Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %>
920 Disc Drive
Scotts Valley, CA 95066-4544
(408) 438-6550
http://www.seagate.com/

UNION CITY, Ca., July 16, 1996/FOOLWIRE/ --- Seagate Technology reported revenue of $2.01 billion, net income of $101 million, and fully diluted net income per share of $0.84. Analyst estimates were $1.02 per share for Q4, but there were one-time charges and write-offs included in the fully diluted EPS number reported, as follows:

One time write-offs of in-process R&D of $39.4 million incurred in connection with the acquisitions of Calypso Software Systems, Inc. and Holistic Systems Ltd. and other non-recurring charges of $3.0 million associated with the February 1996 merger with Conner Peripherals. Without these amounts, EPS would have been $1.04, or $0.02 above analyst estimates.

The decline in revenue from Q3 was primarily due to the lateness in qualification of the company's new desktop products with key OEM customers, a decline in sales of products for use in portable computer applications as well as softness in the desktop PC market. Although the company anticipates an increase in sales of products for use in portable computer applications in its first quarter of FY 1997, sales of its products for use in desktop computer applications may continue to be soft.

Revenues break-down as follows: $34 million was 2.5" drives, $1.663 billion was 3.5" drives, $105 million was 5.25" drives, and $213 million was other components. Other components include: $59.1 million was magnetic recording heads sold on the outside, $40.4 million was software, $96.5 million was tape drives (this was up from $66 million in prior quarter), and the rest was miscellaneous of $16 million.

Price erosion was relatively normal during the quarter. Seagate doesn't give out specific numbers for this.

They shipped 6,740,000 drives which is down from 7,159,000 drives in Q3. Looking ahead, the September quarter is a very difficult quarter to forecast and they predict a typical Summer quarter. They think the inventory levels in the channel are a little high for this time of year, but are not out of line and certainly not as out of line as people might have read in media stories. The percentage of revenue for drives above 1 gigabyte was 87.5%, up from 82% the prior quarter. The percentage of drive revenue above 2 gigabytes was 55%, up from 51% the prior quarter.

Inventory was $791 million, up from $760 million in the prior quarter. This breaks down as follows: purchased materials was $295 million, work in process was $139, finished goods was $357 million which represents about 4.3 weeks worth of inventory. Most of the finished goods inventory is their desktop products of lower capacities. They think clearing this out is just a matter of pricing it right. They think they will be able to move all inventory below 1 gigabyte at no loss to the company and, hopefully with some margin. Inventory turns were 8.2 and "days sales outstanding" were 48 days. Capital additions for the quarter were $268 million which gave them a total for FY 1996 of $974 million. The budget for capital additions for FY 1997 will be in the neighborhood of $1 billion. Depreciation and amortization for the quarter was $150 million. They had 86,659 employees.

The percentage of OEM sales went down from 71% to 66%. They think OEM inventory is extremely low and think OEMs have gone to Just-In-Time buying and hub stocking centers. Distribution percentage went up from 29% to 34%. Broken down geographically, North America was 55% of sales (up 1% from Q3), Eruope was 28% (down 1% from Q3) and the Far East was 17% (the same as Q3).

Last quarter they delayed the La Paz product, getting it through qualifications and then into customer qualifications and they said they would produce 400,000 units for the quarter. They actually produced 440,000 units for the quarter, most of that in the second half of the quarter. They shipped more than 350,000 of that 440,000 produced. That continues to be quite strong. The plans are to ramp the product very significantly.

With regard to the announcement today that Seagate will manufacture the Jaz cartridges for Iomega Corporation's Jaz drive, Seagate said that basically they saw an opportunity to use their manufacturing expertise and also their vertical integration with their media and saw an excellent opportunity and are prepared to take advantage of it. Obviously to the extent that Jaz is successful, that business will be successful and Seagate found it a good opportunity to participate in the removable market.

The company was asked, given the fact that they will be using some of their media production to produce Jaz disks, where they are in terms of their overall capacity designed for Seagate products. They spoke specifically about producing 75% or so of their needs internally. Seagate said that they are currently running at about 50% of their total internal requirements and are still in the process of qualifications that they believe will get them into the 75% range by the end of the calendar year. The Iomega relationship does not negatively impact that. The La Paz drive, that they are ramping now, should be doing close to 5 times the volume in the next quarter over the last quarter and that drive is all internal media and internal heads.

An analyst stated, with regard to the Iomega Jaz cartridge, that he assumed Seagate wouldn't take that business if the gross margins are below Seagate's corporate average. The company responded that his assumption is a fair assumption, but it is probably also fair to think about it in the context of operating margins rather than gross margins. The company was asked whether Seagate was the sole supplier for the Jaz cartridge business or if the business was available to others too. They replied that, to their knowledge, it is available to other people and other people are making it right now including Iomega.

The company was asked if they had any interest in building Iomega Jaz drives, in addition to the Jaz cartridges, given the fact that Iomega is looking for additional manufacturing partners on that front. The company answered that they have been looking at the removable market for a long time and anything they might decide to do we will have to wait until they decide to tell us what they are going to do, if anything. They said that we cannot conclude that because they are doing the Jaz cartridge, that they are going to do another deal.

The company was asked why they have the enthusiasm they do for a notebook line, which has been erratic and disappointing. Seagate is gearing up for a surge there. Seagate answered that they are enthusiastic because the market for notebooks appears to be ready to show some strong growth and they have two new products for the market, their 9810 and their 91350 products. The 9810 is shipping now, the 91350 should ship later this quarter. They have announced some other new drives using MR heads. The 52520 is a high-performance high-end workstation drive and they will be transferring and ramping that product in the mid-August time frame. The 3 and 4 gigabyte AT drives are about one month behind schedule, so that will not be ramping until September.

At the end of June, Seagate had completed all of the tough jobs related to integrating Conner Peripherals. The directions are all set, the objectives are set, and the company feels pretty good about the disk drive part of the acquisition. The disk media part of the operation went together very quickly. The tape drive operation revenues went from $66 million to $96 million in one quarter. The Arcata software operation was merged with Seagate Software's Palindrome division. The systems side, the MIS side, etc. all hit their date for conversion - July 1st. All major manufacturing, order entry, and other related systems have been converted. From a factory implementation standpoint, it has gone very smoothly. They have closed the Singapore new tech park facility and integrated that all into the AMK plant. They closed Italy as they said they would. The last hurdle they have to clear is getting the Conner media qualified onto the new Seagate programs and they are working hard on that and should have more news by the next conference call.

The Hewlett-Packard announcement was very positive in Seagate's eyes from the point of view that it is one less competitor. They mentioned that Hewlett-Packard has been a good customer of Seagate's for disk drives and Seagate hopes that they will now be a bigger customer. Hewlett-Packard has also been a buyer of Seagate magnetic recording heads. Whoever gets the business that Hewlett-Packard had with their disk drives is someone Seagate needs to make sure they are supplying with heads, whether it is Seagate (internally) or someone else. On balance, Seagate thinks it is a very healthy thing for Seagate and they are very glad to see Hewlett-Packard drop out of the business. The overall market for high-end drives in the quarter showed a seasonal flatness. They would anticipate that this market will show significant growth going forward and that what we are seeing now is more of a seasonal thing than anything else. Seagate believes that they have picked up market share in the high-end business. Without Hewlett-Packard and not considering IBM, the company now sees Fujitsu as their primary competitor on the high end.

The first drive that they will begin shipping in volume with MR heads are the 2.5". They were shipping a 9630 product (630 megabyte, 2.5") last quarter. This quarter that will transition into mostly 810 megabyte drives and 1.3 gigabyte drives with MR heads. On the high capacity drives, their Barracuda 9 and their new Barracuda 4 low-profile drive will come in the second half of the quarter and those will ship with MR heads. Those will be the first main products they ramp with MR heads. Elite 23 is in the latter part of the quarter and that also has all MR heads in it and Laser Zone textured media (5.25", 23 gigabyte drive).

Transmitted: 7/17/96

* 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.