Negative preannouncement

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1 Estimate Change Equity United States Electronics NEUTRAL Negative preannouncement PC demand creates FQ3 shortfall Last night, Seagate announced that FQ3 (March) results would be below expectations due to broad based PC demand weakness at the end of March, which coincided with more than expected pricing pressure especially on high capacity PC drives. Sales are now expected to be ~$2.8B vs. our estimate of $2.95B and the company s previous of $ B. Therefore, we do not expect gross margins to even achieve the low end of the company s expected H2 range of 24-26%. We had been modeling a gross margin of 24.3% for the March quarter, but we are now modeling 23.4%, which brings our FQ3 EPS estimate to $0.46 from $0.56. We are reducing our F2007 and F2008 EPS estimates to $1.45 and $2.25 (vs. $1.70 and $2.65). For now, we are assuming that competitive pressures combined with demand uncertainty in the PC market hinder gross margins from exceeding 24% until the seasonal peak in FQ2 (December). STX announcement felt throughout the industry We believe it is likely Western Digital suffered from similar trends as Seagate given that ~75% of WDC units (~65% of revenues) are PC drives vs. ~61% of STX s units (~47% of revenues). Throughout the quarter we had been more concerned with aggressive 2.5 pricing as potentially creating gross margin pressure (See note). However it does not seem that the 2.5 ASPs saw further weakening since the end of February. We believe it is safe to infer that unit demand for the 2.5 and all other markets were not too far from management expectations at the end of February. Nevertheless, the all important month of March created a surprising development in the 3.5 HDD market. We continue to stay on the sidelines toward STX shares. Estimates (Jun) (US$) 2005A 2006A 2007E 2008E 2009E EPS GAAP EPS EPS Change (YoY) 48.2% 38.9% -23.8% 54.9% 18.0% Consensus EPS (First Call: 22-feb-2007) Dividend Rate Valuation (Jun) 2005A 2006A 2007E 2008E 2009E P/E 17.1x 12.3x 16.2x 10.4x 8.8x GAAP P/E 16.7x 14.6x 21.6x 10.4x 8.8x Dividend Yield 1.2% 1.4% 1.7% 1.7% 1.4% EV / EBITDA* 12.8x 9.5x 8.6x 6.6x 5.8x Free Cash Flow Yield* 5.2% 2.5% 1.0% 5.7% 7.0% * For full definitions of iqmethod SM measures, see page 5. Steven B. Fox, CFA Research Analyst MLPF&S steven_fox@ml.com Ingrid Tiltmann, CFA Research Analyst MLPF&S ingrid_tiltmann@ml.com Stock Data Price US$23.46 Investment Opinion C-2-7 Volatility Risk HIGH 52-Week Range US$ Mrkt Val / Shares Out (mn) US$14,123 / ML Symbol / Exchange STX / NYS Bloomberg / Reuters STX US / STX.N ROE (2007E) 16.9% Total Dbt to Cap (Dec-2006A) 32.0% Est. 5-Yr EPS / DPS Growth 13.0% / 3.7% Quarterly Earnings Estimates Q1 0.55A 0.16A Q2 0.58A 0.39A Q3 0.51A 0.46E Q4 0.27A 0.44E Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Merrill Lynch in the US can receive independent, third-party research on companies covered in this report, at no cost to them, if such research is available. Customers can access this independent research at or can call to request a copy of this research. Refer to important disclosures on page 6 to 7. Analyst Certification on page

2 iqprofile SM iqmethod SM Bus Performance* Return on Capital Employed 21.6% 18.6% 12.5% 16.1% 16.5% Return on Equity 31.9% 25.5% 16.9% 23.8% 22.9% Operating Margin 9.4% 10.5% 7.9% 11.3% 12.2% Free Cash Flow iqmethod SM Quality of Earnings* Cash Realization Ratio 2.0x 1.4x 1.5x 1.6x 1.6x Asset Replacement Ratio 1.5x 1.6x 1.4x 1.4x 1.4x Tax Rate 3.5% 2.5% 4.3% 5.0% 5.0% Net Debt-to-Equity Ratio -0.4% 1.2% -3.4% -12.8% -21.4% Interest Cover 14.6x 23.6x 6.8x 8.7x 10.1x Company Description Seagate, the leading hard disk manufacturer by sales & volume, sells 50% to desktop, 31% to enterprise, 9% to notebook, and 9% to the CE space. The company recently acquired Maxtor, the #4 HDD company. Stock Data Average Daily Volume 5,979,406 Brokers Covered (FirstCall) 7 Income Statement Data (Jun) Sales 7,553 9,206 11,350 12,300 13,200 % Change 21.4% 21.9% 23.3% 8.4% 7.3% Gross Profit 1,666 2,166 2,375 2,965 3,260 % Change 14.2% 30.0% 9.6% 24.8% 9.9% EBITDA 1,168 1,579 1,750 2,285 2,560 % Change 26.1% 35.2% 10.8% 30.6% 12.0% Net Interest & Other Income 6 42 (20) (60) (60) Net Income (Adjusted) ,259 1,473 % Change 52.2% 41.0% -14.8% 49.5% 17.0% Free Cash Flow Data (Jun) Net Income from Cont Operations (GAAP) ,259 1,473 Depreciation & Amortization Change in Working Capital 236 (76) (401) (104) (87) Deferred Taxation Charge Other Adjustments, Net 19 NA (4) 0 NA Capital Expenditure (691) (1,008) (1,150) (1,250) (1,350) Free Cash Flow % Change NM -52.0% -60.9% 485.6% 22.4% Balance Sheet Data (Jun) Cash & Equivalents ,963 2,844 3,607 Trade Receivables 1,094 1,445 1,419 1,538 1,650 Other Current Assets 1,662 1,978 1,873 1,903 1,928 Property, Plant & Equipment 1,529 2,106 2,100 2,200 2,250 Other Non-Current Assets 213 3,105 2,800 2,800 2,800 Total Assets 5,244 9,544 10,155 11,285 12,236 Short-Term Debt Other Current Liabilities 1,780 3,007 2,572 2,517 2,593 Long-Term Debt ,800 2,100 2,100 Other Non-Current Liabilities , Total Liabilities 2,703 4,332 5,386 5,481 5,182 Total Equity 2,541 5,212 4,769 5,803 7,054 Total Equity & Liabilities 5,244 9,544 10,154 11,284 12,235 * For full definitions of iqmethod SM measures, see page 5. 2

3 Table 1: Seagate Annual Income Statement June Year End ($ Millions) 2009E % Chg 2008E % Chg 2007E % Chg 2006 % Chg 2005 % Chg 2004 Sales 13, % 12, % 11, % 9, % 7, % 6,224 Gross Profits 3, % 2, % 2, % 2, % 1, % 1,459 Gross Margin 24.7% 24.1% 20.9% 23.5% 22.1% 23.4% Product Development Expenses % % % % 645 (3.2%) 666 % of Sales 7.4% 7.6% 7.7% 8.4% 8.5% 10.7% SG&A Expenses % % % % % 289 % of Sales 5.1% 5.2% 5.3% 4.6% 4.1% 4.6% Total Operating Expenses 1, % 1, % 1, % 1, % % 955 % of Sales 12.5% 12.8% 13.0% 13.0% 12.7% 15.3% Operating Income 1, % 1, % 900 (6.9%) % % 504 Operating Margin 12.2% 11.3% 7.9% 10.5% 9.4% 8.1% Other Income (60) (60) (20) 42 6 (16) Pretax Income 1, % 1, % 880 (12.8%) 1, % % 488 Pretax Margin 11.7% 10.8% 7.8% 11.0% 9.5% 7.8% Income Taxes % % % 21 (14.1%) 24 (11.7%) 28 Tax Rate 5.0% 5.0% 4.3% 2.1% 3.4% 5.6% Net Income 1, % 1, % 842 (14.8%) % % 460 Net Margin 11.2% 10.2% 7.4% 10.7% 9.1% 7.4% EPS % % % % % 0.92 EPS (GAAP) % % % % % 1.06 EPS (Excluding Options) % % % % 1.37 Average Shares Outstanding (Diluted) 555 (0.9%) 560 (4.1%) % % % 498 Dividend Per Share % % % % % 0.20 Payout Ratio 15.1% 17.8% 27.6% 16.8% 20.4% 21.6% Employees (Year End) 60, % 57, % 54,000 (10.4%) 60, % 44, % 40,000 Sales per Average Employees (000s) Stockholders Equity 7, % 5, % 4,769 (8.5%) 5, % 2, % 1,855 Average Return on Equity 22.9% 23.8% 16.9% 25.5% 31.4% 29.0% Long Term Debt 2, % 2, % 1, % 640 (13.0%) 736 (0.4%) 739 % of Total Capital 22.9% 26.6% 27.4% 10.9% 22.5% 28.5% Short Term Debt Total Capital 9, % 7, % 6, % 6, % 3, % 2,594 Average Return on Capital 32.2% 17.4% 13.2% 20.9% 23.5% 19.8% Capital Expenditures 1, % 1, % 1, % 1, % % 605 As a Percent of Sales 10.2% 10.2% 10.1% 10.9% 9.1% 9.7% Depreciation & Amortization % % % % % 422 EBITDA 2, % 2, % 1, % 1, % 1, % 926 Cash Flow 2, % 2, % 1, % 1, % 1, % 882 Free Cash Flow 1, % % 542 (8.4%) % % 277 EBITDA/Share % % 3.00 (0.2%) % % 1.86 Free Cash Flow/Share % % 0.93 (17.6%) % % 0.56 Cash Flow/Share % % 2.90 (4.8%) % % 1.77 Source: Company reports and Merrill Lynch estimates 3

4 4 Table 2: Seagate Quarterly Income Statement June Year End ($ Millions) Prod Other Dil. Cost of % Of Gross Gross Develop % Of Mkting % Of Oper Oper Int Int Other Inc Pretax Tax Net Diluted Yr/Yr Shares Sales % Chg Sales Sales Profit Margin Exp Sales Admin Sales Earns Margin Inc Exp Inc (Exp) Earns Taxes Rate Income EPS % Chg O/S F2009E Q1 E 3, , (40) 5 (15) Q2 E 3, , (40) 5 (15) Half E 6, , , (80) 10 (30) Mar E 3, , (40) 5 (15) Mo E 9, , , , (120) 15 (45) 1, , June E 3, , (40) 5 (15) Year E 13, , , , (160) 20 (60) 1, , F2008E Q1 E 2, , (40) 5 (15) Q2 E 3, , (40) 5 (15) Half E 6, , , (80) 10 (30) Mar E 3, , (40) 5 (15) Mo E 9, , , , (120) 15 (45) June E 3, , (40) 5 (15) Year E 12, , , , (160) 20 (60) 1, , F2007E Sept A 2, , (18) (70.5) 602 Dec A 2, , (35) 9 (1) (31.7) 598 Half A 5, , , (53) (50.5) 600 Mar E 2, , (40) 11 (10) (10.6) Mo E 8, , , (93) 23 (7) (38.0) 590 June E 2, , (40) 8 (13) Year E 11, , , (133) 31 (20) (23.8) 584 F2006 Sept 2, , (13) Dec 2, , (11) Half 4, , , (24) Mar 2, , (7) Mo 6, , , (31) June 2, , (10) (51.4) 568 Year 9, , , (41) , F2005 Sept 1,558 (10.5) 1, (11) (5) (82.0) 494 Dec 1, , (11) (31.1) 500 Half 3,405 (2.7) 2, (22) 5 (4) (56.6) 497 Mar 1, , (13) Mo 5, , , (35) 8 (4) (11.3) 500 June 2, , (13) NM 510 Year 7, , , (48) Source: Company reports and Merrill Lynch estimates

5 Analyst Certification I, Steven B. Fox, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. iqmethod SM Measures Definitions Business Performance Numerator Denominator Return On Capital Employed NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill Amortization Total Assets Current Liabilities + ST Debt + Accumulated Goodwill Amortization Return On Equity Net Income Shareholders Equity Operating Margin Operating Profit Sales Earnings Growth Expected 5-Year CAGR From Latest Actual N/A Free Cash Flow Cash Flow From Operations Total Capex N/A Quality of Earnings Cash Realization Ratio Cash Flow From Operations Net Income Asset Replacement Ratio Capex Depreciation Tax Rate Tax Charge Pre-Tax Income Net Debt-To-Equity Ratio Net Debt = Total Debt, Less Cash & Equivalents Total Equity Interest Cover EBIT Interest Expense Valuation Toolkit Price / Earnings Ratio Current Share Price Diluted Earnings Per Share (Basis As Specified) Price / Book Value Current Share Price Shareholders Equity / Current Basic Shares Dividend Yield Annualised Declared Cash Dividend Current Share Price Free Cash Flow Yield Cash Flow From Operations Total Capex Market Cap. = Current Share Price * Current Basic Shares Enterprise Value / Sales EV = Current Share Price * Current Shares + Minority Equity + Net Debt + Sales Other LT Liabilities EV / EBITDA Enterprise Value Basic EBIT + Depreciation + Amortization iqmethod SM is the set of Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of iqmethod are: A consistently structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls. iqdatabase is our real-time global research database that is sourced directly from our equity analysts earnings models and includes forecasted as well as historical data for income statements, balance sheets, and cash flow statements for companies covered by Merrill Lynch. iqprofile SM, iqmethod SM are service marks of Merrill Lynch & Co., Inc.iQdatabase is a registered service mark of Merrill Lynch & Co., Inc. 5

6 Important Disclosures STX Price Chart 1-Apr:N Seyrafi US$36 21-Apr:S US$32 US$28 US$24 US$20 US$16 US$12 US$8 US$4 US$0 STX 19-Jan:N 1-Jan-05 1-Jan-06 1-Jan-07 Review 13-Jul:B PO:US$23 31-Jan Fox PO:US$32 B : Buy, N : Neutral, S : Sell, PO : Price objective, NA : No longer valid 9-Aug PO:US$25 The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark Grey shading indicates the security is restricted with the opinion suspended. Light Grey shading indicates the security is under review with the opinion withdrawn. Chart current as of March 31, 2007 or such later date as indicated. Investment Rating Distribution: Electronics Group (as of 31 Mar 2007) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy % Buy % Neutral % Neutral % Sell % Sell % Investment Rating Distribution: Global Group (as of 31 Mar 2007) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy % Buy % Neutral % Neutral % Sell % Sell % * Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities % for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend. Restricted 25-Oct:N PO:NA MLPF&S or one of its affiliates acts as a market maker for the securities recommended in the report: Seagate Tech. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Seagate Tech. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Seagate Tech. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Seagate Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Seagate Tech. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues. 6

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