Kate Scolnick - IR Dave Mosley - President & COO Dave Morton - EVP & CFO

Edward Parker - BTIG Katy Huberty - Morgan Stanley Christian Schwab - Craig-Hallum Capital Ananda Baruah - Loop Capital Rob Cihra - Guggenheim Partners C. J. Muse - Evercore Group

Good day, and welcome to the Seagate Technology Financial First Quarter 2018 Financial Results Conference Call. My name is Vinyl, 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 Treasurer. Please proceed, Kate.

Thank you. Good morning, everyone, and welcome to today's call. Joining me today from Seagate's executive team are Dave Mosley, Chief Executive Officer and Dave Morton, Executive Vice President and Chief Financial Officer\. We've posted our earnings press release and detailed supplemental information for our September quarter 2017 on our Investor Relations site at Seagate.com. During today's call, we will review the highlights for the September quarter, provide the company's outlook for the December quarter 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 recognize there is a lot of interest in learning more about Thank you. Seagate's strategic initiatives in the silicon memory market and a deeper understanding of our technology portfolio roadmap including our advanced work in areal density improvements with heat assisted magnetic recording. We've a few high level prepared remarks. However, the focus of our call today will be September results and we look forward to planning a strategic update for investors sometime in early 2018. On our call today, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures on our supplemental information available on the Investor section of our website. We have not reconciled our non-GAAP financial measure 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, demand for our products, access to long term NAND supplies, consummation of the bank capital private equity transactions 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. I would now like to turn the call over to Dave Mosley. Please go ahead, Dave.

Thanks Kate. Good morning, everyone and thanks for joining us today. For today's earning call, I'll cover the high-level trends we're seeing in the business, our CFO Dave Morton will then discuss certain financial highlights and I'll close the call with our outlook for the December quarter. Beginning with our operational results for the September quarter, Seagate achieved revenues of approximately $2.6 billion, GAAP gross margins of 28%, net income of $181 million and diluted earnings per share of $0.62. On a non-GAAP basis, Seagate achieved gross margins of 29%, net income of $279 million and diluted earnings per share of $0.96. HDD exabyte shipments for the September quarter were a record 70.3 exabytes, up 5% year-over-year. The average capacity per drive across the HDD portfolio was also a record, 1.9 terabytes per drive, and the average selling price per unit was $64. GAAP operating expenses were $481 million, down 17% year-over-year and non-GAAP operating expenses were $408 million, down 14% year-over-year. Cash flow from operations for the quarter was $237 million and free cash flow was $113 million. At the end of September, Seagate announced our participation in this consortium led by Bain Capital Private Equity that has entered into an agreement with Toshiba Corporation to acquire Toshiba Memory Corporation. We are pleased to be part of the consortium and to help facilitate maintaining Toshiba Memory as a world-leading, independent NAND technology company. Over the course of many years, Seagate's developed a long-term relationship with Toshiba Memory, and we have always been impressed with their consistent leadership in advancing NAND technology. We believe that Bain Capital is dedicated to the long-term success of Toshiba Memory, and this acquisition is in the long-term best interest of our industry and the storage customers worldwide. In addition, we expect to enter into a long-term NAND supply agreement with Toshiba Memory, and that will provide continuity of raw NAND for our expanding product portfolio. We have developed our NAND storage technology portfolio over the last several years and today, we have a broad offering of flash-based products that are ready to scale and grow across multiple markets. Our NAND supply agreement with Toshiba Memory will enable Seagate to continue innovating and providing customers with storage solutions that fit their needs, be it HDDs, SSDs or hybrid solutions. This agreement has the opportunity to increase the potential for meaningful future revenue growth from Seagate's NAND storage portfolio while providing significant value for our storage customers. We look forward to updating you on our progress in the future; however, we will not be providing further color on the details of the transaction until we are closer to the deal closure. I'll now turn the call over to Dave Morton to go into more depth on our operational activities.

Thanks, Dave. For the September quarter, we achieved $2.6 billion in revenue and shipped a record 70.3 exabytes of storage, with an average capacity per drive of 1.9 terabytes, also a record. For the enterprise HDD market, we shipped 27.2 exabytes, with a record average capacity of 3.9 terabytes per drive. Our average capacity per drive for our nearline products reached over 5.4 terabytes per drive, up 17% over last year's strong ATB demand and up 75% from the September quarter two years ago. The growth in hyperscale and cloud storage deployments continues to represent an important opportunity for Seagate, and we are confident in our nearline HDD portfolio designed to serve these environments. Over the next 12 months to 18 months, we expect a diverse and strong market with multiple capacity points for different application workloads. Use cases will cause capacity points to span from two terabytes to four terabytes for certain applications and up to 16 terabytes for other customer needs. At Seagate, we believe we are well poised to help our cloud customers with our stringent and varied requirements. Our 10-terabyte helium nearline product was our leading enterprise revenue SKU in the September quarter, and we shipped over 1 million 10 terabyte units, up threefold from the June quarter. We also achieved sequential volume and revenue growth in our 12-terabyte helium nearline product in the September quarter. Customer feedback has been excellent and we are confident in our competitiveness across our key customer qualification processes. For the December quarter, we are planning for significant sequential volume and revenue growth for our 10-terabyte and our 12-terabyte helium products as the market adoption grows. In the edge and consumer verticals, our 1-terabyte per platter, 2.5-inch platform continues to perform well. Using our areal density advantage, our 2-terabyte per platter, 3.5-inch platform continues to ramp for desktop markets, providing a great value for customers needing 2-terabyte, 4-terabyte and 8-terabyte capacity points. Customer feedback indicates we are well ahead of the competition in these important verticals. Within this, notebook compute revenue was up 37% year-over-year, with exabytes up 75% year-over-year. Average capacity per notebook compute drive -- year-over-year. Our gaming business revenue grew sequentially 13% and average capacity per drive was up 27% over last year. We continue to be selective in our participation in this market, and we are focused on the highest capacity areas for the gaming customers that are demanding more local mass storage for their rich gaming experiences. Our non-HDD revenue, primarily from our cloud systems and silicon group, in the September quarter was 242 million, up 30% quarter-over-quarter and up 17% year-over-year. Our operating expenses for the September quarter were 481 million on a GAAP basis and 408 million on a non-GAAP basis, down 14% year-over-year. Total operating expenses were slightly lower than forecast, primarily due to restructuring and other cost-containment measures. We continue to identify areas for cost improvements, and during the September quarter, we divested the majority of our high-performance computing assets, which will result in a cost savings of approximately 20 million a year and impact revenues by approximately 50 million per year in our non-HDD revenue. We remain on track to exit the calendar year with non-GAAP operating expenses of approximately 400 million per quarter. Capital expenditures were 124 million for the September quarter for maintenance capital and manufacturing footprint redeployment, supporting the continued ramp of our new HDD products in our portfolio, which utilize new tooling and equipment. For December quarter, we expect capital expenditures to decrease sequentially and remain less than 5% of our total consolidated revenue for FY 2018. Cash flow from operations in the September quarter was 237 million, and free cash flow was 113 million. These results include approximately 46 million in cash payments related to previously announced restructuring charges and some inventory staging related to a strong October demand signals. For the December quarter, we anticipate cash flow from operations to be at least two times more than the September quarter due to working capital improvements in our business outlook. Our balance sheet remains heavy – healthy, and we ended the September quarter with 2.3 billion in cash and cash equivalents, with 289 million ordinary shares outstanding. Our board has approved our quarterly dividend payment of $0.63 for the September quarter, which will be payable on January 3, 2018. Interest expense for the September quarter was 61 million. Our debt structure and level of interest expense continues to be well within our financial capabilities, given our staggered maturities and low interest rates. In the September quarter, we deployed 166 million to redeem 5 million shares and 22 million towards redeeming our 2018 senior notes. As Dave Mosley noted, at the end of September, we announced our participation in the consortium led by Bain Capital Private Equity that has entered into an agreement with Toshiba Corporation to acquire Toshiba Memory Corporation. We committed to provide up to $1.25 billion in financing to support the acquisition. Upon closing, we would expect to fund the transaction with existing cash balances and some short-term financing mechanisms, including the long-term NAND supply agreements we expect to enter with Toshiba Memory, we anticipate this transaction to be accretive to our earnings. Overall, our operational and financial performance in the September quarter reflects execution of our business model and profitability improvement objectives. Looking ahead, we will continue to optimize our business and focus on aligning our go-to-market and product portfolio advancements towards the future growth opportunity markets. I would now like to turn the call back to Dave Mosley.

Thanks, Dave. The long-term trajectory of growth and infrastructure spending in the large cloud service providers and hyperscale companies appear intact, as they continue to demonstrate and increase their service offerings and exhibit significant business momentum. Critical to supporting the massive growth in data is our ability to continue to provide mass storage solutions that optimize areal density and have the greatest reliability, quality and total cost of ownership benefits. Seagate has demonstrated technology leadership with generations of storage technologies and products. Over the last five years, we have been the leader in areal density with our SMR and TDMR areal density solutions, and we continue to make progress towards the introduction of our heat-assisted magnetic recording, or HAMR, technology portfolio, which is expected to be shipping in volume in 2019. Over the past year, we have been ramping production of our HAMR evaluation drives, and we have shared samples of current generation shipping product with HAMR technology substituted in these devices. Early customer feedback from more than six months ago, using standard qualification processes, demonstrates that the technology will not require any changes for customers to adopt. We believe that HAMR technology opens up a rich design space for high capacity and great value, and we've been communicating that with customers for some months now. In terms of future investment in order to launch our HAMR portfolio, the costs are already contemplated in our existing operating expense and capital expenditure long-term model. While we don't have time today, I personally am looking forward to discussing more about HDD areal density and future technology development at our next strategic update that Kate mentioned earlier. Turning to our market outlook. With major transformative shifts taking place in the storage marketplace from client server to mobile cloud, high-capacity mass storage deployments continue to represent significant opportunity for Seagate. We remain cautiously optimistic about the current macroeconomic environment as well as enterprise and consumer spending trends. On the heels of the various IT component supply constraints, we witnessed in late calendar 2016 and early 2017. We are continuing to monitor outgoing inventory closely. From Seagate's vantage point, our channel inventory positions and inventory for our customers that are visible to us are, in general, lower than last year. Sell-through appears reasonable. For the December quarter, we anticipate strong exabyte growth with the CSP ecosystem, normal seasonal demand for our other major markets, including PCs in the consumer market and sequential growth in our Cloud Systems and silicon businesses. Almost all of our vertical markets are now engaged in exabyte growth again compared to the first half of the calendar year. Given this demand environment, for the December quarter, we expect to achieve revenues up approximately 3% to 5% sequentially from the September quarter. This is consistent to slightly better than the sequential growth we saw at this time last year. Gross margins to expand slightly sequentially and within our 29% to 33% long-term range; non-GAAP operating expenses down sequentially 2% to 3%, with further cost containment measures, as we continue to manage our operating expenses tightly, targeting approximately $375 million per quarter by the end of fiscal 2018; and cash flow from operations to be up significantly sequentially, with improvements in working capital and less restructuring costs. In summary, I'd like to thank our customers, employees, suppliers and business partners for their contributions to our quarter's results. Thank you for joining us on the call today, and we'll now open up the call for questions-and-answers.

Thank you. [Operator Instructions] And our first question comes from the line of Edward Parker from BTIG. Your line is open.

Great. Thanks. Good morning. I wanted to ask you about your exabyte ships. And it looks like the growth in the quarter was mostly from non-nearline, and so nearline has actually been down year-over-year for the past couple of quarters. So, I recognize it's a really tough comp from last year, but I was wondering if you could speak a little bit more specifically as to what you're seeing in that segment, what you're hearing from your customers and what type of exabyte growth you would expect over the next 12 to 18 months? Thanks.

Thanks, Edward. Yes, it is a pretty tough comp year-over-year. I think, if I think about 2016, calendar 2016, we were strong from March through November in all markets geographically. So CSPs were strong, and we saw strength in some of the more nascent cloud spaces. We believe that the various component supply issues that existed and pricing of those components and so on actually caused a little bit of an overbuy and some further disruption in the supply chain, which we've talked about. And so, some of the markets, not necessarily all the CSPs, but some of the markets, were impacted in early 2017. And I would say, at this point, all the way through July, we were still seeing that impact. August and September started to turn back on, which resulted in some of the growth that we saw in the quarter. But to your point, it's not back to the level it was before, although it appears to be coming back. What we hear inside of the data centers is that the exabyte growth is still high, so the bit growth is still high. That's irrespective of whether you're talking to large-scale CSPs or some of the smaller cloud players who still have yet to build out the scale. But people couldn't exactly stretch for all those solutions. And now it looks like now they figured out architecturally how they're going to respond to the new cost structures or maybe they had supply -- other supply chain issues that would cause them to -- some of their suppliers to not want to build for them for a while. I think we're through most of that, and I think we're seeing the world starting to turn on.

Thank you. And our next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.

Thank you. Good morning. I just want to follow-up on the enterprise segment. While there is a tough compare, exabytes did recover sequentially and the decline was less year-on-year. But you're seeing more aggressive pricing, both sequentially and year-on-year. So, can you just talk about how much of that is mix shift to cloud versus more aggressive pricing in the market? Thank you.

Right, Katy, I'd say that there is mix shift going on. I'll let Dave talk about the pricing.

Yes, I would classify any pricing you may see as more of a normal mix shift versus a like-for-like across consistent customers within that same channel. Pricing has been relatively benign. And so, to your point, as the exabytes continue to expand in this data rich area, pricing has not been a major factor across all of our nearline portfolio.

Right. Year-over-year, last year, we were talking about 8 terabytes. Now we're talking about 10s and 12s at the high-end. But especially back to Edward's question, the 4s and 8s now, even 2s, are very relevant in some applications in some of the smaller cloud players. So...

Thank you.

Thank you. And our next question comes from the line of Christian Schwab from Craig-Hallum Capital. Your line is open.

Great. Thanks for taking my call great quarter. Can you -- as we talk about the cloud and the hyperscale and the increased offerings, which we're hearing about as well, do you have any changes in outlook for exabyte growth over the next three years versus what you previously thought?

I'd say, great question, Christian. The exabyte growth, as both the previous people have asked the question about, has been rather muted this last year if you look at it in aggregate. And some of that's driven by the cloud, some of it is driven by other dynamics. Long term, we think data's growing at 30% to 35%. We've been talking about that fairly openly, but the fact that we're off to a trend this year, means that we'll get back on the trend in the future. Now how fast does it come back, some of that depends on the architectural nuance that I referred to earlier. Are people truly on to further architectures that they can deploy? Or do they still have parts in the system? And what's going on with their specific applications? I actually think we're going into fairly healthy period of the growth that gets us back on to the trend line, and that's what's something we're trying to respond to. We can do it with higher and higher capacity drives because we have areal density to solution it.

Great. And then just one quick follow-up, just as far as you look at your solid state drive business and the broadening portfolio, obviously, with the long-term supply NAND agreement with the technology leader, are you guys prepared to give any expectations of how big that business could be in three to five years?

Not yet because, I think, to our points on the script, which I don't want to go into more detail on, I think it depends on exactly the natures of the deal. I will say that the work that we've been doing with customers means we have a lot of options. There are customers who really like our solutions. I think our portfolio is a little too varied , actually, right now, too many interfaces and different solutions for our customers. I think we're going to have to make sure we pick and choose exactly which ones that we want to scale, but I think we have a lot of options.

Great. I don't have any other questions. Thank you.

Thanks.

Thank you. And our next question comes from the line of Ananda Baruah from Loop Capital. Your line is open.

Hi, thanks guys. And congrats for a solid quarter. I would love to just get your take on, I guess, the conviction and then what would be the levers to get the growth margin over time to move back to, say, the midpoint of your range? And then just I'll just make another one in there, too. Your share count, you continue to move it down. Is that opportunistic buying at these levels or should we think about a return to sort of share count to $250 million philosophy? Thanks, on both of this.

Yes. I think, from the margin perspective, to see exabyte growth go back, to Christian's question, I think that's the most relevant point. Obviously, 2017 or early 2017 was rather muted on exabyte growth. We think it'll come back. And on the share count, I'll let Dave answer.

Yes, the share count, it's back within overall capital allocation, the system that we've been working at over returning over 30% to 50% of our cash flow back to shareholders. And so, obviously, we've been fairly muted on our buybacks, which has been more a reflection of a NII dilution perspective. But we're still very convicted in and around the 30% to 50%. And as we continue to see strength in our cash flows, obviously, we'll continue to be in the open-market.

Awesome. Thanks a lot.

Thank you. And our next question comes from the line of Rob Cihra from Guggenheim Partners. Your line is open.

Hi, thanks very much. Two quick, if I could. On the enterprise, with mission-critical, I know it's been sort of declining for a while, but the exabyte shipment growth actually looks like -- or declines, I guess, picked up, looks like kind of declining with the low double digits. Is that now, do you think, the pace or do you think you can get that's more of us to a flattish exabyte business? And then, I think, just quickly on cost cuts, OpEx coming down nicely. Is that -- are you still sort of cutting capacity and pruning portfolio or is it just more keeping OpEx percentage of revenue discretionary-type cuts? Thanks.

So, I'll start with the enterprise side, mission-critical in particular. This market was one of the most impacted earlier in the year by some of the changes in build material pricings. To your point, we do see a mix up in there. Some of the lowest-capacity drives that we sell are on the order of 300 gigabytes. Those are impacted because some of those architectures are changing quickly. Mission-critical is actually a very rich, diverse space. There's not -- it's not a one-size-fits-all solution. And we do see mix up to 1.2 and 2.4-terabyte type drives. And we think that, that'll have a long tail for especially for a lot of those workload-intensive applications that need that value. So, I don't think you're going to see significant exabyte growth, but you will see that mix in the longer tail. And then on the OpEx question, I'll hand it over to Dave.

In the OpEx, it's been too hard. We still have, I'll call it, some curtailing specifically in the portfolio when you look at some of our adjacent businesses. But then we also have just common items that we've been still trying to drive towards the lowest common denominator. So, we're still very much convicted on achieving the $375 million by the end of FY 2018, and I believe we're on a very good glide path to enable that.

Great. Thank you.

Good, I think we have time for one more.

Thank you. And our last question comes from the line of C.J. Muse from Evercore. Your line is open. C. J. Muse: Yeah. Good morning. Thank you for fitting me in. I guess a follow-up question on the nearline side. Clearly, you had a difficult comp from a year ago. But if I look at your outlook for calendar '17 in its entirety, it looks like that business is growing low to mid-single digits on an exabyte basis. Curious if you could kind of walk through what your outlook is from here? And then second part of the question, on the enterprise side, as you look at Intel and the launch of Skylight, can you talk about how you see that core enterprise piece of the business flowing through from here? Thank you.

Yes. Thanks CJ. I think we've talked about it quite a bit on the call. With the issues that there were earlier, that's why the year-over-year compare is pretty tough on the nearline space, with now higher capacity drives and ramping in the market and some of the markets, especially geographically turning on, some of the smaller cloud providers now seeing the architectures that they want to go invest in. We think that there will be substantial nearline growth into next year. Now, obviously, our job is to turn that into orders as quickly as we possibly can, and we're out pursuing strategic agreements to go do that because these are large investments that these companies are going to have to make. But I do think that calendar year '18 will be better than calendar year '17 was from an exabyte perspective. On the Skylight question, it's kind of interesting because we look back ourselves at some of these Intel transitions and said, what does that typically mean for our industry? And when do things latch? This one's very different because, I think, the nature of the interface and performance and so on are actually pretty exciting for the entire enterprise space. Typically, it doesn't latch very quickly. But typically, it does move to a different value proposition overtime, and that's consistent with the mix-up discussions that we had in mission-critical. We believe that some of the lower capacity points will be flushed from the system and will mix up to higher capacity points and mission-critical as we look towards the future, that market, it's not a big market but the mix will be high, so.

Okay. I would like to thank all of our customers, suppliers, employees for all their hard work on this quarter and all their partnership. It's been a very good back half of the year coming. In July, when last time we spoke to investors, things were pretty tough with the slow Q4. It's good to see August and September turning on, and we look forward to talking to you on the next call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.