Good afternoon, welcome to the Seagate Technology fiscal fourth quarter and year-end 2012 financial results conference call. My name is Melanie, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Kathryn Scolnick, Vice President, Investor Relations. Please proceed, Kate.
Good afternoon, welcome to today's call. I'm joined today in Cupertino by Seagate CEO, Steve Luczo, and CFO, Patrick O'Malley. Dave Mosley, our Executive Vice President of Operations, is joining the call from our Singapore offices. Other members of our executive team are traveling today and will be unable to join the call. We've posted our press release and detailed supplemental information about our fiscal fourth quarter and year-end 2012 on our invest relations site at seagate.com. During today's call, Steve will review highlights from the June quarter and provide the company's outlook for the fiscal first quarter 2013. After that, we'll open up the call to questions.
As a reminder, this conference call contains forward-looking statements, included but not limited to statements related to the company's historical and currently anticipated future operating and financial performance in the September quarter and thereafter, and includes statements regarding customer demand for disk drives and general market conditions. These forward-looking statements are based on information available to Seagate as of the date of this conference call and are subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties, such as global economic conditions and other factors, may be beyond the company's control and may pose a risk to the company's operating and financial performance.
Information concerning additional factors that could cause results to differ materially from those projected in the forward-looking statements is contained in the company's annual report, Form 10-K and Form 10-K/A, as filed with the U.S. Securities and Exchange Commission on August 17th 2011 and August 24th 2011, respectively, and in the company's quarterly report on Form 10-Q, as filed with the U.S. Securities and Exchange Commission on April 30th 2012. These forward-looking statements should not be relied upon as representing the company's views of any subsequent date, Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made. I would now like to turn the conference call over to Steve Luczo. Please go ahead, Steve.
Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. As Kate mentioned, we are in two locations today. Pat and I are in Cupertino, and Dave is in Singapore. We've just celebrated the 30th anniversary of Seagate Singapore operations. It's been an honor to be such an important part of the business transformation of this leading industrial country, and we thank all the employees, community members, and government officials who have played such an important role in Seagate's overall success. Seagate's fourth quarter and year-end results reflect the overall strong operational performance by the company and our commitment to returning value to our shareholders. In the June quarter, we achieved record revenues of $4.5 billion and record shipments of 66 million units, which represented an approximately 42% market share.
We had very strong profitability, with non-GAAP net income of $1 billion and diluted earnings per share of $2.41. Non-GAAP gross margin was 33.6%. Fiscal 2012 revenues were $14.9 billion, with non-GAAP net income of $3 billion and non-GAAP diluted earnings per share of $6.75, and non-GAAP gross margins of 31.7%. We also achieved record operating cash flow of $1.4 billion in the June quarter, and we returned over 90% of our operating cash flow for the quarter to shareholders in the form of dividends and share redemptions. As further evidence of our commitment to returning value to our shareholders, and as a reflection of our confidence in the company's future, we announce today that we have raised our quarterly dividend payout 28% to $0.32 per share.
For the fiscal year, Seagate generated over $3.2 billion in operating cash flow, of which we returned over 85% to shareholders through dividends and share redemptions. We ended the quarter and the fiscal year with approximately $2.2 billion in cash, restricted cash, and short-term investments. We are on plan to reduce our share count to 350 million ordinary shares outstanding by calendar year-end 2012. Assuming market and macroeconomic conditions and the company's performance and valuation metrics are similar to what they are today, we plan to reduce our share count to 250 million ordinary shares by calendar year-end 2014. Given the assumptions stated above, we expect that we will continue to increase our dividend payments in a meaningful manner while continuing our redemption plan over the course of the next several years. We achieved many of our goals in the June quarter and set records in revenue and unit shipments.
There were, however, a few areas where we did not perform as expected, which we highlighted in our preliminary results announcement a few weeks ago. I'll discuss the dynamics of the quarter and our thoughts on the business outlook for the September quarter and fiscal year 2013. Looking at our overall business activity in the quarter, we executed on our OEM agreements, and we resumed more typical volume shipments to the channel and retail markets. Overall unconstrained demand was lower than we expected going into the quarter. Against this demand profile, industry shipments have ramped to the point where supply and demand have come back into balance earlier than we had believed at the start of the quarter. The company is encouraged by its performance in transitioning to the next-generation technology across its entire portfolio. We believe Seagate is leading in technology transitions in all product categories.
As a result, our inventory is comprised primarily of the newest generation products. In our enterprise business, we had a strong year-over-year growth reflecting demand for cloud infrastructure build-outs and enterprise storage. Our shipments to cloud applications grew faster than the market, increasing 70% year over year. Offsetting some of this strength in the quarter was an isolated supplier issue in one of our mission-critical products that impacted our enterprise business. From an operations standpoint, it was a unique problem that required a thorough and timely investigation in order to determine the root cause. Given the nature of the problem, which was a particle contaminant coming from a supplier 3 levels down in the supply chain, determining the root cause was a challenging endeavor. Once we identified the issue, we were able to switch to an alternate supplier, and we resumed shipping the product within the June quarter.
Despite our efforts to solve this issue quickly, the time we were out of the market impacted enterprise sales by approximately 1.5 million hard drives. As a result, our earnings were impacted by approximately $0.48 per share. We recognize the fact that an issue like this requires additional engagement with our customers to regain their confidence. Given the overall strength of our enterprise portfolio, we are encouraged that we will recover market share with our mission-critical customers. In our client business, desktop unit shipments were relatively flat sequentially, and our share decreased marginally to 56%. Our notebook drive sales were up 12%, resulting in nearly twice the sequential growth of the market due to the strength of the seven-millimeter product line and the successful ramp of the Samsung product line.
Our consumer electronics and retail businesses achieved sequential growth, and during the June quarter, we made an important investment in our retail business with the proposed acquisition of LaCie, known for its premium external storage business. The overall breadth and depth of our hard drive product portfolio leads the industry, and we are aligning our technology roadmap to broaden our ability to provide customers with hybrid and solid-state products that leverage NAND flash technology. To facilitate this effort, we announced today that Gary Gentry will be rejoining Seagate as Senior Vice President and General Manager of our SSD business. Prior to rejoining Seagate, Gary was General Manager of Micron's enterprise SSD business. In the fall, we will be introducing our third-generation client hybrid drives, which will be in the seven-millimeter form factor. We will also be shipping demonstration units of our enterprise hybrid drives later this calendar year.
We are encouraged by our engagements to date on this product, as several OEMs have requested exclusive access to this technology. In addition to the enterprise SSD products we are shipping today, our technology partnership with Samsung has progressed on plan and has resulted in a highly competitive Tier 0 product. We expect to be shipping customer test units of this product at the end of this quarter. To further deepen our SSD capabilities, we made a strategic investment in DensBits Technology, and we are also jointly developing a next-generation solid-state controller technology with DensBits that is focused on breaking through current cost, reliability, and performance benchmarks in the client and enterprise markets. We continue to believe that hybrid drives and SSDs are an important complementary technology to HDDs.
We are confident in our approach to these markets, where we leverage our customer relationships and technical capabilities and focus on building core technology with strategic partners to produce best-in-class devices and solutions. Turning to our September quarter outlook, we believe that the industry is operating with supply sufficient to meet demand. We continue to monitor several key indicators in the market, including macroeconomic dynamics, overall PC demand, product mix, growth in tablets and smartphones, the upcoming release of Windows 8, and the numerous thin and light product initiatives. Based on current planning indications from a broad base of customers, we are approaching the September quarter conservatively, focusing on supply-demand balance, and are currently aligning our business for relatively flat demand sequentially and continued improvement in the average capacity per drive shipped.
For the September quarter, we expect to maintain market share, achieve revenue of approximately $4 billion, deliver gross margins exceeding 30%, and have operating expenses that remain relatively flat. At this time, we believe that December quarter's addressable market will improve for the September quarter. These conditions would put us on a path for revenues of at least $17 billion in calendar 2012 and exiting the year with margins above 30%. For fiscal 2013, assuming modest market growth, we are planning to maintain market share and deliver at least 25% annual growth in non-GAAP earnings. With respect to our capital structure and priorities for cash, as previously discussed, we expect to continue to enhance shareholder value through dividends and share redemptions. Seagate is well-positioned in the current environment. We look forward to updating you on our vision and strategic plan at our investor meeting on September 21st.
Melanie, we are now ready to open up the call to questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press *1 on your touch-tone phone. If your question has been answered or you would like to withdraw your question, you may press *2. Please press *1 to begin. Our first question comes from the line of Steven Fox with Cross Research. Go ahead.
Thanks. Good afternoon. Two questions from me. First of all, on the lost $0.48 during the quarter around the enterprise problem, can you just talk about more details in terms of how quickly you expect to recover that share and how it would flow through the next couple of quarters? Secondly, any details on capital spending for the full fiscal year? Not just the dollar amount, but what you're going to be spending it on would be helpful as well. Thanks.
Well, we'll give you what the dollar amount is. I don't think we want to competitively tell people where we're deploying our capital. Dave, I'll let you handle that in a second. With respect to the $0.48, Steven, I think an issue like this, clearly, we need to, like I said, rebuild confidence with our enterprise customers. I think some of the good things are is, we caught what was a very difficult problem in an extensive stress test, and we were able to really protect the vast majority of the field from the problem. That being said, I would expect that it's going to take us at least a couple or three quarters to regain the market share that we would typically see across our enterprise product line. Dave, you want to talk about capital?
Yeah, I can. I think as a relative percentage of revenue, Steven, we'd be about the same level that we were last year. I don't really see any reason in today's economy to be ticking it up. We're through most of the product transitions. We've still got some technology transitions going on that force us to buy new capital, but we won't be adding significant capacity with the economy where it is right now. That's the way I'd characterize it.
Yeah, Dave, if I could echo that. Actually, if you look at our historical model of 6%-8% capital, we've talked about taking it below that, and we'd be below that range for next year with the outlook at Seagate. We're monitoring very tightly, and as Dave said, he could position it if there's needs for growth, but we're down much lower.
Just a quick follow-up, Steve, just to make sure I'm clear on what you're saying about your outlook. It's all predicated on that you're comfortable with the current levels of market share you have now and going forward, X the problem you had in the enterprise.
Well, I'd always like more market share. I'm not sure what you mean by comfortable, but we believe that the market shares that are in the industry today. Look, we've talked for a while of a 43/43/14 or a 42/42/16 kind of split between Seagate, Western Digital, and Toshiba, with Hitachi and Samsung obviously still operating as either fully or semi-autonomous units at Seagate and WD. 45/42, could those shift by a point or two? Yes. I still think that that's the general market share splits. On the 66 million units, the million units of lost enterprise isn't a huge market share issue. Obviously, in terms of revenues and profits, it was very difficult. Yeah, I think overall, that's where the market will settle out.
Great. That's very helpful. Thanks so much.
Thank you.
Our next question comes from the line of Aaron Rakers with Stifel Nicolaus. Go ahead.
Yeah, thanks guys, for taking the questions. Two questions if I can as well. Steve, when you talk about the guidance and you say $4 billion roughly in revenue, looking at that on the basis of what you're telling us on the shares and the gross margin line, I guess what I'm trying to figure out is it seems like you're implying as much as a high single-digit sequential blended ASP decline to get close to that number if you keep your share trends on a flat TAM. I'd like to understand a little bit in the context of where you're seeing pricing going right now and how you're factoring that into your assumptions over the calendar 2012, but also looking out for fiscal 2013. I do have a follow-up.
Yeah, pricing has remained relatively benign. I think the issues that you have to think about are mix more maybe than pricing and how mix relates to pricing and AUP. With the pricing overall being relatively high compared to pre-flood, a lot of the OEMs have mixed down in order to preserve the budgets that they have going towards storage. It's one of the factors that we're still learning a lot about in terms of what happens with different price moves at different capacity points, and how does that result in volume changes, and how does that result in AUP changes. Price erosion is one measure, but AUP is another. We try and think about AUPs that aren't hopefully falling at very high rates. Of course, one of the ways you can prevent AUPs from falling is by having mix-up.
Those are what we're continuing to model with our customers in order to help them achieve what they're trying to achieve, is also maintaining the kind of benign environment we have. It's fairly consistent with the outlook that was given by WD also in light of, I think, a September quarter that right now is a little bit vague from the OEM perspective. We want to make sure that we're cautious in terms of what the OEMs are seeing, and I guess we'll hear more about that in a month or so when two of the biggest OEMs report.
Okay, great. As a follow-up, Steve, clearly you've made an appointment on the SSD side. You've invested in DensBits. Can you talk a little bit about your strategy there? Do you think you have all the pieces of the puzzle as it relates to SSDs? As it relates to DensBits, when do you expect products to hit the market from that investment that you've made? Thank you.
Yeah. To answer the first part first, yeah, we feel, like I said in the script, we feel good about the approach we're taking for a market that today hasn't been terribly attractive from a profit perspective. We've kind of consistently said that in the enterprise, we view this as a 2015 market where we want to be significantly engaged, and I feel like we're still on that path. Our work with Samsung has really progressed very well. We feel very good about the performance of the controller that we developed with them, and we're getting really quite good feedback from the test beds that we run, which we run at enterprise HDD grade, which is quite a bit more stressful than what a lot of the SSD companies run.
I do feel good about the path that we're on, and our path, like I said, is really leveraging our customer relationships, leveraging a lot of what we know about enterprise-class storage and enterprise workloads, and then complementing that with significant technology. If there's technologies out there that we feel are going to be important going forward, that's something we investigate, typically in a partnership manner as we've done so far. DensBits, I think, is really an indication of what I would say next generation. It's really about a controller technology that has the potential for significantly reducing the overall cost of the flash in both enterprise and client applications. We're hard at work with them. We haven't disclosed yet when we expect to deliver a jointly developed technology, but we'd probably be talking to that more specifically in the September analyst meeting.
We feel very good about what we've been able to achieve, both with the investment and technically where we think we can go with DensBits.
Great. Thanks, Steve.
Thank you.
Our next question comes from the line of Ananda Baruah with Brean Murray. Go ahead.
Hey, thanks guys for taking the question. Steve, too, if I could, I guess just real quickly on the September quarter guidance, what types of ASP declines do you have baked into the guidance right now?
Pretty marginal.
Okay.
Less than 5%.
On a like for like basis.
ASPs.
ASPs. Yep. Okay, great. Thanks a lot. Then just the second one for me is, to get to the share count, I guess, of $250 million exiting calendar year 2013, I think you said, I'm going to paraphrase, something like a stable or normalized kind of environment. Can you give us, I don't know, a little more sense of what that might feel like? Would something like this feel like that environment with a little slight growth in the TAM?
End of year 2014, calendar year 2014, not 2013.
Sorry about that. 2014. Yep.
Yeah. I think what I said was assuming market conditions and company performance similar to what we're experiencing today.
Great. Thanks a lot.
Yeah.
Our next question comes from the line of Rob Cihra with Evercore. Go ahead.
Hi. Thanks very much. I guess I'll ask two questions, too. That's the norm. First, just on Samsung, if you can give us a view into, I don't know, whether contribution in terms of percentage of units or just where that integration stands. Then secondly, just keeping with the flash discussion, you guys historically have obviously been the biggest proponents of hybrid drives, but if you look at the interest that's building in just using a small flash cache module plus a drive, where do you see that demand shaking out versus hybrid? Do you think that's an interim step, or do you think we'll literally end up with three setups, drive only, full hybrid, and then in between using a flash cache plus a drive? Thank you.
Yeah. Thanks, Rob. On Samsung, just quickly, operationally, we were integrated really at the end of December. The March quarter, from an operations perspective, we were fully integrated. From a sales perspective, it's a separate entity. Everything that's revolved around the customer interaction, product planning, order, pricing, commitments, roadmaps, that's all a separate team, and that would continue to be in place under the requirements of MOFCOM through at least December this year, depending on whether or not the agreement with MOFCOM terminates at that time or not. It's integrated as much as we can, and it's operating well. We don't break out separately the unit volumes of the Samsung product line. On your question on hybrid and flash cache modules, not to discredit any other great technology companies, we believe there are certain performance advantages to a real hybrid device.
We still believe that that's got some performance characteristics, both in terms of endurance and absolute performance that are better than other alternatives. My guess is, yeah, it's a world where you'll see lots of different implementations of how flash presents itself in a system. Even with people calling things hybrid drives that maybe we wouldn't call a hybrid drive, i.e., you could stick some flash in between the DRAM on a rotating disk and call it a hybrid. If you don't have the algorithms that we've developed over the three or four years to optimize when and how you cache, both on rotating media as well as on the silicon and do error correction code. There is going to be a lot of different flavors out here.
Again, for us, I think the benchmark that we've tried to establish in our portfolio, whether or not it's on the client side or on the enterprise side, is maintaining or bettering HDD performance, which is a technology that is robust and has stood the test of time on workloads. I think it's one of the biggest challenges of flash, obviously, is write performance and write endurance, especially as you get to smaller linear density or newer technologies that have to be compute grade. It's one thing to dump something down on a memory stick, and it's another to be really maintaining your corporate data in it. That's where we think we bring a lot of value add to the equation.
Yes, I think there will be all sorts of different versions, not just three, but we're primarily focused on hybrid and full SSD along with HDD at this point.
Great. Thank you.
Thank you.
Our next question comes from the line of Keith Bachman with Bank of Montreal. Go ahead.
Hi. Thanks very much. Steve, I wondered if you could take a crack at inventory for the industry, including your best guess at the OEM, and how that makes you think about the potential growth of the market in the December quarter. Any color there would be great. Thanks.
Okay, Keith. Well, I was just going to say no. Since you said in the December quarter, Look, I think you're on the point, which is that the industry, I think, has to be very cautious about maintaining supply-demand balance this quarter, particularly in light of the macroeconomic conditions, potential issues around our fiscal cliff, and then weighing that against an opportunity in the December quarter that we're actually pretty bullish on, primarily driven by Windows 8. It's just something that we're going to watch very closely and probably go into the quarter fairly conservatively in terms of build and inventory management. I think it's important to recognize that in the case of Seagate, I'm not saying it's not the case in WD, it's just not my position to talk to them. We're really running full on now with all of our new technology transitions.
Across the portfolio, the products that we're building are products that we'll be building for a couple of years at least.
Right.
Therefore, the management of the inventory is important, but we never kind of feel bad that we're stuck with some "stale technology" or stale product. It's something we're watching closely. Where do I think people are? I think it's hard to say right now. The June quarter is always a tough quarter, then you flow into July and August, which are slow, then September usually is very strong. I think it's just something that we have to keep an active engagement with our customers on and make sure that neither us at the component level or they at the systems level get too out of balance. Obviously, we all have vested interest in doing that.
Okay. Let me just, one clarification, if I will. Steve, did you say mix would improve in the September quarter? I thought I heard that.
Yeah
Yet on Aaron's comment, it's just hard to reconcile ASPs going down as much as implicit within the guidance with mix improving, perhaps I misheard it.
Yeah. Again, I don't know that it's any different than what the other industry competitor has said. Average capacity per drives flattened in the December quarter, in the March quarter. They picked up in the June quarter. Thus far in this quarter, the average capacity per drive does seem to be improving. I think it's really an issue of where does ASP end up? Where does TAM end up? To your point, how much inventory rebalancing is there? Again, we want to be conservative. If it turns out that the TAMs are bigger or the inventories are going to be replenished, we can easily chase upside.
Right. Okay, thanks guys. Appreciate it.
Easier to chase upside than it is to reduce output once you've built it.
Yeah, fair enough. Thank you.
Yeah.
Our next question comes from the line of Sherri Scribner with Deutsche Bank. Go ahead.
Hi, thank you. I was hoping to get your thoughts, Steve, on inventory growth going forward. I think you commented that you expect for your calendar 2014 guidance or fiscal 2013 guidance that you expect modest unit growth. If we look at the flat TAM guidance for 3Q, it looks like units declined 10% year-over-year. I'm just curious what type of modest growth do you think there is going forward, and does it worry you at all that 3Q is down that much?
No, it doesn't worry me in light of the macro conditions that we're in and in light of maybe what some delayed purchases around Windows. I think that the kind of 5%-7% unit growth number that industry analysts are putting out there seems to be the right number for how the world feels right now. You could be here the third week of September and things could be a lot better or a lot worse depending on what's going on with the macro conditions. I'd say right now growth is probably a good thing, period, relative to what a lot of other companies and industries are facing.
The fact that September is down or flat seems pretty consistent with what most technology companies are saying, which is they feel like it's a bit of a lull, but they're still fairly confident about December and the first half of 2013. Now obviously flat relative to what a normal September would be, you could argue is down 5% or 7%, right? I think that's a reflection of what we read in the newspaper every day. It's not like there's a lot of great structural decisions being made by the leaders of the world. Maybe when those people start getting their act together, then we can get some better growth.
Okay. Well, hopefully that will happen soon. Then I just wanted a clarification on the fiscal 2013. I wasn't sure if that was EPS growth of at least 25%. Does that also include buybacks in that assumption?
Yeah, it's EPS growth.
Okay. That includes your buyback plans?
Yes.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Rich Kugele with Needham & Company. Go ahead.
Thank you. Good afternoon. Just two quick ones. One on technology. In terms of the enterprise hybrid hard drives, do you see others in the industry supplying that as well? Looked at it another way, do you think the OEMs will require multiple sources for that, or do you think you can go for a while as a single vendor?
Well, no, I don't think again, Rich, if the type of hybrid drive we're talking about, no, we don't think that there's anything competitively in the marketplace, just because of the amount of time that we've spent developing the technology around our hybrid drives. It's been going on for four or five years, really. In terms of the OEMs, since we've had OEMs that have asked us for exclusivity, I would say that it would be really obnoxious for them to ask for exclusivity but require redundancy. I think they'll probably get over that heartache. The performance on these drives and certain attributes that certain segments require is pretty impressive given the dollar investment relative to a pure SSD. It's a pretty exciting opportunity, and I think people will feel quite comfortable. Probably half of our portfolio, we're the only company that provides right now.
It's not like we're not sole source to a lot of our customers in the enterprise. Most of the small form factor SAS products we're really the only supplier of right now. That's something that they're pretty comfortable with.
Then in terms of inventory, since the flood, the industry's had some pretty good visibility by directly shipping to the OEMs or their manufacturers, and moving away from hubs. Is that still the case today? Are the hubs being used?
It's kind of getting modified, I'd say. Dave, you can answer the question about what our direct shipments were over the course of the quarter. Rich, overall, I think, again, most of our customers, certainly the biggest and most sophisticated ones, are focused on velocity of inventory, as opposed to, if you will, cost of product. I think a lot of them learned that lesson of saving $0.50 on a drive is not nearly as impactful as the velocity of getting a product through that generates $500 to $2,500 of revenue. If there's any issues around reestablishment of inventory, if you will, regardless of who owns it in the hub, I think that there's been a lot more focus on doing that in a way that increases velocity. It's not concerning to me. Dave, do you want to answer the first part of that question?
Well, I think you said it, Steve. The only thing I'd add, Rich, is that it's not just about the velocity, but it's also about seeing the demand and making it as predictable as possible just so we make sure we have the right stuff in the right place versus filling up the hubs and having too much there. From a quantitation perspective, we're not nearly to the service models that we had before. There are some hubs that are open. Specifically for some customers, there's reasons why we haven't opened the hubs, and we're still having a really successful model develop after the floods. Velocity and this demand predictability and fulfillment predictability.
The inventory that's on your balance sheet in terms of finished goods is more a reflection of the new normal as opposed to stopping production for the last two weeks or something like that?
That's a good way to think about it, is that maybe in the past it would've been largely in hubs and now it's largely close to the back doors of our factory.
Okay, great.
Dave, percentage direct shipped June quarter?
Yeah, still over 80%.
Okay, that's helpful. Thank you.
Our next question comes from the line of Scott Craig with Bank of America. Go ahead.
Yeah, thanks. Good afternoon. I was hoping I could get a little bit of context around gross margin for the September quarter, and maybe what some of the positives and negatives are there, and how close to that 30% level you kind of expect to be, because I know you said greater than 30%. Then just secondly, Steve, with around the December number, it seems like if you just back out that $17 billion, you're looking at just over $4 billion worth of revenues. So I guess I'm trying to triangulate, you said you feel bullish on the fourth quarter prospects with a number of things going on. Obviously, you probably have some ASP reductions and maybe they'll be benign again, but just trying to triangulate sort of a flat revenue number and the sort of bullish commentary around the fourth quarter. Thanks.
Yeah. I'll let Pat answer the gross margin question. I think what we said was revenues of at least $17 billion, not $17 billion. If I stumbled over those words, since I seem to stumble over a few in the script, I apologize. It's revenues of at least $17 billion, if December plays out the way we think. Do you want to-
Yeah. The gross margin, obviously as Steve talked, there is pricing, and we view it as relatively benign, but there is pricing. The upside to take there is, as Steve said, using the pricing that we are to mix up in all product categories, whether it's enterprise, mixing up in capacity, client, et cetera. The other piece is that, with the enterprise share loss last quarter, because of the issue, we're regaining it. It's not that we're not regaining, it's just not at our historical levels. That certainly gives us opportunity for the next quarter. The last piece would be, now that these fact products are ramping pretty significantly, we're getting the cost efficiencies that will probably continue for a couple more quarters through the factory.
We got those tailwinds behind us, and of course, the one that why we put it near to the 30 and we're not talking how close is that there are macro concerns that we're just going to be very cautious about. Our goal is to exceed what we're putting out there, but we're also being very cautious. I think we have some good tailwinds behind us that we're looking forward to harvest.
Okay. Thank you.
Our next question comes from the line of Jayson Noland with Robert W. Baird & Co. Go ahead.
Okay, thank you. A question on distributor revenue first, up 37% sequentially by our math. Is that just rebalancing or is there something more going on there?
Yeah, no, it's just as we finally had product to address the channel away from the OEM agreements that we committed to, it's just giving us, like I said, the ability to kind of start shipping more typically there, so.
Okay.
They were pretty constrained, obviously, in the two prior quarters to that.
Right. With LTAs, would those still comprise 60% of calendar 2012 production, should we expect to see LTAs carry into calendar 2013?
Yes. On the 60%, I think that number is still the right number it is. We do have LTAs that extend into calendar year 2013. There may be even some that go beyond that. Yes, you should expect that they do.
Thank you.
Operator, we have time for one last question. Thank you. Our last question comes from the line of Joe Yoo with Citigroup. Go ahead.
Thank you. Thank you for squeezing me in. The first question is regarding the new products. Steve, you mentioned that you're leading the industry in the new product transitions in every form factor. Can you help us understand how this advantage is translated in either volume or profitability for the company?
As you ramp the technology, typically your newer technologies have lower cost at yield. The further down or the further up the volume curve you are, then the further ahead in the race you are on getting to the lower cost. We feel that, whether or not it's the one terabyte per disk on the three and a half or the 500 gigabyte on the two and a half or the host of products on the enterprise, those are just good technology points to be on in order, as Pat said, as we ramp those and we pick up yield, which means we lower cost.
Is it fair to assume that, if based on similar mix, your margin should be better than the competitors?
No, I don't know about that because I don't run my competitor's business. What it should say is that as we continue to ramp our volumes, we get a positive gross margin impact from the increased volume that we get from the new product. We're on the front end of that ramp. Usually once you get onto that ramp, you get some nice gross margin accretion for a couple, three quarters.
Great. Thank you. Second for Pat, you've obviously increased your dividend in a fairly short amount of time. Can you talk about your thinking behind the recent increase and maybe just how we should be thinking about future dividend increases?
The way we look at this first step function, Joe, is I think we've effectively executed what the board authorized us to redeem the ordinary shares out there, and we did that in a fairly effective manner with the tools given to us. If you take a look at just from a year-over-year with 100 million shares out, clearly the step-up is not more of a significant cash outflow. It's just representing the existing cash flow we would've given and a commitment to where we believe the valuation could be underpinned with the ongoing cash flow. That's step 1. Step 2, we'll continue to monitor. As Steve said in the script, we're continuing to look at enhancing shareholder value through redemptions and dividends.
This one was more of a step function because of what we've executed in the last year and our conviction going forward.
I think I was pretty clear of the intent of the board is to continue to increase the dividend in a meaningful manner, prudently assuming that business conditions and operating performance are as strong as they are right now. That there's a balance between how we handle that between buyback and dividends. We're well aware of all the various constituencies and lobbying about which one of those deserve priority. At three times cash flow or four times cash flow or wherever the company's trading right now, it makes sense, obviously, to reduce the equity base and then continue to increase dividends in, as I said, in a meaningful way. That's the plan.
I think in September, we'll probably be a little more descriptive in terms of how we view our payout ratio, if you will, then how we split that between dividends and buyback. Again, it's a dynamic situation, that's driven primarily as a function of company performance and valuation metrics. We're not ignoring either one of them. We think that they're both important to enhance the value to shareholders. That's primarily driven, obviously, by our operating performance. We're going to continue to have an active dialogue and hopefully strike a balance that satisfies both classes of investors that like to see a smaller share base and those that like to see a bigger dividend, we honestly think we can do both. I think we've shown that we can do both. We'll stay on the path as long as the operating performance is there.
Great. Thank you, Steve. Thank you, Pat.
With that, I think I'll just begin. On behalf of the entire management team, I want to thank our employees, our customers, partners, suppliers, and shareholders for your support and your commitment, and we look forward to speaking with you next quarter. Thanks a lot.
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect.