Seagate Technology's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Oct.28.13 | About: Seagate Technology (STX)

Seagate Technology PLC (NASDAQ:STX)

F1Q 2014 Earnings Conference Call

October 28, 2013 5:00 PM ET

Executives

Kate Scolnick - Vice President, Investor Relations

Steve Luczo - Chairman and Chief Executive Officer

Pat O’Malley - Executive Vice President and Chief Financial Officer

Rocky Pimentel - President, Global Markets and Customers

Dave Mosley - President, Operations and Technology

Ken Massaroni - Executive Vice President and General Counsel

Analysts

Amit Daryanani - RBC Capital Markets

Andrew Nowinski - Piper Jaffray

Monika Garg - Pacific Crest Securities

Nehal Chokshi - Technology Insights Research

Rich Kugele - Needham & Company

Eric Sterling - Barclays

Rob Cihra - Evercore

Aaron Rakers - Stifel

Sherri Scribner - Deutsche Bank

Joe Wittine - Longbow Research

Steven Fox - Cross

Operator

Good morning, and welcome to the Seagate Technology’s Fiscal First Quarter 2014 Financial Results Conference Call. My name is Regina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Kate Scolnick, Vice President of Investor Relations. Please proceed Kate.

Kate Scolnick

Thank you. Good afternoon everyone and welcome to today’s call. Joining me today in Cupertino are Seagate’s executive team; our Chairman and CEO, Steve Luczo; EVP and CFO, Pat O’Malley; President Global Markets and Customers, Rocky Pimentel; President Operations and Technology, Dave Mosley; and EVP and General Counsel, Ken Massaroni.

We have posted our press release and detailed supplemental information about our fiscal first quarter 2014 on our Investor Relations site at seagate.com. Please note we have combined our supplemental data and CFO commentary into one document. During today’s call, we will review the highlights from the September quarter and provide the company’s outlook for the fiscal second quarter 2014. After that, we will open up for 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 December quarter and thereafter and includes statements regarding customer demand 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 based on management’s current views and assumptions. These forward-looking statements are subject to a number of known and unknown risks, 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 7, 2013 and in the supplemental information presented and posted to our website. These forward-looking statements should not be relied upon as representing the company’s view of any subsequent date, and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they are made. We will also refer to non-GAAP measures which are reconciled to GAAP figures in our supplement.

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

Steve Luczo

Thank you Kate. Good afternoon everyone and thank you for joining us today. Seagate demonstrated excellent execution this quarter and achieved revenues of $3.5 billion and on a non-GAAP basis gross margin of 28.5%, net income of $473 million, and diluted earnings per share of $1.29. We had a strong cash flow quarter generating operating cash flow of $682 million and free cash flow of $521 million. In terms of our product portfolio we shipped a record 48.7 exabytes of storage, up 14% year-over-year and averaged a record 875 gigabytes per drive across our portfolio, up 19% over last year.

Our non-GAAP operating margin for the quarter was 15.1% in inventory turns and day sales outstanding were within our targeted ranges. Our balance sheet remains healthy and we ended the quarter with $2.5 billion in cash and investments, and during the September quarter S&P raised its corporate rating on Seagate to BB+ further reflection our strong financial position.

Returning value to shareholders through share redemptions and dividends remains a top priority for Seagate. In early October, we completed a private share redemption transaction with Samsung of 32.7 million shares for $1.5 billion. In addition, our Board last week approved raising our quarterly dividend $0.05 or 13% to $0.43 per share.

Through these activities, we expect to meet our goal of returning approximately 70% of operating cash flow to shareholders this fiscal year. At our strategic update in September, we discussed the major dynamics we see in the storage industry and the expanding and changing opportunities for Seagate in mobile, cloud, and open source computing. Looking out to 2020, we believe that data growth and demand for storage is continuing at a pace that is higher than what the drive industry infrastructure is capable to produce, and we estimate that approximately 60% of this data will be stored in both home and enterprise cloud environments.

Seagate’s research and development is focused on advancing our product offerings to align with these emerging market trends. Some recent examples of our R&D success include our 4 terabyte nearline product delivering a competitive combination of capacity and energy efficiency, the storage industry’s first enterprise and desktop hybrid drives, and enterprise level NAS offering leveraging are LaCie software expertise, and the announcement of our Seagate Kinetic Open Storage Platform designed to simplify data management and improve performance and scalability while lowering the total cost of ownership of cloud computing.

Developing products that our customers value and which solves their storage needs is one of our highest priorities, and we believe we have a very competitive portfolio from traditional HDDs to the highest performance flash-based enterprise products. We also continue to focus development efforts on improving magnetic recording aerial density. We’re leading the transition to Shingled magnetic recording technology or SMR and are currently shipping drives utilizing this technology in significant volume. We will be incorporating this technology into additional products over the coming year. In addition, we’re integrating flash technology across our product portfolio, and we’re pleased with the traction we’re seeing in our solid state hybrid drives as well as our enterprise SSD products.

For the September quarter, non-GAAP product margins were 28.5% reflecting market demand for our storage portfolio, effective supply chain management, and cost improvements. Maintaining margins within our long-term target range of 27% to 32% will continue to enable us to further invest in advancing our storage technology and manufacturing efficiency. Non-GAAP operating expenses this quarter were $469 million within our targeted range of 12% to 14% of revenue and reflecting investments in our core infrastructure and aligning our organization for our cloud, mobile, open source, and flash technology opportunities.

Turning to our December quarter outlook, we see the revenue and unit demand environment remaining relatively similar to what we have seen in the last several quarters. While global macroeconomic conditions and technology transitions continue to provide a level of uncertainty with our customers, we are mindful of those factors and we are confident that we can continue to execute effectively. For the December quarter, we expect revenues of approximately $3.5 billion to $3.6 billion, and non-GAAP gross margin relatively flat sequentially.

Seagate is well-positioned for this era of ongoing data growth and technology transformation, and we will continue to focus on executing to our financial model and delivering strong operating results. I am pleased with our performance this quarter, and on behalf of the entire management team, I’d like to thank our employees for their solid performance and thank our customers, partners, and suppliers for their support and commitment. And before we open the call for questions, I want to take a moment and acknowledge the well-deserved executive promotions we announced today. Rocky Pimentel named President, Global Markets and Customers and Dave Mosley named President, Operations and Technology. By elevating Dave and Rocky to lead our core product technology operations and customer engagement, Seagate is even better positioned for continued operational excellence and to further our ability to capitalize on our growing opportunities in the storage marketplace. This new leadership alignment also allows me to focus more on the long-term strategic opportunities for our company and to increase my efforts around accelerating our mobile and cloud technology strategies. I am pleased to continue to be Chairman and CEO of Seagate, and I have no plans to leave the company anytime soon.

Regina, we are now ready to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question today comes from the line of Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Good afternoon guys. Two questions for me. One, maybe you could just talk about the buyback program as you go forward and given the repurchase of shares from Samsung, what implications does it have to the Section 382 limitations that you have on your buyback as you go through the next 12 months?

Steve Luczo

Well, the Samsung shares were not subject to the 382 restrictions. And as you may know, and I will have Pat go into this in a little more detail, the 382 requirements were changed a little bit in a mode that makes it more favorable for Seagate in terms of giving us more flexibility quarter-to-quarter. So the buyback redemption from Samsung didn’t affect us, and the 382 changes provide us a little more flexibility going forward.

Pat O’Malley

Yes, with the recent IRS relaxation or amendment of the 382, companies like Seagate have been buying back their shares were in the same ilk of other companies buying other companies. So, we got relaxation on that. So, now the 382 should not be a gate or anything like that buying back our shares. So, our buying back redemption of shares will be totally a function of the cash flow generated by the entity.

Amit Daryanani - RBC Capital Markets

Fair enough. Thank you. And then maybe if you can just touch on ASP declines that you had sequentially of about $1 to – it sounds like I am assuming it might be more due to the consumer side of the business, but maybe if you could talk about it on a like-for-like basis, what did you see in terms of pricing in September quarter and how do you expect that to shake out in December quarter? Thank you.

Pat O’Malley

Less than 2%, we expect that environment to continue on a like-for-like basis not mix of course, but like-for-like.

Amit Daryanani - RBC Capital Markets

Perfect, thank you.

Operator

Your next question is from the line of Andrew Nowinski with Piper Jaffray.

Andrew Nowinski - Piper Jaffray

Good afternoon. Just wonder if I could get a little bit more color your SMR drives, your competitor launched a 7-platter helium drive that’s expected to come out this quarter with one use case definitely targeted at the cloud. So do you think your drives leveraging SMR will be effectively positioned against those drives in both cloud and enterprise?

Steve Luczo

Yes. We are pretty confident in our cloud near line portfolio right now, and we look forward to the product launches that are coming next year.

Andrew Nowinski - Piper Jaffray

Okay. And then just a last follow-up on gross margin, it certainly came in a little bit higher, and I don’t think you guided flat, you said so, I guess can you just talk about what drove that up this quarter and why you think it’s going to just continue to remain flatter, is that just a matter of mix?

Steve Luczo

I will let Rocky go into that in a little detail and Dave would just give some macro thoughts, this is Steve. One is we have continued to emphasize our focus on quality of revenue. So we are starting to focus a lot more in revenue market share and exabyte market share, and we feel that in certain segments it just didn’t make sense to participate given the rather lackluster revenue boost that would have provided maybe margin pressure. So, I think part of it is that we were selective in the business we pursued from a margin perspective. Rocky will talk to that a little bit more in terms of quality of share, and then the operating side, the factory has really performed extremely well. So we had some really great execution from Dave’s organization and he can go into a little bit more detail following Rocky.

Rocky Pimentel

So I think to echo Steve’s comments, you know, there has been a lot of operational go-to-market discipline that we have tried to build over the last several quarters through processes and behavior, and you know we’re focusing on preserving or gaining share in those key categories of the portfolio that give us margin leverage and being very disciplined at the low end of the portfolio where you know the competition is maybe looking for volume upticks, et cetera. So anyway that gives you the color on it.

Steve Luczo

And from the operations perspective, we continue to manage the things that are under our control scrap and freight lanes and warranty and things like that very well, so we’re pretty comfortable with the portfolio we have and we keep driving it.

Operator

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

Monika Garg - Pacific Crest Securities

First one here is could you maybe kind of talk about the momentum you see from your cloud or web scale customers buying directly from you guys and maybe if you could provide some idea of how much revenue – your enterprise revenues from these kind of segments?

Pat O’Malley

I will just again, let me just say you know generally the purchases by the cloud service providers or Internet service providers or any other big web based companies are they are very choppy, and we’ve said that over the last several quarters these large volume orders, but they tend to come and go in big blocks, and sometimes those companies are buying from our traditional OEMs and sometimes they shift their purchasing to direct kind of depending on what type of architectures they are deploying. So, I think it's a bit early to kind of get a read on how that’s going to play out consistently, in fact it's my personal belief that the traditional OEMs are probably going to reestablish themselves pretty effectively in this marketplace just because of their go to market capability, so it's dynamic and it's choppy, and then I can let Rocky talk a bit about how we view what percentage of our drives go into what I just think of cloud-based architectures.

Rocky Pimentel

Yeah I think we were really pleased this last quarter despite in the cloud market some softness overall, we were able to gain market share in some of the key categories, and we talked a few quarters ago about estimating our cloud business at somewhere around 10% to 12% and now it’s continued to escalate, and probably 15% to 20% because some of it is direct and some of it is indirect, but we’re really seeing a lot of traction and with our recently announced kinetic drive, we’re getting a lot of interest from all the key cloud customers across the globe, and I think we’re continuing to build a great relationship with all those key customers to give us a preferred competitive position.

Monika Garg - Pacific Crest Securities

And last one from me regarding your hybrid enterprise drive, could you maybe talk about the traction you see in the market and kind of where you think the group could be in that segment?

Steve Luczo

Yes so, we've had a limited release of the enterprise hybrid drive with couple of our key OEM customers, but it is benchmarking really well. It's particularly as we noted against our 15,000 RPM class drive in the marketplace, so as we continue to kind of uptick the marketing effort with our key OEM customers, we see that continue to grow for the foreseeable future. We were really satisfied as well in our desktop hybrid introductions and then in our client class commercial class hybrid drives meaning we crossed over 1 million units this quarter of shipments and see that continue to grow as an important part of the client compute part of the TAM basically.

Operator

It's from the line of Nehal Chokshi with Technology Insights Research.

Nehal Chokshi - Technology Insights Research

Can we go a little bit more into what’s underpinning the guidance of effectively flat Q-on-Q market by segment, and then maybe I might have a follow-up on that?

Steve Luczo

So, we generally don’t break it up by segment, but just if you take a look at the – even going back the last eight quarters, we have been running above our new target range of 27% to 32%, so – but while that period has been going on, the visibility is nothing stronger than it has been in the past. So we are in a world that has limited visibility. We are playing in the world that’s relatively flat on unit, but growth in exabytes and that’s how we are taking the approach of business. We are going after the quality of revenue. We are trying to manage the business accordingly and deploy capital appropriately. So that’s the world we are living in and that’s the world we are operating in.

Nehal Chokshi - Technology Insights Research

Okay. And then within that context, would you be expecting flattish going out on to calendar year as well, and also given that you typically see seasonality in the December quarter and looking at the year ago compares where you had the iPad Mini being significantly cannibalistic, but there doesn’t appear to be any new tablets cannibalistic device. Is there an opportunity for upside do you feel or do you feel that this is actually an aggressive target basically?

Steve Luczo

It seems like you are focused on unit TAMs still, is that right?

Nehal Chokshi - Technology Insights Research

Yes, yes, I am sorry, I am sorry that’s with respect to unit TAMs.

Steve Luczo

That’s not the only world you are talking about. Again, that’s not the only world we think about. So we think unit TAM probably trends as it has over the last several quarters, which seems to be this kind of 140 give or take like we said I think the last call and the call before that whether or not when you are within 10 million units of either side of that type of TAM for the drive industry, now that’s the things that the industry can manage pretty easily given the way we are producing. It’s really the mix within that. That’s more critical. And I think that just the architectural trends that we see one is the continued advancement of mobile technologies and then the network effect that, that has on where data is created and stored doesn’t seem to us there would be any trend to break away from that. Hopefully, we are some of the new mobile products. You get an even greater network effect, because maybe there is more endpoints of people sharing which content, but the reason we kind of feel December is the same is the last five or six quarters is because we don’t really see any big macro changes negative or positive and we don’t really see any shifts away from the mobile and cloud future that we have been pretty solid on speaking to. So I think you are going to see relatively flat TAMs with the shift to increasing capacity per drive, which of course were the vertically integrated drive companies means absorption in heads and disc, which is good for us. And then the higher capacity drives of course are higher value-add technology as they are harder drives to making harder drives to test.

Operator

Your next question is from the line of (indiscernible) with BMO Capital Markets.

Unidentified Analyst

Hi, thanks for taking the question. I had a question on hybrids and SSDs, in your Analyst Day you guys communicated that you guys would have about $100 million in hybrids and SSDs, can you provide an update on that for if you guys are still tracking that?

Steve Luczo

Yes, I would say we succeeded in those comments that we made previously. We are not given specific numbers on that, but we met or exceeded that comment that we made in the September analyst update.

Unidentified Analyst

Okay. The question on the ASPs, it was down roughly 3% sequentially. And when I look at the product mix, your consumer electronics rose roughly flat and your hybrid shipments were much higher than we expected. So can you help us understand why ASPs were down 3, was there anything in terms of each products, where pricing was more aggressive or not?

Steve Luczo

Overall, the portfolio like I said was less than 2%. What you are seeing in ASP is much more mix adjusted on based on how the between segments. So if we take a look at the breakdown where the revenue came from, it was on a higher mix of I’d say client drives versus then I mean the enterprise side. So it’s all – what you are seeing is all affected by the market mix.

Unidentified Analyst

Alright, thank you.

Operator

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

Rich Kugele - Needham & Company

Thank you. Good afternoon. A couple of questions from me. I guess first, when it comes to highest capacity drives that the cloud can buy, it's basically 4 terabyte correct, on the 3.5 inch form factor. I’m just interested in what the next aerial density point is when we should see that and will you launch it on the cloud first?

Dave Mosley

We will probably will launch it on the cloud first, we won't make a product announcement today but you can imagine that if that segment is really demand in the capacity points we were talking about and we’re looking hard on it.

Rich Kugele - Needham & Company

Let’s go peep into the fourth ladder, universe.

Dave Mosley

It's pretty competitive information Rich but we’re not going to talk about what part of (indiscernible) we’re putting inside of our devices.

Rich Kugele - Needham & Company

Okay and then I guess within that range if you write about where the Exabyte growth is going and the industry's ability to fulfill it the supply chain we will need to invest as well, especially on the head side, but at the same time heads are one of those categories where one of your competitors buys almost all of their business. So I'm just interested in your views of the strategic levels of commitment that the head supplier has to you guys and your view of cutbacks in that area if you want to keep it more in-house.

Dave Mosley

Well, I think we have talked about this a little bit at the analyst day in New York. We’re great partners with the external head vendor TDK and we don't foresee changing that going into the future. They have other customers obviously and what they do with those other customers kind of up to them. We will continue to maintain the technology and manufacturing synergies that we get with them going forward.

Rich Kugele - Needham & Company

Okay and then last question is just Pat, what should we be assuming from a share count perspective on a blended basis for the second quarter?

Pat O’Malley

I think if you take a look at the December quarter based on what we have transacted with Samsung. It's is a 320 million for the actual shares and approximately 346 million for fully diluted and I just planned for that.

Operator

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

Eric Sterling - Barclays

Your competitor last week had talked about modest potential improvement on the PC side, I’m just wondering if you guys are seeing anything to substantiate that looking at into the end of the year and into next year? Thanks.

Steve Luczo

Yes so I think right now we still see a pretty choppy situation among the different OEMs. There's clearly some that are still suffering and some that are doing better than the overall market segment and we look out to next year in early stages, we’re hopeful with the new design, the OEMs are coming out with well to stimulate consumer demand but it's still just a pretty murky segment of the market and that's why I think we’re very selective and cautious about how we continue to look at the client level of the marketplace.

Eric Sterling - Barclays

And any of the different view on the corporate PC side?

Steve Luczo

Yeah I think we’re much more optimistic on the corporate PC side, and we have got a couple of initiatives that should bear a very positive fruit as we go into 2014 so we’re much more optimistic on that side for sure.

Operator

Your next question is from the line of Rob Cihra with Evercore.

Rob Cihra - Evercore

Two questions I would like to ask one just real quick I guess for Pat with the OpEx do you think OpEx keeps increasing in dollar terms into the summer quarter I guess particularly with options but anything outside of the ordinary and then more sort of strategic product wise, can you tell us I know it's early but when you look at the ultra-mobile drive targeting tablet, where is the early OEM interest do you think most focus is it literally tablets or is it convertibles and is it going for using capacity or sure of bang to the buck as a differentiator or is it trying to kind of create a different looking part, I’m just trying to see where the demand is there. Thank you very much.

Steve Luczo

So I will answer the first part and then I will hand it off to Rocky but in the first part, we are committed for the December quarter statement, 12% to 14% revenue range for OpEx and it’s probably close to the high end as you said with options in our continued investment in cloud mobility. So it’s probably at the higher end of that range for the December quarter. And then it should probably moderate after that and for Rocky to go through.

Rocky Pimentel

Yes, this is Rocky. So we have a number of OEM programs currently addressing the ultra-mobile class product that we announced back in September. One of the benefits of our design kit is the ability for the OEM to either buy the drive in a native format or buy it as a hybrid, which gives a lot of flexibility we provide the micro code in the mobile enablement kit according to what the OEM wishes to do, but certainly as we see 2014 unfold and this is where there could be a new pop in the consumer side of the business as the new form factor and design packaging comes out to be more of a convertible device that functions the benefits of both the tablet and the traditional notebook world. This is certainly something we think it stimulate consumer demand. And also commercial demand, we think that there will be some commercial platforms also introduced that better fit the enterprise environment. So we are actually very hopeful on the ultra-mobile side. And maybe Dave has got a couple more comments on that?

Dave Mosley

Yes. I guess the other thing I would say is that we are pretty confident in that 5-millimeter design point as being robust enough to handle it. And a lot of that will depend on the market adoption of those form factors, but it’s still pretty slow, but over the next year we should see more and hopefully that’s a compelling play out there in the notebook space.

Rob Cihra - Evercore

Great, thank you very much.

Operator

Your next question is from the line of Aaron Rakers with Stifel.

Aaron Rakers - Stifel

Yes, thanks for taking the question. A couple if I can as well. I think in the past and I have not seen the supplemental commentary stuff yet, but I think in the past you have talked about the breakdown of your 8.1 million units that you have shipped in total enterprise between mission-critical and near line. Can you disclose that? And then also I am interested to understand what you view as your share position in the higher capacity point with the 4 terabyte solution starting to ship this last quarter? And I have a follow-up.

Pat O’Malley

Hi, Aaron. This is Pat. I will answer the first part and I will let Rocky answer the high capacity. When we look at the products in the markets whether it’s near line business critical and mission-critical, they are very similar in their technical applications and the customer sets. Therefore, we feel it’s more appropriate to aggregate these for presentation purposes and we will continue to do that in the future. And Rocky, you could take the high capacity?

Rocky Pimentel

Yes. So, on the high capacity side, we actually gained some market share in the near line this last quarter with our 4 terabyte solution. We were admittedly a quarter or two late to market against the competition. We have gained our traditional market share in that category. And on the enterprise class products, we also gained this last quarter. So we are very happy with the performance of the upper end of the portfolio.

Aaron Rakers - Stifel

Okay. And then as my follow-up, just looking at the continued return of cash or free cash flow to shareholders, it looks like coming out of this quarter with a $32.7 million that you are spending on the shares of Samsung, we are already talking about $1.8 billion spend thus far this year. How do we take that in the context of the 90% cash flow from operations of return that you expect to do? And I think on top of that, are we still kind of sticking to the target of $250 million exiting calendar ‘14? I just want to be clear that those shares from Samsung aren’t on top of that?

Steve Luczo

So we commit three-side turn, 70% of operating cash flow. And this puts us well in line to do that. For the rest of the shares for beyond this level, we don’t view the – because of 382 rules now, we are going to view those as fairly synonymous going forward. So now, it’s going to be a function of cash flow, but given when we have started this program and the stock is at 19, it’s now going to be a function of the stock price and how we want to look at dividends and redemption of shares. So we will continue to monitor that and we will engage appropriately, but from our standpoint we are committed for the return on cash flow in the most efficient and effective way to our shareholders.

Aaron Rakers - Stifel

Okay. So the $1.5 million for the Samsung shares is inclusive or should be included in that 70% number?

Steve Luczo

That’s correct.

Aaron Rakers - Stifel

Okay, thank you.

Steve Luczo

Sure, thanks.

Operator

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

Sherri Scribner - Deutsche Bank

I just wanted to ask a little bit about your CapEx plans going forward I think historically you have had a goal of 6% to 8% of revenue for your CapEx, you have been well below that clearly with the market being relatively flat. I wouldn’t expect you to increase that but just wanted to understand your views of spending for CapEx, what do you need to spend on? What do you think the industry is spending on and does that pick up at a new point? Thanks.

Dave Mosley

So yeah as we have talked about before we’re still pretty much in line with 6% to 8% for this year although as we see that we have enough capacity online to meet the demands you know quarter-over-quarter we will sometimes pull the breaks a little bit and we did that starting a little bit last quarter so which as reflected in the CapEx numbers that we talked about. I think that we can replace equipment and keep our technology migrating along for something well under that 6% to 8% so occasionally from time to time we will pull back but we will be ready to go should we see upsides either heads, disks or drives as Exabyte march goes on.

Right now I’m a little bit just concerned that that we won't see that for another year or so we pulled this last quarter.

Sherri Scribner - Deutsche Bank

And then just thinking about the long term targets that you could have for the gross margins 27% to 32%, you guys are sort of at the lower end of that, how do we get to the higher end of that range what needs to happen? Thanks.

Steve Luczo

I think Sherri it's really a function of again kind of relative growth of the cloud service providers again just because of the value associated with those drives and then really just macroeconomic traction I mean I think as long as the petabyte growth is where it's at, the industry does all right to maintain the margins because of the absorption, but I think really to push the industry you know let say above 30% I think it's probably going to take some overall growth. I think the world is still a bit cautious on maybe that plays into some of the things we talked about earlier in terms of what happens with the drives that are more targeted towards the mobile market that with the next-generation of products from OEMs could be compelling. You can get some Exabyte growth with HDD's in the markets that today are just purely SSDs. We have seen that even a little bit on the high-end notebook market that is all flash based or hybrid drives now represent about 20% of that market which is a market that I think year ago people would have said we wouldn’t have anything of so. I think it just plays into a bunch of things but I think the real driver is going to be a better macro outlook with generate just you know a higher rate of global demand for storage both in terms of exabytes and units across the board.

Operator

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

Joe Wittine - Longbow Research

The big introduction of new SSDs was in May, I hope you can maybe talk through how the adoption has gone and maybe how you’re competing there too with the relative mix of OEM versus channel and then maybe as a third point, what’s the ultimate share opportunity within pure SSDs? Thanks.

Rocky Pimentel

We’re still in the early stage of the SSD I think we were really pleased with this quarter’s performance on SSDs obviously, making the comment that we did over a $100 million of solid stake related storage in the quarter tells you that you know our SSD business unit performed very well relative to a quarter-to-quarter performance. I think as we look out and actually look at this quarter’s performance the unit is probably as big as anything that's been acquired recently by other companies. So we were very pleased with that, I think we’re still working on our technology roadmap of the sustainable strategic advantages we can have in each of the key product portfolios so I don't know that we can now that we made a bold statement as to how much of a market share we’re going to have but I think that we feel with our presence in our existing storage portfolio and the response we've been getting from our major accounts in both the cloud service area as well as the OEM area the opportunity is there for us to execute to have a pretty handsome share in the SSD market. But it's still early on and there is a lot of plays to be executed and a lot of competitive developments that are going to happen. So we have to go and attack it.

Steve Luczo

Yes, this is Steve. I mean, it’s pretty dynamic right now. And we expect it will be over the next couple of years as all these different technologies play out in terms of which application spaces they are successful and then which kind of workload requirements are needed by which type of customer. I think for Seagate, certainly, we have always targeted the enterprise SAS market as one that we believe we have a competitive advantage in value-add as a result of our experience in the higher end compute market as it exist. Obviously, Hitachi has the same advantage. So I think relative to some of the other players that haven’t been as exposed to those enterprise workloads as we have, the drive industry has kind of a natural advantage and I could see that those shares reflect what we see in the mission-critical space.

I think the SATA space gets a little more confusing just because it’s currently under a lot of price pressure from the people that control media and then the PCI market space whether or not you call that storage or fast memory is also I think extremely challenged right now by a lot of competitors in the space. And while there is value-add to the software, the companies that are providing the media I think are making it difficult for anyone to really have an attractive margin there. So for us, we are really focused on enterprise SAS. That’s where we think we have our best opportunity in the most capabilities and we were most excited about our partnership with Samsung. And the other areas, we will proceed with cautiously, but with the same mindset that we are really focused on margins here and want to make sure that we deploy something that we can sustain over a number of years with the competitive advantage.

Joe Wittine - Longbow Research

Great overview, thanks. As my quick follow-up, Pat, with the sustainable or a go-forward quarterly interest expense, net interest expense number after the $1.5 billion goes out, that went out the door in October? Thanks.

Pat O’Malley

So the interest expense, if you just talk pure interest expense, it’s around $40 million to $45 million in that range. Obviously, if you are talking to net line over the interest income, the interest income is still going to be relatively low whether we have the cash or not, you are not getting much on your investment this day. So that won’t marginally change. So I think if you are just looking for the interest expense model around $45 million and it will be okay.

Joe Wittine - Longbow Research

Great, thanks.

Operator

Your final question today comes from the line of Steven Fox at Cross.

Steven Fox - Cross

Thanks. Good afternoon. Just two questions from me. Just I was wondering if we can get some highlights around the branded business for the quarter whether just it look like it was up marginally from fiscal Q4 and sort of the outlook for the rest of the calendar year? And then secondly, just on the Kinetic announcement, probably don’t understand the technology as well as I should, but from a go-to-market standpoint, your ability to commercialize this platform, can you just sort of talk about, I don’t know if timeframe is relevant, but just sort of how you go about realizing revenues from this announcement? Thanks.

Rocky Pimentel

Yes, this is Rocky. I will take the branded one and then on Kinetic, I will turn it over to Dave. On branded, I would say, we were very pleased with the performance of the branded division. We succeeded in higher capacity drives in that category in the marketplace. There was legitimately a very challenging low end of the market price environment for branded, but despite that characteristic, our branded team did execute well against the market that made sense for our quality of business. So we are really pleased with that. Now having said that, there is a key product segment in the branded business, 2 terabyte that has been pretty successful in the marketplace for the last quarter or two and we are now shipping that product into the marketplace and that was not present to our September numbers in volumes. So we are optimistic about what we can continue to do on the branded side as we get to volume on our 2 terabyte products. So we will keep you posted on that. And I will turn over to Dave then for Kinetic.

Dave Mosley

Yes, Steven on the Kinetic announcement, it’s really a development kit at this point in time, it’s some electronics added to our print circuit board on our hard drives, not tremendously difficult to do, but the ecosystem that’s outside of the drive isn’t developed yet. So we need to get the product out so that people can get working on that development. As you know in the past, we have kind of spearheaded the changes whether it’s SCSI or fiber channel or serial attached SCSI in the enterprise world to new interfaces and this is the same along that line. Although it's not a block based interface it's really a key value Ethernet interface if you will, and the largest reason that we did it was because well we have got a bunch of customers asking us for things like this, but what’s happening what they see is that the objects themselves are being disaggregated in the blocks in order to be passed across the block based interfaces into the drive and that’s costing money outside of that the disk drive whether it's software or silicon or whatever. So by virtue of us having this I mean expose this kind of interface to them then they can go and integrate without some of those added cost and the total cost ownership [ph] goes down. So we’re pretty excited about it right now but you need everybody’s else to go help develop that ecosystem outside the drive.

All right great. Thanks everyone. On behalf of the Seagate team we thank you for joining us today. We look forward to speaking with you next quarter. Thanks a lot.

Operator

Ladies and gentlemen this concludes today’s presentation. Thank you so much for your participation. Have a great day.

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Seagate Technology (STX): FQ1 EPS of $1.29 misses by $0.01. Revenue of $3.49B misses by $0.06B. Shares -4.2% AH. (PR)