Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Seagate Technology (NASDAQ:STX)

F2Q13 Earnings Call

January 28, 2013 5:00 pm ET

Executives

Stephen J. Luczo – Chairman, President and Chief Executive Officer

Patrick O’Malley – Executive Vice President and Chief Financial Officer

Albert “Rocky” Pimentel – Executive Vice President and Chief Sales and Marketing Officer

Dave Mosley – Executive Vice President, Operations

Bob Whitmore – Executive Vice President and Chief Technology Officer

Ken Massaroni – Executive Vice President, General Counsel and Chief Administrative Officer

Analysts

Rob Cihra – Evercore Partners

Monika Garg – Pacific Crest Securities

Shebly Seyrafi – FBN Securities

Steven Fox – Cross Research

Aaron Rakers – Stifel Nicolaus

Meredith Dunne – Wells Fargo

Ananda Baruah – Brean Murray Carret & Co., LLC

Nehal Chokshi – Technology Insights Research

Cindy Shaw – Discern, Inc.

Jung Pak - BMO Capital Markets

Eric Sterling – Barclays Capital Inc.

Sherri Scribner – Deutsche Bank

Scott Craig – Bank of America/Merrill Lynch

Operator

Operator: Good afternoon, and welcome to the Seagate Technology Fiscal Second Quarter 2013 Financial Results Conference Call. My name is Keith, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

At this time, I’d like to turn the call over to Kate Scolnick, Vice President, Investor Relations. Please go ahead, Kate.

Kate Scolnick

Thank you. Good afternoon and welcome to today’s call. Joining me today in Cupertino are Seagate’s CEO, Steve Luczo; CFO, Pat O’Malley; and EVP of Sales and Marketing, Rocky Pimentel. On the line we also have EVP of Operations; Dave Mosley; CTO, Bob Whitmore; and EVP and General Counsel, Ken Massaroni.

We have posted our press release and detail supplemental information about our fiscal second quarter 2013 on our Investor Relations site at seagate.com.

During today’s call, we will review the highlights from the December quarter and provide the Company’s outlook for the March quarter. After that, we will open up the call to questions.

As a reminder, this conference call contains forward-looking statements including, but not limited to, statements related to the Company’s historical and currently anticipated future operating and financial performance in the March quarter and thereafter, and includes statements regarding customer demand for disk drives and general market conditions.

These forward-looking statements are based on information available to Seagate as of the date of this conference call, and are subject to a number of known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements.

Such risks and uncertainties such as global economic conditions and other factors may be beyond the Company’s control and may pose a risk to the Company’s operating and financial performance. Information concerning additional factors that could cause results to differ materially from those projected in the forward-looking statements are contained in the Company’s Annual Report on Form 10-K as filed with the SEC on August 8, 2012 and Quarterly Report on Form 10-Q as filed with the SEC on October 31, 2012.

These forward-looking statements should be relied upon as representing the Company’s view as of any subsequent date and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

I would now like to turn the call over to Steve Luczo. Please go ahead, Steve.

Stephen J. Luczo

Thanks, Kate. Good morning, everyone, and thank you for joining us on the call today. Seagate’s second quarter results reflect strong operational performance as we continue to manage through a challenging demand environment. For the December quarter, we achieved revenues of $3.7 billion, non-GAAP net income of $525 million, and non-GAAP diluted earnings per share of $1.38.

We generated $844 million in operating cash flow and returned $1.1 billion to shareholders through share redemptions and dividends. In December, we raised our quarterly dividend 19%, and in the first half of fiscal 2013, Seagate has returned over 95% of operating cash flow and over 100% of free cash flow to shareholders.

Our business environment continues to be impacted by a wide range of macroeconomic, spending and demand challenges. Industry shipments declined 3% sequentially in the December quarter to approximately 135 million units. This decline was primarily driven by the notebook market as all other segments demonstrated quarter-over-quarter growth.

The overall industry demand environment was slightly lower than what we had expected. By executing effectively in response to in quarter upsides from our customers, our market share grew to near the higher end of our market share expectations.

We effectively balance supply and demand with finished goods inventory levels decreasing over 10% from the prior quarter. For the December quarter, we shipped over 47 exabytes of storage with an average of approximately 823 gigabytes per drive. This reflects a 59% year-over-year exabyte growth, which is well over twice the current rate of areal density growth.

Gross margins for the December quarter were 27.6% within both our expectations and our long-term margin range target. The pricing environment and the benefit we’ve received from cost improvements from product transitions were also within the expected ranges for the quarter. Product mix improved slightly in the quarter.

Operating expenses in the December quarter were $437 million, including a $21 million benefit from legal costs reimbursements. We are focused on effectively aligning our operating expense to support a broader product portfolio of storage devices, including hybrid and solid state drives, software, other devices, and services. We believe these additional investments will support our continued leadership in the storage market and effectively align us with the rapid advancements in mobility, cloud, and open source initiatives.

We also continue to make strategic investments that position us for the future success in new storage applications. As an example, today we announced the strategic relationship with Virident Systems Inc., a performance leader in flash-based storage-class memory solutions. The company’s plan to jointly deliver solutions for the fast growing PCIe storage market and most immediately, we will offer a complete line of flash-based PCIe solutions to our OEM and distribution partners, powered by Virident.

Longer term, we plan to jointly create next generation hardware and software solutions for the solid state storage market. We also made an strategic equity investment in Virident. Virident products are highly regarded for their industry leading performance, reliability and capacity. This is another example that accelerates our strategy to offer our customers a complete line of solid state products across all markets.

Now I’ll provide our view for the March quarter and some context related to our outlook. Based on current planning indications from a broad base of customers and our assessment of the global macro economic conditions, we are continuing to manage our business cautiously. While customer demand visibility remains challenging, we expect the industry to continue to balance supply effectively and maintain relatively stable pricing.

For the March quarter, unit shipments in the first few weeks of the month of January have been linear and have trended higher than the beginning of the December quarter. Our outlook reflects an addressable market that is flat to down sequentially, and we are currently forecasting March quarter revenues of approximately $3.25 billion to $3.45 billion.

We continue to focus on the quality of our business versus absolute unit shipments. And at the low end of our revenue guidance, we have a conservative view of in quarter upsides. We expect to maintain gross margins at the lower end of our long term range of 27% to 32%.

Seagate remains focus on sustaining profitability in the current demand environment and investing to continue to be a storage leader. We are targeting non-GAAP operating expenses to be relatively flat sequentially, which should then directionally decline in the June quarter.

As we’ve said over the last few quarters, Seagate is maintaining capital expenditures to meet narrow term demand signals as opposed to deploying capital and anticipation of our recovery of demand. The vast majority of our capital expenditures continue to be used for maintaining our existing operations and our current technology transitions. We expect to maintain capital spending at or below our long-term targeted range of 6% to 8% of revenue.

In light of the gap between areal density growth and petabyte growth and the resultant upward pressure this puts on average capacity per drive shipped. We believe that this approach to capital provide support for our long-term gross margin expectations.

Delivering value to our shareholders continues be an important objective with Seagate. Through the share redemptions we have made this fiscal year and through our quarterly dividends, we are on track to return approximately 70% of operating cash flow and 100% of free cash flow to shareholders in fiscal 2013.

The next few years in the storage industry will present new and significant opportunities for Seagate. Data consumption and creation, along with the increase of global internet connectivity continue to drive petabyte growth at rates that are significantly greater than the areal density growth rate.

At the same time, open source software, cloud infrastructure and architectures, and mobility are fundamentally reducing the overall cost of computing and extending its deployment.

In addition, the new touch-enabled thin and light systems, along with Win 8 should be increasingly compelling in the client market. These dynamics should provide significant benefits for Seagate and the storage device industry. As such, we remain optimistic about the second half of calendar 2013 and beyond.

Keith, we’re now ready to open up the call to questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And your first question is from the line of Rob Cihra with Evercore Partners. Please go ahead.

Rob Cihra – Evercore Partners

Hi. Thanks very much. I was just wondering with the enterprise was clearly better than expected in the quarter versus when you went into the quarter, and I know we are going through inventory correction that really hit in the September quarter. Did you think that the upside particularly in near line was reflecting better end demand or was it really just a timing we’re coming out of a inventory correction and we’re just sort of correcting a little better and quicker than we thought, or do you think, I guess end demand was stronger than expected? Thanks.

Stephen J. Luczo

I think demand continues to increase in the near line space. I mean that’s where the vast majority of the companies that are providing cloud infrastructure, purchase those types of devices, so as the cloud deployments continue, that market continues to grow. And I think in Seagate case, we did execute well in terms of in quarter upside there as well.

Rob Cihra – Evercore Partners

Okay. And then if I get a follow-up i'm not sure if I do, but I will ask one, may be I’m curious with LTAs as a run through here into that beginning of calendar 2013, any expectation that they impact your pricing or market share, or do you think they really don’t have as much impact as maybe people think, or do you think they do? Thanks.

Stephen J. Luczo

I know I do what people think, but the LTAs again provided favorable pricing to the OEMs in the supply-constrained environment, substantially lower priced in the spot market would have provided at the time. And it was to align the longer-term purchase requirements of those customers with our supply situation. A number of those agreements have been extended. Others originally extended beyond this calendar year, last calendar year and this calendar year. So I don’t see any big changes as a result of the constant evolution of the LTA agreements.

Rob Cihra – Evercore Partners

Okay, great. Thank you very much.

Operator

Your next question is from the line of Monika Garg with Pacific Crest Securities. Please go ahead.

Monika Garg – Pacific Crest Securities

Hi, thanks for taking my question. The question is on the TAM, if I compare the peak industry TAM about four or five quarters back, and with this quarter or the guided quarter for the March, it seem the industry and Seagate is operating less than 80% utilization. So I would like any comments thoughts about right sizing the capacity?

Stephen J. Luczo

Well, I think our businesses isn’t as simple as just taken the TAM and the number of units. So you have to take into consideration the nature of the devices so to split between client and enterprise and then the capacity per drive. So with average capacity per drive increasing the way it is, that’s absorbing head and disks, which is a very good thing for a vertically integrated drive company. And with average capacity per drive continue to increase, that also absorbs test capital.

So our most expensive capital deployments are in heads and disks and test, and our most expensive R&D is in heads and disks. So as we continue to drive more heads and disks per platform, it’s actually not a terrible situation in terms of being a flat TAM or slightly eroding TAM. That being said, clearly TAM growth would be a good thing in terms of a final assembly, but with the average capacity per drive right now, our factories are running at levels obviously it allow us to maintain these margins, and we are not considering any sort of reduction in sale just because our longer-term outlook obviously is different than what the situation looks like today is.

As you know, we believe that by the end of the decade there is going to be a significant demand for petabyte shift and that will evidence itself in unit growth, as well as average capacity per drive, so we don’t want to take capital a lot right now.

Monika Garg – Pacific Crest Securities

Okay, thanks. Just the last question on the Virident acquisition, a very interesting acquisition there, could you maybe talk about the Virident’s current customers and kind of any of the traction where you would see in the market?

Stephen J. Luczo

Yeah, it was an investment.

Monika Garg – Pacific Crest Securities

Yes, sorry, yeah, I misspoke.

Stephen J. Luczo

And I’ll let Rocky talk to the details of it. I’ll just provide a brief little overview that is consistent with how we approach the emerging solid state market, which is developing nicely. And we believe that we have to participate in a variety of segments that we feel very good about our position. On the enterprise SaaS side with our partnership with Samsung, the PCIe space is clearly an attractive one. And we feel this partnership is going to allow us to address the needs of our OEM and distribution customers, and then we are doing things on the clients’ space that we have talked in prior calls.

Albert “Rocky” Pimentel

Yeah, I mean I think Steve just covered it. It’s really another step in completing the platform for solid state storage that Seagate wants to offer alongside of its traditional magnetic core storage side. I think we’re pretty excited about this engagement with Virident, not only to we have a strong go-to-market initiative, but also strong development initiative forward. And so as a result, we’ll have a stack of SSD solid state solutions that span from the client all the way through to the flash server, high application, data demands of the massively scale data center.

Monika Garg – Pacific Crest Securities

Thank you.

Operator

Your next question is from the line of Shebly Seyrafi with FBN Securities. Please go ahead.

Shebly Seyrafi – FBN Securities

Very much. So it looks like your guiding down – revenue down 9% sequentially and that’s worse than what I have in Western Digital down 3% sequentially. Maybe you can talk about why you think you’re going to go down more, are you being more price aggressive than them? And also relates to this on the gross margin, do you expect to get a mix benefit in the March quarter, you had one in December just now, and with the lower revenue and perhaps no mix benefit, is there a possibility that it goes below your target of 27%?

Stephen J. Luczo

I’m sorry, what was the last part of that?

Shebly Seyrafi – FBN Securities

The possibility of the gross margin goes below the 27%, what was your target range?

Stephen J. Luczo

I think we already indicated what we thought our gross margin is going to be, so I’m not going to repeat that. On the first one, I’m not sure what Western Digital’s revenue decline was. I thought at the midpoint it was closer to 6% not 2%. But and for us I’m not sure if you’re in the first part of the call where we indicated that we’re also at the near of the high end of our market share in the December quarter as a result of some really good in quarter execution to customer upsides.

At the low end of our range, we haven’t modeled that type of performance again, we typically don’t model that. So I think that the outlook for the markets, we maybe a touch more conservative in TAM than our competitors and coming off of the higher market share. We may have some small market share loss if we don’t get the in quarter upside like we did. But in general, I think it’s a fairly consistent, okay.

Shebly Seyrafi – FBN Securities

Just a quick one on Virident, right, can you talk about the opportunities with Web 2.0 customers?

Albert "Rocky" Pimentel

Well, we definitely think are the huge opportunity with Web 2.0 customers. When you actually look at the index that we manage to of our direct cloud-based customers, that share the business or that portion of our business grew strong double digits quarter-over-quarter, and certainly the Virident product solution is a very pertinent solution for the hyper-scaled cloud providers.

Shebly Seyrafi – FBN Securities

Okay. Thanks.

Operator

Your next question is from the line of Steven Fox with Cross Research. Please go ahead.

Steven Fox – Cross Research

Thanks. Good afternoon. Just one question from me, Steve, I was wondering if you could talk a little bit about your average capacity per drive, the recent trends are up again from like about 832, I think you said in a release from 802. You exited like fiscal 2011 like less than 600. I’m just curious, can you talk about what’s different between the first for this fiscal year versus maybe in the first half of last fiscal year, and then how you see that progressing and what are the key drivers over the next few quarters? Thanks.

Stephen J. Luczo

I think if we go back further than that, Steven, I think of it kind over a four-year trend and the average capacity per drive is kind of gone from mid 20s to mid 30s to mid 40s to mid 50s. And whether or not it goes to mid 60s, I guess we can argue about. But even at these rates given where areal density is, it’s a good thing for the drive industry, because what we do is we ship petabytes, how we package them is probably the easiest thing that we’re faced with, driving areal density and then of course managing our capital deployment and matching up with our customer needs architecturally is where a lot of our work goes. So I don’t see it slowing down.

I just think if the – know if the silicon folks can keep on track in terms of reducing the cost of silicon and the software people can continue to develop nice portable easy open code, then we’re going to see device proliferation in the client side, especially in the mobile space continue to grow and hopefully we go from 1.7 billion people connected to 2.7 billion connected and sharing all sorts of rich content which is what we hear about.

We do believe that to give people the user experience that they probably deserve at the edge, there is an opportunity for HDDs to play a greater role in some of the mobile devices and we’re pursuing those discussions but clearly the backend infrastructure to support that type of data growth is a big opportunity for us. I don’t see it slowing down if anything I see it accelerating.

Steven Fox – Cross Research

And do you see…

Stephen J. Luczo

If you go to high frame rate video, you go to 4K video, I mean these imply, movies today in HD are 20 to 30 gigabytes and 4K that’s just average frame rates is 100 to 200 gigabytes. So it just gives you a feel for the challenges we have gone for to provide storage people are going to need.

Steven Fox – Cross Research

So all that applies and given some of your previous comments that you are thinking at both the enterprise and clients side can grow capacities at a similar rate going forward, or is it a one that’s going to grow faster?

Stephen J. Luczo

Depends on the application, enterprise has to be split, I think, in the mission critical enterprise versus maybe call service provider or content. If you are in an archiving mode, then clearly we believe that there are architectures we can deploy that drive capacity per drive. But if you are in the pure mission critical, you have a performance constraint that always has to be bought about. So it just depends on the application.

Steven Fox – Cross Research

Fair enough. Thanks very much.

Operator

Your next question is from the line of Aaron Rakers with Stifel Nicolas. Please go ahead.

Aaron Rakers – Stifel Nicolas

Yeah. Thanks for taking the question guys; one on gross margin and a follow-up on the Virident acquisition. First on the gross margin line, can you just clarify how much benefit you got back from the Brazil situation last quarter? And then also as you think about people looking at these models on a capacity shift versus a unit TAM assumption, can you provide us an update on where you stand with regard to the industry supplying enough media as you expect obviously there is possibly to accelerate in terms of capacity per drive?

Stephen J. Luczo

I’ll take the first one, Aaron. On the first one…

Albert “Rocky” Pimentel

Aaron, this is “Rocky” Pimentel. Let’s clarify, you said acquisition, we made an strategic investment in Virident.

Aaron Rakers – Stifel Nicolas

Fair enough, sorry. And I’ll ask on that little bit.

Stephen J. Luczo

So on the Brazil issue, however, last quarter we said – at least half of the impact in that was even less than that this quarter, so it was measurable but not any frame that we were about. We’ve put a plan in place to correctly resolve some of our provision in inventory and I think that’s working well. So we think we largely taken care of that issue.

Aaron Rakers – Stifel Nicolas

Okay. And then on the media in terms of continued increase and capacity per drive?

Stephen J. Luczo

Dave Mosley is on the call. I’ll let Dave talk to that.

Dave Mosley

So just real quick, I think with the TAM being down here, we are putting more disks into each drive, but I think the industry is probably okay for the next couple of years depending on how you view the overall growth of petabytes and the box count. But after say 2015, there could be significant challenges if we could continue on the rates that Steve just illustrated. So that’s the way I’d answer that.

Aaron Rakers – Stifel Nicolas

Okay. And then on Virident maybe you could help me, if you compare and contrast maybe this illusion relative to the primary competitor of the market being Fusionio, either from an architectural perspective and also on a cost per gigabit perspective if you can?

Albert “Rocky” Pimentel

Yes, so one of the, Aaron, this is Rocky Pimentel again. Obviously – they actually have benchmarks that you can refer to on their website, but based on the benchmark, the external third-party benchmarking they’ve done with their product against other leaders in “the category out there”, they demonstrate the ability to exceed many of the key specs like IOPS et cetera against the incumbent competition out there. And I think secondly, another thing that we can bring to our relationship is the ability to drive their cost structure down from a product standpoint, given our scale and our involvement and other areas of solid state storage.

Aaron Rakers – Stifel Nicolas

Okay. No quantification on cost per gig right now though?

Albert “Rocky” Pimentel

No.

Aaron Rakers – Stifel Nicolas

Okay. Thank you.

Operator

Your next question is from the line of Meredith Dunne with Wells Fargo. Please go ahead.

Meredith Dunne – Wells Fargo

Hi, thanks. Someone in the industry have talked about hybrids accounting for about 0.5 of the 2.5-inch notebook drives for 2015. Just curious what your expectations are for that and whether there are any shifting capacity or utilization effects to think about in the market transition that could impact gross margins? And I have a follow-up as well, please.

Stephen J. Luczo

Sorry, I got the first part of that question. What’s the second part of the question related to the first part or was that a second question?

Meredith Dunne – Wells Fargo

It was, it was related to the first part.

Stephen J. Luczo

Okay, so while the first part is I think that those types of estimates are possible. And then what was the second part of it?

Meredith Dunne – Wells Fargo

It’s just in terms of – if that starts to ramp up and the HDD side starts to “ramp down” just in terms of any sort of shift in that market impacting your gross margins?

Stephen J. Luczo

No, no. Hardware isn’t HDD, it just also got flash in better than along with a bunch of software that makes that flash work well. So we don’t, from a manufacturing perspective, we don’t see that shift is being problematic because again its still lots of heads in this. And I think the trend up where we are at on single disk and two disk solutions is probably not necessarily influenced by hybrid. It’s really a performance play. I think it’s a big deal. I think because you kind of get the SSD – for example down at CES last month or whenever it was now, earlier this month hard to believe and just shocking the number of thin and light machines that are packed with expensive SSDs when you can use a hybrid drive for a lot less money with the same performance.

I think as the industry has now become the line around the right chipset and the right performance measures, we are going to see a lot of thin and lights that roll out with hybrid, because you can pickup ten times the capacity of one-fifth the cost and that probably will help the notebook market, that’s probably more price sensitive than other market. So I think it’s a big transition ahead of us.

Meredith Dunne – Wells Fargo

And along those lines, can you just talk about the opportunities in the tablet market and I am referring primarily to the ARM based market that’s using flash today. May be if you could just talk about if and where discussions currently are? Thanks.

Stephen J. Luczo

Yeah. And I think it’s a big opportunity again. We indicated that we believe to deliver the user experience that you probably deserve as a mobile user. There is lots of reasons that you need more storage capacity in that device, not citing anyone’s product. We are just calling something a tablet. If you only have 16 or 32 gigs and you have to decide which three or four movies you are going to take with you seems kind of silly when you can take every movie your own for less cost and actually the same battery performance in the same (inaudible). So yeah, we think there is a big opportunity coming down the pipe for tablets as well and we are engaged on multiple fronts.

Operator

Your next question is from line of Ananda Baruah with Brean Capital. Please go ahead.

Ananda Baruah – Brean Murray Carret & Co., LLC

Hi, good afternoon guys. Thanks to taking the question. Steve, let me just ask one on pricing here. I believe that earlier comments you guys are looking for March quarter pricing to be more flattish blended, and I think if I just work in a point of the guidance it seems like down mid-single digits. Is that accurate and if so can you just sort of walk through the puts and takes maybe it’s a mix, talk about some of the mix issues, not issues but the mix situation in the December quarter that maybe them winding, just love to get your thoughts and I have a follow-up. Thanks.

Stephen J. Luczo

I think where we had some share gain in the December quarter was spread across all the markets, but probably a little heavier on the enterprise and on the newer line so that’s partially influencing the AUP discussion. So in general, the pricing that we’ve entered into was pretty much what we expected and pretty benign.

Ananda Baruah – Brean Murray Carret & Co., LLC

Got it. Thanks. And then I guess just to that end, the gross margins are still pretty solid in the March quarter. I guess even with – I’m just I’m sort of referring that maybe some of the market share gains in the enterprise, there’s some of the share get backs that you’re talking about the normalization and you still guiding to 27% gross margins in the March quarter. So not to get too far ahead, but can we infer that go and post the March quarter with sort of more of a normalized mix and you expect margins to still be pretty stable?

Stephen J. Luczo

Yes.

Ananda Baruah – Brean Murray Carret & Co., LLC

Great. Thanks a lot.

Operator

Your next question is from line of Nehal Chokshi with Technology Insights Research. Please go head.

Nehal Chokshi – Technology Insights Research

Yeah, thanks. I calculate that your ASP for the December quarter was down Q-over-Q. So could you take and also you didn’t reflect all your segment numbers. So if you are not divulging your segment numbers, could you at least take us through which segments drove that and if you don’t mind, do you have older segment numbers?

Stephen J. Luczo

No, we don’t have segments, but Pat you can talk to what the AUP decline was, pretty minimal as I recall of the September quarter.

Patrick O’Malley

Yeah, AUP was managed mainly with mix. We had talked in the September out, it’s September call in October that the pricing was negotiated in the backdrop if they had access and so we were heavier on pricing than historically in the December quarter, but even with that they were able to stay in the target margin range and we highlight that we will be going with fairly benign pricing going forward and that’s been the case across the board.

Nehal Chokshi – Technology Insights Research

Okay, thanks. And I’d also like to ask question about the Virident investment note that I got that right. But so as you guys hope to get this product out to market, do you expect this to be margin neutral, margin accretive or margin dilutive, because it sounds like this is more of a distribution relationship and that the technology relationship is to come?

Stephen J. Luczo

Yeah, the first phase is definitely a go-to-market phase. The next phase will be joint development on product. And our intention is to make it margin neutral to margin accretive overall.

Nehal Chokshi – Technology Insights Research

What about initially?

Stephen J. Luczo

Initially it will be pretty minor amounts of money. By the time it becomes visible, it should be margin neutral and margin accretive.

Nehal Chokshi – Technology Insights Research

Okay. Thanks.

Stephen J. Luczo

And just on your first question, we just – we just look the AUP, the AUP decline was only 3% quarter-to-quarter, so that was a lot less in the price erosion that we have talked about.

Ananda Baruah – Brean Murray Carret & Co.

All right, okay.

Operator

Your next question is from the line of Cindy Shaw with Discern. Please go ahead.

Cindy Shaw – Discern, Inc.

Hi, thank you. I was wondering if you could talk about LaCie, which you had for the first time in the fourth quarter, any impact for that on revenue and earnings as well as the SSD business sort of the non-traditional business. Is there any impact on revenue and earnings? And then I have a follow-up.

Bob Whitmore

LaCie is accretive to us. It’s been a good investment. We are in the process of still integrating that. But that’s been accretive and so as we would expect obviously that is some OpEx, but for what brings for breadth and depth on our portfolio is in expectations. And then your second part of the question?

Cindy Shaw – Discern, Inc.

Yeah. I was also asking about SSDs and other sort of non-traditional contributions? Then I have a follow-up after that.

Stephen J. Luczo

No big changes from the prior quarter.

Cindy Shaw – Discern, Inc.

Okay. And then the follow-up, the Cloud Builder Alliance, when will you be expecting to see revenue and really meaningful revenue out of that?

Stephen J. Luczo

Of what?

Bob Whitmore

Cloud Builder Alliance. We are in helping to engage the Cloud Builder Alliance. We are not going to get revenue from that. We are just engaging with them to help align the architectures and our products to contribute to that, so the second tier and direct builder architectures approach the market. But we are not going to get any direct revenue other than enabling the folks in that. We help enable the folks in that alliance to better tackle the market.

Cindy Shaw – Discern, Inc.

And when do you think, can you measure really when or how that’s going to impact revenue or is it just too disconnected?

Patrick O’Malley

No, I mean I think over the course of the back half of this year, we are definitely going to be able to measure it as cloud overall is one of our key initiative. So we’ll be able to articulate the details of what that program is delivering. Like Pat said, it’s really a market creation engagement vehicle, it’s not a direct sales vehicle at this point.

Cindy Shaw – Discern, Inc.

Great, thank you.

Operator

Your next question is from the line of Jung Pak with BMO Capital Markets. Please go ahead.

Jung Pak – BMO Capital Markets

Hi, thanks very much. The notebook market has been down for two consecutive quarters, what do you think inventory is with the OEMs in the channel for the notebook market? And what are your views for the notebook HDD shipments for the next quarter or two? Thanks.

Stephen J. Luczo

I think the inventories are better certainly over the last two quarters and probably closer to where the customers wanted me to have to ask the customers that. But I think from our perspective, no one is really confident on it, but our inventories are, so I don’t know what that is. Our inventories are quite low, running almost a $0.5 billion of inventory less than our competitors.

So, we feel really good about our inventory balances, as far as we can tell that customers inventory balances are pretty well managed right now. And I think, the demand on the notebook side is really just a function of the new platforms gain traction, which is partially dependent on the touch-enabled technology and Win 8 deployment.

So we’re kind of in a wait and see mode, but we’re optimistic that things improve from here, well enough that happens in the March quarter, the June quarter, September quarter, we’ll see. But I think we’re probably skipping along the bottom here and I also think as hybrid start showing up in these devices, it’s going to be a value add to the notebook market, because like I said you can get a lot more capacity in the same performance with a lot lower costs, so.

Operator

Your next question is from the line of Eric Sterling with Barclays. Please go ahead.

Eric Sterling – Barclays Capital Inc.

Hey, thank you. Given the limitations on the buybacks throughout 2013, can you discuss your plans for the dividend?

Stephen J. Luczo

Nothing different than what we’ve already said and disclosed on our file documents, something we continue to look at every quarter. We don’t really have a limitation on the buybacks. It’s just that if we buyback too much stock, we run into section 382 issue. So it’s just something you consider as we think about whether or not we want to pursue buybacks, but it’s not a direct limitation.

Eric Sterling – Barclays Capital Inc.

Okay. Thank you.

Operator

Your next question is from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, thank you. I think that in December, you anniversaried one year on the Samsung acquisition. And if I remember correctly, there were some limitations on you combining the business with Samsung for at least a year. I was hoping you could give us an update on where you are with combining the business and do you expect to see any cost savings as we move through the year?

Stephen J. Luczo

Well, for us, we integrated pretty much most of the areas where there were cost savings on the R&D side and on the operating side. Our limitations were and/or really geared around the go-to-market side, sales, customer engagement, pricing. And you are right that the initial – on December 19 or 20 or 21, we had the right to ask the regulatory authorities to relapse those. We haven’t done that. We continue to have a positive and constructive dialogue with Matcom and other regulators in China, and we are going to continue those dialogues and when appropriate then we’ll seek release from the requirements.

Sherri Scribner – Deutsche Bank

Okay, great. Thank you.

Stephen J. Luczo

Thank you. I think we have time for one more question.

Operator

Okay. Your final question will be from the line of Scott Craig with Bank of America. Please go ahead.

Scott Craig – Bank of America Merrill Lynch

Okay, thanks, good afternoon. Here is a couple of questions around OpEx, do you made it from a longer-term perspective. Is there a revenue target or timing or something we could think around when you would reach the OpEx target of sort of 8% to 10% of revenue?

And then secondly, with regards to an earlier question on capacity if the PC market is a challenge to what some people think, and I believe their consensus is sort of where declined this year. How does that impact, what your capacity thoughts are for the back part of calendar 2013? Thanks.

Stephen J. Luczo

Yeah, I kind of answered the second question already. I mean we’re not going to – we manage our capacity more on our capital deployment as opposed to brick and mortar. As we look out to 2015, 2016 we believe that that this constant disconnect between petabyte growth rate and areal density growth rate is going to put extreme shortages in front of the drive industry at current capital deployment rate, so we don’t want to walk away from brick and mortar, it’s really how we manage the inside of the walls in the meantime.

And that’s what we are doing very conservatively, so I don’t think it changes any of that. I don’t know that I agree with all the nay sayers anyhow I kind of like the term – what was the – what’s the normal term on PC, post-PC, but whatever it is. It’s really what the PC evolving to, and I think these convertible platforms that become tablets and notebooks and have onboard storage are very compelling, and I expect there will be resurgence in the client side of the market here in the not too distant future, but we’ll watch it. And in terms of the OpEx question, we just see big opportunities on the mobile side, I mean call the infrastructure side where there is a lot of device level technology, software technology, and even system level technology that really only a drive company can provide and we don’t want to miss the opportunity to investment in some of those fundamental technologies as these markets develop.

So I think for the incremental dollars, it’s a prudent thing to do now, and then we’ll see where the revenue flows with it. But clearly, we think these are multibillion dollar opportunities when you take mobile and cloud and think about the evolution of computing.

Over the next five to 10 years and so we want to position Seagate to participate not just as a device company, which will be our core, but some of the other opportunities that go along with it. So we’ll manage it prudently and hopefully start to show some revenue associated with it in the next year.

Scott Craig – Bank of America Merrill Lynch

Okay. Thanks, Steve.

Stephen J. Luczo

Okay. Thanks very much. And on behalf of management team, I want to thank our employees, customers, partners, suppliers and our shareholders for your support and commitment, and we look forward to speaking to you next quarter. Thank you.

Operator

Ladies and gentlemen that will conclude today’s call. Thank you very much for joining us. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Seagate Technology's CEO Discusses F2Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts