Operator:

Good afternoon, and welcome to the Seagate Technology Fourth Quarter and Fiscal Year 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Investor Relations. Please go ahead.

Dave Mosley:

Thank you, Shanye, and hello, everyone. Seagate in fiscal 2024 on a high note, reflecting strong operational execution and more favorable supply demand dynamics. Fourth quarter revenue increased 18% year-on-year, supported by strengthening global cloud demand. We achieved non-GAAP gross margin of nearly 31% at the company level, supported by HDD gross margin that were above that level and at the top end of our long-term target range. These results, along with ongoing expense discipline, led to non-GAAP EPS of $1.05, far exceeding the high end of our guidance range. At the start of the fiscal year, we highlighted three financial priorities, namely to increase profitability, drive cash generation, and strengthen our balance sheet. Reflecting on our full-year performance, we delivered on all three. Our results were due in part to the built to order or BTO strategy that we put in place to provide greater supply-demand predictability and optimize our cash resources. For fiscal ‘24, we expanded non-GAAP operating profit by 64%, grew free cash flow sequentially every quarter of the fiscal year, and maintained healthy liquidity levels. As we enter the new fiscal year with operating and financial momentum in an improving demand environment, executing our mass capacity product roadmap is a top priority. In the September quarter we expect to complete the HAMR-based Mozaic 3+ product qualification with our lead CSP partner. We've also started to ramp our 28 terabyte PMR, SMR product platform drives in high volume. These two product advancements align well with the strengthening nearline demand environment. I'll share further details around our product execution momentarily, but first I'll briefly review the current market trends. As I highlighted a moment ago, we are seeing strong nearline cloud demand growth from customer globally. Fourth quarter nearline cloud revenue more than doubled from the year ago period and we expect growth to continue in fiscal 2025. We attribute the underlying demand drivers to an increase from both traditional cloud computing workloads, as well as new AI-related deployments. We believe this demand rebound follows a period of deferred HDD storage investments by cloud providers as they prioritize spending towards compute-intensive infrastructure. While cloud service providers are continuing to build out that infrastructure, they increasingly focus on developing, deploying, and monetizing AI applications. This involves both training of large language models and expanding the entire hardware stack to support future generative AI content-driven growth. While HDD demand pull-through related to AI is still relatively small, we believe HDDs will play a crucial role in enabling both of these phases of the AI adoption curve. By offering cost efficient, scalable storage solutions, HDDs are ideal for maintaining the integrity of AI training data sets, as well as preserving the valuable content that AI engines are projected to generate in the future. In the enterprise OEM markets, we observed a gradual improvement in demand for the second consecutive quarter and continue to project stronger growth in the second-half of the calendar year, driven by both modest improvement in traditional server unit demand and increased exabyte content. We've also started to see incremental demand for higher density storage specific solutions, due in part to enterprises putting storage capacity in place, either on-prem or in private clouds, as they prepare for future AI applications. Finally, turning to the VIA markets. Sales of our VIA products came in better than we expected in the June quarter, while customer inventory remains at healthy levels. We expect VIA sales will likely fluctuate a bit in the second-half of the calendar year off of this higher base. Global demand indications for smart city projects remain strong, but near-term budget visibility for these projects is mixed in many markets amid the current global macro uncertainty. Overall, the end-market demand trends are solidly pointing to long-term growth opportunities for mass capacity storage. Demand recovery for our high capacity near line drives has been faster than anticipated, which has extended product lead times and led to tighter overall supply conditions. Based on our current outlook, our nearline exabyte supply is committed through the end of the calendar year. These trends underscore the relevance of our BTO strategy, which is intended to provide greater demand predictability for Seagate and supply assurance for our customers. In this environment, we are working with our customers to obtain better demand visibility and address their exabyte growth needs through product transitions while maintaining a strong focus on profitability and supply discipline. As noted last quarter, we are executing the qualification and ramp of two new high capacity drives. Transitioning to these higher capacity products enabled Seagate to profitably expand exabytes shipment volume with our existing Hard Disk Drive production capacity, while also supporting our customers growing data demand and TCO needs. Customer acceptance of our new PMR product continues to gain momentum. These drives, which offer capacities of up to 28 terabytes, have demonstrated solid yield, quality, and performance today. With numerous customers now qualified, spanning the cloud, enterprise, and VIA markets, and several more planned to complete in the coming months, volume ramp is already underway. In the June quarter, we shipped a small volume of HAMR-based Mozaic drives for revenue to non-cloud customers. Consistent with our recent public commentary, our lead CSP customer is validating drives built with the improved process controls and new firmware optimized for their specific workloads. Testing on these drives is progressing to plan and we expect a complete qualification to begin shipping them revenue units later in the September quarter. Based on our confidence in the technology and experience on this product platform, we are proceeding to launch new HAMR qualifications with the expectation to have multiple U.S. and China cloud customers, calls underway this quarter. We estimate these qualifications will take around three quarters on average to complete, which points to a broader volume ramp toward mid-calendar 2025. We are leveraging all of our learnings and pushing the pace of development on our next generation of HAMR drives, the Mozaic 4+. Mozaic 4+ offers 33% more capacity compared with the HAMR drives that we're shipping today with minimal changes to the bill of materials. This illustrates the central value proposition of the Mozaic platform, namely the technology's ability to scale drive capacity through aerial density gains rather than adding Hard Disk Drive. This capability is enabling Seagate to deliver significant cost benefits to our customers as well as offer power and space advantages that are particularly valuable for data center operators as they expand cloud and AI infrastructure. For example, each data center slot loaded with one of our Mozaic 3+ drives offers 3 times the storage capacity relative to the average capacity of nearline drives in our installed base and consumes about 70% less power per terabyte. These represent tremendous savings opportunities for data centers at exabyte scale. We are hearing from customers directly, including CSPs, that HDDs already play a crucial role in extracting value from data in the early stages of AI application deployment. As GenAI engines mature, customers expect an acceleration in content creation that will lead to significant demand for mass capacity storage. We recognize that GenAI is still in its early stages of adoption. However, this customer feedback combined with our early engagements with nearline cloud and OEM customers reinforces our view that mass capacity storage will be a beneficiary in both the cloud and at the edge as the adoption of these new exciting applications take hold. I'll stop there and pass the call over to Gianluca.

Dave Mosley:

Thanks, Gianluca. I'm pleased with our strong performance exiting fiscal ‘24, which reflects our team's unwavering focus on improving profitability and driving cash generation. Two key financial imperatives, as we enter fiscal ‘25, and the improving near line cloud and enterprise demand, we will focus on supporting exit by growth through product transitions. We are working closely with customers to address their data storage needs through two new high capacity products, including the Mozaic 3+ HAMR Drives. We remain confident in the HAMR technology, which provides our customers with cost efficient, scalable storage that we believe will prove critical in an era where data holds unprecedented value. We want to thank our global teams for their creativity and perseverance over the last several quarters that have helped us achieve the results that we announced today. Our structural performance improvements, coupled with a favorable demand environment and differentiated technology roadmap, position us well for years to come. We also wish to thank our suppliers for your support and our customers and shareholders for placing your trust in Seagate. Gianluca and I are now ready to open up to call for questions.

Wamsi Mohan:

Yes, thank you so much. Dave, you mentioned that nearline capacity is committed through end of calendar ’24? How should we think about the market coming more in supply-demand balance and when do you think that would happen? Or maybe asking it another way, how long would it take for you to add incremental capacity? And how do we square that with the low end of capex for fiscal 25 comments from Gianluca? Thank you.

Wamsi Mohan:

Okay, thanks. If I could really quick one for Gianluca. In your guide of the gross margin improvement, right? As you've gone through the last few quarters, you've been seeing material step function changes in your gross margin as some of these underutilization charges have gone away on these higher revenues. As you think about this quarter-on-quarter into September and beyond, it seems that the gross margin improvement is sort of asymptoting. And I'm wondering, is that more because of the ramp and qualification around HAMR and sort of where those volumes are this year? Or is it, and should we think that we won't get as much leverage on gross margins over the next few quarters. How should we be thinking about that? Thank you so much.

Wamsi Mohan:

Okay, thank you so much.

Operator:

Next question is from a Asiya Merchant with Citigroup. Please go ahead.

Dave Mosley:

Thanks, Asiya. I would say that the visibility is not as good as what we have from the CSPs today, but it's been a fairly sharp downturn in on-prem enterprise, as well over the last year. So talking to the customers, they see some of that coming back, maybe not as early, but probably into FY ‘25 later in the year. So that's what we're targeting right now. And again, trying to get the new products qualified there so we can answer it with exabytes. We think that over time on-prem is going to grow, because a lot of the cool applications that people are talking about, read AI applications, will need on-prem storage, as well for various reasons, snapshotting and checkpointing of the data and just making sure you feed all the AI engines with mass data at the edge. So we think there's opportunity there, but it's definitely lagging what we're seeing in CSPs right now.

Operator:

The next question is from Erik Woodring with Morgan Stanley. Please go ahead.

Dave Mosley:

Well, yes, we're pretty convicted from our comments in the prepared remarks, of course. You know, in short, Erik, we're looking at the data and we have thousands of drives running in our shop. We have at the customer sites as well they're running under a variety of workloads and we're mindful of the fact that we have to prove the long-term performance. We had some supplier issues during the course of this summer when we went to high volume, but we see the fixes and we see how they're responding in the test beds that we've got. So we're very optimistic about getting through these things. Our industry's really upped its game as the drives, they have to last for five, six, seven, years in the data center. It takes a little time to prove that kind of performance. We can't just fix that in a week. We have to actually prove it ourselves. So the bar is pretty high, but we'll get over the bar really soon, and that's why we're optimistic about it.

Operator:

The next question is from Krish Sankar with TD Cowan. Please go ahead.

Gianluca Romano:

In terms of gross margin, as I said before, we are going in the right direction. We have improved our gross margin by a lot in the last three or four quarters, so we are pleased with this trend. And we see further improvements coming in the current quarter. And then, as we discussed also in the past, we see both revenue and profitability continue to improve through the calendar ‘24. So we are fairly optimistic of course, we always need to check supply and demand balance and we need to have enough volume to bring underutilization charges to zero and right now it is in our forecast. So we are going the right direction, and we are not giving a new range for now. But as Dave said in his script, especially the hard disk part of the business is particularly strong and is already at the top of what we have in the current model range in terms of gross margin.

Krish Sankar:

Thank you, gentlemen. Very helpful. Thank you.

Amit Daryanani:

Good afternoon. Thanks for taking my question out too as well, I guess. I guess just both on pricing, especially on the mass capacity side, it looks like your pricing is up mid-single-digits maybe even slightly better than that. Can you just talk about how do you see the pricing trajectory on a year-on-year basis pan out through the end of this calendar year or fiscal year. I'd love to just get a sense on the pricing side? And then, Dave, when you talk about these HAMR volumes getting -- happening in mid-2025, so the push out you've seen, there's always this fear that as people, as investors, as customers wait for HAMR arms, Western did will pick up more incremental share with the Seagate. So can you just talk about customers broadly doing as a way for these HAMR qualifications to happen? And what gives you comfort that perhaps the share -- market share doesn't go away from you as these qualifications happen over the next few quarters?

Gianluca Romano:

Yes. On the pricing, of course, we are coming out from a fairly long down cycle, and we have started to increase our pricing based on the increased demand a few quarters ago. Part of the pricing is already included in our build to order that Dave already discussed, so already is part of the volume that already include a certain pricing for the next several quarters and is another part that will be discussed during the quarter in terms of upside and in different segments. In some segments, now the demand is strong, especially in the cloud. Enterprise OEM is also starting to improve. That is very good for us. Video and image application, I think through the end of the calendar year, will show some further improvement. Of course, there is also part of the business more in the legacy side that is not currently growing. Obviously the industry is becoming more healthy. The ecosystem is improving. So the pricing trend is going in the direction where we have discussed also in the last couple of quarters and of course is part of the improvement that we can see in the gross margin.

Operator:

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

Gianluca Romano:

Yes. I would say the June quarter came out better than what we were expecting, so we have anticipated a little bit of that gross margin improvement in the June quarter. Again, we are very positive for the current quarter. We have included in the guidance what we already have agreed with customers, and then we will see how the quarter will come out, can come out also a little bit better than what we expect in terms of pricing but of course, depends on what are the negotiations through the quarter. We are happy on the cost side. Cost is declining, so this is helping us. And it will be another step during the second part of the calendar year. So in terms of SMR, I don't know if, Dave, you want to answer that question.

Aaron Rakers:

Yes. Thank you.

Timothy Arcuri:

Hi, thanks. I think in the past, you said that your max exabyte shipment capacity is about 120 exabytes. You just shipped 114. You're going to ship more in September. So in the not-too-distant future, you're going to kind of bump up against max capacity. I know, Dave, you said that you're hiring folks back and stuff. But we're going to kind of get to a point where you've been raising prices. But how do you think about -- strategically, do you sort of slow roll the capacity expansion so that you don't really grow that number very much and you then take price? Or do you just think about more of a modest price increase trajectory and you basically back solve into what you have to expand in terms of capacity? How do you think about that balance?

Timothy Arcuri:

So is there just -- is there some number that the customer is bearing to -- I mean, willing to bear, Dave? Is it like -- do you think the customer can bear these sort of 5% to 10% price increases? I mean those are the kind of numbers we're hearing for the back half of the year. It seems very high and not a number that the customer probably can bear?

Gianluca Romano:

Yes. Tim, finally, the supply-demand dynamics will determine the price. That's a reality at the end. So demand is fairly strong at least in part of the business right now, and hopefully, this will continue for a certain number of quarters in the future.

Operator:

The next question is from Karl Ackerman with BNP Paribas. Please go ahead.

Dave Mosley:

Yes. Karl, as you know, the front end of the plunge was much more significant than anything we've ever seen before. We didn't ever even seen negative growth before the middle of this pandemic, right, on nearline exabyte demand. So it's -- we started from a very weak spot. I don't think we're back to normal demand by any stretch of the imagination, but we're going to have to -- like I said, because of what we've been through, we're going to be very cautious. And do you want to say something else, Gianluca?

Dave Mosley:

Right, Karl. I mean the BTO process gives us the visibility that we need. I don't think I would take away that's some middle of next year or anything else. I mean we're going to be very aggressive on all of the products moving forward to give exabytes that way. The high volume issues, the process issues that we've seen are really valuable learning for us, and I'm happy that the industry is all aligned at 4 terabytes and 5 terabyte value propositions that are not too far away. So we're going to aggressively drive these introductions and be as aggressive as you can just to help reconstitute the margin in the industry. We've had a busy summer making it work, of course, but I wouldn't trade all those learnings in as far as future ramps and future qualifications. Let's go.

Vijay Rakesh:

Yes, just a quick question on -- when you look at your underutilization, I just wonder if you can give us a color on what the utilization levels are now? And how do you -- does it get to like 85%, 90% by exiting the year?

Dave Mosley:

Right. If it helps, the utilization generally is high, but there are various factories in the industry and the supply chain that have been pulled offline. So the question is do we bring those factories back online, even though the utilization of the existing factories might be high than bringing new factory -- or the -- sorry, some of the old factories back online is one of the questions we're dealing with.

C.J. Muse:

Yes, thank you for taking the question. You talked about nearline exabyte committed for all of calendar '24. Curious how much of that have you locked in fixed pricing. And then, I guess, bigger picture question on gross margins. Now that underutilization is de minimis pushing into the second-half of the calendar year, how should we be thinking about ASPs versus mix driving gross margins higher? And as part of that, as HAMR revenues start to trickle in, in September, in December at those lower volumes, do you expect that to be accretive or dilutive? And very helpful.

Gianluca Romano:

Yes. So I would say, all what you said will be an help to our gross margin, of course, the pricing in the BTO, the eventual pricing that we will negotiate through the rest of the quarter and the fiscal year, now assuming demand is still growing as we expect and of course, also HAMR. HAMR, hopefully, we will be able to ship a significant volume in the next few quarters, and that will help also our gross margin to grow.

Operator:

Next question is from Mehdi Hosseini with SIG. Please go ahead.

Dave Mosley:

Yes. Thanks, Mehdi. So these are questions that we're stewing on now since the last year has been so operationally focused, to your earlier point, and thanks for all the accolades. I mean it's a very, very tough year that we've been through, but we're going to have to start addressing these questions. A lot of it comes down to what ultimately the demand is and is that demand persistent. What we don't want to do is drive our supply back up to some higher demand thing and then go through the same kind of cycle again. We just can't. We can't do that, I mean, on our financial footing. So we're going to have to address the debt. Depending on what the demand ultimately is, we're going to have to address the debt where it is. But if the demand is even higher, then we'll address that when it comes. And I think it's too early to speculate on what that is. We're still recovering from what we've just been through.

Operator:

The next question is from Steven Fox with Fox Advisors. Please go ahead.

Dave Mosley:

Thanks, Steve. It is difficult math because you have to understand exactly what the mix is of the demand that comes, right? So if it's all highest capacity drives, that's one question. If you get a lot of mid-capacity -- mid-range capacity, which is really the strength that we saw before the pandemic, was mid-range capacity and if some of that starts coming back, there's various customers that may need that. We answer the call differently for our product today or once we drive through these transitions, we're much more efficient, right? So a lot of it will depend upon the exact mix. I think where we are right now is our thinking is do not add any drive capacity at all. Just continue to be as utilized as we can and wait and see how that mix develops.

Ananda Baruah:

Hey, guys. Thanks for taking the question. Dave, just going back to GenAI, in the prepared remarks, you talked about starting to see demand driven by AI. I guess how much -- in what spirit is it starting to show up? Is it just kind of like dribs and drabs? Are you starting to see legitimate kind of chunky orders? And then any view -- like do you have any visibility or any view on when on-premise starts for inferencing? And I guess just in that context also, are the Tier 2s yet kind of "get customers treated as"? Appreciate it. That's it for me, Tier 2 CSPs.

Operator:

The next question is from Tristan Gerra with Baird. Please go ahead.

Dave Mosley:

Sorry, Tristan. Yes, we said non-cloud customers. We didn't say anything specifically.

Dave Mosley:

Yes. I think the way I think about this is there's different kinds of customers that have different kinds of qualifications and also those customer architectures are more and less tolerant of certain kind of faults and things like that. And we're very communicative with the customers on this. So the volume ramp has begun. It's not as aggressive as we were 6 months ago because of some of these volume issues that we have, but we're going to continue to ship more and more units to other people and learn from those shipments as well as we build volume in our factories, we'll learn about these -- some of these supplier interactions that really slowed us down.

Thomas O'Malley:

Hey guys, sorry if I missed this, I was bouncing between calls, but could you just update us on the process with the firmware update that you chose to do? I think you had previously mentioned that you had a subcomponent with a single supplier that was causing an issue, but then you used that opportunity to update the firmware. So have you completed the firmware, I guess, requalification? And does that have anything to do with the push out into Q3? And what incremental steps do you need to take to complete the qualification from this point? That would be super helpful. Thank you.

Operator:

The next question is from Mark Miller with The Benchmark Company. Please go ahead.

Dave Mosley:

This is a very interesting topic as well, Mark. From my perspective, it's time for the PC ecosystem to get some new applications. And so I'm very excited about it. I hope that some of those applications are what I'll call video editing applications. And so then the question is where is the data. Is it on the PC forever? Is it right next to the PC? Is it in the closet in the small, medium business? Is it up in the cloud? I mean as long as those applications are creating data and you want to store that data for a long time, I'm happy with it. Some of the sharing may not be as rich, but I think people are going to be very creative with some of the applications that are coming. We've seen the applications in the AI PC space, but I think the adoption is still going to be slow. And I hope I'm wrong. I mean I hope it's a little bit faster.

Dave Mosley:

Thanks, Gary, and everyone on the call. We appreciate your participation and your questions today. Hopefully, you've seen our enthusiasm for how Seagate is positioned to address the improving demand environment across all of our end markets. By continuing to focus on the fundamentals, the strong financial and operational execution and advancing our areal density growth road map, Seagate is well positioned to deliver value both to our customers and our shareholders, and we look forward to keeping you posted on our progress.

Operator:

Welcome to the Seagate Technology Fiscal Third Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations. Please go ahead.

Dave Mosley:

Thank you, Shanye, and hello, everyone. Seagate is delivering solid financial results in an improving demand environment. In the March quarter, we grew revenue 6%, expanded non-GAAP gross profit 18%, and more than doubled non-GAAP earnings per share compared with the prior quarter. Our performance is a function of both improving end-market demand and the decisive actions we implemented throughout the downturn to strengthen our financial profile heading into the recovery. Nearline cloud demand trends are increasingly positive across both US and China customers, and we also saw a sequential improvement in the enterprise OEM markets in the March quarter. On the execution side, the quarter-on-quarter margin expansion reflects our pricing initiatives taking hold as well as favorable mix, resulting in revenue growth in the quarter outpacing exabyte growth. Pricing strategy is just one key piece of our broader focus on profitability, which also includes maintaining a healthy supply-demand balance, introducing new technologies to enhance value for our customers, and maintaining tight expense controls with an emphasis on generating cash. Looking at the near-term end-market dynamics, cloud continues to lead the demand recovery. For a second consecutive quarter, we realized strong double-digit revenue growth from sales to cloud customers, with improvement across both US and global cloud names. We believe the long-running cloud customer inventory correction is mostly complete and their end demand is also improving. Based on our customer interactions, we currently expect healthy nearline demand growth to continue through the rest of calendar 2024. Within the enterprise OEM markets, demand stabilized in the second half of calendar 2023 and we observed incremental improvement in the March quarter. Historically, enterprise nearline demand has correlated well with traditional server growth, which is projected to modestly increase in calendar 2024. As a result, we expect enterprise OEM revenue to improve as server growth resumes. In the VIA markets, revenue was seasonally lower in the March quarter and we expect demand to trend higher through the calendar year. Smart cities remain the largest end-market opportunity for VIA products. However, new applications continue to emerge that use AI analytics to form actionable insights from data at the edge, where an estimated 80% of data resides. One such use case centers on smart energy and utility management that aims to use imaging data to drive energy efficiency and conservation. Analysts place this among the fastest-growing sectors for VIA applications worldwide. Within China, the pace and magnitude of demand improvement in VIA and other HDD markets will be shaped by economic recovery in the region. We continue to monitor the government's efforts to spur economic growth, including stimulus plans aimed at digital transformation and infrastructure spend. Recent economic indicators show signs of progress. However, it will take time for the benefits of these programs to take hold. Overall, we believe these constructive market trends support steady revenue growth throughout the calendar year. Our ability to deliver that growth is enhanced by our build-to-order initiative that is now in place with the majority of large mass capacity customers. These plans support Seagate better demand visibility and greater predictability for capacity planning, while our customers find value in the assurance of supply that meets their volume and timing needs. Importantly, the improving overall outlook for HDD demand is unfolding as we execute on our product and technology roadmap. Today, we are simultaneously driving qualification and ramp plans for two high-capacity product families. Our last PMR product delivering up to 28 terabytes per drive, as well as our first HAMR-based Mozaic product on 3-plus terabytes per disk. This is rare for our industry, and I want to acknowledge our product teams at Seagate, who are doing a phenomenal job supporting customers as we work together to advance our industry-leading products and technologies through the various customer qualifications. These two product families share about 95% commonality in components and leverage the same assembly processes and test processes. This enables efficiencies across areas such as procurement, manufacturing, capital investments, and customer qualifications. The 24-terabyte, 28-terabyte PMR drives are in qualification at most of our global cloud and enterprise customers. We have already completed qualification with one major enterprise customer, some global Tier 2 customers, and with our enterprise systems business. We currently expect to begin shipping significant volumes in the first half of fiscal 2025. Relative to HAMR technology, we continue to progress towards completing our first large CSP customer qualification, though we experienced a temporary slowdown in recent weeks. We determined a mechanical component unrelated to the HAMR recording subsystem and some of our drives was not performing as expected. We identified and rapidly implemented the solution with full support from our customer. Verification tests are underway and these tests should be completed in the June quarter. Every other aspect of the qualification process has gone as expected. With this shift in timing, we now expect to ship a few hundred thousand HAMR-based Mozaic drives in the June quarter and meet the remainder of our customer's exabyte demand through other already qualified products. As we gradually ramp HAMR products with our lead hyperscale customer in the second half of the calendar year, we remain focused on broadening the number of customers qualified on Mozaic products. Customer feedback reaffirms strong interest in HAMR technology and that is further reflected in the successful completion of our first qualification with a top non-cloud customer a few weeks ago. We've laid out a Mozaic roadmap with a clear path to at least 50 terabyte drives that offers customers TCO and sustainability benefits, including lower power consumption and less required floor space on a per terabyte basis. We are scaling drive capacity through aerial density gains rather than adding heads and disks. As we execute on our product roadmap to 50 terabytes and beyond, we expect to incur minimal changes to our bill of material costs and maintain low capital intensity of between 4% and 6% of revenue. As a result, we believe HAMR provides the path for achieving margin performance beyond our current target range as production scales and also positions Seagate well to continue capitalizing on megatrends like AI and machine-learning, which drive long-term demand for cost-efficient mass storage. As we've discussed in the past, the initial phase of GenAI has focused on building out the compute-intensive infrastructure required to develop and train large language models. As development shifts to the deployment phase, enterprises will begin to leverage these trained AI models to transform data with value-enhancing applications and generate data-rich content. Customers expect HDD demand to increase as this phase takes hold. Over the next several years, the volume of AI-generated content is expected to increase and also shift towards more imagery and videos, which can be up to 1,000 times larger than text. These trends bode well for HDD demand over the long-term, as HDDs remain the most cost-effective means to house and subsequently use mass capacity data. To summarize, the combination of more favorable demand trends, strong operating discipline, and product and technology leadership, provide the foundation for driving further financial performance gains. This combination reinforces our confidence in returning to our long-term target margin ranges and potentially exceed those ranges over time as HAMR-based products proliferate in the marketplace. With that, Gianluca will now cover our financial performance and outlook.

Dave Mosley:

Thanks, Gianluca. Seagate is demonstrating strong operational execution and supply discipline amid an improving demand environment, which sets us up well to grow revenue and further expand margins throughout calendar year 2024. Our product portfolio, anchored by industry-leading HAMR technology, offers compelling economics for our customers and for Seagate. As we proliferate these new products, we expect to drive further financial leverage over time. I'm confident that our product strategy offers customers the most compelling TCO proposition and positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. We believe that the Mozaic platform delivers TCO advantages for datacenter operators and supports their increasing focus on conserving power and space. This week, Seagate published our 18th Annual ESG Report outlining the progress we've made towards our own sustainability goals, including our product circularity program. We are collaborating with customers and recovering drives from our own operations to extend these products' life cycles and conserve the planet's limited resources. Since launching this program in 2020, we've recovered and shipped nearly 4 million drives back into the market. Finally, I want to thank our global team members for their hard work and dedication and recognize our suppliers, customers, and shareholders for your ongoing support of Seagate. Gary, we're ready to open up the call for questions.

Erik Woodring:

Great. Thank you so much for taking my question. I'll make it -- I'll combine this into a two-part question. So, Dave, I appreciate your comments on HAMR in the prepared remarks, really just wanted to get clarification on two points, if I may. First is, have you replaced the mechanical component that was giving you an issue and then proceeded to do testing such that you won't have any further delays on HAMR and now you're just going through kind of the final testing phase with your lead CSP customer? And then second, I believe you've talked in the past about a goal of onboarding the remaining large CSPs by the end of calendar year '24. Does this hiccup impact that timing at all, or have you started the call process with these customers? Just any clarification on those two points would be super helpful. And that's it from me. Thank you.

Erik Woodring:

Great. Thank you so much.

Amit Daryanani:

Good afternoon. Thanks for taking my question. I guess, Dave, in the -- I just want to focus on the cloud recovery part. In the past, I think you've talked about this being potentially a bit more gradual in nature, but certainly looking at your March numbers and the June guide, it would suggest perhaps the recovery is a bit more steeper. So I'm hoping when you talk to -- to get a sense of when you talk to these cloud customers, how do you think about the pace and the durability of demand recovery on the cloud side? And related to that, I think you folks shipped close to 100 exabytes of capacity this quarter, what is the total available capacity that you have right now? And what triggered the decision to potentially add more capacity down the road? Thank you.

Gianluca Romano:

Yeah, let me add on the underutilization charges, we said in the prepared remarks we do not expect underutilization charges in the fiscal year '25, so fairly soon we will not have that additional cost.

Operator:

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

Gianluca Romano:

Yes. Well, I would say in the last several quarters, now we had some success in improving our pricing and we are continuing to do that, so part of this increase in gross margin that you are estimating for the June quarter is, of course coming from pricing. As you know, we are -- in the March quarter, we were very high in mix for the mass capacity, then when we go through the rest of the calendar year, you have other parts of the business that will grow. So the mix will not be maybe as good as we had in March, but pricing is going up, and our cost, of course, is always trending in the right direction. Of course, we have a ramp of new products, but overall, we are very happy with the pricing action and where the mix is today. So we see further improvement through the calendar year.

Wamsi Mohan:

Yes, thank you so much. Dave, if I could just go back to the qualification, any color you can share on the differences between these two qualifications at your CSP and non-CSP customer? And is there a meaningful difference in the product itself between the CSP and non-CSP customer? And if I could for Gianluca, with this Broadcom deal that you also announced, how should we think about both the OpEx trajectory and would this impact your gross margins, so should we expect your gross margins to go down because of this slightly and then OpEx also to go down, or what the dynamics -- what dynamic should we expect? Thank you.

Wamsi Mohan:

Right, yes.

Wamsi Mohan:

Okay, got it. Thank you so much.

Operator:

The next question is from Krish Sankar with TD Cowen. Please go ahead.

Dave Mosley:

Yeah, thanks. We will continue to ship aggressively and go through the HAMR transition largely because we think it provides better value to our customers. Higher and higher capacity points, and then ultimately over time it allows us to get components out of the chain, which saves cost against these platforms as well. I mean, we're in an interesting position right now because, say, six months ago, I think supply was ahead of demand and now supply is lagging demand, some of that's just lead times on the product. So, balancing all these things is very important, I think, in today's market, but we're still going to drive very aggressively through the transition and we do believe that this is the way to get more margin into our business as well. So I won't go into specific numbers as we qualify customers, because right now, customers are seeking any kind of product that we can actually make, which then we may actually turn -- our turnover to some products that are already qualified versus prior plans we were driving, but I view that as a good thing because now we actually have demand that's helping our factories that's getting us focused and so I'm very optimistic about that. But -- so just we all are very clear, we're going to continue to drive the transitions very aggressively.

Krish Sankar:

Thank you.

Steven Fox:

Hi, good afternoon. Dave, I was wondering if there's any more color you can provide on your experience with talking to customers about build-to-order plans for, say, the next 12, 24 months. I mean, it sounds to me like you have accelerating demand on the cloud side, Legacy, and VIA sort of recovering on a seasonal type of basis, and then you have channel partners that are going to need inventory in order to help even things out. So how are you balancing all that? What is going to be different do you think that we should consider if we're looking out over the next few quarters with how you're going to be doing business? Thanks.

Steven Fox:

That's helpful. Thank you.

Timothy Arcuri:

Thanks a lot. I wanted to ask about this million HAMR unit that you had guided for the first half of the year, mostly was going to be 30 key drives. So you're going to make up, it sounds like 700,000, 800,000 drives with other stuff beyond HAMR, but I had kind of two questions. One, you probably have to rework some of the HAMR WIPs, so that would be a negative, but it did seem like HAMR was going to be dilutive initially. So is that all kind of a net positive [trade] (ph) for June quarter gross margin? And then because you gave us this -- sorry, go ahead.

Timothy Arcuri:

Yeah, so I just was going to ask, since you gave us that million unit number, I'm curious if you can give us some indication of what you think units will be in the back half of the year for HAMR? Thanks.

Gianluca Romano:

And just a clarification, Tim, on the HAMR gross margin, we never said that HAMR was dilutive to gross margin. We said that HAMR gross margin will for sure improve in the second part of the ramp or the first part of the ramp as, of course, a little bit more cost, but we never said it was dilutive to our overall gross lines.

Operator:

The next question is from Karl Ackerman with BNP Paribas. Please go ahead.

Dave Mosley:

Yeah, thanks, Karl. Different customers have different requirements and different feature sets, how they use the drive, and so I don't think there's a one-to-one swap. I mean, the good news for us is we have a lot of commonality and so we can react fairly quickly as to whether more people want one family or the other. But we're working with a lot of people on, as I said in the prepared remarks, on two different qualifications at the same time. And as far as I'm concerned, the qualifications are going well. We're staying very communicative with the customers. And against a demand environment that's improving, I think we -- that's why they should value our predictability even more as we show them what we have and what we're willing to build.

Ananda Baruah:

Yeah, good afternoon, guys. Thanks for taking the question. I guess just one on gross margin. In the past when you had dynamics similar to these demand ramp and price increases, and then Dave, supply demand tightness, there's typically been a quarter or so where you can get pretty pronounced step-ups in gross margin. And just wondering if there is anything that will preclude this cycle at some point from having the same type of dynamics. And then just to sort of sneak one in there real quick. Gianluca, any updated metrics -- you've given metrics in the past about revenue to gross margin, kind of scale ratios, do those still hold the ones that you've been given -- giving or does the pricing dynamics here change that at all? Thanks, guys.

Gianluca Romano:

Yeah, on the trajectory, especially of the gross margin, but with the business in general, every cycle is a bit different. We are saying today we see a good recovery from the cloud part of the business. Of course, it's not all the business increasing at the same way. So we still need to wait for other segments to start having the same kind of recovery before we can see a strong upcycle. But, no, we are very positive. We said earlier, we see that gross margin improving quarter-over-quarter and to be in the target range during this calendar year. I would say, every quarter, we have a little bit better pricing, little bit better cost. So the opportunity for us to achieve that target range at even lower level of revenue is for sure a reality.

Dave Mosley:

Thanks, Ananda.

Mehdi Hosseini:

Yes, a couple of follow-ups from me. I was under impression that for most of your components you have gone in-source, so what is it with HAMR that has made you rely on external vendors and how is -- how you're switching these vendors? And one follow-up for Dave. What is your most updated exabyte -- overall exabyte growth looking forward as the cycle gains momentum? Thank you.

Gianluca Romano:

No, I was just thinking about the components, but there are many components that we source externally, actually now the Ads and media, of course, we produce internally. Those are the most critical components, but there are many other components that we get from external suppliers. And on that particular component, we have multiple sources, so we can switch from one to the other.

Mehdi Hosseini:

Thank you.

C.J. Muse:

Yeah, good afternoon. Thank you for taking the question. I know you talked about the qualification just being a three-month delay in qualifications elsewhere on track, but if things do push out a bit, how do you, I guess, expect to maybe impact your planned utilization elsewhere, your thoughts around pricing and mix, and what kind of impact could that have? I would think positively on gross margin in the back half, would love your thoughts there.

C.J. Muse:

Thank you.

Toshiya Hari:

Hi, thanks for taking the question. Dave, in your prepared remarks, you talked a little bit about AI. I realize you don't have perfect visibility into what's driving customer demand, but I'm curious based on your conversations with your customers, to what extent is AI having impact on your business? I know it's nascent, but if you can comment on that, that would be great. And then related to that, I was hoping you could opine on your ability and the broader ACD industry's ability to compete with Flash in AI. I think based on recent conversations, some of the concerns that investors seem to have is that hard disk drives, you're very cost-competitive, but when you take into consideration things like read-write capability, space, and power consumption, it might be a little bit more competitive vis-a-vis what you're shipping today. So curious if you can -- if you can opine on that. Thank you.

Toshiya Hari:

Thank you.

Thomas O’Malley:

Hey, guys. Thanks for taking my question. I just want to understand the ramp with your largest customer in HAMR. You talked about this subcomponent and you were replacing that subcomponent, is that -- you're saying multiple vendors are getting qualified at the same time, so if you look at what a step back traditionally takes in terms of having a customer qualify a product, is that several weeks? Is that several months? I guess, what gives you the confidence that with this effect that you'll be able to not only qualify but then ship these drives within the quarter? Thank you.

Thomas O’Malley:

Okay. So in the future, you will just not use that supplier anymore or you would just rely more heavily on the others?

Thomas O’Malley:

Helpful. 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.

Operator:

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

Operator:

Welcome to the Seagate Technology Fiscal Second Quarter 2024 Conference Call. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations. Please go ahead.

Dave Mosley:

Thanks, Shanye and hello, everyone. I am going to focus on 2 key topics in my remarks today. First, we delivered solid fiscal second quarter results with revenue at the midpoint of our guidance and non-GAAP earnings of $0.12 per share, exceeding the upper end of our guided range. And second, last week, we marked a major inflection point in mass capacity storage with the launch of our ground-breaking Mozaic platform. Mozaic is intentionally named to describe the fusion of innovative technologies including Seagate's unique implementation of HAMR that collectively enable us to extend our areal density leadership. As we shared in the past, growing areal density is the most efficient way to enable data center operators to scale mass capacity storage to lower their TCO and to advance their sustainability targets. I'll discuss the platform in more detail shortly and also share progress towards qualification and volume ramp of our first HAMR-based Mozaic product which lays the foundation for products boasting 5 terabytes per disc and beyond. Let me start by highlighting our fiscal Q2 performance. Revenue of $1.56 billion was led by sequentially improving cloud nearline demand and a seasonal uptick in consumer drives, offset partially by the decline in VIA sales that we anticipated. Strong cost discipline and execution on pricing adjustments resulted in non-GAAP operating income tripling quarter-over-quarter and increasing roughly 17% year-over-year despite lower revenue levels. These performance and demand trends affirm our expectation for the September quarter to be the bottom of this prolonged down cycle. The enhanced discipline we've built into the business, including strict cost controls, management of supply and the strengthening of our balance sheet gives us an excellent foundation to build on as we move into a broader recovery. Additionally, execution of our product roadmap is expected to structurally improve profitability and return us to our targeted financial model which supports healthier industry economics. We enter calendar 2024 with increased confidence in our non-GAAP gross margin trajectory, including our ability to reclaim 30% minimum benchmark level at quarterly revenues that are at least 20% below our prior cyclical peak. From a demand standpoint, gradual recovery within the U.S. cloud market has started to take shape, reflecting solid progress in consuming excess inventory, along with more stable end market behavior. Enterprise OEM demand trends have also stabilized within the U.S. markets. Customer feedback still points to macro-related concerns, although IT hardware budgets are projected to modestly improve in calendar 2024 and traditional server growth is expected to resume, trends that support incremental HDD demand growth in the calendar year. We were also encouraged to see incremental demand among certain non-U.S. cloud and enterprise customers in the December quarter. Across the broader China markets, we project a relatively slower pace of recovery given the ongoing economic challenges within the region. However, some local governments announced further steps to support the region's economy which our customers believe will bolster local demand across mass capacity markets in China in the second half of the calendar year. These efforts support our view for demand in the VIA markets to pick up sometime after the Lunar New Year. Against the dynamic market environment, Seagate has continued to execute on a mass capacity product portfolio that further advances our technology leadership and serves the breadth of our customers' unique workload requirements while also supporting our objective of improving profitability. I'll outline the execution path for our latest product launches and the relevance of the new platform and then share how we believe our mass capacity solutions deliver economic value both to our customers and to Seagate. Our product qualification and ramp plans are on track with what we've been articulating over the past several quarters. We began shipping initial volumes of our 24 terabyte PMR, 28-terabyte SMR drives in the December quarter. Customer reception has been positive, as illustrated by the numerous active qualifications underway across multiple cloud and enterprise customers. Our 3-plus terabyte per disk product is the first major release of the HAMR-based Mozaic platform and we are rapidly nearing qual completion with our initial hyperscale launch partner. The qual has gone very well and we are working with this customer at their request to fully transition future Seagate demand to the 3-plus terabyte per disk platform. Volume ramp is starting in the March quarter according to plan with a goal to ship about 1 million units in the first half of this calendar year. We then expect to continue to ramp through the balance of the calendar year and we are currently broadening our customer engagements. Based on their planned timelines we expect to complete qualifications with a majority of U.S. hyperscalers and a couple of global cloud customers during calendar 2024. Starting at 3 terabytes per disk, Mozaic delivers a quantum leap forward in areal density innovation with a well-defined path that extends to 5 terabytes per disc and beyond. This transformative platform is the culmination of decades of development and numerous technologies pioneered by Seagate, including our Super lattice platinum alloy media that enables higher bit density. The revolutionary plasmonic writer with integrated laser capable of reliably writing each bit and an advanced reader technology that boast one of the world's smallest reading sensors. While Mozaic represents ground-breaking technology, the platform is fully plug-and-play with existing conventional drives and addresses the breadth of our customers' mass capacity workloads. These drives can also be deployed with SMR technologies for the few customers able to integrate SMR to take advantage of the additional capacity gains. As I noted earlier, areal density gains are the most efficient way to scale storage capacity. Let me offer a few clear examples. First, as we execute our product road map we can deliver increasingly higher capacity drives with minimal changes to the bill-of-materials. This results in a better TCO value proposition for our customers and attractive economics for Seagate. Second, as we scale areal density to 4 terabytes per disk, this enables extremely cost-effective product offerings in the low to midrange capacity points used by a majority of our enterprise VIA NAS customers. With 4 terabytes per disk, we use half the number of heads and disks to produce a 20-terabyte drive. Prototypes are already working in our labs with revenue planned for the second half of calendar 2025. As we ramp production to expand to other end markets, we gained tremendous manufacturing efficiencies, adding to the attractive margin opportunities that I just described. We continue to build on our technology and operational innovations with each successive product generation. For example, we are executing plans to vertically integrate the laser manufacturing process which enhances supply flexibility, provides greater control of the technology and provides opportunities to lower production costs. Collectively, we believe these actions underpin our mass capacity cost reduction road map while also providing a very strong TCO story for a broad range of customers. While TCO remains a key driver for mass capacity storage, data center operators are also focused on power and space consumption, particularly as investments in compute-intensive infrastructure proliferates to support generative AI applications. For context, the latest AI GPUs consume up to 700 watts which is roughly 100x more power intensive than a hard drive operating at maximum performance. Our products can help data center operators store more exabytes using less power and space. To quantify this, a single 32-terabyte Mozaic drive can replace three 10 terabyte drives storing more capacity at 1/3 of the power and footprint. TCO and sustainability gains of this magnitude are decision altering when architecting a new data center and offer a highly economical path to modernizing existing infrastructure. We believe that this dynamic can potentially accelerate the replacement cycle. As we move into the early stages of demand recovery, Seagate's strong focus on maintaining our product and technology roadmap through this past down cycle position us to return to profitable growth and address data center operators most important challenges

Dave Mosley:

Thanks, Gianluca. Heading into calendar 2024, we have increased confidence in a gradual nearline demand recovery that coincides with the launch of Mozaic. We believe this platform delivers sustainable areal density leadership with compelling TCO advantages, enabling data center operators to satisfy their increasing workload demands while conserving both power and space. This combination of capabilities is significant and our timing is fortuitous. We've navigated the last 7 quarters with discipline and focus while maintaining our product and technology execution plans. As a result, we emerge well positioned to drive optimized financial performance to support our capital return commitments and return to our targeted profitability levels over time. Our strong execution is only possible through the tremendous efforts of our global team and I would like to thank them for their resiliency and dedication through this dynamic period. I would also like to thank our suppliers, customers and shareholders for your ongoing support of Seagate. Operator, let's open up the call for questions.

Wamsi Mohan:

Dave, you alluded to the progress that you've made on Mozaic. -- Given what you know now, how would you characterize the outlook for maybe HAMR units in the second half of '24 or perhaps into '25? And I think you mentioned your first customer looking to transition to 3 terabyte HAMR. What kind of exabyte installed base opportunity is that? And maybe you could address it even more broadly across hyperscalers. That would be very helpful.

Wamsi Mohan:

Okay. Gianluca and maybe could you help us just think about the margin ramp? I think you noted some headwinds that will continue from underutilization charges but you're also expecting the margins to increase all through calendar '24. Could you maybe also help us think through in that margin commentary, how -- what the margin differential is between HAMR and CMR mass capacity drives and how that might change over time?

Operator:

And our next question today comes from Erik Woodring with Morgan Stanley.

Dave Mosley:

Yes. The dynamics for them is very interesting and it has affected us quite a bit over the last year or so I do think the inventory situation is much, much better than it was 6 months ago. So I'll say, it's basically cleaned up at this point. And it's going into the inventory changes going out and being consumed by the data centers again. So we're much happier with that. The rate of consumption isn't what it was 2 years ago. And but I do think it's going to accelerate a little bit. And this is where we get into the forecast numbers of what the CAGR is the exabyte CAGR. In 2020, we were in the high 50s and then we stayed in the 30s for 2021 and 2022. And then for the first time ever for the last year, 1.5 years, we've seen negative exabyte growth which doesn't make any sense. We're forecasting still in the mid-20s right now. And it may be a little bit higher as people get into some of these replacement cycles that we talked about. The interesting dynamic as I look back on the last 1.5 years was the push for AI and how it consumed a lot of compute dollars for the compute infrastructure that was going on in the data centers. And that's critical for most of our customers. They have been raised up to get as much compute memory for that compute online as they could to be able to handle all these AI applications everyone's talking about. I do think ultimately, there's a data back end piece of that. And then also, there's the fact that they were -- as they were prioritizing that, they were letting the drives that they had in the data centers just continue to run. So there's the replacement cycle for power and space and just overall cost benefits. We're all -- we're definitely having those conversations with our customers. And then factoring that into what exactly our volume plans are for the next 3 years and saying this is what we're intending to build. This is the economics that you could get it to -- and we've talked about this build to order before and I think we're getting a lot of good reception is. There's a lot of other supply chains that are actually managed this way by these people. So they understand it fairly well and they see the TCO benefits of the higher capacity drives, so they want to reach for that, plan it well and they'll get it. And we have to be careful, of course, because the factories have been so decimated by this downturn that we need to make sure that as we grow back, we go back in a smart way.

Aaron Rakers:

I wanted to maybe just ask about the income statement, just the P&L trajectory from here. This guidance that you've given, looks like it's the first kind of sequential increase in OpEx that we've seen and I can appreciate improving fundamentals, et cetera. I'm just curious, how do we think about the pace of quarterly OpEx and maybe a normalized level of operating expenses looking out over a couple of quarters. And then kind of building off of that with free cash flow generation returning -- just remind us again how you think about the capital structure and possibility of coming back into the market in terms of share repo?

Operator:

And our next question today comes from Krish Sankar with TD Cowen.

Dave Mosley:

Yes. Well, it's a good question. We will balance everything, of course, what our yields are and our costs are and the try to get the customers incentivized but there is some incentive business provided by their power and space reductions as well. We call that their TCO proposition. So all things in balance. I do think that the price per terabyte, if you will, is nominally the same. It may be just slightly lower but there's definitely going to be a TCO incentive for the customers to move off of the lower capacities and under guidance.

Dave Mosley:

Cycle times are a little bit longer now. So I don't think it will be as fast. I mean, I'd like it to be as fast and we'll continue to drive it as quick as we possibly can. The one thing I will say is that our last generation PMR product, if you will, the 2.4 terabytes [indiscernible] drive that we've just talked about has a remarkably similar kit of parts as the HAMR drives do. So relative to what we're making one versus the other, it's not a big deal and we can get through customer transitions easier. I think as we gain more confidence in a year over the 4-plus terabyte Mozaic platforms, then we'll definitely want to accelerate. Because by the time you get to say, 5-plus terabytes, then it's such a great replacement on every legacy product that you have that we want to drive the whole portfolio there because utilization is much better in the factories and the costs come way down.

Thomas O'Malley:

I appreciate it. So I just wanted to understand the move from qualification to revenue recognition. It sounds like with your largest customer, you're finishing qualification right now and you're obviously pointing to some big units in the first half. You mentioned on the call that you're expecting calls with the majority of the U.S. cloud and a couple of others in calendar year '24. Would you expect a similar time frame between qualification and revenue recognition? Alike if those are getting qualified in the second half of this year, you could see revenue from a large number of additional customers. Just wanted to understand the timing.

Thomas O'Malley:

Yes, that's helpful. And then I just wanted to ask one on the margin side. So you guys have talked about 20% below peak but still getting back to that 30% gross margin target or at least at the low end. If you look at what you're saying for mass capacity growth for the industry, mid-20s if you just assigned that to kind of your revenue ramp over the next couple of years, it takes probably 1.5 years to kind of get to that $2.5 billion, $2.6 billion mark, just using like a linear growth rate. Is that the time frame we should be thinking about until you get back to that 30% to 32% gross margin? Or can you get there before? And what are the levers that get you there before revenue gets back to that $2.5 billion, $2.6 billion.

Operator:

And our next question comes from Karl Ackerman with BNP Paribas.

Gianluca Romano:

Well, I would say, you can see the good improvement in our profitability. A good part of that is actually coming from pricing. Of course, you need to check into the like-for-like pricing. The mix has, of course, always a major impact on the average. We are very happy with what we are doing, both on pricing and on cost. This quarter show a fantastic improvement in profitability, both gross margin and operating margin. And if you look at our guidance, this imply another strong improvement in profitability. So Pricing is a good part of that. Mix is another part of that improvement. And we will continue to do exactly execute a strategy and we are really we are very glad with the outcome so far.

Operator:

And our next question today comes from Kevin Cassidy of Rosenblatt Securities.

Dave Mosley:

Yes. Thanks very much. It is and it's transitioned from my last comments as well because the industry just at the levels that we're at, to build on my last comment is just can't fund the investment disease make an areal density and exabyte growth over time with the revenue and margins where it was and what helps us is to run factories is the improved visibility and the predictability towards that in demand. And so I think that's why the HDD industry has changed fairly dramatically through this cycle, the last 6 or 8 quarters because capacity did come at the same time that people were that demand was down. And the industry is, therefore, underinvested in capital and lead times are going up, as we've talked about before. So we need this build-to-order framework to just get back to a healthy industry. And we are rewarding predictability with our customers and we're incentivizing that predictability and where the people aren't predictable and they come in at the last minute for product that either we don't have it or they have to pay for our flexibility. I think that's the way we're thinking about it and then making sure that we stabilize the supply base as well because it's not just ourselves as the HDD supplier but we have numerous upstream supplies that need to be stabilized as well. So it's still going to take some time.

Dave Mosley:

Yes. I think at this point, it's been a long time coming and we definitely value the suppliers that have helped us get HAMR products to market. We also feel like given how intricate this silicon photonic circuitry is, is that we needed our own capability to control but right now, it's more of a technology second sourcing, if you will. And so we're going to continue to run with a few sources. I think over time, there should be the opportunity to go drive the cost down and balance all things with multiple sources and the ability to control the investments that we make in capital, for example and things like that. But it's been a long time coming and part of the reason we're talking about it as part of Mozaic because it's very relevant as we get the 4-terabyte platter and 5 terabyte platter I think also there's been some noise out there in the industry about, well, as goes the ramp of that supplier so goes the Seagate ramp and that's clearly not true.

Steven Fox:

Dave, I was just wondering if you could zoom out a little bit without putting any kind of time frame on it, to get to the 30% gross margins, it seems like you can almost get there from here on just the typical incremental margins from volumes. But based on everything you said, it doesn't seem that easy, especially early stage with HAMR versus later stage. So can you sort of walk through some of the puts and takes, say, over the next 2 to 3 quarters versus, say, when you hit that volume crossover where it becomes more smooth to get to the margin. It's just -- there's been a lot of comments around this. Maybe you could just sum it up.

Gianluca Romano:

Yes. No, I said that before, I think the combination of stronger demand through the cycle and our very good products based on HAMR technology. will drive further improvement in gross margin, sequential improvement. Now I think we will have a sequential improvement through the entire kind of '24. And this is, of course, based on our view of the ramp of HAMR and also the recovery from the prior down cycle that we expect, especially in the mass capacity to continue through the entire kind of '24 and actually even kind of '25 in it.

Dave Mosley:

Based on where we were from legacy products years ago on desktop and so on and even just the volumes we were at a couple of years ago, I think we have plenty of back in test capacity.

Dave Mosley:

It is. It certainly is the bigger the drive, the longer the test cycle but we still have plenty of capacity to cover the demands at this level.

Unidentified Analyst:

This is Mia [ph] on for Tim. Just one for me. Now you don't report orders but perhaps you could give us some color on book-to-bill and just some idea of where orders are relative to revenues and where that -- how that book-to-bill has been trending and where you think that's going over the next couple of quarters, that would be helpful.

Operator:

And our next question comes from Vijay Rakesh with Mizuho.

Gianluca Romano:

No, we don't guide after this quarter. So we just gave a good guidance for the March quarter in terms of revenue increase and profitability increase. And as we said, no, we are ramping here volume. We are seeing better demand environment. So we expect sequential improvement through the quarter but we don't give specific guidance on revenue for the end of the calendar year.

Vijay Rakesh:

Got it. And then on the gross margin line, sorry to [indiscernible] that, look at -- do you see you guys getting back to that target window 33% exiting this year? And especially on the HAMR side, I think Dave mentioned you can do with 4 terabyte plus 5 disks or a 20-terabyte drive versus 7 to 10 disk now. What are the gross margins on HAMR versus where you see your corporate margins today, I guess.

Operator:

And our next question comes from Ananda Baruah with Loop Capital.

Dave Mosley:

Yes. Ananda, it's a real complex topic. What I would say is that the compute infrastructure is changing dramatically and the memory architectures will change to support that computer architecture very dramatically as well. So there is a lot of redesign discussion going on. there are different types of applications and things that are being branded AI, there's stuff that's very focused on text or large language models. And then there's image recognition and video creation. And so there's a lot of different types of applications that propagating. And I think this is just normal application development that's been going on for years and years and years. But I do think there's different types of hardware. So I think there are some now AI data centers being discussed that are largely compute. I also think that some of these applications are spinning off a lot of data and they're requiring data to be stored for a certain period of time and then brought back up to the higher levels to be reprocessed. And so that's just normal data growth as well. So I think the net of it is there's a lot of architectural redesign going on, probably not affecting the tiers that we're in. If anything and we made reference to this in the prepared remarks, there's cost power and space or at a premium. There's many AI applications from what I'm hearing that there's just not enough power for and our infrastructure is going to be critical. But to the extent that you can do your part to buy transitioning to higher capacity drives that net-net gives you the same exabyte capacity with less power. I think that's a good thing. It may be an opportunity for us.

Dave Mosley:

It's hard to say. It depends on the bills and how much people are having to pay for it. Again, I think in the AI applications that are really exploding right now, power is going to become one of the limiting factors. And so to the extent that there may be a really good payoff in not only cost savings, space savings and so on but also just freeing up that power infrastructure to go to other things. I mean, that might actually help us get above the 25%.

Mark Miller:

Congratulations on the launch of Mozaic. I'm just wondering, you mentioned it briefly. What kind of traction are you seeing from AI-related opportunities? And what do you -- how do you see that ramping throughout the year?

Mark Miller:

So that's more 2025, you think?

Operator:

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Operator:

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Operator:

Welcome to the Seagate Technology Fiscal First Quarter 2024 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] 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.

Dave Mosley:

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. 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 plus terabyte products remain fully on-track with high volume ramps starting early is a competitive differentiator and increasingly important in light of the green shoots that we're starting to see with respect to cloud demand trends. 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. 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. The 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 VIA 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. Near-term conditions aside, we are optimistic about the VIA market given the increasing use of AI and deep data analytics that enhance the effectiveness of VIA systems. These systems are evolving from basic monitoring tools to more fulsome 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 return to healthy exabyte growth. Seagate's mass capacity storage portfolio sets us up strongly with this growth backdrop. Last week, we announced our latest high capacity Nearline products boasting 2.4 terabytes per disk and leveraging our proven 10-disk platform to deliver capacity starting at 24 terabytes. 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 ‘24. We also expect to begin aggressively ramping 3 terabyte per disk products based on HAMR technology in early calendar 2024. These drives deliver capacity starting at 30 terabytes and offer customers the same flexibility to adopt either CMR or SMR configurations, to further boost areal density into the mid-30 terabyte range. 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 plus terabyte PMR drives is compatible HAMR products. The 30 plus terabyte HAMR drives utilize many of the same components in electronics as our 20 plus terabyte 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. 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 and volume. Our execution and cycles of learning have enabled us to continue strengthening our portfolio and we expect to launch products yielding 4 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. Simply put, we offer customers mass data storage at less than one-fifth 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 plus terabyte HAMR drives currently in qualification are more than two times the capacity compared to the average installed base across large data centers. This HAMR based upgrade would more than double their existing storage costs in the same footprint or offer a 50% reduction in operating cost for the same storage capacity using about half the power and floor space. 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.

Dave Mosley:

Thanks, Gianluca. We are operating in a longer than typical cycle, and I'm very proud of our team's shared 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 has 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. Operator, lets open up the call for questions.

Erik Woodring:

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

Erik Woodring:

Great. Thanks so much.

Wamsi Mohan:

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 a color on what you expect in aggregate, given what you know about the ramp in terms of you know, unit shipments maybe one, 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.

Wamsi Mohan:

Thanks, Dave.

Sidney Ho:

Great. Thank you. It's great to see some green shoots in the US cloud market. Dave, last quarter, you talked about expecting cloud inventory to normalize in a couple 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 going to like beyond the December quarter, especially given your efforts to increase visibility through, earlier collaboration or longer term collaboration with your customers. Thanks.

Sidney Ho:

Thank you.

Karl Ackerman:

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.

Karl Ackerman:

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

Operator:

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

Gianluca Romano:

Hey. Good morning, Aaron. 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, there's a pricing actions that we are taking, and we have already started in the prior quarter. And a better cost structure. No part of improvement is for sure coming from the full impact of their 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 will continue to improve our structure and we think our revenue will continue also to increase sequentially. Now to go back to the let's say the 30% gross margin. No, 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 rate.

Gianluca Romano:

Thank you.

Timothy Arcuri:

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.

Dave Mosley:

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

Dave Mosley:

Yeah. It's actually an interesting question. So we do have some customers that are embracing the predictability. And there are reasons for that, 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, multiple years just yet. For various reasons, they make procurement decisions all the time and 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. We have to make sure that what we do start that 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 value, like the 3 plus terabyte per disk capacity points. And then the 4 plus terabyte per disk capacity point, 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, 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 I can be frustrated by that. But as those negotiations continue on, I think we will continue to make sure that we write the industry and ourselves our suppliers so that we can at least get back to a point where 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.

Operator:

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

Dave Mosley:

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 progress, and we can see when we have more and more certainty we get towards the end of the qualification. So all of those things are factoring into to our confidence. And I think, we'll continue to update everyone going forward exactly how this is going. Remember that we're also starting into qualification with this 2.4 terabyte 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, most of the vendors, the lion's share, 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.

Gianluca Romano:

Yeah. I think for the current fiscal year and probably the calendar 24, is not very probable that we can double the exabyte, but we think we will grow sequentially in all those quarters.

Dave Mosley:

Thank you.

Thomas O’Malley:

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 a Nearline in particular, and you know, it's kind of pushed to Q1. You're seeing this US 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 recovery will be helpful.

Thomas O’Malley:

And then just on the gross margin side as well, just taking the midpoint of guidance and you're talking about operating expenses actually up slightly in the December quarter. It implies 200 plus basis points of sequential improvement in gross margin. I understand that you pointed to some pricing increases, but that'll be pretty quick in terms to get the full benefit there. Is there any other levers that are contributing to December? Obviously, you have some mix benefit with [Viagon] (ph) 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.

Dave Mosley:

And sorry, just to be clear, we are also going through product transitions. Right? So as we may raise price on one of the older products and then 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.

Steven Fox:

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 12, 18 months is out done, 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 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.

Steven Fox:

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 charges likely for 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 there's smaller charges, in calendar Q1 and Q2 keep that in there gross margin calculations. Thanks.

Steven Fox:

Great. That's helpful. Thank you.

Ananda Baruah:

Yeah. Thanks, guys. Good morning. Thanks for taking the question. I guess, Dave, just given that you're starting to see things start to firm up, and talking about I think, Gianluca, q-over-q increases, in Nearline as you go through 2024, what's the opportunity, Dave, for things to get tight as you go through 2024 just given the capacity that you've taken offline?

Ananda Baruah:

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

Ananda Baruah:

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

Mark Miller:

Thank you for the question. You mentioned AI opportunities in via cameras and other areas. I'm just wondering, when 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?

Mark Miller:

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

Mark Miller:

Thank you.

Vijay Rakesh:

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

Vijay Rakesh:

Yeah. Right.

Dave Mosley:

Yeah. We're not going to guide that, but I will say that, we'll be very aggressive. When we talked about 4 terabytes per disc and the and cost optimization of these platforms and things like that. I mean, this is something the hard drive industry has been doing for years and years, decades. Right? So, we know how to do these transitions. We are very confident in technology. And we look to be very aggressive there. The wafer lead times are also quite long. So, we're already starting on this journey because we're already in wafer and so we're populating the wafer fabs with the parts that will support it.

Dave Mosley:

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 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 going to get back to more predictable buying patterns.

Operator:

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

Operator:

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

Operator:

Good day, and welcome to the Seagate Technology’s Fourth Quarter and Fiscal Year 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations. Please go ahead.

Dave Mosley:

Thank you, Shanye, and hello, everyone. We appreciate you being here with us on today’s call. Amid a tough business environment, Seagate delivered fourth quarter revenue of $1.6 billion, while holding non-GAAP operating margin at 3.5% to narrow our non-GAAP loss per share to $0.18. These results demonstrate financial leverage and our focus on returning to profitability. Importantly, we continue to generate positive free cash flow, achieving $168 million for the quarter and $626 million for the fiscal year, reinforcing Seagate’s solid operational and financial execution amid the business backdrop we have seen in fiscal 2023. This past fiscal year has been shaped by macro and end market conditions that have tested our resilience in addition to our financial performance. I’m proud of our team’s perseverance and execution. As a result of our proactive actions, we’ve lowered our cost structure by more than $350 million on an annualized basis. We’ve enhanced balance sheet flexibility taking out nearly $800 million of debt funded largely by monetizing non-manufacturing facility assets. We reduced production output by approximately 25% compared with peak volume in order to drive better supply/demand dynamics and enhance profitability as the markets recover. And all of these accomplishments were made while delivering on our 30-plus terabyte HAMR product development and qualification milestones with volume ramp on track to begin in early calendar 2024. Looking ahead, we expect the macro end-to-end market conditions that we have flagged throughout fiscal 2023 to continue weighing on demand through at least December. Consistent with our track record of managing what is within our control, we are taking additional measures to weather the near-term business environment. First, we are adjusting pricing, which we believe will help to ensure a healthy industry supply chain for our customers over the long term. And second, we are carefully managing our manufacturing capacity through a build-to-order approach for certain areas of the business to align our future production output with customer qualification and demand plans. It will take time to bring production capacity and associated support resources back online. Therefore, it is crucial that we balance lead times for mass capacity products with our ability to reramp production. We expect these efforts will enable Seagate to efficiently manage supply for our customers as demand improves. I’ll now share some perspectives on near-term demand factors, in particular in the mass capacity markets, starting with our business in China. As expected, sales in China improved sequentially off of the March quarter lows, driven by increased demand in the VIA markets and certain regional cloud and enterprise OEM customers. While these trends are pointing in the right direction, sales are still well below historical levels. Since the strict COVID protocols were eased last December, the pace of economic recovery in China has been uneven. For now, we are forecasting sales into China to remain relatively stable for the balance of the calendar year. We are encouraged to see Chinese authorities begin to inject more stimulus to reaccelerate economic growth. Based on customer input, economic improvement is expected to catalyze e-commerce, drive cloud-related ad revenue and spur new smart city projects. Seagate’s VIA and nearline products are positioned to benefit from these anticipated improvements in the end market demand. Outside of China, nearline demand from enterprise OEM customers has remained soft. CIOs continue to operate under tighter budgets in response to near-term macroeconomic uncertainties. Ongoing efforts to optimize existing workloads, both on-prem and in the cloud, are helping enterprise customers defer mass storage deployments. These trends have slowed the pace of inventory absorption among most of our U.S. cloud customers. We have significantly reduced shipments to several large cloud customers in order to accelerate inventory absorption and protect our financial returns. We project it will take another couple of quarters for inventory levels to normalize. We also believe the timing for demand recovery could be affected by spending priorities focused on accelerating the build-out of compute-intensive AI infrastructure. While AI and ML have been around for quite some time, generative AI has quickly emerged as the next megatrend. This megatrend makes us as excited as ever about the long-term growth drivers for Seagate. In addition to the ongoing migration of workloads to the cloud, which we believe is far from over, gen AI is expected to be a catalyst for data creation, underpinning future demand for mass capacity storage. In today’s earliest stages of gen AI development, you’re seeing the necessary first steps of building and training of AI models. These efforts require significant investment in compute architectures, and we’re seeing that investment ramp today. The next stage of development will yield enterprise-specific use cases that leverage trained AI models to convert data into value-enhancing applications. As this phase plays out, cost-effective mass storage will be critical and we see HDD as a long-term beneficiary. We are already seeing examples of content creators generating high-definition images from text, which is growing in use as evidenced by four of the top services selling 20 million images each day. Development is well underway to create data-intensive videos and animations simply from voice commands. The adoption of AI-generated video bodes well for mass capacity storage. For context, today, nearly four million videos are uploaded daily to YouTube and their file sizes can be thousands of times larger than a single image. Additionally, we believe that predictive AI will lead to advances in many fields, including science and health care. For example, predictive AI can be used to analyze large collection of medical images, many created by Gen AI to provide insight for early detection, prevent disease progressions and develop patient-specific treatments. Mass capacity data storage will remain both an enabler and beneficiary of these trends working in harmony with flash and DRAM memories to bring AI applications to bear. While flash will continue to feed high-performance compute engines, mass capacity HDDs will remain the most cost-efficient storage media to house the enormous volumes of data being generated and used for predictive analytics. Even in today’s unsustainably low NAND pricing environment, HDDs are still roughly five times more cost-efficient than comparable flash solutions on a per bit basis, and we do not project that gap to close in the next decade. This level of conviction is due in large part to our leading technology road map. Seagate is leveraging magnetic recording technology innovations such as HAMR across our mature 10 disc [ph] HDD platform, positioning us very well to meet increasing demand, including from data-intensive AI applications. Given the current business climate, Seagate is focused on product development and execution and helping our customers qualify next-generation drive capacities. We are executing well on both fronts. We continue to deliver aerial density and TCO advancements through our conventional PMR hard disk drive products. Development efforts on what may be our last PMR product are nearing completion and will extend drive capacities into the mid- to upper 20 terabyte range. As mentioned earlier, our 30-plus terabyte product launch plan is fully intact and initial customer qualifications are progressing well. We are on track to begin volume ramp in early calendar 2024. We are also preparing qualifications with a broader number of customers, including testing for lower capacity drives targeting VIA and enterprise OEM workloads. While there is always work to do, I am pleased with the progress the product development teams have made during fiscal year 2023. Overall, Seagate has consistently demonstrated the ability to quickly adjust and execute at a high level on every factor within our control. We remain diligent in managing through near-term business conditions. At the same time, I am excited by the tremendous long-term opportunities ahead brought about by existing and emerging megatrends underpinned by data. Cost-effective mass capacity storage is a critical enabler and Seagate is poised to deliver with strong technology road maps and improving financial leverage. I’ll stop there and hand it over to Gianluca.

Dave Mosley:

Thanks, Gianluca. I’m proud of the perseverance and agility as we continue to proactively respond to the market environment we have faced over this past year. Entering fiscal 2024, we are leaner. Our balance sheet is healthier and our product roadmap is stronger. All of these factors enhance our ability to weather near-term market conditions, deliver financial leverage and position the company to capture attractive long-term opportunities for mass capacity storage. As we conclude our prepared remarks, I would like to thank our employees, suppliers, customers, and shareholders once again for their support. Thanks for joining us and let’s open up the call for questions.

Eddy Orabi:

Hey guys, this is Eddy for Krish from TD Cowen. I understand you want guide for December, but curious to know your thoughts on December nearline exabyte shipments. Like do you see them growing sequentially from September or more like flat or maybe slightly down? I’m asking is in case we remain at current revenue of $1.6 billion per quarter into next year, I’m wondering if there would be a risk to the dividend that in case especially you guys continue to invest in the business. Thank you.

Eddy Orabi:

Got it. Thank you.

Wamsi Mohan:

Yes. Thank you so much. I was wondering, Dave, if you could flush out a little bit two of the points that, that you made in your purported marks. One on adjusting pricing strategy in certain markets. What specifically are you doing in these markets? And then secondarily, the reduced production output through this bill to order and lower CapEx comments that you made. How exactly will this bill to order work? Is this specifically for mass capacity? What kind of lead times would you require and are your customers and what do you expect your follow through from customers and also from a competitive standpoint? Thank you so much.

Gianluca Romano:

Yes, on the cost side, Wamsi, and on the production, that is of course driving under-utilization. Now, we had a little bit higher production in the June quarter, mainly on the wafer side and little bit on the media, but I would say more on the wafer, we will no need to do that level of production right now. So general utilization charges that declined in the June quarter from almost $80 million to $40 million, it’s probably going up a little bit in September. We estimated about $70 million, but of course through the quarter, that could change a little bit.

Operator:

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

Dave Mosley:

Yes. Thanks, Tim. So, yes, you are right. It’s a weak demand environment. But I think also there’s, generally speaking, the whole industry is underwater. So I mean, we have to make sure we protect ourselves, we protect the supply base as we talked about earlier. And it’s different in different products across the market obviously – the different markets obviously. How is being accepted? There’s – you can imagine the entire monopoly of different responses. Some people are worried about supply longer term. They do believe that supply will be short and demand will come back. And so – and especially with the long, long lead times that there are on mass capacity products right now, I think it’s something that people are very much in tune with. And so it’s forcing good discussions. There’s other people for various reasons that need to make tactical procurement decisions and they’ll take whatever deals are out in front of them. And I get that. I mean, that happens from time to time in the business. That’s one of the big reasons why we don’t want to overbuild, we want to make sure, we hold as much as we possibly can. And as we continue to play this forward, I think we’ll see and adjust accordingly to make sure that we defend our products. I think the optimism for us is that we can actually go through the product transitions, get to the higher capacity points, provide a better TCO proposition, get components out of the supply chains and so on. And then, we didn’t dilute or extend the problem any by overbuilding or dilute the problem by continuing to overbuild and then lowering price. And that’s what we have to hold onto.

Erik Woodring:

Awesome guys. Thanks for taking my question. Now, Dave, I just wanted to ask if you could flesh out the comment you made in your prepared remarks about the timing of a demand recovery being delayed by AI investments. Just in the context of you talking about market conditions weighing on demand through December. Are you telling us we shouldn’t expect sequential growth in capacity shift until calendar 2024? Just if you could help us connect some of these dots that’d be great. Thank you very much.

Operator:

The next question comes from Thomas O’Malley with Barclays. Please go ahead.

Dave Mosley:

Yes. Tom, there’s no real change. We’ve been talking about it, I think for about a year. We said we can get PMR into the mid-20s. And the product that we have now, let me – I’ll talk about it very quickly here. We believe that with SMR variants, it can get in the high-20s, the product is in the mid-20s, but it is highly, highly leveraged. It’s almost identical electronics and mechanics that takes us to HAMR. So it’s almost the same product, you swap out the heads and discs for HAMR and a couple other component changes that have to happen. So we’re going to get a lot of leverage from that. That platform has been planned for a long, long time. We called it a 10 disc platform in the prepared remarks. So I have a lot of confidence that we can solution PMR anywhere the customer wants to stay there in the mid-20s or we can go to HAMR variants with the same bag of parts or very, very similar bag of parts. I do think that there’s a lot of confusion out in the market. I’ll say that this way about what capacity point is it? 24, 25, 26, but there’s customers who need all kinds of different variants and I think that we confuse people frankly by kind of amalgamating all these things. All I will say is that I think those products that we have are very, very competitive in the market. Right now the issue is, if I had it, I’m not going to try to force it into the market, into a space that people don’t need the product simply because it poisons the well for that product, maybe two quarters out or three quarters out for when people do need it. And it would erode the value proposition for the HAMR products when they come. So we’ve got to run the business the way we are right now.

Operator:

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

Aaron Rakers:

Yes, guys, sorry about that. Thanks for the question. I just wanted to unpack some of the kind of considerations we should be thinking about in terms of gross margin as we move forward. Appreciating that you’re not guiding explicitly, but I guess first of all, if I look at the pricing discussion, based on the math it looks like your mass capacity dollar per terabyte was up by about 10% sequentially. I guess as we look forward, should we be thinking that the ASP on that basis continues to trend higher? Or how much of that capacity shift have you already kind of imposed price increases upon? And then also, when we look at the capacity shift in total with a 25% reduction in production capacity, do we take prior peak capacity shipment levels and take 25% of that? And that should be a level for which you think you would get back to kind of that 30% gross margin level? I know there’s a lot in that, but I’m just trying to think about some of the variables, looking out just not this current quarter, but beyond.

Gianluca Romano:

Yes, Aaron, you were asking about the price per terabyte in particular in Q4. That is a result also of the mix. So we have a reduction in cloud. That, of course, is our higher capacity that usually has the lowest price per terabyte, but also the lowest cost per terabyte. And we have an increase in VIA. So mid-capacity drives with, again, higher price per terabyte and a little bit higher cost per terabyte. So there is a mix that is impacting, of course, when the volume is not very high. Just a few exabyte difference in the different segments can swing those price and cost per terabyte.

Gianluca Romano:

In terms of capacity, Aaron, the 25%, I would not take the peak of where we were probably more than a year ago. We have done a lot of restructuring, a lot of adjustments. And as they said, we will need time to eventually rebuild that capacity also in terms of employees.

Aaron Rakers:

Thank you.

Kurt Swartz:

Hi, this is Kurt Swartz on for C.J. Thank you for taking my question. Open to delve into generative AI implications for both HDD and SSD demand. What is the perceived time line for storage demand uplift as data creation accelerates? And is there any concern regarding more workloads moving from HDD to flash within an AI data center paradigm? Thank you.

Operator:

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

Dave Mosley:

Yes, thanks, Karl. So the – we are not overbuilding, especially the high capacity drives are trying to push out into some of the cloud service providers. We’re waiting until the inventory actually goes down. And so I think that’s why, and I made reference to this earlier, that’s why some of the metrics may look weird, like you just pointed out on capacity per drive diving down. I don’t think that’s a long-term trend either. I think of course that’s going to go back up.

Dave Mosley:

I’m sorry, Karl, what was the second part of your question?

Dave Mosley:

Okay.

Dave Mosley:

Good. There are hundreds of, sorry, hundreds of millions of cloud drives, if you will, in data centers around the world. And some of them are aging to your point. And if unit shipments go down, its exabytes can still go up even though unit shipments are going down because the ones that are aging off are lower capacity points, say fours, eights, 12 terabytes, whatever. But over time it’s much more efficient, actually it’s more efficient power-wise and for all a lot of other features system level features to put the newer drives on. So it’s about all these things in balance. And I do believe that unit shipments are down largely because of this inventory digestion that we’ve been talking about. That will turn, again, will it go back to the peak of where it was five or six quarters ago and how fast will it go back? These are tough questions for our customers right now. It comes down to their prioritization of their spend. But all indications are in the latest numbers. And if I think about these latest numbers that the cloud service providers are announcing versus where they were six months to nine months ago, there’s a very positive trend. And I think to the questions about GenAI and other feature sets, we’re not at peak cloud yet. So I do think it’ll come back fairly strongly from a unit’s perspective when it does.

Tristan Gerra:

Hi, good afternoon. A couple of questions. The first one is about the production cost curve, and if you could talk about the percentage decline per year that we should expect in a medium term on a per bit basis? And then second question about is the percentage of production that’s coming from China and also the true demand that you see from China as a percentage of your revenue? Thank you.

Gianluca Romano:

The cost per terabyte of course we don’t guide the full year. What I would say is in a down cycle it depends a lot from the level of utilization that you have in your factories, so can vary a lot from one quarter to another quarter. In general, no we are continuing to do our product road map. And as Dave said, we have a new PMR product coming out soon, higher capacity, that means lower cost per terabyte. And then we will have HAMR in just a couple of quarters, so all those new products will help us in reducing the cost per terabyte.

Tristan Gerra:

Great. Thank you very much.

Mehdi Hosseini:

Yes. Thanks for taking my question. A couple of follow-ups. Given your lower OpEx missed around to 160, how should I think about scaling, especially on the revenue side before you would need to increase OpEx materially?

Mehdi Hosseini:

Sure. And then for Gianluca, should I assume that free cash flow would be down in September and then up in December?

Mehdi Hosseini:

Right.

Mehdi Hosseini:

Negative, just sequentially, down in September and then rebounding in December on a sequential basis?

Mehdi Hosseini:

Got it. Thank you guys.

Mark Miller:

I’m just wondering if, it sounds like the PMR is going further than I originally thought it would be. Is this a change? Or was that always in your plan?

Mark Miller:

Is there any specific technology advance that’s allowing you to push that now up to almost 30 terabytes?

Mark Miller:

No, I mean taking the PMR up to the high-20s in terms of terabytes, anything new in the technology and any breakthroughs or advancements?

Mark Miller:

Thank you.

Vijay Rakesh:

Yes. Hi, just a quick two questions. Just when you look at HAMR, obviously ramping well, any way of looking at what the exabyte mix would be as you look at calendar 2024 or even calendar 2025?

Vijay Rakesh:

Got it. And then on the data center inventory side, any way to kind of gauge how much – how many weeks of inventory is still there? And how that compares to the prior terabyte I guess, in data center inventory or...

Vijay Rakesh:

Got it. Thanks a lot.

Dave Mosley:

Thanks, Betsy [ph]. As you heard today, Seagate is continuing to take proactive actions to navigate this tough business environment over the near term. However, we remain excited as ever for the long-term opportunities for mass capacity storage, and it’s brought about by existing and emerging trends that are underpinned by data like AI, like we talked about today. Our leading technology road map positions us really well to address future demand and enhance value for both our customers and for Seagate’s financial performance. I’ll close by thanking all of our stakeholders for their ongoing support. Thanks for joining us today.

Operator:

Welcome to the Seagate Technologies Fiscal Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Shanye Hudson of Investor Relations. Please go ahead.

Dave Mosley:

Thanks, Shanye, and hello, everyone. Seagate's March quarter revenue came in at $1.86 billion, just above the low end of our guidance range, while we reported a non-GAAP loss of $0.28 per share. These results reflect rising economic uncertainties and an elongated inventory correction that impacted demand among a few large customers late in the quarter. As a result, we've altered our outlook regarding the timing and trajectory of recovery to now begin later in the calendar year. In response to the current market environment, we are taking aggressive actions to further reduce costs and rightsize the business to navigate this downturn and position Seagate to thrive when recovery ultimately comes. Beyond this cycle, we remain excited about the long-term opportunities presented by the secular growth of data and the relevance of mass capacity storage as new data-centric applications emerge and more workloads migrate to the cloud. We continue to make strong progress on our industry-leading technology road map, including launching HAMR-based products this quarter, which we believe put us in outstanding longer-term position. In my remarks today, I will share some perspectives on the current market dynamics, provide greater context on our restructuring initiatives and update you on our product plans. First, let me address the settlement we announced with the U.S. Department of Commerce, Bureau of Industry and Security, or BIS. The agreement resolves BIS' allegations regarding Seagate's sales of hard disk drives to a certain customer between August 2020 and September 2021. Under the terms of the settlement agreement, Seagate has agreed to pay a total of $300 million in $15 million quarterly installments that will take place over the course of five years. I want to emphasize that Seagate maintains its strong commitment to export compliance, and we believe that we comply with all export regulations at the time we made the shipments. However, in working toward a mutually acceptable solution with BIS, we balance factors such as the risks and cost of protracted litigation involving the U.S. government, the size of a potential penalty, which could have been a significant multiple of the settlement amount, and our desire to focus on current business challenges and our long-term business goals. We believe the outcome we have reached and putting this matter behind us is in the best interest of our customers, shareholders and other stakeholders. Turning now to the near-term business environment. For the past year, Seagate has been navigating a complex market shaped by a few primary factors. Inventory digestion among our large cloud customers that is impacting our nearline business, lower economic activity in China owing to the country's COVID lockdown policy and weakening macro conditions that initially impacted consumer demand and is now affecting all end-markets. These pressures have been compounded recently and weighed on our end of quarter dynamics. In the nearline markets, CIOs are now facing constrained IT hardware budgets, which has raised the bar for projects to get funded and resulted in efforts to optimize existing workloads, both on-prem and in the cloud. In turn, cloud service providers have focused on maximizing utilization of their existing infrastructure rather than deploying new capacity. The combination of these factors dramatically slowed the pace of cloud customer inventory consumption, and led to the pronounced slowdown in cloud and enterprise storage demand that we experienced exiting the March quarter. However, we don't foresee a strategic shift in customer spending patterns or a change to what remains a robust long-term outlook for cloud storage. Digital transformation trends will continue as enterprises realize significant cost benefits and operational efficiencies by transitioning workloads to the cloud. Industry analysts have observed that once applications and workloads are moved to the cloud, they generally stay there and grow. Digital workloads rely on data, which bodes well for mass capacity storage as the number of new cloud workloads multiply every year. Within the China markets, customers remain constructive on their end market demand outlook as the economy continues to reopen. However, rising macro uncertainties are pushing timing for recovery to begin later in the calendar year. Despite the pushout, we are seeing some positive demand movement in the consumer and service sectors after COVID lockdown restrictions were lifted. These trends support a digital economy growth that bodes well for China cloud demand as growth in consumer demand has historically led to revenue growth for regional cloud customers. Within the VIA markets, future demand pickup is based on two factors. First, you will recall that several existing VIA projects were delayed during COVID lockdowns. Customers expect these projects to gradually resume as the economy reopens in the coming months, which will consume the existing HDD inventory that was earmarked for these projects. Second, we expect new smart city and smart manufacturing initiatives to build momentum as government funding and enterprise budgets free up and the global economy improves. In this dynamic environment, we are continuing to manage what is within our control. In late March, we extended the first phase of our restructuring efforts to adjust our factory headcount to align with lower production volumes, realized efficiencies across various operational support functions and reset our live edge to cloud business plans. We are scaling back new investments in Lyve Cloud as we focus on filling our existing infrastructure. We expect to drive operational and cost synergies across all platforms to accelerate time to profitability while growing the business over the long term. Since fiscal Q1, we've taken more than $150 million out of our cost structure, lowered debt by 5% and significantly reduced manufacturing capacity. Given the prevailing market conditions and our reduced near-term demand outlook, we are undertaking the next phase of restructuring actions targeted to yield at least an additional $200 million in annualized savings from both COGS and OpEx as well as implementing temporary cost savings measures, including salary reductions. We are taking a programmatic approach focused on three key areas

Dave Mosley:

Thanks, Gianluca. The past year has presented a set of challenges that have impacted Seagate and our industry to a degree not seen for more than a decade. As our outlook and commentary today demonstrate, we believe that we are still a couple of quarters away from seeing a positive turn in demand for data storage. However, there are a few key takeaways that underpin our confidence in the business and our long-term potential. We are aggressively managing through this environment and taking appropriate actions to generate positive free cash flow, strengthen our balance sheet and enhance future profitability, all while executing our technology road map. To that end, we have continued to prioritize investments on our HAMR product road map. These drives offer the highest density, most cost-efficient mass capacity drive storage, which we believe translates into a competitive advantage for our customers, and we are focused on driving appropriate returns for the value we are delivering. And we continue to receive indications from our customers that demand will pick up as the global economy improves. The secular drivers powering long-term demand for storage are intact, and this fact is at the root of the conversations we're having with customers across our key markets and geographies. I'd like to thank and recognize our global team for your resilience and perseverance through this challenging period. We are keeping our heads down and aim to make continued progress towards our goal as we move closer to market recovery. Thanks again for joining, and let's open up the call for questions.

Erik Woodring:

Dave, can you maybe help us understand kind of as we sit here today, what gives you the confidence to kind of talk about a recovery towards the end of the calendar year? I guess what I'm hearing from you is a worsening of demand in the last few weeks of the quarter, greater macro concerns amongst customers, obviously, challenges in the nearline market. And so like what data points are you seeing today? Or what are customers saying to you that gives you the confidence that the recovery will happen towards the end of the year as we sit here today? And then I have a follow-up.

Erik Woodring:

Okay. And then I guess, Luca, I know you mentioned talking about paying down the $540 million maturity in June. But can you maybe just help us understand some of your sources and uses in cash over the next, let's call it, 6 to 12 months, how you're thinking about your liquidity situation, just given your leverage is kind of quickly kind of creeping up towards that 5x number. And then, for example, how are you thinking about the stability of your dividend, any potential drawdown of your revolver, adjustments to covenants? Maybe if you could just unpackage that a bit, that would be helpful for us.

Operator:

The next question comes from Tom O'Malley of Barclays.

Dave Mosley:

So a few points. I would say that the next quarter will be fairly muted as what we just described. I do think that there will be exabyte growth as we -- I'll say, late in this calendar year as we get towards the end of the calendar year. That comes from many cloud service providers in the world that are getting through their digestion phase, if you will. Because again, there's a lot of data that we get from them about utilization rates being high inside the data centers and data continuing to grow. So I do think this is going to be over at some point. Relative to the VIA markets and maybe the broader macro, we're not really calling the end of any macro uncertainty as part of this, but we do think that some of the investments that have been put off and put off for quite some time may actually come back at the -- towards the back half of the year. So there's positive sentiment. It hasn't translated into POs yet, but that's the way we're feeling about it. And only one other point that I would make there is that inside of the cloud workloads that we see, the data growth is actually fairly profound. So I think people can make trade-offs with older drives that they have running and throwing data away and things like that, but at some point, the world runs out of gas. We all know it's -- we're creating more and more data all the time in the form of videos and communications and AI and things like that are all going to need the data. So we're just really focused on making the space for it. I don't think the world can deal with this kind of supply and demand imbalance for very long, but we need to take the actions that we are taking on the supply side to make sure that we're not waiting too long.

Gianluca Romano:

Yes. Thanks, Tom. So I would say the March quarter, of course, has some mix impact also. For example, mission-critical was sequentially down. And as you know, it has a good gross margin generation. VIA was also sequentially down. So we had a couple of segments that are, let's say, above average gross margin in March because of seasonality we're down. So we see that recovering actually in the June quarter. As you said, there is also some pricing pressure, especially through the end of the quarter with no certain customers. We decided to take some of those deals, and we decided to take -- not to take other deals. And so this is what we are focusing on, trying to keep a supply-demand balance where we can. This is why we are doing another restructuring action. We want to keep the capacity that we have internally aligned to the short-term demand and then, of course, in the longer term, keeping that balance in a way that there is not too much pricing pressure to Seagate and to the industry in general.

Operator:

The next question comes from Wamsi Mohan of Bank of America.

Dave Mosley:

I'll let Gianluca talk about the restructuring because I think that's a significant part of your question. But I would say relative to the pricing environment, this is really where -- we believe we have good products that 20 terabytes to mid-20 capacity points and not -- there's not great demand right now, but we have good products that we can yield and so on. The way out of it, of course, is to continue the areal density gains into the mid-30s and we get the chance to reset things a little bit. From my perspective, the demand environment is so low that the way pricing becomes more strained is when we overbuild. And so that's what we have to make sure that we don't do because we can't continue to stress ourselves and our cash that way. So we just have to wait this thing out a little bit. So Gianluca, if you want to talk about the first part.

Wamsi Mohan:

Okay. Thanks for that color. And if I could follow up, Gianluca, on the comments around positive free cash flow for the remainder of the year. Your free cash flow and EBITDA levels have the potential to deteriorate from current levels. And when we look at that on an LTM basis, it does get you pretty close to your existing covenants. I know you mentioned certain actions that you can take on sale leaseback and other elements. But how should investors think about the dividend in this context, given that you have some cash restructuring charges coming up, you do have other uses of cash as well? I know you are paying down debt. But in the context of dividend, should investors think that's pretty secure as we go through the course of this year? Or is that going to be another lever to use to balance the cash sources and uses for you?

Dave Mosley:

Yes. I'd say, Wamsi, that I'm proud of who we've been. If you look just over the last 15 years when we came up with some of the policies that we're talking about, I'm really proud of what have we been able to return value to shareholders. Times are tough right now. We have a lot of levers that we can look at, I think, over time. But we want to continue to be that company that we have been. So we're factoring this into all of our discussions right now what our priorities are, trying to keep the exact same priorities we've always had for shareholders. And one of the reasons why we're being really aggressive on the cuts that we are, we're also as aggressively trying to turn some of the assets that we have into cash. We'll continue to look at all those options.

Timothy Arcuri:

I had two. So Gianluca, just on free cash flow. So are you implying that it's going to be positive for the June quarter? Because you did extend payables a lot in March, and you'd probably have to bring that down maybe 25 days or so. So it seems like maybe June free cash flow could be quite a bit negative. So what's the message on June and particularly around cash flow?

Timothy Arcuri:

You do. Okay. Okay. Then I guess I had a bigger-picture question. So Dave, in your prepared remarks, you talked about some evaluation of the longer-term capacity needs for the business and that's kind of a new angle. And we've gone from a year ago, thinking that the industry didn't have enough capacity, and now we're thinking about having too much on a structural basis. So I guess, can you talk about that and maybe in the context of that, just given how low NAND pricing has gone, we're now basically at cash cost. Is there a risk that there's some cannibalization happening now in nearline? And sort of what's the TCO difference in SSD and nearline now and data center? Is that part of what's driving you to talk about maybe rethinking what the longer-term capacity needs are for the business?

Operator:

The next question comes from Aaron Rakers of Wells Fargo.

Aaron Rakers:

Yes. Sorry about that, guys. Can you hear me?

Aaron Rakers:

Yes. Sorry about that. I guess I got two real quick. Dave, just on the heels of that last question, I'm just curious of if you're asked kind of the longer-term growth of nearline capacity shift trends, where do you think that is today? Like as we come out of this, do you think we -- maybe I will stop there. What do you think that long-term capacity shift growth trend looks like now?

Aaron Rakers:

Yes. And then the follow-up question, just trying to think about gross margin kind of normalizing itself or, I guess, taken another way, if we kind of think about the progression of lifting out the underutilization charge, appreciate you're not guiding beyond this next quarter. But as I look back in time, when I look back and say, hey, if this model gets back to total capacity shipment levels of 150 exabytes a quarter, 130 exabytes a quarter. How do we think about that relative to lifting out the underutilization charges in the P&L?

Aaron Rakers:

So underutilization charges continue beyond the June quarter through the back half of the calendar year?

Dave Mosley:

And some of that is a reset to fixed and variable cost as well, Aaron. So I think as we look forward, we have to project what we think the supply that we'll need to meet that demand is, of course, and we'll be adjusting and trimming as need be.

C.J. Muse:

Yes. I was hoping to maybe drill down a little bit deeper on the nearline outlook. If you think about your vision three months ago versus today, obviously a change. And I guess I was hoping you could kind of isolate between cloud, enterprise and China and maybe rank order the change statements there in terms of the slowdown as well as from an end demand overall perspective versus just realizing that there's just too much inventory downstream, and that's what kind of caught you by surprise. So I would love to hear kind of maybe the moving parts there. And if you could prioritize what has really driven the change, that would be helpful.

C.J. Muse:

Very helpful. And I guess as my follow-up to Gianluca, thinking about liquidity. You talked about intention to pay down the debt that's coming due in June. Curious how you're thinking about gross cash? And is there a plan today to draw on the revolver? Or that's TBD depending on kind of the free cash flow generation into June and September?

Operator:

The next question comes from Krish Sankar of TD Cowen.

Gianluca Romano:

Yes. Well, I would say right now, we are very happy with how we are progressing with HAMR. As we said in the prepared remarks, we are shipping products for Qual, so right now, we don't have revenue coming from HAMR. So it's not really impacting our gross margin. But we think, of course, in the future, 3 terabyte per disk or 3.5 terabyte per disk and 4 terabytes per disk, those are very interesting propositions for our customers, and we think will be actually a very profitable gross margin improvement for Seagate, which is why this product is so important to us. And in general, in the longer term for the entire industry.

Dave Mosley:

No, I would say when you get into mass capacity, the highest capacity points, I don't subscribe to the notion it's 2x to 4x. I think it's significantly higher than that. And we'll have an ability to continue to drive to better and better value propositions as we add more capacity per drive through the transitions that we're talking about. So what I would say is that right now, demand is low for everyone. And so what you see, the dynamics you see is just manufacturers trying to take some of their cash that they've tied up in inventory and turn it back into cash as quickly as possible. And if you start to look and say that's below cost or something like that, hopefully, people stop doing that and try to look for other options. And that's exactly how we're thinking about ourselves as well, right, to make sure you don't build. So I think in that kind of environment, it's really hard to extrapolate on trends, exactly to your point, Krish. I think some of these other things that we're comparing against are unsustainable. They're going to have to re-equilibrate at some point. I don't know exactly when that is. The more we push into the value chains, the more we push inventory in there, the more people will build buffers and then continue that. So I think that's one of the reasons why from our not hole in defense, we've continued -- we've decided to really pull back on our builds and reduce our footprint.

Toshiya Hari:

I had one for Dave and then one quick one for Gianluca as well. So Dave, I know it's a bit of a black box, but I was hoping you could give kind of your assessment of nearline inventory -- or customer inventory in the nearline market relative to six months ago, 12 months ago, what's your view there? And when you compare and contrast what you're selling into the nearline space versus what's truly being consumed, what's the percentage delta at the moment?

Toshiya Hari:

Got it. And then any view on sell-in versus end consumption? Or is that too hard to really see.

Toshiya Hari:

That makes sense. And then Gianluca, on gross margins, longer term, obviously, you've had this target of 30% to 33%, if I'm not mistaken. You're obviously significantly below that today, but as you think about the path towards your long-term model over the next four-eight quarters, given the reduction to manufacturing footprint that you're executing to, what sort of quarterly revenue run rate would you need to be at to be at that, call it, 30% range? I assume it's lower than where you were about a year ago, which was about $3 billion, a little bit below $3 billion.

Shanye Hudson:

And operator, I think we have time for two more questions.

Sidney Ho:

Great. So I have two quick ones, one on the HAMR side. It sounds like high volume is starting in early '24 to your plan. Can you give us any goalpost in terms of when you expect to hit a certain unit volume on a quarterly basis and maybe when you expect HAMR to be gross margin accretive, and maybe at what kind of volume level? And I have a follow-up.

Sidney Ho:

Okay. That's helpful. Maybe a follow-up question is on the demand side. It seems like you're more optimistic about the enterprise market as compared to the cloud market. Do you expect further correction in the enterprise market, maybe -- or maybe just a U-shaped recovery, considering comments from some of the storage OEMs seem to be quite subdued and it looks like they are just going through the domain collection in their -- it's still in the early stages for them.

Operator:

The next question comes from Ananda Baruah of Loop Capital.

Dave Mosley:

Yes. I think -- Ananda thanks for the question. I think it's a little too early to guide. I mean I think we're still, frankly, digesting. We're just telling people what we're building. I do think at some point, exabytes pick up, of course, right? And if we want to think about the December quarter or something like that, that's fine because I think there should be some pickup, barring any other macro issues or something, but it's too early to guide, I think, very specific. What we're doing right now is curtailing the build.

Dave Mosley:

No, no revenue impact.

Dave Mosley:

Thanks, Andrea. As you heard today, Seagate's acting with speed and agility to manage through a tough near-term market environment. At the same time, we're executing our strong mass capacity product road map that positions us to serve our customers and improve Seagate's financial performance. I just want to close by thanking all of our stakeholders for their ongoing support, and thanks for joining us today.

Operator:

Good day, and welcome to the Seagate Technology Fiscal Second Quarter 2023 Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Dave Mosley :

Thanks, Shayne. Good afternoon, everyone, and thanks for joining us today. Seagate delivered on what we set out to do in the December quarter, and I'm proud of our team's accomplishments amid this tough business environment. Revenue and non-GAAP EPS came in slightly above the midpoint of our guidance range and free cash flow generation increased by more than 50% quarter-over-quarter. We are managing well what is in our control and executed on the actions we outlined on our October call. We retired more than $200 million in debt, strengthening our balance sheet. We lowered operational costs by realizing a meaningful portion of the expected savings from our restructuring efforts. We reduced capital expenditures by more than 40% sequentially while still accelerating the launch and development schedules for new mass capacity products, and we adjusted our factory production output to support strong supply discipline as demand recovers. These actions, we believe, put Seagate on solid footing to weather the near-term industry dynamics while continuing to make the technology investments to meet our customers' evolving needs and thrive over the long term. Relative to market conditions, three primary external factors have been impacting our business over the past several months. The COVID-related economic slowdown in China, the work down of nearline HDD inventories among U.S. cloud and global enterprise customers under a more cautious demand environment and macro-related disruptions primarily impacting our consumer-facing markets. These factors remained at play during the December quarter and weighed heavily on the mass capacity markets, resulting in a 10% sequential decline in mass capacity revenue. Having said that, we are already seeing some encouraging indicators. Within China, we believe first steps toward recovery are being implemented through government policies aimed at improving economic conditions including the faster-than-expected reversal of zero COVID restrictions and a show of confidence following the policy shift several major banks raised their 2023 outlook for China's GDP. We expect it will take time for consumers and businesses to work through disruptions related to the COVID policy pivot and for the economy to fully reopen. Based on our customer conversations, we anticipate regional sales into the VIA and nearline markets to remain subdued in the March quarter and gradually improve as the calendar year unfolds. We will continue to monitor demand signals and expect to gain a better picture following the Lunar New Year celebrations. Turning to the U.S. cloud and enterprise markets. Customers have focused on working down the HDD inventory levels that were built up during the pandemic as non-HDD component shortages created inventory imbalances. We believe some progress has been made in recent months supported by an improvement in non-HDD component availability. While inventory adjustments are customer-by-customer event, and ongoing macro uncertainties have led to more cautious near-term buying decisions, we expect nearline sales will improve slightly in the current quarter, particularly for our high-capacity drives. Our view is supported by the ongoing adoption of our 20-plus terabyte family of nearline products, which represented close to 60% of nearline exabyte shipments in the December quarter and is expected to trend even higher in the current quarter. Relative to our products, we are seeing a wider variety of nearline capacity points and configurations being adopted across our customer base, depending on their specific data center architectures, workloads and application needs. Seagate is well equipped to address these individual unique requirements with our deep customer relationships and broad technology portfolio, spanning traditional perpendicular recording technology or PMR drives to performance-oriented dual actuator products to TCO enhancing SMR technology. In addition to our device portfolio, Seagate's Systems business offers cost-efficient, scalable petabyte solutions for both enterprise and cloud customers. While system sales were down sequentially off of a very strong September quarter, we captured a record number of new customer wins with our CORVAULT products. CORVAULT offers features such as self-healing, autonomous drive regeneration, which increases productivity while reducing electronic waste. The momentum that we're seeing across the systems business supports revenue to move higher in fiscal 2023. Our strong product pipeline is underpinned by the technology advancements we're bringing to market. We are leveraging our technology leadership to scale drive capacities through aerial density gains rather than additional heads and disks. As a result, we can deliver our trademark TCO advantages to customers with attractive margin opportunities for Seagate. Our 20-terabyte product features 2 terabyte per disk capacities and we have started to ramp the volume of 22 terabyte products deployed on 2.2 terabyte per disk capacities. The 20-plus terabyte platform is based on traditional PMR technology. And some customers are choosing to enable SMR technology as an additional feature that slightly increases the drives capacity for certain applications. In the December quarter, about 35% of our nearline exabyte shipments were deployed as SMR drives. We are executing plans to deliver another 10% gain in per disk capacity for this PMR platform to offer drives in the mid- to upper 20 terabyte range. However, I'm most excited made on our HAMR technology. It was nearly four years ago to the day that I first shared our lab results demonstrating 3 terabyte per disk capacities. And today, we have demonstrated capacities of 5 terabytes per disk in our recording physics labs. In the current market environment, we've been taking advantage of our reduced factory utilization to accelerate cycles of learning around HAMR productization. We are meeting or exceeding all product development milestones and reliability metrics, and we will be shipping prequalification units to key cloud customers in the coming weeks. As a result of this progress, we now expect to launch our 30-plus terabyte platform in the June quarter, slightly ahead of schedule. The speed of the initial HAMR volume ramp will depend on a number of factors, including product yields and customer qualification time lines. However, we plan to use our systems business to quicken the pace of learning and time to yield. Our tremendous progress reinforces my confidence in HAMR products and our ability to execute. These innovations were only possible through the hard work and dedication of our global team, and I would like to thank them for their many efforts. Our multi-decade focus on HAMR R&D and our innovation across all facets of drive production have resulted in a development advantage that we believe is measured in years, and we're excited by our collaborations with cloud customers on HAMR capabilities. The technology innovations driving aerial density higher will deliver strong and consistent cost reductions at the highest drive capacities and enable future cost-efficient refreshes of our mid-range capacity drives. We believe these products serve as the foundation to expand our margin profile back into and possibly beyond the long-term target range. Wrapping up, Seagate is executing with speed and agility through the near-term macro challenges. We've made meaningful improvements to our cost structure and balance sheet while steadily advancing our product and technology road maps. With signs starting to emerge that market conditions could improve as we progress through the calendar year, Seagate is well positioned with an industry-leading mass capacity portfolio that we believe supports the return to our long-term financial model over time. Thanks, and I'll now turn the call over to Gianluca.

Dave Mosley :

Thanks, Gianluca. Seagate continues to demonstrate resilience in the most dynamic of times. We are executing on what is within our control, generating positive free cash flow and advancing our product road map. As I indicated earlier, we expect mass capacity market conditions to gradually improve as we progress through the calendar year, which supports stronger revenue and profitability in the back half of 2023. Longer term, we remain excited by the secular trends driving demand for mass capacity storage, and Seagate unique capabilities to capture these future growth opportunities. We are leveraging our aerial density leadership to increase capacity per disk, which we believe enables the most cost-efficient product solutions for mass capacity storage. We will begin shipping products based on 3-plus terabyte per disk capacities in the coming months, which is up to 35% more than comparable drive capacities available today. Amid a challenging macro and industry backdrop, I'm incredibly proud of the partnerships and hard work from our suppliers, customers and our employees. Earlier this week, we published our fourth annual diversity, equity and inclusion report, which highlights how Seagate aims to build and support its global team. The principles outlined in this report are foundational to Seagate's technology innovations and long-term success. I encourage you to read the report in full on our website. I will conclude by thanking our shareholders for your ongoing support. Our objective remains taking the decisive steps to best position Seagate for long-term value creation. Gianluca and I will now take your questions.

Thomas O'Malley :

Hi. Good evening, guys, and thanks for taking my question. My first question is just on the nearline market. You're talking about a slight recovery from a unit perspective in the March quarter, you may refer to exabytes. I guess you could clarify that first? And then can you just talk about what you're seeing there that gives you the confidence that, that's inflecting. In the December quarter, clearly, you saw other mass capacity accelerate pretty robustly based on the numbers you gave. But what are you seeing on the nearline side? And what gives you the confidence that the March and June quarters are going to be sequentially higher? Thank you.

Thomas O'Malley:

Thank you. And then my second one is for Gianluca. You described, I think, $79 million of underutilization cost in the December quarter. When you look at the midpoint, I kind of know where guidance is, I'm getting gross margins slightly up, but you would expect with a better revenue, maybe a little more leverage. Can you just talk -- you talked about some costs associated with ramping up the factory post Lunar New Year. Would those costs kind of offset the comedown in underutilization costs? Just walk me through the puts and takes there, so I understand the gross margin implication? Thank you.

Thomas O'Malley:

Thanks. Appreciate it.

Operator:

And our next question will come from Krish Sankar with Cowen. Please go ahead.

Dave Mosley:

Sorry, Hadi, you're breaking up just a little bit. Could you repeat your question, give another try?

Dave Mosley:

Okay, thanks. I think I understood, and we'll go forward here. The underutilization charges are the ones that are hurting us the most, I'll say, relative to turning of our factories and things like that. From my perspective, we're going to -- we took down the factories intentionally to make sure that didn’t build too much of the old stuff. So it's a 16 terabytes or 18 terabytes that where people are still consuming and then we're focused more on 20s and 22s and 24s and 30s and so on and so forth, like we talked about in the script. And that fills back up the factory. So I think that's the answer. You get more exabytes out and it's a better financial return as well. I think that answers your question.

Dave Mosley:

Yes. I won't speculate on that right now other than I'll say that we're now in a position on HAMR that, that's exactly the problem we're working. No longer is it a question of whether or not the technology is viable, the parts that are out of the oven. And from our perspective, this is what we do really well as well, which has ramped high-volume production. We've got everybody and the team is focused on it, and we'll get there as fast as we possibly can.

Erik Woodring :

Hi. Good afternoon, guys. Thanks for taking the question. Dave, just for you, great to see the continued confidence in the June HAMR launch. I'd love to know just kind of what the feedback is that you're getting from prospective customers. Clearly, we're in a more cautious macro environment we've heard the term like optimizing cloud spend more often. And so is this a technology and a capacity size that they're really pushing for now despite the slowdown that we're seeing in the market? Or are there other factors driving the timing of the launch? I would just love if you could unpackage that question. Thanks.

Erik Woodring :

Super. That's really helpful. And then Dave or Gianluca, I'm not sure. Can you just remind us exactly how we should think about the potential margin impact of launching HAMR and ramping that platform just as we think about, again, the next 12 months? And that's it for me. Thanks.

Gianluca Romano :

Yes, HAMR is a new product. So we need to go through a little bit of the learning curve, something different from what we have done in the last several years. But as Dave said, Seagate is very good in the operation, in manufacturing. And therefore, we are very confident now we can have very good results, results that at a certain point will be similar to the PMR, but exactly when it's a bit difficult to say right now. So we are going step by step. But we are actually growing faster than what we were expecting. And as Dave said, we are ready for launching the product in the June quarter, but is a little bit before what we were discussing just three months ago.

Erik Woodring:

Great. Thanks, guys. Congrats.

Operator:

And our next question will come from Karl Ackerman with BNP Paribas. Please go ahead.

Dave Mosley:

It's a really interesting question, Karl. Let me try it this way. Usually, when supply is behind demand considerably, then you're having LTA discussions. But I think in the case of this, obviously, our suppliers have got challenges, we've got challenges. Even our customers have challenges. So I think it's really an entire supply chain that needs to co-plan together. And we've -- demand is low right now. There's plenty of supply. But I think we're all very mindful of cash and mindful of the financial outcomes that we want. Indeed, we are having LTA discussions still. The levels of the LTAs may not be reminiscent of what they were when you had demand for above supply. But I think the predictability is what we need to keep our factories running, to keep our people employed, getting paid and actually keeping the reinvestment so that we're out there with the right products and the right costs in those right times. Specifically to your HAMR question, I would say the answer is no at this point, but I think we could get there soon where we say HAMR is -- this is the volume ramp of HAMR at this customer, and then that becomes part of the LTA, but we're not there yet.

Karl Ackerman :

Understood. Thank you. If I may ask one more. I was -- one of the impression, your SMR drives were closer to 25% of your mix, you're suggesting it's close to 35% of your mix today, which is quite impressive. So I'm hoping you could discuss what sequential improvement you've seen in SMR drives this quarter and whether you are seeing better economics within this area of mass capacity? Thank you.

Gianluca Romano :

Yes, I would say on a quarterly basis, the percentage change based on the mix of our customers. So depending in which quarter, one customer can be a bit higher than another one, we can have a little bit more SMR or less. But for us, as Dave said, we have both is actually a fairly easy way for us to convert the PMR into an SMR. So just a matter of where the demand is in the specific quarter.

Operator:

And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Dave Mosley:

Yes. Hi, Aaron, I think there's a couple of different answers to that question. Obviously, from an equipment perspective, all the equipment is still there. As a matter of fact, as we go through transitions to say, 2.2 terabyte per disk or 2.4 terawatt per disk to a 3 terabyte per disk, we get a lot more efficient out of our parts that we have accessible to us and out of that same equipment, some penalties with process content. But generally speaking, our capacity footprint goes up. In the current -- to directly answer your question in the current state, we did have to scale back in our factories, and that will take just a little bit of time, not a lot of time to scale back up because that's about people. It's been a tremendously painful time for our people, for the people in the supply chain for the people and the customers for that matter. So I would say that our theoretical capacity is still as high as it is, but we can't react on a dime to go get there. We need to plan for it. And once upon a time, we did 165 exabytes. We could get back there fairly with all the technology transitions, we can also go beyond.

Gianluca Romano :

Yes. We realized a big part of that saving already starting in the December quarter, as we were discussing beginning of November. The majority of our restructuring actually happened at the beginning of November. So we had basically two full months out of the three where we could take the benefit of the cost reduction. And now in OpEx, there are always few other items that impact the cost of the quarter. In the script, I said we expect this quarter and even next quarter to still be around the $300 million.

Operator:

And our next question will come from Timothy Arcuri with UBS. Please go ahead.

Gianluca Romano :

Yes. That is related through our reduction in production. Of course, we had some commitment with some of our suppliers that, of course, we want to comply with. So on those cases, we had to stay for take-or-pay products that we didn't need, and we decided not to take based on our focus on reducing our own inventory on top of reducing customer inventory. I think we have taken all those liabilities into the December quarter. So I don't expect at this point this those liabilities to come back in the March quarter.

Gianluca Romano :

Yes, we are generating still a fairly strong free cash flow. In the December quarter, we generated $170 million, I think this quarter will be higher than that. We have note that will mature at the beginning of June that we want to repay and we will not refinance, that is about $540 million. So we will use our cash. We have actions going on to optimize our cash between now and June. But I would say, right now, our focus is actually on reducing the debt and reducing the full amount of those notes.

Gianluca Romano:

Thank you.

Sidney Ho :

Great. Thanks for taking my question. Congrats on pulling in the launch schedule of HAMR drives. A couple of questions here. How are you thinking about the adoption of HAMR drives in the back half of the year into '24? Is it more broad-based? Or is it focused on a few customers -- and I know it's early, but do you expect -- when do you expect unit or exabyte crossover for HAMR drives? And lastly, on this subject, just to be clear, are you planning to dual track with PMR products in the 30-terabyte range? And then I have a follow-up question.

Sidney Ho :

Okay. Maybe a follow-up question. You and your competitors have both in quite in terms of production cost in this down cycle. Curious if you're seeing any less rational behaviour in terms of pricing given the high level of inventory in the channel and the customers in the December quarter, but more importantly, going forward, do you think the pricing environment will still be okay? Thanks.

Sidney Ho:

Great. Thank you.

Vijay Rakesh :

Hi, Dave, and Gianluca. Great quarter and a good control on the inventory side. Just a quick question on how you see broad inventories in the channel. Like if you look at China and U.S. enterprise hyperscale, any thoughts on where inventories are broadly?

Vijay Rakesh :

Great. And you mentioned HAMR ramping here. Good to see that. A exit the year, any thoughts on what that mix would be of your mass capacity at nearline of revenues or units?

Vijay Rakesh:

Got it. Great. Thanks a lot.

Ananda Baruah :

Hi, thanks, guys, for taking the question. Two quick ones, if I could. Just going back to Aaron's question, Dave and Gianluca on the utilization. So Dave, you said you're 30% below peak your gross margins are actually down 30% from that same peak. Is that a coincidence because pricing has been stable? Or is it really sort of that simple? And then I guess the ramp back up kind of higher cap drives sort of takes up more capacity. And so is it really as simple as on sort of the ramp back up sort of the same indexing on capacity ship, is like a little bit more of a slope up, just given the mix? And I have a quick follow-up after that.

Ananda Baruah :

Gianluca, is it -- can we kind of model the gross margin more or less calibrated with where we see capacity increases to be going forward?

Ananda Baruah :

Okay. Cool. And then just a real quick follow-up. $300 million OpEx through the June quarter, how do you want us to think about modelling out past that, the puts and takes? Thanks.

Dave Mosley:

Yes. I think Ananda, we reacted, obviously, very early on some of this when we saw it. And I think we're going to be asking the same kinds of questions throughout the course of this year, what's the new trajectory, the new normal, if you can. When some of the normal demand cycle comes back, where is the world from an economics perspective and we'll address factory footprint and things like that when those times come.

Gianluca Romano:

Thank you.

Wamsi Mohan :

Hi. Yes. Thank you so much. Apologize, jumping across calls if this has already been answered. But I'm wondering if you could talk a little bit about the trajectory that you see in exabyte growth. It's kind of been a little bit all over the place given so many moving pieces with both demand slowdown as well as inventory and if you could maybe calibrate for calendar '23, that would be great?

Wamsi Mohan :

And maybe you already covered this, but if you wouldn't mind, if you have covered it, then we don't need to go in. But I was wondering if you could address if there's anything abnormal that you're seeing within pricing in the competitive environment, is there especially within the channel, anything that you're seeing that might be abnormal? And when do you think if there is something when that would normalize?

Wamsi Mohan:

Okay. Thank you so much.

Kurt Swartz:

Hi. Thank you very much for taking the question. Maybe just first, within the context of recent export restrictions and macro headwinds in China, I'm curious if you have -- if you can share any color on your TAM assumptions for the VIA market, both in the near term and longer term, which I believe you previously said the longer-term market outlook remains intact, but just curious on those dynamics?

Gianluca Romano :

In the very short term, we see possibly a decline in the March quarter, mainly because of seasonality. March is always the quarter where we have the lower revenue from VIA and from some of the legacy markets also. So not a lot of increase in the short term. But in our view, the rest of the calendar year, we should see sequential improvement. And VIA is an important segment for us. And in a segment that is also generally generating a very good gross margin.

Dave Mosley:

Yes. I think to find the long-term demand, we're still kind of assessing that. So I won't be -- I won't predict it just yet. But I will say that this management team's goal to get back in those models as fast as we possibly can. Obviously, demand is the fundamental driver to that. We've made operational improvements by cost reductions. And we've, unfortunately, had to cut some things that we're working on. So there is a reason to suggest that we have a little bit more oxygen than we had going into this thing. But I think fundamentally, it will still be the demand driver. And one of the reasons we're trying to transition products is as aggressively as we can is because we think we intercept that demand with a better value proposition that comes back to us faster, but we also go off and work our own internal operational metrics and then we get the best cost at the time, and that helps as well.

Operator:

And our next question will come from Ashley Ellis with Credit Suisse. Please go ahead.

Gianluca Romano :

Yes. In the December quarter, our working capital was positive by about $50 million. We decreased our inventory by a lot, but we also paid a lot to our suppliers. So I think that is part of the positive working capital that will actually impact the March quarter. And after that, probably is fairly stable for at least a couple of quarters.

Dave Mosley:

Yes. Thanks, Ashley. So it's underneath all of the demand for data growth that we see, I think this is 1 of the big trends that we're watching because it affects not only what's going on in the cloud, but it also affects what's happening at the edge. And so that -- I do think that over the long haul, we're very bullish on this. If you think about it, early days of AI or training models and things like that, that needed access to big data sets. But I think as time goes on, big data sets have to be very real time to make decisions that are relevant in the moment. And sometimes they need to be kept at the edge because you have a lot of video data, for example, at the edge to make good decisions on consumer behaviour or inventory, like I talked about before, all these new applications that are coming. So our customers are quite excited about it. The good news, and I've been saying this for the last couple of years is that I see a lot of innovation that's happening on that front because of the unsure footing that a lot of people have in the macro condition, people aren't really leaning into it, but I really look forward to the days that they are and these applications come online because I think it's going to contribute a lot to the data growth.

Operator:

And our next question will come from Tristan Gerra with Baird. Please go ahead.

Dave Mosley:

Tristan, I think that back in the day that the legacy markets obviously went through some transitions because of this. There may be some happening in the consumer markets, that's relatively small. The impact is relatively small. We still have a pretty good value proposition in the consumer markets as well. In the mass capacity markets not really. I mean I think the people running big mass capacity rigs either they understand both technologies and they use both technologies. They're not really making a trade-off of one versus the other. I think NAND, we can all see that the business is tough over there. I think everybody is in tough shape and I feel for some of those guys because the world needs their technology, I think we need their technology as well to make sure that they do their part and the layers they're relevant in, but I don't think it affects mass capacity long term.

Operator:

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Operator:

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

Operator:

Good morning, and welcome to the Seagate Technology Fiscal First Quarter 2023 Earnings Conference Call [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Dave Mosley:

Thanks, Shanye and hello, everyone. In our remarks today, we will discuss the September quarter performance in the context of an intensely challenging macro environment and outline the aggressive actions we are taking to manage the company during this tough period. Despite these near-term challenges, the underlying data demand drivers remain strong as does the opportunity for mass capacity storage solutions. I will outline why we're confident that as current conditions improve, Seagate is in an outstanding longer-term position. For the September quarter, revenue came in at $2.04 billion, which was inside the revised guidance range that we provided at the end of August. Non-GAAP EPS of $0.48 was well below our expectations, impacted by multiple gross margin headwinds that I'll touch upon shortly. As we shared in late August, three main factors were influencing our outlook, the impact of COVID lockdowns and the related economic slowdown in China, broad-based customer inventory adjustments, and weakening global consumer spending. Since the August timeframe, macro sentiment has further deteriorated, which has led to a more cautious spending environment and more significant inventory adjustments as we move through the final weeks of the September quarter. These factors incrementally impacted sales volumes in the economically sensitive consumer markets, as well as certain U.S. cloud customers. We currently expect customer inventory drawdowns will remain a factor through at least the December quarter. We reacted quickly to adjust our production levels to the current demand environment and our gross margin performance reflects the resulting factory underutilization costs that increased markedly through the month of September. It's important to note that consistent with some of the U.S. CSP comments, end-user demand for core data and analytics applications remain solid, which supports our view that the business will improve as elevated inventory levels are consumed. In the meantime, we continued to respond to the changing market conditions and further reduced production output across all product lines with the exception of our 20 plus terabyte products, where demand has held firm and pricing relatively stable. Our actions underscore our focus on maintaining strong supply discipline and we believe this will enable us to quickly return to a more favorable pricing environment across mid to lower capacity products as conditions normalize. Stepping back, today's highly uncertain macro environment stems from multiple factors outside of our control, such as rising interest rates, inflationary pressures and geopolitical dynamics. With that in mind, we are focused on managing what we can control and taking aggressive actions to appropriately respond to the near term market environment, and enhance profitability over the long term. In addition to adjusting our production output to drive supply discipline and pricing stability, we are implementing a restructuring plan to sustainably lower costs, including a reduction in our global workforce. These are very difficult decisions to make and ones that we do not take lightly. However, we believe they are necessary to align our cost structures with the realities of the near-term market, while still enabling us to support future mass capacity storage opportunities as demand recovers over the longer term. We are improving working capital by reducing our inventory levels over the next couple of quarters, and we are significantly lowering our fiscal '23 capital expenditures while maintaining investments that support the launch and ramp of the 30 plus terabyte product family based on HAMR technology. These cost-saving actions, together with our supply discipline enable us to drive increased leverage to earnings as conditions improve over the near term. Longer term, we remain confident in the secular growth of mass capacity storage and believe our technology leadership positions us to capture the significant future growth opportunities. Consistent with our focus on enhancing longer-term shareholder value, we are maintaining our quarterly dividend. However, we are temporarily pausing our share repurchase program to ensure we can continue to make necessary investments to support our current business and underpin our longer-term strategic plans. Let me now share some perspectives on the end markets, starting with VIA. The global economic slowdown has continued to impact VIA-related project budgets and installation time lines, which has led to a buildup of customer inventory. These trends have dampened the typically strong seasonality in the back half of the calendar year, particularly in the China market. Stimulus programs to help boost the local economy have been announced. However, timing for economic recovery is not yet apparent, while COVID lockdown restrictions remain in place. Our long term expectations for VIA demand have not changed. While we have significant direct customer exposure in China, end market demand is global and continues to expand, as smart video applications are adopted to address real-world challenges. For example, reducing traffic congestion is one area of focus for smart cities which cost U.S. drivers alone an estimated $53 billion in 2021. These savings can only be realized after capturing and storing large volumes of data and application best served by HDDs. In the nearline markets, we saw a double-digit percentage sequential revenue declines across both cloud and enterprise OEM customers, reflecting the broad-based inventory adjustments that I described earlier. Recall we had been anticipating the customer inventory correction to be largely complete in the December quarter. However amid intensifying macro uncertainties, customers have grown more cautious with their spending plans, which we believe will extend the recovery into calendar year '23. U.S. cloud customers are still reporting healthy demand tied to digital transformation, artificial intelligence and other applications that unlock data value and continue to rank among CIO's highest investment priorities. While enterprise CIOs continue to move workloads to the public cloud, according to a recent study, 80% of cloud users also have a hybrid cloud strategy, illustrating the desire to operate seamlessly across the network of public and private clouds. We believe these trends support our view for mass capacity exabyte growth to return to the upper 20% range as the broader markets recover. These same trends underscore the positive market momentum we are seeing in our enterprise systems business, which recorded revenue growth of over 45% sequentially. While we expect sequential sales levels to reflect some lingering supply challenges in the December quarter, our systems results illustrate how customers are still allocating budget dollars toward areas that drive business value. The data trends that rely on cost-efficient, higher-capacity storage solutions remain intact. As a leader in HDD technology, Seagate is well-equipped to address demand by continuing to execute our strong product roadmap. We are leveraging the current production slowdown to double down on our development actions and accelerate cycles of learning to continue delivering TCO value to customers. Sales of our 20-plus terabyte product family grew meaningfully quarter-over-quarter, supported by strong demand from cloud customers. 20-plus terabyte drives now rank as our highest volume in revenue platform, surpassing 18 terabytes as expected. We are extending this product family using conventional CMR technology into the mid-20 terabyte range, which also offers SMR capabilities into the upper 20-terabyte range. Development of our 30-plus terabyte platform based on HAMR technology remains firmly on track. In addition to HAMR, these drives incorporate many new technology innovations to reflect the years of development, design, and integration know-how that form the backbone of our future product portfolio. We continue to execute our development plans, meeting key milestones, including reliability metrics and aerial density gains that also position us to extend drive capacities well beyond 30 terabytes. As I shared in our July earnings call, customer revenue shipments are expected to begin around mid-calendar 2023. I could not be more pleased with our great progress this quarter. In closing, we are navigating through the macro challenges that are impacting our business over the near term. However, the long term growth trajectory for mass capacity storage remains solid, driven by the fundamental demand for data and the need for businesses to harness its value. We believe that the actions we have undertaken will ultimately strengthen our position over the long term. Looking ahead, as we incessantly push the technology innovation roadmap, we believe our customers will continue to value Seagate as their primary storage solutions provider. Gianluca will now cover the financial results in more detail.

Dave Mosley:

Thanks, Gianluca. Seagate's team is acting with determination and agility to rapidly adjust to a highly uncertain environment. I'm incredibly proud of their unwavering focus. Throughout our 40 plus year history, Seagate has successfully operated through many adverse conditions, and we are putting that experience to work. We're taking the right actions to strengthen our near-term financial position and optimize liquidity through this period. We're driving forward on our technology roadmap which makes us poised to quickly recover, as market conditions improve, as well as capture the significant future opportunities ahead. Finally, we continue to operate with a deep sense of commitment to all of our stakeholders, our people, our customers, the communities in which we operate, and, of course, to our shareholders. Gianluca and I would like to now take your questions.

Wamsi Mohan:

Yes. Thank you. Good morning. As you look into the December quarter, you've not reported a sub $2 billion revenue quarter. I went back and checked all the way since back in 2005. What is your view on the inventory levels? And how much below-demand levels are you currently shipping? And do you expect to exit the December quarter with a lower inventory level? If I could also ask just are you expecting higher underutilization charges in December? Or should we expect the same magnitude? Thanks.

Gianluca Romano :

Yes. During the September quarter, we reduced production twice at the beginning of the quarter and then again during September. And we actually increased even more through the end of September. So we had more than $50 million of underutilization charges in the September quarter. December will be higher. So we start already with a lower production than the beginning of the prior quarter in October, in November. And then in the month of December, we will, of course, look at the demand for the March quarter and see if we can start to ramp back production or we need to keep it lower. And I think Dave wants to add something.

Wamsi Mohan:

Thanks for the color, Dave. And if I could -- I mean, this is -- I know you guys said you really can't talk a lot about this export regulation area. But could you just give investors some sense on why you believe the shipments are not subject to export regulations? Does it have to do with the IP for the products and where it resides, or any color you can share about why you have confidence in your position. Clearly, you articulated that you do? So it's the why is, I guess, important from an investor standpoint. Thank you.

Wamsi Mohan:

Okay. Thank you so much.

Krish Sankar:

Yeah, hi. Thanks for taking my question. Hi. The first one for Dave. I'm just kind of curious heading into 2023, how should we think about the pricing environment? Is there a way to quantify it or qualitatively see relative to the last downturn in 2019? And if we extrapolate how to think about revenue growth for FY23 or calendar '23? And then I had a follow-up.

Gianluca Romano :

In the legacy market, we saw some pricing pressure, so the low capacity drives, maybe also coming from the very low price of the NAND right now. On the high-capacity drive, as Dave said, the price environment is still very favorable and say fairly stable. So I would say different from what we have seen in prior down cycles.

Dave Mosley:

We're not really trying for market share, I'd say at this point in time. We're watching all these inventories levels. And we're saying, let's make sure we build the right absolute right stuff. So I think there various challenges that I can articulate at various hyperscalers. And they have different business models, different dynamics within them. Some have multiple business models. So there's macro implications as you're hearing from some of their comments. And there are also architectural transitions and there are still supply chain shortages. In some cases, some of the supply chain shortages led to situations where people bought too much of the wrong stuff, and then there's even overages in the supply chain. So I think it's really complicated as to how this inventory built. Fundamentally, the creation vectors for data and the consumption of mass capacity drives have not changed. There is an aging of the fleet going on. There's replacement of old mass capacity drives with the new ones which has TCO proposition, higher capacity drives are just better that way. And so all of the relevant trends still exist. We believe that the drives that are in the data centers today are being used. They're more full than ever. The data keeps coming at them because of all the hyperscaler product offerings that are incentivizing people to move to the cloud. So we think this is just a temporary environment.

Krish Sankar:

Got it. Thanks Gianluca. Thanks, Dave.

Karl Ackerman:

Yes. Good morning, Dave and Gianluca. Two questions for me as well, please. The first one is on HAMR. And so I guess as you think about ways to reach demand equilibrium, how are you thinking about transitioning capacity to HAMR during this softer period? I guess, does the transition to HAMR create the need for retooling head and possibly media production? And I guess as you address that question, could you also discuss the buy-in on HAMR from your cloud customers and some of the progress you referenced in your prepared remarks. Thanks.

Karl Ackerman:

That's very helpful. If I may squeeze one more in. Given the strength of your systems business this quarter, are there still match set challenges for you in that business? And are you still facing long lead times for other hard drive input components or have those challenges loosened and I guess, maybe back to what you would consider normal? Thank you.

Operator:

And our next question will come from Timothy Arcuri with UBS. Please go ahead.

Gianluca Romano :

Yeah. No, we are happy with the liquidity that we have. Actually, no, our cash balance is higher than prior quarter. As you have seen, we have increased our debt during the September quarter. We are, of course, looking at covenants, looking at debt structure. And if we have to take actions there, we will, for sure, do it. But now we are -- as we said in our prepared remarks, we are comfortable with the level of our dividend, but we are pausing on our share buyback for a while.

Gianluca Romano :

Yes. We want to protect the dividend. As you know, one of our priority is shareholder return. And dividend is an important part of that. And we know that and we want to protect the dividend.

Timothy Arcuri :

Great. Maybe as my follow-up, I had a question on this letter from BIS. And maybe can you help us -- I'm sort of trying to handicap the revenue, what the right normalized revenue would be if something were to come from this letter. I'm trying to handicap what the right normalized revenue is so --

Timothy Arcuri :

Okay, okay. Shanye, thank you so much.

Erik Woodring:

Hey, good morning, guys. Thanks for taking my questions. I have two, if I may. Maybe, Dave, just first for you. Can you maybe marry the comments you had in your preannounced, the preannounced text today, with what you talked about at the beginning of September, meaning at the beginning of September, you mentioned for the first time that certain U.S. hyperscaler terminology, that's the cautious buying terminology. And then today talked about uncertainty worsening in the latter part of September. Does that imply that demand or purchasing habits from U.S. hyperscalers has incrementally deteriorated since the preannouncement or over the trends that you saw in September, still relatively in line with what you spoke about back in early September? And then I have a follow-up.

Erik Woodring:

Okay. That's helpful. Thanks, Dave. And then maybe, Gianluca, just one for you. Kind of, to think about the impact of your restructuring plan, is it the view that kind of your quarterly run-rate OpEx can be closer to, let's call it, $290 million starting in the March 2023 quarters after you go through this restructuring? Or does your current OpEx base incorporate some -- not just September, but then December incorporates some of the early parts of your restructuring efforts? Thanks.

Erik Woodring:

Okay. Thanks so much.

Operator:

And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Dave Mosley:

Right, Aaron, they are -- and it's a fairly complex space. But I will say that -- if you look at what's aging off, the exabytes that are aging off is actually pretty small. The exabytes that they're putting on is relatively large. So the -- we believe the growth in usage of exabytes is large, but we also believe there's a little too much inventory. I'm not going to say it's -- I'm not going to try to quantify how much that is. I think there's other reasons why some of the pauses in data center build-outs have happened. And depending on which customer you're specifically talking to, it's -- can be complexities in their supply chain. It's not necessarily their business models that are driving the problem there. So -- and it's a complex space globally. There's lots of different kinds of LTAs. We would just -- I would say that as they -- what I said before is as they've timed out, people have given us visibility to the next one and the next one is significantly lower. So then therefore, we're in a period of coming to reality on that relative to what we're building and making sure we're disciplined through it.

Dave Mosley:

So there's a difference between mass cap and nearline. So mass capacity typically would run a little bit higher -- or sorry, lower. And then nearline would grow a little bit higher. So that's the reason for the difference. But I think our fiscal '23 will be an anomalous year for sure. And what kind of new trajectory we get into is -- obviously, as we continue to build exabytes in the cloud, the growth rate will come down over the next 10 years. But I do think that we believe the fundamental drivers are still there for data. We're pretty excited about answering that with more and more efficient drives as well, so which is why we're using this period to kind of get those drives into the factories to come out as aggressively as we can afterwards.

Operator:

And our next question will come from C.J. Muse with Evercore. Please go ahead.

Dave Mosley:

I'll let Gianluca answer quantitatively for you. I would just say that a lot of it comes down to this fundamental premise, just don't build anything speculatively when you're trying to manage cash. So we're not managing a gross margin outcome as much as we are just watching and making sure that any start that we have, that we pull from stores and we use our cash that we're going to ultimately get paid for. We don't want our cash tied up at this point. We are going to make -- because of that, we're going to make a big dent in inventory, and we're very mindful of the impact of the factory workers in the supply chain and so on. But we just believe it's critical to resize the business for the future right now. So Gianluca, do you want to answer?

C.J. Muse:

Very helpful. As a follow-up question, I guess, specific to the VIA market and thinking around surveillance in China, and totally separate question from kind of the BIS issues you referred to earlier. But curious if you're worried at all about increased regulations coming out of the BOC and BIS as it relates to further entities in China being placed on the entity list or unverified list. Is that something that you're contemplating as a potential risk to that part of your business?

C.J. Muse:

Thank you.

Shannon Cross:

Thank you very much. Gianluca, maybe could you talk a bit about beyond inventory and lower CapEx, any other levers you see that you could pull within working capital or other areas to drive incremental cash flow? And then I have a follow-up. Thank you.

Dave Mosley:

It's not as big, Shannon, but we can go with yields and scrap. And these are still material numbers that the team can use, the time, the excess capacity, and so on to do the right experiments to drive those on the right products.

Dave Mosley:

Yeah. I would say we'll still have the ability to flex up. Obviously, people impacts are the toughest parts of the job, and we're really sensitive to not only the people but the communities and the supply chain. There are big impacts happening right now. We are lowering output of some of the legacy products and completing product transitions to future products, which are more efficient products as well, just from a support perspective. So the complexity of the product line is coming down and resetting the factory footprint a little bit. We haven't talked about that very much. But there are demand realities out there what line we have, where it may actually impact the factory footprint. So there's OpEx support around that as well. That will all help as we restructure and then come out. We're very mindful of the fact that we do need to accelerate into the future with the right products as well because that's been the nature of this business. I don't think there's a massive structural change in mass capacity data that we're planning at this point in time. We're just dealing with the reality of the current environment.

Operator:

And our next question will come from Jim Suva with Citigroup. Please go ahead.

Gianluca Romano :

Well, it's a bit difficult to say right now. So what we are doing is keeping the level of production down for the month of October and November for sure. And then at the end of November, we will look at a more tangible demand for the quarter of March and also June and see if it's the right time to ramp it back or if we need to keep it down for a few more weeks.

Jim Suva:

Great. Thank you so much.