Good morning and welcome to the Seagate Technology Fiscal Third Quarter 2019 Financial Results Conference Call. My name is Amanda, and I'll 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 Shanye Hudson, Vice President, Investor Relations. Please proceed, Shanye.

Thank you. Good morning everyone and welcome to today's call. Joining me today are Dave Mosley; Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our March 2019 quarter on the Investor section of our website. We will refer to GAAP and non-GAAP measures, non-GAAP figures are reconciled to GAAP figures in our earnings release for our March 2019 quarter, which is posted on our website and has been furnished on a Form 8-K that was filed with the SEC. As a reminder, this call contains forward-looking statements, including our June quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, 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 the SEC and supplemental information posted on the Investors section of our website. Today's call is expected to be approximately 30 minutes in length and we'll do our best to accommodate your questions following our prepared remarks if time permits. Starting next quarter, we plan to extend our call to 60 minute in the duration. And with that, I'll turn the call over to you, Dave.

Thanks, Shanye. Good morning everyone, and welcome to our quarterly earnings call, which we are joining from Dublin, Ireland. During today's call, I will cover the key highlights from the March quarter, share some perspectives on the market, and outline our progress on advancing our technology roadmap. Gianluca will then discuss details of our March quarter financial results and provide our outlook for the June quarter. Following our prepared remarks, we will open the call for questions. Seagate executed well in the March quarter, navigating challenging business conditions to deliver financial results that met or exceeded our expectations across every financial metric. We recorded revenue of $2.31 billion and achieved non-GAAP earnings per share of $0.83, nearly $0.10 above the high end of our guidance range. Free cash flow increased to $291 million, up 81% quarter-over-quarter and we returned over $0.5 billion to shareholders through dividends and buybacks, demonstrating our long-standing commitment to capital returns. We achieved these results through our focused efforts to drive operational efficiencies, control expenses, and optimize cash flow generation, proactively managing the business in the face of multiple revenue headwinds. In the edge compute market, revenue was impacted by the expected transition to SSDs, ongoing CPU shortages, and seasonal demand slowdown for Notebooks and desktop PCs. In the surveillance market, revenue remained suppressed by economic and geopolitical uncertainties. However, over the long term, we expect the market to grow as camera resolution improves to 8 megapixels and drive the average capacity per drive above current levels of 3 to 4 terabytes. In the enterprise market, both seasonal and macroeconomic challenges weighed on revenue for our Nearline drives. Revenue from a few hyperscale customers improved slightly quarter-over-quarter. However, that revenue did not fully offset the slower demand from OEM and other global cloud customers. As a…

Thank you, Dave. In the March quarter, we delivered strong earnings and free cash flow underscored by our solid operational execution and focus on profitability in the phase of a challenging business environment. Consistent with our expectations, March quarter revenue was $2.31 billion, down 15% sequentially with total shipment of 77 exabytes down 12% quarter-over-quarter. Our results reflect the impact of softer demand from cloud service providers in advance of our transition to 16 terabyte Nearline drives as well as the ongoing global macro concerns and typical seasonality as Dave discussed earlier. Revenue for the enterprise market, which includes Nearline and mission-critical hard disk drives represented 39% of March quarter revenue, flat as a percent of revenue from the December quarter. We shipped approximately 33 exabytes into the enterprise market, down 10% quarter-over-quarter. The vast majority of the exabyte shipments were into the Nearline market. Exabyte shipment for cloud customers were up quarter-over-quarter, which partially offset the decline in shipments to OEMs. The average capacity for Nearline drives hit a new record of 7.2 terabytes, up 11% over the prior quarter. Our 12 terrabyte Nearline drive remained the highest-selling enterprise product in the March quarter. As Dave indicated earlier, we have started to ship the industry's highest capacity 16 terabyte drive in the current quarter and expect to ramp production as customers complete their qualification over the next few quarters. Given the total cost of ownership benefit for customers and expected high reliability of these drives, we believe we are well positioned to capture market opportunities in the coming quarters. We also continue to leverage our existing product portfolio to address customer demand for mission-critical drives, which positively contributes to our margin and cash flow. Revenue for the non-compute market contributed 32% of the total March quarter revenue compared to…

Thanks, Gianluca. In summary, Seagate is executing well on multiple levels. We are driving operational efficiencies by managing our cost and capital investments to align with near-term industry conditions, and optimize profitability and free cash flow. We are harvesting HDD opportunities and markets with low exabyte growth such as mission critical drivers which contributed nicely to our bottom line particularly during these slower demand periods while requiring no R&D investment. We are executing our technology roadmap and leveraging our 40 plus year heritage of innovation and expertise and precision engineered data solution to introduce new products with the higher areal density, quality and reliability to address our customers' future mass storage requirements. We believe the near-term industry headwinds we are experiencing will abate in the coming quarters and the long-term growth trajectory of mass storage demand provides a rich set of opportunities for Seagate. Data hungry applications are fueling demand for high-capacity storage in both public and private clouds. Looking ahead to fiscal 2020 we expect the exabyte TAM for Nearline drives to be well above the long-term CAGR of 35% to 40% importantly, Seagate's strong technology portfolio and customer relationships, make us well positioned to capitalize on this growth. Before opening the call for questions, I'd like to thank our customers, suppliers, business partners and employees for their ongoing support and contributions to the success of our business. Gianluca and I will now open up for your questions.

[Operator Instructions] Our first question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.

Thank you. Good morning. How do you think about the gross margin trajectory as demand comes back? If we see stronger cloud and surveillance demand in the September quarter, would you expect gross margins to be in the 29% to 33% long-term range or does it take a couple of quarters to expand back to the target model?

Hi Katy, I'll pass it over to Gianluca in just a second, but what I would say is -- what I talked about last quarter was, if gross margins as we went through these digestion phases, if we got out of the period of factory under-utilization faster, then we might see expansion. I think what we're seeing right now is rather a bit of a build ahead for the fall. I mean, we've got these product transitions going on, which I think is weighing us down just a little bit. Otherwise, we would have snapped back a little bit faster. I'm sure if the cloud comes back faster than we're anticipating right now, which we are starting to see signs of it in the back half, then I think we should be able to get back into the range. And I think I've said this before that our [indiscernible] is not gross margin percentage either. We were in the January timeframe when we last spoke to everyone. We were really focused on free cash flow, just making sure we watched our cash very carefully, make sure we weren't holding too much inventory and things like that, so, you know, that may have actually hindered our ability to move a little bit extra product in this last few months. Again, I'd say that's towards the conservative side on my part, but that's how I think about the gross margin. Go ahead, Gianluca.

Yes. Last earnings release, we said that we were expecting about half of the gross margin decline quarter-over-quarter to be related to lower volume produced, and we still expect more or less the same impact in FQ4. Our volume in FQ4 will be a little bit higher. But, at the same time, we are building more capacity in our factory in order to take advantage of the second part of the calendar year where we expect more demand to come in. So, the impact of under-utilization charges will be more or less the same in Q3 and Q4.

Thank you.

Thank you. Our next question is from the line of Mitch Steves of RBC Capital Markets. Your line is open.

Hi guys, thanks for taking my question. I just had a question more on the PC side of the business. It sounds like you guys are seeing some weakness due to CPU constraints, is there any way to help us quantify what that impact is? And then secondly, when you think that will be an upbeat since it probably impacts the results on the hard disk drive side?

Yes, Mitch. I would say it's against the backdrop, like we talked about in the script of all the SSD incursions, natural transitions, especially for the lower capacity stuff. So in what we call the enterprise, sorry the edge compute markets, you're seeing some low capacities 500 gigabytes or 1 terabyte, and then you're seeing some high capacity, some bifurcation if you will to 2s and 4 terabytes. Where the CPU constraints are a problem usually are of smaller players, so the long tail, if you will, distribution channel I think would be a good way to think about it. In the distribution channel, there are some people still making the lower capacity disk drive products, but very few, I think they tend to be much more entrepreneurial. I talked about this a little bit last quarter. We still haven't seen the healthy channels just yet. So while, weeks on hand are fairly healthy on a relative basis, I look at the absolute value of the channel, and it's not as strong nearly as it was just a couple of quarters ago. And that includes the higher capacity stuff, which should be some of those new markets and creative new markets. So, you know, my perspective is this will start to come online as well through in the back half of the year, but it really hasn't built up as much momentum as I expected in the January time frame.

Got it. And just to clarify, is that impacting the margin line, the gross margin line as well, given that prior under shipping demand [ph] a bit?

To the extent that we have more product to be absorbing our factories, the answer is yes. And, you know, the distribution channels, some of them tended to over time provide some nice outlets at low capacities and high capacities, so it would be nice to get some of the high capacity stuff moving again.

Got it. Thank you.

Thank you. And our next question comes from the line of Ananda Baruah of Loop Capital. Your line is open.

Hi. Good morning, guys. I guess good afternoon for you guys. Dave and Gianluca, thanks for taking the question. I guess, just real quick a couple from me. So Dave, is it safe to say that since we're sort of 90 days further through the calendar that you feel that we’re sort of confident about the hyperscale picking back up as we get into the second half of the year? I guess from just a quick second part to that, with regards to your comment about fiscal 2020 demand, how long do you see, I guess this is all kind of -- just got at this point, but how long do you see, how long are you hopeful that this next cycle can last once you get started? Thanks.

It's interesting. So a couple of points. So, I think on the February call, we were just coming off of a fairly disturbed pull dynamics that were going on all the way through December. And the cloud was one aspect of it, not the only one obviously. It was fairly global. It's also got a long tail. It's not just one CSP or 3 CSPs or something, but it's also the smaller build out. The reason we have confidence in the back half of the year now is we're starting to see some of the data center build out that was anticipated, say 6 months or 9 months ago to be discussed again, the exact same datacenters again, especially globally. And then we also think that there has been some inventory readjustments that have gone on for the last 6 months. There will be an anticipation of moving to higher high-capacity drives with better total cost of ownership propositions out on the back half of the year. So, we're feeling a lot more confident that we were there talking to you in February, for sure. As far as the next cycle, this one's been a little bit more pronounced than the last one that it feels that way, and it's been more global and it's been touching as we reach out through OEMs and ODMs who are helping do the builds, it's been much more broad based than the last one. The last one came back pretty quickly, because of the world turning on at the same time, we're hearing roomers of all this, but I still wouldn't say strong, but it feels like this would maybe a bigger peak in exabytes but much wider, I'd say that way, because, just because there would be a little bit of trepidation.

That's helpful. I'll stop there and see the floor. Thanks so much.

Thanks.

Thank you. Our next question is from the line of Kevin Cassidy of Stifel. Your line is open.

Thanks for taking my question. On the 16-terabyte what are the unit volumes, how did that compare to last year and any other new product ramp?

Thanks, Kevin. Yes, we like this platform quite a bit, there is, we get through a lot of transitions to your point, different drives going from 6 to 8 to ten to twelve to fourteen, we've had different drive platforms. This particular platform for us will take us 16 and 18 with SMR and other variance it will take us beyond 18-terabytes and probably into the HAMR families as well, because HAMR is basically dropping into this when we are ready. So we feel very comfortable with our ability to yield and ramp this product. It's gone through all its internal qualification testing really well and so that's why we are fairly aggressive about it. I think it's going to be a pretty steep ramp as well. So, in the last couple of months, just giving lead times for largely the head wafers that are required for that, that's where we have focused a lot of our efforts internally. My senses as well that given some of the pause that's gone on in hyperscale and other places around the world that the value proposition of 16-terabytes versus maybe 12, it was thought of 6 months ago when the fall started, it's pretty substantial. And I think we'll start to see those revenue ramps in early, fiscal year 2020.

Okay, great. Thank you.

Thank you. Our next question is from the line Aaron Rakers of Wells Fargo. Your line is open.

Yes. Thank you for taking the question. Kind of building on the high capacity Nearline drives, one of your competitors kind of notes as far as in the context of visibility kind of stocking relationship and visibility and from an inventory, even getting paid the wholesome inventory for some of the hyperscale customers. So I'm curious that how do you characterize your visibility? Do you have similar relationship as that ? And then also how would you compare 16 terabytes competitively versus the competitors that you see and when they might come into market? Thank you.

Aaron, the second question first. I don't really, we believe, we are in the lead on 16 terabytes and the families that go on along with it with different SMR variance and things like that. It's like, it seems, I don't have very good visibility beyond there as far as when people are going to be able to ramp. All I know is, we're ready to ramp. Relative the stocking, I do think there are a few customers that have such huge scale that they start talking like that, other customers are much more opportunistic and it's been a buyer's market recently. So we were, like I said, earlier, we were 90 days ago, we were really watching our cash and controlling our bills very, very carefully to make sure we didn't carry too much inventory. If we had pushed out more of the lower capacity drives in anticipation of higher capacity, I don't if that serves us right either, so that's the way we are thinking about it, if that helps

Okay, thank you.

Thank you. Our next question comes online of Jim Suva of Citi. Your line is open.

Thank you. In your prepared comments you mentioned an improving demand environment in the second half whereas the year progresses, is that based upon older trends that you're seeing or more anecdotal of customers sweating or using their assets a little bit longer just trying to help figure out the conviction level of that rebound in demand?

Jim, it's, interesting because I think there's a little bit of both of what you said. The first is people know that they're going to be making the investment for 5 or 6 or 7 years when they buy the next product, so, they'll wait to get the right TCO proposition, that's, these are more hyperscale and global hyperscale comments. I think relative to my earlier comments about some of the channels have been disrupted, there were lots of liquidity issues especially among smaller players, more entrepreneurial people were trying to do edge build out, very application specific items and because of that I think the market has been pretty choppy, we're starting to see our way through that, people are coming back to those plans again, as we all know data will grow and some of these new applications will take off. So, but I think given some of the issues the world was having back in the December time frame we just didn't have very good visibility in them, so we're still expressing confidence against this next cycle.

Thank you so much.

Thank you. And that does conclude our question-and-answer session. I'd like to turn the call back over to Management.

Thanks, Amanda. I want to once again thank all of our employees, customers, suppliers and business partners for their contributions to our third quarter performance. And thanks to our shareholders for their ongoing support. We'll talk to you next quarter. Thank you.

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