Seagate Tech Q1 '97
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Seagate Tech Q1 '97
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> Q1 1997 Contents
I. Press Release Plus I. PRESS RELEASE PLUS ALEXANDRIA, Va., October 10, 1996/FOOLWIRE/--Seagate Technology, Inc. reported October 10, 1996 revenue, net income and fully diluted net income per share of $2.06 billion, $129 million and $1.06, respectively, for its quarter ended September 27, 1996. This compares with revenue, net income and fully diluted net income per share of $2.14 billion, $121 million and $1.05, respectively, for the quarter ended September 29, 1995. During the quarter ended September 27, 1996, the Company reversed approximately $9.6 million of its restructuring accrual in connection with its February 1996 merger with Conner Peripherals, Inc. The reversal was a result of the completion of certain aspects of the restructuring plan at less than the originally estimated cost. This reversal was offset by approximately $9.5 million in other non-recurring merger-related costs incurred during this period. The results for the quarter ended September 29, 1995 included a one time write-off of in-process research and development of $2.8 million incurred in connection with the acquisition of Sytron Corporation. Without this write-off and its related tax effect, fully diluted net income per share for the quarter ended September 29, 1995 would have been $1.07. Revenue, net income and fully diluted net income per share for the immediately preceding quarter ended June 28, 1996 were $2.01 billion, $101 million, and $0.84, respectively. Without non-recurring merger-related costs and one time write-offs of in-process research and development totaling $42.4 million and their related tax effects, fully diluted net income per share for the immediately preceding quarter ended June 28, 1996 would have been $1.04. The merger with Conner was accounted for as a pooling of interests, and accordingly all prior periods have been restated to reflect this transaction. Components, mainly magnetic recording heads, will trend lower in the future until the company can expand its customer base for those products. Much of the sales increase in software came from the acquired Holistic Systems. Drive revenue above 4 Gbytes was 31% of revenue, matching the percentage from the prior quarter. Inventory came down; most of the inventory workdown during the quarter came out of finished goods. Capital expenditures for the entire fiscal year should approximate $1 billion. The "sweet spot" (where margins are best) was in the high volume products, between 1.2 and 1.6 Gbytes. Almost all products were on allocation at the end of the quarter. Pricing held up "pretty well during the quarter," and was about the same as last quarter. The company purchased 170,000 shares of its stock in the market during the quarter, spending $9 million. Tax rate was 28%, which should continue for the fiscal year. II. FINANCIAL INFORMATION, BY SEGMENTS $ in Millions
Revenues Q1FY97 Q4FY96 Q1FY96
<3 1/2" 20 34 75
3 1/2" 1,727 1,664 1,705
5 1/4" 101 105 137
>5 1/4" -0- -0- -0-
Tape 96 97 104
Software 49 40 30
Components 53 62 81
Other 15 13 9
Total 2,061 2,015 2,141
% Drive Revenue
>2 Gbyte 57 59 44
Inventory Breakdown
Purchased Materials 345 295 377
Work-in-Process 115 139 151
Finished Goods 223 357 151
Total 683 791 679
Inventory Turns 9.8 8.2 10.3
Accounts Receivable Days
Sales Outstanding 46 48 48
Capital Expenditures 208 268 202
Depreciation and
Amortization 121 115 87
Employees Worldwide 90,941 86,659 78,954
% Revenues Splits
OEM 68 66 76
Distribution 32 34 24
North America 57 55 60
Europe 27 28 25
Far East 16 17 15
III. QUESTION AND ANSWER SESSION The company is transitioning into newer products above 2 Gbytes going more towards AT. Those should be coming on line during the coming quarter as the company re-dedicates capacity toward that end of the product range. These products are Barracuda 4 LP and Barracuda 9. Demand at >2 Gbyte remains strong and the company does have the opportunity to improve production in this range though it was on allocation during the quarter. Some of these new products have started to ramp up. The company does not believe that their market position was assailed while high-end production was constrained.
The company is not operating in the 3" form factor market for portables. In 2.5", Chair/CEO Al Shugart expressed disappointment with those sales. There are no plans to implement a 3" program, though the company will be looking at that market.
Everything upward from 1 Gbyte was on allocation in the last half of September and has been on allocation through October. With media, the company supplies 55% of its media needs. It plans to get that into the 70-75% range in the next couple quarters. The new Recording Media Group was successful in qualifying its media into one of Seagate's new high-end products, the Hog XL line and is imminent for qualification on the Barracuda 4 LP and the 'Cuda 9, which use the laser zone textured media. Because of increasing demand, much of the capacity is being consumed desktop products La Paz and Belize. Incremental capacity is being added in Singapore, which should come on line in the next couple quarters.
In the coming quarter, the older Barracuda 4 and Barracuda 2 LP and Elite 9 products will stay essentially flat. They will see a slight decrease for the Elite 9 as the 'Cuda 9, 3 1/2" form factor will take over for the more mature model.
Cheyenne Software is more focused on Netware while Seagate's Storage Management Group is more focused on Windows NT. For the last two years, Seagate has concentrated on integrating their software into a "network and systems management framework," which the Computer Associates buyout of Cheyenne confirmed. In the competitive comparison of the two companies, Cheyenne's sales have come through distributors while CA's sales are made directly, which may cause some transition difficulties for CA at first. On a short-term basis, that is an opportunity, but long-term, CA is a strong competitor that will be pursuing the same business model as Seagate's software model. Between Cheyenne and Seagate, the two dominate the market for storage management software. Legato focuses on the UNIX space. Seagate also competes in the network and systems management spaces, as well as in data access and analysis, or "business intelligence," which is where Cognos and Business Objects compete.
Channel inventories are in better shape than they have seen in a "long time." Industrial distributors are looking for product to have in inventory right now. 50,000 'Cuda 4 LP products were produced last quarter while 36,000 'Cuda 9 drives were produced. The company will be ramping those throughout the quarter. Seagate is looking to bring into production the Elite 23 this quarter. Initial testing and final testing will be happening either late in Q2 or early in Q3. Ramping should begin in January. Evaluation units have shipped with favorable feedback.
Much of the lower range desktop inventory was cleared out at prices favorable to customers, which softened average selling price somewhat. Absent that, ASP has been quite stable. 630 MB drives will be worked off but there is still 850 demand to be taken care of in the coming quarter. The gross margin impact of moving away from those lines will be favorable going forward.
There was a large reduction in accounts payable that was booked just after the quarter ended, so cash flow looked much stronger than necessary working capital flows would actually dictate. Cash balances increased $415 million in the quarter. Share repurchases are still authorized if the company sees that as a good use of cash.
Gross margin of 20-22% should still be achievable for the company.
The company continues to ramp the La Paz 1.2 Gbyte Conner tape product. In the June quarter, 440,000 were produced while 1.9 million were produced in Q4. About 30,000 1.7 Gbyte Belize products were produced and there will be a large ramp-up this quarter.
The company feels positive about design wins for OEMs. Without those successes, the company would not be able to ramp as strongly without OEM acceptances, particularly with the Belize.
Based on the results of certain tax matters pending for the company, they believe they can keep the company's tax rate down to 28% going forward.
In the sub-1 Gbyte business, the company should be doing the same volume of sales in the next quarter.
The company's expense reductions, with respect to the Conner integration, are almost complete.
Hewlett Packard was a major customer for the company's magnetic recording head businesses. Until the company can replace those revenues with a new customer, that line item won't be doing much. The company is well-positioned, though, since there are not many suppliers of magnetic recording heads in the market.
The Barracuda 4 LP and 9 were ultra-SCSI I/O and not fiber channel. Evaluation units went out with fiber channel. Commercial availability for fiber channel should happen in the coming quarter, but there wouldn't be a ramp until the first quarter of calendar 1997.
When the company comes out of the December quarter, about 23% of its output will be on MR heads. By the end of June, that should be in the 40% range. Very little of the desktop line is MR heads. The mobile and high-end segments will transition almost completely to MR heads by the end of the fiscal year. On the desktop, 52520 product is available with MR heads. In the mobile segment, 100% of the products are MR. The company declined to comment on its MR yield. Inductive is still lower-cost right now as compared to MR, though.
The existence of a 3" form factor has not hurt the 2.5" marketplace, in the opinion of Al Shugart. His opinion is that the form factor will not have a significant effect on the industry, and thus, Seagate is not planning anything there.
The lead-time on ASICs has not expanded and the company doesn't see restrictions there.
The company doesn't see much competition from Micropolis or IBM in the 9 Gbyte sector. The company has not seen IBM performing competitively in the distribution channel.
The supply of MR heads could become a limiting factor for the companies without head making capacity. Seagate would like to buy MR from the outside but has not found merchant market heads that match the price/performance factors of the MR heads they produce in-house. Once the market can meet Seagatre's needs, then it will go out into the market for some of its head supply so that the company can participate in the technical community.
The company will probably force conversion of its Conner debentures as soon as possible.
The company does expect growth in the software business, but it has been busy with integrating the ten software companies that it has acquired. Now that that effort is on-track, Seagate expects a return to 15% sequential growth. The tape business' flat revenue growth was expected or even better than expected. Profitability improved greatly for the tape business in the quarter. Because of the goodwill on the company's balance sheet and also due to the company's broad sweep of acquisitions, they do not foresee the independent software company model of profitability happening in the near-term. They are moving in that direction, though.
The biggest component concerns right now are laser zone textured media used with MR heads and also the ramp-up of MR heads through the quarter. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |