Seagate Technology PLC Earnings Call Nuggets: Pricing Analysis and Capital Deployment

Seagate Technology PLC (NASDAQ:STX) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Pricing Analysis

Ananda Baruah – Brean Murray Carret & Co.: I guess Steven, I guess the first question is around ASPs can you just walk through the dynamics that led to the flat pricing for the quarter. Feels like it was sort of like you said benign like-for-like and then some mix, but just the specifics will be helpful and then I have a, I guess it seems like you are guiding to down 2% blended for the June quarter and if you could just walk through those dynamics as well and then have a quick follow-up? Thanks.

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Stephen J. Luczo – Chairman, President and CEO: On the pricing like we said its benign. We’ve haven’t done in specifics on what that is, Anand, but it was below historical rates and that’s what we expect sort of be the operating model going forward as long as supply demand stays relatively in check. The mix was a positive element for the quarter. The business-critical nearline drives clearly were a growth segment for us and that helped the mix, but all-in-all it played out as much. Now, for the next quarter, we have still benign pricing. We don’t have excessive pricing there by any stretch of imagination, it’s very benign, but the mix is probably somewhat offset due to seasonality.

Stephen J. Luczo – Chairman, President and CEO: I think the other thing and that is, in the notebook space we definitely felt that there was opportunity and the need to increase pricing marginally and we did do that and that pricing has helped so far.

Ananda Baruah – Brean Murray Carret & Co.: Steve, how should we think about I guess the new pricing dynamics at least this quarter, next quarter manifesting itself on the margins. I guess, longer-term you gave guidance for the – the June quarter obviously on the margin. But then we think about sort of what might allow the margins to move up into the upper half, or towards the middle of the longer-term gross margin guidance range, where the dynamics that you sort of envisioned that they get it there over time? Thanks…

Stephen J. Luczo – Chairman, President and CEO: Couple of things. I think one is if you get TAM expansion in the back half of the year, from a capacity perspective the industry is kind of bumping up against its limit. I’ll turn it over to Dave Mosley in a second to talk on that. But if we do have TAM growth that I think is actually more related to macroeconomic conditions and also I think to some of the new product offerings by the OEMs and the client, we’re pretty excited about some of the things that we see in the notebook space for example. And then I think, the other big trend is just the shipped to the clouds. As the cloud continues to build out and it’s our belief that we’re going to see a fairly dramatic acceleration in that, exiting this year and going into the next calendar year. Given the number of heads and just that get absorbed into that product area, I think there is going to be some pretty tight supply situations for back half of the year and we have already been signaling to our customers that the current pricing may even look favorable relative to what we see the last have of the year, because I think we could start seeing some constraints in your line even exiting the quarter. I’ll let Dave talk to some of the math behind it.

Dave Mosley – EVP of Operations: To the comments that Steve made earlier, the industry is relatively constrained at say roughly 500 exabytes of capacity and we’ll put the capital online sparingly as we talked about earlier, but the growth of the cloud primarily continues to drive a lot of capacity into the industry and so as we see that, we talk about aerial density growth, our ability to deliver that capacity relative to the shared capacity growth, I think those are two vectors that are diverging, and as we look to invest in the future, I think we need to make sure we see the requisite return on that capital investment. But the trend line is definitely hold that aerial density is not growing nearly at the rate as the capacity growth is and that’s what’s ultimately given them the constraint.

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Capital Deployment

Joseph Wittine – Longbow Research: First question, I want to talk about capital deployment. I guess with the near term piece of debt taken out, do you still have something I guess a pause on the buyback this year and then maybe just as important is that share count target for the end of calendar year 2014 still possible in your view with the appreciation and the share price? Thanks.

Albert ‘Rocky’ Pimentel – EVP, Chief Sales and Marketing Officer: On the 2014 we certainly are still committed that, with the share price.

Joseph Wittine – Longbow Research: Then near term thoughts on capital deployment?

Albert ‘Rocky’ Pimentel – EVP, Chief Sales and Marketing Officer: Continue the dividend as stated and buyback shares within the limitations that we have today on 382, that would have changed for any reason we certainly modify or cling to that but as Steve and I commented we are still good for the 2014 to 250 million shares.

Joseph Wittine – Longbow Research: Then Steve in your prepared comments you talked about being accelerated in growth in new form factors in the second half of the year here. Intel recently said they think 30% of the client PC environment could be these new form factors ultrathins, convertible, detachables, just curious from your point of you how many of those products do you think will be carrying or will be initiated with the HDDs or hybrid HDDs? Thanks.

Stephen J. Luczo – Chairman, President and CEO: I think over time the penetration is going to be pretty high I mean it’s kind of funny watching the tablet evolution reminds of the netbook evolution in a certain way. It’s just that the tablet started with really great screens and no keyboards. Now they have keyboards and you can take them apart and I think shortly here you are going to see tablets with HDDs them as well and all of sudden what it was going to look like again. It is going to look like a lot like notebook. So I think it’s just really a question between the breakdown overall of what’s a super thin notebook what so slightly thicker notebook, what’s a higher performance notebook some of them with detachable keyboards and some of them not and some of them with flash and then some of them with flash and some of them with HDD. If you think of the super mobiles, we think of tablets today, I mean, I honestly think – I believe that penetration rate is going to probably go into the 30% to 40% range, because if you can deliver 500 gigabytes of storage with the same performance that you get off of flash, for all those people that want to watch something through those three pieces of glass you can at least store it somewhere. But I think it’s a ramp that begins hopefully I think sometime this year and then continues to accelerate. I will let Rocky…

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Albert ‘Rocky’ Pimentel – EVP, Chief Sales and Marketing Officer: Yeah. This is Rocky. I think with that Steve and Dave talked about some of our emerging form factor and product solutions on the client side over the second half of the year and you look at the total TAM between classic PC desktop and the tablet we got 80 million to 85 million units a quarter on the classic PC, notebook, desktop side and then you have another 40 to 45 million tablets. So you have a total market of like 130 million to 140 million devices. I think based on the product platforms we’ll see over the next six to nine months easily serviceable market probably is north of 100 million units, which is a positive, because we’ve been dealing with a serviceable market that’s been 80 million units. So, I mean, certainly it still has to be proven but I think we’re optimistic about the opportunity to extend or expand the serviceable TAM on the client side.

A Closer Look: Seagate Technology PLC Earnings Cheat Sheet>>