Some excerpts from STX's CC:
Luczo's opening remarks:
With respect to demand in the March quarter the total available market countered seasonal patterns and grew to approximately 163 million units, higher than our original expectation of 155 to 160 million units. The 163 million units were likely short of unconstrained demand. As indicated by low inventory levels, in our OEM and distribution channels.
As expected, we experienced variability and demand during January and February, particularly, around lunar New Year for notebook drives. As was the case last year, demand for Seagate products increased and sustained throughout the month of March.
Pricing in the March quarter was as we planned. As a result of a relatively balance supply and demand profile throughout the quarter. Additionally, channel inventory levels for Seagate products remain at around three weeks across all geographies and across all product offering. Finally, as planned, Seagate continue to shift time to market products in all markets with the broadest offering in the industry.
Consistent with our expectations we delivered strong operational and financial results. Revenue in the March quarter reached $3 billion, a 42% increase year-over-year. Net income was $518 million resulting in $1 of diluted earnings per share.
While the financial and operating results were strong, there were internal supply chain constraints that impacted our mix optimization early in the quarter. We generated operating cash flow of $577 million in the quarter and we repurchased approximately $250 million of our common shares.
As we plan for the June quarter, we are expecting the TAM will be 155 million units to 160 million units. However, there is some growing evidence that the seasonal declines in the notebook and desktop markets historically associated with the March and June quarters are diminishing. Due to the continued growth in Asia-Pacific demand, back to school bills occurring earlier in the summer, as customers attempt to optimize their supply chains and dynamics around lunar New Year.
Given the strength of the March quarter, and our current outlook for June, we are also more confident in our estimate of a calendar 2010 TAM of between 650 million units and 670 million units.
As stated previously, our TAM outlook for the calendar 2010 does not include a significant commercial refresh cycle. However, we do believe there are early indications that the commercial refresh cycle has begun as evidenced by the strength in the 3.5-inch product TAM.
Additionally, we believe it is increasingly likely that our broader economic recovery in the United States and Europe will occur later in the calendar year, resulting in a potential for increase in demand above our current forecast of 650 million units to 670 million units. We still believe, however, that the HDD industry is constrained to a total output of around 670 million units given capacity, yields, component supply, technology transitions and capital deployment schedule for the remainder of calendar 2010.
Consistent with this outlook, we anticipate price erosion to be lower than historical patterns primarily due to tight supply for the remainder of the calendar year. Consequently, many of our OEM and distribution customers continue to emphasize supply availability as their primary concern in our discussions for the June quarter and through the remainder of calendar 2010.
[My comment: so much for those analysts who say they are worried about inventory buildup and too much capacity.]
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Mosely's opening remarks:
Contrary to the last two quarters, total 3.5-inch unit shipments surpassed 2.5-inch unit shipments. OEM 3.5-inch poles were strong and the desktop channel business exhibited typical sales patterns in the March quarter.
We believe the HDD industry managed inventory appropriately from March quarter. And that Seagate specifically exited the quarter was channel inventory for desktop notebook and enterprise drives close to three weeks, which is below historical level.
Looking at our market performance, Seagate shipments grew 31% from the year ago quarter to a record 50.3 million units demonstrating continued HDD demand resilience against the macro economic background.
We continue to meet our customers demand for high capacity, high performance product configurations across all markets. Seagate delivered over 70% of its unit shipments to OEM customers during the quarter.
Now, I will give some detail on a few key markets. Seagate shipped 5.1 million drives for mission critical server and storage applications during the quarter, representing an 11% increase quarter-over-quarter. We extended our leading share position as we believe the total available market in this space was essentially flat from the December quarter.
These shipments were slightly higher than we had planned at the beginning of the quarter as our products experienced strong demand and with our flexible supply chain we were able to take advantage of competitive execution issues.
The TAM and the desktop market for the March quarter was approximately 65.1 million units, up 4% sequentially, and up 24% year-over-year. Seagate shipped 24.6 million units in this space. For the June quarter we expect the desktop TAM to be flat sequentially.
Seagate shipped 13.7 million units into the mobile compute market, an increase of 54% from the year ago quarter. The overall TAM in the mobile compute space was approximately 71 million units in the March quarter, essentially flat sequentially and up 65% year-over-year.
We expect the TAM in the mobile compute space for the June quarter to be seasonal and slightly down sequentially. That said it is possible that the TAM for the June quarter for 2.5-inch mobile drives could be higher sequentially because of the supply chain optimization. In addition, depending upon the demand profile of June we may have the opportunity to build some inventory to serve customer demand in the back half of the calendar year.
[My comment: Analysts who want to be bears will use that comment to hang their hat on, IMO.]
Finally, we believe that the retail market for both Seagate branded products and for the external Box Builders that we service saw relatively flat demand quarter-over-quarter, with high growth in Asia tampered by seasonal slowdowns in the U.S. and Europe.
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Whitmore opening remarks:
Finally, I will make a few comments on our capital investments. Today’s robust demand environment and the broad acceptance of our products require capital investments that line our capacity to support 650 million units to 670 million units industry TAM for the calendar year 2010. This represents a year-over-year increase of 15% to 20% and is in line with third-party analyst growth estimates.
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O'Malley opening remarks
1. March Q recap:
I will start with some comments regarding the fiscal Q3 results, then touch on the balance sheet and close with our June quarter outlook. For the March quarter Seagate reported shipments of 50.3 million units and revenue of $3.05 billion, up slightly as compared to the prior quarter and up 31% and 42% from a year ago period respectively.
Gross margin for the March quarter was 29.6%, roughly 40 basis points better than our midpoint guidance implied. R&D and SG&A totaled $329 million for the March quarter better than expected due to R&D spending that shifted to future quarters and discrete items benefiting SG&A.
The tax provision for the March quarter was $4 million as compared to a benefit of $6 million in the prior quarter. We continue to use for planning purposes a tax rate of 3%. Note that the June quarter is our fiscal year end and any adjustments are required to our annual book tax rate will be reflected in the provision for the quarter.
Moving now to the balance sheet, cash, cash equivalents, restricted cash and short-term investments totaled $2.4 billion at the end of the March quarter, up approximately $117 million as compared to the December quarter. Cash flow from operations was $577 million, capital investments were $108 million and free cash flow was $397 million.
In late January, the Board approved an anti-dilution stock repurchase plan. Under this plan, the company repurchased 13.5 million common shares for approximately $250 million during the March quarter.
Over the next 18 months we will continue to reshape the capital structure of the company with a primary objectives been an overall debt level of $1.5 billion to $1.75 billion and a fully diluted share count of 500 million shares or less.
2. June Q forecast:
Now, I like to update the outlook for the June quarter. The key assumptions on which we are based our outlook are a historical pattern for unit demand which for June quarter is down 2% to 5% sequentially.
Pricing trends better than historical for June quarter, reflecting a balance supply and demand environment. And our competition will likely improve the current enterprise class product offering and Seagate share in this market will trend closer to historical levels.
As a result, for the June quarter the Company expects the following
Industry unit TAM of 155 million to 160 million. Revenue of $2.85 billion to $3.05 billion. R&D and SG&A costs were approximately $340 million.
Other income and expense of a net expense of approximately $35 million. A tax rate for planning purposes of 3%. Outstanding share count were approximately 520 million and GAAP earnings per share of $0.81 to $0.85 per share which includes approximately $0.02 in charge related to purchase intangible amortization expense.
The June quarter outlook does not include the impact of any potential new, restructuring activities. Future mergers, acquisitions, financing, dispositions for other business combinations that Company may undertake, the Company’s policy is to refrain from commenting on such activities.
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Q&A period:
Ben Reitzes – Barclays Capital
And then my follow-up is with regard to the calendar second quarter, I mean, you’re guiding units down, 2% to 5% but you also said a lot of things in your comments about how it could be better than that. So I guess what are you trying to say have you seen indications from your customers that it probably is better but you just going to guide it down 2% to 5% and what exactly are you seeing that gives you the confidence that it could be a little better than that?
Dave Mosley
I will try in this way. So, this is seasonally down that much. I think most of the customers right now because of comments that we’re all hearing together are a little bit gun shy about carrying inventory at the end of this quarter and so on and so forth. But they see a big back half of the year and people are fairly consistent in that. So they will be worried about supply as well. So our guidance is that as we go up through a step function into the following quarter we’re going to watch very carefully, manage our inventory very carefully, if we see the opportunity to allay some of those fears, especially take advantage of supply chain optimization, get things on board up against back to school and so on, we will do that, we will do that with our customers as we approach June.
Steve Luczo
And I think the other kind of unknown variable is the historical patterns up until maybe last one year or two years haven’t really encompassed the level of demand that we get out of Asia Pac that we do now. And because those economies are so large and are growing so quickly that they can also tend to offset what might be “A typical seasonal decline” that was mostly a U.S. Europe phenomenon or the 20 years that we look at historically. So talking to a lot of the producers whether or not it’s OEM or ODM, they will make those decisions sometime in the May to end of June timeframe and depending on how really they make them a good it could positively impact June in a way that we haven’t seen historically.
Ben Reitzes – Barclays Capital
All right, thanks and one final if can just impose is you mentioned that the industry analysts generally see demand increasing 15% to 20%, but I would think that investors are really thinking at the PC markets up around 20% this year, and you’re increasing TAM 15% to 20% I mean do you think there is a chance that disk drive capacity could hold back the growth in the PC market this year or things that type or are things that have potentially to, do you have a potential to meet demand if indeed 20%, 20% plus is, is possible in the PC market?
Dave Mosley
Yes, again, I think we’re mixing and matching between overall TAM versus PC and then between desktop and notebook. I think right now the industry is fairly well aligned to the growth that that’s the customers are forecasting. On the other hand if demand is stronger either because there’s a commercial refresh cycle that stronger than people are booking in or if the Europe and the U.S. pick up in ways that are currently forecasted than it could be a struggle, I mean right now though it feels everybody is kind of go and flat out and meeting the demand or maybe just shy of the constrained demand that’s there. |
