Conference Call, 04/10/97 Seagate Technology Inc.

FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

Seagate Technology Inc.
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920 Disc Dr.
Scotts Valley, CA 95066
408-438-6550
http://www.seagate.com

WASHINGTON, DC, (April 10, 1997) /FOOLWIRE/ -- Seagate Technology Inc. reported third quarter 1997 results, for the quarter ending March 28, 1997, on April 8, 1997. Al Shugart, Chair and CEO and Donald L. Waite, Seagate CFO, among other corporate officers, attended the conference call to discuss the quarter.

SUMMARY OF QUARTER'S RESULTS. Seagate Technology reported record revenues, net income, and fully diluted net income per share of $2.5 billion, $257 million, and $1.01, respectively, for its quarter ended March 28, 1997. The results for the three months include charges of $16.3 million for one-time write-offs of in-process research and development and compensation expense in connection with additional amounts to be paid with respect to the acquisition of Holistic Systems Ltd. And $8 million for write-offs and write-downs of certain intangible assets related to the acquisitions of certain of the company's software businesses. Without these charges, fully diluted net income per share for the quarter would have been $1.07.

AL SHUGART. "Demand during the quarter was strong, still is strong. Most of our products for desktop and high-performance were on allocation at some point during the quarter. The price erosion is still pretty good, more than last quarter, but in the competition mainly at the high-end, but nothing drastic. We could have ship some more drives -- we were short heads even though the heads ramped during the quarter. Heads will continue to be hand-to-mouth this quarter." There was a flex cable problem early in the quarter that affected production of high-end Barracuda 9s through February. "No other significant component problems -- the desktop chip problem we discussed in our last conference call was resolved earlier in the quarter and wasn't a problem in the quarter."

BREAKDOWN OF REVENUES (IN MILLIONS)

      Q3 97 Q2 97 Q3 96

      $44 $50 $59 Mobile
      $835 $830 $903 Desktop
      $1,398 $1,286 $956 High-Performance
      $92 $104 $66 Tape
      $58 $55 $33 Software
      $48 $53 $63 Components
      $27 $20 $13 Other

      $2,502 $2,399 $2,339 Total

74% of drive revenues were derived from drives above 2 gigabytes, up from 66% in Q2 1997 and 54% in Q3 1996.

Seagate shipped 7.901 million drive units in the quarter, up from 7.719 million last quarter.

The sweet spot for disk drives, from the standpoint of number of units, was 1.2 and 1.7 gigabytes. 99% of drives shipped were over 1.0 gigabytes. 46% of drives shipped were over 4.0 gigabytes.

CUSTOMER AND GEOGRAPHIC BREAKDOWN.

% splits

      Q3 97 Q2 97 Q3 96
      76% 71% 71% OEM
      24% 29% 29% Distribution
      53% 55% 57% North America
      30% 29% 32% Europe
      17% 16% 16% Far East

      INVENTORY BREAKDOWN (IN MILLIONS)

      Q3 97 Q2 97
      $398 $361 Purchased materials
      $112 $156 Work-in-process
      $123 $156 Finished goods

      $633 $673 Total

Inventory turned 11.9 times, up from 11.1 times last quarter and accounts receivable DSO (days sales outstanding) declined by one day from last quarter, to 45 days. The company finished the quarter with 4.5 days of inventory.

CAPITAL EXPENDITURES AND DEPRECIATION. Capital expenditures for the quarter were $212 million and depreciation was $177 million.

HEADCOUNT. The company employed 108,368 people at the end of the quarter, up from 101,649 last quarter and 86,942 at the end of Q3 1996. The company announced profit sharing plan for approximately 100,000 employees.

SHARE REPURCHASE. The company repurchased approximately three million shares during the quarter for about $146 million.

QUESTION & ANSWER SESSION.

The company is still working at various levels with Sony on magneto optical media, but didn't have much to report this quarter. There have been some developments in optical recording that are of interest to the company from a market standpoint.

Cash and marketable securities at the end of the quarter amounted to $2,357 million, up $879 million from last year, which includes $700 million of debt financing and is net of $146 million from share repurchases.

Seagate is producing a significantly greater amount of heads quarter-over-quarter, but that is still short of its requirements. The company anticipates a further ramping of head production in Q4.

28% of drive unit volume was MR head, which represents 36% of head output. From a head distribution standpoint, half of heads produced going forward will be MR and half inductive. The company is dealing with three companies on the outside for heads, but they do not need any more vendors.

Software business was up slightly. The company merged two companies in the quarter -- the storage management group and the network management group. Crystal and Holistic are in the final phases of putting together their integration plan. The company still feels good about 40-50% growth rates for the software business going forward.

Tape revenues were down, primarily related to product transition issues, both in the DAT product line and in the low-end TR-1 and -3 business, which the company is essentially out of. The company is the market share leader with the TR-4 product, which is starting to penetrate not just the workstation market but also server markets. The new DAT product line is in qualification. Overall, the tape product line is healthy, and the company is looking for 20% growth rates here.

Component revenues were down $5 million sequentially. Half of that was in tape heads and half was disk heads, primarily attributable to early-quarter issues with the number of heads the company could ship to OEM customers.

Since all convertible securities have been redeemed, there was no interested add-back in the quarterly fully diluted EPS calculation. The add-back for the nine-month EPS figure was $16.5 million.

Gross margin was enhanced by the software business, which builds gross margin by about 1.5 points. In addition, gross margin improvement came from two sources. The first is the greater high-performance mix, particularly the increasing mix to the >4.0 gigabyte products, although there has been substantial price reductions in that area within the industry. The high-performance area is still a positive on the gross margin scene. Equally as important, gross margins on desktop products improved more quickly than the company believed they would. The company has made the transition to the Conner product with Conner media and internal heads, which showed up in the gross margin line.

Long-term, the company will target higher gross margins, through cost reduction, yield improvements, and new products, to meet capital cost requirements. "It looks to us like 22-24% is probably where we should be looking at for gross margins, not the old 20-22% that I've talked about in the past for drives, just because of the capital requirements and advancing the technology as fast as we've advanced it."

The Elite 23 and Cheetah ramps are going well. In Q3, the company produced more than 40,000 Elite 23. On the Cheetah, the company produced and shipped more than 11,000 units of the 4.0 gigabyte drive. The 9.0 gigabyte Cheetah is coming on this quarter. Those drives are well into their production ramps and are performing quite well.

Internal media was 59% for the quarter. 59% is up from 54% in Q2. The stated goal has been 75% and the company is still inching up 2-3% each quarter.

The Woodlands facility is in production. One line is up and running at volume and the second line, or set of cells, is about to go into volume production. The third cell will not go in until the September timeframe.

The entire $24 million in writedowns was included in restructuring costs and goodwill amortization and not in the cost of goods sold line.

The company didn't want to discuss market share since the data floating around the market is unreliable, but they did say that it would be surprising if they did gain market share during the quarter.

If the company didn't have head shortages, it probably would have shipped a couple hundred thousand more units.

The DLT tape drive technology is owned by Quantum and the company won't pursue licensing of that technology. Seagate will be announcing their plans for the high-end drive market within the next couple weeks. The high-capacity high-performance market is growing and has nice margins. The company believes that it can compete effectively against the cost aspects of DLT with the strategies it is pursuing.

The company believes it can exit Q4 coming close to producing 4 million MR HGAs per week. The company won't average that for the quarter, but total head production is likely to ramp up by 75% during the quarter. Yield improvements and capacity expansion both play into this.

Capital expenditures for year to-date total $639 million. Cap. ex. for the year appears to be closer to $1.0 billion for the year. The company still anticipates $1.0-1.1 billion in cap. ex. for fiscal 1998.

The company feels that its finished inventory in desktops was too low, which was a result of not having enough magnetic recording heads because of a shift in head output to high-end drives from desktops.

There is adequate inventory in the distribution channel. With the OEMs, inventory looks to be low, but the company does maintain just-in-time inventories.

The company sees a much more competitive market in the high-end, which is Seagate's franchise area. The company is seeing Fujitsu, Quantum, and IBM more clearly in the market right now. Business is good, but the market is more competitive than they've seen in the past.

The PC markets appears to be quite healthy and the company believes that that will be the case through the rest of the year.

The company shipped 15,000 fibre channel drives during the quarter, up from 5,000 last quarter.

There hasn't been any recent indication of anyone else introducing a 10,000 RPM product.

Some of the company's projected advance in margins, through competitive advantages, on desktop margins was seen in the quarter.

The company believes it will be at an 80% MR head level by the December quarter.

At one time or another during the quarter, almost every product was on allocation during the quarter -- the company expects to see that again in Q4.

Average selling price went from $280 per drive last quarter to $288 per drive.

The company does not see any pronounced weaknesses in any particular geographic regions right now.

The company believes that, with its vertical integration and product offerings, it is entitled to a larger gross margin and larger market share. The company is not out to initiate a price war

Mobile revenues were down during the quarter, but units were slightly up. The company moved some older mobile drives out of inventory. Long-term, the company is confident that it will be competitive in the mobile market.

Desktop drives did well this quarter because of continuing strength in integrating the Conner operations with Seagate's. This isn't simply a matter of putting Conner disks in Seagate drives and Seagate heads in Conner drives, but the Conner platform is a lower-cost design. The Conner operations in the Far East are allowing for better manufacturing productivity and better time-to-market with the OEM qualification cycle. All of these allow for market share gains without reverting to pricing weaponry to do so.

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