SecProbe.io

CORRESP
1
filename1.htm

Response Letter to the Securities and Exchange Commission

 Seagate Technology

 920 Disc Drive

 Scotts Valley, CA 95066

 Charles C. Pope

 Executive Vice President and Chief Financial Officer

 Telephone: (831) 439-2773

 Fax: (831) 438-8128

 Email: charles.pope@seagate.com

 May 8, 2007

 VIA EDGAR

 Mr. Stephen Krikorian

 Accounting Branch Chief

 Securities and Exchange Commission

 100 F Street, N.E.

 Washington, DC 20549

RE:
Seagate Technology

 Form 10-K for the fiscal
year ended June 30, 2006

 Filed September 11, 2006

 Form 10-Q for the quarter ended December 31, 2006

 Filed February 2, 2007

 Form 8-Ks

 Filed October 24, 2006, October 25, 2006 and January 23, 2007

 File No. 001-31560

 Dear Mr. Krikorian:

 Seagate Technology (the “Company”) hereby submits for filing by direct electronic transmission the responses set forth below to the comment
letter dated March 30, 2007 from the Staff regarding the filings listed above. To assist your review, we have included the text of the Staff’s comments below in bold italicized type.

 Form 10-K filed September 11, 2006

 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 Results of
Operations, page 43

1.
Your disclosure indicates that the 22% increase in fiscal year 2006 revenue was offset by price erosion; however, the average sales prices per unit increased during fiscal
year 2006. Your disclosures elsewhere in the filing appear to indicate that the increase in the average sales price is due to the introduction of new product offerings offset by price erosion on older product offerings. Further, your disclosure on
page 44 indicates an average sales price of $77 for fiscal year 2005 while your disclosure on page 46 indicates an average sales price of $80 for fiscal year 2005. Please clarify the impact of price erosion on your fiscal year 2006 and 2005 revenue
and how your disclosures accurately reflect your pricing trends. Please clarify how your disclosures fully comply with Section III.B.3 of SEC Release No. 33-8350, Commission Guidance Regarding Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

 Response:

 We acknowledge the Staff’s comment with respect to the Company’s inconsistent disclosure of average sales price per unit in our Form 10-K for
the year ended June 30, 2006 (our “2006 Form 10-K”) and have the following responses: the Company’s average sales price was reported erroneously as $80 for fiscal year 2005 on page 46 of the 2006 Form 10-K; the accurate average sales
price was $77; and the error was the result of mistakenly using the average sales price for only the fourth quarter of 2005 instead of the full fiscal year. We will correct the error in our annual report on Form 10-K for the year ending
June 29, 2007 (our “2007 Form 10-K”).

 1

 In response to the Staff’s comments about disclosure of pricing trends for the Company’s
products, and after reviewing the relevant sections of the Release, we have clarified in our most recent Form 10-Q for the quarter ended March 30, 2007 that there are two major factors affecting average sales price in any fiscal period. The
first factor affecting average sales price is price erosion for products that have a similar storage capacity and feature set (e.g., “like-for-like” products). Over time, we experience price declines for like-for-like products. The second
factor affecting average sales price is the increase in average capacity and improved feature set of disc drives. When we introduce new products with increased capacity and/or improved feature sets, we seek to maintain or increase prices. We
supplementally advise the Staff, and will clarify in our 2007 Form 10-K, that in both 2005 and 2006, the price erosion on a like-for-like basis (first factor) was more than offset by the increase in average capacity and improved feature set (second
factor) such that the average sales price increased from $71 in fiscal year 2004 to $77 in fiscal year 2005, then to $78 in fiscal year 2006. On pages 11, 12, 18, 22, 23 and 39 of our 2006 Form 10-K, we described the factors that lead to price
erosion, and commented that the trend was likely to intensify as the rate of growth in areal density, or the storage capacity per square inch on a disc, slows from previous levels. We further commented on page 39 of our 2006 Form 10-K that we
believed that the trend in fiscal year 2007 would reflect growth in demand for higher capacity products with higher average capacity and improved feature set, which, depending on industry consolidation, the level of new product introductions and
demand/supply imbalances, could, to some extent, be offset by increased price erosion.

 While the Company’s past filings have
extensively commented on the known material trends and uncertainties that management believes are prevalent in its markets, in future filings, the Company will endeavor to more clearly identify and delineate the inter-relationship of price erosion
on a like-for-like basis (the first factor) with the increase in average capacity and improved feature set (the second factor), and their combined impact on average selling prices. For example, in the Company’s most recent Form 10-Q filing, we
provided additional disclosures on the impact of price erosion on pages 44 and 45 under the caption “Industry Overview”, on page 50 under the caption “Results of Operations – Revenue”, and on page 51 under the caption “
Results of Operations – Cost of Revenue”.

2.
We note instances where two or more sources of a material change have been identified, but not quantified. For instance, the disclosure on page 44 of your filing indicates the
increase in gross margin as a percentage of revenue from fiscal year 2005 to 2006 was primarily due to higher overall unit shipments and an increase mix of new higher-margin products partially offset by higher costs associated with new product
transitions, increased warranty cost and customer service inventory write-downs, stock-based compensation costs, price erosion, etc. Please tell us your consideration of quantifying the impact of each source of a material change. See Section III.D
of SEC Release No. 33-6835, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 Response:

 We acknowledge the Staff’s comment and have reviewed our historical disclosures and Section III.D of SEC Release
No. 33-6835. We supplementally advise the Staff that we have historically disclosed the changes to our unit shipments in percentage terms by market application under the caption “Seagate Overview”, which appears on page 47 of our most
recent Form 10-Q filing, and compared that against our estimate of the growth (or decline) in the total available market for disc drive products.

 In our
most recent Form 10-Q filing, we supplemented our disclosures to provide more in-depth qualitative and quantitative discussion of material changes to the components of our results.

 For example, we clarified on page 50 of our most recent Form 10-Q filing under the caption “Results of Operations – Revenue” that the comparative decline from the immediately preceding quarter in
average sales price was higher than we expected in the desktop, notebook, and enterprise markets, as improved mix was more than offset by price erosion.

 We also provided additional qualitative and quantitative disclosure on page 51 of our most recent 10-Q filing under the caption “Results of Operations – Cost of Revenue”, e.g., the improvement in the gross margin percentage
from the immediately preceding quarter was due to:

•

 the reduction in shipments of lower margin Maxtor designed products from approximately $200 million in the December 2006 quarter to immaterial amounts in the March
2007 quarter and underutilization of Maxtor manufacturing infrastructure in the December 2006 quarter;

•

 the reversal of previously accrued variable performance-based compensation of $16 million, compared to an expense of $10 million recorded in the immediately
preceding quarter; and

 2

•

 a $20 million reduction in warranty costs;

•

 which was only partially offset by $12 million in higher amortization of existing technology related to the Maxtor acquisition.

 We also clarified that the decrease in gross margin from the year-ago quarter was primarily due to a 9% decline in our average sales price per unit, the impact of which
was not entirely offset by the increase in unit volume and shift to products with higher capacity and improved feature set products.

 We further disclosed
that the gross margin decline was only partially offset from the year-ago quarter by the reversal of previously accrued variable performance-based compensation of $16 million, compared to an expense of $25 million recorded in the year-ago period.

 We will endeavor to continue to provide more in-depth discussion of material changes to the components of our results when possible in future filings on
Form 10-K and 10-Q.

 Critical Accounting Policies

 Establishment of Sales Program Accruals, page 52

3.
Your disclosure indicates that your estimates are based on various factors, including estimated future price erosion, customer orders and sell-through levels, program
participation, customer claim submittals and sales returns. Therefore, it appears that your accounting policy for sales program accruals includes several significant estimates and/or assumptions. Please explain why you have not provided discussion
as to how you arrive at each estimate, how accurate each estimate/assumption has been in the past and whether each estimate/assumption is reasonably likely to change in the future. You should provide quantitative as well as qualitative information
when information is reasonably available. In addition, we note that you assumed a warranty accrual from Maxtor. Please tell us whether your process for estimating warranty accruals from Maxtor products is similar to your heritage products and how
your policy addresses any differences in estimates. Please revise your disclosures to address material differences. We refer you to Section V of SEC Release 33-8350.

 Response:

 Critical Accounting Policy related to Sales
Programs

 We note that in our historical filings, we have disclosed that accounting for sales programs is subject to management’s judgments
and inherent uncertainties in the assumptions and estimates used in applying our accounting policies, in accordance with SEC Release 33-8350. In addition, under the caption “Results of Operations – Revenue” of Item 7 of our Form
10-K for the year ended June 30, 2006, and under the corresponding caption of Item 2 of our Form 10-Q for the quarter ended December 29, 2006, we provided a historical comparison of the magnitude of sales programs charged to contra
revenue as a percentage of gross revenue and further noted the judgment involved in formulating the estimates and assumptions underlying the sales program accruals.

 Nonetheless, in response to the Staff’s comment, after further consideration of Section V of SEC Release 33-8350, we have expanded the disclosures of our critical accounting policies on pages 59-61 of our most
recent Form 10-Q filing to provide greater insight into the nature, variability and subjectivity of the estimates and assumptions used in estimating the contra-revenue sales programs, and the potential impact of variations between actual results and
estimated accruals and between historical experience and future requirements. Our sales programs are complex, and are continually customized to respond to market conditions and encourage specific customer behavior in each quarter. Additionally, our
sales programs are short lived, and we are able to determine within one or two quarters after the quarter in which a program commences whether our estimates require adjustment based on actual program results. As disclosed in our most recent Form
10-Q filing, since fiscal year 2005, total sales programs have ranged from 5% to 9% of gross revenues (5% to 8% excluding programs related to sales of legacy Maxtor products that have been discontinued). We also enhanced our disclosure in our most
recent Form 10-Q filing to report that adjustments to revenue due to under- or over-accruals for sales programs related to revenues reported in prior periods have averaged 0.3% of quarterly gross revenue throughout fiscal years 2006 and 2007
to-date. We also disclosed that, due to the competitive pricing environment in our industry, sales programs as a percentage of gross revenue may increase from the current range and are likely, in that event, to reduce revenues and margins.

 As our business and competitive landscape changes, and the methodology of applying our critical accounting policies are adapted (where necessary) in
response thereto, we will continue to review our disclosures and will provide more information in future filings

 3

to enhance the reader’s understanding of the uncertainties and judgments involved in applying our accounting principles and the variability that is
likely to result from the application of such principles over time. In future filings, we will also include quantitative information where feasible and meaningful.

 Warranty Accrual

 As noted by the Staff, we assumed a warranty liability from Maxtor on May 19, 2006, which amounted to $187
million as at June 30, 2006. In the critical accounting policies disclosures located on pages 59-61 of our most recent Form 10-Q filing, we disclosed that we base warranty estimates on estimated product failure rates and trends (including the
timing of product returns during the warranty periods) and estimated repair or replacement costs. On page 60, we also disclosed that we employ a statistical model to derive these estimates. We supplementally advise the Staff that the approach used
by Maxtor in determining its warranty accrual prior to its acquisition by Seagate was similar to Seagate’s approach. In the quarter ended March 30, 2007, we fully integrated Maxtor’s warranty model and estimates into Seagate’s
processes, and upon completion of the integration, it was determined that the two warranty models yielded approximately equivalent estimates for the Maxtor warranty liability.

 In consideration of the Staff’s comments, and after further consideration of Section V of SEC Release 33-8350, we disclosed on page 60 of our most recent Form 10-Q filing additional analysis of our critical
accounting policies to provide more insight into the nature, variability and uncertainty related to the estimates and assumptions used in determining our warranty accrual, including quantification of historical ranges of estimates for warranty cost
and re-estimates of warranty accruals, and provided qualitative analysis as to the drivers of the re-estimates.

 Consolidated Financial Statements

 Notes to Consolidated Financial Statements

 Revenue Recognition, Sales Returns and Allowances, and Sales Incentive Programs, page 63

4.
We note your disclosures on page 6 that state, “the disc drive industry is undergoing a shift from longitudinal to perpendicular recording technology” and
“perpendicular recording technology requires a complex interplay between the read/write heads, the recording media, the ASICs and the disc drive software.” We further note from the support section of your web site that you offer customers
software updates. Please clarify how you have evaluated the impact of the technological advances on your products revenue recognition policy. In this respect, clarify whether the software contained in your disc drive is more than incidental to the
product as a whole pursuant to paragraph 2 of SOP 97-2. Please describe your consideration of each of the factors that you consider to be relevant in supporting your determination. In addition, describe the nature of all software updates being
provided to your customers.

 Response