Seagate Techn Earnings Call Nuggets: Enterprise Weakness and OEM Inventory

On Wednesday, Seagate Technology PLC (NASDAQ:STX) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Enterprise Weakness

Robert Shearer – Evercore Partners: I just wanted to ask a question on the enterprise weakness or shortfall in the September quarter and continuing through the December quarter, maybe Steve or whomever, how much of that you think is the market because you did cite Europe, and how much of that was inventory drawdown and where we are in that inventory drawdown process?

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Stephen J. Luczo – Chairman, President and CEO: It’s the right question and unfortunately it’s a little hard to seek. I think the third element that’s probably playing into that is the architectural changes as well. We’re definitely seeing more customers that are building various types of either private or public cloud infrastructures that are purchasing systems maybe away from the traditional OEMs, whether or not they’re going directly or whether or not they’re maybe buying architectures from smaller startups, but I think it’s the right combination between people that acquired inventory in the March and June quarters in anticipation or concern around recovery still in enterprise from the supply chain disruptions caused by the flood, combined with the slowdown. So I think there is an inventory overhang that’s still being addressed and then there is also I think some competitive issues where certain of the OEMs, maybe just not having the sell through that they felt they were, which may be related to macro or maybe competitive issues, but it’s definitely a combination of the three things of a changing customer base that’s responding to a new architecture, and then inventory absorption as well as. I do think the macro impact is significant, though I have been a little surprised that the European situation hasn’t kind of shown its (head) earlier, just because as you know most of the enterprise companies still have somewhere between 25% and 40% of the revenue exposure in Europe. Which is different than the client side or consumer technology companies.

Robert Shearer – Evercore Partners: I guess everything you just said do you think that applies equally to mission critical and business critical or is this most of that more mission critical?

Stephen J. Luczo – Chairman, President and CEO: I think it applies equally I think probably the comments around cloud service providers and architecture is probably more of a near line business critical point than mission critical. But I think that basically was inventory buying on near line as well, again a lot of the OEMs feed to cloud market is well right. I think it applies to both of them.

OEM Inventory

Keith Bachman – Bank of Montreal: Steve I just want to try to get your take about the OEM inventory I know if you talked a little bit about inventory more broadly, but specifically at the OEM and the channel and then I had a follow-up please?

Stephen J. Luczo – Chairman, President and CEO: I think there is two levels of inventory obviously at the OEMs right, one is the device level inventory and then the other is the system level inventory. And I think the comments I just made I think at the device level I think there was probably a fair amount of volume really in the June quarter with still some concerns around the recovery of the drive industry. Then I think that volume happened to coincide with the slowdown that really started at the tail end of the June quarter to me 2012 feels a lot like 2010 where we started getting this roll over in May and then things never recovered for the rest of the year. I think for the OEMs that we’re buying in inventory and then things started slowdown and it’s always little confusing in June when things slowdown because it’s a summer and that’s a typically slow period anyhow and you hope it recovers in September. We really didn’t see that recover and I think people clearly are grasping the macroeconomic issues a little better now as being more significant than maybe we thought three, four, five months ago. So, I think at the OEM level it’s a combination of a lot of system inventory and initially in the summer and device inventory, and then I think probably trying to (bleat) down that inventory in anticipation of Windows 8, clearly people are trying to get lean on how many of the old systems they’re carrying in order to be prepared to ramp as Windows 8 is released. Then depending on the robustness of demand to Windows 8 I think they’ll be able to respond. So, again I think it’s a similar story, there is different reasons maybe more related to Windows as opposed to cloud architecture changing.

Keith Bachman – Bank of Montreal: But in terms of just run rates do you feel like their finished goods inventory and/or channel, is it a point where the ships of your drives will match whatever their demand is, so do you think things are kind of even out I know it’s hard to see.

Stephen J. Luczo – Chairman, President and CEO: I think the channel actually feels better to me if you’re talking about the distribution channel with respect to device level technology feels better. Our position is about 1 million units less than it was last quarter and then within our range of four to six weeks, I’m not that concerned about the distribution channel. I think in the OEMs there is depending on the customer there is probably still some work to be done. I would say at the margin I wish inventories at the customer level were a little lower both on the systems side probably and the device side, so again that’s one of the reasons that’s weighing on our flat TAM assumption, I think probably end user TAM is actually probably going to grow by low single digits or maybe even mid-single digits, but I still think there is inventory adjustments to be happen.

Keith Bachman – Bank of Montreal: My follow up then I’ll leave the floor. Steve you mentioned you thought ASPs in the March quarter would be flat. I just wanted to see if you could flush that out a little bit, it would be unusual relative to history for those March quarter ASPs to be flattish, just curious a little bit of feedback?

Stephen J. Luczo – Chairman, President and CEO: The difference in history I suppose is the structure of the industry, so I think the major point that we’re trying to convey is. This quarter is when we negotiate prices for next quarter, so if you think about it in reverse for the quarter we’re in now, we negotiated those prices in September or late August and I would say that I kind of feel that the December pricing probably got away from us, just a touch with the demand falling off as much as it in September and trying to I think recognize what was the real TAM going to be for the December quarter, I think the industry and probably our customers were hoping that it was going to be more in the 150 or 155 range. So, I think the industry is probably recognized that the March quarter is likely to be pretty flat too or maybe marginally up and that we’re really not going to buy TAM with pricing, so I think we’ve obviously got the pricing levels that are as low as we want to see in before bumping on the bottom end of our range. So, it’s important for us to make sure we maintain discipline going forward, so we can get our R&D and capital investments where we want for the long term, so that’s the way we’re going to approach the March quarter.

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