Good morning, and welcome to the Seagate Technology fiscal first quarter 2019 financial results conference call. My name is Liz, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. 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.

Thank you. Good morning, everyone, and welcome to today's call. Joining me today from Seagate's executive team are Dave Mosley, Chief Executive Officer, and Kate Scolnick, Interim Chief Financial Officer. We have posted our earnings press release and detailed supplemental information for our September 2018 quarter on our Investor Relations site at seagate.com. During today's call, we will review the highlights for the September quarter, provide the company's outlook for December quarter, and then open the call for questions. 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 December quarter, we would like to note that our quiet period will begin on December 17. On our call today, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in our earnings release for our September 2018 quarter, which is posted on our website and has been furnished on a Form 8-K that was filed with the SEC. We have not reconciled our non-GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort. As a reminder, this conference call contains forward-looking statements about: the company's anticipated future operating and financial performance; customer market demand in the current macroeconomic environment; industry growth and trends; our technology and product shipments, developments, advancements, and our ability to achieve volume shipments for new products in 2019; demand for our products; continuity of access to long-term NAND supply; the expected return on our investments; ability to execute our roadmap and address supply constraints while maintaining an agile manufacturing footprint; potential impact of trade barriers, such as import/export duties and restrictions, tariffs and quotas; and the general market conditions. These forward-looking 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 the company's SEC filings and supplemental information posted on the Investors section of the company website. I would now like to turn the call over to Dave Mosley. Please go ahead, Dave.

Thanks, Jingjing. Good morning, everyone, and thanks for joining us for today's earnings call. I will cover the high-level results from the September quarter and offer some market commentary. Kate Scolnick, our Interim Chief Financial Officer, will then discuss certain financial highlights from the quarter, and then I will wrap up with our outlook for the December quarter. Following our prepared remarks, we will open the call for questions. For the September quarter, Seagate delivered 14% year-over-year revenue growth, 78% year-over-year growth in non-GAAP net income, and 148% year-over-year growth in cash flow from operations. These strong results were driven by 41% year-over-year growth in exabyte shipments, reflecting persistent global data growth trends and demand for Seagate's mass storage solutions. As data-centric applications continue to proliferate inside the global digital economy, strong exabyte growth trends will continue in multiple markets for the next decade. Seagate is a critical supplier to the companies, institutions, and entrepreneurs that are driving value from the massive opportunity in big data analytics, AI, smart cities, machine learning, and other cloud-based architectures. Additionally, our edge product portfolio is delivering tremendous value to a growing consumer landscape in video content creation and analytics, best represented in the gaming and entertainment arenas. Developing our product portfolio to intercept these trends has resulted in strong exabyte growth over the past several years, and we expect these trends to continue. We are leveraging our 40-year history of innovation in the storage industry to introduce new precision engineered technology advancements, including multi-actuator designs, security, video, and cloud-specific feature sets, all to meet economical next-generation capacity and performance requirements for our customers. In September, we launched the industry's broadest portfolio of 14-terabyte hard drives for NAS, desktop surveillance, and hyperscale data center applications. This purpose-built portfolio empowers customers to consume, manage, and…

Thank you, Dave. Seagate executed well in the September quarter against strong market demand. We achieved revenues of $3 billion, up 14% year over year and up 6% sequentially, consistent with our expectations. Hard disk drive revenues were up 17% year over year, and we are confident that our portfolio is well positioned to monetize cost-effective storage demand. For the enterprise hard disk drive market, we shipped 45.5 exabytes, up 67% year over year. In the nearline market, we shipped 42.5 exabytes, and our average capacity per drive exceeded 7 terabytes per drive, up 30% over last year and up 52% from the September quarter two years ago. In addition, we saw stronger than expected demand for our mission-critical portfolio that resulted in 42% year-over-year exabyte growth, with average capacity per drive over 1 terabyte. Cloud-based enterprise storage demand in the September quarter demonstrated strong year-over-year growth, but was slightly lower than we anticipated sequentially. As nearline storage capacity demand grows over the next several years, we expect continued opportunity for our mass storage portfolio that delivers multiple capacity points for different application workloads. Our 10-terabyte nearline product continues to be the leading enterprise revenue SKU for Seagate, and we achieved significant sequential volume and revenue growth in our 12-terabyte nearline product. Our highest capacity 14-terabyte products also started shipping this quarter. In the edge verticals, we've had year-over-year exabyte growth and increased average capacity per drive for nearly all end markets in the September quarter, including desktops, surveillance, DVR, gaming, network-attached storage, and consumer. In our mature markets, we remain active in minimizing our exposure to the sub-1-terabyte client, consumer and mission-critical 15K markets, as we believe these application workloads will move over time to either silicon-based memory or cloud storage, where we have or are developing portfolio offerings.…

Thanks, Kate. As many other IT companies have noted in their recent earnings reports, we are exercising caution in our immediate forecast due to political, regulatory, and foreign exchange uncertainty around certain areas of the world. As in the past, we believe these perturbations to be temporary, and we will still see fairly healthy exabyte demand in most markets in the December quarter. As I outlined earlier, we anticipate nearline HDD demand will decline sequentially from Q1 due to immediate drops in demand with most of the cloud service providers and given some uncertainty in the China enterprise marketplace. Previously, we were not forecasting these dynamics to occur in Q2, and we are adjusting our build plans accordingly. We anticipate edge market demand to be mostly consistent with higher seasonal demand for consumer products and lower seasonal volume for gaming consoles. Our non-HDD revenues are forecast to be relatively flat quarter-to-quarter for systems, and our SSD revenues will be up double digits, sequentially. We expect total revenues in the December quarter to be in the range of $2.7 billion to $2.75 billion. As always, we will consider intra-quarter upside opportunities that make sense for our long-term portfolio profitability. We expect gross margins for the December quarter to be at the low end of our 29% to 33% long-term range, primarily reflecting the lower demand for nearline HDDs. Operating expenses will be relatively flat, sequentially, and we are actively implementing incremental expense controls. We are committed to controlling operating expenses within our long-term financial model range of 13% to 15%, even in this challenging environment. Capital expenditures will remain at approximately 6% of revenue to support product transitions that we have planned for later in FY 2019 and beyond. For the fiscal year, we are forecasting capital expenditures to remain slightly…

Our first question comes from the line of Karl Ackerman with Cowen & Company. Your line is now open. Karl Ackerman - Cowen & Co. LLC: Hi, good morning, everyone. Thanks for taking my question. In the context of your comments on cloud customer buying patterns, I'm just curious. What processes have or are you currently working on with your customers that can improve the long-term visibility of their purchasing patterns, particularly given the long lead times for your enterprise drives?

Karl, that's a good question. There are long lead times of internal components, of course, and even some of the external components we have to procure. So relative to interlocks with the customers, I think those generally go pretty well. This recent demand fallout happened fairly systemically, many, many different accounts we talk about. And basically – quickly, it wasn't something that we'd ever seen as quickly before. So in these typical digestion phases, I think this one was fairly pronounced. I think long term the growth in the cloud is still there, still very strong, and qualification cycles will come back really strong at the next capacity points as those higher and higher capacity points offer better TCO propositions for them. But the ability to forecast the tactical reductions and things like that is still not where we want it to be. Are there other things that we can be doing longer term? I think so. Our portfolio is fairly complex, and I talked about that a little bit in my comments. And so I think simplifying the portfolio a little bit will allow us a little bit more flexibility. We just got caught in the middle of these product transitions, and that wasn't an option this time. But I think we'll make progress on that next time. Karl Ackerman - Cowen & Co. LLC: Perfect, thank you.

Our next question comes from Joe Wittine with Longbow Research. Your line is now open.

Hi, thank you. Dave, is it possible to provide some context of this digestion period as you see it for nearline compared to similar periods in the past? Today, are you merely seeing the CSPs growing into those robust fiscal 2018 investments you referenced, or are there also efficiency techniques in play? I think that was mentioned by one of the larger players earlier in earnings season. Thanks.

I think they talk about efficiency all the time. I think some of those techniques that they're using have diminishing returns. I do think that the buying pattern was so strong that there was probably a little bit of overbuying, and so you'll have to wait at certain accounts for them to blow through that inventory. The root of the problem, as I talked about the last problem that we had in the last digestion phase, if you will, that largely came because there were a lot of changes in component pricing quickly, and the changes in component pricing really put some of the builders upside-down. I think this one is a little bit different, but it does have to do with supply chains being a little broken right now for many components. And I think we're going to get through it fairly quickly as well. I don't think it's so much about those efficiency gains right now, Joe. That's my read from today. And I do think that there are some elements of hard drive availability at 12 terabytes. They know 16 terabytes are coming. They see the TCO proposition of those new capacity points and things like that that may actually delay through these periods as well. So we factor all these things in. To your point exactly on how big is this one relative to the last one, so our baseline that we believe we're hitting as an industry is higher than the last digestion phase, and that one was higher than the previous digestion phase. But then the run-up that we have to prepare for is very profound, and you've seen that in our financials as we come out of those digestion phases and go back into growth phases. So as far as predictability, I wish we could be better at it. But I think there are a lot of economic factors and other things that are playing in. We're just going to do the smart thing through this digestion phase and get on to the – and be prepared for the growth when it comes.

Got it, thank you.

Our next question comes from Katy Huberty with Morgan Stanley. Your line is now open.

Thank you, good morning. Given the multi-quarter cloud digestion, some of the macro uncertainty in supply chain dynamics, do you have a view yet as to whether March revenue could be down more or less than normal seasonality? And is there a risk that margins could dip below the 29% to 33% range in the short term as a result?

Yeah. I'll let Kate talk about that. We've been forecasting that, Katy. My sense, at this point, is that the revenues may be a little bit impacted into March and even further out because this digestion phase may take a couple quarters to sort out. Relative to margins, I think we can absorb a lot of things internally and manage things internally to stay inside of our range. But it's challenging because those nearline products are very content-rich, to your point. So I think we're going to take as many cost actions as we can to stay in the range. Kate, did you...?

Yes. I think what Dave said, in that we expect revenue to be down, but the gross margin to be within our long-term range.

Okay, thank you.

Our next question comes from Ananda Baruah with Loop Capital. Your line is now open.

Hey, good morning, guys. I really appreciate you taking the question. I have two, if I could. Just sticking with hyperscale dynamics, cloud dynamics into the March quarter, are you guys able to get a sense or visibility or an intuition around what exabyte shipments might do in March and June, at least in March? It sounds like you're saying, guys, that you expect them to decline slightly or somewhat maybe potential for that in March. But have you gotten any anecdotal feedback, yet, from the hyperscalers that you can share with us to allow us to develop some context ourselves? And then, I have a quick follow-up. Thanks.

Yeah, Ananda, so I think that the push-out of some of the transitions and the fact that they will be a little bit more muted through these periods will affect the exabyte shipments. We saw very strong exabyte shipments, for example, in Q4. And then, going into Q1, the cloud actually started. At the very end of Q1 this started. So like I told Katy, I don't think we'll necessarily be done with that by Q3. Now, other segments are growing. So the edge segments continue to move up from 4 terabytes to 6 terabytes to 8 terabytes. We see good impact there. So I think net-net is some of the cloud demand impacts will be offset in exabyte growth by other segments. But I think we're just going to have to watch it and adjust our builds accordingly through those periods.

Okay, I appreciate that. And just a real quick follow-up is, just on the OpEx, it sounds like there's things you're doing to keep the gross margin 29% – 29%-plus. On the OpEx, do you guys think about reducing OpEx levels, yet? And if not yet, what would be the signposts for doing that? Thanks.

I would say we're taking the opportunity – because of this softness in demand, we're taking the opportunity to make sure that everything we're doing near term that we're going to get rewarded for in the longer term. Obviously, some of these decisions we're making are out over the next year or two years. But against that different demand environment and where the product qualifications will change relative to the demand environment, I think we have opportunity to go save some money, and we'll go do so and make sure we don't spend too much money into those things. I think, from my perspective, this is normal course. Had we seen the demand stay high, we might have continued to invest into those and make sure we get all of those qualifications done because you get rewarded for it in that higher signal and you can get through the product transitions, which helps your costs and so on. I think it's better to hunk down on some of the swim lanes. There's other swim lanes that are doing fine through these periods, but it's better to hunker down and save the money now and make sure that you can flow that to the bottom line.

Great context. I appreciate it, thanks.

Our next question comes from Steven Fox with Cross Research. Your line is now open.

Thanks, good morning, just one question from me. Given everything you said, it sounds like, obviously, you're not going to be as tight on media and heads going forward. So how do you manage that supply in order to maintain the industry discipline you've shown over the last few years? Thanks very much.

Steven, that's actually a very interesting question. Process content continues to go up in heads, and we continue to ship more heads per drive. Even though the demand may be down a little bit, the demand for heads is still staying fairly consistent. And we really want our factories to be full. We want to use the highest process content that we can. So from a heads perspective, we anticipate full factories. And we're really happy with the way we've managed our footprint. Media, I think we have a lot more flexibility. And then final drive inventory, we'll watch it very carefully because we're watching cash through the period as well.

Thank you.

And our last question comes from Aaron Rakers with Wells Fargo. Your line is now open.

Thank you, two questions real quick, if I can as well. Going back to the discussion on the cloud demand dynamics, I'm just curious. As you look at that customer base, can you give us any kind of quantitative or qualitative commentary around how concentrated you are or how diversified you are within that customer base? And what I'd also like to understand is, how do you actually get visibility into what they're doing – or holding, for that matter, from an inventory perspective?

So I think I had expressed some confidence in – when things were strong a couple quarters ago, Aaron, that the reason it was strong for us is because we were diversified. I think the general demand reductions have come across a diverse set of customers. It's not just at one account or two accounts. And that's global as well. I don't really want to quantify it at this point. But you can see it in the revenue projections right now and how impactful it is to us. I would say that as far as visibility, I think this is the question that Karl or Joe asked earlier as well. My sense is that there's not a whole lot of visibility to this early. So some people have claimed that they saw this coming three months ago or four months ago. I don't see it as much. And in talking to the customers. I don't believe that they did as well. They saw signals and then they backed off of some of their plans. We stay tight with them, and we trust that those conversations are pretty good over the long haul that ultimately this demand is going to come back. And like I said before, they'll be back probably looking for the higher capacity drives because those are a better value proposition in their data centers. If you think about it, if you're going to make an investment in data centers, you want to use the highest capacities you can and put those – plug those drives in for five years. That's the best TCO proposition you can find. So they have to manage those transitions as well. And I think, as we all take a little pause here, then we're going to look to align that way and get ready for the next plug.

Great. And as a second question, I'm just curious. On the silicon front, how do we think about the supply that you're getting today on the silicon, the supply arrangement that you have? And is there anything going forward that brings on more supply that we should think about of starting to really drive an appreciable revenue stream? And then on top of that, what's the margin structure of that business, say? How should we think about that?

So I had said before that – I had commented that we were going to be pretty aggressive. Obviously, the market dynamics have changed a little bit. We don't have a take-or-pay, right now. That's not a good way to think about it. So especially because we see a lot of – we see too much inventory in certain channels, remember, we're exposed largely to enterprise SSDs, not consumer-grade and things like that. But we'd still see too much inventory in some channels. We won't bring on as much NAND in order to build our products to compound that problem. We'll be patient through that period of time. So that affects our revenue projections a little bit. But the customer qualifications, the customers who like who products, they'll continue to pull, and I think we'll get back on our horse. We have access to ample NAND to grow to the levels that we had talked about before, which is doubling revenue every quarter – sorry, every year for the foreseeable future. So I'm not worried about supply from that perspective. I'm more worried about the industry dynamics.

And margin?

As far as margin goes, I think it will be probably a little dilutive to Seagate gross margins till we get it running properly, but it's very – it's cash that we really like, and it's a very good flexible model. So we're happy with it.

Okay, thank you.

Okay. Thanks, everyone. I want to once again thank all of our employees and customers, suppliers, and business partners for all of their contributions in the first quarter. And we'll talk to you next quarter. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.