's the fact that someone buys our drive for $150 and turns around and sells that for $15,000 and they sell that because there's a software and services stack above it. The question is, is that software and services stack worth $15,000 And the answer is, in many cases, no, because you can see the gross margins that those companies have.
So there's 100 of 1,000,000,000 of dollars of gross margins. That's a jump ball that a lot of companies are after. But as they bring that down, it obviously means more devices get sold. So we think this is a big deal and you'll see Seagate making a lot of investments in technologies that drive this trend towards lowering the cost of computing. Another big thing, so that's kind of if you will, architectures.
The other thing I think about is what I call who's using this stuff and the convergence of consumer and commercial markets. Again, if you look at the success of Apple, I think one of the real lessons there is clearly that if you can be successful in the consumer space, there's huge implications for you on the commercial space. I would argue that it's the same thing that if you're successful in the commercial space, it has huge implications on the consumer space. Why? Because people are using the same infrastructures and architectures.
It's the same UI. It's the same experience. And therefore, as a company, we need to think about what are we going to do from a product perspective that allows us to leverage our commercial expertise and market share to transition into being just as effective in the consumer space. And that's why we bought LaCie because obviously that company was the most successful company for 30 years and being effective in consumer deployment. And we're doing a lot of other investments just to make sure that as people use more end devices like Ipads and smartphones that are storage light that they therefore can leverage off of a storage infrastructure that can enable and enhance that experience of being basically storage constrained.
And then the third is what I call applications. And I think this is where people get very, very confused about the role storage plays or the role that HDDs play. And I kind of break it into either a consumption, it's a consumption application. I'm just looking at pretty pictures. I'm a knowledge worker or I'm a creator, whether or not that's PowerPoint or spreadsheets or video shows or if I'm just making sure my stuff is safe.
And depending on what that device is, yes, there's different storage needs. If it's just a consumption device, it doesn't need a lot of storage. I mean, there's got to be a lot of storage somewhere to feed that content or to create that content. Watches stuff, I would worry. Thankfully, we're not a world that just watches stuff, we're a world that actually creates stuff every day.
And we create value in lots of different ways and we need lots of powerful tools to do that. And the percentage of those devices that needs disk drives or other types of mass storage is high. And obviously on the storage end, it's all rotating storage or some element of flash for acceleration. So I kind of think about from a strategy perspective, we think about what are the products and strategies that we need depending on if we're addressing devices that go into a consumption market, a creation market or pure storage market. And they all feed off one another.
So the other thing is infrastructure, what is all this stuff running on, hardware, processors, networking and storage. And interesting dynamics between those three pieces of hardware, the processors up until recently I would say are fairly standardized, but that was really a virtue of monopoly. And then really until the advent of ARM and until the advent of companies like Qualcomm that came in from a different perspective on the communications side, the processor world was a pretty good world to be in. I think it's obviously going to be a more challenging world for the big processor companies because there are all these competing technologies. Networking similarly, I mean the devices that are in networking have been fairly proprietary in their nature and that's probably going to be challenged.
But storage has been a fairly open standard based technology for a long, long time. And it's I think it's just one of those great examples of oftentimes what's your greatest weakness becomes your greatest strength. I think from an investor perspective, historically people are negative on the drive industry because it's a commodity. And I think ultimately this is going to be our advantage because no one's out trying to take our margin because there's just not enough margin to make it worth the 1,000,000,000 of dollars of investment and 1,000 of engineers that you'd have to hire. But the result of that I think is as these technologies get deployed that start breaking down some of these locks on processor networks again as it means a higher degree of proliferation of storage devices which is going benefit our industry.
On the software side, it's all about security, ease of use, availability, analytics, big data, we can draw all the fancy words in there. But it's that relationship between what's the software doing and what's it doing with that hardware architecture. And look, those have to be coupled for optimization. Another big lesson of Apple is if you're in the device business and the software business, you likely make a better product than if you're not. It's because you can do all sorts of things between that layer of software and hardware to optimize the solution, whether or not that's a cost optimization, a user experience optimization or reliability optimization.
And the funniest one I love is virtualization because investors will throw virtual, yeah, but it's going to be virtual And in their minds or then 2 derivatives down if you talk to someone on the street, somehow they think that means there's going to be no hardware, which is really kind of funny because where is this code going to reside exactly? I mean, it all sits on hardware devices. And it's funny to me that people forget that there's something called machine code. And that's the layer that matters, right? It's that layer that says, if you have a higher level abstracted level of software running that's trying to make a machine do something, it's got to go through something called machine code, but it still resides on machines.
And so at the end of the day, it's this interrelationship between hardware and software that has to be re optimized for this more scalable, leverageable, available platform. So the engagement that Seagate has with leading software companies or leading systems companies that are trying to and those can be big companies or small companies that are trying to solve this problem is very, very high because people understand that it's the way you make that hardware device respond to this new level of software that's going to break through some of these log jams that we have or some of these control points that we have. So this is I think a big dynamic that we're spending a lot of time working on. I'm going to run through some of my doing time wise by the way terribly probably, right? What time is it?
We have a it's time when was I supposed to be done in 9:20? For Q and A at 10. Okay, well, I can slow
down. So let's just talk
a little bit about the disconnect between petabyte growth, aerial density growth, what that means for our industry. So clearly, again, as the world is deploying these new architectures and as mobile devices come online and generate more data flow around the system, you see this acceleration in petabytes shipped. So this is just a graph of both the annual shipments and the installed base of HDD. A couple of little timelines there to denote when smartphones kind of made their appearance. I mean, obviously smartphones are approaching 1,000,000,000 units a year here in the next year or 2 probably.
Tablets is that next thing in 2,008, 2009. And what you actually notice is the curve actually starts getting steeper as these devices get deployed, it actually doesn't get flatter. And that's because more people are getting connected, they're sharing more data, they want to see richer content and that drives end user storage and that drives HDD storage. That's a trend that we think continues. This shows a 57% growth rate.
If I think back 4 or 5 years ago, petabyte growth rates were in the mid-20s, aerial density growth rates were probably in the mid-30s. So the industry could easily meet that demand by just staying up with aerial density and not adding heads and disc. Then about 3 years ago that shifted where petabyte growth rates kind of kicked into the mid-30s to low-40s. Aerial density started growing down as we got to the harder end of our technology deployment on the current generation of technology. Petabyte growth rate then went to 50%.
This year it'll probably be over 60% in large data centers it's over 100% and aerial density growth rate is now down 25%. That disconnect is something that's fundamental to either believe or not believe, understand or not industry's ability to provide storage. And therefore, without substantial investment in heads and disk, which is what it's really all about, there's going to be, I think, another sustained shortage. So these are kind of the challenges we think about, which is how do we manage our investments and how do we deploy our capital to meet those trends. So here's the area density trends.
You can see that the Perpendicular, these are mostly demos, just so you know, I mean these are kind of demo rates and then with perpendicular obviously we've been shipping perpendicular for a while. But you can see that perpendicular curve rolling over That's kind of when aerial density started slowing down from those mid-30s to kind of low-20s to maybe even sub-twenty right now. Shingled recording and Bob can talk about this later is now being demonstrated at aerial densities higher than perpendicular. We'll ship our 1st SMR drive this year and we'll be the 1st in the industry to do that. I think at the meeting last week, I think they said something about in a couple of years or something like that.
We're excited about where we are with single recording. We think that'll give us an aero percent group boost. And then HAMR, heat assisted magnetic recording, for those of you familiar, I don't need to explain it for those of you not familiar, it's basically putting a laser on top of a head, a head is about as big as a little piece pepper, heating up the media really quickly, writing and
then moving on.
It's really hard. And but we're feeling pretty good about where our technology is. And that's going to be kind of another kick to aerial density. But if we execute to all of those, that still only gets us to an aerial density growth of about 25%. So I think these are the types of investments that we obviously have to keep making, but these are the trends that we're on right now.
So that's kind of the disconnect. Other big thing is where are things being stored? So this kind of gets Rick to your question, right? Is it secular? What's going on?
Is it tablets? Is it this? So here we have a little bit of where HDDs were shipped between tablets, client desktop, cloud and enterprise. And you can kind of see the colored things. It's about 4 50 exabytes, which by the way is a lot of storage just to give you a scale of what is a 4 50 exabytes.
If you're familiar with the Flash world, which we get compared to a lot, Samsung's Fab 16, which is their latest state of the art highest density, best use of capital fab can probably output 7 exabytes of data a year. That was a $12,000,000,000 fab. So with $1,000,000,000,000 of investment, you can start to make an inroad on what we ship every year. No one signed up for $1,000,000,000,000 of fab investments that I'm aware of. So here's what gets really interesting though.
By 2020 that number becomes 7 zettabytes. And we're at the low end of what we think is going to be demanded. Companies like SanDisk would say 12 to 15 zettabytes. EMC says 35 zettabytes. And yes, there's a shift of where that's going to reside.
There's going to be a big shift that on overall percentage basis, we're going to go from about 25% of that storage being quote in the cloud or basically in timeshare and it's going to move to like 60%. That's a big change and it means lots of high capacity drives, it means lots of heads in disk that's good for Seagate. But what's also interesting is look how big the client pie is. We did these to scale. So yes, the percentage that goes to client is smaller as part of the total, but it's still a massive amount of petabytes that have to be shipped into the client.
So these aren't markets that we can ignore. We just have to decide how we again balance the constrained petabyte growth that we're going to have in terms of aerial density. Okay. So our vision, so based on those thesis cloud, mobility, open source, consumer, commercial, underlying architecture is changing then we came up with our vision and strategy. So this is the exercise that we went through over the last 6 months.
So our vision, which is every company should have a vision statement, is very similar to what it's always been, which is to lead the world in start protecting and sharing its digital creations. We think that's a good mission. We think that's an important place to be in the world. One of the things I'm proudest about in terms of not proudest, most honored about in terms of being CEO is I think what we do is really, really important. I think we help make the world a better place because our technology is in deployed and making schools better and making medicine better and all sorts of things, making financial markets more efficient.
And there's something about going to work every day and knowing that what you do is actually important. And we try and make sure that that's reflected in everything we do and we take it seriously. We're deep in innovation and leadership. Seagate has always been about being a technology leader. We believe that innovation is something that we need to continue to do every day.
We have to think about how we continue to invest in our core business to drive aerial density, but we also have to be creative about what are the other opportunities that are occurring because of changing architectures and storage and what does that mean in terms of our product strategy and to always extend our kind of put up some of the recent firsts. And this is something that we kind of put up some of the recent firsts. And this is something that you'll see us continue to invest in. So even though we do believe that it's important to return a lot of that excess cash value to our owners, we also realize that it's very important to keep investing in our underlying technology to make sure we can continue to do the kind of cash generation that we are doing for the next 20 years. So I think it's a good balance and we're very serious about being a real technology company.
What we do every day is phenomenal and people are coming up with innovations that are really kind of mind blowing in terms of what our technology does. And as you can see the application environment that we sell our technology in is broadening by a fair amount. And then our priorities. So cloud devices and service, so we have a big focus both technically and organizationally in making sure that we have product strategies that are aligned to the various needs of people that are deploying clouds whether or not they're public or private. And not just at the device level, but at the integration level between devices and software and also at the services level.
We do know more about enterprise workloads than any other company in the world. We keep track of everything that happens when it happens in a disk drive. We know when we're being asked to seek, we know when we're asking to write, we watch patterns, we move data around to enhance performance. There's a lot of things that go on in that little drive that has 6,000,000 lines of code in it that we can leverage into a better user experience as people start to deploy these new architectures. So we're very focused on this.
You'll see us for sure have devices that are optimized for cloud environments. You'll see us for sure providing some level of services around cloud providers and probably even providing that service directly if for no other reason than as a prototype to test some of our device technology. And this is obviously going to be a big area of growth, I think, for a long time. I think the shift to cloud and mobility is the biggest thing that's happened in the 32 years I've been involved with technology. I think it's bigger than client server and I think it's going to be more profound in terms of the opportunities that prevents your technology company.
And why do I think it's bigger than client server is because it impacts consumers and commercial And obviously the world's a lot bigger. If we go from 1,700,000,000 connected users to 2,500,000,000 connected users in the next 5 to 10 years. Obviously, that's a pretty special thing if you're in the business of providing the base technology to do that. End user focus obviously got to change as well. And I think this is one of our biggest challenges.
Our industry and our company has been designed to engage with a fairly limited customer set and a fairly defined way to provide technology to the world. But that architecture is changing and the customer's customer is changing, which therefore means every way we engage with our customers and other end users changing. So organizationally, Rocky has a lot of work in terms of saying what do we need to do in terms of our engagement with users and end users and therefore realignment of a sales and marketing and support infrastructure, which then of course feeds into the product roadmap to address these new opportunities. Not going to be easy, but if we're successful, the reward should be pretty substantial. But it's really the first time in 30 years that this transition has happened.
And consumer, so again it's not just about reengaging with big companies and big governments that are deploying these new architectures. It's that there's now this consumer world out there that's gobbling up storage left and right that needs devices that are easy to use that can talk to these mobile devices that can make sure that when you walk in your house, you know that what's on your phone is synced. And you don't even need to be asked and you don't need to plug anything in and you don't have to say, do you want me to keep the pictures or not? And this is the world that's in front of us and it's in front of us really in the next 1 or 2 years. And again, one of the reasons we bought LaCie was to kind of advance our opportunity set here.
The operating model has to be flexible. We have to be able to scale our manufacturing infrastructure up and down to address whatever the supply demand environment and in terms of whatever shape that takes in terms of number of units and gigabytes per unit. We think that we have a really, really good model. We led the way with Factory of the Future in 1997. It took us until about 2,003, I think to fully deploy.
Dave will talk more about what we're doing going forward, but we're on the front end of what we think is a pretty exciting transition in terms of how we manage our asset base. So we're basically very flexible in terms of changing demand patterns whether or not that means overall or whether that means how we invest in individual device technology. And then at the end of the day, it's obviously all about the people you have and the technology you have. And Seagate is a good company to work for. We pay a lot of attention to our people.
We try and stay on the leading edge of lots of things around making it a good workplace and we're responsible to the communities that we work in. We're very responsible for the environment. And obviously, we've always been built on a core of technology and we're going to continue to do that. So that's kind of the vision and strategies that we have. So again, just in terms of takeaways, we do believe in mobility and cloud transition.
Biggest thing I think that we've seen and we think that creates a lot of opportunities on the storage front. We're going to use our technology and our engagement with our customers at continue to focus on making sure that we have a financial model that not only allows us to fund those opportunities, but also to return substantial shareholder value back to our owners. So with that, I'm going to turn it over to Q and A for a second or 20 minutes or 30 minutes. But before I do that, I'm going to ask the man behind the curtain, John, to come out front because we have something to show you.
He's got to unplug something.
The Wizard of Oz. So we've been running this whole presentation on a HAMR drive. So he is now unplugging the HAMR drive and bringing it out there. And John, will you please verify for the crowd that that in fact was the drive that we were running the presentation off of?
I verified
And these are just what a terabit per square inch or something like that? Is that what we're
These are this is actually an enterprise drive. So we run it below what the capability of the head is on the FinSTAN. It's 500 gigabits per square inch. So many of you have heard we're at terabits per square inch on the spin stand. But for enterprise drives, it follows
Great. Thank you. Yes. So it's look, that's exciting. And Pat's going to be running his presentation on something else really exciting.
So we'll talk about that in a second. But yes, it's a neat piece of technology And the fact that we have an inform factor and running and working, we're very encouraged about that technology moving forward over the next 2 to 3 years. All right. Q and A? Q and
A. Yes.
Well, Bob's always up for hiring more engineers. The question is, I'll try and recap these questions for those in the back. The question is, if the secular trends are that there's less clients, more enterprise, what does that mean for your business model, your engineering calendar, etcetera. But let me just because you said something about that I want to clarify that if the client PC side shrinks, this is kind of the same characterization that people had about desktop and notebook. It's on a relative basis it's shrinking.
It's not shrinking. It's still growing. It's the question is, is it growing as fast as it
used to. So when people
saw notebooks accelerating 4 or 5 years ago, there was the mindset of investors was that desktops was going like this and notebooks were was that desktops was going like this and notebooks were going like that. That isn't all what was happening. Notebooks were going like this and desktops were going like this and they started going like this, but they were still growing. In fact, desktop still grows today. So just a slight I think the secular trend isn't that clients are going to go down, maybe they do, but they certainly grow at a slower rate, which is your point anyhow.
And so you kind of saw, yes, we believe that that shift is happening between where petabytes are shipped to, that more petabytes are going to ship to enterprise cloud and on a relative basis than to client. But you also saw the size of those pies, the size, the number of petabytes you're going to ship in the client is still 20 times what it is today. So there's still a lot of single disk 2 headed devices that got to get made, right? In terms of margin, yes, you're right. I mean, that's why I was saying that if we're shipping more heads and disk per spindle, that's a good thing for Seagate being a vertically integrated company where most of our R and D and capital is in media and heads, because then it means we get more absorption off of those factories on a relative basis.
And because the easiest capital to kind of change is final assembly and test, it's also kind of look, if you had to paint a world to change, it's probably the world we would want to paint, because it's the easiest asset for us to manage once we become committed and have a better understanding of what the timing of those trends are. From an engineering perspective, I don't think it changes anything. Our at least not in terms of aerial density, not in terms of heads and disc science. We're driving that as hard as we can. Look, the mistake Seagate made in 2,006 was we shifted our emphasis on driving areal density growth as hard as we could and focused more on broadening the product portfolio.
We're using the same amount of R and D dollars I think in a certain way, but there was a little bit of a shift in what the emphasis was. And when the management team changed, we all agreed we're never making that mistake again. You have to drive aerial density as hard as you can. You can always decide how you use it. If it happens to be that you have more areal density than you need, great, then you can get more margin by flying the head higher or whatever it is.
But the reality is, is the areal density is behind the petabyte growth rate. So we have to drive aerial density as hard as we can. We're doing that today. Would more people help that? No.
I mean, I think that we have the number of people that we need working on the core technologies. Long term, I do have concerns around where do we find that engineering talent and is that correlated to where our engineering talent is today? And the answer to that question is probably no. So it's a long term challenge. One of the things that Bob and Dave and I spend a lot of time thinking about is I mean Mark Ray who runs heads in this for us.
Where do we have our technical investment to make sure that we have access to the engineering talents that we're going to need in 10, 20 years, because it's probably unfortunately, not going to be in the United States to the same degree that it is today. And we're very fortunate. We opened a fab in Northern Ireland 10 years ago now, right, or more, I guess. And that originally was kind of done for production only. We had a lot of incentives from the government to do that and there's a good technical talent space there in terms of engineering.
But we also developed these really deep relationships with the universities there. Now we're doing a lot of our head R and D probably what about 25% of our head R and D there and we're shifting so that we have an even stronger technical capability in terms of wafer level head design in Northern Ireland. Obviously, the biggest place that you need ultimately exposure to is Asia, given the number of engineers that are being produced there. And we're doing that. And in certain countries, there's the ability to do that in terms of attracting talent, but it might be expensive.
And others then you have to worry about IP. So you have to be very thoughtful about what technologies you're developing and making sure that the property rights laws are evolved in a way that it's worth the risk to develop there. But yes, those are things that we think about. In terms of level investments, no, I think we're at the right level. Yes?
Yes. Thanks, Scott. Craig Bank from
American Merrill Lynch. Can you discuss in the 5 year CAGR of the 5.5% revenue growth, what sort of assumptions you're making for penetration of hybrids into thin and lighter ultra books or whatever you want to call it and sort of how we should think about the road map or goalposts over the next year or so to show that you're getting traction there? Thanks.
Well, I don't know that over the next year has anything to do with what I was showing there. I mean, when I say long term, I kind of think 5 10 years, not next year. But I think in terms of hybrid, I'll let Rocky and Bob talk to this in a second. Look, my thing on hybrid is that within 5 years 80% of the drives that we build will be hybrid. Whether or not that will be offered that way, I mean, I kind of feel like we're Toyota.
If you want to buy a hybrid, we have it. You want to buy a gas engine, we have it. There's lots of reasons why hybrid should be an attractive technology mostly around performance. You can split that market into the client side and into the enterprise side in both markets. There is there are significant advantages to hybrid technology when you think about performance and cost.
On the client side, it has to do with the user experience that people now are accustomed because of the iPad of relatively instant on and certainly instant refresh on warm boot. We can do that today. I mean, our cold boot times are within 2 seconds and warm boot is actually faster if you're running a bunch of applications. Bob can kind of talk about why that is. And yes, I think that hybrid will be deployed into thin and light and I think it will be the majority of what people are buying in 2 or 3 years.
The benchmark I would look at is probably if you force me to say, where would I like to be in a year? If we're selling 5,000,000 hybrid drives into the notebook market in 2013, I think that would be pretty good. And then there's a couple of OEMs who are definitely on that path. And Dell allowed us to make a statement here today that basically they're going to buy hybrid drives from us across the entire portfolio. So that's it's happening.
And obviously as they gain market share as a result of the performance attributed to that technology, it will obviously force other companies to respond. On the enterprise side, it's more about the dollars per eye off, but we think that the story is just as compelling that there's a lot of reason why hybrid drive is important. So yes, all of that is thought about in terms of my point is, I think that the petabyte growth rate equals or exceeds what we've seen in the last 5 years. So in my mind, since all we do is really ship petabytes and we try and do that as attractive a cost as possible that our revenue growth rate will be equal to or greater than what it's been. But do you guys want to talk a little bit about the market dynamics around hybrid deployment or the technology?
Rocky, do you want to start talking?
Sure. I mean, I think that the hybrid and the client side is going to make a big difference with the reinvigoration of the notebook class product. I think the hybrid provides a number of benefits. 1, cost, we're going to be able to enable the $4.99 to $5.99 notebook thin and light type packaging, which we don't see today with a pure SSD solution. It therefore extends battery life.
So if we continue to proliferate, the hybrid solution should be pretty compelling to sustain and actually reinvigorate the client growth rate, I think.
Yes. I guess the only thing I'd add, just from a deployment kind of execution Steve talked about across the portfolio, this year we've got our 3rd generation notebook. So we've been working on the technology for a long time. It involves a lot of firmware, integrating features into a controller. So there's silicon properties that go along with it.
So we're well down the path and it allows us to do some things like get the least amount of flash on the drive and get that experience for the consumer with the least amount of cost. So we feel good about that. Intel is doing, as you guys all know, their Ultrabook is going to be big next year. We've been developing with them. We're the only one that's been developing with them for the last 9 months.
So that's been a big engagement for us, kind of a unique experience. And then this year a couple of things and Steve mentioned it are going to happen. We're going to put that whole technology on desktop and we'll start shipping that product at the end of this calendar year, so just within the next couple of months and then the same on enterprise. Totally different equation. As Steve said, we'll double the IOPS of our enterprise drive.
So if you look at our mission critical, it's been years since we've had kind of a big performance bump. We kind of make incremental improvements going but going from 10 ks to 15 ks, for example and rotation speed was a big deal and this allows us to double it. So we think it's going to be kind of a breakthrough year in terms of just getting that portfolio coverage.
Yes. I mean for the enterprise customers that we've shown this to, I think this is accurate or pretty darn close, every one of them so far has asked for exclusivity. So it's compelling because I mean a lot of the solution sets that the enterprise customers our enterprise customers are trying to solve are around dollars per eye off and this is a big issue. Bob, just one thing and then Dave while he's answering I want you to think about the absorption question, how you think about running the factory and what happens when demand changes quickly on short term and also long term, how do you think about managing that deployment? But on hybrid, because I think it's important, especially as will be more competitive announcements around hybrid.
Bob, just a touch more on what is that technology. I think people kind of think, well, you just take some flash, you put the DRAM and the spindle and now you have a hybrid drive. And look, if it was that easy, it wouldn't have taken us 3 years, 4 years or 5 years to figure it out. So just a
little bit. Yes, I think the best way to think about it maybe is what people have done with Flash Cache modules, which is out there in the industry and it provides an advantage, but you also have to spend 2 or 3 times more on the flash than what we have to do when we integrate it together. And it gives you a bunch of advantages in terms of not only cost, but also performance. We can what we call self pin applications right at the drive level and not have it above the device level. And so it gives us again a cost advantage and also a performance advantage.
And it also is good for the OEM because you don't separate the data. You don't have data residing on two forms of devices within the unit. So it gives us a bunch of advantages.
There's also a lot of people always compare performance between silicon and HDD and try and make it sound like every application is the same. And clearly, there's differences between whether or not it's a random seek or whether or not it's a sequential read or write. And when you actually match sequential performance HDDs are pretty darn close and certainly well worth the 1 tenth of the cost that they are versus Flash, which is by the way still same differential. But what people don't realize is even in the random world, what appears random really isn't oftentimes. And so a lot of what we do is we watch random reads and writes and we look for patterns that then allow us to reorganize the data into a sequential data set.
And this is a lot of really smart people working for a whole bunch of years on algorithms to do that. So that's a lot of what's going on behind what happens in terms of why is the performance of a hybrid drive actually better than a pure SSD when you actually know what the application set that you're dealing with. So if you're a user that's going from the Internet to a spreadsheet to a PowerPoint and we basically start learning a lot of those trends. We actually can queue up a lot of things on the rotating media, so it pumps through the silicon much faster than if it was just on the silicon itself. So for those who've been to CES, you've seen demonstrations of that technology.
This is kind of what's appealing to our customers. Dave, and not to bring up the question, but it's What do you think the big challenges are around if demand is X or Y? What happens when it changes in the short term? What if it changes over time? How do you think about it from upside?
I think from the upside chase perspective, that's the easiest thing to answer first. We did a lot of drives last quarter and we have the ability to go back up to that level or higher if we need to in all of the various factories. So that's lead time associated with upsides right now. I'm not really too worried about realistic upside. It's the downside case that we have to concern ourselves with.
And we have so many different kinds of factories. We have a wafer fab where the lead times for where the product is in the fab for longer than 10 weeks. And that really touches many different pieces of equipment. That fab, if it runs lower than planned, then we have absorption issues there. There's different there's other different operations.
I think the key point when it comes to box count at the end though is that the drive factories are actually very flexible in upside or downside because it largely comes down to the test equipment and a lot of that's paid for the clean room spaces, which are fully depreciated. So I think we can be flexible there. Media operations, there the media is this petabyte growth that we're talking about accelerates, media is going to be constrained. And so I'm not really that worried about that one.
Okay. Another question from the crowd. Yes.
Thanks a lot. It's Nanda Baruah of Breen Murray. Steve, just wanted to get your thoughts on in a few years when you see the short that you talked about coming, supply versus demand from a petabyte perspective, how do you think that manifests itself on the industry? And what do you think the ramifications of might be?
Well, I think so the question is, if this kind of disconnect between petabyte growth and aero density growth sustains itself for the next few years, which I certainly think if anything gets worse because I think content gets richer and more people get connected, more devices like tablets get out there and just creates this frenzy of people sharing and creating data. Let alone what's going on in corporate world, which is more data being stored, analytics tools getting better, which mean people want to store more things than of course regulatory reasons why you have to store more and more things. I think though the industry I think the big difference is that the industry is not going to lean into investments for a couple of reasons. One is the upstream suppliers won't. I showed you the consolidation in the supply base upstream, especially in heads and disc.
Those are Japanese companies for the most part, if not entirely, who are conservative on capital, who are capital constrained in a certain macro sense. And therefore, they're not going to deploy ahead of a demand curve. I think they're always going to wait and make sure that the demand is there. And in fact, the reality is in a certain way, there's almost a shortage in notebook not that long ago, even with the slowness in demand because the main glass substrate provider just never really kind of they were more concerned about the macro trends and they actually held back production and there was almost a shortage in glass substrate not that long ago, right, like 2 months ago. So I think there's that dynamic that upstream.
But at the drive level, for sure, I mean, it's just the balance between how you invest in R and D and capital is being watched very closely in terms of what that return profile is. And I think if demand accelerates as Dave just said, we always push ourselves to get more units out of the capital deployed that we have now versus saying, oh, we need to build a new factory. And I mean, there's like no scenario that we see that says you build a more factory. It's just like, no, you just put you get better yield or you do things more flexibly or you incrementally add. I mean there's certain things that you can do that are beyond the days of, oh, I need to go greenfield something.
And if demand is lower then we cut capital. And so and we're going to probably cut aggressively. It's already happened this year. I mean our capital budgets are down substantially from where they were just a couple of months ago. So I think you're just going to always have this issue in the time being that says, look the industry has to have a gross margin level that says we can invest in R and D and capital in a sustainable way.
And by definition that wasn't 18% to 22% or whatever it used to be. That's why ended up consolidating the way it did. And so I think the industry is going to be much more focused on saying, I got to keep these investment levels up, which means I need a certain gross margin model. But you're going to run into this disconnect. And whether or not it's 2016 or 2017, it seems to me it's somewhere around there where you just don't have enough heads in disk, which then I think what ends up happening is you have sustained shortage, which means margins will go up.
And then once those are I think more established than people deploy capital again. And then you'll find a new balance point. So look that's 5 years in the future. But if we stay on the path that we are that's what's likely to happen. And I think the only thing that would change that is if someone said I'm going to go build the freeway before I think there's any cars on it.
And I just I think those days are well behind us just in terms of as humanity is. There's just not that much capital to go do that anymore. So I view it more like L. A. We build a freeway and the next day it's full and people say, okay, I guess you got to build buy more freeways.
Could I ever see a new entrant to the HDD business? Only if they buy an existing HDD company. That would be not new, but transferred. No. Only because the underlying technology is so hard.
You need a 5,000 magnetics engineers. I mean, where are you going to get those people? It's very, very today like we saw in this HAMR technology, when you think about this, you're mounting a laser on top of something that's as small as a grain of pepper. And then your timing when it goes on exactly when you need to write something. I mean that's I mean and then the media has got to be hard enough that it can take that, but it's got to be soft enough that you can it's kind of crazy technology and the heads now are planning in this lube.
They're not really flying anymore. They're more like speedboats on top. And if the lubes too thick, it slows the head down. If it's too thin, it creates too many waves. I mean, there's just there's aerodynamics inside of the drives.
It's a really, really, really hard technology. There's millions of lines of code. So the firmware side of it is very tricky. I don't see so. I think that there's the industry is kind of balanced pretty well right now.
We have a very strong relationship with TDK. And we think that that's necessary in order to manage the capital and R and D investment to get HAMR where the industry needs it to get. We have a really strong relationship with LSI and Marvell, because we think that relationship of what happens on the BLSI ASIC side is really important to what we need to deliver for our devices. But I don't see it fundamentally changing now in terms of someone decides tomorrow that, wow, look at this huge disconnect, let's get in the drive business. I mean that would take years and 1,000,000,000 of dollars.
And I just think it's a tough call. I think it's a really tough call. I'm not saying that someone shouldn't do it. I just don't think anyone has the 5 or 10 year horizon that would say and at the end of 10 years could see myself making money on that investment. Yes.
With the technology transitions, I think Wall Street sort of approached these transitions with the level of anxiety in the past. And so going to HAMR or Shingles, is there a chance that this is a problem for the industry?
I don't know that Wall Street has anxiety about technology transitions. I think for our industry, Wall Street usually likes technology transition because that's when our margins get better. Is there a risk to the deployment? I don't think there's risk to the deployment. We've been doing this for 30 years.
I mean, look, we're running a HAMR drive today, but these things won't be in production in mass volumes probably for 3 years. I mean, I think we're pretty smart about making sure that the technology is stable. And in fact, I think it's probably one of the biggest strengths of the drive industry, especially relative to the silicon industry. I mean, our customers know that we do workload testing based on 30 years of experience and we're the only ones with the data sets to do that. I mean Bob's got a huge lab in Minnesota that all it does is run drives on all sorts of enterprise systems to make sure that the reliability is there.
So whether or not that's dealing with shingles or with HAMR or with anything else. So I'm not worried about that. I think it's I'm worried about it only in the sense of if it doesn't get delivered, if it isn't on time, if it doesn't if it's not stable, then our aerial density growth rate is even lower. And then we have a bigger disconnect between the demand side and the supply side. I don't know, Bob, do you want to talk about how we manage technology deployment?
Yes.
I think the only thing I'd add is that we go through a recording technology transition about roughly every 8 to 10 years. And we're kind of at that point right now with conventional perpendicular recordings, Steve showed the chart. And so what we do is we start 10 years in advance on the next technology. So for example, shingle magnetic recording, which is just really what I'd call a firmware enhancement of Perpendicular, we've been working on for over 5 years. We're going to start to shift that technology this calendar year as well.
So there's a lot of preparation that goes and we've done it over and over again. HAMR we've been working on over 10 years. So I guess the only point is that, A, we expect to make a transition every 8 to 10 years. We resource it accordingly and then go through the transition. There's always risk.
There's timing risk, but we think we're pretty well staged.
Capital, I think is an interesting question. I think HAMR for sure, I think the HAMR capital issues have to be better understood. It is a highly leverageable technology. It's not like Bit Pattern Media where you basically have to redeploy your entire media equipment set and which would be 1,000,000,000 and 1,000,000,000 of dollars which is one of the reasons we're not big believers in bitpad and media. Hammer is leverageable.
It's definitely leveraged off the existing capital base, but it's going to take incremental capital. So you have to time that with the markets that will pay for it and need it. And obviously, enterprise is probably at the leading end of that. But yes, those things have to be managed. But I think at the end of the day, the technology transitions do a couple of things.
They drive aerial density and they lower cost. So from a margin perspective, they're actually usually pretty good things once you get through that initial curve.
Okay.
Thanks a lot. Rod here at Evercore. When you go back to the Samsung deal, part of it at the time seemed to be the go forward relationship in terms of sourcing NAND and your jointly developed controller or tech roadmap, whatever. Has that played through? I mean, is there a relationship there that's long term in nature?
Or have we kind of gotten to the point where, okay, done and now in terms of net sourcing, whatever
So, I'll let Dave and Bob talk a little bit. Let me just give an overview on the two points. 1 is kind of technical and the other is kind of sourcing. And the technical development on the flash management engine, which is what we that chip, has gone very well. That product is close to being ready to go to market.
We're really pleased with its performance. Again, we benchmark our drives and everyone else's SSDs against our HDD test bed. You might argue that that's overly conservative because a lot of people actually put drives out there in the enterprise SSD space that last weeks instead of years. But we feel really good about where that technology development has gone. We are currently in discussions with Samsung about what do we do next in terms of that collaboration.
But of course, this product is going to be in the market for a number of years. We feel really good about it. On the flash sourcing side, it's a great question. And it's one of the things that was I think not paid attention to about investors in terms of one of the big things that we did was not just align ourselves technically with Samsung, but we also aligned ourselves in terms of making sure that we had access to the best silicon with priority at good pricing. So maybe, Bob, you can talk a little bit about the technical sourcing side, but we feel really good about the relationship and no it's at the beginning, it's not over.
Yes. I don't know that there's a whole lot to add other than we've had this relationship for about a year and we are through this first product offering, we're going to see huge dividends by the technology that we can draw up by doing the product together. So it's been a good outcome so far and we can we'll see that continuing going forward. And Steve said the relationship
is going well and just at the beginning. You go back to the hybrid discussion that we had earlier and you put 8 gigabyte or 16 gigabyte of NAND on every hard drive or 80% of the hard drives in 5 years or those kind of volumes, those are substantial volumes for the NAND vendors. So that's kind of the bedrock of the whole partnership.
And fairly predictable demand. I mean, one of the things that the NAND flash providers deal with is a lot of volatility around demand. And when you're plunking down $10,000,000,000 for fab, that's kind of a pain in the butt not to know how much capacity you're running through that. So to have kind of a stable business model that absorbs let's just say 15% or 20% of that fab is a really good thing, we think, and obviously our partner does as well. So no, feel really good about it.
And it's a strong relationship.
Sherry Skibner from Deutsche Bank. Steve, you laid out a clear path of growth in petabytes and zettabytes, 7 zettabytes in 2020. I want to play devil's advocate because some investors will say to us, okay, on the PC side, you're shipping 500 gigabytes per PC and nobody needs all that capacity. That's really a unit play. If all of that moves into the cloud, we only need a few instances of that and we don't need everyone to have an iTunes song on each PC.
So really that growth is going to be much slower. What would you say to those people that would argue that we're not going to see that type of growth?
Well, I mean, look that's the thesis and that's the debate. Is it 7? Is it 10? Is it 15? Is it 35?
At 7, we're at way at the low end by the way. And my guess is if you ask those analysts 5 years ago, was it going to go from 40 exabytes to 500, they would have said no just as well. I mean, I think you have to say, yes, there's a lot of technologies that are being deployed that say storage can be used more efficiently. I would argue that a lot of those have already been deployed, especially after 2 2,008. We're not at sync, data to data to higher utilization of storage platforms.
People used to run storage platforms at 50%, 60% utilization and it was time for new and now they're running the 80%, 90%. I mean a lot of that's already been done. Yes, it's going to continue. That will continue. And that's why I said the funny thing about virtualization.
Guess what? It still runs somewhere. In terms of a single instance, I don't think that happens in my lifetime. I hope it does because that means I live really long. Look, when I can drive from my house from Los Gatos to Cupertino and not lose a phone call, I might start to believe that there's some day that's in our future where you can stream any movie anytime, anywhere and it's not going to be a very poor user experience.
I think we're a long, long way away from that. So what do you do in the meantime? You cash. The way you make that experience rich enough is that there's caching, which means that the content is closer to that end user device. And that's going to be on a disk drive or disk drive and flash or whatever.
The other big thing though and I think this is where the argument falls down is the world's getting bigger. If you have 1,700,000,000 users today connected and that number goes to 700 or 500 because worth of you're not going to be worrying about Seagate. I believe we're going 5,000,000,000 connected. And I believe that the nature of the content that people share is going to get richer and richer. I think it's going to be full motion HD video.
And when you do that math, it actually says that the on 7 set of bytes. But yes, it's the question and that's what we have to watch. And do we believe that the client world goes more to a single disc 2 headed device and there are fewer of them because those are all in those numbers. But we also believe that the back end storage required to feed this system of people needing and using content every Bonnie, there was an article written the other day in the Wall Street Journal by shoot that was talking about the celebration of the disk drive. Come on, you guys read the newspaper.
Was it Mark? Mike Miller? Malone. Malone. Yes, Michael Malone.
That's right. And it was a really great article except that then the collusion was conclusion was and drives are going away. And I was almost going to write a letter to the editor thing or whatever and just say, well, that thing both in the production, the resultant reading of it got stored on its drive that second. Look, we're a long way away from that world. And I would argue and if you look at technology over the last 35 years, what tends to happen and this is why it's great to be a hardware company.
What tends to happen is you have all sorts of people creating all sorts of solutions to address these problems and these problems are really about latency and cost. So they do that with technologies that gobble up hardware and they're successful or they're not. But if they're not, the hardware goes away and they have next guy has to buy new hardware. It's not like a code base that I can take over and put in a new platform, right? It's whatever Dropbox and Boxnet.
So they go out there and they buy a bunch of disk drives and whether or not they make those business models successful or not will determine whether or not they stay in business or not. But if they don't, guess what, all those drives were bought and then the next one that starts the next business that has a business model that's maybe more successful is going to need by disk drives too. So I mean there is something about that we kind of feed that advancement of how people are trying to address latency and cost of computing. But the fundamental issue is we're creating more data every day than we have the capability to create technology to store. That's the equation I look at.
So if that curve rolls over either because less people use it or for some reason less people are sharing or creating content, then yes, then we have then maybe that comes into balance and then we have more of an issue around what we do. I just those aren't what the trends are saying. Where the trends are saying if anything, it's accelerating the other way, especially with the deployment of devices that connect more people. So but that's the counterargument
and that's what we have to watch. Yes. Okay. Last question.
That was really, really good. Now sell your time to some of these other people. Okay.
The meeting starts now. Three questions. One back to the earlier question about secular cyclical. What are you looking forward to try and questions open sort of when and how will you know secular versus cyclical? And the other really about the mix shifts.
One is we haven't really heard anything about to do it yourself data center guys, the Facebooks and the Googles that are kind of marginalizing out the enterprise storage providers. That's an opportunity for Seagate what you're doing there. And then finally, mix shift that we've talked about and we've talked a little bit about client versus enterprise, but we haven't heard a lot about in the retail. I think you're going to see more and more homes putting in, let's say, at the home NAS system where you may not have that much on your notebook or desktop, but I personally have several terabytes on a network at home.
Yes. Okay. So let me ask
Mix and margin impact of that sort of shift.
Sure. Let me answer the second one and remind me of the first one and the third one because Judy kept me out too late last night. No, he didn't. He really didn't. The second question was
Do it yourself data centers sector versus Yes.
No, we did answer it. Sorry, maybe I didn't articulate it very well. That's what I was talking about in our engagement with the end user versus the traditional engagement with our customers who engage with the end user. So the deployment of architectures that we're talking about cloud and open and scalable and consumer that's being driven by a lot of end user IT departments in addition to traditional systems providers, in addition to new companies. They're all about dealing with that $100,000,000,000 of gross margin operating profit that's sitting out there.
And so, yes, we have huge efforts of engaging with whether or not it's Microsoft or Amazon or Google or Yahoo or whoever in understanding what needs to happen at the device level in order to make those architectures more scalable. Collaboration with the hardware device tighter the collaboration with the hardware device manufacturer with various levels of machine code or firmware whatever you want to call it is important. So we have to figure and we are deploying engineering and business relationships with technology providers to address what they're really trying to address, not in just today's environment. Today's environment, they may just be saying, hey, how do we use a bunch of SATA drives or SaaS drives or how do we do this? But they're really talking about how do they get more leverage out of the hardware in the architectures they're developing.
What's interesting is they're all developing different architectures, the leaders and they're all optimized around different things, but most of them are optimized not around storage curiously enough. Most of them are optimized around application performance or development platforms. Why? Because everybody's driving with the rearview mirror looking at AWS. Our industry on the downstream end does a lot of that.
You look at the leader and then you kind of say, what do I need to do, which I think is kind of silly for innovative companies. But so a lot of people are looking at the AWS success and they're saying, okay, I need a great application and development environment. But that isn't optimized for storage. It's optimized for the application experience. So we do think there's an opportunity for someone like us who understands workloads and storage architectures say, well, what if you want to do a storage purpose cloud and here's an architecture that we think is a lot better than the one that you've deployed for application experience.
And that's why I was saying, so we'll do that on our own as a test bed and testing out some of our device technology and software layers that we have. We do have services business. And then we'll leg into that with both our OEM customers and end customers. We sell directly to a lot of customers that you mentioned. So if I didn't clear talk about that enough, yes, we absolutely believe that's a huge opportunity for us.
But it's also a challenge because those aren't customers that we've traditionally engaged with. So there's a lot of engineering resources. There's a lot of interesting things that you have to deal with. On the consumer side, absolutely. I think maybe to Sherry to your point, I think one of the best hedges of if the client world changes because all these devices eliminate the need for spinning disk and notebooks or whatever.
It for sure means that stuff's got to be stored because no matter what silicon is really, really expensive. And
$1,000,000,000 And
$1,000,000,000 And then the next ones are going to cost $25,000,000,000 because as you go down in linear density, the equipment set gets more expensive, silicon gets more unstable, having it be compute grade is tricky. And therefore, there's always an opportunity that says, yes, I can carry some amount of this flash with me, but I need to basically hold the mass amount of my content somewhere else. And look, I think the whole market whatever you call that a NAS device or we're struggling. Rocky and I are spending a lot of time with the development team about what does that thing look like and what do we call it because we call it NAS that kind of turns off consumers right away because like, it sounds like I need someone to come put it in my house and make it work. And maybe it's just something inside of your desktop computer that actually works like a NAS.
But yes, we have a lot of investment in that We're developing that we're developing that capability internally. And I think that consumer side of the world in terms of not just DAS, not just buying a disk drive that plugs into something, but the whole environment around wireless drives, around smart NAS enhance the tablet experience is a huge opportunity for us. Rocky, it kind of led the investment in dense bits and maybe Rocky can talk about that a little bit in terms of this whole play.
Yes. I think we've actually launched several initiatives around the whole client and near field storage kind of initiative, one of which was the acquisition of LaCie and their experience with NAS or first phase NAS devices for the home and the consumer application. The second one is, which Steve alluded to, is the building of our team with companies experience like Google, Apple, Cisco, etcetera. We've got senior leadership, which have also participated in some of the most exceptional user development experience at Apple now inside of Seagate working on that whole consumer experience. So we're pretty excited between the actual product on the roadmap and the development talent that we've added to the company to really take Seagate's efforts beyond the device to another level, which we think is going to really pay off over the next 3 to 5 years in the products that we release to the marketplace around the whole consumer and home application area.
And then on dense bits, this is a new technology. It's a group of Intel ex Intel engineers that were focused on communication processing architectures at Intel who have approached error correction code algorithms, etcetera, in a much different way as it relates to storage or memory management applications, which we think provides actually a unique way to build an SSD. And so we're very optimistic about proving out their technology. And hopefully in about 16 to 18 months, we'll be bringing devices to the marketplace as a result of that relationship. So we've got, we feel, multiple compelling forces going on around our whole consumer and home applications area.
And what was the first question?
Owen, when will you know secular versus forward looking for
Well, you're going to hate this answer, but so now I'm treading closely on politics. What the heck? I think the next 5 years probably looks like the last 5 years and that's the world we all live in and that's what we got to manage to. Because the answer is the only way you would really know is if the macro issues get resolved. And all of us in this room know that for the macro issues to get resolved some really hard decisions have to be made that our political leadership is not going to make.
So you're going to have periods where instead of addressing the fundamental problem that there's been too much borrowing for unproductive projects and therefore the people who own that debt need to take the hit, but they can't take the hit because they don't have enough equity to fund the hit that we're going to keep doing what we're doing, which is saying let's not deal with it now. Let's hope we deal with it later and things will be better. And maybe there'll be enough growth that goes at a faster rate than the problem gets worse, so that when you deal with it then somehow that's better. I think that's absurd. I think the problem gets worse before it gets better.
But central banks around the world will keep doing what they're doing, which just means you're going to have 6 great months followed by 2 bad months followed by 9 good months followed by 3 bad months and it's a tough way to run a business, but I think that's the reality. So I think it's going to be really, really hard to dissect what's macro and what's secular. It's going to be hard. And therefore, we got to watch our capital. So how are we going to do?
So what are we going to do? So we're going to be really conservative on capital. Because like Dave said, if we're wrong and we're short, okay, that'll be reflected in pricing and then we chase upsides. And if we're right, then at least we haven't over deployed capital. And that's maybe not a great answer for a growing world, but I think unfortunately until our political leadership decides they want to put a better model out there that allows everyone to invest with confidence that the structural issues are addressed, that's what big smart businesses are going to do.
And that's what we're going to do. So it's going to be really hard. I wish I had a good I wish I could tell you, I was talking earlier, The way I feel is, when you feel good, if you feel good physically for a while, you kind of forget how good it feels to feel good until you get the flu or you get a cold or whatever. And then after that, you're like, man, when you feel good, I mean, you really feel good, right? I mean, but you don't know it sometimes till you're sick.
I mean, for a lot of my CEO pals or these guys, I mean, it's kind of like we've had a 5 year flu. And I mean, we don't now it's the new norm, I guess. So but I mean, one of these days, it would be great to wake up and say, yes, next year it's going to grow 5% and the year after that it's going to be 7% and man, if we get back to that world, it's going to be really fun to run a company, because it's tough right now. It's tough for all of you. How do you invest?
I invest now because QE3 started, but fundamentally I know nothing really changed and
okay.
There we go. End of political statement. All right. On that note.
We'll be back at 10:40.
Thank you.
Thank you for joining us everyone. If you could make your way back into the main ballroom, we will begin the second half of our presentation. If you could join us in the main ballroom, we would appreciate it. Thank you.
Let's get seated, please, if we can or if you're still talking, go outside, which is fine. I mean, I don't really care if
you could talk outside, but I'm not keeping notes.
Ben, are you still here? Okay. Just one thing I wanted I was thinking about Sherry's question that I should have been more articulate about on the 7s, so that'd be right thing. For our industry just to get from where we are today to 7 to 10 zettabytes, which take about 2.5 to 3 times the investment in heads and disks that we're doing today. So that's so if it doesn't become 10%, which again is like at kind of the low end of whatever you're saying anyhow, let's just say it's 6%, that still takes a lot more investment than what the industry is doing today on today's margin market.
Is, but you don't want to leave 1,000,000,000 of dollars of revenues on the table because the capacity isn't there either. That's what's going to be hard for our industry is to say on the one hand you don't want to over invest for sure, but you also don't want to under invest, right, because then you're leaving a lot of revenue on the table. And I think it's going to be a tough balance. But just you understand, to get to 7s out of bytes means there's a big shift in the business models already to allow us to do invest literally 2.5 times it's like 2.5 times as many heads and disc as we make today. So it's a big challenge for us even if that growth isn't there.
Okay. I'm going to introduce Pat O'Malley who's going to go through some of the financial modeling and thoughts on capital allocation and things like that and then we'll open up for another Q and A.
Thanks, Steve. So I'm already behind schedule. So but I think that's true. But the good news is nice to see a lot of familiar faces. So many of you have been with us a long time, you know the industry pretty well, but I'm going to try to leverage the financial model of what we've seen over the last 10 plus years and how we see what Steve described to everyone for the medium to long term.
And as Steve said, yes, could things change in the short term? Yes. But that's called running a business. We have to run every day. You heard some view of it with Dave and Bob of how you have to react and sense and respond even on supply chain.
But this is really for a long term model. And so some of these from time to time will go above the range, will go below the range. But long term, we feel fairly convicted on these. And like Steve said, we're just getting to the fundamental premise of where storage is growing at a rate of what we can deliver. And it's not just what we can deliver, what the storage industry, whether you want to put flash or other technologies could deliver is a lagging performance.
So that means we're just going to be in this mode where we're always pushing that envelope to stay up with it. So that's the good news. So if that premise were to change, whether it's the secular discussions or whether then you start thinking it, but we don't fundamentally believe that. So what I'm going to go over is basically,
I said, leveraging what Steve talked about, because this is how we believe
it and this is what we think So we sort of like this little fictitious city that Prezi created for us. It looks like the alien coming in over it, but hopefully it's not that scary because I think we can walk you through this. And I said many of you have been very familiar with our story. So I think you could come to some of your own conclusions or certainly we could probe them with you at a later time further. But I want to open up with the first of all, the theme of the consolidated market.
I think last year the headlines clearly were directed with the Thailand unfortunate situation with the floods, which created a supply disruption. But what really was on the backdrop there was also we had consolidated market going on to 3 players. And as you can see going but at that same time is when the consolidation started occurring. So you saw a revenue bump and a margin bump. In fact, fiscal 2012 obviously was a record year for us and probably the industry for sure that we've seen.
But there's a few things that as the consolidation happens, if I took this chart even back further, what you see is the lows get higher and the highs get higher. Some of you might see a little bit of the volatility in the curve and that has a lot of impacts whether supply is out of balance with demand. But when you have 5 companies or 7 companies, it takes longer to get there. So as Steve says, my guess is the industry is seeing a little bit of an industry rebalancing right now, but it's reacting, I think, hopefully very quick. We don't always have insight to every piece of inventory out there, but I think we have a pretty good idea and I think the industry is responding and going to address that.
So for the financial market model targets that we look for going long term 40 to 43. I mean, there's really 2 scale players in this industry. Steve showed the chart where one time there's 247. There's really 3 of us left, 2 of us are vertically integrated. So we have very similar models.
We look alike. We sort of approach the market the same. We want to make sure we get an adequate return on our invested capital. And then there's one player in there Toshiba that has to leverage off the left side of the chart that Steve told you about for their technology, whether it's heads media, they have to leverage that. And so they're going to be a much smaller scale player.
But 40% to 43%, we don't see is out of the ordinary. And obviously, Dave talked about where we think our share may be when you open this up and going to be relatively in that range and we think that could be maintained. Revenue growth, Steve also commented on plus or minus 5%. We do believe if you look over the last 10 years, it's grown at that rate. And in fact, we think, as Steve showed with the 7 zettabytes, it probably has opportunities to grow more, but you'll have that trade off.
Do you not invest because to lag and then you need to leave some on the table, but you run a tighter business. But long term, we certainly believe what's shaped in the last 10 years certainly should roll forward for the next 10 at least given where we are with the storage and technology misalignment. And our gross margin 27% to 2%. Our old margin that we sort of always walk to is 22% to 26%. If you looked at the first decade of the century, it was pretty much right spot in the middle of it.
And that was with many more companies. I don't know what the decade started with. It didn't start with 247, but it started probably close to 9 drive companies and down to 3. We don't think there's a reason why the model shouldn't move up. And so we certainly feel that comfortable that that's a long term model that we can certainly achieve.
The operating expenses, a lot has been said about the gross margin. And one of the things that people I think really should start focusing on in the business is more of operating margin. I mean, if you look at the last consolidations, the industry has gotten tremendous operating margin leverage. I know our competitor talked last week and they have different issues on the operating margin, but I think long term they'll address them. But at our level right now, you can see that's around $400,000,000 That's what we're targeting to run at.
Could it be flex down? Yes, it could be flex down. Do we have the capacity to take it up for add investments? We certainly do. And I think as I go through this, you can certainly see we have the capacity to do that.
But the important thing here is the most OpEx in the business today. We're funding all projects we have that we believe we need right now. Can there be incremental investments? Absolutely. Steve talked about, do we need to be closer to consumer?
Does that require a little more investment there? Yes, we do that. That's fine. We certainly have line of sight of those, but we think we should be able to run this at about $400,000,000 a quarter. And like I said, we think that's efficient.
And like I said, we as Steve talked about a resilient model, we could flex down or flex up. But right now, we don't really see much need other than to deliver the products we're talking about. And I think that will be a good return. Talked about vertical integration. There's 2 of us that have that.
And from our standpoint today, you can see the capital over the last several years. Other than large investments, whether it's a media plant or wafer plant, we've been pretty efficient. As Steve says, we're the semi con has to do a third of the revenue for $1 in revenue. We've historically been the 6 to 8 and we've been operating last 2 years been operating under that. So we look at about $750,000,000 that we sort of start the game with and some of that's maintenance capital, some of it's investments whether we need a design center like we acquired in Korea, we need a facility for that.
So times you'll get things like that. But generally, we'll keep it in that range. We think we're very efficient with that capital. And but right now, we're probably in maintenance capital mode. This could probably support $70,000,000 drive $70,000,000 plus or minus given the mix.
We We picked up $15,000,000 with the acquisition of Samsung. So I think the model is really scalable pretty up pretty well. And we try to run the business about 20% ROIC as a quarterly target. So I think like the 2 vertical guys left clearly look at ROIC because that's what you have to make the decisions on how you're getting returns for that. Cash flow generation.
As most folks here, the investors know that's one of the big stories with Seagate in this industry. We generate a lot of cash. And if you take a look at this chart that we put together for the last several years, a couple of things I want to point out. Obviously, fiscal 2012 was very, very strong and you can see the amount of cash we generate there. Then the start of the year, end of the year, we ran about the same amount of cash on the balance sheet.
So we deployed that and I'll get into that a little bit. But the other number on this, if you take a look at fiscal 2019 and that wasn't our best year, wasn't the industry's best year. It was a bad year for a lot of companies. Even at that year, you see we generated near $1,000,000,000 of cash flow. So the entity itself can generate a lot of cash.
In fact, the last 5 years nearly $10,000,000,000 So that's not a has not been a problem for us. I think folks get we're really tied up in the earnings volatility. But from a cash generation, the entity and the industry generates an awful lot, whether it's through efficient leverage of the operating expenses or I just talked about the capital. And just everyone could do their own valuation metric, but if you look at last year's cash flow, our current market valuation will be trading less than 4 times that. So I think that's pretty good value.
I mean discounted value, but that's what the tag line on that is. So I think let the industry decide what it's worth, but it generates, as I said, significant amount of cash to fund all the things we've talked about here. So we have some principles for capital deployment. I'm going to build this 1 by 1 because I want to really focus on what Steve said. It is a disciplined process.
We have a very active Board that looks at our capital structure. Steve and I go over this fairly regularly. And we want to look at this from many different ways from corner cases of things got really tight to where there's opportunistic places. But we go through a structured process as we go through this. And it is adaptable.
We can go we can flex down, we can flex up, but we look at this in many different ways at many different times. People always ask what does it really take to run the company. We just had to run the company with cash. We like to say $1,000,000,000 to run the business with inter quarter variations. You probably run the business without stressing too much of $1,000,000,000 and you start getting under that, you start want to watch your cash.
I always as a CFO luxury, I like to say a little $1,500,000,000 and Steve always says you don't need it and he's right, we don't. But it always gives you some dry powder and you could argue at $2,000,000,000 on the balance sheet. We run that pretty we have enough cash on the balance sheet. But the one thing you'll see is the cash really won't grow unless there is a need to do that. And as you'll see here, we don't really have in our mind a tremendous need to grow that right now.
So what do you do with the cash when you would generate it? First, you obviously invest in your portfolio and we talked about that through the operating expenses. That can you deploy through your factories to build what you need to. You talked about that we're fairly efficient. And then the third to us is you return to your shareholders and you do that in a few ways.
You do it through dividends. I'll go through that in a moment. Our share redemptions, which Seagate is both programs, keep appropriate debt levels. Seagate likes to operate as investment grade, whether we're rated as investment grade, that's one thing. But our principles around debt inside the company are to operate at near investment grade level and an opportunity driven M and A.
And so we always have to look at these as part of our tool chest. So our dividend, as you can see here, the dividend has had 2 step functions over the last 2 years, which was as we did that, we went through and looked at our conviction on where we think the cash flow is going to be and we felt very convicted on that. So we took 2 step functions on that over the last year plus. And over the last 6 quarters, we returned over $500,000,000 to our shareholders in that form of a program. We think long term, the stock, the dividend program will become probably more structured as the industry aligns itself to those earlier targets I talked about that we'd like to target near 10% growth stock, dividend growth stock over time.
So you could do your own modeling on that, but that's how we tend to look at that from our what we see from our cash flows in the future. The other part of the program is the share redemptions. And Seagate has gone through a heavy period of the last 2 years of buying back significant amount of shares. Since fiscal year 2010, we've returned nearly $4,000,000,000 for our shareholders through this program. So as you saw that cash flow generation near $10,000,000,000 we're certainly returning quite a bit of that in just this program alone back to shareholders.
That's about a 16% decrease in actual shares, which in some ways is somewhat more impressive is that in there you don't see the $45,000,000 add for the Samsung. So we've actually took care you don't see that step function going back up. So we sort of made that a virtual cash transaction by going through that. And our overhang of our options or share awards inside the deployed base, that overhang is cut in half in that same period of time from 50,000,000 potentially dilutive shares to less around 25,000,000 now. So we've taken a lot of what I'll call headwinds into the face of the share repurchases and we've offset those.
And I think we've done a fantastic job. Currently, we expect this quarter to be at 383,000,000 shares outstanding that's through private and public placements of buying shares back. So that puts us pretty much on path I think by the end of this year by December that you get to our target that we put out a year ago with the 350,000,000 actual shares outstanding. So we'll be very close to that. So we're on target for that.
And then in our last investor call, we talked about the target for calendar year 2014 of 250,000,000 shares. So we certainly think in our cash modeling that those are both attainable and achievable. So our long term debt profile, one of the things that Steve said, even what the employees always ask is why don't we do X with it? I always get it back, why don't we pay off debt? Well, our debt is structural number 1 and I think it's a good point of view to have some leverage.
And so our debt, we do run the SP credit rating at BB plus I said we philosophically operate as investment grade, but it's slightly less than $3,000,000,000 But the story with debt is many things. You really have to look at it as a 3 d picture. It's not a 2 d dimension. It's not $3,000,000,000 If I had $3,000,000,000 due tomorrow that might be a problem. But I have $3,000,000,000 if you look at this over the next decade, it's not such a problem.
So there's 2 things on the chart on the right is 1, it's spaced out very nicely. So I don't really have a wall of liquidity in any given year that I'm facing. And I think would I like to have rates lower over time? Yes, I would. But we don't need anything structurally to do change that right now.
And so if you see the first up debt is the 10% secured debt and that's due in it's due for payment on May 2014. We do have some optionality to pay that this May. So depending on the cash flow, we may call that in. 1, because of rate and 2, because of security. And so we can relieve the security off of our debt profile, which I like to do sooner than later, but that's on optionality.
And then beyond that, you don't see another debt payment all the way till 2016. So there's no real large impending piece of liquidity over the next several years that we have to deal with. So our capital deployment plan, looking at last year and this year, so I'd put some of those pieces we just talked about in the chart here. So share redemptions and dividend program, we were both into them last year. We're still going to be committed to them both again in target fiscal 2013.
So last year you saw Steve chart earlier with about 85% payout of that cash flow. This next year is still going to be pretty significant at 70%. So the share redemptions gets us to the target of the $350,000,000 and the dividends supports what we have already disclosed for a dividend. So we certainly could support that payout ratio in the absolute dollars very easily. I put debt retirement as optionality, don't need to do it, it'd be nice to do it.
And so we'll have that decision at the end of our fiscal year. And M and A strategic, you saw last year we did the Samsung, we did other investments, strategic investments. We always look as opportunity dependent, nothing that we really ever comment on publicly, but we always look at it. As Steve talked about, we did acquire L'Cie. That transaction hopefully will complete itself in the December quarter, but we're well down the path of having that asset and we think it's going to be a very beneficial asset to Seagate's portfolio.
So let me just put all this what we just talked about the financial model assumptions, lay that out what we just talked about and the capital deployment assumptions. So summarizing again revenue growth plus or minus 5%. Again, I'm not going to get into whether it's this year or next year, but I long term, we certainly feel comfortable with that. Margins 27% to 32%. So you can almost look at our last time model high end is now approximately in our low end.
And then operating expenses plus or minus $400,000,000 a quarter. For the capital deployment assumptions, I mean capital expenditures $750,000,000 if we flex it down, we will have the opportunity. But right now, we've modeled that. Our dividends, I just talked about nearly $500,000,000 The share redemptions, which we had also in the previous chart of $1,400,000,000 And I've just said, okay, if we need the 314 pay the principal off, we do that, which would tell you that for what you'd need to do to support that program, we need to generate at least 2,800,000,000 dollars in operating cash flows. That maintains cash.
Remember, I said we probably only need $1,000,000,000 So you could even probably say, I really need to do $1,000,000,000 if I want to take the cash down to $1,000,000,000 I'm not saying that's going to be an outcome. The real point of me saying that is that no matter what scenario we look at, we think we can execute this plan I've just laid out with a high degree of certainty. So I'm just going to get to a point of wrapping up here a little bit. And I'm going to close with a slide that Steve opened with on the takeaways. And I'll just go through them 1 by 1 again just to reiterate them.
We do believe in the mobility in the cloud. That's probably the biggest thing driving that Zetta by growth. And as Steve says, we modeled that down. We had to really pull that model down just to say how far can it go. But every time you add a device as Steve chart earlier, you're going to have some pop somewhere in the storage ecosystem.
And I think what you saw from Steve's chart, we're looking at it as an ecosystem. We're not looking at it as one drive goes away. And what does that mean? That means it goes away. No, where does that storage go?
Because fundamentally the storage has to go somewhere. With our technology leadership, we're able to bring products, innovative products, time to market products, cost leadership products to the market. And so we're pretty proud of that and we're continuing to leverage that. We're making the investments you saw from the OpEx. Everything that Steve talked about, we have it funded through our operating expenditures.
And if there's other opportunities, we'll deploy that funding as well. But right now, that leadership is being demonstrated for the products, the time to market products we're shipping on this last round and some of the technology that we continue to demonstrate. And then it's resilient financial model. I think most folks that know me personally, I know you, you've seen how Seagate in times where it gets tough. If there is a macro, I know that's on everyone's mind.
We certainly can scale things back and try to run a business that still generates positive cash flow. But with the opportunities, we'll go after those as well. I think that whether it's through our cash generation, our debt capacity, those type of things, we certainly will be in any position to take a look at any opportunity. So that's our real focus there is, I mean, it's really about you can see the top part about the operating model, but really shareholder value. We look at the whole balance sheet.
And so we'll continue to look at that and how we deploy that to shareholders. You can see that we pretty much use all tools available to us. So I want to make one more thing before to Q and A because my little surprise is, I have a surprise too. He's not going to show and tell. This is a 5 millimeter in form factor, standard connector SATA, fully functioning drive in.
1 just like this is running my presentation. So it's out working and so we're obviously well down that path as well. Yes.
We're not out form factor, the right connector.
And customers are seeing them.
We feel really good about our 5 millimeter program.
So that's my little show.
Hey, before we get to Q and A, I was sitting here thinking about something on the cash stuff because it's an interesting philosophical difference that I think investors and management can have about what does it mean when you decide that you should return cash to shareholders because there there's kind of an archaic thesis that says, well, that means you have nothing better to do with the cash, which I think is really odd because it actually means quite the opposite. It actually means that you have enough confidence in what you're doing in your R and D and capital investments that you're actually going to create enough cash flow to sustain that growth that you actually don't need to hoard cash. And it's just a different way of viewing your future prospects. And as we look at our future prospects, we believe this business creates a lot of cash flow, more than enough for us to address what we needed to invest and innovate every day to create more value than the innovation investment and the go to market investment. I was at a conference by a bank not to be named, where there was a panel of young entrepreneurs with no experience.
Who, one of the persons made a statement that, well, once you're making a profit, then your company is done innovating, which to me is one of the most absurd statements that I've ever heard in my life, implying that companies like Apple and Google and Coca Cola don't innovate because they make profits. Profits are the result of what happens when you innovate to a degree that the value of what you innovated covers the cost of that development, while the sustaining development plus go to market. And so if you have confidence that you can continue to do that either because of your competitive position, your technology ownership, the growth of the market and that translates into a business model that generates lots of cash, then it's I think bad form to hold that cash. 1, it's a drag on ROE. 2, you can always go borrow money if you have some big important need that is important for strategic reasons.
And if you can't justify that to the debt or equity markets, you shouldn't be doing it anyhow. And 3, I think it can make you lazy. I mean, I think you can take comfort and well, now we have all this cash or you can spend it on R and D projects that don't really have the returns that you want to drive your overall ROE to like Pat was saying ROIC is something we look hard at. So my point is I think there's a philosophical divide amongst certain management and certain investors as to what is that signal. But for me, it's not a signal that there isn't something better to do with the cash.
It's a signal that what we're doing with our cash is so darn good that we actually can give some of it back to the people that let us use their cash to build the company. So I think it's just a completely different viewpoint on things.
Yes. And then just second one of the things Steve said that when he talked about the next 5 years maybe like the last 5, because we all said the last 5 weren't great, even that last 5 was near 10,000,000,000 dollars and that was the pre consolidation. No, the
last 5, I didn't say they weren't great. I just said they were hard. It's hard. It's really hard. I mean, look it's great.
We're a big company and but it's hard environment to manage it.
Much. Following right off that last thought, I guess, strategically, if you go back like, I don't know, at least a decade, if not 15 years or so, old Seagate, there was a time when you guys used cash and actually were investing in, I'll call it, non drive technology that was like
All that software craft we bought.
I don't know, probably 50 things Well,
Veritas wasn't a bad one, but go ahead.
Right. No, no. I mean that's a good one.
But I think that was obviously
that was one strategy, which was take all this and invest in other storage more broadly. And it would seem now it's not that. Not really. I'm just I'm wondering what the thought process
Well, let me recast what really happened. I mean that's an interpretation from the outside and I can accept that because you weren't in the boardrooms and with Al when we decided what we were doing. We weren't actually what we were doing is, look, Al, one of the things that Al never gets credit for because he's so close to his sole stated with being a disk drive engineer is Al saw the implications of client server. He really had a fundamental understanding of what happened, what was going to happen to computing needs as a result of client server deployment. And he was thinking about it from the perspective of an individual that clearly was a driving force in mainframe computing.
He had this worldview about, wow, once you start deploying technology in more unit scale and cheaper and enabling more people to access technology, by the way isn't that a lot like what's happening now with smartphones and iPads that that created a massive opportunity for technology companies around hardware and around software and the integration of the 2. So it wasn't about getting away from the drive business. It was understanding that that deployment was going to create a massive opportunity for the drive business including the software implications. And so therefore let's participate in that because the quicker we could help that advance, the quicker that deployment was going to happen. And so that's what drove us originally our whole software strategy, which then I was hired to lead was around information management, storage management, network management software that was designed around the client server architecture.
So in that sense, if you say how do I overlay that with what I talked about today, yes, we're going to do the same things, but it's a different animal. It's around mobile and cloud. It's around consumer and commercial convergence. It's around open source software changing the entire underlying device technology opportunity. So yes, you can expect us to make investments whether or not that's partnerships, whether or not that's JVs, whether or not that may be technology acquisitions for some software stack that we think we might need.
We'll do that. And look, in terms of that report card, we invested $400,000,000 over 7 years and that created $22,000,000,000 of value. I'd be pleased if we could do that again on the same scale. So we're not going to shy away from it. We think it's an opportunity.
We'll be prudent. We think we're pretty good at it. But I think it's an opportunity for us. I think that's what's great about being in technology for as long as I've been in it. I mean, when I started I was doing Fortran code for mainframes that only 2% of the population had access to in a business.
And the world's completely different and that's good for all of us. So we want to be aware of those opportunities, but always leveraging off of our core strength, which is storage. And Al did have that pieces as well. Keith? Whoever gets the mic.
Hi. I guess I'm the
lucky winner. I had 2. First, one of the premises for your model is no share loss. Toshiba has been pretty active about talking about they want to gain share and are willing to invest in even in their partners to help their supply chain. How do you reconcile kind of their statements with both WD and Seagate saying Air stays where it is?
Look, people forget a lot about the drive industry. First of all,
I
think people are very aware that it's funny people think about it individually right but not necessarily altogether, right. There's a bunch of people that understand how much technology this requires and what that means in terms of fundamental ownership and development advancing technology and unless you're doing it today at volume, how do you do it tomorrow at volume. That takes a lot of expertise and vertical integration has its advantages, especially as we move forward because the interrelationship between heads and disc is becoming more and more important. The material science around how a head works and how that interacts with the disc and the magnetic layering on the disc is becoming very highly correlated. So having that capability directed by internal resources is a big advantage.
It doesn't mean that you can't do it with partners. It's just a little bit harder. And then there's the scale of the investment that goes to D and therefore you have to have a business model that says I can make that investment. Again an entity that's getting the return on the total value of that probably has a better ability to make that deployment than individual companies, which is why there was first consolidation upstream now here. The second thing is that we're a high volume manufacturing company.
And I think that's again, a lot of people maybe sometimes vote focus on that in terms of the what's the TAM and absorption. But it's that combination that's really the magic of it, right? You're the only industry in the world that is as high-tech as we are across as many scientific disciplines as we are at the volumes that we are. We're going to make 2,000,000 disc a day. I mean, it's like these crazy numbers, right?
If you're not at scale and if half as big as the other two people, you aren't at scale. It's really, really hard to do that cost effectively. If you're at a parent company that's generating, let's say Google owned them and said, yes, I don't mind losing money to grow scale. Yes, but they're not owned by Google. They're owned by a company that is challenged on every one of its main strategic fronts in a substantial way.
So you have to say is that where they're going to deploy their precious capital versus some of their other opportunities like fabs. My bet is no. I mean if I'm Toshiba and I'm thinking about I have to beat Samsung and whoever else you want to throw on the list of fab guys. My focus is that's my business, right? That's where my dollars are going to go, not trying to scale my disk drive business to compete against guys who are twice as big as me with deep technology courses.
Do I think that they can be successful being a player in the 15% to 20% range by focusing on a limited offering in the enterprise and a limited offering in notebook or hybrid, I mean hybrid would be a natural spot obviously for Toshiba to be competitive. Absolutely. And I think that's what we assume will happen because that's going to be the highest return for them. Trying to buy market share for what reason doesn't really make sense because the margin model is not going to support it. But we'll see.
I don't run that business, so we'll see.
I want to point out that I
asked my questions
one at a time instead of all at the same time. Yes, it's
no problem.
The second question is
Makes it easier for my fading memory. That's why
I'm working with it. The second question was on aerial density. You've talked a little about and you've talked about a 5% kind of revenue growth over time. Could you bridge gap a little bit? At least help us think about how you're approaching the unit volume growth for both yourself and the industry to kind of pull those 2 together?
I think it's again, here's the good news. We don't have to think about a long term unit growth right now because we don't not deploying capital based on what we think is going to happen in 3 years. If we were leaning into capital deployment, we would, right? That would be big point of discussion. Is it going to be 600 or 700 or 800 or when is it going to get to 1,000,000,000 and when do we but that's I think that's the importance of this issue that Sherry raised and one of our investors raised about.
It's we're going to lag. The cost of lagging is you may leave revenue on the table, right? Because if you lag and the demand is better, you say, man, I wish I had those extra 10,000,000 units to sell this quarter, right? Especially if the demand was 15 more because it wouldn't have even screwed up pricing. That's just not where the industry is right now in this macro environment.
And so I don't really need to make a big long prediction about it. I need to think more about petabytes because I have to make heads and disk and I have to invest in heads and disk. Our drive asset footprint is the easiest one to manage both up and down. It's the least expensive and it's the easiest to manage. So I have to be more focused on my short term forecast about that.
I don't want to whipsaw Dave and start a quarter at 70 and then tell him, no, I mean it's 48 or actually it's 63 and then it's 52.5. I mean that's terrible for him because he's bringing people to work then he's sending them home and he's bringing them back. And so there's a
lot of issues around
our day to day quarterly management. I mean our master schedules change every day, I mean, every week, but every day. So I think right now we look at it as again marginal growth in the December quarter, probably in that because I think September is probably a bit depressed by inventory adjustments and things like that. So whether or not it's 150 or 155, we'll see obviously windows gets released and we'll see what kind of impact that has. And then I think you probably stick with a pretty flat forecast for a while until you see if there's any dynamic that easing does or any other Chinese government transitions and then maybe they start a stimulus program.
I mean, look, there's a lot of things the way to be seen, but right now I'd say we feel it's going to be pretty flat. Fiscal, yes, I think that's right.
Yes, yes, I think that's right. Yes, and if it
goes up, we'll chase it. We can chase. We're good at
chasing, we'd rather chase. David chase.
Ops guys love chasing. They hate cutting.
Just a
question about the a question about
the long term model. I was wondering if you could give us some sense for what your assumptions are around pricing, mix and maybe some of the cost takeouts you're at the middle of the gross margin model right now?
No. I mean, come on, it's like how many SKUs do we have? It's just our business isn't that simple to say here, here and here. It assumes that actually this is another thing, Shor you hit on, that's really an interesting question about how many gigabytes do people really need. So the thing that's confusing about it all right now, because that thesis is out there, you don't even need the 500 gigabytes.
Well then why is average capacity per drive? In the environment now where you can buy a single disk 500 really cheap, why is average capacity per drive still accelerating to the rate it is? And one of the reasons is people don't realize what you store isn't necessarily what the system needs. The system does all sorts of like little reading and writing and what is it a gigabyte an hour or whatever thing it is. There's a lot that gets going on with your disk drive that isn't about just storing your data.
And so average capacity per drive is accelerating. I mean, we'll be over 800 gigabytes per drive, I think in the not too distant future. And so I think the assumptions are that that fundamental demand probably continues, but that the client devices go more towards single disk and 2 heads instead of multiple disk and that the enterprise drives probably go from 4 disks to more like 5 or 6 or 7 or 8 or maybe do a half high again and squeeze more in. So that assumption exists that there's going to be a heads and disk expansion average heads and disk per drive goes up substantially from where we're at today. So that would be some if you don't like, you'd kind of say, okay, there's risk in the model.
In terms of pricing, it says that pricing is managed to support what this industry needs, which we think is more like 27 to 32 points, not 20 to 24. That's again back to if you need to deploy 3 times the capital for heads and disc to get to just that 7 zettabytes at some point, we have to have confidence that we should make those investments. If we get a couple of years of 30 points of gross margin with things being imbalanced, you probably start getting that confidence, you probably start deploying and you therefore probably don't lose a lot of revenue because we were so short of the supply. So I think it talks to a more efficient supply chain for sure. I mean, again, the real leading customers are doing some great work with us.
I mean, Dave can talk to this a little bit about things that make our operations more efficient. They make their operations more efficient. They reduce inventory in the system. They increase velocity. I mean that's great for all of us.
And it again, it allows them to match end user demand a lot better than they do today, which is how do they solve that problem today? They carry a lot of inventory. Okay. That's not a great answer. So I think mix, SKUs, pricing, all of it is kind of baked into how we view the world as and maybe we bake it into the other way, which is this is the model that we know is required to fund where we have to go at a minimum.
So the industry is at a point that where it should manage itself that way. Can you get caught by sudden spikes one way or the other? A flood happens, there's a massive shortage, of course, that's going to happen. I don't think you have again, I think the big difference versus 5 years ago, you don't have as big a risk that if demand falls suddenly or consistently that you have an overproduction because we'll adjust production. We'll just say fine, the TAM is 1 gross margin, but it's not a pricing hit on gross margin.
So I think that's and that's the test that's going to hopefully it won't be in front us, right? Hopefully we get macro growth and the world doesn't kind of get into this kind of declining role scenario. But I think at 140 feels pretty again, 140 is December of 'eight. I mean, maybe the world doesn't feel great, but it doesn't feel like December of 'eight to me. So do you want to add anything?
A couple of things. So Steve talked about making things easier with our customers that helps logistics costs, which is a big deal right now, our side and their side, whether it's freight or inventory holding or configuration complexity reduction is another big effort there to kind of grease their supply chains. I think on cost side for us, there's things like automation that we can do to address rising labor costs in various places that we're off to do. So we haven't really pulled the handbrake on all capital. There's, for example, capital for automation projects that are going on to further that cost reduction.
There are raw commodity costs that fluctuate. We all had the rare earth problem last year. It's abated somewhat, but it's not back to where it was 2.5 years ago. So those are things that we continue to watch, try to engineer out better solution for. But I think in general, we'll still be able to address a declining cost world and that helps some of the elasticity that might help drive demand out there in certain markets we have.
Okay. The question over there. Whoever gets the mic, sorry. To grab it from like 20 minutes ago.
Just two quick questions. 1, there was another way to look at your margin profile there, Pat, that even in the current environment, so let's say, next 5 quarters, we're sitting there at 150 ish million that you could go and be within that target gross margin, target OpEx, everything else kind of applies and we'll just reflect it later as we
Yes, I think Steve highlighted the one issue is you have to be responsive to what the real demand is and you just line it up. And then you don't go price to go create demand. That's the fallacy. So if you say back off and you back off and the industry accidentally because they should because that's the right way to look at your resources and then you just back off demand, I mean the supply and that's it will stay there. The industry doesn't back off and then I guess you only have a few people look at, but the industry backs off and it should stay in that range.
Longer term question. You talked about kind of a target mix maybe of how much you'd want to offer in terms of hybrid drives. But should we assume then that any of your pure SSD offerings would be part of that 20% 3 to 5 years out? Or what else is in that mix? Is that just
Yes, sorry. No, I was talking I mean, I was talking more yes, it's a good question. I just meant in terms of stuff that you would think of as spinning disc today that product line, I think 5 years from now 80% of that product line has got a hybrid alternative or maybe only hybrid. Enterprise SSD would be on top of that. I view that as a different market.
As you know, I view it as a complementary market. It's not a storage device. It's an accelerator. It's something that can munch massive amount of data very quickly, which means the massive amount of data has to be stored somewhere and moved in and out very quickly. There's a lot of aspects of the performance of that device that have more to do with enterprise workloads than they do anything else, which is why Samsung came to us and said, hey, you guys know more about this than we do.
What does that code do and how do we manage it? I still believe that the enterprise SSD market isn't going to be that interesting until probably 2015. And I still think we're on target to be the leading provider of enterprise SSDs by that time with our technology investments. It doesn't mean we're not in the market today. We have enterprise SSDs today.
We're going to ship the 3rd generation later this year. We're excited about the product. But look, it's just not a big market right now and it's not a profitable market. So I like bigger and more profitable markets. On the client side, I think that's a different story.
We do client SSDs today. I think that's another secret that we were going to talk about out there. So under the LaCie brand, we do client SSDs. We have a couple out there that are running or whatever they're doing. I'm not a great marketing guy.
Scott, do you want to give the pitch on the okay. So we do have client SSDs today. But look the real key to client SSD clearly is can you take flash that's used in devices that aren't compute grade I. E. Memory sticks and do something because it's really cheap and do something to make them compute grade and this is really what our dense bits investment is all about.
If you guys crack the code, that's going to be a big advantage to Seagate and our ability to play in the enterprise in the client SSD space in a highly competitive manner, right? It just depends how much interface value add stack goes on top of that device. It's a memory stick obviously, we're not going to compete with Samsung and Micron and we're not going to use those things. But there's a good opportunity for us and we view it as a complementary market.
Joe Yoo from Citi. I wanted to revisit the long term margin guidance. I guess one of the reasons why you previously had a 400 basis point range was to consider the severe price fluctuations during demand cycles. But given that prospect of better supply and pricing discipline fall in consolidation, is it could you consider a world where the fluctuation is less or gross margin could be narrower?
I don't think Joe, I don't think now. I mean if the world were a more stable place, yes, sure. But what's volatility in the market right now? Betas are off the charts. I mean, volatility is high.
I just I think it'd be irresponsible to do that in the macro environment that we're in. Do we think of our business in a more narrow range? Do we try and yes, of course. But I mean, I'm not going to sit here and say that it's going to always be in that range. It's always going to be at the midpoint of that range.
The reason we give a range is because it's a range depending on circumstances. The to be. And that's driven by the demand for storage, where the industry's ability to ship to is and consolidation allows for better demand supply alignment. That will result in a better margin structure. How much better we'll see?
That's a function of how well does the industry behave itself? What does Toshiba do? Is there macro growth? What if there's another recession? Come on.
You tell me the answers to all those things, I'll tighten up the range for
you. Jason Nolan with Baird. Thank you.
I wanted to ask about the mix shift from mission critical to business critical, high cap nearline drives with cloud community. What are your expectations? And can you drill a little deeper on the economics of a high cap nearline drive drive sold to a cloud provider?
No different. No different. I don't even know that needs to be distinct. There has to be a distinction between it going forward. I mean, if you really believe in cloud build out in public and private in their infrastructures that are being used for enterprise level computing whatever that means that can mean a look at what was the thing I just read the other day that Berkeley ran a DNA sequencing thing on AWS, right?
What is that? Is that an enterprise thing? Is that some lab thing? I don't know. I mean, it's all the same.
That's my point. The infrastructures are basically colliding and they're going to be leveraged across all these different applications. I think the delineation between what's a near line drive and what's an enterprise drive is basically going to go away. If you answer your question, the margin profile is essentially the same. If it uses more heads and disc, it's good for us.
Yes, thanks. Aaron Rakers with Stifel.
Hey, you already asked a question.
I
did. First half.
A lot of questions on gross margin and actually tackle the OpEx side. You talk about plus or minus $400,000,000 I'd love to understand given the variations in the demand TAM, how much of that cost structure would you characterize as being variable in nature? And how quickly can you flex that up or down depending on whatever demand presents itself?
You can flex it down really quickly once you make the decision. It's just the question of whether or not you want to cut. And you wouldn't do that unless you felt that there was some sustained pressure on your OpEx. I mean, obviously, again, kind of given our model, covering 400,000,000 dollars a quarter in OpEx is
not a challenge.
If the world's changed dramatically and it was a sustained change, the second we make that decision, it gets cut. Seagate is not unable or doesn't lack the tools to figure out how to cut OpEx from $400,000,000 to $352,000,000 or $336,000,000 or whatever it needs to be. But I don't think that needs to happen. I think the $400,000,000 look, we always look for efficiencies. We're doing a lot of things to drive better business processes.
Dave mentioned logistics. I mean, look, there's a lot of things that obviously we wanted to reduce our and we try to every day. But in terms of whatever that good efficient baseline is, can you cut it by 10%, fifteen percent quickly? Yes, you can cut it really quickly. The question is, but when you do that, it's going to take you a little while to recover it if you decide all of a sudden you need it back again.
And so it's but it's yes, it's something in terms of flexing up, obviously, they're going to get interesting question. And it's probably hard too just because people are enough good people to hire and the disciplines that you need them. And this is back to one of the earlier questions. As it relates to our R and D investment, it's a challenge. I mean, it's a challenge to find the engineering resources that we need to find on a global basis to keep doing what we're doing.
And that's something that Bob and I think a lot about. Dave thinks a lot about it because a lot of engineering goes into the process side as well. So flexing up in some ways might be a much harder challenge than flexing down.
Quick follow-up. The enterprise discussion on the SSD side, you talked about 2015. Your closest competitor last week talked about being a PCIe SSD vendor as well. I would love to hear your opinion on that market. Is that also 2015?
I think it's an important interface. Yes.
I think PCI is definitely an interface that a lot of people are using. And if you're going to be in the SSD market, you probably should have that product offering. Interfaces don't matter to us. People get all hung up on it, oh my God, fiber channel is SaaS. We don't care.
I mean, it's a chip. It's writing to some media. I mean, that's not what we do. We can if that's the interface people want, great. We'll write some code to make it a PCI.
It's not a big deal. But I do think that'll be a I think PCI is going to be interface that a lot of people use and want and we'll have a product that addresses that. That will be more important.
Yes. Great. Thanks. Bill Shope, Goldman Sachs. You've obviously given us a lot of color on demand trends over the next few quarters and the client being the greatest source of near term pressure.
How are you thinking about enterprise demand trends? And looking at this given quarter this particular quarter right now, did you see incremental pressure on the enterprise, obviously, cyclical pressure?
I never think about looking at a quarter and making some prediction about what that means. I think in general having been someone that's been way more embedded technically on the enterprise side than on the client side. I'll say what I said earlier. This change to cloud is bigger than client server in terms of the implications for anyone that's dealing in the enterprise environment. And I mean that in positive way for the drive industry because you're lowering the cost of computing, you're not lowering they're not after us.
The driver is really cheap. I saw something the other day, I think it was another AWS ad, they're really good at marketing. A penny a gigabyte per month, right? It's cheap, right? A penny a gigabyte per month.
That sounds cheap to me. Penny is not much money and gigabyte sounds like a lot. That's $0.12 a gigabyte per year. We deliver HDDs at $0.06 a gigabyte. So you're renting something for 2x what you can buy it for.
No, no, no, because you can't buy it at $0.06 a gigabyte, right? EMC can and HP can. You can. What happens between $0.06 $1 software and services, are you kidding me? That's under attack.
And maybe the $0.06 goes to $0.05 and we hope so because guess what, then people use more of our devices. It's that dollar that's under attack and that will happen. And by the way, EMC is doing it themselves as is HP, as is everybody gets to joke. The question is who are the winners and losers. But at the end of
the day that lowers the
cost of computing, which is good for us. So I think the more you bring that cost down to the real hardware and the true value of the software, guess what deployment goes up. And I think this is bigger than client server. So we're pretty excited about it on the enterprise side. So my answer is, I think for whatever goodness happens out of the client side with NAS devices and all that stuff and thin in lights and hybrid drives and 5 millimeters, I think what happens on the enterprise side is bigger.
With that in mind, if we look at the enterprise over the next several years, you obviously have one key competitor there you're focused on. How do you think about the sources of competitive advantage and what Seagate can do to have a longer term?
Look, they're a great competitor. I mean IBM, really who that is, is a really good disk drive company. IBM and Seagate were the 2 best disk drive companies in enterprise and Hitachi continued that heritage. Whether or not WD does or not will be interesting to see maybe by Steve now running the company maybe it makes it more likely versus less in terms of the operating philosophy. Seagate's broader, has been broader.
We do more form factors, we do more spin seats, we do more interfaces. We have way more SKUs to support our customers. But they're really, really good at what they do. And that makes us better at what we do. This world is plenty big enough for BMW and Mercedes and Audi now.
And that new Audi is really nice. So I don't worry about them. I want them to be competitive. People ask me before that merger went through, did I hope it go through or not? And you could tell that the answer was the answer they were looking for was implying that I was going to say whatever was the weakest result was what I wanted.
But it isn't. I wanted it to be the strongest result. I mean, we had a great competitor in WD on client that made us do things every day smarter on client. How Dave runs his factories? What's on our product roadmap?
What are they same thing with Hitachi and Enterprise. They made us do things better every day because of how good they were in Enterprise. If by putting those 2 companies together they get stronger that's really good for Seagate because it means it's like any of us who play sports. You want to play the person who's really, really good, not the person that you can beat every time because they bring out the best in you. If you don't believe that, well, none of you would be in the business you're in if you don't believe that, right?
It's your business is all about competition. My yield is better than yours, right? So I think it's going to be interesting to see if that's a stronger company together than apart. I think that under the regulatory rules that they're operating under for the next 2 years that's going to be a challenge because they can't get the leverage that they really want whether or not it's technically or operationally. We're not going to presume that's the way it's going to stay.
We maybe view that as a window that therefore we can even get more advantage that when they do get together we're that much more competitive. But look, they're going to be a good competitor going forward and we're prepared for it. I think it's going to be a good head to head competition. Yes.
How do the buyback and share count targets change with changing stock price? Is the plan to get it down to those share count levels irrespective of where the stock price is?
I think of it more in terms of multiples. I mean, look if enterprise value to cash flow multiple stays super low, then you just keep buying the stock. If they go high, then yes, maybe you slow them down. But I'm not really worried about the equity market running away from us in the next 2 years. So my guess is that probably just keep buying.
That's a fair question.
We're at like 4 times today, we really said. But I think if you're at
6 times, then that's I always think of it in terms of financing, right? If you can finance debt at whatever rate, maybe we'll be like Switzerland pretty soon, we'll be able to finance that negative 2%, wouldn't that be cool? Look, if you can finance reasonably at 5 percent or 6% or whatever that Seagate's rate would be today, and people are looking at coverage ratios of 8 times, then I kind of think that's where your breakeven is, right? If you're starting to get valued more than that, and that means you can't really finance debt with that, which is how I think of it from a balance sheet perspective, something like that, 2x where we're at today. So like I said, I think we got the runway.
In terms of dividends and buyback? Yes.
Yes.
Yes, we did. We know your opinion. You wrote about it. The no. And Yes.
And I think as you saw in Pat's chart, you see the transition to that. I mean, the ratio between last year's to this year's is definitely shifting towards dividends. What Pat didn't show was kind of a long term philosophy, whatever that means. No, but I mean long term I think the philosophy is well, no, no, no. No, he said minimum 10% growth.
And he also said and witnessed that we've done step function changes between now and then. So you guys always try and boil it down to just one thing that isn't what we said. He said minimum 10% as a model. And don't forget, we do step function things. Let me answer your question.
I question. I think that where the Board is at and by the way this is the Board's job with all of your input. And there's a lot of diversity and input about whether or not you do buybacks or dividends or management bonuses. That's a really small percentage of the shareholders that are voting for that. I think where we're going to end up is probably around a 40% to 50% payout rate with 80% of that dedicated to dividends.
Okay. So no, it doesn't look like we're doing it today. Why? Because of your thing. Because at 3 times cash flow, are you kidding me?
Because if I take those shares out, I get there faster, right? Because I don't even have to increase the payout ratio when I can get $2 a share, right? If I'm down to 2.50 1,000,000 shares. So I think it's just where we're at right now. We're not you and I do not following disagree about this, how you return that capital the best way, when the people capitalize, what rate, blah, blah, blah.
But right now, because the disconnect is so big on valuation versus cash flow, I'd rather reduce the equity base so I can raise the dividend rate without increasing. Yes, exactly. Well, exactly, which is what we did last year, right? We had basically 100% 100% trial measures. So I don't think we're that far off.
In the back?
I just have two quick questions. On the tax rate, what should we be assuming for a
tax rate over the next few years?
Tax rate, I tend to look at it more as a fixed income. If you're looking at the model, I'd put anywhere $6,000,000 to $80,000,000 in your model. $20,000,000 a quarter. Yes, dollars 20,000,000 a quarter.
Perfect. And
then my next question regarding increased aerial density slowing down and warheads and platters increasing, typically the largest driver of gross margin for you time has been the ability to take out components. And now it sounds like we're going to be entering a stage with increased component costs. Is that a significant gross margin challenge, especially on the enterprise side? And how should we be thinking about that?
No, I think it's back to this question of unless you have gross margins that tell you to deploy that capital so you can maintain those margins, you're not going to do it. That's what our customers need to start understanding, right? That the reason that this new model is what it is and that you're not going to run back to whatever it was when there was a different aerial density to petabyte growth relationship and a different industry structure is because that's what you need in order to make those heads and disc.
And the component cost will come down.
Yes, component cost comes down in all those models substantially. But you're adding more heads and disc to get to the again, someone's I mean, we have customers saying give me 20 terabytes under 1 spindle. No problem. I can manage it now. 3 years ago, people were saying I can't manage more than 4 terabytes under a spindle.
But that there's been a huge breakthrough in terms the software capabilities. So but that net net long term that's a really good thing for Seagate. That's absorbing heads and disc capital, which is what we want to absorb.
And then one other And I'll
tell you where it gets tricky, Dave alluded to this. The first place it's going to get tricky is media, because the first shortage isn't going to be drives. The first shortage is going to be media. Media plants are expensive and they got long lead times. So how far into the shortage are you before you say, okay, I'm going to build another plant?
That's going to be an interesting question. Then the second big break point is probably actually Slider before wafer even. Slider. The Slider and then wafer. But those are decisions that have literally they have at least a year of lead time if you have the greenfield picked out.
So it's when the shortage comes, I say it's going to make the flood look like a hiccup, because it's not something that's going to get resolved by rebuilding your supply chain really quickly in 6 months. These are long lead time capital deployments if you have a building ready. And so what are we doing? So we're thinking about ways that don't require buildings to be ready. We can do it more incrementally.
Okay. Yes. Technology Insights. Western Digital announced last week that they will be coming out with helium filled drive. Can you talk about what are you guys expected to do that?
It's time all day for someone to ask the question.
Well, can you talk about when you expect
It's a radically new technology. We were blown away. We have I mean Bob scrambling to see what we can put together. I'm sorry, I'm supposed to be polite. Okay.
We've been building helium drives for 20 years. We've got most of the early patents on it. We use helium every day in our production. We don't given the technologies that we have to deploy, we don't see that as certainly can do it. I mean Bob has a funny story about
it. Yes.
I probably shouldn't go down that path.
No, go ahead. It's a good story.
Well, actually the biggest thing is the cost. You got to get all those strings for David to tie it to the so they don't float to the ceiling. But no, seriously, I think Steve's point is just that we've had a lot of experience with helium. We certainly know the benefits. There's increased costs for doing it.
There's technology changes that you have to make. And at this point, it's just not something that we need to do. If we wanted to, we could definitely deploy it down the
road.
The follow-up to that is, so the 3.5 inches technology to run out problems, that's not going to be an issue without needing to have them permanently heal being filled. Is that correct from your view?
We don't see that.
Right, right.
Yes, if you look at
it, they announced a 7 disk, 1 inch drive and you can do the same or you can do air technology, current technology without using helium on 6 disks. So it's about a 16% capacity improvement to there's lots of ways to go solve that equation. You can for example, I've mentioned earlier that we're going to ship shingle magnetic recording this year. That's over 16% just but firmware without changing the whole chemistry of the drive, without having to go to radical seals, without having to go to super thin disk. So there's other ways to get at 16% capacity.
So but if we wanted to down the road, we could go implement that.
Yes. Okay. 1 in the back. Yes.
Almagashi with Credit Suisse. You quickly touched on your M and A strategy. So as you look forward to entering the enterprise business space by 2015, how do you view build by partner?
Question, sorry, I think I got it was in with respect to SSD, how do we view partner buy or make for SSD? I think it's the relationship between the media provider and the drive provider, our knowledge of on the enterprise, our knowledge of workloads, interfaces, test that provides a lot of value and then you want to be able to leverage whatever controller technology that you have to go as deep into the silicon as possible. The deeper look that you have into the cell structure gives you the best ability to have those devices not burn out. And that's what our partnership with Samsung is about. I don't see there being any dramatic change to our partnership with Samsung.
We picked Samsung because we believe they're the best long term player in developing that silicon technology. And they were willing to basically show us their secret sauce of what's going on at the cell level. I don't think there's going to be a big change in that. Can you see technologies that you may want to buy or invest in? Dents fits is a great example of that.
That's technology that we felt that 1, we felt that they were pretty far down the path of solving some interesting technical issues that if they're successful and will make a big difference in what kind of silicon you can use and we wanted to have rights and ownership to that technology.
I would say there's really three factors at how we look at the SSD SSD market. The first one being defensible technology, the second one is getting time to market and the third one getting time to scale. So we look at all three of those factors and figuring out how we're attacking the sector. And I think our decisions all support that kind of priority stack.
Yes. I wouldn't I don't foresee any big changes in that strategy. It'll probably most be partnerships, maybe some investments and then continue to develop the program that we have that we feel pretty good about.
Two questions. 1 in terms of how to think about market share over the coming year. Seagate experimented with auctions this past year. If you could update us on how you're thinking about that and how the LTAs as they expire will play into market share? And then the second one on SSDs, if you could sort of look at strengths and weaknesses between say a flash provider and Toshiba which is really coming from both the solid state hard drive side and then a Western Digital or Seagate coming with the hard drive side in terms of who's got what advantages?
Well, I think like I said, I think if Toshiba if I were running Toshiba, you'd think that between leveraging the Fujitsu enterprise capability and the Toshiba wafer capabilities that you could have a pretty compelling offering in enterprise SSD. So I think that'd be a good area for them to focus on. Then you have to decide how are they going to do competitively against Samsung in the fab world and their lineup looks pretty good. I mean their linear density roadmap is pretty compelling. I think in terms of WD and Seagate, well, Hitachi more than WD, if you meant the old WD then that would be a really easy answer.
Hitachi because of the Intel partnership, I think clearly has very good product today. They have good traction. They have good engagement with customers and I'm sure they'll leverage that. And for us, it's Seagate and Samsung. I mean, we decided to say the leading enterprise player should be with the leading silicon player and together we should be pretty successful.
So I like our odds. Like I said, I think by 2015, twenty 16 we'll be the leading supplier in that space. But it's going to be a competitive marketplace. Or there's some more questions, I think. Yes.
Again, I talked about the long term agreements. The long term agreements, even though you all wanted to think of them as things like share lockup things, they were more about, again, engaging words, the relationship is formed. So I don't see any big shift in market share because LTAs do or don't expire. By the way, we have LTAs that go for 2 years 3 years. We also have people just re up their LTAs for 1 2 years.
So they're not these things that were that are like is kind of defined as I think investors want to believe they were. They're really good contracts for us and they were really good contracts for our customers. And I think that's what people would understand that when the smart customers realize that the ability to have access to this technology became very important to them when there was a sudden supply disruption. So they don't want to get caught in that trap again. So embedded in our belief that we can hold 42% market share plus or minus is our knowledge of what our agreements are with our major customers regardless of whether or not that's documented as an LTA or not.
So yes, that's included in that thinking. Auctions, I don't know if we're doing any more auctions. I mean, Rocky should talk about auctions the most. I mean to us it was another test of how we get product to market and I think we're going to continue to develop the concept. We may use some different vehicles to
do it. But, yes, we're still experimenting with it. Yes, exactly what Steve said. We think it's an interesting channel for sales and we're going to continue to research and develop it. And some quarters we're going to do things that are meaningful impact and some quarters it will be a learning experience, but we're pretty committed to continuing to develop the platform.
Time for what one more, if there is one more.
We don't have any planning horizon with say that we would do that. So when we look going to dividend, we're just saying it's a fixed charge. And so we I guess if we couldn't fund our product portfolio or deploy capital as we need it, then you'd have to look at that. But it's right after that and with supporting our debt. So it's I don't see a scenario in our planning horizon that we would cut that.
Yes. When we established the dividend, we're definitely establishing it with the mindset that it's there or better going forward, which is why we stay away from the one time dividend thing. I think to me, I'd rather there's a lot of interesting debates about what happens if you win the WD thing and all of a sudden there's like $700,000,000 that you didn't have yesterday, do you dividend that out or not? I think we'd probably just say this is just more capital that we could then sustain the dividend growth that we don't ever have to backtrack on. That's for the Board to decide.
But the philosophy is when we set our dividends, we're setting it to be there or better based on everything that we know. If the world cratered, of course, if you're saving the company, then you save the impressive. And I really appreciate it. We appreciate your support. We're very impressive.
And I really appreciate it. We appreciate your support. And we look forward to developing a relationship further. Thank you. And everybody gets what how do I what's my pitch?
You can give the pitch.
Yes. As you walk out, please look for people that are handing out one of our lessee products called I'm a key.
Thanks everyone. Thank you.