Seagate Technology Q1 2024 Earnings Results & Report

Seagate Technology EPS Results

• Actual EPS: -$0.22
• Consensus EPS: -$0.20
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $0.37
• EPS Beat Rate: 7 of last 8 quarters

Seagate Technology Revenue Results

• Actual Revenue: $1.45 billion
• Expected Revenue: $1.51 billion
• Beat/Miss: Missed by -$53.93 million
• YoY Revenue Growth: -28.60%

Seagate Technology (NASDAQ:STX) (NASDAQ: STX) is a data storage company that develops and manufactures mass-capacity storage products and solutions. Its portfolio is centered on hard disk drives (HDDs) used in cloud data centers, enterprise systems, network-attached storage, video and imaging applications, and personal computers.

The company also provides storage-related services and solutions designed to help organizations store, manage, protect, and access large volumes of digital information. Seagate serves customers across a range of industries, including cloud service providers, businesses, governments, and consumer electronics manufacturers.

Founded in 1979, Seagate has played a longstanding role in the development of the data storage industry. The company serves customers internationally and operates across a global supply and distribution network. Seagate is headquartered in Fremont, California, and Dave Mosley has served as its chief executive officer since 2017.

Seagate Technology Q1 2024 Earnings Call Transcript

Key Takeaways

• Seagate reported $1.45 billion in Q1 revenue and a non-GAAP loss of $0.22 per share as legacy HDD markets remained soft and cloud inventory corrections continued.
• The company hit all key HAMR milestones and plans high-volume ramp of 30+ TB drives in early 2024 to lower storage cost per bit and boost profitability.
• Mass capacity HDD shipments held at 90 EB with average drive capacity up 17% to 7.5 TB; U.S. cloud customers show early demand recovery.
• Non-GAAP gross margin expanded ~30 bps to 19.8% through pricing actions and cost-savings, and Q2 guidance targets mid-single digit operating margin.
• Strong cash discipline delivered $57 million in free cash flow, $2.3 billion of available liquidity, and $1.5 billion convertible notes issuance to reduce annual interest by $15 million.

Presentation

[Operator]

Welcome to the Seagate Technology fiscal first quarter 2024 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President of Investor Relations. Please go ahead.

[Shanye Hudson, SVP of Investor Relations at Seagate Technology]

Thank you. Good morning, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings, press release and detailed supplemental information for our September quarter results on the investors section of our website. During today's call, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and, or cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort.

[Shanye Hudson, SVP of Investor Relations at Seagate Technology]

Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today, and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements, as they're subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the investors section of our website. As always, following our prepared remarks, we'll open the call up for questions.

[Shanye Hudson, SVP of Investor Relations at Seagate Technology]

I'll now hand the call over to Dave for opening remarks.

[Dave Mosley, CEO at Seagate Technology]

Thank you, Shanye, and welcome, everyone. Before I discuss our financial results, I want to acknowledge the situation taking place in the Middle East. Our thoughts are with all of the people in the region, including our Seagate team members, their families and loved ones. Moving on to our September quarter results, revenue came in at $1.45 billion, with non-GAAP loss per share of $0.22. Consistent with our recent public commentary, we experienced softer than anticipated demand in the legacy markets, while the ongoing cloud inventory correction and weak economic trends in China continued to restrain near-term demand for hard drives. Looking ahead, we expect the pace of economic recovery in China to be uneven. However, we are encouraged by the positive progress of U.S. cloud inventory consumption.

[Dave Mosley, CEO at Seagate Technology]

Importantly, we continue to demonstrate financial discipline and strong execution on the priorities we outlined at the onset of this down cycle, namely, to drive cash generation, strengthen our balance sheet, and position the company for enhanced profitability as the markets recover. We also continued to hit all key HAMR product development milestones, demonstrating our ability to drive significant areal density gains with this technology. These gains translate into lower storage costs on a per bit basis, enabling Seagate to offer a compelling TCO proposition for our customers while enhancing our future profitability. Qualification and revenue ramp plans for our 30+ TB products remain fully on track, with high volume ramp starting early... Is a competitive differentiator and increasingly important in light of the green shoots we are starting to see with respect to cloud demand trends.

[Dave Mosley, CEO at Seagate Technology]

Within the mass capacity markets, we saw a modest uptick in demand for our high-capacity nearline products among U.S. cloud customers. We project incremental revenue growth from U.S. cloud customers again in the December quarter and are encouraged by constructive customer dialogue regarding our transition to a build-to-order model, making us more confident on demand fundamentals entering calendar 2024. Additionally, industry analysis of cloud customer behavior suggests that their cost optimization efforts are nearing a conclusion, while enterprises continue migrating new workloads to the cloud. These include both core IT workloads as well as AI-specific workloads. In addition to cost optimization efforts, spending priorities for CSPs have temporarily shifted towards AI-related infrastructure, which have further slowed the pace of demand recovery for mass capacity storage.

[Dave Mosley, CEO at Seagate Technology]

While AI-related spending remains a near-term priority, several cloud customers have indicated that investments in traditional servers and other IT hardware will resume in the coming quarters. All of these trends bode well for HDD demand recovery in both the cloud and enterprise OEM markets. These same markets in China are lagging these early positive signals due to the regional economic conditions that I mentioned earlier. However, video and image applications were a notable exception, reflecting demand both within China and globally. Public and private investments in smart city and smart security projects have been key demand drivers for the IVA market. While we believe these underlying demand trends remain intact over the long term, the severe slowdown in China's property sector and broader global macro uncertainties are likely to temper demand over the next couple of quarters.

[Dave Mosley, CEO at Seagate Technology]

Near-term conditions aside, we are optimistic about the IVA market, given the increasing use of AI and deep data analytics that enhance the effectiveness of IVA systems. These systems are evolving from basic monitoring tools to more holistic solutions, incorporating advances like high-definition AI cameras that offer more valuable insights and lead to longer data retention rates. These data-intensive solutions are well-suited for hard disk storage in terms of cost, capacity, and performance. Looking back across our 45-year history, cost-effective, high-capacity storage has been vital to the enterprise's ability to harness the benefits of every generational technology megatrend that we have experienced. From personal computing to the internet, mobile to big data, to the ongoing migration to the cloud, we anticipate the same will be true with the rise of AI and generative AI applications, which contributes to our long-term view for a return to healthy exabyte growth.

[Dave Mosley, CEO at Seagate Technology]

Seagate's mass capacity storage portfolio sets us up strongly with this growth backdrop. Last week, we announced our latest high-capacity nearline product, boasting 2.4 TB per disk and leveraging our proven 10-disk platform to deliver capacity starting at 24 TB. We continue to offer customers the flexibility to deploy these drives as a conventional CMR drive or as a shingled SMR configuration based on their specific capacity and architectural needs. We are engaging with a number of cloud and enterprise customers on qualification and expect volume shipments to begin in the first half of calendar 2024. We also expect to begin aggressively ramping 3-TB per disk products based on HAMR technology in early calendar 2024. These drives deliver capacity starting at 30 TB and offer customers the same flexibility to adopt either CMR or SMR configurations to further boost areal density into the mid-30 TB range.

[Dave Mosley, CEO at Seagate Technology]

Initial customer qualifications are progressing very well, and we continue to hit our reliability and yield metrics. We are getting extremely positive customer feedback, and we are broadening the number of customer qualifications as planned. We've been very thoughtful in building our product roadmap to stage HAMR technology, leveraging existing product design and process commonality where possible. For example, virtually all of the capital invested for the 20+ TB PMR drives is compatible with HAMR products. The 30+ TB HAMR drives utilize many of the same components in electronics as our 20+ TB products. They represent the fourth generation product using our 10-disk platform and the seventh generation that leverages glass substrates. These actions improve capital efficiency, reduce manufacturing complexity, ensure reliability, and hasten time to market. While many aspects of our product design are evolutionary in nature, HAMR revolutionizes areal density advancements.

[Dave Mosley, CEO at Seagate Technology]

Through years of persistent research and development investment, innumerable design iterations, and optimization cycles across all elements of the drive, from mechanical and electrical designs to wafer processing and firmware, we have now reached the appropriate balance between areal density gains, cost optimization, and reliability to launch HAMR in volume. Our execution and cycles of learning have enabled us to continue strengthening our portfolio, and we expect to launch products yielding four terabytes per disk in less than two years' time, significantly differentiating Seagate and addressing the full spectrum of mass capacity demand. Architecturally speaking, in today's data-driven business economy, mass capacity storage is a crucial tier. The HDD areal density advancements that we are delivering affirm and sustain the existing TCO advantages relative to NAND for mass capacity storage.

[Dave Mosley, CEO at Seagate Technology]

Simply put, we offer customers mass data storage at less than 1/5 the cost of comparable NAND solutions on a per bit basis. We don't foresee that value gap closing over the next decade relative to data center architectures. In addition to optimizing costs, customers are intensely focused on conserving data center power and floor space. Customers can realize benefits across each of these objectives by upgrading their existing installed base of HDDs to higher capacity drives. The 30+ TB HAMR drives currently in qualification are more than 2x the capacity compared to the average installed base across large data centers. This HAMR-based upgrade would more than double their existing storage capacity in the same footprint or offer a 50% reduction in operating costs for the same storage capacity, using about half the power and floor space.

[Dave Mosley, CEO at Seagate Technology]

These are compelling savings for customers and offer valuable optionality to best monetize their storage assets or reallocate floor space and power budgets for other uses, or even defer new data center build-outs to maximize their capital dollars. As we deliver these benefits to our customers, we are also focused on capturing the value of our product portfolio. As noted on our last call, we are continuing efforts to adjust price commensurate with that value, which ensures both a healthy industry supply chain and offers customers the opportunity for improved TCO over the long term. We have already seen some benefit from this strategy, which we anticipate will take a few quarters to implement more broadly across the end markets we serve. I'll now hand the call over to Gianluca for further details on the September quarter results and share our outlook.

[Gianluca Romano, CFO at Seagate Technology]

Thank you, Dave. Seagate's September quarter financial results were consistent with our revised expectations. We generated revenue of $1.45 billion, and a non-GAAP loss of $0.22 per share. Despite a sequential decline in revenue, we expanded total company non-GAAP gross margin by about 30 basis points, and HDD non-GAAP gross margin by more than 130 basis points, reflecting our focus on enhancing profitability. Within our hard disk drive business, revenue declined 6% sequentially to $1.3 billion, reflecting a modest improvement in mass capacity sales, offset by steeper decline in the legacy market than we had originally expected. The mix shift toward higher capacity drives resulted in total HDD shipments of 90 exabytes, essentially flat with the prior quarter. Average capacity per drive increased 17% sequentially to roughly 7.5 TB per drive.

[Gianluca Romano, CFO at Seagate Technology]

Mass capacity revenue increased 3% sequentially to just over $1 billion, driven mainly by the anticipated improvement in the market. Mass capacity shipments totaled 79 exabytes, compared with 75 exabytes in the June quarter. The mass capacity shipments as a percentage of total HDD exabytes were roughly 88%, up from 82% in the June quarter. For nearline products, shipment of 56 exabytes was slightly up quarter-over-quarter. Average capacity per nearline drive increased 12% sequentially, as demand trends among U.S. cloud customers began to modestly improve. We believe that the industry continues to ship below end consumption and is making progress in reducing existing inventory at our cloud customers.

[Gianluca Romano, CFO at Seagate Technology]

As we mentioned last quarter, we anticipate that it will take at least through the end of the calendar year for inventory levels among CSP customers to rebalance and for demand to improve more broadly. Specific to the IVA market, revenue was up sequentially as expected in the September quarter. However, as David noted earlier, the uncertain economic environment in China seems unlikely to change in the near term. As a result, we anticipate the IVA market will reflect an uneven pattern of recovery going forward. Legacy product revenue was $278 million, down 31% sequentially, with lower demand in each of the three markets served: mission-critical, client, and consumer. Finally, revenue for our non-HDD business decreased slightly more than anticipated to $159 million, compared with $218 million last quarter.

[Gianluca Romano, CFO at Seagate Technology]

Reserved IT spending patterns in light of economic uncertainties remain a headwind to our enterprise system business, and we expect similar revenue levels in the December quarter. Moving to our operational performance. Consistent with lower revenue levels in the September quarter, Non-GAAP gross profit decreased by $25 million to $288 million. Non-GAAP gross margin of 19.8% expanded slightly compared to the prior quarter. Pricing adjustment enacted during the quarter and cost saving from earlier restructuring activities more than mitigated the 9% decrease in revenue and increase in underutilization costs, which were approximately $59 million. We expect to see further margin benefit in future quarters as we continue to execute price adjustment across the entire portfolio and achieve full realization of projected cost savings.

[Gianluca Romano, CFO at Seagate Technology]

I note that beginning with the September quarter, our results reflect a change in the estimated useful life of certain capital equipment used in manufacturing. Our ability to increase the efficiency of our existing fixed asset base has enabled us to extend the useful lives from a range of three to seven years to a range of three to 10 years. This change reduced depreciation expense in the September quarter by approximately $9 million within cost of goods sold, and is expected to increase by about $20 million in the December quarter. We reduced non-GAAP operating expenses to $248 million, down from $258 million in the June quarter. While we continue to actively manage all areas of spending, we do expect non-GAAP OpEx in the December quarter to be up slightly as certain minor spending reduction measures begin to conclude.

[Gianluca Romano, CFO at Seagate Technology]

Moving to cash flow and the balance sheet, we have continued to take actions to improve our debt profile and manage working capital to support positive free cash flow generation. September quarter, we reduced inventory by 8% sequentially to just under $1.1 billion. Capital expenditures were $70 million, compared with $50 million in the prior quarter. For the fiscal year, we are still planning a significant reduction in CapEx spend compared with fiscal 2023, and expect spending will be more heavily weighted to the first half of the fiscal year. Free cash flow generation was $57 million, after giving effect to approximately $90 million of restructuring related payments that we had highlighted on our last earnings call. We used $145 million for the quarterly dividend and exited the quarter with 208 million shares outstanding.

[Gianluca Romano, CFO at Seagate Technology]

We closed the September quarter with $2.3 billion in available liquidity, including our undrawn revolving credit facility. During the quarter, we raised $1.5 billion in new capital through the issuance of convertible notes, bearing a low interest rate of 3.5%. A portion of the proceeds were used to fund a covered call transaction that increased the effective conversion price to nearly $108 per share, reducing potential future share dilution. The majority of the remaining proceeds were used to retire the outstanding balance on our term loans, which total approximately $1.3 billion. As a result of this debt restructuring action, we expect to realize cash interest savings of about $15 million on an annual basis.

[Gianluca Romano, CFO at Seagate Technology]

Additionally, we renegotiated the terms of our credit agreement, and with support from our lender group, we significantly relaxed the debt covenants through fiscal 2025. Accounting for all action that I just described, our debt balance was $5.7 billion at the end of the September quarter, up $215 million quarter-over-quarter. Non-GAAP interest expense was sequentially flat at $84 million, and we expect similar expense levels in the December quarter. Turning to our outlook, we expect mass capacity sales to move slightly higher in the December quarter, supported by incremental demand for our nearline products from both cloud and enterprise customers, offsetting softer sequential IVA demand. Within the legacy business, we are projecting higher seasonal demand, mainly from the consumer market, while non-HDD revenue is expected to be essentially flat.

[Gianluca Romano, CFO at Seagate Technology]

With that in context, we expect December quarter revenue to be in a range of $1.55 billion ± $150 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the mid-single-digit percentage range, with underutilization costs expected to be relatively flat with the September quarter. We expect to narrow our non-GAAP loss per share to $0.10 ± $0.20, based on a share count of approximately 210 million shares and a non-GAAP tax expense in the $15 million range. I will now turn the call back to Dave for final comments.

[Dave Mosley, CEO at Seagate Technology]

Thanks, Gianluca. We are operating in a longer than typical cycle, and I'm very proud of our team's sheer determination and resilience. We've continued to drive our financial, operational, and innovation priorities, which is evident by the actions we've discussed today. We are focusing our tactical business decisions on free cash flow generation. We are strengthening our balance sheet through debt restructuring actions, and we are executing on our mass capacity product roadmap to address future data growth. Signs of recovery have started to emerge as we look past the end of calendar 2023, and as industry conditions improve, Seagate is ready to capitalize. We are a stronger, more efficient company with a technology roadmap that extends our areal density leadership, positioning Seagate to deliver enhanced value to our customers and shareholders. Thanks to all of our stakeholders for your ongoing support of Seagate.

[Dave Mosley, CEO at Seagate Technology]

Operator, let's open up the call for questions.

[Operator]

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourselves to one question. If you have further questions, you may reenter the question queue. Once again, that was star then one to ask a question, and at this time, we will pause momentarily to assemble the roster. The first question comes from Erik Woodring of Morgan Stanley. Please go ahead.

[Erik Woodring, Head of U.S. IT Hardware Research at Morgan Stanley]

Super. Thank you for taking my questions this morning, guys. So, you know, Dave, I kind of want to take a step back, and if we go back to your prior analyst day, you know, the expectation was that mass capacity exabyte shift could grow at a 35% annual rate. Now, the world is clearly different today, both, you know, from a macro outlook and the emergence of AI as kind of a board-level investment priority. So curious, you know, as we look forward, how are you thinking about kind of the long-term, you know, three- to five-year rate at which mass capacity exabytes could grow? And, you know, maybe help us think about the linearity of that. Could that strengthen over time? Is that relatively linear?

[Erik Woodring, Head of U.S. IT Hardware Research at Morgan Stanley]

Just, just any thoughts that you have kind of longer term on what mass capacity exabyte growth could be? Thank you.

[Dave Mosley, CEO at Seagate Technology]

Thanks for the question, Erik. Yeah, we were coming off the back of a number that was almost 80% in one year. So to your point, back in the, in the last Analyst Day, the mid-30s was feeling pretty good for us, given all the data growth that we know is happening. And then we've, we've gone through these, you know, these current events, I, I'll say that we're, we're all seeing. Look, I, to your point about linearity, I, I don't think it's a very linear function. I think there—it's, it can be very choppy, up one year, down the next. It, it can be. I, you know, as we look out three to five years now, I would temper that somewhat and say in the mid-20s is probably good modeling range.

[Dave Mosley, CEO at Seagate Technology]

But we will see probably more growth from time to time. I do think that given the move that happened in the middle of the pandemic, of data into data centers for, you know, enterprise applications that were being run in data centers, I think that data is still going to grow in those data centers. So we're not at peak data center growth. And then you lather on top all these new applications that will be really sped up with features like AI and generative AI on top of them. I think that there's a big, healthy demand growth coming. 25% would be healthy for, you know, any kind of CAGR that's gonna go out for three to five years or a decade or something like that.

[Dave Mosley, CEO at Seagate Technology]

So we think there's healthy demand growth, but I do think it will - it won't be linear. There will be periods of, you know, big growth, and then there will be periods of digestion as well. We'll continue to see this as the economy flutters.

[Erik Woodring, Head of U.S. IT Hardware Research at Morgan Stanley]

Great. Thanks so much.

[Operator]

The next question comes from Wamsi Mohan of Bank of America. Please go ahead.

[Wamsi Mohan, Senior Equity Research Analyst at Bank of America]

Yes, thank you. Good morning. Dave, can you talk about HAMR qualifications? How many customers are you expecting qualifications in the near term? And maybe share color on what you expect in aggregate, given what you know about the ramp in terms of, you know, unit shipments, maybe one to two years out. And if you could, maybe just comment on how this higher areal density shift might change the dollars per terabyte relative to current product. That'd be super helpful. Thank you.

[Dave Mosley, CEO at Seagate Technology]

Yeah, interesting. I can take a crack at that. So relative to qualification, we are prioritizing customers, not necessarily the easiest customers first. You know, sometimes they can be more difficult, challenging customers, but we're staying very tight with customers, and we're trying to make sure that every of the initial drives that we build has a home. You know, make sure that as we bring on more qualifications, like we talked about in our prepared remarks, that we will make sure that we have the supply that's adequate for those, because I do think there will be a strong demand. What we're showing customers right now, exactly to your point on the value proposition, is a projection for what their TCO benefits will be.

[Dave Mosley, CEO at Seagate Technology]

That part of that's the acquisition cost of the drive itself. Part of it's the power and you know, floor space improvements that they'll get as we model TCO with some of them. So I do think that there's going to be a big push for the higher capacities, just like there always has been in our industry. And I think this is gonna be one of the biggest jumps in areal density we've done in the last five years. So the healthy growth is right ahead of us. We are filling the lines with the wafer lines with you know, HAMR parts, and we expect to you know, see volume shipments in the millions of drives next year, next calendar year.

[Dave Mosley, CEO at Seagate Technology]

You know, it'll all time out based on when the qualifications are, but, but the parts are coming.

[Wamsi Mohan, Senior Equity Research Analyst at Bank of America]

Thanks, Dave.

[Operator]

The next question comes from Sidney Ho of Deutsche Bank. Please go ahead.

[Sidney Ho, Equity Research Analyst at Deutsche Bank]

Great. Thank you. It's great to see some green shoots in the U.S. cloud market. Dave, last quarter, you talked about expecting cloud inventory to normalize in a couple of quarters. Can you give us an update about the timing there? But more importantly, are you getting indication that the rate of recovery is going to—What kind of rate of recovery is gonna look like beyond the December quarter, especially given your efforts to increase visibility through earlier collaboration or longer-term collaboration with your customers? Thanks.

[Dave Mosley, CEO at Seagate Technology]

Very good. Thanks. Yeah, I think as we are giving predictability on what products that we have in our pipeline, the customers are likewise giving more predictability on what they will need out there in time. So, you know, I would say if you look at two years ago, the demand was quite strong, and then we entered into this period about six quarters ago now, where, you know, some customers were saying, "We really don't need very much, and we're gonna make, you know, allocations of what we've already got in our data centers, you know, last for another year or something like that." And the entire industry has been suffering through that.

[Dave Mosley, CEO at Seagate Technology]

It's very hard to run factories like that, and so that's why we've gone out and said, "Okay, let's get predictable." What we're showing the numbers we're showing for customers right now in these long-term forecasts for build to order are nothing compared to the volumes of where we were at two years ago. They're much smaller. But I think the customers are showing us predictability and then asking us for upside on top of that. So it gets into a really interesting discussion about what's the true demand. And exactly to your point, you know, I think it'll help us get through the back of this period, but then I think ultimately we're not satisfying true demand because the growth of data is still large. 25% CAGR is still very, very large.

[Dave Mosley, CEO at Seagate Technology]

And so, you know, we're trying to make sure that we start the parts that ultimately will get paid for, and showing people exactly what we have in process for them. And they're trying desperately to show us a more predictable schedule that, you know, we can all manage better for better economics on both sides, ourselves and our customers.

[Sidney Ho, Equity Research Analyst at Deutsche Bank]

Thank you.

[Operator]

The next question comes from Karl Ackerman of BNP Paribas. Please go ahead.

[Karl Ackerman, Managing Director of Semiconductors and Networking Hardware at BNP Paribas]

Yes, thank you. Good morning. On HAMR, could you discuss the reliability metrics and perhaps power efficiency metrics relative to your existing SMR drives? I ask because at OCP last week, you know, it's clear that hyperscalers continue to prioritize those metrics as they introduce newer technology. And I guess as you address that question, could you also discuss maybe the number of customer engagements you have with HAMR, perhaps beyond the existing customer? Thank you.

[Dave Mosley, CEO at Seagate Technology]

Yeah, we're. As we said before, Karl, we're bringing on multiple customers right now, so we've already shipped qualification units out to multiple customers. I won't talk about them in particular. The HAMR reliability metrics will be identical to the reliability metrics of traditional drives. So there's really no change there, and there's no change in the power either. I mean, the people have pointed to the laser subsystem and things like that. Yeah, there's very small changes, so according to that, but you know, we're also working power down, you know, in normal course on these products.

[Dave Mosley, CEO at Seagate Technology]

I think one thing important to realize about the family is that the mechanical and electrical design points of the 2.4 TB per platter drive that we just announced are very similar to the 3 TB per drive nodes, or even beyond that. We should get into the mid-3 TB per disk drives with those same, you know, parts, so same electronics, same mechanics. So there's really no change in power. There's no change in reliability expectations either.

[Karl Ackerman, Managing Director of Semiconductors and Networking Hardware at BNP Paribas]

Super helpful. If I may sneak in another one, just on your systems business. You know, that has moderated roughly 40% the last two quarters. Just curious, I suppose, why, and kind of the outlook for that, and within that, you know, how much of that is maybe softness in flash prices versus perhaps the CORVAULT hard drive offering? Thank you.

[Dave Mosley, CEO at Seagate Technology]

Yeah, I don't really think flash has much to do with it. It's more, what I'll call on-prem traditional enterprise applications, and, thankfully, that space has not been as bad as we thought it was at the back of the year. It's not nearly as, as, cyclical as what the cloud has been in this recent cycle, but it was down, you know, year-over-year. And, you know, I think it will recover over time as well, because I think on-prem enterprise should benefit from all the growth of data. In many cases, you can't move the data off-site or into the cloud. It's just, it's either too massive or you've got regulatory requirements or sovereignty requirements, and you want to keep multiple copies anyway.

[Dave Mosley, CEO at Seagate Technology]

So I do think on-prem enterprise should have a good recovery at some point, and you know, we're happy with the systems business and our penetration into multiple accounts, you know, on that front to recover when the on-prem enterprise business does recover.

[Operator]

The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.

[Aaron Rakers, Managing Director and Technology Analyst at Wells Fargo]

Yeah, thanks for taking the question. I wanted to maybe just unpack the gross margin a little bit, appreciating that you guys don't give a defined, you know, kind of guide on a forward basis. Could you help us, though, you know, understand kind of, you know, the impact of underutilization you expect going into the December quarter relative to the $59 million reported this last quarter? And how do we think about, you know, as maybe that starts to lift out of the model, kind of the glide path to, you know, back to that 30% level as HAMR starts ramping, et cetera?

[Aaron Rakers, Managing Director and Technology Analyst at Wells Fargo]

I'm just curious how we think about or how you guys are thinking about the gross margin trajectory, you know, kind of the variables within that, looking out over the next couple quarters.

[Gianluca Romano, CFO at Seagate Technology]

Hey, good morning, Aaron, and thank you for the question. Yes, our guidance for December quarter is, of course, implying an improvement in gross margin. It is not coming from underutilization. We think underutilization will be fairly flat with the September quarter, but it's coming from, of course, the pricing actions that we are taking, and we have already started in the prior quarter, and a better cost structure. Now, part of the improvement is for sure coming from the full impact of the restructuring plan that we started in the prior quarter. So now we start seeing the full impact in our cost structure. So those are the major drivers for the improvement in gross margin. Then, now we continue to improve our structure, and we think our revenue will continue also to increase sequentially.

[Gianluca Romano, CFO at Seagate Technology]

Now, to go back to the, let's say, 30% gross margin, we think we need to have a revenue that is lower than the prior peak, we think at least 20% lower, so we can achieve that level of profitability with a much lower revenue.

[Aaron Rakers, Managing Director and Technology Analyst at Wells Fargo]

Very, very helpful. Thank you, Gianluca.

[Gianluca Romano, CFO at Seagate Technology]

Thank you.

[Operator]

The next question comes from Timothy Arcuri of UBS. Please go ahead.

[Timothy Arcuri, Managing Director at UBS]

Thanks a lot. I also wanted to ask on gross margin, Gianluca, as HAMR ramps, I think there's some controversy in terms of whether it's initially negative for gross margin or, you know, like, what the crossover point will be for when it becomes positive to gross margin. I think it depends on your yields, obviously. But can you just talk about sort of how that plays into the answer to your question, the trajectory of margins off the bottom here? Thanks.

[Gianluca Romano, CFO at Seagate Technology]

Yeah, no, as Dave said before, no, HAMR will strongly increase our capacity per drive, and that will for sure improve our gross margin. It will, no, it will be accretive to our gross margin since the beginning. Of course, when we go to, you know, 3 TB, 4 TB, 5 TB per drive, you will see even a bigger improvement. Now, we think we will start our HAMR revenue fairly strongly in the first six months of the calendar 2024. We think we have about 1 million units as opportunity to be sold.

[Gianluca Romano, CFO at Seagate Technology]

That will help, of course, as every time you go into a new technology, a new product, we could have a little bit lower yield, and that could limit in the first quarter or two, the improvement to the gross margin, but we see gross margin improving sequentially.

[Dave Mosley, CEO at Seagate Technology]

And Tim, just I would add, remember that it's not just about the highest capacity point, although that drive does drive a lot of heads and media in our factories. It's also about mid-range, if you will, capacity points, like 20 TB or 24 TB again, or, you know, those, the areal density enables us to go address those capacity points with improved cost structure.

[Timothy Arcuri, Managing Director at UBS]

Great. Great. Yes, thanks for that. So I also jumped on just to speculate. So, maybe you talked about this, but can you talk about how the change to build to order is impacting bookings? So I know that, you know, revenue is being guided pretty flat, but it seems like bookings are improving, and I wonder how much of that is due to the shift to build to order, and how much of that is due to just the customers having worked through inventory. And, you know, what do the bookings tell you about the trajectory of where revenue is going to go into the first half of next year? Thanks.

[Dave Mosley, CEO at Seagate Technology]

Yeah, it's actually an interesting question. So we do have some customers that are embracing the predictability, and there are reasons for that. You know, maybe some of it is because they have burned through their inventory completely, and so they know that they're going to be buying. I think there are customers who are not leaning into, you know, multiple years just yet, for various reasons. They make procurement decisions all the time, and, you know, so do we, right? Everybody has to make these tough decisions. But, you know, generally speaking, I think it's giving us better visibility, at least at the lower rate that the industry now runs. Because remember, the industry just doesn't have the money to speculatively start a bunch of products right now.

[Dave Mosley, CEO at Seagate Technology]

We have to make sure that what we do start, the suppliers are going to get paid for and so on. I think the model is generally working out pretty well, and as we show higher and higher value, like the 3+ TB per disk capacity points and then the 4+ TB per disk capacity points, I think people will want to make sure that they can take advantage of that TCO proposition we put out in front of them. So, so I anticipate it'll pick up steam. We are still doing things that are two quarters or four quarters or something like that, and so, you know, there's negotiations and everything, and you know, I can be frustrated by that.

[Dave Mosley, CEO at Seagate Technology]

But, you know, as those negotiations, you know, continue on, I think we will continue to make sure that we right the industry and ourselves, you know, our suppliers, so that we can, you know, at least get back to a point where we're, you know, returning value to everyone so we can keep investing in the industry. I think that's an important point. That's one of the reasons we've done this.

[Timothy Arcuri, Managing Director at UBS]

Got it. Thank you so much.

[Operator]

The next question comes from Krish Sankar of TD Cowen. Please go ahead.

[Krish Sankar, Managing Director and Senior Research Analyst in Semiconductor Capital Equipment and IT Hardware at TD Cowen]

Yeah, hi. Thanks for taking my question. I have a two-part question. First is, you folks shipped about 56 exabytes to nearline customers in the quarter. Given the view that, you know, nearline is going to improve in calendar 2024, do you think you can hit the 100 exabyte run rate sometime in calendar 2024? And then a follow-up is, Dave and Gianluca, it seems like you've been most confident about HAMR ramp and gross margin, you know, this quarter versus all the prior quarters. Kind of curious, what is the reason for that? Was there any improvement in the quarter that you hit some milestones, or was it more increased customer demand or better visibility into the other purchasing of HAMR next year? Any color on that would be helpful.

[Dave Mosley, CEO at Seagate Technology]

Yeah, I would say all of the above. As time marches on, our teams make progress against the yield targets, the reliability targets, and the qualifications, you know, progress, and we can see, and we have more and more certainty we get towards the end of the qualification. So all of those things are factoring into our confidence. And I think, you know, we'll continue to update everyone going forward as to exactly how this is going. Remember that we're also starting into qualification with this 2.4 TB per platter, which again, I made the point before, it's almost the same box. And so we have a PMR outlet for those same parts, and we're driving the vendors to that commonality.

[Dave Mosley, CEO at Seagate Technology]

Most of the vendors, the lion's share of the vendors have common parts through these two platforms, so, we can drive that much more volume in and predictably get people paid and things like that.

[Krish Sankar, Managing Director and Senior Research Analyst in Semiconductor Capital Equipment and IT Hardware at TD Cowen]

And then on the exabyte Nearline, can you hit 100 exabytes next year, or is it too aggressive?

[Gianluca Romano, CFO at Seagate Technology]

Yeah, I think for the current fiscal year and probably the calendar 2024 is not very probable that we can double the exabytes, but we think we will grow sequentially, you know, in all those quarters.

[Krish Sankar, Managing Director and Senior Research Analyst in Semiconductor Capital Equipment and IT Hardware at TD Cowen]

Thanks, Gianluca. Thank you, Dave.

[Gianluca Romano, CFO at Seagate Technology]

Thank you.

[Operator]

The next question comes from Blayne Curtis of Barclays. Please go ahead.

[Tom O'Malley, Director and Equity Research Analyst at Barclays]

Hey, sorry about the name mix up there. This is Tom O'Malley on for Barclays. I just wanted to understand the timing of the recovery a bit better here. You previously have talked about Q4, and then you talked about the end of December, and this is in Nearline in particular, and, you know, it's kind of pushed to Q1. You're seeing this U.S. cloud uptick, you said again, so kind of in September and in your expectations for December. But when do you expect the market step up in the market? Is that still expected for March, or have things kind of elongated just given the inventory situation? Any update on that, on that recovery would be helpful.

[Dave Mosley, CEO at Seagate Technology]

Yeah. Yeah, Tom, thanks. I think we're still on the same plan that we talked about last quarter. It's a gradual uptick, so we're watching the inventory being depleted. We're seeing new orders come in. You know, I think the one variable would be maybe some of the global cloud customers, not the U.S. cloud customers, but maybe some of the global cloud customers, given some of the economic issues that we have in various parts of the world. But generally speaking, we're still on the same plan and, you know, we'll see a gradual uptick rather than a hockey stick.

[Tom O'Malley, Director and Equity Research Analyst at Barclays]

Then, just on the gross margin side as well, just taking the midpoint of guidance, and you, you're talking about operating expenses actually up slightly in the December quarter. It implies, you know, 200+ basis points of sequential improvement in gross margin. You know, I understand that you, you know, you pointed to some pricing increases, but that'll be pretty quick in turn to get the full benefit there. Is there any other levers that are contributing to December? Obviously, you have some mixed benefit with IVA gone or going down and Nearline up, but, just any other levers that you could point to other than the pricing that are impacting December? Thank you.

[Gianluca Romano, CFO at Seagate Technology]

Yeah, I would not say that pricing is the only things driving the gross margin up. Actually, the cost side is very important. We have the full impact of all the restructuring plan that we executed in the prior quarters that are now going into our costs, of course, also in our OpEx. OpEx could be a little bit higher, but not much higher. So we are talking about $ a few million higher. So I would say both pricing and cost should go in the right direction to improve our gross margin sequentially.

[Dave Mosley, CEO at Seagate Technology]

And sorry, just to be clear, we, you know, we're also going through product transitions, right? So as we, we may raise price on one of the older products, and then, you know, there's a, the customer can offset some of those increases by a better TCO proposition in the next drive, and we can go work the cost on that. So the mix plays a role, and the customers can see the TCO benefit. They're incentivized for that.

[Operator]

The next question comes from Steven Fox of Fox Advisors. Please go ahead.

[Steven Fox, Founder and CEO at Fox Advisors]

Thanks, for taking my question. Dave, understanding everything that you said about sort of a cyclical recovery, there's still a lot of macro headwinds out there. And obviously your decline in sales over the last, you know, 12-18 months is outdone, you know, what the macro is doing. So I'm just curious, how can we get comfortable with the idea that as you see more macro pressures, that business... your business keeps recovering? Is there anything you would point to in particular that, you know, may not limit cloud spending as much more than you think of, or just like other cycles where you outgrew in tough environments? Thank you.

[Dave Mosley, CEO at Seagate Technology]

Right. Thanks. You're right, it is a tough environment. I will say that, data continues to grow, and people want to, you know, improve their economics all the time. So, the data centers that exist in the world have an enormous number of hard drives. We're gonna see some refresh of those for various reasons, power, some of them are just aging off. The upgrades can be actually fairly large. If you think about buying a 32-TB drive and replacing four 8-TB drives, that may still be in your system. I mean, those are market economical benefits that will ripple through the data centers. And so I do think that, you know, in some cases, since data is growing so big, it bucks the trend of what's going on in the macro.

[Dave Mosley, CEO at Seagate Technology]

I mean, obviously, that everyone's paying attention to the macro. But I do think that, you know, there will still have to be some investments to make, and there will also be opportunities to go save costs with some of the new products that we have coming. And we've also been through the cycle on the early side already of, you know, already the inventory is being depleted around the world, so you know, there's not that massive inventory bubble out there anymore.

[Steven Fox, Founder and CEO at Fox Advisors]

Thanks for that. That's interesting color. And then Gianluca, can you just... I mean, I assume you don't want to give, like, specific underutilization charge, charges likely for the, you know, the first half of next year, but can you sort of directionally give us a sense for how long you think we should keep modeling, even if they're smaller charges, you know, in calendar Q1 and Q2, to keep that in our gross margin calculations? Thanks.

[Gianluca Romano, CFO at Seagate Technology]

Yeah, we expect to have a underutilization cost also in calendar Q1 and calendar Q2. Probably a little bit, could be a little bit lower than what we have in December, of course, but, of course, the volume that we are producing is still a little bit below what we now had installed in at the top of the cycle before.

[Steven Fox, Founder and CEO at Fox Advisors]

Great. That's helpful. Thank you.

[Operator]

The next question comes from Ananda Baruah of Loop Capital. Please go ahead.

[Ananda Baruah, Senior Equity Analyst at Loop Capital]

Yeah, thanks, guys. Good morning. Thanks for taking the question. I guess, Dave-

[Ananda Baruah, Senior Equity Analyst at Loop Capital]

... Just given that you're starting to see things start to firm up, and talking about, you know, sort of, I think, Gianluca, Q over Q increases in nearline as you go through 2024, what's the opportunity days for things to get tight as you go through 2024, just given the capacity that you've taken offline?

[Dave Mosley, CEO at Seagate Technology]

Well, I think the tightness is actually kind of interesting because like we said before, the data is growing, and the data centers, we all know that. You know, the amount of data being generated is growing quite quickly. And I think relative to the hard drive industry quickly reacting to anything right now because of some of the damage that's been done in the supply chain and just some of the, frankly, the lead times that exist on current parts, especially at the highest capacity points, there's not as much flex as there used to be. And so I think we may see we may enter into an environment where people say, "Okay, I see the economics of upgrading part of my fleet here now. Let's go ahead and do it.

[Dave Mosley, CEO at Seagate Technology]

It'll save me power, it'll save me space, it'll, you know, it'll allow me to answer the call for the data that's growing. And then they'll, once they get their orders in, we'll say, "Well, the lead time is X," and, you know, that might, that might be the challenge. So that's, that's how I think things may get tight, and, and it'll manifest itself. I don't know exactly when, but, you know, I certainly think that we could get into an, a situation like that just simply because the hard drive industry does not have the immediate capacity gains that it used to.

[Ananda Baruah, Senior Equity Analyst at Loop Capital]

And then what does that... So what are the downstream impacts of that? I mean, in the past, it's been pricing goes up, long-term agreements, that type of deal. Is that, is that still some of the stuff that could occur if you find-

[Dave Mosley, CEO at Seagate Technology]

That's right. But that's exactly why we're addressing the customer base with these build-to-order models, you know, 'cause I think we're, in some sense, we're helping the customers get a predictable financial outcome if, you know, if they can give us at least some predictable visibility.

[Ananda Baruah, Senior Equity Analyst at Loop Capital]

That's super helpful. Thanks. I'll keep it there, guys. Thanks.

[Dave Mosley, CEO at Seagate Technology]

Okay.

[Operator]

The next question comes from Mark Miller of The Benchmark Company. Please go ahead.

[Mark Miller, Senior Equity Research Analyst at The Benchmark Company]

Thank you for the question. You mentioned AI opportunities in IVA cameras and other areas. I'm just wondering, when do you think these opportunities will really start to ramp, and any idea on the magnitude of these opportunities in terms of sales for next year?

[Dave Mosley, CEO at Seagate Technology]

Yeah, Mark, I think it's really hard to quantify just yet, but, you know, there's a lot of stuff going on in, I'll say, big data around AI. You know, you've got people appointing Chief Data Officers now to be able to track where is the data, what's its value, you know, might we want to retain that just in case that we end up with some tools that are, you know, allowing us to monetize it or understand more about our processes, you know, so on and so forth, the customer base, factories. So my personal opinion is we're in the early innings of a move from throwing data away to keeping some of it longer term, you know, for, for, you know, the benefits of the, of the corporations.

[Dave Mosley, CEO at Seagate Technology]

I do think that a lot of that will be edge. I don't think all of it will end up in the cloud. I think a lot of it will actually be on the edge. And so, this is something we're tracking very carefully. I don't think it's really manifested itself just yet. I think people are using some of the new application capabilities that are being branded AI applications to get to know them and understand them. And I certainly like things like generative AI, which I believe is kind of a new inter-user interface, if you will, that allow the applications to be used much more efficiently and maybe queries to be made of these terms much more efficiently.

[Dave Mosley, CEO at Seagate Technology]

But I think we're still in the early innings, and I think once it does latch, we're gonna know that data and the longevity of that data and the integrity of that data is all critical, and so I think that's good for us.

[Mark Miller, Senior Equity Research Analyst at The Benchmark Company]

You mentioned lower CapEx for fiscal 2024. Can you give us a range or any idea what it would be?

[Dave Mosley, CEO at Seagate Technology]

I think we'll probably stay inside of our existing range, you know, 4%-6% of revenue. But we are, you know, since the revenue is so, so far down, we are, you know, very mindful of the spending. However, you know, we can see the tools that we need to bring HAMR up according to a certain pace, and as soon as—if the pace quickens, we will get there as quickly as we possibly can. So, you know, we understand what the recipe is, and we understand what's needed to make the recipe really well, and we'll spend accordingly.

[Mark Miller, Senior Equity Research Analyst at The Benchmark Company]

Thank you.

[Operator]

The last question will come from Vijay Rakesh of Mizuho. Please go ahead.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Yeah. Hi, guys. Just quickly on the HAMR side, I was just wondering, when you look at exiting calendar 2024, what your mix of HAMR would be, either by exabyte or units?

[Dave Mosley, CEO at Seagate Technology]

Calendar 2024, you said?

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Yeah.

[Gianluca Romano, CFO at Seagate Technology]

Yeah. Well, yeah, I don't think we guide,

[Dave Mosley, CEO at Seagate Technology]

Yeah.

[Gianluca Romano, CFO at Seagate Technology]

... so far in time precisely on the mix.

[Dave Mosley, CEO at Seagate Technology]

Yeah, we're not gonna guide that, but I will say that, you know, we'll be very aggressive. When we talked about, you know, 4 TB per disk and cost optimization and of these platforms and things like that, I mean, this is something the hard drive industry has been doing for years and years and years, decades, right? So-

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Mm-hmm.

[Dave Mosley, CEO at Seagate Technology]

We know how to do these transitions. We're very confident in the technology, and we'll look to be very aggressive there. The wafer lead times are also quite long, so you know, we're already starting on this journey because we're already in wafer. And so we're, you know, populating the wafer fabs with the parts that will support it.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Got it. And then on the nearline side, obviously, you know, the shipments, exabyte shipments have come down quite a bit. As you look at the green shoots with some data center coming back, do you feel pretty comfortable given what the inventory levels are at the OEMs and, you know, what you see in terms of the return on the spend? How would you characterize that if you look at those two? Thanks.

[Dave Mosley, CEO at Seagate Technology]

Yes, I do think that the inventory has been depleted now to levels that, if you think about the complexity of all the data centers of the world and how much material needs to be parked out of them, in front of them for replacements, and then, and then what the data growth is in the data center, I think the inventory levels have come down to a point where we feel comfortable now that people are gonna get back to more predictable buying patterns.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Thank you.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

[Dave Mosley, CEO at Seagate Technology]

Thanks, Andrea. As you heard today, Seagate remains focused on our key priorities, including executing our leading technology roadmap, which we believe positions us to, well, to enhance profitability over the near term and to capture long-term opportunities for mass capacity storage. I'll close by once again thanking all of our shareholders for their ongoing support of Seagate. Thanks for joining us today, and we look forward to speaking with you during the quarter.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Participants

Executives

• Dave Mosley, CEO
• Gianluca Romano, CFO
• Shanye Hudson, SVP of Investor Relations

Analysts

• Aaron Rakers, Managing Director and Technology Analyst at Wells Fargo
• Ananda Baruah, Senior Equity Analyst at Loop Capital
• Erik Woodring, Head of U.S. IT Hardware Research at Morgan Stanley
• Karl Ackerman, Managing Director of Semiconductors and Networking Hardware at BNP Paribas
• Krish Sankar, Managing Director and Senior Research Analyst in Semiconductor Capital Equipment and IT Hardware at TD Cowen
• Mark Miller, Senior Equity Research Analyst at The Benchmark Company
• Sidney Ho, Equity Research Analyst at Deutsche Bank
• Steven Fox, Founder and CEO at Fox Advisors
• Timothy Arcuri, Managing Director at UBS
• Tom O'Malley, Director and Equity Research Analyst at Barclays
• Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho
• Wamsi Mohan, Senior Equity Research Analyst at Bank of America