Kate Scolnick - Vice President, Investor Relations Steve Luczo - Chairman and Chief Executive Officer Pat O’Malley - Executive Vice President and Chief Financial Officer Rocky Pimentel - President, Global Markets and Customers Dave Mosley - President, Operations and Technology Jamie Lerner - President, Cloud Storage and Systems Ken Massaroni - Executive Vice President and General Counsel.

Rich Kugele - Needham & Company Aaron Rakers - Stifel Sherri Scribner - Deutsche Bank Steven Fox - Cross Research Amit Daryanani - RBC Capital Markets Katy Huberty - Morgan Stanley Ananda Baruah - Brean Capital Andrew Nowinski - Piper Jaffray Monika Garg - Pacific Crest Securities Scott Craig - Bank of America Merrill Lynch Joe Wittine - Longbow Research.

Good day, ladies and gentlemen and welcome to the Seagate Technology’s Fiscal Third Quarter 2014 Financial Results Conference Call. My name is Jackie 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 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, Vice President, Investor Relations. Please proceed, Kate..

Thank you. Good afternoon, everyone and welcome to today’s call.

Joining me today from the Seagate executive team is our Chairman and CEO, Steve Luczo; EVP and CFO, Pat O’Malley; President, Global Markets and Customers, Rocky Pimentel; President, Operations and Technology, Dave Mosley; President, Cloud Storage and Systems, Jamie Lerner; and EVP and General Counsel, Ken Massaroni..

Ladies and gentlemen, at this moment we are experiencing technical difficulties. Your conference will resume shortly. You are back in the line..

Information concerning risk, uncertainties and other factors that could cause results to differ materially from the expectations described herein are contained in the company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on August 7, 2013 and in the supplemental information posted to our website.

These forward-looking statements should not be relied upon as representing the company’s view of any subsequent date and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they are made. I would now like to turn the call over to Steve Luczo. Please go ahead, Steve..

Thank you, Kate. Good afternoon, everyone and thank you for joining us today. Before I begin our quarterly overview, I’d like to welcome Jamie Lerner who has recently joined Seagate and is our President of Cloud Systems and Solutions.

Jamie is leading the integration of the storage systems business that we have recently acquired with Xyratex in addition to other cloud initiatives within Seagate. We expect Jamie to provide more details about these initiatives on next quarter’s call. Now, I will review the key figures from our fiscal third quarter.

Seagate demonstrated solid execution this quarter achieving revenues of $3.4 billion, net income of $395 million and diluted earnings per share of $1.17. On a non-GAAP basis, we recorded gross margins of 28.5%, net income of $453 million and diluted earnings per share of $1.34.

During the March quarter, we shipped 50.8 exabytes of storage and average 920 gigabytes per drive across our portfolio. Our non-GAAP operating margin for the quarter was 14.7% and operating expenses were $470 million slightly better than our plan due to lower variable compensation and cost containment efforts.

Inventory turns, days sales outstanding were within our targeted ranges. We continue to manage our capital investments closely and our production cautiously and we are pleased with our performance against our metrics for manufacturing efficiency and operational excellence.

For fiscal year ‘14, our capital investments are running below our long-term targeted range of 6% to 8% of revenue and it will most likely be below the range for the full fiscal year. Operating cash flow for the quarter was $443 million and free cash flow was $319 million.

There were various reasons operating cash flow was impacted this quarter, some of which were non-recurring in nature and some front-end linearity. We expect to be back to our normal level of operating cash flow in the June quarter and we anticipate achieving operating cash flow of at least $2.7 billion for the fiscal year.

Our balance sheet remains healthy and we ended the quarter with $2.3 billion in cash and investments. We continue our focus on returning capital to shareholders. And during the March quarter, we returned $324 million, including $184 million to redeem 3.5 million shares and $140 million for a quarterly dividend of $0.43 per share.

We are planning for a similar level of cash return in the June quarter, which will keep us on track to exceed our shareholder capital allocation goals for the fiscal year. We are currently in the early stages of planning for fiscal year ‘15 and we will update our capital allocation plans on the July call.

We closed our acquisition of Xyratex on March 31 slightly earlier than planned. The addition of Xyratex will further ensure uninterrupted access to important capital equipment for our integrated supply chain and expand Seagate’s storage solutions portfolio with their enterprise data storage systems business and high-performance computing business.

We are in the initial stages of integration planning and we expect the acquisition to be slightly EPS accretive in fiscal year ‘15. We continue to believe that this decade will be transformational in the amounts of data created as well as where and how data will be stored.

The economics of storage infrastructures are changing as utilization of public and private hyperscale storage and open-source solutions are working to reduce the total cost of ownership of storage, while increasing the speed and efficiency with which customers can leverage massive computing and storage power.

Growth in mobile, personal devices, video surveillance and big data analytics are all trends that we believe will continue creating significant demand for next generation storage systems and solutions.

Through our technology investments, we are aligning our storage product portfolio with these emerging trends, which we have categorized as mobility, cloud and open-source computing.

We believe the significant investments we are making at the drive device level can bring even higher capacities, faster access time, increased reliability and improved overall efficiency to storage systems.

Examples of these investments are reflected in the new products we introduced this quarter, including our 6 terabyte nearline enterprise drive, which is our highest capacity, self-encrypting product for server and storage systems and the fastest nearline drive on the market.

We believe we will see a strong ramp for this product in the second half of the calendar year, as enterprise cloud customers continue to push for higher density drive technology.

Our seventh-generation surveillance drive, which can store over 500 hours of high-definition video, is specifically designed for the high right workloads of surveillance applications. It is estimated that surveillance cameras worldwide are producing over 400 petabytes of data each day.

And we believe this market will continue to be a high growth opportunity for Seagate. In addition, market interest for Seagate’s object-based Kinetic Open Storage platform continues to grow across many industry verticals.

We believe the Kinetic platform will be a fundamental underpinning for next generation cloud architecture and we continue to actively cultivate an ecosystem of system integrators and software developers. We plan to have further technology development and customer announcements later this year.

Turning to our outlook, the market environment in the tech sector remains dynamic with visibility somewhat limited. We therefore continue to plan conservatively for the near-term, while providing flexibility to meet importer upsides and make investments for the longer term opportunities we have discussed.

For the June quarter, we are planning for revenues of at least $3.3 billion and operating expenses of $505 million, including the acquisition of Xyratex. As we just closed this acquisition, we are not modeling synergies assumptions at this time.

Non-GAAP margins of approximately 28%, down slightly from the March quarter reflecting seasonality, market mix and with relatively stable pricing and maintaining overall market share of approximately 40% to 42%. Our June outlook assumes unit demand to be down a few points with negotiated pricing having been relatively benign.

The outlook also assumes Exabyte growth will be modest due to seasonality in the client and branded markets as well as due to a few specific temporal factors in the enterprise and nearline market this quarter.

These factors include a few significant enterprise customers are absorbing in-house drive inventory and reducing disk drive purchases in the June quarter as they prepare for their new product introductions planned for the second half of the calendar year.

And a number of cloud service providers have accelerated their time to deployment and have improved overall utilization and existing cloud infrastructures during the last three to four quarters, thereby absorbing their in-house drive inventory over the last two to three quarters.

Based on current customer sentiment, we are planning for a stronger market demand in the second half of the calendar year as these entities deploy new build outs.

As we look ahead at the second half of the calendar year, we are anticipating the stronger seasonal demand in the client and branded markets that we have seen historically and for the temporal issues in the enterprise and nearline market to be resolved.

Given these factors, we would expect market demand at the higher end of the range we have seen over the last several quarters with continued benign price erosion.

On behalf of the entire management team, I would like to thank our employees for their performance this quarter and thank our customers, partners, suppliers for their support and commitment as well as our shareholders. At this time, we would like to open up the call for questions..

(Operator Instructions) And your first question comes from the line of Rich Kugele with Needham & Company. Please proceed..

Thank you. Good afternoon.

Just a couple of questions, I guess first just a follow-up, Steve on your last comment there on pricing, so your indications from conversations with the OEMs that you think that the second half if their demand profile plays out that you can maintain this or even a lower level of price erosion quarterly?.

Yes, I mean if we break it down by market, Rich I think on the client side both notebook and desktop, those markets have stabilized I would say over the last year, I mean I think we have been pretty consistent in saying we thought it was kind of flattish market year-over-year.

And it seems to continue to be so and I think for the rest of the year we are probably thinking the same, which would imply maybe low-single digit growth for the second half of this year relative to the first half, but flattish year-over-year. That pricing has been pretty stable overall.

There has been shifts by the OEMs in terms of capacity points that they have been purchasing.

Nearline, I think has been aggressive in the last couple, three quarters and I just don’t see those price erosions sustaining themselves, given the capacity points that we have to deliver over the next year, going from 6 to 8 to 10 terabytes, that’s a lot of technical investment as you know, it’s also a lot of test investment.

And therefore I think that the margin profile on those drives is about where they can be in order to sustain the investment that we have to make going forward. So I would say that I would see a reduction in that price erosion to something close to what we are seeing on the client side..

Okay.

And then just lastly I don’t know if Jamie wants to handle this or Pat, but how should we be modeling the progression to neutral to slight accretion from Xyratex, how long do you think it will take to get to a more efficient operating model for that business?.

This is Pat. Jamie could add color to it Rich, but obviously we haven’t started the synergies. Jamie and his team and Dave and his team are working on the capital equipment group have already started that. I would imagine you would see incremental improvements quarter-to-quarter.

Obviously, we want to drive the top line growth as well and not just the OpEx, but I would expect you see OpEx reshaping over the next two quarters and start seeing signs of that in the P&L as Jamie reshaped the top line that will probably take a little longer..

And will the Evolve business be rolled up into that entity?.

Well, Jamie has responsibility for Evolve as well and we are going to through the work right now to figure out how they are going to integrate our Evolve business, Xyratex, our data center operations business and some of the business – some of the new efforts that we had focused on devices aimed towards hyper scale inside the both the product management and the design center, so all of that will be under Jamie..

Okay, excellent. Thank you very much..

And your next question comes from the line of Aaron Rakers with Stifel. Please proceed..

Thanks for taking the questions. So the first question just to build on Rich’s question on the Xyratex transaction.

We actually build our models I have got a lot of questions around how we think about the gross margin of bringing Xyratex into the fold, relative to what Xyratex were to look like on a standalone basis to gross margin on that systems business.

So maybe you can help us understand at least albeit early how we should think about that gross margin trajectory from that revenue stream and are you still targeting $500 million to $600 million in revenue for the first fiscal year of combined, that being in the model?.

This is Pat. I think the $500 million to $600 million is where what we are targeting whether we can achieve that obviously we are engaging with customers has been pretty positive.

So that would be the model we are aiming to, but even with that with the gross margins probably 10 to 20 basis points drag on overall HDD, but we would hope to even neutralize that as a year, but that’s what we are modeling now..

Okay. And then as a quick follow-up, can you talk a little bit about how you guys are thinking about capacity shipment trends in the overall hard disk drive industry, I think obviously at 8% year-over-year growth that’s a little bit off the pace that we saw outlined at the analyst event back in 2013 I think 26%.

So maybe you can help us understand are we changing at all from that growth trajectory in terms of capacity shift are you still comfortable that that’s a progression we are working towards?.

I think we are still working towards that projection. I don’t, it’s an interesting discussion between capacity shipped versus capacity deployed. And I think – I usually typically think of it in terms of capacity deployed, i.e. end user demand of petabytes versus ability to deliver aerial density.

And I do think that there has been a lot of inventory absorbed over the last six months as again on the cloud side as utilization rates have bumped and deployment times have been blocked down. And you know at least of one major customer that also kind of redeployed a bunch of drives into cold store or warm store.

All those customers have kind of said that that one-time event or series of one-time events is kind of over and they were looking at second half demand that more reflects the end user growth in data. And their end user growth in data is actually, probably accelerated not decelerated over the last six months.

So that’s why I am still fundamentally encouraged by the overall delta, which is what’s petabyte growth at the demand level versus aerial density growth and I still believe it’s running two laps at least..

Okay, thank you..

Yes, thanks..

And your next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed..

Hi, I think I just wanted to ask a quick question about your expectations for Xyratex in terms of how much revenue they add next quarter, I guess I would have thought the revenue would have ticked up some based on the benefit of having Xyratex in the business?.

Yes, about $100 million, but it’s really hard to say right now, because again you may have a big test business, which we now own and we have to kind of – we don’t really know what the order profile of that business is going to look like yet.

I mean, obviously their customers are still deciding which orders to place when and then of course we have to be able to fulfill those and that timing isn’t completely understood yet either. So I think right now we are thinking about $100 million.

I think you also have to recognize that the systems business was declining fairly rapidly over the last year. And the good news is, is that the traction with our OEMs has been quite positive in terms of their perspective on what they might do with us now that it’s owned by Seagate, but of course, the lag time on that is fairly long as well.

It’s not like they are making order and we shipped it this quarter. So, I think we have to recognize that those revenues were falling and we are kind offsetting the fall of that revenue as quickly as we can. So, all in all, I think about $100 million, which kind of speaks to a seasonal decline in the June revenue numbers for the HDD business.

And then we will just see what happens with the test business, whether or not the Xyratex business picks up a little bit. Good news on the Xyratex business is they do a lot of the integration for some of the new storage architectures as well and we have seen a lot of encouraging signs from those customers buy Seagate’s ownership as well.

So, I think we just have to get a little more time under our belt to be able to be more articulate about what that revenue profile looks like and we hope to do that in the call for the June quarter..

Okay, that’s very helpful. Thank you, Steve. And then I just wanted to follow up with a question about your expectations for PCs, you were generally pretty positive in your comments earlier about the PC market, but I think some people are concerned that maybe the XP refresh impact is starting to wane, so wanted to get your updated thoughts? Thanks..

In general, I think versus last quarter where it felt like business was getting some traction. And I was a little bit cautious about – but we are going to be really disappointed in April or May like we were kind of the last two cycles that’s happened.

I actually have to say that I am more encouraged in terms of what I think is going on, on a global basis in terms of economic activity and what that means for technology spending in general.

So, I mean, I think that we are – we have stabilized the decline and I think we are going to see some modest growth across – really across all segments here going forward. June quarter is obviously, mostly always seasonally down except for when we have been recovering from floods or huge cutbacks by the industry.

So, where we are at in June? I actually feel okay about and the back half of the year is we are starting to get some good indications from customers about stronger shipment scenarios..

Great, thank you..

Thanks..

And your next question comes from the line of Steven Fox with Cross Research. Please proceed..

Thanks. Good afternoon. Two questions from me. First of all, I don’t know if there is any more detail in terms of what the initial steps are that you guys had tackled in terms of integrating Xyratex, it will be great to get some more color on that.

And then secondly, Steve, in terms of some of the temporal issues you mentioned, you did mention that higher utilization of HDDs.

I guess is that something that we should think of as an ongoing impact of some new technologies, have been sort of ramped into some service provider capital models?.

Not as I have heard the conversation, which has been directly with two of the largest CSPs that they are more. Again, I think people can understand that for the big CSPs today that are buying directly mostly from the drive industry, they are all employing very different architectures.

I am not sure if we grasp this yet that those architectures are in fact their proprietary competitive advantages for the application set that they are serving. So, the Google implementation is very different than Microsoft’s is very different than Amazon’s and different than AWS’ versus the rest of Amazon versus eBay.

And what’s happening is that as they are pursuing different architectures to achieve those application sets, they have breakthroughs every once in a while whether or not they are on how quickly they can get a server up and running and active with storage to how they get utilization rates and then in a couple of cases over the last couple of quarters, a couple of those really being providers have either dramatically pulled in time to deployment in one case, because I think they were probably not competitive and/or kind of step function improvements and utilization.

The conversations are pretty much that I have had it pretty much some of those technical leads have pretty much concluded that that’s it for a while. And then you know in another year or two maybe there is another step function change.

I just think that’s the nature of the business with those big CSPs that are calling multiple billions of dollars into their infrastructures. So, I don’t think it was like some magic of some new technology.

And by the way I wouldn’t say it was disk drive related, I think it’s overall system related that those are utilization rates and deployment rates that have improved, not just targeted towards disk drives. I think it’s across the board..

Great, that’s very helpful.

And then just any other color on what are the first steps in terms of or you got to get a handle on with Xyratex?.

I will let Jamie talk to it, because he has been into it the most..

Hey, Steven, this is Jamie. I mean, I think we are thinking about the acquisition of Xyratex in terms of putting together both a technical architecture and a business architecture.

On the technical architecture side, we are looking at ways and drilling in with our customers in the ways that we can combine the storage devices that we have into the enclosures and appliances that Xyratex builds.

And working with our customers say, are there architectures that we can come up with that allow us to achieve synergies or technical breakthroughs by combining those technologies, essentially Seagate on Seagate methods.

On the business architecture, we are looking at can we provide greater operations, manufacturing and logistics synergies between the disk business and the enclosure business to pull cost out of the model as well. So, we are working to do both those and next quarter we should be able to come back with a strategy..

Great, that’s all. Very helpful. Good luck going forward with that..

Yes, thank you..

And your next question comes from the line of Amit Daryanani with RBC Capital Markets. Please proceed..

Thanks a lot. Good afternoon guys. Two questions for me. One on the enterprise side, Steve you talked about a couple of the temporal issues that are impacting the enterprise business. It sounds like enterprise units both mission-critical capacity will be down sequentially in June.

I am curious are we seeing incremental conversations about SSDs becoming a more of a replacement option on the enterprise side and if that’s the any parts, especially for nearline drives?.

No. Again, I mean, I just don’t – the architectures aren’t really about replacing HDDs. I mean, we have kind of been over this a whole bunch of calls. SSD deployment is about the acceleration and fast data processing. HDD is about storing data and they complement one another. So, it’s not that architectural shift.

What’s happening is we have two big customers who are both about to release new products on the storage side, which are mostly HDD-based storage products for the second half of the year. And when they do that, they typically bleed down all the inventory they have inside of their company in various labs.

And I mean, people don’t realize the scale of what some of these customers do in terms of the drives that they hold for a number of years as they test these systems. And when they get to the end of a product cycle, they basically are able to flush through all that technology as they prepare for the next generation of technology.

So, it’s related to that..

Fair enough. And then I guess the $505 million of OpEx that was mentioned for June, how much of that incremental $35 million is Xyratex centric versus some of the organic Seagate dynamics, can you kind of break that out? That would be helpful..

The vast majority of that, you could probably model in $40 million for Xyratex, $35 million to $40 million, almost all of it. You might have little puts and takes, but you just model all of it..

Fair enough. Thanks a lot..

Thank you..

And your next question comes from the line of Katy Huberty with Morgan Stanley. Please proceed..

Yes, thanks.

How did the shorter cloud deployment times impact you order visibility? In other words, when will you have certainty around whether those orders come through, is it a few weeks ahead of time or is it months?.

Well, kind of I’d just associate to two things. It’s not so much about visibility on orders, it’s about how much inventory or how much are they guessing about what they need.

So, I think, how I view it Katy is that we have way better alignment between supply and demand, because with the longer deployment periods, what was happening is that the customers were having to predict out in the future how much capacity they would need, server capacity, storage capacity, and they would buy all that and then sometimes they were right and sometimes they were wrong.

And of course, being wrong is probably was really probably a really bad thing, because when they couldn’t bring servers online. So, with the ability to deploy quicker just means that the forecast that we get are more accurate.

In terms of our ability to respond to that, that’s a completely different dynamic which is actually becoming more challenging I think for the customers.

And one of the reasons why we think some of these pricing issues are going to kind of have to stabilize is that, as you get to the 6 and the 8 and the 10 terabyte drives, the lead time on those drives is going to be pretty significant whether or not that’s wafer-related or whether or not that’s test related.

And so you are not going to kind of be able to call up and say, by the way I need an extra 500,000 eight TBs I forgot to order, because they are just not going to be there and the industry can’t respond that quickly.

So I think we are going to get better linkage on supply and demand and I think we are probably going to get more accurate forecast because people are going to realize that the lead times on these drives are longer, much longer than they are used to..

Okay, thanks.

Any update on expected timing or results of MOFCOM deciding whether the industry can begin taking out costs?.

I think Ken can talk to that..

Yes, we continue to have a positive dialogue with MOFCOM regarding market dynamics that gave rise to the original conditions that were attached to the approval of our Samsung transaction. We are going to continue to have those discussions with MOFCOM and we continue to expect that in due course, the conditions will be released.

But unfortunately, I can’t tell you it will be this day or that day. It continues to be something that they are paying close attention to and we will continue to cooperate with them on..

Okay. Thank you very much..

And your next question comes from the line of Ananda Baruah with Brean Capital. Please proceed..

Hey, thanks guys for taking the question. Few if I could, the first maybe for Pat, the second for Steve.

Pat I believe last quarter you guys were talking about HDD related OpEx starting to soften at least as a percentage of revenue, in the June quarter you are beginning to drive some leverage and having some of that going forward, I was just wondering if you could give us some context around what to expect now?.

I think you saw it manifest in this quarter where we basically went from the 4.90 plus down to the 4.69. So we started shaping that at the end of activities in December, which showed up in this quarter.

We expect those to stay at the same level from an HDD level and all the increases from Q3 to Q4 are really driven by the integration or just the addition of Xyratex OpEx. As we look to integrate the organization, Xyratex we expected some synergies there.

But many of the modes that we are looking to reshape right now and on this reshaping deployed obviously with Jamie’s initiatives to drive cloud we will make the appropriate level of investments there with the SSD appropriate level there.

So probably we are going to stay at the high end of that 12 to 14 for a period of time with the expectation to drive revenue growth with those investments. But for the short period of time in that high end of HDD and then we have to figure out how to integrate Xyratex.

As Steve said Evolve and look at the whole holistic picture and say how do we reallocate that, but it’s going to be at the high end of the range. And we will – as Steve talked about the capital allocation we will talk further about the OpEx model for ’15 as we finalize our plans going into next year..

Yes, thanks Pat. That’s really helpful.

Steve can you just – just a follow-up for you on your TAM comments with regards to the second half, should we expect I guess you said sort of a high end what current quarters have been, should we expect September and December to be sort of towards the high end of what sort of recent quarters have been which should be more in the 1.42 range, are you saying September quarter will be sort of at the high end of what recent September quarters have been and December quarter at the high end of what recent December quarters have been, just a clarification there? Thanks..

Sorry I was trying to be confusing. I think we think that September and December are probably in the 1.40 to 1.45 range..

Thanks a lot..

And your next question comes from the line of Andrew Nowinski with Piper Jaffray. Please proceed..

Okay. Thanks for taking the question. I understand the weakness in the enterprise, but can you discuss the initial uptake of your new 6 terabyte drive by the cloud providers? And then I have a follow-up. Thanks..

Hi, this is Rocky Pimentel. So the 6 terabyte drive is in late evaluation with the customers and we see clearly very positive response from all the cloud customers there. They are definitely interested in higher capacity, higher density per drive products and we have done some really good engineering work on that product.

We think it’s a real value leader in performance and design margins, so we are pretty optimistic about how it’s going to play in the marketplace when we start production shipments probably towards the back half of this quarter, but certainly building strongly as we go into the second half of this current calendar year..

Okay, got it.

And then I know you will update your capital allocation next call, but can you tell us how much cash you need on hand to run the day-to-day operations and what’s your appetite for taking on more debt to maintain the current level of repurchases if needed?.

We think we have the appropriate level of leverage, we certainly could take on more leverage, but we look at that leverage more as monetizing it through investments in business.

So I think returning the level of capital we did has been appropriate for where we have been in the investment stage of the company, so we are still committed to our dividend and growing the dividend. And we will continue an active buyback program, but we want to look at everything that’s available to us.

So we will monitor that and like Steve said, we will come back in July with further updates on that, but we will – certainly will continue a buyback and a dividend program. And with the debt like I said, I think the levels we have today even though we have the capacity for some additional debt, but I think the levels are fine today..

And then the minimum cash level?.

I am sorry minimum cash level, $1 billion to $1.5 billion we could run the business at that level. I am more comfortable with $1.5 billion for strategic elements that may pop themselves up, but we feel comfortably at the $2.3 billion that we have plenty of cash to run the business..

Got it. Thank you..

And your next question comes from the line of Monika Garg with Pacific Crest Securities. Please proceed..

Thanks for taking my question.

Just kind of first on the September and December time, which you talked 1.40 to 1.45 range, maybe could you elaborate which particular segment you see the more pickup for the demand?.

I think it’s across the board..

Thanks.

And then you kind of talked about some inventory digestion at your customers at enterprise and hyperscale, do you think it is possible that you are seeing the pause, because people are waiting for the 6 terabyte drives or it is more to do with some products at their end?.

No, this has to do with your own products..

Okay, just kind of the last one on the NAND side, maybe could you kind of talk about the NAND strategy, do you think you need any more M&A in this field or do you think you would like to grow the business more in-house? Thanks..

Hi, this is Rocky Pimentel. On the NAND side, certainly, we have our organic efforts on SSD, but as we have said in the past we are definitely always on, looking at the inorganic activates we can do, whether it’s acquisition or investments.

So we continue to have a pretty disciplined filter, but needless to say we see ourselves pushing forward the initiative from both an organic and an inorganic standpoint..

Thank you. That’s helpful..

And your next question comes from the line of Scott Craig with Bank of America Merrill Lynch. Please proceed..

Yes, thanks. Good afternoon.

Pat I was wondering if you can go over the OpEx again on the quarter because it came in a bit better than you guys have thought originally, you mentioned cost containment, given you expected some of the comp stuff to go away, so is there anything specific you guys are doing on the cost side that perhaps continues moving forward here.

And then secondly, just a clean up item on our models on the tax rate, there was a credit there as opposed to an expense, can you help us understand what that was and is that something that is more one-time in nature? Thanks..

Yes, so starting backwards on the tax there was some tax adjustments every periods from time-to-time, audit periods expire with time, so you just – you take a look at that and you make the appropriate level of adjustments.

So that was a $14 million one-time item, that’s why I think claiming the tax rate of about $60 million on a go forward basis, spread equally through quarters is probably the best model for that. On the OpEx were some actions of reshaping some of the activities throughout the company. We had some cutbacks over the last several months.

So we certainly reshape some investments through actions inside the company and then through slowing down some investments on pieces we talked about SATA 4 SSD where we thought that wasn’t probably the appropriate place, so you saw some expenses come of there.

So it was looking across the board, not just core, but some of these new investments where we thought the best chances if we get the adequate level of return on investment.

And so that was done, that activity will continue to keep ourselves flat through on the HDD for Q4 the June quarter and as Steve and Jamie talked about from a business process we will continue to look to how to integrate further and maybe harbor some of that, but like I said probably with the appetite to redeploy in other areas.

So, I would like I said model that high in the 14% and we will get more clarity on the Xyratex, Evolve everything else optimization in the July timeframe..

Okay, thank you..

Sure, thanks..

And your next question comes from the line of Joe Wittine with Longbow Research. Please proceed..

Hi, thanks.

With the weakness in enterprise, I am curious, Pat, if there is an impact, a noticeable impact on gross margin for not just on a mixed basis and if so how much?.

We already gave you our gross margin outlook of 28%..

Yes, I am sorry.

So, talking to just to clarify talking to the current weakness we have seen over the last couple of quarters, is that driving a noticeable level of weakness in the companywide consolidated gross margin that you are reporting?.

Yes, enterprise drives have higher gross margins in the corporate average..

Okay.

And then maybe just on market share, with the big swings in enterprise and the downside in client, especially desktops and the upside, is there anything you would like to note in market share that’s been happening over the last quarter?.

No, market share has been pretty consistent for the last four or five quarters. Maybe if I think back the last six quarters, I think the biggest swing in market share has been a couple of points overall.

I think half a point shifts here and there are kind of to be expected then those are seem to be mostly a function of either product gaps from either us or the competitors or maybe someone has access to a customer that happens to be doing better and sometimes that advantages us and sometimes it advantages one of our competitors.

I would say the only kind of significant trend if I think back over six or eight quarters is that Toshiba has picked up a lot of share on the branded side, which was done through relatively aggressive pricing three or four quarters ago and that seems to have been resolved in the last couple of quarters as well.

So, no, I don’t see any huge market share shifts, some at the fringe, but that’s mostly either product related or maybe something specific customer related..

Okay, helpful. Thanks..

Good, thanks..

And your next question comes from the line of Robert Cihra with Evercore Partners. Please proceed..

Hi, thanks very much. Two questions as well if I could.

One on just your internal head in media, mostly the head side just that without, not so as far number, but just where you are now and if you think there is that’s changing over the next couple of quarters in terms of more internal head mix or do you think it will stay similar? And then on the enterprise side, I know it’s been picked apart 50 times, but out of the 7.7 million enterprise units, if you could give us any kind of mix between mission-critical and nearline and all the dynamics you are talking about, Steve, in terms of the OEM product cycle than a hyperscale, I assume is applied across both mission-critical and nearline or are they kind of mostly mission-critical on the OEM side and mostly nearline in the hyperscale side? Thanks..

Let me answer that before forgetting and Dave can talk about the sourcing stuff.

Yes, the most of the mission-critical stuff is I would call legacy system, which is obviously still an enormous market and that’s where you see a big rotation on the architectures, the new product offerings from a few of the customers that’s causing kind of the soak up in the inventory that they have in the house.

And then the deployment and utilization rate stuff that we have seen over the last few quarters has been mostly on the hyperscale side.

That can show up either in the OEMs or it can obviously just show up directly to the drive companies and to the server companies or the white box server companies, because as you know, the CSPs for the most part are buying direct although from time-to-time, they are still buying through certain OEMs.

So, there is a more of a mix on that side of whether or not it’s impacting OEMs or if it’s impacting the component industries directly..

And Rob, to answer your question on the heads internal versus external, we are fairly happy with the mix, also the technology access that we are getting across various platforms. So, right now, I don’t foresee any changes in internal versus external strategy for the coming few quarters..

Alright, great. Thanks very much..

And your next question comes from the line of (indiscernible) with Technologies Insights. Please proceed..

Yes, thank you. I got a couple of questions. First is to pick apart guidance a little bit more, $3.3 billion includes about $100 million from the Xyratex. So hard drive operations revenue, it sounds like that’s about $3.2 billion, so probably about 6% Q3 decline on hard drive revenue.

Could you help parse out the two factors that you have cited, the inventory correction and the seasonality?.

So, on the inventory correction, that would probably be….

The seasonality is usually 4%, yes..

Right. And the inventory correction would be the other piece and probably the bigger drag on the margin..

Okay, okay very good. And my other question is on the branded that has had two consecutive quarters of core unit growth, but more importantly two consecutive quarters of ASP growth.

So, the question is are you seeing this growth coming from higher ASP offerings, and more importantly, where is this mix shift at this point in time and where do you think it will go two years from now?.

Hi, this is Rocky Pimentel. Yes, I think we have been pretty pleased this last quarter with the execution on our retail side. And that is a mix to higher product, higher capacity products, particularly our momentum built in the 2 terabyte category in the channel.

So, we continue to see higher capacity products playing a bigger role in the mix as we go out over the foreseeable future in the branded side as well as the emergence of more NAS centric products in both the small, middle – small, medium-sized business as well as consumer NAS..

Okay, thank you..

And your question comes from the line of Bill Shope with Goldman Sachs. Please proceed..

Okay, great. Thanks.

Looking at the demand outlook you discussed, how should we think about exabyte shipment growth in the second half of the year given that the strength I believe you said was going to broad-based across the segment?.

Yes, I think it’s going to accelerate. I think what I said is I expect growth across all segments, but I do think that on a relative basis, the growth will be better on the nearline side, where it’s been pretty flat the last three quarters. So, I think we are going to see some exabyte growth acceleration.

And keep in mind obviously on the client side, we have large capacity types, through lots of people gobbling up one and two and three terabyte drives on notebook and then two, threes on desktop.

So, it doesn’t really hurt you so much even if you get it on notebook and desktop, but I do think the weighting will be more towards nearline mission-critical..

Okay, great. That’s helpful..

Thank you..

Second question on MOFCOM, can you remind us of the potential benefits you would expect to see if all the restrictions were lifted and obviously we don’t know how it will play out, but just how are you thinking about that today?.

Yes.

Obviously for Seagate, it was – we picked up a product line, we picked up a good engineering team that would still utilize post MOFCOM and continue to invest there, but if you take a look at the total operating synergies on the OpEx, you could make that case for $40 million, like I said what would we do with that, whether we redeploy it, but that will be probably a magnitude for us.

And then obviously just giving us our customers would like to have one access point. So, the customers would prefer it as well. So maybe customer set and that yields something, but from an OpEx about $40 million..

Okay, great. Thank you..

Ladies and gentlemen, that concludes today’s question-and-answer session. With that, I would like to hand the call back to Mr. Steve Luczo for closing remarks..

Okay, just want to thank everybody for being on the call today. And then we look forward to speaking with you again in July. Thanks..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day..