Welcome to conference call to discuss today's announcement by CJ and Samsung. Later on the call, CJ will also be discussing its fiscal 3rd quarter 2011 financial results. My name is Chanel, and I'll be your coordinator for today. At this time, all participants are in a listen only mode. Following prepared remarks, there will be a question and answer session.
As a reminder, this conference is being recorded for replay purposes. This conference call contains forward looking statements, including, but not limited to, statements related to the company's future operating and financial performance in June 2011 quarter and thereafter. The company's ability to generate free cash flow on a sustaining basis, the company's dividend policy and include statements regarding customer demand for this drive and general market conditions. These statements also include statements regarding the transaction described in our earlier press release announcing a strategic amendment, the expected benefits from the proposed transaction, the financial impact of the proposed transaction of the Company's financials, the Company's ability to continue the top rolled transaction the satisfaction of closing conditions pertinent to the confirmation of the proposed transaction the Company's execution with respect to integration and the timing of closing of the proposed transaction. These forward looking statements are based on information available to StuGage as of the date of this conference call, but 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.
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 on Form 10 ks Form 10 ksA and quarterly reports on Form 10 Q as filed with the U. S. Securities and Exchange Commission on August 20, 2010 October 6, 2010 November 3, 2010 and February 3, 2011, respectively. These forward looking statements should not be relied upon as representing the Company's views as of subsequent date and CDK undertakes no obligation to abate or remove consent to reflect events or circumstances after the date's release. This conference call should be considered in conjunction with the press release we issued earlier today.
Our press release and in this call contains non GAAP financial measures. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non GAAP financial measures are useful are discussed in our press release. Production solution of our GAAP to non GAAP items posted on our website at www dotseagate.com. I would now like to turn the conference over to our host, Mr. Steve Lusso, CEO.
Please go ahead.
Good morning and thanks for joining the call today. On the call with me from Seagate are Pat O'Malley, Seagate's Chief Financial Officer Bob Whitmore, our Chief Technology Officer and Head of Research and Development Dave Mowgli, Executive Vice President of Operations Rocky Cimentel, Executive Vice President of Worldwide Sales and Marketing and Tim Mastaroni, our General Counsel. I will focus my remarks on our strategic thinking and the benefits of the Samsung transaction and Pat will address the transaction details and the financial implications. As you have seen from our press release, in addition to discussing the strategic relationship we have handed to the Samsung, we will also use the later portion of the call to review our fiscal Q3 2011 financial results and our outlook for the fiscal Q4. We will not be hosting our previously scheduled call this afternoon.
To begin, I'd like to express my sincere appreciation to all of the management employees and advisors who have worked so diligently over these last several months to structure these transactions and agreements. Through a series of transactions and agreements announced today, Seagate and Samsung are significantly expanding and strengthening our strategic relationship by further aligning our respective ownership of, investments in and sharing of key technologies. By aligning in this way, we expect to achieve greater scale and deliver a broader range of innovative storage products and solutions to our customers, while facilitating our long term relationship with Samsung. The elements of the relationship, each of which I will speak to in more detail, include Samsung combining its HDD operations into CD extending and enhancing the patent cross license agreement between the companies A NAND flash memory supply agreement under which Samsung will provide Seagate with its market leading semiconductor products for use in our enterprise SSDs, solid state hybrid drives and other products. A disk drive supply agreement under which Seagate will supply drives to Samsung for its PCs, notebooks and consumer electronics.
Expanded cooperation between the companies to co develop enterprise storage solutions. Samsung receiving significant equity ownership in TD and a shareholder agreement under which an executive Samsung will be nominated to join Seagate's Board of Directors. The combined value of all of these transactions and agreements is approximately $1,375,000,000 which will be paid by Seagate to Samsung in the form of 50% stock and 60% cash. The primary objective of our new relationship anchored by these agreements is to enable both companies to better align current and future product development efforts and roadmaps, accelerate time to market for new products and position the companies to better address rapidly evolving opportunities in a variety of markets, including mobile computing, cloud computing and solid state storage. Specifically, we will be able to optimize the resources of both companies to advance technology on behalf of our customers.
This will increase our responsibility to customer needs, accelerate the adoption of next generation technologies, speed innovation and allow customers to benefit from important technology transitions. In addition, through the mutual supply agreements that are part of our strategic relationship with Samsung, Seagate secures an important source of leading edge NAND flash supply as well as early visibility into the development of next generation NAND technologies. This will be very valuable to Seagate as we continue to execute on our executing on our strategy of developing SSD and solid state hybrid product offerings. These agreements also position Seagate to be a more significant supplier of disk drives to Samsung for their broad offering of products. Once this transaction is complete, Samsung will have a significant ownership position in Keygate and the right to nominate an executive of Samsung to join Keygate's Board of Directors.
This further underscores the high level of alignment between our company and positions Samsung to benefit along with Seagate's other shareholders from this enhanced relationship as we execute together in the future. The key aspect of the agreements that I want to highlight is that we are acquiring only those elements for Samsung's HDD operation that Seagate needs in order to achieve greater scale and efficiency. Together with Samsung, we have been thoughtful in identifying the assets, infrastructure and people that we need to drive scale and innovation, which we expect to be able to leverage to enhance our future products and accelerate innovation. Elements of the HDD operations that we do not need will be retained and redeployed within Samsung. Because we have structured the transaction this way, we do not anticipate significant restructuring costs and we expect to achieve significant reductions of overall operating expenses for the combined businesses while maintaining the integration costs and distractions by minimizing the integration costs and distractions that have been associated with other transactions historically.
To help us accomplish a smooth transition and minimize distractions and disruption, as well as restructuring charges, a number of support and transition functions will be temporarily provided by Samsung 2 Seagate. We will be focused on achieving a timely closing of all elements of this enhanced strategic relationship. We anticipate that to provide IT, cross licensing agreements and the NAND supply agreement will become effective this quarter. The other elements, including the acquisition of Samsung's HCV operations, the equity investment by Samsung NCD and HCV supply agreement will be driven by the regulatory approval timetable. For those elements, we are targeting closing by the end of calendar 2011.
With that, I will turn the call over to Pat. Thank you, Steve. First, to summarize the key terms of the transaction, we believe that the consideration is structured in a way that is optimal for both parties. Under the terms of the agreement, Samsung will receive consideration consisting of 50% Seagate Organized Shares and 50% cash. Upon closing, Samsung received CD8 organic shares valued at $687,500,000 Specifically, we received 45,200,000 shares or approximately 9.6 percent ownership of Seagate based on Seagate's 30 day volume weighted average stock price prior to signing.
Samsung will also receive 687 $500,000 in cash. The amount of cash paid is consistent with CBIC's balanced capital deployment strategy, which also encompasses the recently declared dividend, ongoing share repurchase and recent debt type refinancings. I'd like to emphasize that the $1,357,000,000 represents the value of all the elements of this transaction, including HDB operations, cross licenses and supply agreements. However, even if you just consider the HDB operations alone, which are capable of producing 18,000,000 units per quarter, this is a highly effective use of capital and aligns with our overall capital deployment strategy. We expect our capital budget to remain at a level we've had discussed previously of 60% of revenues going forward.
During calendar 2010, Samsung's HDD operations shipped approximately 66,000,000 units and had $3,100,000,000 of revenue. We anticipate that some rebalancing by customers may happen in connection with this transaction, but we will be focused on maximizing revenue retention. We expect that any revenue attrition will be mitigated because Samsung's customer base, which includes a significant volume of distribution channel customers, has a relatively little overlap with Seagate's customer base. In addition, the supply arrangement with Samsung will enable continuity of demand. So we are confident that we can manage and limit revenue attrition effectively and achieve an attractive return profile.
As a result of the transaction structure, Seagate expects these transactions and agreements to be meaningfully accretive to non GAAP earnings per share and cash flow within the 1st full year following the closing. With that, let's now shift to the March quarter financial results and the outlook for the June quarter and then we'll open up the call for Q and A. As we have done now for the past several quarters, we have posted detailed supplemental information about the quarter on our Investor Relations website. Seagate reported revenue of $2,700,000,000 and non GAAP gross margin of 19.2% for the March quarter, north at the high end of our January forecast. The Company also reported non GAAP diluted earnings per share of $0.25 per share.
Earlier this month, CIGA announced that the Board had approved a quarterly cash dividend of $0.18 per share. The establishment of the quarterly dividend is an important milestone for the company as it reflects the strength of our balance sheet and the strong cash generation ability of our business. Additionally, it demonstrates the confidence that the Board and the management team had in the Company's ability to generate free cash flow on a sustained basis. No change is anticipated to this dividend policy in light of today's announcement. During the March quarter, we repurchased 49 point 5,000,000 shares for approximately $405,000,000 This leaves approximately $1,600,000,000 remaining under existing share repurchase authorization and we anticipate no change to our authorization program in light of today's announcement.
We expect to maintain a sufficient cash balance that will enable the company to respond quickly to changes in market dynamics, take advantage of unexpected opportunities and provide flexibility for future investments and growth. The goal of our capital structure strategy is unchanged. To maximize shareholder returns, while maintaining the flexibility to invest in a broad range of storage technologies to serve our customers. Turning to the June quarter outlook, the impact of the Japan earthquake and tsunami in marshes is still affecting the PC supply chain and in particular is constraining supply of hard disk drives due to specific component shortages, power issues and transportation issues. Seagate has not been materially negatively impacted by these issues to date.
While we do not anticipate component shortages directly attributed to the tragedy in Japan to impact Seagate, We are closely monitoring this situation. As of now, we expect this situation to be volatile for several months. As such, we are planning for a June quarter industry TAM to be flat to slightly down as compared to the March quarter. The June quarter outlook does not include the impact of restructuring activities, future mergers, acquisitions, financing, dispositions or other business combinations the Company may undertake. The Company's policy is refraining from commenting on any such activities.
As a result, the outlook for the June quarter is approximately $2,700,000,000 OpEx is flat to the March quarter, a tax rate between 3% 10%, diluted earnings per share is expected to be in the range of $0.19 to $0.23 per share. We are now ready to open the call to questions.
Your first question comes from the line of Arren Ranchers of Stifel Nicola.
So first question for me is,
I understand that you guys are talking about
the dividend and share repurchase. How do we look post this deal? How does the balance sheet, how does the capital structure look? How much debt are you willing to put on the balance sheet? Just kind of any framework of how we should think about that?
I'll give a brief answer and then Pat, you can fill in. So as indicated, the deal is really the whole transaction is actually being financed with cash from our balance sheet that we currently have as well as equity. And I think with the cash generation capabilities of the company, we certainly feel that the transaction can be financed in that manner and not change any of the elements with respect to the dividend or the long term buyback program that we've had in place. That being said, we're not commenting on any future financing we might state as a not necessarily as a course of this transaction, but just as a course of our normal balance sheet management. Pat, do you want to?
Yes. Steve, the only thing I'd add is today we're $2,900,000,000 We also have structured debt due in October with this transaction. We're comfortable with both coming off the balance sheet, but we're also very comfortable with the level of debt we have today.
Okay. And then as a follow on, I think you referenced $18,000,000 is kind of the capacity that Samsung offers. I think there's some stories out there or some indications out there that Samsung does leverage TDK a portion of their hard drive business. Can you say how much TDK, is TDK included in that $18,000,000 number or is that just the capacity that has been the manufacturing capacity within Samsung?
Right. So I'll answer the question. And no, the 18,000,000 units from the 3,200,000,000 is representative of the total output of Samsung that they achieved all through the relationship with TDK SAE as well as the optics that they own and operate directly.
And how much do they how much is of that PDK?
Well, we're not breaking that out, but we're basically having access to both of those assets. Okay. And then
final question for me is on your guidance. Are you assuming in your preliminary results, you talked about distribution inventory levels running below the targeted range. Is your guidance assuming any replenishment at all of distribution inventory levels? And if you can tell us what those levels currently stand at? And that's
a final question. Thank you. Okay. I'll answer part of that. I'll ask Dave Mosley probably to answer the other part of it.
I just think in terms of what might happen during the quarter, it's very fluid right now. The supply situation is constrained and therefore, ability to drive inventory levels to what might be considered more normal levels would probably be difficult. So Dave, do you want to add anything to that? We're not anticipating any significant replenishment. We finished below our targeted 4 weeks, but from our perspective, things were in the channel were lower than what we expected, But a lot of that was the strength of the last 5 or 6 weeks of the quarter.
So I think it's really hard to forward forecast given all the disruptions we talked about.
Okay. Thank you.
Your next question comes from the line of Ben Knightis of Barclays.
Yes. Thanks a lot. Steve, can you talk a little bit more about Samsung's earnings potential? You're saying it's accretive, could be meaningfully accretive. Any numbers around that?
And in particular, what are Samsung's gross margins? And then I have a follow-up. Yes. I'm going to
let Pat answer that in more detail, but we're not prepared to talk about specifics on the earnings model. That's a lot of work to do in the interim period. And of course, we're also subject to regulatory conditions in terms of the type of work that we can do with Samsung until the transaction is approved by various regulators throughout the world. But based on what we know and what the opportunities are around leveraging the infrastructure and the fact that it's a pretty capital light operation that we do believe will be meaningfully accretive. Do you want anything else to comment on?
Yes, I think you're absolutely right, Steve. We're largely into the infrastructure they have. We certainly get scale with their own components, further scale with their own components. And as Steve said, the what a very asset light business that would be hitting very well of our strategy that we can leverage more and their operating expenditures, we certainly could lever that. So we see many vectors of leveraging this.
We fit very well in our structure that within the 1st full year, we expect this to be meaningfully accretive.
Okay. But in terms of gross margins going forward, I think it's pretty well known that they're not given their lack of enterprise exposure, etcetera, it'll be meaningfully below where you're at now. And so with lower gross margins, we still get you, at least in the beginning, we get you meaningfully accretive.
Okay. And you take taking that on the construct of what their scale and leverage was. I mean, they were very as a design team, very, very efficient. They just didn't have scale and leverage. Now you put that in our business, you can't take their gross margins as they're operating today and lay them into our financials because we're going to get scale out of theirs, which they lack.
They don't lack design capabilities or manufacturing capabilities. They just lack scale.
Got it. Well, that's helpful. Thanks. And just a little bit more on pricing. Can you talk about on the industry with regard to the quarter in your guidance, Steve and Pat, What happened with pricing towards the end of the quarter?
It sounds like there was a surge in business. It sounds like distributors, especially looking for product in case there's a shortage. And can you talk about what pricing did specifically and how you see pricing in the June quarter? That would be great. Thanks a lot.
Okay. Yes, I think
the quarter, it wasn't a surge in demand due to a concern about supply. I mean, there is constrained supply. And a lot of the Porsche pricing negotiations with our OEMs had already been concluded prior to the disruption in the supply chain. And of course, the channel is more typically a spot market and is basically evidence of the supply demand tightness right now, although the pricing has turned relative to where it was.
And into June? What were your expectations of pricing? Again, I think as we indicated
in the call, we expect that the supply situation is going to remain sustained through the June quarter. Okay. Thanks a lot.
And your next question comes from the line of Katy Huberty of Morgan Stanley. Thanks.
Good morning and congrats also on the deal. First, as it relates to the joint development and partnership with Samsung on SSDs, does this actually accelerate time to market of a much more strongly competitive SSD solution in enterprise? And what's your latest thinking as to when you'll have a very competitive product in the market in that space?
Well, I contend that we have a competitive market product today, but I'll let Bob and Dave talk to that more explicitly. But I think as it relates to what we consider our 3rd generation product, which is the one that we're developing as piece of silicon with Samsung and then utilizing their NAND flash. It doesn't accelerate the timing of that. That product program is on schedule and I'll let Bobby speak to that. I think we've given updates on a couple of calls.
But I do think it does address an issue that customers have raised repeatedly as well. They have a lot of confidence around the capabilities of Samsung and Seagate to which we've designed the flash management engine leveraging our capabilities at the channel and interface and controller level and of course Samsung in terms of the deep biology of silicon. There's always been a little bit of a concern about without a formal supply agreement, what was the whole package going to look like. So the specifics of that agreement are subject to NDA, but I'm pleased with where we ended up in a I think just a little bit of inclusion to that entire strategy. Dave, do you want to add anything?
I think so, Will.
I mean, Rob, do you want
to talk to the timing? No, I think you said it.
I think the engagement with Samsung is longer term and currently we're in qualification with our SLC product, SaaS SLC product. We just you'll see in the supplement that we just announced our MLC based SSD, which will be coming into production shortly. So those 2 are unchanged. And then as Steve said, the real strategic engagement will happen on the 3rd generation.
Okay. And then on the quarter, the $26,000,000 increase in WIP and raw material inventory, was that a strategic decision post the Japan earthquake? And is that what is driving your confidence in being able to get the components you need for June? Or is that confidence driven by conversations you've had throughout the supply chain or a combination of both?
Yes. That was a follow-up. I'll take the last part of it. Issues related to the Japanese earthquake and tsunami haven't directly impacted in terms of component availability. That being said, obviously, this major transportation hub is damaged, the major power grid is damaged.
There's a lot of human loss, so all the implications I think are still to develop. So we have tended to have very deep and broad supply chain. It may be one of the reasons why historically some of our cost of goods may be higher than some of our competition because we tend to keep multiple sources and maybe sometimes never at that maturity cost with that. But I think in this particular case, the relationships with that supply chain are certainly benefiting us relative to some other people that are in the P and C supply chain. Dave, do you want to talk specifically to the inventory issues?
Yes. Katy, I think you said it you talked about the earthquake and tsunami as the trigger. I think that's probably not the right way to characterize it. We believe the demand in March was pure demand, real demand, and then it's actually extended somewhat into April. And so the staging of the WIP and the raw materials is all about staging for that early month 1 demand.
I think there will still be the volatility all the way out through June and that's the thing that we made reference to before relative to the supply chain disruption.
Okay. And then just lastly, Pat, I think you've said that the earliest gross margins to an uptick would be the September quarter with the new desktop products planned to be launched. With the industry consolidation and the tightness we've seen over the last several weeks, is there a chance that, that changes? And there's some potential upside for June? Are you still thinking about the back half as when the earliest that gross margins could
Yes. I'll answer that, Katie. I mean, with respect I mean, there hasn't been any industry consolidation that these transactions are all still pending and everybody is still competing against each other like they normally would. And I don't know what the indication is on the coming Visa Tasi transaction. I think it was anywhere from 4 to 12 months and we've indicated we believe this will be some time before the end of this year.
So that aspect doesn't really change anything and I don't think we'll change anything post transaction. I think though that, as I indicated, there does a security of supply demand imbalance right now that's related to component shortages that are impacting various people in the supply chain and in particular in the supply chain. And that could have an implication of firmer pricing and depending on how bad those dispositions get, that is in tech margins right now as you can tell. We're not actually predicting anything like that. That's why I don't have anything.
No, I agree, Steve. I mean, we've been focused about the new products. That's what's going to drive it for us. These other ancillary items, as Steve said, maybe opportunistically, but this year is all about driving the product transitions. They're going to have a sustained ability to hold the gross margins higher.
So that's number 1. And of these other opportunities, as Dave didn't see that echoed, we are in a position to take advantage of them, but it is going to be volatile. So we want to be flexible on that. So I think we're still just focused on driving our cost structure for the new products that will maintain it for a period of time.
Okay. Thank you. That's it for me.
And your next question comes from the line of Rich Poggins of Needham.
Thank you. Just a couple of questions. I guess first, in terms of Samsung, can you give us a sense of what their mix was versus OEM versus channel? And then secondly, in terms of the quarter, is it fair to say then, just to summarize some
of your comments, that
your lack of impact from the component availability is leading to the opportunity for you to pick up maybe some share over the near term. And does that affect has some of that share been as well leakage from Hitachi WBE a little early? If you have any color from the OEMs on that side?
So, Rich, I think, examining this answer to the second question first. I think that I don't know that it has anything to do with leakage from an unannounced transaction. I think it's more related to the relative impact that the component shortages have had at all of our competitors. And we have seen a lot of upside from a lot of customers and we've been able to respond to so many and of course we need to manage our overall production as well given the fact that our cost factories are getting near capacity as well. So I don't know that I could say that it's leakage because of the Hitachi WB transaction as much as on the supply chain.
With respect to Samsung OEM channel, I'm not going to touch specifically to it other than to indicate obviously we have a large OEM customer in the form of their own company on the PC side and other computer related products and consumer products. And then they also have a channel business that's very interesting. There's not a lot of overlap, as it turns out, between the Seagate customer base and the Samsung customer base, particularly in the channel, they have some very unique access points to markets that we think we can learn
a lot from. Okay. Just one last one on Samsung. Is the $688,000,000 worth of stock, does that vary as the stock price, if it were to rise, would you assume less shares or
is that a fixed share volume? No, it was a fixed share volume that was based on the negotiated transaction value of 1.275 but it had a 30 day average on the calculation on the shares. So that share count is now fixed.
Okay. Thanks very much and congratulations. Yes. Thank you.
Your next question comes from the line of Amit Dhanjani of RBC Capital.
Yes, thanks. Good morning, guys.
So let me just ask you, if you look
at it on a longer term, do you think the combined entity would have a different longer term gross margin target than what Seagate has independently had?
Pat, do you want to answer that question? I'd say at this stage, we would certainly not move away from it. Obviously, they don't have the enterprise business, but what we think we could pick up the scale and drive cost savings, we would, at this point, not move away from that. We'll continue to evolve that story, but our intention is to drive just keeping our targeted margin 22% to 26%.
Got it. And then
just for March quarter, yes, can
you just talk about what drove the strength
in the quarter? Was it the OEMs trying to build up inventory towards the end of the year, end of the quarter? Or was it more broad based end demand that you saw?
Dave, I'll have you answer that question in a second. But I think just one thing also on the benefits of the Samsung transaction. I mean Pat mentioned scale a couple of times. I think it's important for everyone to realize though that Samsung is a very capable designer and producer of hard disk drives and there's a lot of technology ownership that Samsung has, both on the design side and on the production side. But we believe we'll be able to bring elements of that over to our entire operation and give the leverage across our portfolio.
I think it's important that it's not just about a mass number of scale, but there is that's a very confident group that's been in business for a long time making certainly a material amount of disc drives and there'll be benefits that we can leverage across our whole company and hopefully reduce costs and pass those savings on to our customers. Dave, do you want to talk to the kind of the demand elements in the March quarter? Yes. I'd just say relative to the linearity, January and February were fairly slow and that followed I it was fairly broad based demand. I think that the OEM band distribution was fairly well represented in March.
And I think some of that trends continued into April as there were a number of supply disruptions, I think even earlier in January to various chains that have caused people to pull back a little bit in January February.
And just finally, if my looks at June quarter gross margins are turning down. Could you just
confirm that? And if so, what's driving it? Pat, do you want to add that? Yes, they're going down as much as we feel very comfortable where we're at in April. Steve and Dave talked about the volatility of this.
I mean, what we're modeling is for a historical June quarter. We certainly think there's potential upside to that. But given the nature of the supply chain where it's been impacted, we are just modeling for lack of any other reason just for historical given the dynamics in the whole business model today. So yes, it would be modeled down because of the approach we're taking to forecast. Fair enough.
Thank you.
And your next question comes from the line of Scott Brink of Bank of America Merrill Lynch.
Hey, thanks. Good morning. Steve, maybe from
a long term perspective, there's a lot of consolidation going on in the industry, obviously. So how do you think the margin structure gets affected for the industry longer term? Is up a couple of 100 basis points a reasonable assumption given everything that's going on? And then secondly, do you
guys foresee any regulatory issues going on with
any of the transactions that are pending given the top two players are going to have a fairly significant market share here? Thanks.
Yes. I think with respect to the second one, no, we don't anticipate regulatory government. We'll be working with the regulatory agencies in all of our land jurisdictions to get the transaction approved as constructive and we're confident that we can do that. I think in terms of margins going forward, I think the important thing about the industry consolidation is, honestly, it's more about creating business models that can fund the technology going forward that our customers need. I think as a result of a lot of issues, the demand for storage is accelerating.
The petabyte growth is very strong and really has been over the last 6 to 8 quarters even in an economy that for the most part has been pretty lackluster. The petabyte growth ship driver and drive industry has grown and at very high rates, higher than historical rates. And this is against a backdrop of an aerial density service actually slowing, where at that portion of the S curve where basically the technology gains that we can get out of the current levels of technologies are getting more and more difficult. So that means in order to address that pipeline growth, either a lot more investment has to go into the fundamental technology to accelerate aerial density and if that can't be achieved at a different level and current generation of technologies, then the only way that you can really provide that storage required is with more heads and disks, which of course has a big capital budget to it. So I think the consolidation is really reflective of the needs of the industry to make an investment in capital and technology to continue to provide these devices that are in such huge demand.
And, oh, by the way, the demand is probably accelerating as a result of all these wonderful viewing devices that basically are putting very rich content in front of people and therefore that content, which is very rich in terms of its density has to be stored in that storage. It has to be underutil and discharge because of the cost and the density of that technology. So even though that end viewing device may or may not have a disk drive on it, everything that's up and down the food chain to pump it through that little beautiful window needs to be stored in that kind of rotating door somewhere. All that being said, mobility, cloud, commercial deployment of enterprise computing in Asia, there's just a big demand for what we do and how we continue to deliver it in a way that allows our customers, whether or not they're consumers or enterprises, ours, assistant integrators, to do that as competitively as they have for the last 30 years. And I think it's more about stability of a business model to make those investments as opposed to necessarily the gross margin structure changing or increasing.
Thank you.
Your next question comes from the line of Bill Shope of Goldman Sachs.
And I think we're just going to take one more because we're I think we're getting close to market opening, if I'm not mistaken.
Okay, great. Thanks. I'll just do one question here.
Assuming the deal closes, can you walk through how
we should think about your longer term procurement strategy? And in particular, how we should think about your sourcing of internal versus external components?
Yes, I don't think that there will be any good changes. And again, I think
Seagate has a strong relationship
with many of the same suppliers that Samsung does. And it's our expectation that we would look to actually strengthen those relationships as a result of these transactions. So I don't think that there's going to be any fundamental change in our long term strategy. Dave, do you want to add anything to that? I agree.
That almost shifts flyer by flyer.
Okay, great. Thank you very much. So we
can Janelle, sorry, I meant we could take one more. It looks like we've got just a few minutes here.
Okay. No problem. Your next question comes from the line of Sherry Stifman of Deutsche Bank.
Hi. Thank you. I guess I squeaked in there. I wanted to just ask about your CapEx plans going forward. I think on the call, you mentioned that you didn't have any changes to your CapEx plans with the transaction.
But I'm curious, with the Samsung acquisition, does that mean you're getting additional capacity and you don't feel you need to add anything this year? Do you think you'll need to add capacity for the second half of the year? Just wanted to get a sense of what you're thinking about.
Yes. Thank you.
Yes, once the transaction closes, we will have capacity that was coming over from Samsung and we would certainly intend on utilizing that. And I think the message should have been not that our capital budget has kind of changed, but as a percentage of revenue, we'll still expect that to be in the 6% to 8% range. The Samsung operations have been very capital efficient. So there's an advantage to us in terms of not having to take on a lot of capital that's expensive or depreciated or not depreciated. It's a very capital light model that they have to produce as many units as they produce.
We'll be able to leverage that and obviously over time absorb it into an integrated manufacturing organization. And overall, I think we can still hold capital budget for about 6% to 8%.
Okay. And so is the idea that if there is some overflow potentially, you use TDK to manufacture those cards. Is that kind of the thinking?
You know, again, we're not going
to talk to specific arrangements, but, again, we're postposed. We don't see any sudden changes to the relationship that stands on hand.
Okay. Great. Thank you.
Okay. I'd really like to thank everyone and we're sorry that we had to shift the call at the last minute, but I'm sure you can understand it has been a complex and moving transaction that we're pleased to conclude and therefore, as part of the open today. I want to thank all of the Seagate customers and suppliers and employees in particular for their effort over the last quarter and we look forward to speaking to you again next quarter. Thanks very much.
Ladies and gentlemen, that concludes the presentation. Thank you for your participation.