Welcome to Seagate Technologies Fiscal First Quarter 2011 Financial Results Conference Call. My name is Stacy, and I will be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be question and answer session. As a reminder, this call 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 the December 2010 quarter and thereafter and include 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, but are subject to a number of risks and 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 and Form 10 ksA as filed with the U. S. Securities and Exchange Commission on August 20, 2010, and October 6, 2010, respectively.
These forward looking statements should not be relied upon as representing the company's views as of any subsequent date and Seagate undertakes no obligation to update forward looking statements to reflect events or circumstances after the date they were made. I would now like to turn the conference over to our host to Mr. Steve Lusso, CEO. Please go ahead.
Thank you, Stacy. Good afternoon, everyone, and thanks for joining on the call today. Sorry about the delay. On the call with me from Seagate are Ken Massaroni, our General Counsel Pat O'Malley, our Chief Financial Officer Bob Whitmore, our Chief Technology Officer and Head of R and D and Manufacturing Operations and Dave Mosley, Executive Vice President of Sales, Marketing and Product Line Management. Also on the call today are Larry Sonsini of Wilson Sonsini, Goodrich and Rossotti and Joe Perella of Perella Weinberg Partners.
Today, we are continuing with the new format that we began last quarter and we have posted detailed supplemental information about the quarter on our Investor Relations Web site. Due to the announcement we made on October 14, 2010, concerning the preliminary indication of interest regarding a going private transaction, there are some additional requirements with respect to today's call. First, the company will not at this time be providing any additional information regarding the aforementioned announcement. 2nd, in order to comply with regulatory requirements, the company will not provide, discuss or answer questions regarding the outlook for the December quarter or any future fiscal periods. And finally, the company will not be participating in individual meetings with investors or analysts either in person or via conference call until further notice, again, due to the regulatory requirements.
Seagate entered the September quarter with the following key assumptions for planning purposes. First, that we would not see any additional slowdown in consumer spending on technology generally. 2nd, that 2nd, that we would hold the market share levels of approximately 30% with which we entered the quarter. 3rd, that we would not see attempts by competitors to shift aggressive pricing 4th, that inventory on hand would remain flat quarter over quarter and finally that the corporate technology refresh that we had been experiencing going into the quarter would continue. We did experience some additional weakness in the consumer markets, particularly in the United States and in Europe early in the quarter.
Primarily as a result of this weakness, the total available market for the quarter was approximately 165,000,000 units, which was the low end of our expectations at the beginning of the quarter. We did, however, see some early signs that consumer activity is beginning to improve in early September. Additionally, industry market share remains substantially unchanged. However, pricing remained aggressive across all of our product lines, customers and geographies. As noted in the Western Digital conference call yesterday, the week 13 industry shipments in the September quarter were represented during week 13 week 12 as compared to the level of the 1st 11 weeks of the quarter.
Dave Mosley can provide more details during the Q and A session if required. Turning to our September quarter results, we reported 1st fiscal quarter revenue of 2,700,000,000 dollars in non GAAP diluted earnings per share of $0.37 on shipments of 49,200,000 units. Gross margin of 20.4 percent was below our target range due to the aforementioned market dynamics, which impacted our ability to deliver earnings within the target range we provided at the beginning of the quarter. Our balance sheet remains strong. Cash, cash equivalents, short term investments and restricted cash totaled $2,200,000,000 Long term debt, including current portion was reduced $328,000,000 to $2,200,000,000 at the end of the quarter with the redemption of the Max store convertible notes.
Stacy, we're ready to open up the call for questions.
Thank you. Your first question comes from the line of Keith Bachman with Bank of Montreal. Please proceed.
Hi, good afternoon, gentlemen. I wanted to try to get 2 questions if I could. Could you just give your views on how much incremental inventory you guys I'm sure listened to WD last night, what's the channel look like? What's the inventory status look like as you look out across the industry? And then I had a follow-up please.
Keith, this is Dave. Inventory was below 4 weeks in the channels as we usually model and we made reference to the assumptions going into the quarter of inventory, exits being about that same level. So, we feel pretty good about that.
And what about at the OEMs?
Well, we don't have a
whole lot of visibility into JIT hubs and the like, and we've talked about that before, but we have no reason to believe that there are inventory issues.
Because I'm sure you heard WD last night say there was probably an extra 5,000,000 units that was sitting at the OEMs. It doesn't sound like you would agree with that line of reasoning.
I think what they talked about was a big shipment week in week 13 and as Steve talked about in the comments, we were underrepresented in that. So even actually into week 12, I think there is a few different dynamics going on that we see. 1 is Golden Week in China that affected that somewhat. There's also some shipments that are done within, say, some of our competitors to their mother ships, if you will, to some of their internal customers. So we're still trying to triangulate that, but what we definitely feel like is that as far as notebook in particular where we saw one of the big shipment weeks there in week 13, we were dramatically underrepresented versus what we had seen in the prior 11, 12 weeks of the quarter, even if you go back to week 12.
And then we exited with our inventory under 2 weeks going into October.
Okay. Well, I wanted to sneak one in with Pat then. On the CapEx, Pat, it was a little higher than we were thinking for the September quarter. I know you said it would be up due to some slippage from the previous quarter, but is there any color you can give us about that? And is there any comments you can make as it relates to your anticipated CapEx plans?
Yes. So, let me address that. One, the number you see of the 358 is the cash. We sort of hinted at that last quarter that what you saw coming our CapEx last quarter was a cash that bubble rollover. So just for a number that we just to give clarity, our actual receipts were only 195 $1,000,000
and
that was down significantly from plan. So we are decelerating. I won't go into the forward looking for the rest of the year, but just for the quarter, those receipts were $70,000,000 less. So we it is in a deceleration mode. So that was really the cash bubble that came through on the Q4.
Okay. Thanks, Pat.
Your next question comes from the line of Mark Moskowitz with JPMorgan. Please proceed.
Yes. Thank you. Good afternoon. A couple of questions if I could. Just want to get a sense in terms of where Seagate views opportunities for cost takeouts or the need for further investment whether it's in SSD or other adjacent markets.
I'm just trying to get a sense just given the recent announcement last week, where the LBO or the PE folks would see the value proposition line?
Yes, I'm sorry, we can't as I mentioned in my preamble, we can't reference anything with respect to any possible transaction with a private equity firm.
I guess, maybe another way to ask the question is, given the recent secular slide within hard disk drives over the last 6 months, we all know how pricing when it does slide, it can slide for a while unless demand picks up. It seems like this could last a little longer just given what we're seeing in the marketplace and also with the competitive dynamics a lot more tenacious than years past and certainly is no disk drive manufacturer who can't compete right now. Is there any sort of impetus on your part where you think that you need to accelerate investments into different markets, I. E. SSD with your Samsung announcement back in August?
I think that we have indicated that we think there's plenty of area of potential for growth in the drive industry with respect to R and D investments and whether or not it's SSD or the announcement last quarter of our hybrid drive, those would certainly be examples of that, yes.
Okay. And then my other question revolves around the enterprise business right now. Just in terms of the recent changes with Microsoft Exchange 2010, it seems like fiber channel drives do not need to be the cornerstone, if you will, for serving Microsoft Exchange environments. We keep seeing more and more SaaS and SATA drives underpinning NAS and SAN deployments. How should we think about the enterprise profit profile going forward for Seagate and for the industry?
Is it something that could be undercut going forward?
No. And again, we can't make any forward looking statements about profit pools or as it might impact Seagate.
Have you been seeing changes recently though in the mix
versus that? I think historically, we've I don't know if we've talked about or if that we'd be prepared to talk about shifts amongst our customers in terms of interfaces. Dave, is there any kind of general color
you want to add? I'll just answer it. Over the last few quarters, no. Macro trends is what we can't talk about going forward.
Okay. Thank you.
Your next question comes from the line of Katy Huberty with Morgan Stanley. Please proceed.
Yes, thanks. I wonder if you could provide your thoughts around whether you think the industry can put on the brakes around some of the CapEx orders that were put in place back in the Q4 of last year and Q1 this year. Do you think that some of that can be canceled and or pushed out enough that the industry can manage through a better supply demand environment over the near term or does that equipment have to ultimately be accepted?
Adi, this is Pat. Fortunately or unfortunately, we've been through these cycles and we've worked with our vendors. We certainly have strategic relationships with them. We try to give them long lead time, but we do push out, do cancel and manage that to get to the right size of the business. So, the industry is capable, Seagate is certainly capable and I believe the industry and Seagate have put plans in place to handle it to get the demand and supply what we believe closer in line.
Okay. And then, WD had somewhat of a negative bias as it relates to the week 13 activity into the OEMs. But if you take another view, if OEMs are willing to accept inventory, if they're doing more air freighting heading into the 4th quarter, is there maybe a more positive read that they've seen something on the demand front that's more encouraging going into the holiday period? Not asking this as it relates to Seagate, but just overall demand environment for IT?
Yes, I'm not exactly sure what the question is. I think in general, I would concur with the way that Western Digital characterized it as probably overage in week 13. I mean, that's my general read on it.
Okay. So more a function of the OEMs taking advantage of pricing, not necessarily seeing a demand uptick?
Well, I think it's a broad brush to say the OEMs. We've got a tick and tie exactly where all the units went and I think it's maybe too broadly speaking to say it's the OEMs.
Okay. Thank you very much.
Your next question comes from the line of Ben Reitzes with Barclays Capital. Please proceed.
Yes. I have two questions. First of all, could you just talk a little bit more about pricing on the client side? How was it particularly towards the end of the quarter? Why were you underrepresented in that surge of units?
Was it due to pricing at the OEM level being super aggressive? Or was there something you didn't like out there in the marketplace with regard to pricing? You could just talk a little bit more about that, the price trend throughout the quarter and why you didn't participate at the end? And then I have a follow-up for Steve, if you don't mind.
Yes. Let me characterize it a little bit differently. I mean, there may have been some deals that were done at the end that contribute to week 13 that we didn't participate in. I'd say it a little bit differently. We have line of sight to some of those OEMs that we service and those are the ones that we were tied off with pretty well.
There were a couple of other dynamics that happened. I think given some factory slowdowns in Golden Week in China, there was some natural next quarter activities that were actually pulled in because of that. Then there was actually some deals that happened and I said I made reference to this earlier before where people in some sense had to buy sell model where they shipped to other places inside of their own corporation. So it's really hard for us to triangulate back through all those things and say which contribution means what part of it. But in general, I would say that Seagate made an effort not to participate in some of those quarter end deals.
And because we've seen competitive pricing all quarter long, we realized that we don't want to do that at the end of the quarter.
Yes. And Ben, this is Pat. The pricing as you heard yesterday, you obviously see this through the financials today, we're as aggressive the whole quarter. So, not participating in pricing for a certain deal is probably not a fair characterization. We talked at the beginning of the quarter we're going to hold share, we did hold share.
I think there was not much movement in share, but we got a fair look at all business and we made what we think is appropriate decisions to maintain share and get the right coverage in each of our OEMs and distichannel partners, but it was aggressive through the quarter.
Through the quarter and not necessarily more so at the very end?
That's correct.
Then Steve, I just wanted to ask you philosophically, I mean, I got to ask it about Apple. Today they announced the 999, 64 gig MacBook Air and Steve Jobs made a comment that he thought all notebooks were going to move this way. And I think he was referencing without the disk drive. And I was just wondering is he right? Is he early?
Is he just and are you seeing any other on the mainstream PC market anybody kind of adopting Apple's curve which seems obviously as usual they're early on and early adopters. But I just wonder what you thought of that announcement and whether you thought that would change the adoption curve for the industry or if it's wishful thinking?
Well, look, I mean, obviously, Steve sits in a position that only Steve sits in, in terms of the offering that they provide to their customers and it's obviously pretty compelling. I would say though that from what we know of the offering, for example, at Apple, the percentage of their units that they sell with SSDs versus HDDs is a tiny fraction. I think it's under 3%, certainly under 5%. Obviously, this isn't the first product that they've had. I have an air book with an SSD in it that I've had for, I guess, a year and a half now.
And I think there are certain things that are certainly very nice about it and other things that are a little bit frustrating and the little bit frustrating parts are the cost and the lack of capacity. I spent a lot of time cleaning out files, so I can make room for not a lot of content to be honest with you. I think are there some users that can operate in that environment and be happy? I think the answer is yes. But I think as Seagate introduced its hybrid drive last quarter, you get basically the features and function of SSD at more like disk drive cost and capacity.
And in fact, with the additional layer of caching, we believe that downstream from a product perspective, there'll be performance advantages to SSD, whether or not that has to do with Insta non or application load or what a load looks like a year or 2 after you have your product versus the day you buy it. I can tell you that my SSD drive takes about 25, 30 seconds to boot now versus the 12 seconds when I bought it. And that's just an issue more related to OS than it is specifically to the technology. But again with the hybrid, there is things that you can do to alleviate that. So your boot times are actually as compelling 1, 2, 3, and 4 years down the road.
So, do I think that's where mainstream notebook computing is going? If that's what your question is, no, I don't. Do I think that Apple will be successful with that product? Absolutely, because Apple is successful with all their products and it's a very compelling company and a compelling value proposition within their value chain. But again, we just view it as more devices that are computing and eating data and if they're low capacity on the edge, that means you need a lot of storage piping down close to the edge and whether or not that's in a NAS box or in the cloud or in a local cloud, those are all markets that we serve.
So the more that people do creative things with computers and devices, we're all for and Steve is certainly at the forefront of that.
Okay. Thank you very much.
Your next question comes from the line of Rich Kugelian with Needham and Company. Please proceed.
Thank you. Good afternoon. Thanks for the extra detail on the 13th week. But I did want to ask Pat one question. In terms of the, I guess, the ending of the early pay discounts with the channel, did you have to come up with some other type of offset to be cost competitive, price competitive with your peers who still offer those discounts?
And did it affect gross margins at all in
the quarter? No. The well, the fact that we had extra carrying days of DSO, you could marginally argue is a low cost, but clearly what we saved on our pay was a positive financial and we didn't have to add any extra programs to offset that. In fact, we were the only one that offered it before. So, it was a, I'd say, net positive to us other than what's manifested in the DSO.
Okay. And then obviously, everyone keeps harping on the tablet angle and if we're going to go and talk about what segment of the drive universe really plays within the netbook space and the low end notebook space, you're really talking about what 250 gig and below. I mean, do you are you willing to provide a percent on how much of your business may go into notebooks? Do you have that kind of netbooks, I'm sorry. Do you have that kind of visibility?
And any comments on how we might be able to quantify the total TAM that's at that low end?
I guess, just to make sure I understand your question, Rich, this is Dave.
So going forward,
what net book capacities would be offered by the market? Is that worth a little bit? Well,
my understanding is that the maximum net book capacity per Microsoft is basically 250 gig, right? I don't know if there's even 160 shipping anymore, but 250. So you could argue that that number of netbooks have at least 250 gig, so that you can add that in and then subset of low end notebooks, what do you consider a low end notebook capacity points, like for example?
Yes. Let me try it this way. So I think we obscure a little bit what we call net book and what we call low end notebook to your point and what the capacity point is. I don't think there's a unique value proposition for somebody who has, say, for example, 250 gigabyte in the consumer device. Sometimes people will fill that up fairly quickly and other use cases they won't.
I do think that what you're seeing in the tablet space is putting a lot of pressure on innovation, thinner, lighter, power savings and to the point capacity as well to just value differentiate. I think there will be other also be low cost sensitivities there. So if you can continue with a productivity device to provide a value proposition at a price point, I'd pick a price band, if you will, that we would call netbooks traditionally and people can innovate to still provide a compelling device there, it may have capacity may have more capacity in it. And that's I think from an innovation perspective what the devices are really driving. Okay.
And just lastly on your own hybrid drives, there is a lot of interest around them. But traditionally, in order to really have a large market, you need to have multiple sources. Do you expect anyone else to launch a hybrid drive? And then secondly, would you expect to license out your code that makes it so, I guess, workable within a system?
Yes, we would certainly expect that there'll be competitors launching hybrid drives. I guess the question, Rich, is what's the nature of it? Is it just a piece of silicon between the DRAM and the disk or is it more to that? And I think that lends to your second question, which is we have a lot of IP in this area and a lot of know how and a lot of investment that's occurred over several years. And no, we're not planning on licensing that out to anyone.
We believe that's why our drives perform the way they are and what the opportunity is as we basically take advantage of some of our algorithms with some of the people that are developing OSs or applications around them.
Okay. Thank you very much.
Your next question comes from the line of Sherry Schreiber with Deutsche Bank. Please proceed.
Hi, thank you. It looks like you guys your share was relatively flat this quarter. You commented that you thought your share was flat. Western Digital thought their share was down a little bit in the September quarter. Who do you think is gaining share in the market at least in the September quarter?
I think all the data points aren't yet in Sherry. So obviously, we're watching the data that we have and then the data that was announced yesterday, but I don't think we really know all the answers just now.
Okay.
There wasn't major shifts like it was in the Q4 or Q4.
That's right. That's right.
Okay. And then in terms of OEM pricing, which was determined in September for the December quarter, would you characterize it similar to Western Digital that it was competitive and OEMs were taking advantage of the fact that the market was a little bit softer?
Yes, I think that would lead to a forward looking statement in one form or another. So we're going to avoid that one.
Okay. Thank you.
Yes. Thank
you. Your next question comes from the line of Aaron Rakers with Stifel Nicolaus. Please proceed.
Yes. Thanks for taking the questions. A couple as well. First of all, you guys had commented that desktop, your inventory in the channel was less than 4 weeks. What do you think the overall inventory looks like for the industry
as a whole? Just slightly higher than 4 weeks,
I think. Okay, slightly higher.
And in the context of you being underrepresented in week 13 relative to Western Digital, when you look at that over the average of the prior shipments for the 12 weeks, how does that compare to what you've typically seen in prior September quarters?
Sorry, Aaron, I didn't say relative to Western Digital. I said relative to the rest of the industry and we don't have very good visibility into exactly what they shipped in week 13.
Okay, fair enough. But for you guys, how would week 13 stack up to prior year's week 13 for the September quarter?
Let me just give you a quarter over quarter. In my opinion, the industry had some behaviors like this in week 13 of the June quarter. And so that was about 15% shift in week 13 in that quarter. We believe about 18% of the 165,000,000 unit TAM or thereabouts shipped in week 13 of this last quarter. Again, some of it because of Golden Week preparation and factory logistics that are going on in week 1, some of it's because everybody phased up in the first was a Friday and so everyone's end of quarter effectively became the same day.
I mean, there's little dynamics like that, but still that's why I hold to the central thesis. I just say we were underrepresented.
Okay. Final two questions. What is your current capacity in terms of production on a quarterly basis? And then if you can help me understand just real quickly the fully diluted share count decline relative to what your guidance was for the quarter?
So from a capacity point of view, I think like we talked about a few quarters ago, we're looking at a little bit higher output for these quarters. We've dialed that so that we're pretty fully utilized at the production levels that we're at. So that's what our run rate is today.
Okay. So you're effectively 95% plus utilization?
Yes, in that range.
Okay. And then the share count?
Share count is just the average price of
the stock over the quarter.
Okay, fair enough. Thank you.
Hey, Stacey, why don't we take 2 more questions?
Your next question comes from the line of Kevin Hunt with Heplim Securities. Please proceed.
Hi, yes. Thank you. I had a couple of questions actually. First on just to kind of drill down more into the gross margin, do you agree with Western Digital and that 5% like for like price declines were what occurred in the quarter? And if that's true, it seems like you still had a higher gross margin base on my math.
So can you maybe break down what other factors are contributing there?
Western Digital referenced 5% for the next quarter, not this quarter. The quarter 7, 8 dates discussed in excess of 8% for this current quarter just ended. So our pricing was Just
to be clear, WD referenced in excess of 8% for the September quarter. They talked about 5% for the December quarter. Correct.
So with that 8% ours was in that range. It was very like I said throughout the quarter. That was the primary miss of our earnings and revenue. The primary was pricing and then we expected the midpoint of the TAM for our volume. So you can from 165 to 175, we had a shortfall there of revenue and gross margin, but clearly the biggest impact was the pricing in those ranges of that WT quarter for the September quarter.
And to go back, so when you did indicate going into this quarter, you'd expected pretty aggressive pricing, so you're saying it was maybe incrementally above that, so you might have been looking, say, 5% and it was down 8% to that?
Yes, it was probably closer to 6%, closer to 8%, but yes, that was a little less than 6%, right. That's correct. Okay.
And then the second question I had was, I just want to kind of clarify and understand here on the comments about the 13th week here. So, I mean, you basically said upfront you didn't think there was any inventory. You kind of give out various explanations of why there might have been higher shipments. But I just want to make it clear, you're saying that it's not because everyone just piled everything into inventory?
I guess, we what I'd say relative to everyone piling in that inventory, I mean, we don't have visibility in the OEM inventories at all. So we only know what Seagate inventory and Seagate sell through is. Sense?
And Seagate inventory was under 4 weeks and where we can see our inventory and with respect to our participation in weeks 1213, were underrepresented versus the average for the 1st 11 weeks. We can only talk to Seagate. Right. And there was an industry dynamic that showed that week 13 was substantially higher than the average for the 12 weeks and was higher than it typically is.
Okay.
But it sounds like you I
mean, Western Digital clearly made the conclusion that, that was all in the inventory. It sounds like your conclusion is not that. Am I getting this right or?
Well, it was clearly going into someone's inventory that last week. I mean, probably it should be I
think we're making a different point. It's not our product.
Okay. But you are saying that there is potentially a lot of inventory at OEMs even though you don't have visibility to that, is that?
The inventory went somewhere.
Okay. And then I'll try this one. The last one, you said you won't comment on the LBO talk, but can you I mean, there were talks 2 or 3 months ago that you had an LBO offer. Can you maybe help us understand what legally is your client to have this whole production you're going through now versus 2 or 3 months ago?
I don't think the company ever said anything 2 or 3 months ago about any sort of transaction. I think there may have been some rumor published in a publication, which obviously the company never commented on, but the company has only made one statement with respect to indication of interest and that was the one that we made on October 14, 2010. Larry, do you want to answer the question as to the regulations around disclosure?
I think it's best that we
have no further comment on that subject.
Thank you.
Your final question comes from line of Jason Nolan with Robert W. Baird. Please proceed.
Okay. Thank you. Just two quick questions. Steve or Pat, did you cut back on production in the September quarter?
We aligned our production to hit our customers' demand. So, obviously, we were aiming for the midpoint of the TAM. We certainly missed on that element. So, we aligned our supply. You can see our terms got better.
So, I think we manage our inventory pretty well.
Okay, makes sense. And then the last question for me, Steve, you had mentioned competitive actions in the June quarter hurt the market. And I guess my question is, is the price aggression a function of competitors trying to take share? Or is it just a normal reaction to supply demand imbalance?
I think it was a combination. I really do believe it was a combination that was I think the industry lining up for TAMs in the June September quarter that didn't materialize and then certain competitors being late to adjust production and therefore the movement of the product was facilitated by price. I think the industry is doing its best to adjust to that as quickly as possible.
That makes sense. Thank you.
Yes. Thanks. All right, everybody. I'd like to thank you all for joining us on the call today. We look forward to speaking with you next quarter.
And before I depart, I want to make sure that I compliment the employees of Seagate as always as well as our suppliers and our customers. Thanks for the effort. Thank you.
We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect.