Kate Scolnick - Senior Vice President of Finance, Corporate Communications and Treasury Steve Luczo - Chairman and Chief Executive Officer David Morton - Executive Vice President and Chief Financial Officer Dave Mosley - President and Chief Operating Officer

Richard Kugele - Needham & Company, Inc. Ananda Baruah - Brean Murray Carret & Co., LLC Sherri Scribner - Deutsche Bank Amit Daryanani - RBC Capital Markets

Good morning and welcome to the Seagate Technology Fiscal Second Quarter 2017 Fiscal Results Financial Results Conference Call. My name is Carmen 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 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 Kate Scolnick, Senior Vice President Investor Relations and Treasury. Please proceed, Kate.

Thank you. Good afternoon, everyone, and welcome to today’s call. Joining me today from Seagate’s executive team are Steve Luczo, Chairman and CEO; Dave Morton, Executive Vice President and CFO; Dave Mosley, President and COO; and Phil Brace, President of Cloud Systems and Silicon Group. We’ve posted our press release and detailed supplemental information for second fiscal quarter fiscal year 2017 on our Investor Relations site at seagate.com. During today’s call, we will review the highlights for the December quarter and provide the company outlook for the third fiscal quarter of fiscal year 2017, and then open the call for questions. We are planning for the call today to go approximately half-an-hour and we will do our best to accommodate your questions following our prepared remarks as time permits. We will refer to GAAP and non-GAAP measures on this call. Non-GAAP figures are reconciled to GAAP figures on our supplemental information available on the investor section of our website. We’ve not reconciled our non-GAAP financial measures guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort. As a reminder, this conference call contains forward-looking statements about the company’s anticipated future operating and financial performance, customer demand, technology and product development advancements, and general market conditions. These forward-looking statements are based on management’s current views and assumptions and should not be relied upon as of any subsequent date. Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in the company’s SEC filings and supplemental information posted on the investor section of the company’s website at seagate.com. I would now like to turn the call over to Steve Luczo. Please go ahead, Steve.

Thanks, Kate. Good afternoon, everyone, and thanks for joining us today. For today’s call, I will cover the high-level trends we are seeing in the business, Dave Morton will then discuss certain financial highlights, and I’ll close the call with our outlook for the March quarter, as well as for the calendar year 2017. Over the course of calendar 2016, Seagate exhibited discipline and focus and delivered four consecutive quarters of gross margin, operating margin, and EPS improvements. The drivers of our improving performance, particularly in the December quarter are combination of market demand trends across our high capacity storage solution portfolio, component cost optimization within our storage products, and the structural cost improvements we are driving throughout our company, particularly within our manufacturing operations. For the December quarter, Seagate achieved revenues of $2.9 billion, GAAP gross margins of 31%, net income of $297 million, and diluted earnings per share of $1. On a non-GAAP basis, Seagate achieved gross margins of 32%, up over 600 basis points year-over-year, net income of $412 million, and diluted earnings per share of $1.38, up 68% year-over-year. Cash flow from operations for the quarter was $656 million, up 72% year-over-year. HDD exabyte shipments for the December quarter were 68.2 exabytes, representing the third consecutive quarter of record exabyte shipments, and up approximately 13% year-over-year. HDD unit shipments were 39.9 million units. Average capacity per drive across the HDD portfolio was 1.7 terabytes per drive, up 30% year-over-year. ASPs of $66 were sequentially flat for the December quarter, and up 12% year-over-year. We believe, Seagate’s December quarter demand environment reflects a generally stable, but mixed macroeconomic environment, as well as the continued acceleration in the deployment of cloud-based storage associated with usage shifts of technologies and architectures by end users. In addition, we saw strong sequential demand for higher capacity products in the consumer, surveillance, and NAS markets. Our Cloud Systems and Silicon Group demonstrated sequential growth in the December quarter, with particular strength for our flash-based solutions. We are pleased with Seagate’s execution in the December quarter and throughout calendar 2016, both in terms of our ability to maximize the profitability of our technology portfolio and our continued execution on our cost reductions. I’d like to thank Seagate’s employees for their tremendous effort and contributions towards our business objectives. I’ll turn the call over to Dave Morton now to go into more detail on our operational activities.

Thanks, Steve. With the shifts taking place in Seagate’s business, there are few specific areas of our financial performance in the December quarter that I would like to provide further context to Steve’s earlier discussion. For the December quarter, Seagate’s addressable HDD market was in line with our forecast. We continue to drive our HDD product set sales towards our higher capacity products across our portfolio, benefiting both our revenue and margin results for the quarter. HDD enterprise revenue was up 5% year-over-year and represented 37% of our total consolidated revenue. Nearline product revenues were up 15% year-over-year and our ATB nearline product continues to be our leading revenue skew. Mission critical product sales remain stable and were up slightly, sequentially. HDD client high capacity growth opportunities include consumer, surveillance, DVR and NAS markets, and represent approximately 30% of total consolidated revenue. In the December quarter, revenue from these markets grew 19% year-over-year and average capacity per drive across these markets was approximately 1.9 terabyte per drive, up 20% year-over-year, and PC client shipments continue to represent 24% of consolidated HDD revenue. Operating expenses for the December quarter were $521 million on a GAAP basis and $458 million on a non-GAAP basis. During the December quarter, we implemented a certain cost reduction activities and recognized approximately $33 million in pre-tax restructuring charges. The magnitude of these cost efficiencies we implemented across our company in calendar 2016 to ensure the resiliency of our business has been upwards of $500 million over calendar 2015. In this short period of time, we have improved our factory utilization, reducing our manufacturing cost by approximately $200 million year-over-year, operating expenses, excluding variable compensation have been reduced by approximately $300 million year-over-year. We will continue to drive cost out of our manufacturing operations and operating expenses, as we move through the fiscal year. Capital expenditures were $95 million for the December quarter for maintenance capital, supporting the acceleration of the ramp of new products in our portfolio that utilize new tooling and equipment, and the accelerated expansion of our Korat facility to expedite the manufacturing footprint reductions that are in progress across many sites. Our capital expenditures and maintenance capital requirement levels are expected to be less than 5% of our revenue for the remainder of the fiscal year. And through our manufacturing consolidation activities, Seagate is and will continue to operate at or very near full capacity. Cash flow from operations in the December quarter was $656 million and free cash flow was $561 million. Our balance sheet remains healthy and we ended the December quarter with $1.7 billion in cash and cash equivalents and $295 million ordinary shares outstanding. Our debt structure and level of interest expense is well within our financial capabilities and reflective of our investment grade framework, given our staggered maturities and low interest expense. Due to the confidence in our cash flow generation, our Board has approved our quarterly dividend payment of $0.63 for the December quarter, payable on April 5. Our December quarter dividend payout of $188 million is at the low-end of our long-term target range of returning 30% to 50% of free cash flow. In addition, we deployed $147 million for the redemption of 4.1 million shares for the December quarter. Our ability to return to our long-term financial model in the December quarter is a reflection of our portfolio optimization, as well as Seagate’s operational cost reductions. From a market demand perspective, we continue to believe that optimizing our full HDD portfolio to the structural shifts in the application workloads towards higher capacity will prove to be a resilient and competitive marketplace strategy. Combined with our Cloud Systems and Silicon Group, we review that approximately 80% of our storage product revenue opportunities in calendar 2017 have growth potential. At the same time, we have structured our refreshed portfolio to optimize the gains in areal density improvement, increasing storage capacity per drive, and in turn this enables us to lower our build and material per drive and redeploy the internal head and media components towards our highest margin products across the portfolio. While we are still in the process of executing many actions, we believe the overall cost alignment activities and the new high capacity and cost advantage products within our HDD product portfolio refresh will continue to benefit our product gross margins and overall profitability of our business over the course of our fiscal and calendar year 2017. Given the current demand outlook and assuming a stable macroeconomic environment, we are confident in our ability to remain around a higher-end of our long-term targeted margin range of 27% to 32%, and within our operating income margin targeted range of 13% to 15% for FY 2017. I would now like to turn the call back to Steve.

Thanks, Dave. Over the course of 2016, Seagate demonstrated execution and focus towards structural improvements to our company’s global operations. The ongoing shift from client server to mobile cloud architectures continues to create significant opportunities for core technology providers, such as Seagate, with an expanding customer base and high value-add opportunities associated with data retention and data analytics. As Dave mentioned, we have a refreshed cost optimized high capacity portfolio that is well-positioned in the consumer CE surveillance and NAS markets. Where we choose to participate in the PC market, we will lead with our one terabyte and higher products and our desktop products remain highly competitive. We will continue to be extremely competitive in the enterprise market with our business critical product portfolio. Our eight terabyte product leads the market in cost and performance and we are pleased with the ramp of our 10 terabyte product in terms of quality, performance, and customer qualifications. For the last few quarters, our 12 terabyte product has been with customers for evaluation and the feedback has been positive. During the next 12 to 18 months, we expect the nearline market to be diversified in capacity points for different application workloads, with use cases from two to four terabyte products for certain applications up to 16 terabyte for other use cases. From a macro perspective, we remain cautiously optimistic about the current macroeconomic environment and IT spending trends. We expect overall exabyte demand to grow double digits in calendar 2017 over 2016. For the March quarter, we anticipate the unit an exabyte demand environment to decline relatively seasonally. Our outlook for enterprise demand is stable and we will continue to drive the high capacity products in our portfolio and minimize exposure to the low capacity HDD market. We are expecting to achieve revenues of approximately $2.7 billion, representing a slightly less seasonal decline in revenue than the last two years. We expect to maintain margins at the mid to higher-end of our long-term range at approximately 30%. The sequential decline is primarily due to seasonality and some factory under absorption, as we transition Suzhou facility and other activities through the end of June. Operating expenses will trend down sequentially to approximately $440 million, reflecting further cost measures. In addition, assuming market conditions remain intact, we believe Seagate will achieve revenue growth in calendar 2017, with earnings per share of, at least, $4.50. These are significantly improved expectations from where we were last June and positions the company well for our operating and financial performance in calendar 2018. Thank you for joining us on the call today, and we will now open the call up for questions and answers.

Thank you. [Operator Instructions] One moment for questions. And our first question is from the line of Rich Kugele with Needham & Company. Please go ahead.

First, can we just discuss a little bit more about the restructuring? Clearly, you’ve made a lot of progress, those are all structural changes within Seagate. But can you just talk about how we should think about where Seagate excess calendar 2017, perhaps since that’s the metric you’re talking about from a maybe a COGS perspective or utilization if you want to look at that way, OpEx, is this the right level what we’re seeing here for the March quarter exiting the year, how is the progress?

Hi, Rich, this is Dave Morton, I’ll tackle some of the OpEx ones and then turn it over to Dave Mosley to address some of the COGS and the improved efficiency there. I would take you back to middle of last year, where we had approximately two 8-Ks that we signaled upwards of $225 million of restructuring. We’ve had a significant amount of that get recognized in the P&L, as we’ve noticed on in the 8-K. With that said, we haven’t necessarily seen all the savings come through, and those are just on the activities that we’ve announced thus far. And so, as you think about the OpEx, that’s going to continue to trend down. Now some of that’s been masked a little bit by some of the variable compensation that’s gone into the first-half. But we believe we’re on a trajectory for that to continue to take steps down exiting not only the March, but continued into the back-half of the year. So that’s our alignment right now. And then Dave in regards to…

Yes, Rich, on COGS, it comes down to the utilization of our factories to first order, there’s heads media and drive factories. And as we alluded to in the script, we’re still in the consolidation phase on some of those. We have been for the last six months in earnest, but there’s some work left to do. So your question directly was at the end of this calendar year, I think, some of it has to do with our product transitions that we’ll still be going through throughout this calendar year as far as whether we can stay full, but we’re planning to, I think, and so we’re planning to stay at the same utilization rates that we have today albeit with a little bit smaller footprint when those factories finally come offline.

Okay, thank you. And then just quickly on technology, 8 terabyte is your most important skew so far and revenues. But as you look at the balance of the year, do you see 10 terabyte really being adopted in size, or will people just move to the 12 that’s in qual today?

That’s a difficult question, I think.

Yes, just before we talk about it just so, I think one thing though, Rich, it’s dangerous to conclude that it’s all about 8s or 10s or 12s. I think what this quarter showed is, it’s actually the breadth of the portfolio that matters. So, again, we had great results in the consumer space, the surveillance space, the NAS space, it’s kind of all high capacity product for us and the profitability on the portfolio across the portfolio is quite significant. So I don’t think you want to fall into a trap of thinking that it all comes from a terabytes, because that’s not true. And then I think, Rich, as we add the higher capacity points, clearly there’s a value proposition for some customers who have those kinds of installs and see the TCO benefits from the really high capacity drive. I think a soon as we as the industry get the next one out, still tend to want to move to the next one as well. So the 12s are out in evaluation that we’ve been – for a a couple of quarters as we’ve been talking about. And as we go to 2014 and 2016 and so on through the next year-and-a-half, I think, there’s going to be continued motion here. Some people will stop at one that they’re happy with who doesn’t – don’t want to take the risk on the new or can’t get the new one, there’s going to be a lot of those dynamics I think for – over the course of the next six quarters.

Great. Thank you very much.

And our next question is from the line of Ananda Baruah with Brean Capital. Please go ahead.

Hey, thanks, guys, for taking the questions. Hey congratulations on the execution. Over the last nine months, it’s been pretty impressive and the velocity has been pretty fantastic to see. I guess, just two quick ones for me. With regards to the sort of gross margin performance for the December Q and the ongoing sustainability of that, I – to what degree has the expansion – incremental expansion been from the capacity utilization action or the consolidation? And then to what degree is it been and will remain from other factors you guys have talked about, maybe improving gross margin profile in the non-enterprise products the rest of the portfolio, Steve, as you mentioned and anything else, I just like to get a sense of a magnitude of what the improvement has been from, and then I have a quick follow-up? Thanks.

I think, if you’re breaking it down between product refresh and mix, if you will in demand shifts that we believe are sustainable and restructuring. I’d say it’s probably two-thirds on the product refresh so far, because not all of the restructuring is done. And so I think what we’ll see is uplift from both as we continue, because we clearly expect the demand profile that continue to shift to the higher capacity points, that’s why we’re positioning the portfolio in the manufacturing footprint to support that, and of course, the manufacturing footprint will get more efficient.

That’s really helpful. And I guess, just a quick follow-up is, what is the current capacity utilization, or how you want to think about that? And it sounds like the – sort of the comments are you going to sustain that that, but what is the current way? Thanks a lot.

Yes, I think we have a number of different operational units, if you will, through our heads process or media process and our drive process, there’s a number of different lines. But we’re running anywhere from 80% to a 100%, depending on how you view those factories and we’ll stay there. There will be some places necessarily in the supply chain, where we need flexibility. But we intend to stay at about these levels.

Thanks, much appreciated.

But also just remember, you can’t as soon as one factory is at capacity, you’re at capacity.

That makes sense.

Yes, because we need lots of parts to make a disk drive.

Thank you. Good luck.

Thank you.

And our next question is from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Hi, thanks. If I look at the guidance on a year-over-year basis, you’re guiding to revenue growth for the first time. But the implication suggests that units still are declining maybe roughly 10% on a year-over-year basis. I’m trying to understand what is the implication of the annual unit declines for the HDD industry? Are those declines offset on the utilization basis because of the mix to higher capacities? Do you still need to take some capacity offline, because typically, when we look at sort of the leverage that you get it’s based on the the unit mix or the units improving, but we’re not really seeing that right now?

Well, it’s really components improving versus what’s the unit, right? So units will probably be flattish to down slightly maybe, I don’t know, it’s kind of early to tell on that front, looks like this quarter unit demand was pretty good. I think for us, for sure, you remember, you always have to think about the market that we’re focused on and which is what we’re trying to get people understand that the Seagate addressable market is probably going to be diverging from what the other competitors think of as the market. So for the market that we’re in, we actually would say, that it’s probably going to be a growing market, because we see growth in all those applications that require high capacity. And then within that obviously, because it’s the highest capacity technology that we’re using then it’s lots of heads and disk absorption, which goes along with the units. Then as you know, going from 8 to 10 to 12 to 16, you’re going from six to eight disk, at least, on the nearline products and we do think there’s opportunities for more heads and disc on desktop and notebook, as people need higher capacity as well. So I think from an absorption perspective, we feel pretty good – better than pretty good about calendar 2017 in terms of what it means in terms of our factory absorption, which is really what you’re asking. And no, we don’t need a disk drive unit growth to drive factory absorption like we used to, because the demand profile now is all about high capacity drives not about lots of little drives that aren’t connected that go into PCs.

So that makes a lot of sense. I was just trying to understand the dynamics, because clearly now there needs to be more of a focus on revenue as opposed to the unit growth, which is what we used to look out before? My second question would be, what is the implications for Seagate’s business based on the administration changes we’ve seen in the White House? I know, you guys are not incorporated in the U.S. But will you see any tax benefits potentially? How should we think about some of those changes, because we’ve had a lot of questions about that. Thanks.

I’ll let Dave talk about the tax implications in a second. I think from a usage perspective, we’re encouraged that they will probably be a reacceleration of data acquisition systems, which had been stalled out fairly dramatically for the last several years. And I think the change in administration is probably going to result in some growth in that segment, which has been pretty stagnant for the last few years. On the tax and regulation side, Dave Morton has done a lot of work there. So I’ll let him answer that question.

Thanks, Steve, and thanks, Sherri. Seagate does carefully monitor any and all potential tax law changes, not only here in the U.S., but in all areas of the globe, where we operate. We continue to evaluate the various proposals coming out of Washington to determine what their potential impact might be. And most of the proposals and process and in flight do contain certain provisions, which could have both positive and negative impacts to the company. We do believe that the most serious tax proposals being considered, including the House Republican Blueprint with its border adjustability tax provision would not likely have a significant near-term impact for the company. But again, that’s still under heavy review.

Thanks so much.

And our next…

Okay, we have time for one more question.

Thank you. And our next question is from Amit Daryanani with RBC Capital Markets. Please go ahead.

Thanks, glad I made it through the line. I guess, maybe to start with the free cash flow usage, you guys have had really impressive free cash flow for the few quarters beyond dividend would seem to be a comfortable thing for you guys to do. How do you think about deleveraging versus potentially returning to the M&A framework?

Well, those are the things we think about. And I think, probably the best thing is to just look at what we’ve done historically. I think, we – how do we think about it first and foremost whether or not it’s dividends or buybacks. Number one thing we think about is, maintaining enough investment in our core business to maintain the technology platforms that we have and the leadership positions we have, the technology, as we mentioned, in the response to Sherri’s question is it’s getting more difficult, but these to deliver devices at 12, 14, 16, 20 terabytes takes a lot of investment, a lot of technology. So first and foremost, we make sure that we’re covered on that front. And then, we obviously protect ourselves in terms of downsides or anything like that. And then if there’s excess cash flow, we think about M&A opportunities or returns to shareholders. And I think the Board has been fairly consistent and I expect to remain consistent of 30% to 50% of free cash flow being returned to the shareholders. That leaves us, given the cash flow generation capabilities of the company that leaves us a lot of cash flow to do things like M&A. So it’s not – we don’t think it constrained us – constrains us in anyway if we saw an opportunity that we felt was important to any sort of strategic direction we want to go in. And then that’s just the issue between dividends and buybacks. And again, I think, if you look at our history, we try to maintain a dividend base that is kind of at the low-end of that range. And then what we do above that is probably buybacks opportunistically when we see discrepancies in the valuation versus what we think the long-term value of the company is.

Fair enough. And if I could just follow-up, you talked about being able to operate at the higher-end of your gross margin range for calendar 2017, what would enable you to operate at or above that range, because mix is only better and I think your manufacturing savings ahead of you?

Yes, I mean, you’re nailing both of them, right. We’ve got through the March quarter and then extending into June in the back-half of the year. A lot of those savings will come to fruition on that top line, as well as some of the mix iterations and as we continue to ramp up the portfolio as well. So that’s where we have a high degree of confidence in enabling that that sustainability in those levels at that margin range.

Thank you.

Okay, great. I would like to thank everyone for joining us today, and particularly our customers and our suppliers and our employees and our investors obviously. We appreciate your support over the last year, and we look forward to speaking in the next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.