Kate Scolnick - SVP, Investor Relations and Treasurer William David Mosley - CEO David H. Morton, Jr. - EVP and CFO

Kathryn Huberty - Morgan Stanley & Co. LLC Steven Fox - Cross Research LLC Ananda Baruah - Loop Capital Markets LLC Tim Long - BMO Capital Markets Aaron Rakers - Wells Fargo Securities Robert Cihra - Guggenheim Securities LLC

Good morning and welcome to the Seagate Technology Fiscal Fourth Quarter and Year-end 2018 Financial Results Conference Call. My name is Jedi, 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'd 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 June quarter and fiscal 2018 on our Investor Relations site at seagate.com. During today's call, we will review the highlights for the June quarter in the fiscal year 2018, provide the company's outlook for the September 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. For the September quarter, we'd like to note that our quiet period will begin on September 24. On our call today, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures on our supplemental information available on the Investors section of our Web site. 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 and market demand in the current macroeconomic conditions; industry growth and trends; our technology and product development advancements and our ability to achieve volume shipment for new product development in 2019; demand for our products; continuity of access to long-term NAND supply; the expected return on our investments; our ability to execute our roadmap and address supply constraints while managing an agile manufacturing footprint; potential impact of trade barriers, such as import/export duties and restrictions, tariffs and quotas; 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 Web site. I'd now like to turn the call over to Dave Mosley. Please go ahead, Dave.

Thanks, Kate. Good morning, everyone, and thanks for joining us. For today's earnings call, I will cover the high-level results from the June quarter and fiscal 2018. Our CFO, Dave Morton, will then discuss certain financial highlights, and I will close the call with our outlook for the September quarter. I’m pleased to report Seagate's financial results for the June quarter reflect very strong year-over-year growth in revenue and profitability. We achieved revenues of $2.8 billion, up 18% year-over-year, GAAP gross margins of 31.9%, and net income of $461 million. GAAP diluted earnings per share were $1.57. On a non-GAAP basis, Seagate achieved gross margins of 32.4%, net income of $475 million and diluted earnings per share of $1.62. HDD exabyte shipments for the June quarter were 92.9 exabytes, up 49% year-over-year. The average capacity per drive across the HDD portfolio was a record 2.5 terabytes per drive, up 40% year-over-year and the average selling price per unit was approximately $72, up 12% year-over-year. GAAP and non-GAAP operating expenses were $399 million with non-GAAP down 5% year-over-year. Cash flow from operations for the quarter was $468 million and free cash flow was $372 million. Turning to our full fiscal year 2018 results, our solid business model execution drove year-over-year growth in revenue, profitability and cash flow generation. Strong year-over-year growth and exabyte shipments reflects the competitiveness of our mass storage solutions and their alignment with the growing demand for data products globally. For the full fiscal year of 2018, Seagate achieved revenue growth of 4% year-over-year, $2.1 billion of cash flow from operations, up 10% year-over-year and $1.7 billion of free cash flow, up 18% year-over-year. GAAP net income and non-GAAP net income growth of approximately 53% and 31%, respectively. GAAP diluted earnings per share of $4.05, up 57% year-over-year and non-GAAP diluted earnings per share of $5.51, up 34% year-over-year. GAAP gross margins of 30.1% and non-GAAP gross margins of 30.7% and total exabyte growth of 29% year-over-year. I'll turn the call over to Dave Morton to go into more depth on our operational activity shortly. Before I do so, I'd like to address the announcement we made today in addition to our earnings results regarding our CFO transition. Dave Morton, who has been our CFO for close to three years and with the company for over 23 years has decided to leave Seagate for a Senior Finance Executive role at another company. We will be conducting a search for the Chief Financial Officer role and the Board has appointed Kate Scolnick, Interim Chief Financial Officer. Kate is a Senior Vice President and the Company Treasurer and over the last six years has been an integral part of Seagate's senior leadership team. On behalf of the management team and the Board, we thank Dave Morton for his leadership of the finance organization and his many contributions to our business. And I’d also like to thank Kate for taking on increased responsibilities. With that, I will turn the call over to Dave. David H. Morton, Jr.: Thanks, Dave. For the June quarter, our operational results reflect year-over-year growth in revenues, profitability and exabyte shipments. We executed well this quarter against strong market demand. In the June quarter, total revenues were up 18% year-over-year and hard disk drive revenues were up 19% year-over-year. The growth in hyperscale and cloud storage deployments continues to represent an important opportunity for Seagate and we are confident in our nearline hard disk drive portfolio designed to serve these environments. For the enterprise hard disk drive market, we shipped a record 47.2 exabyte with a record average capacity of approximately 5.3 terabytes per drive, up 54% year-over-year. In the nearline market, we shipped 44.5 exabytes and our average capacity per drive reached approximately 7 terabytes per drive, up 43% over last year and up 54% from the June quarter two years ago. In addition, we saw some intra-quarter upside demand for our mission-critical portfolio that resulted in a 18% year-over-year exabyte growth with average capacity per drive over 1 terabyte. Cloud-based enterprise storage demand continues to be extremely persistent and supply remains bit constrained. Our 10 terabytes nearline product was the leading enterprise SKU in the June quarter and we achieved significant sequential volume and revenue growth in our 12 terabytes nearline product. As nearline storage capacity demand grows over the next several years, we expect continued opportunity for our mass storage portfolio that delivers multiple capacity points for different application workloads. In the edge verticals, we've had year-over-year exabyte growth in the June quarter for nearly all end markets including PC compute, surveillance, DVR, gaming and network attached storage. At the same time, we are actively minimizing our exposure to the sub 1 terabyte client consumer and mission-critical 15K markets, as we believe these application workloads will move over time to either silicon-based memory or cloud storage where we have or are developing portfolio offerings. In the June quarter, these products represented approximately 6% of our consolidated revenue. Non-hard disk drive revenues in the June quarter were $183 million, relatively flat year-over-year. Within this, silicon revenues were up 53% year-over-year and we are bullish about our opportunities to leverage our supply agreement with Toshiba Memory Corporation as we invest in developing a broad-based silicon product portfolio in the SaaS, NVMe, consumer and gaming markets for significant revenue growth and expanding margin contributions. We believe that our strategic approach to participate in the silicon market allows us to address customer storage portfolio needs and provide for profitable revenue growth in our business model without the overhang from capital requirements and cyclical market exposure. Cloud systems revenue declined 21% year-over-year, primarily due to the planned shaping of our business to optimize the margin structure and business mix. Cash flow from operations in the June quarter was $468 million and free cash flow was $372 million. For the full fiscal year, cash flow from operations was $2.1 billion, up 10% year-over-year and free cash flow of $1.7 billion was up 18% year-over-year. Our cash conversion cycle for the June quarter was 6 days, reflecting a persistent market demand environment coupled with well-managed inventory levels that are in line with customer demand. Gross margins in the June quarter were 31.9% on a GAAP basis and 32.4% on a non-GAAP basis and within our long-term margin range target of 29% to 33%. The sequential upside in gross margins included better mix from our enterprise portfolio, linearity and some product cost benefits. Year-over-year, our margins have benefited from the enterprise mix shift in our business, higher capacity points mix shift across the rest of our mass storage solutions portfolio and high utilization of our vertically integrated factories. On a GAAP and non-GAAP basis, operating expenses for the June quarter were $399 million, down 15% year-over-year on a GAAP basis and down 5% year-over-year on a non-GAAP basis. Expenses were slightly higher than planned as we had higher variable compensation as a result of better annual performance and some accelerated material spend needed for our future product portfolio. Capital expenditures on a cash basis were approximately $96 million in the June quarter, which support the continued ramping of our newest highest capacity hard disk drive products and maintenance capital. For the fiscal 2018, capital expenditures were below 4% of total revenue. Our balance sheet remains healthy and we ended the June quarter with $1.9 billion in cash and cash equivalents and 287 million ordinary shares outstanding. Our Board has approved our quarterly dividend payment of $0.63 for the June quarter, which will be payable on October 3, 2018. Interest expense for the June quarter was $54 million. During the fiscal year 2018, the company repurchased $214 million of outstanding debt and our debt structure and level of interest expense continues to be well within our financial capabilities, given our staggered maturities and low interest rates. Our net debt to the last 12 months EBITDA ratio is 1.2x as of June quarter. In the June quarter as part of a consortium led by the Bain Private Equity, we finalized our investment of approximately $1.3 billion in acquisition of the Toshiba Memory Corporation. This investment is expected to have a 5% per annum financial return that is intended to be held to maturity over its 6-year life. For fiscal 2018, we returned 51% of cash flow from operations to the shareholders, slightly above the high-end of our long-term model range of 30% to 50%. And as we did last quarter, I wanted to provide an updated perspective on the recently enacted and proposed trade actions to increase tariffs on some products imported into the U.S., including some of Seagate storage products. As a global technology company, Seagate has decades of experience in managing complex global supply chains and technology manufacturing operations in nearly every region. In response to the tariff changes that took place this month we are actively working with our affected customers and suppliers to identify and implement minimally disruptive mitigation plans. In reference to any additional new duty tax changes that may take effect will be evaluating additional minimally disruptive mitigation plans for the affected customers and suppliers. Going forward, we'll update you if there are any conditions that change in our business. Overall, our operational and financial performance in the June quarter and full fiscal 2018 reflects solid execution as well as the earnings power and financial leverage within our business model. I would now like to turn the call back to Dave Mosley.

Thanks, Dave. Strong global macroeconomic conditions and global investments in IT infrastructure persist leading to higher cloud data center and edge demand. For Seagate, secular market growth trends in nearline, surveillance and SSD are more than offsetting mature market trends as in -- such as in the compute and mission-critical markets. Given the current macroeconomic environment and forecast for data growth and related storage spending, we believe we are on pace to demonstrate another year of revenue and profitability growth and strong cash flow generation in fiscal 2019. To meet the needs of the growing broad base of customers and verticals requiring mass storage solutions, particularly in the cloud environments, we're bringing out a number of new technology enhancements, including multi-actuator designs, security features and application workload advancements specific to cloud customers. An important aspect of Seagate storage portfolio that will accelerate through fiscal 2019 is growing our SSD revenue in the SaaS, NVMe, consumer and gaming markets as we integrate our TMC NAND supply and qualify our products with customers. These qualifications are going well and our expectations are to achieve double-digit sequential quarterly revenue growth through the fiscal year. With favorable conditions and continued execution, we now have NAND supply to sustain this rate of growth over the next few years. For the September quarter, we anticipate year-over-year revenue, exabyte and profitability growth with continued strong enterprise demand and sequential seasonal demand in the compute and gaming markets. We remain bit constrained and we're working to serve our customers across their portfolio needs as we actively work to optimize our media and heads for our entire mass storage solution product set. We expect total revenues in the September quarter to be up approximately 5% sequentially, demonstrating year-over-year revenue growth of over 10%. This rate of sequential growth should continue through the December quarter as well. Cash flow from operations for the September quarter are forecasted to be approximately $500 million, up significantly year-over-year. We expect gross margins for the September quarter to be at the midpoint of our 29% to 33% long-term range, as we competitively participate in the seasonal demand for HDD gaming, consumer and compute products, continue to ramp to yield our highest capacity products within our HDD enterprise portfolio, and ramp our SSD business revenue. Our vertically integrated factory utilization remains very high. We continue to manage our day-to-day operating expenses tightly and work to align our organization with future opportunities. Toward these efforts, we're executing a voluntary retirement plan in the September quarter that is outside of our restructuring activities. This plan will increase our overall operating expenses by approximately 5% sequentially. Beyond September, overall operating expenses will then decline to approximately $385 million a quarter, providing further leverage to our fiscal year '19 financial model and at the low-end of our long-term financial model range of 13% to 15%. To address the high-capacity mass storage HDD demand signals and the product transitions we've planned for FY19 and beyond, we're increasing our capital expenditures in the September and December quarter's to approximately 6% of revenue. For the fiscal year, we're forecasting capital expenditures to remain below our long-term targeted range of 6% to 8% of revenue. In summary, I’d like to thank our customers, suppliers, business partners and employees for their alignment and contributions to our strong fiscal year 2018 results. These efforts have Seagate well-positioned for future success and value creation in FY2019 and beyond. Thank you for joining us on the call today. And we'll now open-up the call for questions and answers.

[Operator Instructions] And our first question is from Katy Huberty from Morgan Stanley. Your line is now open.

Thank you. Good morning. It seems like the biggest tailwind, but also a risk going forward is how strong the enterprise HDD business was in June. So, just wonder whether you can comment on what you see over the next six months from both the mission-critical business where you saw upside as well as whether you're seeing any softening in cloud demand? And then just as a follow-on to that, three months ago, you talked about better seasonal volumes as well as the ramp of high cap in SSD, new products helping margins in the back half, but it doesn't sound like you expect sequential improvement as you go into the September quarter. So just wondering if anything has changed on that front. Thank you.

Thanks, Katy. So mission-critical has been fairly steady, I would say. Last quarter was a little bit higher than last couple of quarters, so we’re watching it carefully to see if we do need to ratchet that up, but I would consider that market very stable. On the cloud front, there are a number of different things going on. And I would say that demand continues very strong. Strong globally and there's also a mix up over the last couple of years many customers who once upon a time were buying 2 and 4 terabytes are now up at 10 and 12 terabytes. So you see as people continue to do these buildouts you see the demand for more and more exabytes, which is where we have to chase with our heads and media investment as well. So I don't see that abating in the next six months. To some extent the industry will answer that as much as we can, but I think for the foreseeable future that’s very strong. Dave, do you want to …? David H. Morton, Jr.: Yes, in regards to the back half of the year, specifically as the sequential margin impact, I'd tell you everything remains on track. With that said, I just think there's some cautiousness in and around some of the regular inflationary pressures we see both from raw materials as well as some of the wage inflation. And as we continue to navigate through that, as we continue to be a bit constrained on particularly at the higher end of those capacity points, obviously that will continue to shape our -- us meeting that margin profile and moving into the higher end of that range, Katy.

That’s right, Katy. So we really want to answer the higher mix that we're seeing all the time. And as we do that, we’ve to launch new products. Some of those new products we have to get to yield -- ramp to yield as quickly as we can. And those are some of the headwinds that we’re facing I think, but long-term I don't think those trends are bad for us. I think they’re very good.

Okay. Thank you. Congrats on the quarter.

Thanks.

Thank you. Our next question is from Steve Fox from Cross Research. Your line is now open.

Thanks. Good morning. I was wondering on the NAND front, if you could just maybe provide a little bit more detail on how exactly that ramp proceeds? You gave some color on the revenues, but if you think about a waterfall where you can have the most success commercially for a second, third as you go through the next few quarters and where, that would be helpful. And then I had a follow-up.

Yes. Steve, I don't think we want to tip our hand too much. But you can see from the interfaces that we’re addressing, that we're really going after the enterprise most heavily, I mean, Seagate has deep experience with SaaS drives, of course, and that's what we've had qualified in the past. So the transition as we get more NAND supply online, the transition in some of those existing customers already took to just more market share. And maybe a little bit of horizontal proliferation to the new customers as well as possible in SaaS. NVMe is -- as we all know, it's fairly new and changing very quickly. There's a lot of demand for new feature sets. We feel fairly linked in with customers there and we feel like we've a pretty good product portfolio. So as the market switches to NVMe, especially with enterprise features associated with that, with our customer intimacy we should do pretty well. There are also other consumer and gaming markets that we will try to deploy the new assets against, but it look -- really stays -- we really stay focused on enterprise.

Great. That’s helpful. And then just -- obviously, it's a small bump up in CapEx and you’re talking about this being continued. But I was curious in terms of the Q1 increase in CapEx, like what bottlenecks are you addressing with that? Is it more related to components or testing etcetera?

Yes, they’re short-term and long-term. The component piece will be relatively longer lead times, so we’re looking out into FY20 and '21 and making sure we have the right comp on stands with the market there. But there will be some short-term tactical things like more test capacity and things like that, because as we move to higher and higher capacity points for the individual disk drives, then we need more test capacity to answer that.

Great. Thank you very much.

Thank you. Our next question is from Ananda Baruah from Loop Capital. Your line is now open.

Hi. Good morning, guys. Thanks for taking the question. Congrats on the solid results. Hey, just real quick, Dave, congrats. It's been great working with you and the company certainly performed well while you’ve been in the role. So we look forward to seeing what’s next in store for you. Just a couple, if you could. Dave, just going back to cloud, when do you or have you yet -- are you yet able to get a sense of when you may not be in a cloud constrained environment, or when would you envision that if you have a sense of that being?

Yes, so for watchers of the industry over the last 10 years, you’ve seen these digestion phases that the cloud goes through. I would say in answer to Katy's question as well, we don't see that in the next six months. Some of that will be driven a little bit by what's going on in the macro, but we don't see that in the near horizon at least. Longer-term the nice thing for us right now is not only the propagation of customers globally, it's not just a few hyperscale people that are doing massive installs, its globally happening. The other thing is that these capacity points are driving north. So I think as people are doing the install, they’re not just answering the call of yesterday's data, they’re actually the data growth is very large. So they want our highest capacity drives. Just over the last few years we've seen almost a 40% CAGR, but just in this last period that we’re in is ticking up. So we are watching carefully. I think, Amanda, to answer your question about any of these digestion phases that we've been bit by the past, but we don't see one in the near-term here.

And how are the constraints impacting like-for-like kind of pricing? And are the dynamics impacting the tenure of contract conversations yet, with your customers?

I do think that this cycle is getting people to acknowledge that they have to be a little bit more strategic on the install. And so, therefore if you’re building a big data center, you don't show up in the last few weeks and surprise us with a bunch of new demand, because we just can't answer it in that kind of lead lines. I think most of our large-scale customers are smart about that and that is affecting that cycle that you made reference to. Pricing will still stay aggressive for the highest capacity points I think and we will continue to have to answer that with cost reductions and new product introductions in areal density is the same way we ever have.

Great. Thanks so much.

Thank you. Our next question is from Tim Long from BMO. Your line is now open.

Thank you. Just a few, if I could. On the new products you mentioned around security and workload [ph] enhancements, et cetera. Could you talk a little bit about how you see them ramping into the revenue model? And is there any of that in the September and December views? And then just on looking out to December with the sequential growth there, just give us a little sense as to your visibility into the numbers. It sounds like there's just tons of demand and capacity constrained, anything other than that you could talk about in the visibility? Thank you.

So as far as the new feature developments, I would say that some of this comes with the maturation of the market. You see customers who want their specific applications optimized and there -- they can pick from a plethora of different features that we've developed arguably over the years for key OEMs or for some of the early movers in the cloud. Now you're starting to see optimization scenarios for some of the growing Tier 2 people and so on. I think what that does is it creates a great business relationship between the companies. It's not necessarily something that that drives a lot of increased revenue or anything other than the fact that it speeds up their transition and makes their data centers more effective, so that they can get done with -- to get done. Beyond six months from now, it's really hard to tell, I mean, we've all been through these cloud cycles before and so I'm -- maybe a little -- there's a little bit of trepidation always that there is another digestion phase coming. But again given how broad-based it is this time, I think it'll probably more muted and we will stay at or above the traditional growth rates, I think.

Okay. Thank you.

Thank you. Our next question is from Aaron Rakers from Wells Fargo. Your line is now open.

Yes. Thank you. And also congratulations on the quarter. I just wanted to ask and going back with the silicon business. I know that you have mentioned 53% year-over-year growth and that kind of kicking in here as we go forward. I’m just curious as we think about that line, how we should think about the gross margin of that business progressing? And kind of taking that also into consideration, it would appear that your hard disk drive gross margin is actually even healthily above that 29% to 33% range. So any kind of color of the sustainability of that hard disk drive gross margin as well.

Yes, I think that over time given the new NAND supply agreement, we will be able to grow certainly accretive to our operating income, which is where really what I'm focused on. The SSD businesses that we have, the lines of business that we have. I think it is fair to say that so far it's been -- it's not been accretive on the gross margin line or the operating income line, and we’re going to go over to fix that as we move forward.

Okay. And hard disk drive gross margin? David H. Morton, Jr.: Yes, Aaron, we don’t want to get into separation of that for obvious competitive reasons. Clearly, we have some upside opportunities as they had intimated on our silicon business. And so we look at it as just all accretive going forward.

Fair enough.

Yes, it depends on the portfolio pretty well, Aaron. You know trying to balance all the things we can for revenue growth and cash flow generations on.

Yes, I agree. Fair enough. Thank you.

Thanks.

Thank you. Our next question is from Rob Cihra from Guggenheim Partners. Your line is now open.

Great. Thanks very much for squeezing in. I guess just a long -- long-term question -- sorry, not long question. The -- you obviously had great leverage from reducing costs and capacity and focus on to nearline. Where do you -- sort of, how do you drive the metrics in terms, I mean, at one point could you -- could see the lead only due enterprise drives and no client at all? I mean, but at the same time how do you manage that, but keep your scale economics? Thanks.

Yes, Rob, I really don't think that’s going to happen and we’re seeing growth in some of the non-client compute markets, the surveillance in particular. Some of the edge devices, the burgeoning edge device, I mean, we might even classify gaming as that, video cashing at the edge is going to be a big market. So, as we look to balance all those things, like I said and to the answer to Aaron's question, we’re going to try to grow revenue first and then balance cash flow. Could the market all become cloud, I don’t think the demand will grow that big, but its growing pretty fast in the last couple of years. So if it could have been nice for us to be able to pivot to there, we’re going to need more heads and disks and drive capacity and so on and so forth to do that. But I would hesitate to say that the other markets are winnowing away if anything, they’re growing in exabytes as well.

Okay. That’s fair. Thank you.

Okay. Thanks, everyone. I would like to again thank all of our customers, suppliers, partners and employees for a great quarter, and we'll talk to you again next quarter. Thanks.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the conference. You may now disconnect.