Kate Scolnick - Vice President, Investor Relations Steve Luczo - Chairman and CEO Pat O'Malley - Executive Vice President and CFO Jamie Lerner - President - Cloud Systems and Solutions Dave Mosley - President, Operations and Technology Rocky Pimentel - President, Global Markets and Customers.

Aaron Rakers - Stifel Joe Wittine - Longbow Research Sherri Scribner - Deutsche Bank Amit Daryanani - RBC Capital Markets Monika Garg - Pacific Crest Rich Kugele - Needham & Company Katy Huberty - Morgan Stanley Keith Bachman - BMO Capital Markets Rob Cihra - Evercore.

Presentation:.

Good morning, and welcome to the Seagate Technology Fiscal First Quarter 2015 Financial Results Conference Call. My name is Kathleen, 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, Vice President, Investor Relations. Please proceed, Kate..

Thank you. Good morning, everyone and welcome to today's call.

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

We've posted our press release and detailed supplemental information about our fiscal first quarter on our Investor Relations site at seagate.com. During today's call, we will review the highlights from the September quarter and then we will provide the company's outlook for the second fiscal quarter 2015.

We will refer to non-GAAP measures which are reconciled to GAAP figures in our supplement. After that, we will open up the call for questions. We're planning for the call today to go only half an hour and we will do our best to accommodate your questions in that timeframe.

As a reminder, this conference call contains forward-looking statements about the company’s anticipated future, operating and financial performance, customer demand 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 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 Investors Section of the company’s website at seagate.com.

Any non-GAAP measures referenced on this call are reconciled to GAAP figures and supplemental information available on the section in the website. I would now like to turn the call over to Steve Luczo. Please go ahead, Steve..

Thanks Kate. Good morning everyone and thank you for joining us today. Seagate demonstrated strong financial performance in the September quarter, achieving revenues of $3.8 billion and on a non-GAAP basis gross margin of 28.1%, net income of $453 million, and diluted earnings per share of $1.34.

We had another strong cash flow quarter generating $602 million in operating cash flow and $430 million in free cash flow. Our results this quarter reflect revenue upside of 7% from our original guidance in July, driven by higher than expected demand for our PC, gaming and cloud storage products.

With most of the unit upside coming from the lower end of the market, we saw some pressure on our gross margin, but this was good business overall. We gained profitable share as a result and remained in our long-term model range of 27 to 32 points of gross margin.

Seagate shipped nearly 60 exabytes of storage in the quarter, up approximately 22% sequentially and also year-over-year. For first time in Seagate's history, average gigabytes per drive for the quarter exceeded 1 terabyte. Our Cloud Systems and Solutions business exceeded our internal revenue plan again this quarter.

And we are pleased with the momentum we have with both existing and new customers. We announced a few new products this quarter. The EVault Enterprise Backup and Recovery Appliance that now accommodates up to 100 terabytes of usable capacity and the ClusterStor 9000 solution which delivers 50% higher performance than previous ClusterStor platforms.

During the quarter, we also announced a number of key leadership hires who have all deep technology industry experience and we are very excited to have them at Seagate.

In September, we made a strategic investment to further build our integrated flash technology portfolio with the close of the acquisition of the SSD controller and PCI assets from Avago.

We're already seeing strong demand for the new Nitro PCIE product platform with customers and we believe we will continue to gain traction in this high growth market. In addition, we saw higher than expected sales of our client hybrid drives this quarter and we are planning for sequential growth again in the December quarter.

To-date we have sold over 12 million hybrids reflecting the growing interest in hybrid in the marketplace. Operating expenses and capital expenditures were in line with our expectations. Inventory, both internally and externally in the channel are within manageable levels.

And we did a very good job this quarter meeting the upside demand we have from customers particularly in cloud computing. We remain committed to a thoughtful and strategic approach to our capital allocation.

With respect to equity purchases, we indicated that our base plan was to offset option dilution and to be opportunistic as to purchases in excess of that amount. This quarter we deployed approximately $183 million to repurchase 3 million shares of stock, which exceeds the base plan and reflects our view of an attractive equity purchase price.

Regarding our give then policy, we have stated a base plan of a 10% dividend increase for fiscal year 2015. Last week, we announced the 26% increase in our annual dividend reflecting the confidence we have in our future cash generation.

Initially, we have planned for a 16% annual increase for fiscal year ‘15, but after consideration by our Board, we decided to also include a portion of the proceeds from the Western Digital Lawsuit settlement in our annual dividend.

Since introducing our dividend growth policy three years ago, we have far exceeded our planned annual increases demonstrating our strong commitment to shareholder return. We also repurchased approximately $110 million of our debt in the September quarter.

The debt that was repurchased was our higher coupon debt which works towards lowering our overall debt service cost and maintaining our investment grade status.

Based on current market conditions and recent unexpected financial performance, we believe that both our debt and equity are attractive for us to continue greater than base plan repurchase activity. Going forward, we will continue to be opportunistic in our debt and equity repurchases.

At our strategic update in September, we discussed our point of view about the architecture and economic shifts taking place in storage and a long-term view of our technology road map both in terms of aerial density and flash integration.

The strength of our core business and its ability to generate cash has enabled us to pursue growth adjacencies in cloud systems and solutions as well as investing in our flash technology platform.

We continue to believe our long-term financial model is solid and we’ll be investing in fiscal year ‘15 for greater revenue growth in fiscal year ‘17 and beyond.

Some of these investments will have immediate benefit to our business while others will take more time, but we believe will create important strategic advantages for Seagate in the storage marketplace. As noted on our last few earnings calls, we have seen demand momentum for our storage portfolio build throughout the calendar year.

Based on the September quarter activity and as a result of ongoing conversations with customers, we believe demand trends will continue to be healthy across most segments. Industry estimates are for the market demand to be approximately 145 million units in the December quarter.

Seagate’s product portfolio is well-positioned competitively in this demand environment and we expect to achieve revenue of approximately $3.7 billion in the December quarter.

We are targeting product gross margins to be slightly higher in the quarter recognizing we have margin pressure associated with the integration of Xyratex and Avago flash technology assets.

We are planning for operating expenses of approximately $555 million, which includes the recent investments we have made in our new cloud and flash platform adjacencies.

In summary, Seagate is very well positioned for continued success, while our forecasting continues to maintain a sense of caution due to macroeconomic conditions and computer industry dynamics.

The trends we’re seeing in the marketplace are continuing to align with our long-term expectations for exabyte demand and the growing need for economical and efficient storage. We’ll now open up for Q&A..

Thank you. (Operator Instructions). Our first question comes from the line of Aaron Rakers with Stifel. Your line is open..

Yes. Thanks for taking the questions. First of all, can you talk a little bit more about the Xyratex business in the LSI or the flash business? By my calculations, it looks you've crossed through about $200 million of revenue if not $210 million of revenue from that other volume item.

Can you just talk about the trajectory of that and when you would expect that to possibly be additive to the gross margin going forward?.

Yes. Again, we mentioned last call; we’re not breaking out those. We will tell you, you're wrong, we didn't breakthrough 200, but the momentum in the business is good..

And as far as the gross margin on that piece, so you talked about that being a pressure point still to the gross margin.

And when do you expect that to actually possibly swing to the positive?.

During this fiscal year, we said that would sum up the pressure, but beyond that would be gross margin accretive. So, we expect in next year and beyond the gross margin accretive..

Okay. And the final question for me. Can you talk a little bit about the demand environment that you're seeing from a PC perspective? There is ongoing debate about inventory build.

What you guys think about in terms of sell-through and that relative to the commentary going into the December quarter?.

Well, this is same commentary that was going in, in the September quarter as I recall. Demand was pretty good in September through the quarter, [pull] so far in the December quarter are good; inventories are well within the balance we like to see. So, we currently don't see any stress on the system..

Okay. Thank you..

Our next question comes from the line of Joe Wittine with Longbow Research. Your line is open..

Hi. Thanks. Steve, you mentioned strength hybrids any color or details you can provide.

You said clients of the notebook, desktop or even client server and maybe more importantly what has kind of changed in the OEMs seemingly being more interested versus two, three quarters ago?.

Yes. This is Rocky Pimentel. Certainly we were really excited to see the success of the hybrid this quarter across both the client and midrange product categories. I think our OEMs have really embraced the value proposition of the consumer.

The product experience now is equal to from a feature set, the kind of experience you have on accelerated storage, but at a very attractive price and capacity value propositions. So the OEMs have building enthusiasm for the category as Steve said. We're very positive as we go forward.

And as we said, we shipped over 12 million to-date and we had a very strong quarter which was over 3 million this last quarter. So, we continue to see strength in that overall program..

Could you bucket it at all, Rocky as far as which categories, which product segments you’re seeing the biggest uptick?.

Yes. I mean it is led by the client end, but like I said, the midrange desktop and even at the cloud class customer or products, as well as even the enterprise products we're seeing people interested in the hybrid solution.

So, it's certainly been driven at the client, but it's continuing to move up the stack and we think long-term all categories will have value proposition which should get good customer traction..

Okay.

And quickly on enterprise, I think it was first understandably so choppy, what if anything can you tell us about the hybrid scale et cetera plans for calendar ‘15? Specifically do you see any risks for any kind of malaise after this current spending uptick like you saw throughout fiscal ‘14?.

Yes. I think we’re cautiously optimistic. Obviously we saw some pretty interesting results over the last several weeks from major OEM, some of the cloud providers. But I think we see overall the category is still showing optimism like Steve said quarter-to-date we’re still seeing strength in that category. So, we continue to be cautiously optimistic.

And the fact that we’re servicing customers across all the key geographies gives us a lot of confidence in the category..

I think just also the hybrid deployment in enterprises, to go a little further on Rocky’s point, where we really see initial traction there is in the cloud service providers especially as they to need the specific workloads. And I think as that continues to deploy, obviously that gives some competitive advantage.

So, we expect continued traction there. On the legacy side, it’s probably a longer design-in in terms of the various levels of software that have to be changed to accommodate some of the real performance improvements.

So, I think it’s really the cloud service providers that are pulling that which is I think from our perspective pretty exciting given the shifts to technology there..

Helpful, thanks..

Our next question comes from the line of Sherri Scribner with Deutsche Bank. Your line is open..

Hi. Thank you. Just wanted to get a little more detail if you could provide it in terms of your view about the different end markets as we go into December, the TAM is going to be down roughly 3 million. Is that down part going to be PCs and what is your view about enterprise and gaming in that mix? Thank you..

Well, I don’t know that it’s down because I don’t know that anybody has been able to total up what the TAM is for September quarter yet. So, we’re just facing it off of industry analysis which is what we've said we're going to start doing. So, a lot of analysts I have talked to thought that the September quarter was 142 to 145.

So, I can't say that 145 is down for December. I think seasonally, we would expect a bit of a slowdown on the gaming side, because there is a little bit of front loading for the December quarter that impacts the component companies in the September quarter. It also leads to little more linearity in October, which is nice from a production perspective.

But in general, we would expect obviously gaming to be down a little bit that might be offset by retail being up a little bit and again, we seem to seeing so far cloud strength is pretty good. And I think in the client space, it's I think we're kind of finding new territory here as the shift between desktop and notebook continues to evolve.

We saw really great growth in the desktop in the first half of the year and the growth has slowed down a little bit in the second half and of course notebook has taken off. So, we feel pretty good about the client side. And as you know long-term, we think it's really positive market opportunity that people haven't focused on yet.

I mean if the cloud does have the things that it’s supposed to, what it means for the client is actually pretty spectacular, the view that this client goes away is kind of a traditional net zero some gain theory of technology which I think has been pretty disproven over the last 25 years.

So, we think as the ecosystem grows, the end points are going to be pretty dynamic as well..

Thank you..

Our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is open..

Thanks a lot. Good morning guys. Two questions from me; one, I guess on OpEx to start with.

I guess organically if I look at it [$525] million taking of the extra week that you had in September, so is the guide of 555, that incremental $30 million call it, is that essentially all driven by the LSI assets getting rolled in or other factors being considered as well?.

That’s driven with the full quarter of LSI asset, number one; offset coming down the 14th week, we don’t have, but we also have our annual increments next quarter. So, all that sort of washes out to be somewhat about flat quarter, slightly up.

And Steve talked about we’ll continue to invest these new adjacencies which will keep us to that high-end of the 13% to 15% for the year. We’ll manage that very closely, but a lot of opportunities there. So, we’re not going to shy on those investments that yield good returns in the future..

Fair enough. And then if I could just ask question on the cloud service provider market, the hyper scale side. It has been fairly lumpy for you guys in fiscal ‘14. But I’m curious as you keep expanding that customer base beyond the two, three customers we talk about, I think you talked about Baidu this time.

As you keep expanding your customer-base, as you potentially interact more with them, is there a potential this becomes less volatile for you and more predictable in fiscal ‘15?.

Yes, I think absolutely. I think clearly for the next say two to three years, the 10 or 15 largest CSPs are still going to drive a lot of that variability quarter-to-quarter.

On the lumpiness, if we think about in the last year, has been there, but if you think about it over the last three years, it’s pretty much been up into the rights phenomenon; and I still think it’s just a issue of when they get big efficiency gains either in terms of time to deployment or utilization rates, it’s still against the backdrop of demand for storage that’s accelerating against the larger and larger principal and growing probably at a faster rate.

So I think even there while you may lumpiness associated with some advancements in technology, the big ones are still driving a lot of storage.

And then to your point, over the next three or four years, you're going to have another maybe 2,000 or 3,000 service providers that are solving different needs which will certainly take the lumpiness out of it overall.

And then throw on top of that five to seven year period of time where you're going to have Fortune 4000 deploying some version of “hybrid cloud” which should take even more lumpiness out. So again clearly, it's a diversified customer base for the drive industry relative to where we were for the last 30 years.

And the long-term trend we believe is certainly less lumpiness and less concentration on the customer set..

Thank you..

Our next question comes from the line of Monika Garg with Pacific Crest. Your line is open..

Hi. Thanks for taking my question. First question is on the cloud segment. I remember on the analyst event you guys talked about 650 million to 700 million in revenue from cloud solution group.

If you could talk about how that is tracking and how to think about the gross margin from that segment?.

Hey Monika, this is Jamie. We are tracking to that goal and probably beyond that.

This quarter, we were over 109% of plan; we grew 11% quarter-over-quarter, seeing strength across the three big businesses that we run; EVault was up 18% year-over-year, ClusterStor and [Strata store], the high performance computing segment was up 18% year-over-year and the majority of our revenues in our OEM, our OneStor business which was up 21% quarter-over-quarter.

So the business continues to grow quickly. I think the customers are excited, the partners are excited. So right now, we feel comfortable about hitting that plan this year and we see continued growth in that business for at least, say at least to eight quarters I can say continuous growth from at this point..

Thank you. Then the last one just a follow-up on the hybrid side, you’re getting good growth in that segment.

Can you talk about is it mainly a client hybrid drive which you are seeing the strength in the market because I think you see kind of enterprise hybrid drive picks up too?.

This is Rocky Pimentel. As we mentioned it, the majority of the strength this quarter was at the client level, but we see growing momentum in all the categories of the product lines..

Thank you. That’s all for me..

Our next question comes from the line of Rich Kugele with Needham & Company. Your line is open..

Thank you. Good morning. A couple of questions, first on the hybrid side again. I believe your controllers are from the Samsung Seagate joint partnership on what you’re shipping today.

And if so, will you be able to migrate that overtime to the -- although the five controller or will you continue to remain on the Samsung side?.

Hi Rich, this is Dave. The controllers for the hard drive business are developed in-house, they’re not merchant controllers.

We believe merchant controllers across the number of different SPP and PCI solutions that we have, but the ones that we use on the hybrid drives all the different markets that Rocky talked about this service are developed in-house..

So, the roadmap just emerged now?.

Well, I think we’ll continue to do that in-house development. We may use some external technology depending on what the best control point is for the flash that we have to use. But right now I think we feel pretty comfortable with what we have in-house to be able to keep going on the hybrid drives for quite some time..

The key to the hybrid anyhow, Rich, at that level is far more anyhow. It's the algorithms that we have that maximize the usage of a flash..

Okay, great.

And then on the cloud side, obviously your overall average capacity was up nicely, but are the cloud buyers mainly still on 4 terabyte or has they shifted to the 6 terabyte? And then within that range, can you talk about Baidu and that relationship and whether that can be applied to other accounts or you see this as bit of a one-off?.

We're not going to talk about specific customers other than the press release is that we've done with their permission. In terms of capacity points, they are shifting to 6 terabyte..

Okay. Great, thank you..

Our next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open..

Thanks. Good morning.

How does the later Chinese New Year influence the pace of demand in late December early January versus the last couple of years, and then I have a follow-up?.

Katy, this is Dave. We don't have too much concern about where Chinese New Year is falling relative to the back half of Q2 and then getting Q3 started. I think traditionally if you go back a couple of years we had some hypotheses that we would have a very fast January and then would slowdown after Chinese New Year.

But I think given the strength that we're seeing is geographically right now, some of that maybe muted this year..

Okay, got it. And then Pat, I think you guided for gross margin up slightly in December.

Can you just walk through the gives and takes on gross margin next quarter? And then can we get back up to that 28.5% range that you are running out in fiscal?.

Yes. I think 28.5 is sort of a sweet spot in the short run and that’s what we’re trying to move that model too on a very short run even December quarter. And that’s primary as Steve talked about, there was a lot of, if you want to call it low-end business or with the gaming generally has -- it's good cash flow business, but lower gross margin.

The market mix will help drive us to that next quarter. And as Rocky talked about some of the migration to a higher capacity in the cloud, we see that going. So, we have some capacity and product mix driving it.

So, those two items are probably fuelled offset by challenges we’ve talked about of integrating the rest of business, but we feel comfortable with those challenges that we could offset them. So, I think in the 28.5 is sort of sweet spot in the short run where we want to get to..

Great, thank you..

Our next question comes from the line of Keith Bachman with BMO Capital Markets. Your line is now open..

Hi. I had two as well. Pat, just going back to the gross margin, your capacity per drive was up quite a bit and your gross margins were down sequentially.

I know you mentioned the gaming probably aid up a little bit, but was there price competition also at the high-end as cloud service providers? In other words, which was the bigger impact on the gross margin change for the September quarter?.

Pricing was relatively in line with what we thought, so wasn’t a concern on that, Keith. Obviously areas where we have strong portfolio, we’ll use that and sometimes drives a little more pricing, but you get back on your volume at last just -- curve. So, we’re comfortable with the trade-offs of pricing, so we didn’t really see it as much there.

Much more saw it in the market mix as a compression this quarter. And so, I think that’s placing our benefit next quarter..

Okay. Then my follow-up is on the cash cycle. Days sales outstanding was up a little bit, so your cash conversion cycle was in that 25 day range. So, it's consistent over the last couple of quarters.

Is that where you anticipate being over the next couple of quarters in that 25, 26 day range or can that come back down a little bit to maybe the low 20s?.

Yes. We're targeting that for ‘20. I think I get two days of DSO for -- a lot of OEM this quarter which we generally are, but the timing of that collection was a little up, but we expect to get maybe pick up two days of DSO and we could pick up a day or two off of the DIO.

So, we know where the model is off a little bit, but we think we're -- it pushed it to 25. We're very comfortable with that. That was driving overall good business that lined up for a good delivery of Q1 which is a good cash flow model for Q2. So, I think 20 would be where we push the model to; we could to be optimal where our business is today.

So, that's what we're driving for..

All right, fair enough. Thank you, Pat..

Our final question comes from the line of Rob Cihra with Evercore. Your line is open..

Hi, great. Thank you very much. If I can ask two questions too because [fattened].

Just on the 14th quarter can you I don’t know give us any sense of how much you think that just mathematically boosted if at all your September quarter numbers? And then secondly just I wanted to check back on -- it sound I guess that you guys were going to pick the buyback up, again I wasn't sure if that was the message or not, but you guys had been obviously super aggressive back at Analyst Day it sounded like you were moderating, but now it sounds like you are planning to pick up back again, I just want to clarify that? Thank you very much..

Well, I don't know how much more to clarify it. We said at these levels, we believe the stock is well valued and we’ll be opportunistic about accelerating above the base plan..

Okay..

And then on the 14th week as opposed to the quarter, it seems like it was 14 quarters but….

I am sorry, yes, 14th week. Yes..

Yes, but the 14th week, it’s easy to cost what it runs to do that business; we did see some tapering off in the last week of the quarter which would tie to what Steve said last quarter that a lot of OEMs tied to quarterly deals, may not look it as ‘14 or ‘13 week.

So, marginally, I’d say if you do the math on just the cost, it’d actually be a little bit of drag. But we really don’t look at it that way; we look at 26 weeks over the next 27 and we thought it was a good quarter performance of lining up cost and revenue..

Okay. And then just one thing, there was a question earlier about the non-core businesses, I thought it was related to the systems business when I said it was an over 200, if we met the systems business plus LSI, then and it was over 200, so just to be clear on that..

Okay..

And I am not showing any further question -- I am sorry that does conclude today’s question-and-answer session. I’d like to turn the call back over for closing remarks..

Yes, good. Just want to thank everyone, our customers, our suppliers, employees, and our shareholders. And we look forward to speaking with you next quarter. Thank you..

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