FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

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

ALEXANDRIA, Va., (July 14, 1997)/FOOLWIRE/ --- On July 11, 1997, Seagate Technology reported revenue, net income, and fully diluted net income per share of $1.98 billion, $59 million, and $0.23, respectively, for its quarter ended June 27, 1997. The results for the three months include charges of $153 million as a result of the adverse judgement of the Amstrad PLC v. Seagate Technology litigation and $2.5 million for restructuring costs in the company's Seagate Software subsidiary. Without these charges and their related tax effects, fully diluted net income per share would have been $0.61.

Al Shugart, CEO; Donald L. Waite, CFO; Ronald D. Verdoorn; Executive Vice President and Chief Operating Officer, Storage Products Group were on the conference call to discuss the quarter's results.

UNUSUAL EVENTS IN THE QUARTER. The judgement in the Amstrad was sealed today in London. We have a 28 day period in which to file a notice of appeal, which we will file.

There is also a paragraph in our press release about a matter with the U.S. Internal Revenue Service. We have just received a notice of deficiency for the years 1991 through 1993 for approximately $38.5 million plus interest as well as approximately $5.7 million in penalties. We will be contesting this assessment and it will probably be some time before we know what the final results are.

Also in the press release was a mention of foreign currency exchange exposure, for which the company will take a $25 million charge against earnings to account for the devaluation of the Thai Baht. The full statement is included at the end of the conference call synopsis.

REVENUE AND INVENTORY BREAKDOWNS. Revenues from mobile products were $36 million, down from $44 million in the prior quarter. Desktop drive revenues were $703 million, down from $835 million in the prior quarter. High performance drives were $1.05 billion, down from $1.398 billion last quarter. Tape revenues were $76 million, down from $92 million; software revenues were $56 million, down from $58 million; components were $40 million, down from $48 million; and "other" was $16 million, down from $27 million. Total revenues for the quarter were $1.977 billion.

The split between OEMs and the distribution channel for the quarter was 69% (down from 76% in the prior quarter), and distribution accounted for 31% of revenues (up from 24% in the prior quarter).

Geographic composition of revenues: N. America, 54% of revenues, up from 53% last quarter; Europe, 29%, down from 30% in the prior quarter; Asia/Pacific, 17%, equal to last quarter.

Total number of drives shipped in the quarter was 7,096,000 drives. Days sales outstanding was 48 days.

Inventory at the end of the quarter was $808 million, broken down as follows (in millions of dollars):

$359 Purchased materials
$134 Work in process
$315 Finished goods

Inventory turns were 7.5.

CAPITAL EXPENDITURES, OTHER INCOME STATEMENT ITEMS, SHARE BUYBACK. Capital additions for the quarter amounted to $281 million. Depreciation and amortization totaled $159 million. Worldwide employment at the end of the quarter was 111,446. During the quarter, we repurchased about 5.5 million shares. We also announced in a press release during the quarter that the board has given us approval under certain conditions to repurchase an additional $600 million worth of stock.

PRICING AND MARKET SHARE. Pricing erosion during the quarter was worse than in the third quarter, but not much worse than anticipated.

We did lose some market share in high-end products, about 4-5 percentage points of market share, which was expected, as our market share in the high end has been about 60%. We have seen some slowdown in the high-end market. At this time, we cannot determine how much of it is end-user slowdown versus inventory reductions by major OEMs. Inventory reductions will effect us more than anybody else because we have the largest market share. On the desktop, demand is still good and was good throughout the quarter. We have had some issues with production. Most of those issues were component availability, which probably will end up costing us one or two percentage points of market share. Pricing was aggressive in the distribution market but what we see is continued strength in desktop demand in the second half as well as increased demand in the high-end, especially toward the end of the year.

BUSINESS MODEL. On gross margins, as you know, we reported 23% gross margin in the current quarter. The current quarter, Q1, could continue to be a difficult quarter, but we would expect to see business picking up towards the end of the quarter and strengthening through the balance of this fiscal year. The impact of that on our gross margins model is that, although it could be difficult, we would like to believe we can sustain gross margins in the first quarter in the 22-23% range. We would also like to see improvement in gross margin as we go forward through the balance of this calendar year. On the software contribution, the software again contributed 1.5 additional points to the overall gross margin of the company.

QUESTION AND ANSWER SESSION. There is definitely some inventory in the high-end channel and not much on the desktop, from a percentage point of view. We would like to get back to normal by the end of the September. With respect to our own finished goods inventory, we have a total of approximately 1.1 to 1.2 million units in inventory. A little over half of that is high-performance inventory and the bulk of the balance is desktop inventory, with some limited amount of mobile finished goods inventory.

For Seagate, the first three quarters of the fiscal year were very good, and obviously the latest quarter was a disappointment. I think when you're reducing inventory, or even if it was just end-user slowdown at the high-end, you're going to have to hit the major supplier harder than anyone else, because that's the only place where you can make the cuts. So, to the extent that we have growth at the high end through the rest of the calendar year and our fiscal year, we obviously believe there is an opportunity to increase revenues and maybe increase market shares, depending on other companies' abilities to ramp to the new demand levels. That'll be a function of the steepness of that ramp.

There are some new products coming out in the desktop and high-capacity product areas.

We certainly believe in the growth of the disk drive business. Last year, we were ramping down rather rapidly, closing factories for weeks at a time, and when August 20 came along, we truly regretted the inability to be able to supply the customer needs. We believe that the outlook for the industry over the longer term remains very positive and we intend to be able to be a major participant in that growth in the market.

Through the quarter, because of head gimble assembly (HGA) availability, in a fairly non-linear quarter, most of our desktop products with the exception of one are still proximity head thin film inductive. That's where we experiencing our shortage of HGAs. That linearity proved to significantly more skewed toward the back end of the quarter than we had planned. Then we started hitting production capacity issues towards the last half of the quarter. So that HGA head availability impacted us to have a linear production capability throughout the quarter. We also had the start-up problem with our Maui product. The yields were a bit lower than expected and we had some yield issues related with some of our mainstay products that took us a little bit longer to work through than we would have liked. Those also impacted our ability to produce and therefore meeting our total customer requirements. Those were the main issues associated with the desktop ramp through the quarter. Looking ahead, in quarter one, our yield issues are resolved. We still, from a component standpoint, HGAs and inductive proximity heads, we have worked through the majority of those issues, but I still at this point would hesitate to say they'll behind us.

We always provide for the necessary writedown to net realizable value of any of our finished goods inventory that we believe is not saleable at a profit. We have certainly done so this quarter.

As we see the tape business, we're in a fairly long-term product transition here, where the bulk of the business we inherited was very low-end. We're moving the businesses to the high-end. I really view fiscal 1998 as a major year of repositioning and doing some development work with revenue growth, and more importantly, margin improvement in the model to really exit fiscal 1998 in a position where the company could then achieve some nice revenue growth off of that. I wouldn't expect robust revenue growth for fiscal 1998, but I would expect margin improvement and execution on the product development side so that we exit 1998 with a much stronger offering at the high-end.

From a price point of view, we don't expect to see any major issues. We'll see the normal pricing pressures through the July-August timeframe but nothing out of the ordinary we can see. OEM prices are set prices that we negotiate months in advance, so we've already taken that into consideration in our calculations. Distribution prices are based on availability versus what the market needs and what everybody else is doing with their inventory levels, and that remains to be seen. We don't see anything grossly out of the ordinary.

As we transition desktop products from thin film proximity heads to MR, we would expect not to have an HGA issue at all. All the way through this shortage we've experiences with inductive heads, we have not had a shortage in MR heads and we're ahead of our capacity requirements for MR. I think we are comfortable with what the schedules look like today in making that transition without any impact. We hope that we can gain back market share on the desktop that was lost due to the thin film HGA shortages in the last year.

On the 23 gigabyte and Cheetah drives, those two products went through fairly normal ramps without any particular issues. They're well accepted with the customer base that are receiving them and those are going quite well. These products are certainly material to the revenue line and the gross margin line. On a unit basis, they're not significant to total unit volume, but they're significant in our total profile. We are still ramping the Cheetah products.

On the BIOS problem with the Intel motherboard, we had an issue with the compatibility of our desktop products with that at the 3.3 volt level. We had to make a change to one of our chips, we have done, to make that compatible. It only happens with the new generation of that board, and it was a mistake on our part not to have that ready and compatible. We've got that behind us and we don't see that as being any sort of problem going forward. That did impact us with European shipments more than anywhere else, but the impact was minimal.

Based on the forecast we have today from customers and from our marketing department, we don't see a demand problem in fiscal Q1, especially in the second half of the quarter.

MR was a total of 33.4 million HGAs, of which 1.8 million were dual stripe. 41.1 million HGAs were inductive. 30% of drives shipped in the quarter were MR and 70% were thin film inductive. Over the next three quarters, those numbers should be close to inverting.

Our high end market share loss was about three points to Quantum and one point to Western Digital, possibly some to Fujitsu.

Depreciation and amortization was affected by the lower volume of drives shipped. That was one of the primary causes for the drop. Secondly, we did write off some component parts last quarter that had increased the depreciation and amortization abnormally last quarter. We did not have that charge this quarter. There was some improvement in overall warranty costs in the quarter over and above the lower volume for the quarter.

Desktop units were obviously down in the quarter.

We think desktop gross margins will improve as we go forward. We believe we have a six point gross margin advantage over our competitors. They're certainly improving their costs as we do the same. We clearly have to factor in time-to-market in that concept. Overall gross margins on the desktop will continue to improve although they tend to flatten out, as we've seen in the last couple quarters.

With some of our major OEMs, we quote prices into Q1 and Q1 (calendar quarters) of 1998. We haven't seen anything out of the ordinary with respect to competitors through this period.

For the quarter, we supplied 72% of our media requirements. Going forward, by the end of this calendar year, we expect to grow that up to the 80% range. We came close to meeting the 75% by June level that we had predicted.

The Company's foreign exchange hedging program currently utilizes forward currency contracts and currency options to hedge local currency cash flows in Singapore, Thailand, and Malaysia. Under this strategy, increases or decreases in the Company's local currency operating expenses are offset by realized gains and losses on the hedging transactions. The goal of this hedging program is to economically guarantee or lock in the exchange rates on the Company's foreign currency cash flows rather than to eliminate the possibility of short-term earnings volatility. Under existing accounting rules, certain of the Company's forward currency contracts have to be marked to market using the current forward rate and any resulting gains and losses must be recognized in the income statement in advance of the related foreign currency cash flows. This mismatch of accounting gains and losses versus actual foreign currency cash flows may be especially pronounced in the first fiscal quarter of 1998 as a result of the July 2, 1997 devaluation of the Thai Baht. Using today's Baht/US$ foreign exchange rate of Baht 29 to US$1, this mark to market adjustment would result in a net pretax charge of approximately $25 million, to be recognized as Other Expense at the end of the Company's first fiscal quarter ending October 3, 1997. The Company's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect at the time such contracts mature over the next ten months. Although the Company cannot predict future movements in currency exchange rates, the Company believes that the benefits from recording local currency expenditures in lower US$ terms over the periods during which these foreign currency contracts are scheduled to mature should more than offset the charges to be recorded in the first quarter of fiscal 1998.

* 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. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.