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Seagate Technology Plc (NASDAQ:STX)

Morgan Stanley Technology, Media & Telecom Conference Call

March 3, 2014 11:45 AM ET

Executives

Pat O’Malley – CFO

Analysts

Katy Huberty – Morgan Stanley

Katy Huberty – Morgan Stanley

Good morning. I'm Katy Huberty, Morgan Stanley's U.S. IT Hardware Analyst, and I'm very excited to kick off the IT hardware discussion with the Seagate’s CFO, Pat O'Malley. Pat has spent a couple of decades at Seagate and you probably don't want me to tell me about that, and brings a unique perspective on the industry. As many of you know, the industry face tons of volatility in the past and in process particularly. And the industry, a couple of years ago went from five vendors to now two vendors that have over 80% market share. And on the back of that, there is far left process and volatility, which has been great to see and good for the stock but I think that the big question now is whether the industry can see revenue growth going forward. So I want to spend a lot of time on that today. We’ll head on some financial questions and then we’ll make sure to leave five minutes or so – five, 10 minutes at the end for your questions as well. So thank you, Pat.

Pat O’Malley

All right. One thing, Katy, just real quick, just sort of a house cleaning. If anyone wants to look at our risk factors, it’s in the last Q published in February, so please visit that for highlighting our factors. And today, we have no obligation or intent to update any guidance numbers, but glad to get into what is Katy’s agenda and whatever is on peoples’ minds.

Katy Huberty – Morgan Stanley

Good. Thanks. So I want to start with cloud, because you’ve seen meaningful unit growth in the cloud space. A lot of the systems vendors are starting to see their growth decelerate, but really the disk drive companies have the opportunity to be the arms dealer into the cloud providers. You have talked about I believe 15% unit growth. We’d love to get your perspective on whether you have visibility into that number over the next year, or is that just a top down view as to the long-term growth in the cloud market?

Pat O’Malley

Yes, that’s a great question, because it’s a sort of mixture. We actually – given we’re dealing with lot of cloud builders, we get some insight. But quite honestly given these are large capital deployments, if they are rolling out a cloud, whether it’s a geographic region in the States or out of the States, they are laying out the deployment. So they’ll give you insight, but not always the best planning.

I mean the way I look it for 90 days, it’s really difficult, for over a course of a year when you look at a tops down, when you look at where growth is happening and what the demand for storage is, when you stretch your thinking of the cloud deployment, it gets a little more predictable. When you look year, the storage grew year-over-year about 40% of exabytes and about 15% units.

I think when you look at the course of calendar ’14, you’re going to sort of see the same thing, but into those 90 days, you might have some ups and downs, because they are not as linear as the PC world. The good news, we feel it’s a structural shift, I mean by then 2020, we do believe, well more than half of the storage will be sitting in cloud whether it’s personal or public, will be sitting in some form of a cloud.

So we’re very convicted on it, but quarter-to-quarter, we’ll continue to monitor as we need to, because being publicly traded company, we have to deliver what we promise. But those challenge intra-quarter are not always attributable, but so we really look it from a high level and then try to build it from bottoms up.

Katy Huberty – Morgan Stanley

Okay. I believe recently you talked about cloud demand hitting an inflection point more in the back half of 2014, as the banks’ new internet data centers are build out. Do you at this point had visibility into the back half, or is it just that you’re not seeing the orders in the first half and so you assume its...

Pat O’Malley

I think there is a combination of that. One, the front-end has been a little stun. And actually it’s been a little stun probably since September quarter, but talking to the cloud folks that are building out, they feel very convicted during the back half of the year. But as any business, we have to run it cautiously, we’re not going to get ahead of that, we’re going to work with them, but we do get a sense of optimism that what their plans are for the back half would align well with some growth, but whether it happens in the level we would like it to, well, we got to manage that. So we feel fairly comfortable, we’re going to continue to see that exabyte grow as well.

Katy Huberty – Morgan Stanley

Okay. Last quarter, Seagate’s inventory balance increased. A lot of that was cloud units. Is that a function of demand not coming in as expected during that 90-day period, or does it have to do with the longer lead times in the cloud business?

Pat O’Malley

There are longer lead times in the cloud. It’s not like the PC where you could sort of manage it intra-quarter fairly flexible, because the timing in the factory. You can get PC units out, especially on the lower capacity one or two platters out in a fairly quick turn. When you’re talking four to five platters going to six platters, it takes a longer time in the factory. So we have to manage it.

I’d say most of this is sort of driving it ahead where we see some competitive deals, but in the cloud you’re talking tens of maybe hundreds of thousands of drive, low hundred thousands, where the PC you have lot more units to play. So it’s not a tremendous amount, but there is value there. So you want to make sure you capture that value was there, but you don’t want to get too ahead of any segment, whether it’s a PC, whether it’s cloud, whether it’s enterprise, we want to work very tightly with our customers, make sure lean supply chain.

So we do have mechanism whether it’s looking at the inventory, reporting inventory, channel partners, OEMs. We try to manage that fairly tight. So from time to time, you’ll see some units build there, but we want to make sure over a period of time, you will see a lot of excess sitting there.

Katy Huberty – Morgan Stanley

Okay. There had been – a storage vendor reported last week, talked about a little bit better component costs. And I’ve received some questions about Toshiba maybe stepping up on pricing. Has there been a change in cloud-related drives pricing environment. Have you been trying to flux through some of that?

Pat O’Malley

From our perspective, we see costs coming down. We’re in long pause cycles as everyone knows. And so we have to manage costs. With that, we have to manage a very benign price environment, very slow takedowns to manage the profitability targets. So what we’ve seen whether its cloud, client desktop, our pricing has been remain fairly benign, and it’s staying in very historically lows because cost components are down.

So what we are seeing out there. We compete with portfolio, not with pricing. And I think our pricing is lined up very well with what we intended to see.

Katy Huberty – Morgan Stanley

Okay. Speaking of computing with the portfolio, you continue to innovate for the space and have six-terabyte drive coming out in the second quarter. Do you think there is any waiting for that capacity drive that’s creating any solid demand?

Pat O’Malley

For some, there probably is. I mean obviously when you’re looking in the cloud build-out, they are looking at the total cost of ownership. The drive component cost is only one element of it, but if you get an increase in your capacity per gigabyte, they would certainly wait for that. But I don’t think that’s the major waiting, otherwise you’d always be waiting forever. So there is many – our four terabytes qualified throughout the breadth of our customer.

So they need things for cloud, they’ll take that, they won't wait, but they are certainly very tied into a rollout of that and some would clearly opt for that because of the value that they get from a six terabyte, but I don’t think that’s a major shift in it, because I think the pause cycles do take some period of time, whether it’s business-critical, near-line type of product or mission-critical. These are sometimes three to as many as nine months product cycle depending on the customer you’re dealing with.

So they are not going to wait forever for a new product, but they are very anxious for that product to come out.

Katy Huberty – Morgan Stanley

Okay. You haven't yet closed the Xyratex acquisition. So I appreciate that there is only so much you can say about the deal, but can you help us maybe just understand the strategic rationale of owning a tech company?

Pat O’Malley

Sure. It did pass their shareholder vote last week, so that’s one step removed, but it isn't through the regulatory process, which it could close this quarter or sometime next, if the process goes as smooth as we have hoped. But really when you look to Xyratex asset, they have more of a front business, and they’ve been a long time technology partner of ours on the equipment. Many folks characterize this as test equipment. Probably not the best monicker, because there is lot of intelligence put on our drive when it goes through that testing.

And so they were a key technology provider that we felt that that asset maybe continue to have investment in it, and we want to make sure that asset been atrophy overtime, so that’s a very key element to it. And then they do have a systems business. The nice thing about that systems business, there is a lot of same customers that we deal with. They are the classic mission-critical enterprise customers that we know very well, and we’ll continue to support that business in the best way we can, and look to develop that asset overtime, but clearly in the equipment space that technology element is very, very important for us to make sure that it continues to be invested in.

Katy Huberty – Morgan Stanley

And there is obviously financial benefits to lower your cost if you own the test equipment, but with some of the strategic rationale around getting into storage subsystems over time and perhaps addressing…

Pat O’Malley

This is probably – clearly as we laid out over the next throughout the rest of the decade, more and more storage will get re-aggregated into the cloud. And having a better insight whether through the devices, through innovations such as Kinetic or being in the rack is probably a better place to have a better understand of that. So that’s a platform. I wouldn’t say that’s an handle but it’s a platform to have that greater understanding, but clearly as you highlighted earlier, their test equipment business is clearly, is a much more strategic when you’re talking about the technology investment. And you want to make sure that our partners, our vendors, our strategic partners continue and invest in the technology platform and we think that’s key to our success over time.

Katy Huberty – Morgan Stanley

Tell us a little more about the Kinetic Open-Source Platform? How do customers consume that, and how does that help you with the relationships in the cloud side?

Pat O’Malley

Yes, it’s probably is much buzz as we’ve got on any type of technology in that space in a long period of time, primarily because it allows a very efficient interface between the top level piece of the hardware, the system to the drive. And it allows it to connect very efficiently. It allows the total cost of ownership to come down significantly, whether you want to eliminate power supplies, because you don’t need a server, you’re using open stack, so it’s helping changing architect. So a lot of folks could really harvest savings on their system.

Now they could either harvest that by just taking the cost down or actually provide more storage. So for us, it’s somewhat of a tip of the spear that allows a much more efficient storage budget to go out there. So in the open stack community, and that even be our traditional OEMs all are very excited about it, because it does allow much more efficient interface between the device level, all the way to the system level. So we’re very excited about that product.

Katy Huberty – Morgan Stanley

So if we add some of the new capacity drives coming to the market, the Xyratex’s acquisition, Kinetic, there is – you’re putting a lot of wood behind the arrow in cloud. I think you mentioned cloud will be 40% or 50% of volumes?

Pat O’Malley

Over 50% -- by 2020, we expect 60% of the storage being either in public or private cloud, so it’s going to be north. We believe north of 50% for sure.

Katy Huberty – Morgan Stanley

And what’s your view as to Seagate’s maintaining or even growing the 40% share you have today?

Pat O’Malley

It’s only done on portfolio. If we line up with the portfolio, we think we certainly should maintain that. And that’s the job of any provider. If you’re technology provider, you got to do a full breadth and depth of the products. And so we believe that we’re going to continue and invest across this. So we have the broadest offering. And then that broadest offering allows us to more share because of the offering. We’ll take that, but we’ll do that for the product portfolio. So whether it’s six-terabyte, eventually we’ll be at eight and 10 terabytes, that should be a surprise to everyone, but we’ll continue to do that whether you have hybrids in that space. We’re going to continue and invest to find out the best solution for the customer that lines up well for our technology deployment.

Katy Huberty – Morgan Stanley

Okay. Let's shift to the branded business, because it’s also increasing in mix. It’s grown over the last year. It has a better margin profile. Is the demand in branded coming from SMB NAS devices, or is it coming from consumers continuing to back up on a physical driver to represent that [ph]?

Pat O’Malley

I think we see a shift. It’s clearly been coming from, what we’d call in the industry as DAS, the Direct Attached Storage. It’s been coming – it’s been fueled through that to the consumers. But we see that starting to shift is you’re looking more for the home or private clouds. Folks who are going to want to manage the storage throughout their household, throughout their ecosystem, whether it’s their household or office, their cloud – they put it on a much more ubiquitous way.

So the NAS, the home network devices starting to grow through the consumer, but more importantly the SMB level is starting to grow, whether that’s through racks, whether that’s through smaller subsystems, for system devices, but we believe that the NAS is going to start killing that, but up till now it’s really been a DAS-based business on the volume and the growth, but we see that shifting into a sort of network-centric type device.

Katy Huberty – Morgan Stanley

Okay. And can this also be a double-digit [indiscernible].

Pat O’Malley

We’re very excited about that space. We feel that, as things are getting connected, as folks are developing – well, generating more and more rich storage, we haven't even hit the 8K, little over 4K, that’s coming down the pike, the right megapixels. It’s all about videos, all about content. And the folks, they are just generating more and more of that.

So managing that across our ecosystem is going to become more and more important. In fact, that’s one of the investments we made with [indiscernible] we talked about CES of how well that ecosystem be very easy. So whatever devices, we’re bringing all device to your house that you’re not really tied up and that allows you to manage that storage whatever device its one in a very clean and efficient way.

Katy Huberty – Morgan Stanley

Good. So shifting to the compute business, which is the largest in volume, you did see upside in the PC market in the fourth quarter as did the industry. Do you think that stabilization will continue or do you think it was transient?

Pat O’Malley

No, I actually think it should continue given one large caveat, but I think that caveat has been minimized. As well as the PC space continues or starts to innovate again, I think you’re going to see that – you’ll see a lot more innovation. I think the challenge with the PC space over the last several years, it really hadn't innovated was it was a cost takedown model. How do we keep on lowering the cost in compute, which is important. We need to do that. What the innovation vector sort of settle off, it’s really left to Microsoft and Intel that’s done a great job of shepherding the industry towards that, but it needs to really take that level.

And what you saw a lot with the tablets really was more that innovation, where people were instant on, big buzz word, but more important that user interface that allowed you to connect and get your information much more readily and much more rich and much more interactive. You’re starting to see that with the PCs. You look at the Lenovo Yoga, so really nice device that really gives you that tablet esc view of the world, but also gives you that heavy compute. And if you looked at the last couple of years, where a lot of the unit shifted from the PC with way from the classic notebook into the tablet, I think that has slowed down, because you didn’t looked at tablet growth rates, even though they are very good, they are becoming sort of pedestrian. They haven't looked like they were. So I think with that growth rate being much more mature growth rate and innovation in the PC, I think we’re very optimistic that you can start seeing growth in that space again, and maybe a little accelerated growth that we could penetrate with our five millimeter into some of these tablets over the course of the year, and even leveraging the seven millimeter hybrid through that space as well.

Katy Huberty – Morgan Stanley

So just to be clear, there the stabilization you actually think that we could get back to growth in PC related units?

Pat O’Malley

Yes, I mean whether you look at demographics around the world, there are still lot of folks that aren’t connected. It’s still the best compute device out there, for all the things tablets have, they still have a challenge and that’s not to say, there is staying still, but most of where folks are really actually dealing real compute is on a PC, but I think demographics, macro and the innovation are three positive tailwinds for the industry that we can see and really encourage what we’re seeing from the large OEMs, and even some of the second tier OEMs in trying to innovate that space.

Katy Huberty – Morgan Stanley

What is your view? You mentioned the possibility of getting drives into some tablet form factors. Is there a real opportunity for drive to ship into a tablet or something like a Chromebook that you would like?

Pat O’Malley

You know what, a Chromebook might be a challenge just because their price point. They’re trying to hit such a low price point, and they’re willing to have whether it’s 816 gigabytes. That’s all you really need just to get connected, and that’s a great tool to do that, but it’s probably not going to be a real storage device for you. So we see those things in Chromebook much more opportunity to get an external drive sold through it. In fact you see on the tablets, a much higher attach rate of an external drive. Notebooks you saw the tenth percent range of – as a sell the notebook you give about 10% on the external drive. On the tablets, it’s close to 40%.

And so you get a lot more attach rates because folks still need storage, but you just want to get connected to internet. It’s a great device. But there will be other devices other than Chrome that you’ll see, tablets that have driven out. We really do believe there is an opportunity. It’s probably going to be a slower hold in where the old netbooks went from an SSD and easily over to a hard drive, because in a day netbook was a compute device, it wasn’t really a consumption device. And so compute device users would really want that disk drive.

I think you’ll see it this year, but I think that’s going to be more of a journey, but we’re pretty convicted to that journey and we’re very engaged with the OEMs on how to make that solution very attractive to the end consumer.

Katy Huberty – Morgan Stanley

We’ve been talking about hybrid drives for several years, and the prediction has been that 80% of disk drives will become hybrid overtime. And hybrid means that you have the disk as well as little bit of flash, and you can get the fast speed up [ph] and features like that that people look to in tablets. Is your view still that 80% of drives will become hybrid? What are the use cases?

Pat O’Malley

Yes, I think from a technical valuation and from, you and I sitting here, the valuation proposition is very clear. How do you get that value proposition always to the end consumer, that probably need to have some help from us and the industry, but we clearly – whether we line up a hybrid to a pure SSD, the cost trade-off and the performance – no performance lost is really there, but we’re going to leave a lot to our customers, but we’ve been working with them across our portfolio saying where they wanted.

Clearly it’s been in the notebook space. It started actually – the biggest place where it was really utilized was in the gaming devices, I mean the gaming PCs I should say, not the devices, but the gaming PCs. And it took off there, and now you’re starting to see it take off in some of the large OEMs, where they are pushing value equation there that it’s good as an SSD for performance but a lot much more – a lot more storage, so more economic.

So we see that happening. We clearly see a performance where, in the enterprise have the architectures being evolved, and let's face it – for all the things we talk about enterprise architecture it’s not architecture, there is no gold standard over the years with the classic – we’re at 15K and 10K, that was established for years. That’s breaking wildly whether you have what type of SSD you have in front of it, what type does it go right to big fat driver or does it have a teering solution. There are so many solutions out there right now. And that’s one of the reasons why we’re excited about this Kinetic to try to build a platform where many of the folks could have sort of a gold standard to build, but we’re going to try to fit in that space and we’re going to extend the portfolios to where it fits. And hybrid is going to fit a large portion of those portfolios for those customers.

The nice thing about it is that we will probably do the hybrid on an incremental type investment over the classic HDD, because now we just need to make sure that we have the HDD [ph] out there and then layer on piece of hybrid technology. So the nice thing is we give the choice to our customers, but we clearly think the hybrid value – the value proposition is pretty strong across the portfolio.

Katy Huberty – Morgan Stanley

Okay. And the last segment is the performance of those enterprise business. Data is still growing at company’s double-digit and storage system revenue is quite weak, in low single-digits. What do you think is going on? And on the back of that, what’s your view around Seagate’s traditional enterprise business?

Pat O’Malley

We continue to invest in the 10 and 15K, a lot of folks would have thought the 15K would have disappeared because an SSD, competitor coming out with 15K again. There is a lot of customers that still need in that, if you want to classic architecture of how to manage large enterprise systems, the 10 and 15K HDs have been workhorses for the industry. People understand the reliability and the workloads very, very well. And when you’re talking about enterprise systems, you’re talking about performance and reliability and you can't separate the two.

You can't say, well, give me performance at expense of reliability. And so I think HDDs are going to be there for a while, but I think they are going to live with SSDs, they are going to live with hybrid type devices, and they are going to live with classic. So we’ll make investments in all three of them, all three of those basis in the enterprise level, and try to figure out the best play. But you’re going to see over the next couple of years, you’re not going to see one classic old standard evolve, because people are trying to hit different elements when they go to market, and they don’t always necessarily line with pure HDD and they don’t always line up with the pure SSD. So that’s what we’re seeing. We’re seeing a lot of different deployments of storage systems.

And you’re going to see some folks that they are going to say, well, their business model is challenge and where others are evolving rapidly, because of how they are placing that system. And our job is, as you said earlier, sort of somewhat be the arms dealer, but with intelligence on there on how we think the best solution. So we want to make sure that whatever the storage solution is out there, that we have a device that hits that application pretty strong.

Katy Huberty – Morgan Stanley

Okay. And we’ve seen that disk drive companies positioned for growth through M&A over the last year. They’ve been dealing more in the flash side, more on the cloud side. Would you expect the recent level of M&A activity to continue, and what areas are of interest for Seagate?

Pat O’Malley

I think whether it’s the space – we’ll always be interested whether it’s partnering or M&A for technology. If you take a look at Seagate, we’ve been much more active in investing with folks, with the line of that technology. So we’re very active there to make sure we understand what’s happening in the ecosystem, and we’ll continue to invest in theirs. And whether that’s through M&A, whether it’s through organic, whether it’s through investment, the answer is probably yes to all of them, but we have always been very cautious on M&A. We will make sure that most of the time it’s either accretive on the short-term or transformative on the long-term, and we’ll be mindful of that. And we’ll continue to look at that space, but the first and foremost thing we need to do is make sure our portfolio with the HDD level is competitive and is wide and deep as it can be, because that’s probably over the next several years, it’s going to be major cash engine fueling our business model.

Katy Huberty – Morgan Stanley

Okay. Seagate is operating at gross margin that’s slightly below Western Digital. What’s creating the gap and what opportunities do you have to close that gap over the next couple of years?

Pat O’Malley

I think there is a few things. Most of the way, given we talk on the backdrop, there hasn’t been tremendous growth. There is so many leverage you have in the business. And the first one is, you have to have a good portfolio. Second is, you have to manage your economics. So your pricing has to be pretty set and you have to have very low pricing threshold, because cost threshold takedown is very difficult.

So what they see and what we see are pretty much the same things. So the tools we have to do. So when we look at them – we look at any of our competitors, we look at SSD folks that are competing in certain space and we try to understand our areas of opportunities, and then we try to do with portfolio. So where I take a look at where we’ve been sort of margin differentials, they have a good enterprise FAS SSD business. And that’s not insignificant and we’re off organically to develop ours. We’re not where we need to be. We’re not where we aspirationally want to be. We would like to be a share leader through portfolio in that space, and we’re far away from that, but that’s clearly one space of differentiation.

If you look in the rest of the HDD, there is plus and minuses. And so I think it’s very, very competition on pure HDD. We probably outsourced a little more of our vertical – we couldn’t do more vertical integration, bring more in-house, but given our conviction with the Xyratex’s view of finding – have supply of testers, given our long-term view of petabyte growth, we believe our partners out there are very important. So having them have a viable business model is probably fine. So over time as we grow our capacity in exabytes, we’ll fill more and more inside the factory and that will give us more leverage.

And as I said, we’re growing about mid 70% utilized and there is that exabytes growth comes, you get more and more leverage during the modeling. So I think we have probably a little more upside on that leverage, but really how you compete with this portfolio and we added two terabyte on the retail that we didn’t had last year. That was a competitive disadvantage to our four terabyte business-critical out there.

And September came up very strong. And so I think we closed the gap. I like our HDD portfolio is probably as good as we’ve had since 2009. So our HDD portfolio should be as competitive on a cost and depth and breadth as any of the competitors out there, that should give us as good or better margin in that space.

Katy Huberty – Morgan Stanley

Okay. So if volumes kind of your utilizations, right, will come about 70%. And on the back of that, you will procure more internally which will shift your mix closer to WD.

Pat O’Malley

That’s right.

Katy Huberty – Morgan Stanley

And the wildcard is catching up on enterprise FAS SDDs?

Pat O’Malley

Yes, enterprise FAS. And that one is going to be – I’d like to say that that’s measurable item in the next quarter or two as you are probably looking at fiscal ’15 before we start making inroads of any measurable. We do have our product out there being qualified that we jointly developed with Samsung. So that’s out through pause right now, but that’s sort of long pause cycle, and I would say that’s probably not going to be meaningful for the rest of the fiscal year, but hopefully that will start making inroads on fiscal ’15.

Katy Huberty – Morgan Stanley

Okay. And then also on the cost front. OpEx is running towards the upper end of the 2014 present range. What can help you get that back to those lower end or midpoint?

Pat O’Malley

More revenue. Really we’re committed to run at a 12% to 14%. And we’ve made investments whether it was our cloud-based subsidiary EVault, whether it’s [indiscernible] whether it’s hybrids which have been very successful, whether it’s been our SAS. Our job is start delivering revenue on those. And certain things need to reshaped, we’ll continue to do that.

So our job is to keep on investing in areas that we see growth, and the areas that we can leverage to take down, because we can get scale and leverage, we’ll do that. So you’ll probably see additional OpEx come in, but you’ll see OpEx coming out, because we’re convicted to give in sort of a flat to low growth world, that would say that as we add things we’re going to probably at this stage now to take things out.

Katy Huberty – Morgan Stanley

Okay.

Pat O’Malley

And if we take out more because we get more efficient, we’ll do that, but I think that 12% to 14% is probably we’re going to live with for the foreseeable future which is medium term.

Katy Huberty – Morgan Stanley

Okay. I have one more question then I’ll open it up to your questions as well. There has been a lot of anticipation around the MOFCOM process, which the Chinese government organization requiring you to hold separate the Samsung business, that maybe the hold separate the Hitachi business. What does as we get into the two year anniversary in March, what do you expect the process to look like, when should we have some indication as to whether you’ll be able to integrate those?

Pat O’Malley

I think you will have indications fairly soon whether that’s a holder longer period of time or getting out to soon, but I think the important message is and this is from the statement of fact more. We’ve worked very well with MOFCOM. We adhere to all the principles of hold separate and we feel very, very comfortable. We’ve did what was asked for us. I believe our competitors have done the same thing. I believe the industry is managed in a very appropriate and a way that MOFCOM will expect.

I think what MOFCOM is working with is the process of letting folks out. I mean we got to realize that we were the first real western non-Chinese entity involved that was even brought into it, and since then there has been quite a few. And so the exit strategy they want to make sure is very good template for companies that scale over – not over just Seagate and WD but over multi-industries. We’ve been working very proactively with MOFCOM. They’ve been very professional mark that to figure out what those templates are. And given that dialog in interface, I would expect that we probably over a period of time, and I don’t know but on two years as March 8, I think coming up this weekend, everyone is out something like that, I doubt that, but is probably not is that much longer where what out is allowing folks to do some level of integration.

But our job is whether to stays holds up or not. We’ll react accordingly, but more importantly as long as hold it separate and manage to what they’ve ask us to do. But I feel very comfortable to the processes of the volatile point where both at MOFCOM and whether it’s Seagate or any other company could have a framework to say, how do you exit these and make sure that the intent of why we hold separate was there are met over longer of periods of time, but I’m feeling very positive about that process.

Katy Huberty – Morgan Stanley

Good. That’s encouraging. Let me see if there are any questions in the audience. If you have question, just raise your hand, they’ll bring the mike. There is one down here.

Unidentified Analyst

Hi there. On the PC business, can you talk about whether the Windows XP expiration has been a tailwind on the business recently and whether you think PCs could follow-up after that, or how sustainable is the recent stability PC is coming out of the back half last year?

Pat O’Malley

We talk to the lot of CIOs and we’ve looked inside Seagate for example. As folks have been upgrading systems overtime, they have been upgrading software platforms. So it could have some marginal pop, but we don’t really think it’s been this wait till the end and everyone go. We think it’s been happening over the last year or so. So is there some drop-off? Maybe, but we don’t really think the XP end date was a factor of you see this bubble spend. We didn’t really see that.

We think it’s just sort of happened overtime. And given – they’ve let everyone know for a while this is coming out and let's say so when most CIOs are out there buying a piece of hardware, they are buying the most – the latest piece of the license for the newest software anyway, and then they may operate on an older level as the enterprise there but then they switch over. So we don’t really think it’s going to be a big catalyst one way or the other.

Katy Huberty – Morgan Stanley

Other questions? The industry has done a great job generating cash since the Thailand floods and post integration. Do you see any change in Seagate’s ability to generate the level of cash that you have, whether it be CapEx investments or changes in working capital. And then just generally, how do you think about buybacks versus dividends?

Pat O’Malley

Yes, if I look forward and things changed radically as further you go out or could have potential to do that at least, I don’t really see any vector changing where the cash flow generation model changes that radically over the near to medium term. So I would expect it to be somewhat the same with – sometimes up and down with a little more CapEx deployed, but we’ve been managing the CapEx deployment on a very tight level. We've been running lower than the historical level and partly it’s because we’re at 70% utilization.

So, but one thing is probably pretty clear, Seagate is not a company that’s going to afford a lot of cash on the balance sheet. So we’ll deploy it through one form or function. The dividend program we talked about is we’re convicted at least 10% year-over-year. The last one we did was slightly higher than 10% last November, largely many of them have funded by the stock buyback, so there hasn’t been much cash flow going out of the business, because as we have taken out 10% shares year-over-year, the dividend has been somewhat self-funding.

We would expect to still stay in that level, 10% growth on our dividend. And then there is going to be some level of continued share, returning back to the shareholders on stock buyback. Last year, we said 70% of our operating cash flow back to the shareholders. This year we said 70%. And we have bought the 32 million shares of Samsung in the December quarter. We’ve pretty much hit that, but I would expect you would see that sort of philosophy continue from Seagate.

Now obviously M&A, any opportunistic debt retirements, structural debt retirements may affect debt, to sort of put that even though it’s not in our operating cash flow, it’s part of our cash flow that we had be to mindful of. So like the Xyratex had approximately $350 million, that had to be taken consideration, but you can see they are not large, large M&A. So I would expect you to see some activity that continues over time for the stock buyback. And that’s probably not going to change.

Katy Huberty – Morgan Stanley

Good. We’ve just run out of time. So let's wrap it up there. Thank you, Pat.

Pat O’Malley

Okay, thank you Katy. And I look forward to seeing some of you folks later today. Have a great conference.

Question-and-Answer Session

[No formal Q&A for this event]

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