Kate Scolnick - Vice President, Investor Relations Steve Luczo - Chairman and Chief Executive Officer Dave Mosley - President, Operations and Technology Patrick O’Malley - Executive Vice President and Chief Financial Officer Albert Pimentel - President, Global Markets and Customers.

Richard Kugele - Needham & Company, Inc. Aaron Rakers - Stifel Nicolaus Sherri Scribner - Deutsche Bank Steve Fox - Cross Research Amit Daryanani - RBC Capital Markets Katy Huberty - Morgan Stanley Equity Research Monika Garg - Pacific Crest Securities.

Good morning and welcome to the Seagate Technology Fiscal Third Quarter 2015 Financial Results Conference Call. My name is Kandis and I’ll be your coordinator for today. [Operator Instructions] At this time, I’d 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, Executive Vice President and CFO; Dave Mosley, President, Operations and Technology; Rocky Pimentel, President, Global Markets and Customers; and our General Counsel, Ken Massaroni.

We posted our press release and detailed supplemental information about our fiscal third quarter on our Investor Relations site at seagate.com. During today’s call, we will review the highlights from the March quarter, provide the company outlook for the fourth fiscal quarter 2015 and then open the call for questions.

We will refer to non-GAAP measures on this call, which are reconciled to GAAP figures in our supplemental information on our website. We’re planning for the call today to go approximately half an hour and we will do our best to accommodate your questions in that time frame.

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.

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. For the fiscal third quarter 2015, Seagate achieved revenues of $3.3 billion on a non-GAAP basis, gross margins of 28.9%, net income of $357 million and diluted earnings per share of $1.08.

As we indicated in our business outlook in January, challenges from macroeconomic pressures in Europe and PC demand were factors we needed to manage through the quarter.

The magnitude of these factors actually increased in third quarter, resulting in an impact to our top line revenue beyond our initial expectations, particularly in our EMEA business which was down approximately $100 million sequentially.

In light of these dynamic market conditions, we are satisfied with the company’s overall execution this quarter and we’re particularly pleased with our sequential gross margin improvements and demonstration of operation expense control.

Overall storage shipments for the March quarter were 55 exabytes, up 9% year over year, with average gigabytes per drive for the quarter increasing sequentially and continuing to average over 1 terabyte per drive.

Cash flow generation was again strong in the March quarter and we achieved $374 million in operating cash flow and $215 million in free cash flow, including our previously announced $225 million payment for our tax audit assessment with the State Tax Bureau in China.

Our non-GAAP operating expenses were $555 million, reflecting expense control around the core business and some optimization in our Cloud Systems and Solutions business. Capital expenditures in the March quarter were in line with our expectations and inventory both internally and externally are within manageable levels.

Our balance sheet remains strong and we ended the quarter with $2.6 billion in cash and cash equivalents. During the quarter, we returned $882 million to shareholders in dividends and stock redemptions. We redeemed approximately 12 million shares, ending the quarter with 318 million ordinary shares outstanding.

Year to date, we have returned $1.4 billion to shareholders and have redeemed approximately 5% of our ordinary shares outstanding. We continue to believe our capital allocation policy is aligned with the long-term shareholder value creation and reflects our confidence in our ability to generate strong cash flow from our business.

Before I cover our business outlook, I’d like to turn the call over to Dave Mosley to provide an update on the technology portfolio refresh that is underway across our business..

Thanks, Steve. Regarding our comments last quarter that we’re in the process of refreshing significant portions of our HDD and SSD product portfolio, I’m pleased to say that we’re executing very well on our plans.

Development in progress and customer qualification activity is on schedule, with our traditional enterprise mission critical HDDs as well as with our newest high-capacity cloud offerings, our 4 terabyte, 6 terabyte, and 8 terabyte platforms are performing extremely well in the field and customer adoption was strong is Q3.

In the retail space, our 2 terabyte 2.5-inch drive still leads the industry in areal density and will be refreshed in the next two quarters to a higher capacity, maintaining our leadership. We look forward to pushing these areal density improvements into the majority of our products in FY 2016.

As the costs of NAND flash have come down over the last several quarters, customers have begun to recognize the combination and the value of combining non-volatile caches with HDDs.

With the advantage of selling over 15 million hybrid drives under our belt, we believe we are uniquely positioned to drive continued innovation and lead the industry in delivering the value that this combination of technology enables.

Revenue growth and customer qualification traction for our SSD controllers, solid-state drives and PCIe accelerator cards are on track to our milestones. Our recently announced partnership with Micron for our next-generation enterprise SAS in proceeding well and customer feedback has been favorable.

In addition, we’re very happy with the close collaboration that we have with customers on application-specific tuning for SSDs in data center environments, underscoring the quality of our decisions in the M&A space over the last few years.

In the high-performance computing space, this past quarter saw major new wins with leading academic, public sector and private labs that combined represent more than 120 petabytes of storage capacity, equivalent to the amount of storage needed for 1600 years of HD video.

We also made first delivery of a massive scale-out storage system that when complete will achieve 1.7 terabytes per second while ingesting data, making that the fastest storage system in the world and it’s built end to end on Seagate storage technology.

I’m really pleased with the breadth of technical innovation that the Seagate engineering teams are delivering, while continuing to judiciously manage operating expenses during a period of dynamic market conditions. I’d like to take a moment to thank the entire global team for their continued efforts.

And with that, I’ll turn the call back over to Steve..

Great, thanks, Dave. Turning to our business outlook, the long-term trends in data growth, big data analytics, machine to machine computing and public and private cloud deployments continued to progress in an encouraging manner.

Seagate is expanding and investing in its storage technology product and solutions portfolio to align competitively with these market dynamics and capitalize on exabyte demand growth.

We remain optimistic that calendar year 2015 will provide significant opportunities to deepen our customer relationships, leverage our business model and return value to our shareholders. In the near-term, macroeconomic pressures in Europe and global currency fluctuations are continuing to have an effect on customers demand visibility.

While we expect Europe to be challenged economically for most of 2015, it continues to be difficult to assess the degree of this impact will have on our client market customers, in addition to the timing of the release our Windows 10. Overall demand in the enterprise market is relatively stable.

And as we have expressed previously, the Nearline high-capacity drive market can exhibit variations quarter to quarter as cloud service providers drive higher utilization of storage capacity additions and others prepared for build-outs in the second half of the year.

When you take a multi-quarter view of this market, the exponential demand for storage is evident as exabyte capacity shipments in 2014 were up 35% over the prior year. From broad based discussions with customers, we currently believe that the addressable market in the June quarter will be relatively flat with the March quarter.

We’re targeting revenues for the June quarter of $3.2 billion to $3.3 billion and managing to a very lean production schedule. Should macro conditions improve or PC builds accelerate with improved confidence in back to school demand, we could see upside to this forecast and we have the ability to flex up production as necessary.

We will continue to shape our top line revenue opportunities that preserve our business profitably and enable us to continue to invest in advancing our storage technology portfolio offerings. For the June quarter, we anticipate margins of approximately 28.5%, taking into account continued dilution impact from our recent acquisitions.

We’re targeting operating expenses at $555 million, as our core product portfolio refresh continues to be on track as well as timing of investments in our new market adjacencies.

Looking further ahead, we continue to believe that the second half of the calendar year will be stronger than the first half with demand coming from the PC market, seasonal gaming demand and continued stability in the enterprise market with potential upside from hyperscale deployments.

We’re confident in the long-term dynamics of data growth and the opportunities ahead for Seagate in the storage technology market place in 2015 and beyond. I thank our employees for their hard work and our customers, vendors, suppliers and shareholders for their ongoing support. I’ll now open up the call for questions..

[Operator Instructions] And our first question comes from the line of Rich Kugele of Needham & Company..

Couple of questions. First, can you comment on what you felt the TAM was in March, so we understand the base for June? And then secondly, just on the PCIe space, Nytro, there’s been some competitors complaining that the PCIe market is losing mine share to SAS solutions and SATA solutions.

Can you just talk about what you’re seeing from a competitive technology perspective in PCIe?.

Richard, I’ll have Dave answer the second question. But the first one is just assume, we believe held share in the quarter of about 40%, so that would translate into a TAM of call it 125 million, 126 million.

Last quarter being early that we are – we made a guesstimate we were off by a few million units, I think, as it turns out, when everything rolled in, so we’ll have to see what the other companies report. But our sense is we held share that would imply about 125 million, 126 million, something like that..

Relative to the PCIe space, what we’re finding is that the customers who tend to buy these drives really want their applications accelerated in a very specific way, so there’s a lot of deep understanding of the application that’s required in order to get the design win and a lot of work with the customers specifically to make sure that it has traction across their entire install base when you install it.

There is a very healthy market out there right now for SATA and SAS going into existing plugs without that requirements of that tuning. And I wouldn’t pick one against the other, although I’d say that maybe some of the growth of the PCIe space was a little overblown in the past.

It’s very customer and application specific and there’s a lot of work required in order to get that traction.

I think going forward, the idea that everything becomes the model where you just unplug what you have against one of those SAS or SATA plugs and plug in something new, it’s probably not the right answer though, because I think there’ll be architectural disruption on the software and hardware side that require further optimization.

And on a lot of the PCIe space, obviously that time is money. The application acceleration that you can get means a lot to those customers and we’ll continue to do that work..

So Richard, I think the comment about overblown, I think the point is that going back a few years when people were projecting how big they thought this market was and how fast it was growing, I don’t think that has ever really been substantiated in terms of how these deployments really occur.

And with respect to the specific question on our particular product and the traction we’re gaining with customers, we find it to be quite positive when we don’t really see some of the challenges that others have indicated..

And our next question comes from the line of Aaron Rakers of Stifel..

Can you talk a little bit about, you made a comment about some optimization in the operating expense structure of your cloud solutions business, can you just remind us where you’re at in terms of the ramp of the Xyratex business and whether or not you still see upside drivers of what you’ve laid out in the past, I think, $650 million to $700 million, and then where you stand on realizing or how much maybe further cost optimization realization could be had from that piece of the business?.

We’re still expecting that, as things develop over the next call it one to three quarters that we’re going to gain some confidence on increasing that profile on what we think the revenue opportunity is from the CSS business.

And on the margin side, we inherited a business that had a lot of good technology, but operationally probably hadn’t had some of the investments that it needed to really be optimized and drive some of the efficiencies that we typically do on the drive side.

So we’re actively using that operations capability that we have to push more efficiency and flexibility, which it’s kind of a combination of trying to get the efficiency with the flexibility because these orders come in fairly dynamically with not a lot of time, sometimes to address these opportunity especially as we get near the end of the quarter, there’s still kind of the systems mentality where stuff is very back-end loaded, which we’re trying to address operationally as well as how we manage our inventory.

So I think there’s a fair amount of room there in terms of what we can do on the margin profile over the next one to two years..

And how much of an overhang is that right now on your gross margin?.

On the gross margin, I’ll give you an estimate, it’s hard to exactly split everything that we’re doing, because we are an integrated leverage company. But I think at least 50 to 70 basis points..

And our next question comes from the line of Sherri Scribner of Deutsche Bank..

Steve, considering the market was a bit weaker than I think most people expected going into the quarter, I was hoping if you could give us some commentary on what you saw in terms of pricing, it looks like your ASPs were up more – it looks like on like for like basis, they declined a little bit, so I was hoping to get some commentary?.

Pricing was about as expected in the quarter, I’ll let Rocky talk to it, but it was about as expected. We did have good mix up..

I think as Steve said, the mix up was good. I think even in light of the fact this was kind of a seasonal hyperscale service provider consolidation period where their purchasing becomes a little more flattish, waiting for some of their expansion in the back half of the year was still strong year over year.

And I think the enterprise was pretty stable, certainly the client had pressure, but we tried to apply very disciplined methodology towards making the market at the low end of the drive portfolio. So I think we felt really good about the overall mix in the product portfolio.

Certainly, I think it’s a reflection of the value that we have going forward in the hyperscale new data center world we’re going to see. .

And our next question comes from the line of Steven Fox of Cross Research..

Just broadly speaking on your non-HDD business, it looked like it was roughly flat, if my numbers are right, quarter over quarter.

I know there’s seasonality in there, could you just talk about how your sales are tracking towards some of those long term goals you laid out? Is there any other positive surprises in non-HDD sales and if you’re still targeting some of the leverage for next fiscal year?.

We think we’ll still on track. So all the businesses either hit their plan of records that we had or maybe slightly achieved our internal plans and feel good about the opportunity in the growth prospects that we provided previously..

And then Steve just there’s been a lot of M&A discussion in general around storage, I know you guys are always looking at stuff, is there anything, if nothing came out in terms of acquisitions over the next six to nine months, is there any reason to think that you’re not – your portfolio isn’t fully loaded for that growth profile or what do you have to go to continue to develop it beyond what you’ve discussed so far?.

I think we have the pieces we need to meet the growth profile.

I think if you see us pursue M&A activities, it will either be to affect the margin profile in terms of the technology that we’re providing to the customer or it will be to either expand market share or broaden the technology portfolio in another way that would gain greater revenue growth.

So it could either be a play on the gross margin or could be a play on the revenue opportunity. But right now I think the assets that we have support the growth profile that we’ve indicated..

Our next question comes from the line of Amit Daryanani of RBC Capital Markets..

Two questions from me. I guess, one, could you just maybe talk about the enterprise business, especially the Nearline Drives, historically you’ve had a few good quarters and you had a bit of a lull.

So I’m curious to what extent do you have good visibility in that business? And as you shift towards the 6 terabyte Nearline Drives, does that help, I’m sure it helps the ASPs, but does that help your gross margin profile as well over there?.

Certainly the high end of the product portfolio always contributes to our gross margin and that was manifested in this quarter’s strengthened gross margin despite the challenges we faced in revenue.

I think our portfolio and as we’ve talked about our 8 terabyte and beyond and Dave mentioned the strength of the hybrid program and things like that, I think we feel very positive about the prospects that the high end of the portfolio offer as we build forward throughout this year and then in the next year.

And I think with the partnership with Micron and working on hybrid programs in next-generation SSD solutions just broadens the non-HDD portfolio that Steve was asked about previously. So I think we feel really good about the opportunities we have in our toolbox to go forward over the next several years..

I’m just curious on the June quarter, it seems that TAM is going to be flat, the mix sounds like it’s going to be fairly stable, so could you maybe point out what are the levers that are resulting in 40 basis points decline in the margin guidance that you guys are providing for gross margins?.

So you heard us we’re going to try to manage the supply tightly this quarter and with that, we’re going to run the factories probably not the optimal way. So we’re planning some downside there. But as Steve and Rocky said, we’re quickly poised to take advantage of any opportunity that comes to us and we could get some lift there.

But we’re just going to manage supply really tight this quarter. That manifests itself in a short term margin compression, but long term economic benefit by maintaining that supply. So it could be a little better, but we’re managing the business really, really tight this quarter..

I think to add on to Pat’s comments there, the marginal profitability for gross margin on the marginal units that we may benefit from with any kind of upside in the quarter definitely would help us to improve the gross margin profile.

But again, we’re just modeling the outlook based on a somewhat cautious TAM I guess for lack of a better description..

So we probably have time for just a couple of more questions before market opens, we want to be respectful of that..

And our next question comes from the line of Katy Huberty of Morgan Stanley..

In the context of the flat TAM for the June quarter, can you just talk about what you’re expecting for PCs versus enterprise versus cloud sequentially and then just your thoughts on Win 10 in the back half and how that impacts PC’s seasonality this year?.

I think actually all of the different markets seem to be at least as we’re managing going into the quarter flat. I think where there is opportunity for the upside is probably on the PC side, depending again on the OEM’s confidence about back to school pool, which I think they’ll start deciding probably in the month of June.

I think my guess is they probably got their build plans pretty set for April and May and June with one level of expectation about back to school which they’re obviously going to prepare for.

And then I think if there’s some shift in terms of what the macro conditions are, whether or not that’s global or just more confidence about what’s happening in the US, then you could see acceleration in June.

So I think on the client side and maybe that’s mostly a notebook comment, I think that’s where there is some opportunity for something beyond flat.

There was also lot of inventory and supply chain adjustments in the March quarter that we don’t have perfect visibility on, but it’s pretty clear that the OEMs drew down inventories and limited their production.

So this quarter, they probably have to catch up on the production side to meet even a flat demand or I guess maybe even imply a slight growth. So we’re watching that closely. As indicated on the Nearline side, it’s really just a function of where are the big cloud service providers are in their capital deployment plans.

Most as we would see it though, the acceleration is probably more in the September and the December quarter. And whether or not they pull anything into the June quarter just to smooth out that pool in September and December is I think where the opportunity might be there. And I think the other markets are relatively flat..

So is it fair to say your guidance does not assume a pickup in PCs in the month of June and that would be largely upside versus the guidance you provided?.

Yes, that’s correct..

And then just Win 10 in the back half and how that impacts seasonality?.

It should benefit it, but it seems to be a bit of unknown right now in terms of the timing. One more question and we should probably let everybody get to work..

And our last question comes from the line of Monika Garg of Pacific Crest Securities..

First question on the – could you talk about the visibility like your comment suggest that you expect pickup in demand for some hyperscale customers back half of calendar 2015, just wanted to check out those views..

So Monika you just want a view of the visibility from the customers, just want to make sure on hyperscale?.

Yeah, hyperscale customers, and do you expect pickup in demand in the back of calendar 2015?.

Yes. As Steve mentioned that hyperscale, the major global hyperscale service providers are all pretty strong in their dialog about their capital expansion in the second half of the year.

And the question I think was posed earlier as to how do we see the June quarter and that’s really – the opportunity is that the hyperscale providers accelerate their purchasing and start in like the June month, that’s an opportunity for us to service, but we’re trying to again maintain a cautious demeanor for the June quarter.

But certainly, hyperscale providers present a very strong opportunity as we go into the back half of the year for sure..

Long lead signals for us would point towards at least 60/40 split second half to first half in terms of the exabytes they’re demanding and for some it’s even greater. So again, it seems to be one of the phases where they’re going to deploy pretty heavily and then they wait and fill it up and then they deploy again.

So that’s what we’re seeing right now. That’s obviously a function of their data growth needs, macro conditions, but right now that’s kind of what we’re seeing, 60/40 or even a touch more..

Just to follow, if my memory serves right, enterprise….

We should wrap it up, we’re at the market open. So we want to thank everyone for participating and we look forward to speaking with you next quarter. Okay, great, thanks everybody..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone..