Kate Scolnick - Vice President-Investor Relations Stephen J. Luczo - Chairman, President & Chief Executive Officer Patrick O'Malley - Chief Financial Officer & Executive Vice President Philip G. Brace - President-Cloud Systems & Electronics Solutions William D. Mosley - President-Operations & Technology.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc. Steven B. Fox - Cross Research LLC Rich J. Kugele - Needham & Co. LLC Ananda P. Baruah - Brean Capital LLC Amit Daryanani - RBC Capital Markets LLC Mehdi Hosseini - Susquehanna Financial Group LLLP Monika Garg - Pacific Crest Securities LLC.

Good morning, and welcome to the Seagate Technology fiscal fourth quarter and year-end 2015 financial results conference call. My name is Danielle, 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 the 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 Phil Brace, President, Cloud Systems and Electronic Solutions.

We've posted our press release and detailed supplemental information about our fourth fiscal quarter and year-end 2015 on our Investor Relations site at seagate.com. During today's call, we will review the highlights for the quarter, provide the company outlook for the first fiscal quarter and full year 2016, and then open the call up 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 are planning for the call today to go approximately 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 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 Investor 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 fourth fiscal quarter 2015, Seagate achieved revenues of $2.9 billion, and on a non-GAAP basis, gross margins of 27.2%, net income of $250 million, and diluted earnings per share of $0.77.

Overall storage shipments for the June quarter were 52 exabytes, up 5% year over year, with an average capacity per drive continuing to average over 1.1 terabytes per drive. Non-GAAP operating expenses were $515 million, reflecting expense control around the core business and new adjacencies, in addition to lower variable compensation.

Operating cash flow for the quarter was $228 million, and capital expenditures were in line with our expectations. Our inventory levels were reduced 8% sequentially, and we exited Q4 with the lowest level of HDD finished goods inventory value since 2009.

Our balance sheet remains strong, and we ended this quarter with $2.5 billion in cash and cash equivalents. Revenue challenges from macroeconomic pressures and PC systems demand have been persistent factors that have offset continued growth in other areas of our business.

While the magnitude of these factors did not increase intra-quarter in June, conditions did not improve as we expected, resulting in an impact to our revenue greater than our initial expectations. In light of the mixed market dynamic conditions over the last few quarters, we are satisfied with the company's overall execution in fiscal year 2015.

Highlights include total revenues of $13.7 billion, and on a non-GAAP basis, gross margins of 28.1%, net income of $1.5 billion, and diluted earnings per share of $4.57. Over the course of the fiscal year, we shipped over 228 exabytes of storage, up 13% from fiscal year 2014.

Within this, Seagate's nearline cloud exabyte shipments increased more than 50%, indicating that we are gaining traction with the higher-capacity offerings in our nearline portfolio and our longer-term thesis of data growth and shifts to cloud infrastructure and hyperscale deployments continue to progress.

In fiscal year 2015, Seagate generated over $2.6 billion in operating cash flow, including the legal settlement from Western Digital.

We returned greater than 65% of our operating cash flow, or $1.8 billion, to shareholders in the form of dividend and share redemptions in fiscal year 2015, increasing our dividend per share by 26% and decreasing our shares outstanding by 6%.

We continue to believe our capital allocation policy is aligned with long-term shareholder value creation and reflects our confidence in our ability to generate strong cash flow from our businesses.

From an R&D perspective, we have successfully transformed a good portion of our traditional storage hardware portfolio and made extensive progress towards pursuing our adjacencies in cloud systems and flash technology.

We will have more discussion regarding our technology portfolio advancements and related opportunities at our strategic update on September 2.

For the September quarter, we are forecasting for a relatively flat business environment, as we continue to shape our top line revenue opportunities that preserve our business profitability and enable us to continue to invest in advancing our storage technology portfolio offerings.

For the September quarter, we are planning for revenue of approximately $2.9 billion to $3.1 billion, and we anticipate margins to be relatively flat, taking into account the anticipated seasonal mix and a lean production schedule.

As of today, we have redeemed approximately 14.5 million shares of stock quarter to date, and we are on pace to exit the quarter with less than 300 million shares outstanding, returning over $900 million to investors through dividend and share redemptions in the September quarter.

Operationally, we have undertaken a comprehensive analysis of our expense base and have identified areas where we can improve efficiency and lower cost in fiscal year 2016. For the September quarter, we are targeting operating expense to be flat sequentially at approximately $515 million.

We plan to actively address additional savings opportunities through the end of the calendar year, and we expect operating expenses will be comfortably under $500 million a quarter in the second half of fiscal year 2016. These actions will decrease total operating expense by at least 10% for the fiscal year.

As a result of our business outlook, capital allocation, and expense control, we are targeting at least 10% non-GAAP EPS growth in fiscal year 2016. 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..

Thank you. And our first question comes from Aaron Rakers from Stifel. Your line is now open. Please go ahead..

Yeah, thanks for taking the question. First of all, I was just curious, what was the ending share count coming out of the June quarter? And then the question would be, is – can you talk a little bit about the gross margin drivers this quarter? I think your initial guidance was 28.5%.

Can you bridge the gap between how much absorption effect of fixed cost or utilization was an impact versus, say, mix or pricing?.

Sure. Let me take the second one while Pat gets the answer to the first one. I think in terms of the gross margin, Aaron, the delta kind of makes sense to us all in all. Probably the biggest change was the absorption issue. So we ran our factories really lean. Our inventory levels are 35% below the competition's right now.

And that absorption impact maybe was as much as 100 basis points. So that's significant.

I think other issues are – we've only had 24 hours to look at the other results, but it does seem like the competition attained revenue earlier in the quarter by virtue of the DSO, and that usually has a margin impact just because pricing sometimes gets more challenging through the quarter.

And it looks also that they probably had some share gain in nearline distribution, which is probably a nice margin advantage as well. And so we're off to kind of decide – figure out where that opportunity lays for us in the next couple of quarters.

I think the fourth point is probably that for the non-HDD businesses for both of us, which are $250 million-ish, while I think both of us obviously are running margins below the corporate average, our estimate is that ours are further below, and so we still have work to do there, as we've talked before, over the next couple of quarters to prove that margin profile.

So I think the combination of things explains the delta to our original forecast and probably the delta to the competition as well. But the single biggest point was we basically ran our factories really lean and reduced inventory, and that has a big absorption impact..

And on the share count, Aaron, we were at 315 million. We're down to slightly over 300 million right now as we sit..

Okay. Thank you..

And that's actual shares outstanding..

Thank you. And your next question comes from Steven Fox from Cross Research. Your line is now open. Please go ahead..

Thanks. Good morning. Just on non-HDD business, I was wondering if you could provide some highlights on the $250 million, what was doing better.

And then also if you made any kind of margin improvement in that non-HDD business during the quarter and how you might have attained that, or is that still on the come?.

Yeah, we'll have Phil answer on that..

Yeah, I think that overall the quarter proceeded as expected. We saw a little bit of softness in the overall system business, primarily related to OEM storage-related sales there. I think you see that reflected in other people's reports.

Our flash business, particularly in the PCIe business, continues to be strong and a growth driver for us in that space. So when we look out in time, I think we continue to be excited about our growth prospects there, and we'll continue to work to improve the operational performance of the business going forward..

And then in terms of profitability in that area? Any other color?.

Well, I think as Steve said, right now it's trailing below the corporate average overall in an aggregate perspective, and I think that we've got a number of levers that we're working to over the coming periods to kind of continue to improve the operational performance of the business..

Thanks.

And then just lastly, I know it's not the greatest question to ask after – with PC demand where it is, but in terms of your upside flexibility, given that average capacities are still rising and you're looking to improve profitability, how would you describe your ability to react to some upside surprises over the next couple quarters?.

On the client-side?.

Overall, just thinking about -.

Well, on the client side, it's pretty easy. The lead times are in quarter usually, and the test times are pretty short. So one of the reasons we ran inventories really lean is because at least if the pocket of upside is client, we can chase that very efficiently. Seagate's great at doing that.

And as you know, we're also on the front end of a big product rotation in those categories, so it's smart for us keep our inventories really lean as we go into the new cycle, which we're very excited about. I think on the nearline, it's much tougher. Lead times on nearline, between wafer and test, are well beyond 13 weeks.

So, unless you're staging inventory, which we can stage some inventory, say, if we're at wafer level or whatever to take some of that lead time out, chasing big upsides on nearline and mission-critical is much more difficult. So it just depends where the products come in..

Great. Thank you very much..

Yes, thanks..

Thank you. And your next question comes from Rich Kugele from Needham & Co. Your line is now open. Please go ahead..

Thank you. Good morning..

Good morning..

I just wanted to get a sense for, you talked about potentially looking at operating expense changes for fiscal 2016 having an effect on second half.

What about on the manufacturing side? Do you feel like there's some room there where you could take some capacity out, or is it really not expensive capacity and it's just better to leave it in place?.

Well yeah, we didn't say maybe we were going to look at some opportunities. We are going to take actions, so we will be under $500 million exiting the calendar year, Rich, just to be clear on that – I mean per quarter on OpEx. And I do think there's opportunities on the cost of goods side, which we're also looking at.

We'll probably have an update for you on that in September. In terms of taking out capacity, which may or may not be an action that the competition's taking, it wasn't quite clear to us what was going on in that restructuring charge.

And we didn't really understand the answer, that we don't think that taking out a major asset right now is the right move, just because as you know we still are very bullish on the long-term prospects of exabyte growth, and we're actually bullish on client ultimately, as I've talked before. It just depends how you define client.

And we believe there'll be a whole new class of clients that are going to need lots of storage. So we don't want to take a bunch of capacity off and then turn around and be putting capacity on. So if things stay low for a while, sure, you have options to do that, but that's not where we're at right now.

But there are probably efficiencies that'll flow through to the cost of good lines as well..

And as you look at the capacity enterprise space, you've chosen to move to SMR, right, and then provide other air-based solutions.

Where you see the need for helium, if at all, over the next couple generations?.

Well, that's a funny question. First the question is, where do you see the need for helium, is probably 10 terabytes. The question is, what's the ownership cost all-in between 8 TB and 10 TB? It just seems to us that the 8 TB platform is going to be a massive platform that lasts for a long time relative to 10 TB.

So the answer is probably 10 TB, but we're just leaning into the 6's and 8's right now, and we think there's a huge run in front of us on that. And those are really low-cost platforms for us because we don't need to use helium..

Excellent. Okay. Thank you very much..

Yeah, thanks..

Thank you. And our next question comes from Ananda Baruah from Brean Capital. Your line is now open. Please go ahead..

Hey. Thanks for taking the question. And congrats, really nice job on the OpEx. Just one for me if I could. Steve, would love to get your longer-term view on exabyte growth, given the market dynamics that we've seen with XP refresh over the last 12 months.

And then would also love to get what your view is on what the different applications are that layer into that kind of growth view over the next couple of years and how it manifests. Thanks..

Well, I think, again, you have to break the market down into the client side and basically the enterprise side, which then breaks into legacy and nearline or cloud service providers. I think on the client side, I think for the next 18 and 24 months it's a tough market.

Because the existing definition of client probably isn't going to change much between desktop, notebook, tablet, and phones of two different sizes. And I think the mix-and-match of that client is probably kind of a net-zero-sum game in terms of the trade-offs that people are making in platforms.

Now, the trend away from tablets to big phones is probably also going to benefit notebooks, because at some point, you need a bigger platform and a bigger screen to deal with. And then all of those have implications of that they don't have a lot of storage on board. And what I mean by a lot is certainly more than 128, maybe even more than 256.

Then you an external storage play, which – we continue to see the exabyte shipments on the branded business exceeding that that goes in the cloud, which people kind of still haven't really focused on.

But I do think that in the commercial space for notebook, there'll be the continued advance of platforms with less onboard storage, and it'll probably be serviced by 128 gigs of flash more and more. It's still not half the market, but I think it's growing.

I think on the consumer side, the HDD play is still the obvious play, just because consumers are big users of content, and the performance and cost, obvious, of HDDs if you want 1 or 2 terabytes is kind of untouchable. So I think then the issue is what happens.

And, again, I think it's the idea around the new client, whether or not it's 3D printers, or whether or not it's AR/VR, whether or not it's robotics or surveillance capture devices. There's going to be a whole host of new clients that we're particularly excited about that I think will benefit the clients downstream.

And also, when we hit new capacity points, which we'll likely hit this year, there could be a rejuvenation on the HDD side. On the enterprise side, you have legacy, which continues to kind of march along at stronger rates than people have expected. I think that'll continue.

And the real growth is in nearline, and I think that's where it's particularly exciting. Data science applications, machine-to-machine data creation, and of course just in massive amounts of unstructured data, mostly in the form of video, and especially hi-def, 4K video. It's just growing rapidly, and that's being deployed around the world.

And all of the implications for that at the application level, obviously, are what's exciting. And then that's obviously creating the impetus for people to want to store this stuff. So we're particularly excited about that. We don't get really hung up on is it a hybrid cloud model, or everything's going to five big CSPs.

We engage, obviously, with all of them. We believe it's a hybrid cloud model, which is probably going to inform Phil's business to a greater degree, because there will be, we think, lots of petabytes shipped into corporations that want to basically have their own, quote, "cloud," as well as leveraging off of any other public clouds.

But we're well-positioned either way. So I think the excitement, clearly, on exabyte growth is in that category. And overall, I think, you still see data in the data centers that shows exabyte growth still annually clipping above 50% and some at 100%, depending on CSPs.

And overall, we still think that the exabyte growth will be in excess of areal density, which means we're going to absorb more heads and disks and test time, which is also critical. The other final point – and sorry for the super long-winded answer – but it's not just about exabyte growth. It's about the packaging the exabytes.

And again, I think financial analysts have continued to miss the shift from client to cloud, the implications for that, not just in terms of heads and disk absorption in terms of units, but heads and disk absorption and test in terms of complexity or content, people are missing.

So as you move to a 6 and an 8 and a 10 and beyond that terabyte drives, the processed content inside of the heads and the disk and the related test codes increases dramatically.

So in addition to the more piece parts that are required for more heads and disks per platform, the content inside those piece points is getting more intense, which also results in more absorption. So the trend is in our favor.

Sure, it'd be great to have a bunch of client growth on top of it, but if the trend is just this, it's a good thing for the drive industry, and we're positioning ourselves obviously from a technology perspective to have best-in-class products..

That's very helpful. Thanks a lot. See you in September..

Yeah, thanks..

Thank you. And your next question comes from Amit Daryanani from RBC Capital Markets. Your line is now open. Please go ahead..

Thanks a lot. Good morning, guys. Two questions from me. One, Steve, you talked about a non-GAAP EPS growth of 10% next year in fiscal 2016, I guess.

Could you just talk about what are your assumptions there? Because it seems like you would get there on the OpEx control and raise share count (22:56) Curious how you think about TAM in context of that EPS growth number..

Yeah, what we said, at least, and so our assumptions right now, at a high level, but we want to kind of preserve this for September, because it's a fairly complex story in terms of what's going on underneath the high level. But right now the assumption is for, think of it as a relatively flat revenue TAM.

And then to your point, operating expense controls as mentioned. And again don't forget, some of these operating savings don't occur till the second half of the year, so it's a little different than just saying it's all coming from OpEx, because the math actually doesn't say that.

But it's generally, you're right generally in terms of direction, and that's why we're confident we can do this, because we can manage the OpEx and we don't think our revenue assumption is wildly optimistic..

Got it. If I just follow up on your systems business, the non-HDD side, you have a couple assets like the controller business from LSI, the enclosures from Xyratex.

Do you consider these as core assets to Seagate's systems portfolio as you go forward, or could these be things that you would look to divest to, at least reduce the headwind they cause on your margin profile?.

No, those are really great technologies, and they result in really sticky customer relationships.

The controller technology in particular is very interesting, because it's flash-agnostic, and for a while I've been kind of marching down a theme that while the conventional wisdom is owning the media is a huge cost advantage and therefore you have to own the media, the reality is only one company can be leading in media, and everybody else by definition is behind.

Now someone may just be a little bit behind, and someone may be a lot of bit behind. But if you're running fabs, you're going to keep those fabs open. And if your flash isn't competitive, you got a problem.

Whereas with our technology, we could take that controller technology and apply it to whoever has the best flash or the cheapest flash or a combination thereof.

And I'm not completely convinced yet that the companies that are actually media independent might have a better advantage long term in certain market segments, certainly not if you're talking about low-grade consumer flash. But certainly stuff that requires workload that we're experts at, we actually like having the optionality.

And our controller technology does inform us in terms of our overall system strategy. So the intent obviously is to keep it internal. If someone wanted to pay us $50 billion for it, we'd probably sell it..

Fair enough. Thank you..

Thank you. And your next question comes from Mehdi Hosseini from SIG. Your line is now open. Please go ahead..

Thanks for taking my question. Steve, I want go back to your commentary about a flat top line, and I want to better understand kind of assumptions in different scenarios. On the client side, it seems like the SSD adoption is accelerating, and on the nearline, where there is growth, there is also more competition.

You have Samsung that is becoming very aggressive with their new flash technology. They're selling it below cost. And you have different alternative technologies that are also trying to minimize the hardware procurement.

And in that context, I want to better understand some of your key assumptions with the cloud and nearline, and how do you see the risk or competition? And then I have a follow-up..

Yeah, well, come to September 2 conference, and we'll fill you in on all that. Just one quick answer. There's no one that's using SSDs for storage. I mean, maybe at the margin for replacing boot drives – I mean, maybe 1% or 3% of the hierarchy is SSDs for storage. Most of your flash product is actually not hanging off the storage bus; it's fast memory.

So I think you have to be careful about where you're talking about where our devices go versus where flash is used.

Most implementations of flash in a data center also have massive amounts of storage, and in fact depending on what application you're running, the flash enabled you to actually need to control more storage because of the type of analytics that you're doing. But that's the whole point of September, and we'll talk about all that then..

That's fair.

And then in terms of just accelerating the capacity, do you really need the helium? What is the incremental cost for increasing the capacity per drive, especially for the nearline? Is there any opportunity that you can add more capacity and – being able to drive the growth?.

Yeah, it's expensive, and I'll let Dave talk to that. Do you need it? We don't think you need it in the near term. We think 6s and 8s on air are a really compelling product from an overall perspective, whether or not it's acquisition cost or ongoing costs. I'll let Dave talk about that.

But if you need to get to 10 terabytes, given our view of technology today at 10 TB and at the discount that we're looking at, you probably need helium.

But it's a big cost adder, and then you just have say which markets are willing to pay that? And, Dave, you want to provide any other color?.

All I'd add is that customers have to make a total cost of ownership decision relative to the power savings that you get from helium, which is nice, versus the cost adders that you're talking about..

Thank you..

Yep..

Thank you. And your next question comes from Monika Garg from Pacific Securities. Your line is now open. Please go ahead..

Hi. Thanks for taking my question. Could you, Steve, just discuss the demand trends you're seeing in all your segments, especially in the hyperscale customers? You talked about last quarter that you expect demand to be 60% second half. Is it still the expectation? Thank you..

Yeah, I'm sorry, this will have to be last question, because the market's about open. Yeah, I'd say we're still feeling it's kind of a 60/40 back half to the first half of the year for the nearline cloud service providers. And then overall, as I said, feels pretty flat to us right now. Obviously, generally the second half is stronger.

We do have some favorable things in the marketplace between the new Intel chip and Win10, maybe that drives some acceleration. But I was wrong last quarter anticipating that. I don't want to be wrong, at least in the same direction, twice in a row. So we're remaining conservative and just calling for a flat quarter in the other segments.

But I do think we will see strength in the nearline. And legacy, as you know, is kind of fits and starts. So we'll see where we're at on legacy. But in general, legacy has been better than people would've anticipated..

All right. Good. I want to thank everyone for taking the time today. And we look forward to speaking to you next quarter, but of course we'll see many of you in September. So thanks very much..

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