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Edited Transcript of STX earnings conference call or presentation 4-Feb-19 10:00pm GMT

Q2 2019 Seagate Technology PLC Earnings Call

Dublin 2 Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Seagate Technology PLC earnings conference call or presentation Monday, February 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gianluca Romano

Seagate Technology plc - Executive VP & CFO

* Jingjing Chen

Seagate Technology plc - Director of IR

* William David Mosley

Seagate Technology plc - President, CEO & Director

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - Director & Senior Research Analyst

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Steven Bryant Fox

Cross Research LLC - MD

* Tristan Gerra

Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Seagate Technology Fiscal Second Quarter 2019 Financial Results Conference Call. My name is Latif, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Jingjing Chen, Director, Investor Relations. Please proceed, Jingjing.

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Jingjing Chen, Seagate Technology plc - Director of IR [2]

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Thank you. Good afternoon, everyone, and welcome to today's call. With me today from Seagate's management team are Dave Mosley, Chief Executive Officer; and Gianluca Romano, Chief Financial Officer. We have posted our earnings press release and detailed supplemental information for our December 2018 quarter on the Investor section of our website. We're planning for the call today to go approximately 30 minutes, and we'll do our best to accommodate your questions following our prepared remarks, as time permits.

For the March quarter, we'd like to note that our quiet period will begin on March 18. We'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in our earnings press release for our December 2018 quarter, which is posted on our website and has been furnished on our Form 8-K that was filed with the SEC.

As a reminder, this call contains forward-looking statements, including our March quarter financial guidance and expectations about our financial performance; customer demand; industry growth trend; planned product introduction; future growth opportunities; and general market conditions. These statements are based on management's current views and assumptions and should not be relied upon as of any subsequent date. Actual results may vary materially from today's statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K filed with SEC and the supplemental information posted on the Investors section of our website.

I'd now like to turn the call over to Dave Mosley. Please go ahead, Dave.

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William David Mosley, Seagate Technology plc - President, CEO & Director [3]

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Thanks, Jingjing. Good afternoon, everyone, and thanks for joining us. For today's earnings call, I will cover the high-level results from the December quarter and offer some market commentary. Gianluca Romano, our Chief Financial Officer, will then discuss certain financial highlights from the quarter. And then I will wrap up with our outlook for the March quarter. Following our prepared remarks, we will open the call for questions.

For the December quarter, Seagate achieved revenue of over $2.7 billion, non-GAAP gross margin of 29.7% and non-GAAP EPS of $1.41, meeting and in some aspects exceeding our expectations. We executed our plans well and with strong operational efficiency, delivered solid financial results.

As we indicated last quarter, we were working to effectively manage through a near-term demand downturn that is having an impact in our current business. For the overall HDD industry, the December quarter exabyte demand declined for the first time after 6 quarters of continued growth.

In the nearline market, we continue to see a cyclical impact affecting a broad base of customers globally. While some of the demand variation is due to the intermittent periods of digestions we have experienced in this market over the last few years, some cloud customers are also pausing ahead of next-generation mass storage technology transitions that will deliver significant capacity, performance and total cost of ownership benefits.

While inventory levels for our HDD, storage devices and global channels appear fairly healthy, other market dynamics, including seasonality, parts shortages and liquidity have created strain for some smaller end customers. For example, in the surveillance market, demand was soft compared to this time last year, impacted by tightening of downstream customer credit as well as government project delays.

We believe that these storage demand headwinds are short lived and that the long-term demand picture for our mass storage product portfolio continues to be strong. Data creation and data utilization are forecasted to grow rapidly over the next decade.

According to a recent IDC study, global data creation will grow from 33 zettabytes in 2018 to 175 zettabytes by 2025, representing a 27% compound annual growth rate. Efficient and cost-effective data technologies are becoming more critical for productivity expansion, data monetization and value creation than ever before.

To support future storage customer needs, storage capacity across all media types will need to grow rapidly. And IDC estimates that at least 59% of the zettabyte demand in 2025 will be supplied by the HDD industry. Seagate is a critical supplier to both the mature and emerging businesses that are only just beginning to derive value from massive application workloads coming in Big Data analytics, smart cities and machine learning devices using both edge and cloud-based architectures.

At CES a few weeks ago, we demonstrated the breadth of our storage solutions covering diverse products from consumer to enterprise, leveraging our 40-year history of storage technology innovation. We are highly encouraged by the continued engagement we have with customers on their future capacity and performance requirements. These technical insights are driving many of the performance and flexibility attributes of our future product portfolio.

As evidence of our drive for innovation, we showcased our future generations of single and multi-actuator devices that many customers are testing in their own data center environments. We're confident in our ability to achieve 16-terabyte drive shipments in the first half of this calendar year, growing to over 20 terabytes next year.

These significant product introductions delivering high capacity and performance options will be critical in the efficient scaling of cloud data centers for the next decade.

This was our second year showcasing Seagate's HAMR technology at CES. In the December quarter, we broke another areal density record, demonstrating almost 2.4 terabit per square inch in spin stand testing, indicating technology than can enable the capacity of 3 terabytes per disc or 24-terabyte drive production capability.

In the past few months, we shipped fully functional HAMR demonstration drives to select global hyperscale and OEM partners. These drives are meeting expectation. Central to that is to establish the plug-and-play nature of HAMR recording technologies in all storage ecosystems. With that in mind, our HAMR recording systems have demonstrated more than 4 petabyte per head data transfers, much greater than the workloads required for today's drives. This means our focus is now on the volume manufacturability of these designs, designs that will fuel the future global datasphere.

Along with HAMR, we are also working to improve the efficiency of mass storage by eliminating the stranded capacity when a drive becomes too large for its IO bandwidth. This is already being seen today on 12-terabyte and 14-terabyte drives at many data centers and will become more challenging as drive capacities increases.

Our Mach 2 dual actuator drive unlocks significant capability with a rough doubling of the IO bandwidth. We have successfully deployed Mach 2 sample drives to customer sites. And for the past 6 months, some of these drives have been serving live production traffic. Later this calendar year, we will begin our volume ramp of these important new designs.

The gaming industry continues to be a rich storage market opportunity, driven by demand for increased capacity points. This year at CES, we showcased our new M.2 NVMe SSD, which delivers blazing performance with intense read and write speeds for the ultimate gaming experience. We are confident Seagate's complete gaming portfolio, including internal drives and attached gaming console drives with the HDD and SSD footprints, will continue to provide optimal user experiences.

Also at CES, we introduced our IronWolf 110 SATA SSD, the world's first purpose-built NAS SSD with enterprise-class endurance and reliability. Looking ahead, we believe we are on the front end of a long-term secular data productivity era that will evolve over the next decade, and managing data through cloud and edge computing layers will remain within the top priority of the growing data economy.

Fiscal 2019 continues to be a year of focused execution and technology advancement for Seagate. With near-term demand headwinds, we are taking action to demonstrate sustained operational performance and the resilience of our company through the fluctuations in the marketplace. We will continue to strive for long-term revenue growth, properly staged capital investment for the coming growth opportunities, control expenses and optimize cash flow generation. Now I'll turn the call over to Gianluca to go into more depth on our financial performance.

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Gianluca Romano, Seagate Technology plc - Executive VP & CFO [4]

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Thank you, Dave. Seagate executed well in the December quarter. Total second quarter revenue was over $2.7 billion, and non-GAAP gross margin was 29.7%, in line with our long-term margin range target of 29% to 33% of revenue. The sequential decline of 130 basis points was mainly due to overall product portfolio mix, and in particular, to a decline in the nearline volume sold. Non-GAAP EPS was $1.41, higher than expected, gaining from overall solid execution and successful expense management.

Our enterprise market includes mission-critical and nearline applications, which represents 39% of total revenue. In the second quarter, we shipped a total of 36.4 exabyte in the enterprise market, down 3% compared to last year's strong demand.

The average capacity per enterprise drive was 4.5 terabyte, up 4% year-over-year.

In the mission-critical market, we continue to address strong demand that resulted in 44% year-over-year exabyte growth, with average capacity per drive of over 1.1 terabyte, up 30% year-over-year. Our breadth of portfolio, up to 2.4 terabyte, continues to provide customers with a cost-effective solution required for mature enterprise application.

In the nearline market, we shipped 33 exabytes, and our average capacity per drive exceeded 6.5 terabytes, up 10% over last year and up 44% from the same quarter 2 years ago.

The multi-quarter digestion phase that we are experiencing with cloud service provider customers is temporary affecting the exabyte demand in the overall nearline market. However, demand from OEM enterprise customers for nearline drives remains fairly stable.

As cloud and enterprise customers transition to higher capacity points, our nearline hard disk drive portfolio is well positioned to monetize storage demand over the long term. Our 12-terabyte nearline drive was the leading enterprise revenue product in the December quarter. As our highest capacity products, the 14-terabyte drive, continue to ramp in volume. Looking ahead, we are on scheduled to launch 16-terabyte products in the first half of this calendar year.

Edge noncompute market include our consumer, surveillance, NAS, gaming and DVR portfolio offering. In the December quarter, this market represented 31% of total revenue, 1% higher compared to the December quarter a year ago.

We drove year-over-year exabyte growth and increased average capacity per drive for almost all end markets in the December quarter. Within this, the consumer portfolio at 27% sequential capacity growth is driven by strong seasonal demand and market share gains. While we are confident of the long-term growth and profitability of this market, we are mindful when near-term demand in some markets and channels was impacted by the liquidity issues that Dave discussed earlier.

Edge compute market include desktop and notebook and disk drive applications, in the December quarter, this market represented 21% of total revenue, 2% lower compared to the December quarter a year ago. Total exabyte shipment declined 4% year-over-year, and average capacity per drive grew 9% year-over-year.

While these markets remain largely stable, there are some headwinds affecting near-term demand. Particularly, in the December quarter, the industry was negatively impacted by a CPU shortage, which affected some vendor's ability to fulfill demand created by business PC upgrades. This, coupled with economic uncertainties in some countries, affected the performance of the normally seasonally strong quarter for the compute market.

Non-hard disk drive revenue in the December quarter were $225 million, up 8% year-over-year, mainly driven by higher SSD revenue. Cloud systems decreased year-over-year due to a planned end-of-life of some legacy OEM cloud system products. Sequentially, revenue has been stable in the past 2 quarters as we optimize the product portfolio.

SSD revenue were up both year-over-year and sequentially. We are optimistic about our long-term opportunities as we invest in developing a broad-based SSD product portfolio in the SaaS, NVMe, consumer and gaming market. We are mindful of the short-term market dynamics and NAND pricing movement, and are managing our business to meet current customer demand in a prudent manner.

Non-GAAP operating expenses were $365 million, down 6% year-over-year and down 4% sequentially. Expenses were lower, mostly due to reduced discretionary spending and overall operational efficiency. We are committed to controlling operating expenses within our long-term financial model range of 13% to 15% of revenue.

Cash flow from operations in the December quarter was $288 million. The sequential decrease was mostly related to the timing of some working capital transactions. We do not expect adverse impact to cash flow from working capital changes to reoccur in the March quarter.

On a fiscal-to-date basis, Seagate has generated $875 million in cash flow from operations and $571 million in free cash flow. Total inventory levels are slightly lower sequentially and consistent with demand expectations.

Capital expenditures, on a cash basis, were approximately $127 million in the December quarter. For fiscal year '19, we expect total capital expenditures to be at the low end of our long-term range of 6% to 8% of revenue.

In the December quarter, we repurchased 3.2 million shares, and we exited the quarter with 283 million ordinary shares outstanding. Our balance sheet remains healthy. We ended the quarter with $1.4 billion in cash and cash equivalent, and our board has approved a quarterly dividend payment of $0.63 per share, which will be payable on April 12, 2019.

As planned, we also repaid the remaining 2018 senior notes for approximately $500 million. The company's debt balance as of December quarter was $4.3 billion. Our net debt to last 12-month EBITDA ratio is 1.1x as of the December quarter.

Interest expense continues to be well within our financial capabilities, given our staggered maturities and low interest rates. Overall, our financial performance in the December quarter reflects solid execution in a challenging demand environment. I will now turn the call back to Dave for final comments and the outlook.

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William David Mosley, Seagate Technology plc - President, CEO & Director [5]

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Thanks, Gianluca. As we enter calendar year 2019, there are a number of market uncertainties that are broadly affecting IT companies. Macroeconomic risks and softness persist in global demand from cloud service providers and supply-chain frictions and liquidity have created strain for some smaller end customers. We are navigating through these market dynamics with a conservatism and managing our business with a focus on profitability and cash flow generation. As we go through this cycle of compressed exabyte demand, we are taking measures to control our costs and capital spending with the expectation that the exabyte growth will resume sometime in the second half of the calendar year.

Within our revenue expectations for the March quarter, we anticipate nearline HDD demand to remain soft and our nearline exabyte shipments to be flat to down -- to slightly down sequentially.

We expect the consumer and gaming markets to

be seasonally down in the March quarter, and desktop and notebook demand to be slightly lower than seasonal demand as CPU shortage and macro uncertainty overhang continue to affect the volume in these markets. We also expect our cloud systems revenue to be relatively flat sequentially and our SSD revenues to be down sequentially due to product transitions in our near-term conservative approach to the NAND market.

We expect total revenues in the March quarter to be in the range of $2.3 billion, plus or minus 5%. Total exabyte shipments are forecasted to be 10% to 15% lower sequentially. We expect non-GAAP gross margins for the March quarter to be at least 26%, with the majority of the sequential change related to mix and manufacturing underutilization. This forecast is outside of our long-term margin range of 29% to 33% as we adjust our manufacturing plan to a lower build volume and to keep a lean inventory level. As demand resumes and other market trends stabilize, we expect margins to return to the long-term range.

We expect non-GAAP EPS to be $0.70, plus or minus 5%. We remain confident in our ability to generate significant cash flow over the next several years as we leverage our mass storage solutions portfolio for existing and new market opportunities.

In closing, like to thank our customers, suppliers, business partners and employees for their alignment and contributions to our strong second fiscal quarter results. Seagate's deep storage industry expertise, leading technology portfolio and focused execution will allow us to meaningfully participate in the long-term growth trajectory for storage, delivering sustainable success for the company and value for our shareholders. I'm confident Seagate will continue to lead the HDD industry and serve our customers with the best technology developments, product offerings and supply chain responsiveness.

Thanks, Latif. Now we'll open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steven Fox of Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [2]

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Dave, just a couple of questions on the nearline comments you made. First of all, when you talked about the outlook for the current quarter for nearline, I was wondering how that's different than maybe 90 days ago? And along similar lines, can you just sort of talk about what gave you the confidence in the second half recovery in nearline spending? And then last question on nearline, will just be any noticeable market share shifts on different capacity points that you might want to call out?

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William David Mosley, Seagate Technology plc - President, CEO & Director [3]

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Yes, Steven. I'd say that we've talked about the cyclicality before, the peak that we were in, in probably fiscal Q4 of last year, maybe even fiscal Q1 of this year. It really looks like we're in the trough now again. And the question is how deep is the trough and how wide is it and so on. So there's no reason to believe that this is necessarily that much different than the prior. But what's different than 90 days ago? I would say that we do see some customers coming back for mix changes and things like that, so there are signs of life, but nothing that I would call growth back to the next peak. And I think there are various reasons for that, you can see that in our capital spending. I don't really think there's very many competitive dynamics that are changing. We did allude to in our script, if you'll notice, that there could be some waiting for the next capacity points to be qualified, if you will. Because once you go into one of these cycles, everyone -- not just the suppliers with hard drives, but also the customers and the filters are requesting their qualification resources and the timing of what they want to ramp, when. So there maybe some of that, that's impacting things a little bit. I do think that the cycle will come back because just the exabyte demand and servicing that's already in the legacy data centers would have to get back on the pace.

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Operator [4]

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

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [5]

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90 days ago, you thought that the nearline business would be weak for a couple of quarters. And if I remember correctly, you thought you could hold the 29% gross margin. Obviously, quite different outlook today. Can you just talk about what has changed in terms of the mix in manufacturing utilization dynamic that you talked about? Cloud is certainly going to continue to be weak, but it seems like that was the assumption 3 months ago.

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William David Mosley, Seagate Technology plc - President, CEO & Director [6]

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Yes, Katy, I'll hand it over to Gianluca, and then I'll come back with some other comments, too.

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Gianluca Romano, Seagate Technology plc - Executive VP & CFO [7]

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Yes, yes. This is Gianluca. So the gross margin that you've seen for F Q3 in terms of guidance is obviously impacted by the volume. So we have a much lower volume in our product as compared to maybe what we were expecting a couple of quarters ago. And we have decided to keep our inventory lean, so we are reducing also our production. This is creating a certain level of under utilization with this part of our guidance. And that is a major part of it, no. Deviation from our long-term range of 29% to 33%. We think this is a temporary slowdown in terms of margin and to come back to that range fairly quick.

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William David Mosley, Seagate Technology plc - President, CEO & Director [8]

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And Katy, I don't know that I would say that the cloud is weaker than what we thought 90 days ago. I think there are other parts of the market, in particular, mentioned the channels that look to be very lean inventory and people aren't pulling it kind of -- even traditional rates for seasonality. So I think those are the things that are probably impacting some of our builds and our forecast a little bit more. We also don't have great visibility through the next couple of weeks. Chinese New Year's, we're right in the middle of it. And so that's part of what's impacting where we are right now. We do expect that, at some point, that cloud is going to come back. When some of these other channels turn on, I think, we need probably some more time before we can properly assess that. Gianluca said, we're going to take our medicine a little bit this quarter by making sure we turn off the factories, don't overbuild the wrong stuff, so we come out as fast as we can.

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Operator [9]

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Our next question comes from Karl Ackerman of Cowen and Company.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [10]

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Dave or Gianluca, I'm curious how we should view your longer-term capacity shipment growth within nearline, despite this near-term hiccup in demand, particularly as we kind of contemplate your progression towards 16-terabyte drives later on this year. And I guess, as a follow-up to that, I'm curious where yields are today on 12-terabyte and 14-terabyte nearline drives relative to historical cost curves of your prior durations of high-capacity drives, and I was hoping you could also quantify or qualitatively quantify customer acceptance on 16-terabyte and perhaps any commentary on yields for your 16-terabyte drives.

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William David Mosley, Seagate Technology plc - President, CEO & Director [11]

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Yes. For a lot of reasons, I think -- well, and the operations' person in me is going to say that I'm never happy with yields, right. So we're driving it. But I don't think yields are a problem at 12 or 14 terabytes. We can make enough drives for the market. I think it's more of the market softness right now that's impacting us. The transition to 16, if you think about it, there's a lot of dynamics that are maybe causing people to pause and wait for 16. So maybe you don't -- maybe you just have to spend a bunch of qualification resources, you don't get enough extra capacity at that last point. Maybe you have software issues that you're looking to stage yourselves up. I think there's a lot of things going on in the world. And then there's this liquidity issues that we talked about with some customers, there's all kinds of dynamics. Look, big picture, we think that these drives are 16, 18, 20 terabytes. Once the industry makes them, they're great-value propositions. We think we're going to be able to yield ours very well, and we pointed all of our resources at that. And we think that's going to become the norm over the next couple of years. So we're pretty excited about it.

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Operator [12]

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Our next question comes from the line of Ananda Baruah of Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [13]

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Just two, if I could, somewhat related. The first one is, Dave, just going back to the volume comments that go into the March quarter guide. Do you think those are macro related in an incremental way? Because it does sound like -- because you thought you can hold the 29% 90 days ago that maybe there is something there different from a macro perspective. And we'd just love to get your context on that. And I have a quick follow-up as well.

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William David Mosley, Seagate Technology plc - President, CEO & Director [14]

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Yes. Ananda, I'd say to the extent that we're looking a little bit further out in time, we can see a little further. And then in response to Katy's question, we can't see right through Chinese New Year. But looking at inventory positions out there in the world, I think it's time that we trim our builds a little bit. And so that does -- to that extent, that they may be some of the macro issues that may be bleeding through. Again, our perspective is inventory while weeks on hand might be fairly "normal". I think that the inventory that's out there, from an absolute volume level, is pretty low, actually. So I don't think that there's an overabundance of inventory, certainly, at Seagate inventory that's out there. So I think we should be able to build the right stuff for the channels when that comes back, and that's what we're off doing.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [15]

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And then you just sled right in. Thanks for that David. That actually just kind of segue right into my second question was with regards to the channel dynamics, it sounds like and is it accurate that you're actually maybe being a little bit proactive, at least part of this is proactive, as opposed to reactive. And if that's accurate, could we see your margins come back? I guess, the demand, if noncloud demand, say, was flattish in the June quarter, could we actually see the margins come back in the June quarter from the March Q levels you're guiding to based on some of these channel actions you've taken?

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William David Mosley, Seagate Technology plc - President, CEO & Director [16]

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Yes. I guess, I wouldn't get into that guide, especially given some of the challenges we have just in the next few weeks of people coming back from Chinese New Year and given it's our latest signal. So I wouldn't get into the guide Q4 so much. But obviously, any mix changes are going to help us, whether they happen in the cloud or they happen in some of these edge channels that have been impacted surveillance. I mean these drives aren't low-capacity drives, they are actually drives that typically take a lot of heads and disks. Then to your point, that would help our margins quite a bit.

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Operator [17]

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Our next question comes from Nehal Chokshi of Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [18]

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So I just wanted to get a little bit more color on the pause for the next-gen hard drives that you're seeing from the cloud customers. Is that HAMR related or is that just the next gen of PMR?

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William David Mosley, Seagate Technology plc - President, CEO & Director [19]

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Yes, we're still in the next gen of PMR. I mean, we actually have HAMR or next gen that are being tested side by side, but I think this is not a HAMR statement yet. We can ramp the next -- the last gen, if you will, right.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [20]

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Okay, great. And then as noncompute, you had a particularly weak quarter. Was that all surveillance or was that beyond surveillance?

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William David Mosley, Seagate Technology plc - President, CEO & Director [21]

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It's getting complicated to call something surveillance or nonsurveillance. Some of the smart cities, IoT, the real I'd say entrepreneurial things that people are doing out there in the channels, people don't just use those drives to build desktops anymore. They're doing solutions for their end customers. That's where we've seen things be a little bit soft. And again, not 500-gigabyte drives like the days of old when we're servicing -- when the channels were servicing the PC market. Some of these are 4-terabyte drives, so that's impactful. But yes, that's the smaller end customers that we were referring to in our script.

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Operator [22]

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Our next question comes from Tristan Gerra of Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division - MD and Senior Research Analyst [23]

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In addition to the factors you've mentioned on the call for weakness in nearline drive, is there a relocation in terms of some manufacturing facilities for data center OEM outside of China, which also could have some impact in terms of ordering patterns for these drives?

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William David Mosley, Seagate Technology plc - President, CEO & Director [24]

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I just -- I think not that I can think of off the top of my head. But I probably have to give it a little bit more thought.

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Operator [25]

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Our next question comes from Aaron Rakers of Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [26]

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One quick housekeeping thing, and then a real quick question, first of all, did you guide an operating expense number for this quarter? And how should we think that, that would progress over the next couple of quarters? And then on the question front, I'm just curious, I think you've mentioned that the compute segment would be down more than seasonal in the current quarter. How would you characterize seasonality? And how much are you factoring in NAND flash price erosion resulting in incremental SSD attach rates?

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Gianluca Romano, Seagate Technology plc - Executive VP & CFO [27]

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Okay. This is Gianluca. I will take the first part of your question about OpEx. So we didn't already guide for F Q3. I will say that the company has done an outstanding job in the last several quarters to reduce OpEx. Our fiscal Q2 was about $365 million. I expect next quarter to be more or less flat to that number.

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William David Mosley, Seagate Technology plc - President, CEO & Director [28]

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Aaron, I'll try your PC side -- if I don't get it right, just feel free to correct me. So the PC market, we think, is more than just seasonality because of some material shortages and maybe some of this destruction that I was talking about in the channel as well, but -- the liquidity issues. But VARs having trouble with their go to market. But I think it's some of the component shortages that they've struggled with. As far as SSD attach, it hasn't really changed our model too much. We're assuming a fairly aggressive penetration certainly at 500 gigabytes and some at 1 terabyte. When you get into commercial system, we're thinking that's mainly tipped. So that's why we're positioning our portfolio, for example, desktop drives are over 2 terabytes of drive and growing, so that's the way we're thinking about that. Notebook continues to be a fairly good market that we service from us. We won't apologize for having a good drive down there, but we're anticipating continued penetration of that market. And I think we're probably less exposed than others on that just because we've been exiting it for a while.

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Operator [29]

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At this time, I'd like to turn the call back over to Dave Mosley for any closing remarks.

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William David Mosley, Seagate Technology plc - President, CEO & Director [30]

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Okay. Thanks, Latif. I just like to thank our customers and suppliers, business partners and our employees for all the contributions that they had in the second quarter, and I'll talk to everyone next quarter. Thanks.

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Operator [31]

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Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.