Seagate Technology Holdings plc
Q3 2015 Earnings Call Transcript

Published: 1 Dec 2015

[Unidentified Company Representative:]

Good afternoon everyone. And on behalf of NASDAQ I am very pleased to welcome Seagate Technologies to the conference today. Presenting is David Morton, Chief Financial Officer. David?

[David Morton:]

Yes, thank you. Thank you everyone. Got a couple of prepared slides here. And then can open it up for Q&A as you see it. Couple of quick housekeeping items. Obviously our forward-looking statements to the extent that we make any – I make any please refer to our K filed on August 11 for any risks and uncertainties about matter. And then to the extent that I use any non-GAAP information please refer again to our investor website or the Investor Relations, so you could see the reconciliation on those perspective numbers. Jumping into this conversation and first and foremost thanks again for having us. As I look and kind a top-level this whole conversation, what we do? We’re a high tech global manufacturing – precision manufacturing company that is able to store the world’s data and how that’s created. And the key note to our investment thesis is really all related to the slide here. It particularly pertains to how we view our long-term thought process in and around the data, the content creation, the 44 zettabytes that will be out there in the year 2020 data that will either need to be stored and/or in flight. And then how we view it is the data that is that necessarily in flight, the 13 zettabytes which is approximately what we look to go off and try to monetize within our solution set. And as we go off and try to monetize that, we believe that 60% of that will reside in the cloud. That’s a very, very meaningful number when you think about exabytes and the delivery of that into the extent that we do our jobs correctly within the management team. This becomes a very, very powerful growth statement. Lot of drivers of the growth that we continue to talk about and which continues to resonate with proof and existence in the marketplace today. Obviously at the bottom right you got the HD and video rich applications that gets into the 4K soon at the 8K as that continues to get richer and richer. In media you’ve got virtual reality and then gaming applications that come in at this round as well. You’ve got surveillance and security by definition of smart cities and shopping malls, looking to expand and store how they view what we’re able to apply. You have the Internet of Things and I know this phrase gets fashioned a lot, but to me and what’s creating the growth is really these watches, smart sensors, because all of that data that’s not only in flight, needs to be captured and monetized in one way or another. Then you get into the big data analytics by which, I think there’s been a lot of conversations in and around and you continue to see different companies go up and make opportunities and monetize these solutions sets as well. And we plan that ecosystem as well and what are the ways to do, Splunk. And then you get into mobility. And even though we don’t certainly sell into a specific phone or tablet per se. With that said, I mean just a billion phones out in that marketplace, that will get sold today for off over 18 exabytes of data a month, that’s being stored somewhere. And then new clients and we don’t talk about that enough, but obviously we continue to see this as another big growth application here whether if it’s 3D printing, robotics what have you, we’re definitely starting to see the inception of new verticals that will go off and try to develop and monetize here further out, outside of 2016 the more into 2017 and 2018. Along with those big growth opportunities obviously our workloads are created equally. I use this chart most when we talk about NAND Flash versus HDD. And in my view I look at them very, very complementary. Store to begin storage and there’s different applications and different workloads that you’re going to go and imply these different tools for the right job. Clearly you’ve got the mobile and video but I talked about underneath more of a consumer angle. You’ve got the content repository which could be a little bit mix on both sides. You’ve got the transaction processing a lot of, lot of storage required there. Then obviously big data and also in some of our adjacent that we bought through our acquisition on some of the high performance computing of how we’re go to market. Really addressing some of the enterprise applications and how we look out in that space. Within these applications and workloads we’re also starting to see these huge tectonic shifts going on in the marketplace and they’re happening all over. And whether if it’s at the device level or even at the system level, clearly we’re starting to participate a little bit more in the system level, whether if its all-flash array, top tier what we can deliver, as well as our traditional go-to-market, our key OEMs that we service. But even within that you’d seem some very large acquisitions and couplings of how these companies will go further upstream. And really what’s driving all of that is the different application layers that is then driving that force down, clearly into the device. And so what’s really remarkable here is if I had stood in front of you five years ago and clearly story would have been our story, Seagate story would have been all about HDD. But since then we have hybrid SSD and even some unique accelerator cards of how we’re going to market. And then even within the components level that we’re able to monetize whether it’s magnetics flash, we’ll continue to evaluate next non-volatile memory and then our heavy utilization of DRAM in each of our applications. So this landscape continues to change ever so often. Just as a sample, again if I were to be in front of you approximately five years ago, all I would have been talking about our performance HDDs and capacity HDDs. But clearly this is just a snapshot of what our offerings are today on the enterprise front of which we’re all trying to monetize both these different big growth areas of opportunity within the ecosystem of both of where we view all these application layers changing and then obviously what our customers are asking for it. And so over to the right, obviously highest performance – and then – excuse me, over to the left highest performance and then over to the right we look at the lowest per gigabyte offering. And so you could see whether if it’s our PCIe Nytro accelerators, our SSD SAS offerings into the enterprise machine critical space and then our key performance HDDs, capacity and then some of our archive offerings as well. So of that billion dollar investment that we continue to monetize, and I gave you snapshot of the enterprise space in the slide before, clearly how we think about these items is our highest capacity of how we continue to evolve in and around offering the lowest technology – cost offering in that space. We have at least 10

[Unidentified Analyst:]

[Question Inaudible]

[David Morton:]

Thank you. So the question is can you talk about your margin structure that brought us out of our long-term range from 27% to 32%. So quickly noted and quickly said what we look to is we develop areal density across all of our portfolio. We’re just not solving for one space and we’re going to drive that with leading aerial density, best cost, and then best quality. In doing that we had a solution that came out and we announced it in September of this year, it’s in both qualification and we’re shipping in volume. So we believe we didn’t actually lose market share, we lost exabyte share specifically in one area of our portfolio. But quite candidly, we’re solving for the long-term. And so yes we had a near-term sidestep but from a long-term we’re much better of this, we’ll be able to apply that aerial density technology across our whole portfolio. Yes, you in the back.

[Unidentified Analyst:]

If you talk about your long-term positioning, when you look at Western Digital’s acquisition of SanDisk and you referred to SSDs and NAND being very complimentary. How are you thinking about broadening your own portfolio positioning within that sort of space is that more a partnership model, if you could elaborate on that? Thank you.

[David Morton:]

Yes, thank you. So the question was in and around the WD and SanDisk acquisition, it’s specifically around NAND technology. Good question, we use NAND quite effectively, we have been the premier provider of a hybrid solution. We shift upwards of 20 million drives on that platform already. Lot of you don’t know we ship almost 1% of the world’s TAM on DRAM as well. So we’re fairly scaled in silicon and cell. We’ve had extensive research in and around even the controller sets, which helps us de-rate the data effectively so we get the highest performance on that flash. In and around the complementary aspect, from my view its past memory in storage and in that complementary and specifically in the enterprise space my views are more of a subset that I’ve actually seen CIO’s say, hey one plus one has to equal two. And a lot of it has to deal with the applications and the architecture that I spoke about before. Now if you were to say, you absolutely need to have a fab, I think, that’s where we start to have a debate on what exactly is part of that acquisition or not and how you see that two, three, five years out. For me specifically I don’t think NAND is going to be hard to access in the next two to three years. Me specifically I believe that there’s a lot of changing nodes going on in this space, whether if it’s 2D, 3D, cross-point and so forth. And so I look at more from optionality perspective and then I’ll able to participate and have meaningful relationships with all the other individual supply [indiscernible]. And so I look at as a positioning of having more optionality, we’re seeing versus having leverage to my balance sheet to a double down on one specific solution set. Quietly frankly and what I do want to go on record for is, and where I get really, really pointing in almost to a defensive stake is HDD bought SanDisk for a cliff risk or going on a business. And that’s just where I don’t see that application any truth in that. More to the matter if that were the case then they, I would think they’ve been using their stock to satisfy that versus leveraging up $17 billion of debt and getting that arrangement [ph] in and around that solution and being able to satisfy it. But the amount of cash that HDD companies are able to generate, to afford and to leverage up is amazing. So that’s how I feel about it. So over the next two to three years I look at it as more of this continuing on the partnerships and the unity that we built and continue to deliver top-notch products. And by the way we’re still in this space it’s just whether or not I had to take a big ownership in a fab to have that specific technology or not.

[Unidentified Analyst:]

Yes, the most customers at this point are talking about tier-one storage going on flash, so most customers are talking about tier-one storage going on flash. So can you just sort of corroborate the stability in your 15K business with that trend? Is 15K moving down to tier-two, are there new applications that are making up for that shift?

[David Morton:]

Yes, I think it’s a little bit of both. Regarding the tier-one going mainly to flash, I think it’s two-fold. One, I still think there is an extreme cost positioning that we’re able to deliver with our 15K application. Two, I would tell you that was a lot of legacy systems as well. I mean, you may be step back and understand all the individual companies even offering an all-flash array today, don’t even match total addressable, TAM that’s still available today, that serviced by tape. And that’s because the legacy of the system. So as I would sit and be very conservative on our own financial models also there and look at different take down rates on channel position as you noted. With that said I haven’t seen that existence. And it’s been more about being flat to up, and then even more so when you just compare exabytes to exabytes.

[Unidentified Analyst:]

And then when you think about the SSD opportunity even putting the SanDisk acquisition aside WD you spend more aggressive in acquiring assets. What’s the – is there a philosophical difference and what does it take for you to catch up as it relates to the SSD revenue run rate?

[David Morton:]

Now I think we’ve been very thoughtful about our acquisitions and kind of that that strategy. Post the Samsung acquisition, we bought a great external box builder LaCie. Post LaCie we bought Xyratex and then we bought LSI Boggo [ph] assets from them. And then continued on and just closed on Dot Hill as of October 6, which by the way Dot Hill has an all-flash array. So it’s all about how you go to market and how you’re going to continue to display all the technology that your drives your core has. And so that’s really been our thought process. We’ve been very, very judicious, we’ve been very thoughtful and we’ve gone for low risk, massive accretive, outside opportunities and that’s what they have served. And whether if it’s been the introduction of our PCIe Nytro accelerator cards working with the top tier companies there, whether if it’s been working with ventures or working with joint arrangements with Micron as an example coming out with our own SAS solution set that’s in qualification and will have meaningful revenue in March quarter. And then you know going further upstream in some of these adjacencies more of the system’s group being Xyratex and Dot Hill completing that, continuing to push on the fill rates specifically with our drives, and upsizing that capability, and going either as a co-traveler or in some cases independently on some of these opportunities. So I think there’s a lot of, lot of opportunities that we’ve been harvesting and will continue to do so. That have been more less, much less of a risk venture.

[Unidentified Analyst:]

And then just finally on the PCN market WD talk this morning about abating PC declines is one of the reasons why profits might improve in the industry? Do you agree with that view and what you think the timing is of improving PC trends?

[David Morton:]

Yes, I think last year was definitely a lagger and I think personally I would go to Steve’s thoughts earlier today or WD’s thoughts earlier today. I believe that PCs have stabilized and if anything could be cautiously optimistic coming into next calendar year. So I think we’ve been through all the meaningful product transitions whether if its Win-10 or ramping up or Intel Skylake chip, I think where the inventories were taken down over the last calendar year, specifically for HDDs I think there could be some room for opportunity.

[David Morton:]

Okay, well seeing no more questions. Thank you very much appreciate it.