Q1 2020 Earnings Call

Recession as reminder, this conference is being recorded for replay purposes. At this time I'd like turn the call for two shiny Hudson Vice President Investor Relations. Please proceed Shane.

Joining me today are easily <unk>, Chief Executive Officer, and Jungle Romano, our Chief Financial Officer.

Posted our earnings press release, you detailed supplemental information for September 2019 order on the Investor section of our website.

Oh, we will refer to GAAP non-GAAP measures non-GAAP figures are reconciled to GAAP figures in the earnings press release, a German website and form 8-K that was filed with the FCC.

I can find certain non-GAAP outlook measures because material items that may impact. These measures are out of our control and or cannot be reasonably predicted airborne reconciliation to the corresponding happens you're not available without unreasonable effort.

As a reminder, let's call contains forward looking statements eating our December quarter financial outlook and expectations about our financial performance.

Within the industry growth from land product introductions ability to ramp production future growth opportunities in general market conditions.

These statements are based on management's current views and assumptions you should not rely upon other any subsequent date actual results may vary materially from todays statements.

Information concerning our risks uncertainties and other factors that could cause results to differ from these forward looking statements are contained in our most recent Form 10-K filed with the FCC and the supplemental information posted on the Investor section of our website.

Following todays prepared remarks, well open the call for questions with that I'll now turn the call over to Dave. Thanks, Jamie Good morning, everyone and for those of you here in Europe . Good afternoon, thanks for joining us.

Let's start todays call by summarizing key highlights from the September quarter during our views on the market relative to C. diff and outlining the progress we've made over key priorities.

Afterwards, Jonathan will provide further details on our financial results and our outlook for the December quarter.

All in the prepared remarks, well open the call for questions.

He's had a solid start, but that's because you're increasing rather than non-GAAP operating profit earnings per share and cash flow quarter over quarter.

Focused on optimizing profit dollars is driving strong and sustainable operating cash flow to fund or future growth.

Technology leadership interesting are strong capital returns.

Over the past 12 month.

We have returned a total of $2 billion.

Our shareholders through a combination of dividends and share repurchase.

Selecting ongoing commitment to enhancing shareholder value.

Our board approved an increase to our quarterly dividend.

Turning their confidence in our future growth and cash generation capabilities.

This marks the first time for years that we've raised our dividend.

Before we plan to review the dividend payment consistently over time.

Let me now I'm sure some perspective on the near term market environment, starting with mass capacity storage.

This market is growing both in terms of dollars and Exabytes.

It's comprised of new airline video and image applications, including surveillance and.

And now structures.

The mass capacity storage market sports cloud applications that are data centers acquired reliable cost effective high capacity storage best suited to HDD.

In the September quarter, we delivered strong double digit revenue growth in your life supported by improving demand across cloud hyperscale customers.

Sure, let somebody ramping or 16 terabyte nearline drives.

Strong customer demand for these products.

With more than a dozen cloud and OEM customers qualified and several others underway.

Executing very well I don't tracking to plan comes from chronic maturity and customer qualification Tom.

Based on our current outlook you expect to ship more than 1 million drives the December quarter, which would make 16 terabytes the fastest nearline program continued century.

Revenue from video in the image applications declined in the September quarter, following an unusually strong.

Geopolitical tensions and regulatory hurdles continued to disrupt customers typical buying patterns across multiple markets, including surveillance.

We expect some demand volatility to persist over the near term.

With the transition to 94.0.

We see the emergence of edge storage applications, which like surveillance you'd like high definition video in EMS Boston.

For example, Smartstack free smart cities of Aiotv, all require large amounts of data you can benefit from low cost I realize only destroyed.

These video and image processing applications continue to represent meaningful growth opportunities for CJ over the long term.

And our legacy markets, which include mission critical desktops notebooks, DDR gaming and consumer applications.

Saw seasonal uptick in revenue in September quarter.

As we've shared in the past these markets contributes as you get cash flow.

Pardon little additional investment.

Importantly, many of the enterprise customers and only importance of your supporting the legacy markets are the same one we expect to create new storage growth opportunities at the edge and in part as.

Along with other than customers.

What's the trend toward a multi cloud world.

And the build out of the private club customers are seeking to follow the same economical disk centric storage architectures as large public cloud providers.

Well cost high density storage platforms are an integral part of the solution to address the rich workload requirements.

She gets high density scalable system solutions ideally suited to these big data applications.

We believe see good strong technology road, though well I'm chronic portfolio with deep customer relationships, because well position to capitalize on this.

Certainly we foresee ahead.

We forecast the mass capacity storage rather than to him well more than doubled from current levels by 2025 supported by ongoing demand from the public cloud due both to flatten club and emerging edge storage applications.

To capture this growing demand we are executing our strategy to be first introduced new product solutions to the market and consistently deliver cost and performance benefits to our customers.

Today. She ended the only company mass producing six two terabyte drives which are the capacity benchmark for the industry.

We are preparing to ship 80 terabyte drives in the first half calendar year 2020.

To maintain our industry capacity leadership.

You are also driving your enough Peterson with our revolutionary Hammer technology, which enables she gave to achieve at least 20% aerial density CAGR over the next study.

We remain on track and should 20 terabyte handle draws in late calendar year 2020.

As Dr. densities increase multi actually water technologies required to maintain fast access to data and skills like capacity without compromising performance.

We generated revenue from our mark to be watchman or solutions for the first time in September quarter <unk>.

We were working with multiple customers won't buy these drivers, including the leading U.S. hyperscale customer list on the technology to meet their rigorous.

Service level agreements without having to employees costly onwards.

We expect to see demand for do much better technology to increase its customers transition to drive capacity is about 20 terabytes.

With that I'll turn call over to John Lukas are going to the worked up our September quarter results and share our outlook foods Evercore.

Thank you Dave.

We executed well in that book, what that go into revenue operating income and nobody in casual.

Support prominent or what I want to sit on them.

Compared to the site import that I haven't increased nine kind of thing.

2.5 used to be done dawn.

Oh, I want to guidance midpoint.

non-GAAP earnings per share what at one dollar and everything.

I had about one guidance range.

I like our former was underpinned by improving demand for myself I think its doors.

So by human increased 16%, what that would cause them to Nike Inc.'s exabyte pretty badly by I wouldn't be airline partner.

Revenue for the enterprise market, we think it was the airline and mission critical.

Representing 45% of thought of it down but one that maybe.

Oh from 41% either.

Exabyte shipments into the enterprise market, because he's talked before about the same sequentially to 51 exabyte.

With me I like that I didn't hear the vast majority on that thought though.

And that's capacity.

Linda has that been saying what kind of went board.

I think they own buying salvation do I ask about any color.

I would exceed that of I wasn't fastest growing yeah length, all that well in Pennsylvania and exabyte.

Got you feel very strong demand what at least probably got cut off cloud I suppose scan, an OEM partner and expect figuring that out but to be I want to I guess enterprise lighting products.

<unk>.

Not what largest company and having a country before you start getting ready.

Well I want my expectation to me this milestone if he's got a coupon.

Revenue indicative I assume that's what I want to me some crazy found that I've watched, especially how you're thinking visit them, but one of them.

We continue to set of its government demand what it means performance Tonight.

We have remained fairly consistent over the past.

Revenue for the as local good market.

Andy talked the Lumpiness and of course, I sent down but important that I mean compare we don't before.

Did you on board.

Thanks, a bunch human remain flat aren't going to be exabyte point, they don't like on that.

It's not going to do it is comprised of something that.

Yes, I mean, yeah and consumer application.

As noted on our core if you sort of either estimate I can anybody man.

Importantly, we said I'd like you know that anything you.

Morning.

As Dave mentioned earlier application such as somebody that you guys I didn't see each on video and you mentioned about getting when do you have to be meaningful growth of what's going to be or seagate moving forward.

Revenue from the edge computing bucket, he's building desktop and notebook side.

Isn't just 17% we thought that anyway.

Like empathic, even doing what.

I've actually met increased 7% sequentially.

Uh huh.

Exactly.

In my book, that's though and nothing.

Aligned with what we implemented during I love it.

They really changed the than what you do that.

I think in the December quarter.

We went back up I know, except MACI right into primary category.

Backup I think you saw that they've got the Mike.

A couple I think they he's made Oh, yeah line.

And he makes up Acacia enough.

Yes, its event that only Mike.

Boy, that's a fancy gotten occasion I fighting I capacity locally so that's what's it.

Well, let's try that you just thought oh, so they got him.

Backup I think he started as meaning anything and then the fact that they're locked without anything you can see because 47% of September blocked out I mean.

We've talked in five of fan just two years ago.

If that was growth in.

The container over the next few years.

I guess the market made up 46 by saying Oh taught us at them back what Goodnight.

Oh, I don't know SMB business made out of the remaining 7% or whatever.

From boy, it's them and SSD solution.

Moving on I think that I would I mean, you upped ruckus and wonder windfall.

We can cancel gained traction in our cseven deals that you the OEM and out of the Guy.

We've seen that what I said the business I think environment has been challenging for most people on board.

Our main focus has been on enterprise, SSD, which coffee man hour musket Bobby de solution provides our customers with them. We're comping started solution portfolio.

We remain focused on instead of using those I guess, how they might occur when seagate and gonna be better value as well I guess.

And that Amanda we're saying if they use it for life a lot about like I think I think we've met.

The range of three to five years.

At age and 87 years.

We said healthy.

Good morning, Vicente was okapi, though.

These changes.

With that then but importantly vision by the approximately 23 million book.

I started to wage was included in cost of goods sold.

I don't think what have you changed non-GAAP gross margin.

And then back what that was up Bucks and that's exactly.

I had a bigger.

27%.

On top of the challenging you just they're going to be shot we discussed over the last few quarters.

Thank God and I was unexpected costs associated with each of them a lot when a new products.

I think those margins by approximately 50 basis points.

Looking ahead, we expect margins to improve as for that sounds good ethics, instead of like that I've become a more meaningful.

Obama thought that I mean.

non-GAAP hope anything this band is fortunate 14 week, what that came in lower than it's gotten a $59 million.

Discretionary costs and costs associated with extra week.

Most lower than our regional outlook.

We got continuing for a few centrally managed to expand here and they'll do my focus I mean.

He said September quarter had expanded non-GAAP operating income who began in thinking I mean I'm gonna.

Ultimately 13% of baby.

We expect it was be financially I haven't heard as we could on revenue and execute how that was not prudent use of course.

We didn't even non-GAAP and yes, Oh, one though not anything.

Which was at high end.

Got it frames.

Capital expenditures for like what the way I went out of that 47 million though.

And then thinking about speaks by saying Oh.

Oh September and what can I mean.

Expects topic, what the fees kinda yet to be and he has a midpoint Oh I went out to get that age oh, 6% to 8% or what I mean you.

So, but I, what I said backup I think aside from that.

And for that I have about what am I think knowledge.

We did here, but at the free cash flow of 309 gondola up 4% friendship.

We utilized one another $50 million right died at 9.2 million or do you have to ship.

Second I think what that was 263 million or she has outstanding down 8% from the Tigers here.

The combination of opportunistic share repurchases and dividend we didn't talk he found that drinking even though to get older than any other fourth.

As of yet I think the earnings at Analyst Day, Our board approved as we've been spending can you talk about unfortunately dividend payment to 65 cents per share.

As you bought Andrea James <unk>.

I don't think.

We think that he is in fact I want to positive long term demand outlook as well as our confidence in sustainable cash in Asia.

We have also been focused on funded improving our balance sheet.

During the September quarter, we successfully marketed if I'm going to meet and all that ixia kind of alone.

Actually I am talking about with it.

Movies that.

And is evident that must we'd be profile.

So what I'm going into this band is by 13 million dollar and that did you listen to what compared to $4.1 billion.

It'll be in September cashing fishing for you, but it was at $1.8 billion.

Access to up to $1.5 billion available to love I Wonder.

Okay, well the outlook for the December quarter.

We expect both diving is being that age of $2.72 billion odd lots of modified per se.

non-GAAP , but in my view is expected to be apples and equaling a lot of life long Adam thought it got phage outdoor into 60% or whatever.

But even by topline growth and Oh God.

And on GAAP, yes, it does that seem to be $1 I am told people, saying that's sort of on either side.

Well that or not.

I think that you can be anywhere.

And why do we can cancel phase viewpoint eventualities.

We believe improving demand combined with an eye and a lot less extreme data by the eyes.

So I'm foundation on even after we got me to growth in the East coast.

2000 and swing.

Probably not doing the convexity for final comments.

Excellent Luca.

In summary, she gave us consistently delivering solid performance and advancing our key business initiatives.

You're generating sustainable cash flow and directing capital towards areas that provides the greatest return for all of our stakeholders.

We are successfully scaling exabyte capacity.

Executing the company fastest ever production ramp on a nearline drives 60 turbines.

We are on track to introduce hammer and Mark to dual actuator technologies.

Dr. aerial density and skilled performance with capacity.

Deliver lower total cost of ownership to our customers over the next decade.

Well, we are mindful of global macro uncertainties.

And the recent industry dynamics, we remain focused on delivering value for all of her stakeholders by executing our technology roadmap and optimizing profitability and free cash flow.

We continue to expect revenue and profitability to grow in fiscal 2020 with the second half projected to be somewhat stronger than the first supported by our 60 terabyte ramp and improving mass capacity storage demand.

Well ongoing execution, leading technology road map and deep customer relationships.

It is well position to capitalize on the significant opportunities in mass costly storage.

Before opening the call for questions I would like to take a moment that maker customers suppliers business partners employees for their contributions to the ongoing success of our business.

John who can I will now take your questions.

Ladies and gentlemen to ask a question. Please press Star then the number one under telephone keypad.

To withdraw your question press the pound Keith we ask that your limit yourself to one question and one follow up.

Your first question comes from Karl Ackerman with Cowen Your line is open.

Hey, good morning, everyone. Thanks for Rob Let me ask a question two if I may.

[laughter] here has been much investor debate, whether you are a.

Better position among peers for gains here, there like a UN one PRM system terrified today.

Other one is in the lead on 14, but are there any other attributes that you'd like to call out that we should be aware oh aside from just capacity per drive.

That would enable you to gain share over the next few quarters now the follow up please.

Yeah. Thanks, Carl I think because simply put the demand is increasing in airline and.

We also see the 16 terabyte, because it's matched with customers and so we have oh, good relationships predictably getting into their architectures I think we feel pretty comfortable that we'll be able [laughter] volume ramp.

Generally speaking whatever other people might do on their capacity points being that that's leading to buy point, that's right in front of us and probably through significant portion portion of the next calendar years more we feel pretty strong.

Got it that's helpful.

If I could ask your question on gross margins I'm, which you know I know that message today and on your analysis spent around operating margins, but no. One of your competitors. This week ullage, some pricing pressure near line.

Do you think that pricing pressure will get worse before it gets better or do you see pricing is the main reason why maybe we haven't seen that inflection yet where margins are gross margins that is despite higher levels of enterprise mix and they'd be more importantly, though you know as we continue to push the aerial density curve.

In in your service and leverage the additional capital required to pursue this greater complexity of Hudson desks and the high capacity points.

You know why can't margins push toward that for hurdle. Thank you.

They certainly cannot all that gianluca elaborate on that impact the ramp cost that you mentioned in the script, but.

Yes, just let me say that in our business to your point gross margins function supply and demand seems very specific to demand for the products that you have.

And.

For the last few quarters exabyte demand was relatively weak I mean, if I go back three quarters ago, we sense, that's what's happening.

You made conscious decisions right builds manage cash inventory really carefully and also start converting production platforms by the way the new platforms are not just the 60 turbine.

Continued ramp of various cost reduction from.

Products across the portfolio.

So demands definitely picking up and that's why.

We are confident the strength of the man, who will go through the back half of this fiscal year, I think him and Uh huh.

Potentially even further than that so we feel like calendar year 20 is very since its launch time for the calendar team and with the new products.

And it will get into that I think long range that we talked about quite quickly. That's why Jonathan mentioned that we'd be above the midpoint of her long term operating range.

In Q2.

The only driving to your point I.

I think gross margins rise from homes.

Dynamics in China.

<unk>, Yeah, Hey, guys. Thank you for an aggressive.

So as a as we discussed in the.

Previous earnings release color.

We do not have them or they put back on it we've got bought convenient that lasted into what could be more often.

And that's what's doing anything I know you do they sometimes if that was higher and basically bought physical invest back into what it was you.

During this period of time west either adding topic.

Even got they'll work doing before it even higher.

Capacity, when we went out maybe prepaid benefit from bad.

Right now we have strong demand.

So we are ramping hod at victory outlets, 16th and I am I not the list. So high that brought that on now know what capacities.

When we announced so fast that sometimes you have a decent on cost.

And he can be below where they need and it would be a decent onscreen.

We added it could be two of those but in a as Q1. We don't have spent vest we had been a gaming and ask you to win the and after that so we expand.

Not a dampening Janet so gross margin and nobody mining to improve staffing as Q2.

I think one other point we've been consistent.

To your point, we have to make sure we make the investments we've been investing in capex for the hats immediately we need to stage for the exabyte growth.

Let's make sure we make those investments and get paid for those investments we're mindful that over the long term.

Your next question, probably very much Oh, sorry. Your next question comes from Steven Fox with Cross Research. Your line is open.

Thanks, Good morning, I had two questions first on a follow up on the gross margin question I know, you're not providing guidance beyond the current quarter, but is it safe to assume that as you ramp capacity the yield issues and scrap issues that you mentioned, our lessen the incremental margins that you would garner from the new products.

If you could just sort of elaborate on what the up half might look like and then I had a follow up.

Yes, Steve and that's that's exactly.

You're right, we think about it and it's not just one capacity point, which we all can fixate on their southern cost refreshes as we talked about through the rest of the portfolio. So we feel pretty good about that strength going into next year.

And in phases, and dancing to bear in mind.

We are getting better gets bad mistake on that holds if he's got here to be stronger than the first time. So of course, if it's possible by what I call me now stands at about.

Great. That's helpful. And then just a question on the surveillance strides I understand what you've said in the prepared remarks about the tougher comparisons in some of the changes that you saw this quarter. What is the recent demand say, though for surveillance drive prospects for the you know the next few quarters or you are you.

Lowering those or do you see different mix a of capacity points et cetera could you just give a little bit more view on that thanks.

It's really interesting question.

If I go back about a year.

She months the demands a box demand was actually higher exabyte growth certainly in surveillance in some of the other mass capacity markets, but we talked started talking about three quarters ago about demand disruptions and you know it's kind of.

Interesting that people want to focus on just one locale, but really that can be much more broadly based on <unk>.

To do with people pulling stuff and because they they're speculative maybe gainshare or something like that so that demand has been disrupted for quite awhile.

And demanding end market demand is strong for Exabytes. We believe it will continue to grow strongly next year, it's exactly how we satisfy that end demand is.

So my question then.

Interesting about some of the the global markets is there really beyond what we called White van markets. There's no the people, making the final buying decision out there is actually doing integration and.

Business, we're in a home or something like that brings us fairly small box size. We don't think that end demand is slowing down at all as much like we think it's growing so.

Great. That's helpful. Thank you.

[noise]. Your next question comes from Katy Huberty with Morgan Stanley . Your line is open.

Thank you add a couple of questions first enterprise price per eggs exit by so much more this quarter than in the recent history can you just talk about is that mix or like for like price aggression in the market.

I think.

I don't think ours filled too much I mean, I'm, we're still analyzing what just went up but I don't think our smell too much right. You know I think Kt will what I would say as a few quarters ago demand was softer than so therefore, there may have been some some behaviors like that I think as we feel going forward, we feel very confident about.

We are that's one of the reasons why we think we get back in our gross margin range.

And then last quarter, you talk about seven different behavior in buying in the China market. Intel gave an actual revenue attribution to some pull forward of demand that does have a terrorists any dynamic in your business. This quarter as it relates to a benefit from early buying around.

And around trade negotiations.

I would say that it's still disturbed into your point, that's kind of what we discuss not only last quarter to quarter before I think as well.

There.

Steven's question, there there those disturbances or still present I think we said something like that it's in the prepared remarks as well I think the end demand is still not strong.

And I feel like calendar year, 20 will be better than calendar year 19, just certainly going into January quarter last year.

We were signaling that we saw you know the softness I'm certainly end demand is still there I think in this matter how do we exact exactly fulfil that in the man.

And Dan. Thank you. Thank for you on it we had gone far lab, but I think that's kinda back Indiana line.

As you know we also have you could he's out what evidence capacity better Guy embed segment and usually when you have these include those airbags capacity you have anything to be totally crazy, but I expect antibody.

Okay understood. Thank you.

Your next question comes from Aaron Rakers football sparkling your line is open.

Yeah. Thanks for taking the question I have two as well if I can I guess going back a little bit to the gross margin line you know I, obviously the yield ramp on 16 TV isn't that I guess as we look forward you know the progression of hammer into next year, but I'm just curious as you kind of add capacity how should we think about you know the.

A level of capacity shipped.

It's kind of you know youre kind of full utilization level here as we look out over the next couple of quarters I'm just kind of curious you know relative to where we stand this last quarter at 98 Exabytes.

Yeah, I think the export capacity will go up very strongly over the next few quarters.

Gianluca.

Talk to your second Aaron the way I would I would say it is fixing turbines to some of the driver for that there's other products across the portfolio that are driving as well.

The margin improvement, we think we position thanks, well, it's a subtle point going a lot of as a capital positioning is actually in hasn't media.

So that's different than drive capacity, if you will.

That's really responding proactively too is that exabyte growth, making sure we have the right products you ramped a good yields and everything else one of the man figure.

Yeah, we did not pay staff, we've got lucky and Andy Vesey, letting some topics a we had I know you just vacation in Florida volume increased demand even act that I would say what people often so we have to be adding to satisfy met the man.

And we should be a firm capacity I would say, maybe two quarters from though.

According to try and better much topics, we want with anything you babies and over the very long you know that's long lead time capital as well, but over the very long haul.

One of the earlier questions, we need to make sure we have that capacity in place because we do believe there will be constraints.

Okay, and then just as a quick follow up as you know that there was not necessarily a competitor of yours, but up but a company last night alluded to.

Basically a a notable pause at one of the hyper scale guys. They also talked about you know Hyperscale <unk> you know companies moving you know moving to more almost a more real time procurement cycle, how how would you characterize your engagement with the hyperscale guys as far as the visibility.

In demand for the Nearline drives has that changed at all over the past few quarters as we kind of think about this this recovery that seems to be you know you're confident kind of continuing to last over the next couple of quarters.

Yeah, I would characterize our engagement as very strong.

And there are problems, depending on who they are there different but their problems are very complex. So it's not a one size fits all answered and I think part of the issue that you might see with other companies I don't want to speculate too much but the issues you might see if you recall qualify them one part of an architecture and also meant that architecture.

Gets delayed for whatever reason it can be impactful I think generally speaking some componentry hard drives are in there as well tend to be fairly broad based alone. For example, we may have an eight terabyte drive qualified on one architectural point and that doesn't move as fast. So it's not like the entire fleet transition to the same time these customers have.

Complex not only supply chains, but also oh problem system cells, and I'm speaking globally as well is the bigger the rural Jets.

More there's some of these inherent inhibition to transitions they have to make sure. They test them against more complex sense. So it's not surprising to me that you know.

From time to time.

You can see when architecture affecting you, but I think.

Most of the demand that we see is across Exabytes is broad based across architectures that are.

What drives our confidence.

Okay. Thank you.

Your next question comes from Christopher Muse with Evercore. Your line is open.

Yeah. Thanks for taking the question. Your first question as you think about the 16 terabyte ramp really accelerating in the first after the year, how should we think about.

Seasonality into your March quarter versus you know what typically at least over the last five years is tracked down 10% sequentially.

Yeah. Good question. Thanks, there will be seasonality in some of the legacy markets. We always talk about I think the exabyte demand in the mass capacity markets is strong.

And.

You know there obviously dynamics from one quarter with Chinese new year coming in in the quarter after that as a seasonally weakest quarter, but we think that theres such strength that's why we're.

So confident our back half revenue numbers that I made reference to earlier, there's also Uh huh.

A fairly large transition that will happen between people who exactly to the earlier question.

The people were on gates or tools are 14 to be transitions 63 teams sometime we late next year Oh. It was all those transitions go up the exabytes.

Growth is very good so getting ourselves stage is our top priority.

Very helpful. As my follow up considering you had the extra week in the September quarter.

It was the math just simply removing that week, so roughly 350 million opex and and as part of that how should we kind of model the trajectory of Opex beyond the December quarter into account or 20.

Yeah, Opex fab four execute wind was actually could be bad times and walk through entertaining.

But you and I saw E Bay and August one extra week.

Modest fairly flat for the next adds maybe balked at all.

We think we could support all with the customer transitions that we need to go raping opex or we can always trim. If we had two depending on macro conditions, but we don't really see that need right now so I think flat as a good way to model.

Should it be quick sort of flat it frees 78.

There's even even though you had the extra week in September .

I think a U.S. vseventy age as boating, including share based compensation. So you should take around that.

Definitely going to like Uniboss, yes, okay.

Your next question comes from Amanda borrow with capital your line is open.

I, yes. Thanks for taking the question guys I was going to say good morning, but good good afternoon for you guys.

Two if I could in the first as a clarification on gross margin.

John Luca you had mentioned one or two light.

That could be adjusted back to get a sense of structural gross margin you mentioned 50 basis point headwind from new product ramp costs and then there was mention of a 23 million impacted gross margin as well or are they separate items and I guess my question. If they are.

<unk> is an accurate way to think of kind of structural gross margin.

If I get 50 basis points it back in each and then so be it would actually be 100 basis points higher for the quarter and walk us through that if that's not accurate thanks and have a quick follow up.

Absolutely and I, we couldn't piano U.S. take on class, though they are the question. So if you could data science, we were talking with you that they're going.

The other one was a there is a mention you made mention of a 23 million dollar impact.

And the question is is that is that separate from the 50 basis points.

From the new products, new product cost ran.

Yeah, So yeah and then.

The 50 basis points beside it relating to if they already and I understand.

I mean, it to that end.

And we don't expect that to happen in asking to it. So you you should convent has a and for women.

I think between $83 million <unk> imation eating that.

He's every penny my wasn't deprecation change what was the impact on that if it is.

Now in the next few tool you will have anything to be hiring pack. So you should go and see that also is one.

The timing.

When you stop and the change Banco de housing policy that getting inventory.

Q1 was.

Yeah, nothing but it looks like it did you mean in northern Mexico, maybe any can be higher non metallic and make the guy.

Got it got understood and then the second question is just with regards to to where the Hyperscale cycle is right now.

Dave is it is an accurate that you mentioned the prepared remarks that it's a little bit of ahead of expectations. We were you guys thought it would be and then.

You know, where I guess like how how sticky they comments in the past about what you think potential.

For the cycle could be with regards to gross.

Do you still feel those are valid could you give us an update there how you feel good or what you're thinking in terms of growth potential.

Yeah.

From a demand perspective, it's about where we thought it would be that doesn't mean, it ticks and ties everywhere, we thought it would be but it's about relative to where we thought it would be there is some indication that.

There's the point I made earlier about the complexity, but some of the global partners have to qualify new products and things like that we think that theres, a little bit of inertia around that but I sleep suggested it even though it might be later in the suggests a higher demand.

Get back to the point of 18 months ago, when the demand was very hot.

So that's why one of the reason we feel comfortable about the demand cycle.

I think what we talked about was 60 turbines on plan to slightly ahead of plan, so happy with the qualifications crust.

And it doesn't Oems now we start we ship those first drives an equal number. So you know there's there's been a lot of work to get here the qualifications around very well customer demands high and that's where we get more bullish.

Okay. That's great. That's helpful. Thanks, a lot.

Our next question comes from Mitch Steves with RBC capital markets. Your line is open.

Hey, guys. Thanks, taking my question to professional just to kind of flush out a bit on the data center side. So right here. It is right that the data center piece, probably would be one of the faster growing end markets for you guys can you kind of December large virginia weighted toward Directionally. It help us out in terms of what what market you guys seem to better over the next couple of quarters or so.

Yeah.

I think definitely data centers or are.

The strength of we're seeing yeah [noise].

Well, we call it all the we'd like to your point, but globally a different people are [noise].

Building on different types of data center.

We call totaled airline industry.

Yes. The second one ahead it is.

Competitor kind of talked about 30% gross margins for hard disk drives in December so how long should we expect to kind of that product transition I kind of understand the investments like there, but I want to be wheat, and do you guys thinking maybe 30% on the it should be side.

Well, we don't we don't guide gross margin.

And they said we as Pat.

It's good to be higher than F Q1 .

No you can't nobody model based on an island, but avionic baby, new and that yes.

Yes.

As we said, we expect improvement what kind of important.

I think will be above the midpoint of the range as well. So we'll just see continued to look is the value that we provide and you know the customers' demand like that sort of strong to continue to work that our cost reductions are good. So all sectors are pointing the right direction, but we don't want to get specific on guides.

Yes, let me ask a different way is 30% attainable for the company.

For gross margin.

Yeah.

Certainly the ban the demand picture is high enough yeah.

I mean, we've kind of know interventional lead driven because the operation operations to be size for exabyte growth.

Van picture goes there than we have the restaurants to get it sure.

Perfect. Thank you so much.

Your next question comes from Mark Delaney with Goldman Sachs. Your line is open.

I guess that good morning, I have two questions as well thanks for taking them first is on the fiscal 20, a revenue outlook I think at the analyst day, the company talked about the potential for revenue to increase in fiscal 20, and ER and on the comments today, we talked about having some some good backlog and expecting strengthened our second half fiscal.

20, so as you said you should today do you still think that's achievable at any anymore quantification you may be able to provide around fiscal 20 revenue.

Yeah. So that's the right take what Mark and that's one of the confidence comes.

I don't think we I did mentioned earlier was as some of the transitions that are going on in globally from one platform to another inside some of these different customers.

There's there's more opportunity I think for us to have better about a product portfolio and there whether it's a lower cost.

Lower capacity drive or whether it's the 16 terabyte you know kind of marquee point that provides us opportunity to get more revenue than we have yeah.

Okay. So far and my second question is a follow up on that's on the prior questions on gross margins I understand there's been some some near term headwinds around around cost and yields but if we look at gross margins for both Seagate and your your main competitor there they're down cycle the cycle compared to where they had been in past points. When your line was was doing while I understand your pricing has got.

On a bit more more difficult, but is there anything else beyond to be on pricing that you know, there's maybe a more structural I I don't know if as an airline mix increases more towards hyperscale compared to.

The more balanced in the past, we you know we havent hyperscale is that having a factor or anything else that may be more structural versus temporal and you're like gross margins. Thanks.

Yeah, I can only really speak to us so what I would say as the demand is not as strong as it was 18 months ago to your point.

He could the last cycle.

For Q1, a year ago.

Demand was quite strong and so it's not been a strong but we think its strength is building up that's what we've been talking about and then having the right products.

In the market that we feel comfortable to ramp and and you know high volume against that that's what gives us confidence.

Okay. Thank you.

Your next question comes from VJ vacation with Mizuho. Your line is open.

Yeah, I guess Im just wondering if you look at the next time a transition.

But when do you expect that to them or where do you expect the mix would be enough grandiose mid 21, and if it would give us some margin profile of cost profile on that thanks.

Yeah, I think that's like thanks for the question. There's there so the highest capacities, which depending on where you're shipping them qualification cycles can be long or short Oh, there's also opportunities for even more capacities.

Built off that say platform. So you know well will ramp that to your point as the yields makes sense one of the cost makes sense to insert in the market.

As time goes on we gained confidence because we keep solving the engineering problems.

So were pretty pretty happy about that I think there's you know there's a TGP before there's 20 TV as well so I think that's going to come to the market.

But the hammer transition is ultimately something that's going to drive us forward in the 21 at 22, and we'll continue to ramp there.

Got it.

And I think you mentioned and yet line or on you'll see a little softness I said look through 21, do you expect or did us into spending your land spending.

To be more back half loaded our middle of the a and B you assemble code if you're gonna do thanks.

I I, you're talking about it's kinda yet on kinda yet.

I kinda, yes, sorry.

Oh sort of calendar year, so yeah calendar year.

19 was relatively muted, especially in the first two quarters counter 20 will be stronger year over year and it's more broad based exactly to your question.

The you know the not only to exabyte transitions that are going on but the demand picture as well.

Thanks.

[noise]. Your last question comes from Jim Suva with Citi. Your line is open.

Thanks, very much earlier in the call you mentioned, you'll be fully loaded or higher utilization rates can you remind us at that time period, and what's that calendar or fiscal year, and then as a follow up as a hammer ramps up.

Will there be much of a impact to operating or gross margins as we go about that I know certain technology changes do you have a meaningful impact to margins like short term a headwind and then longer term positive, but I just didn't know with hammer ramping if if it's going to be material to your company wide margin.

Thank you.

I am all back capacity I said, we would be close to full capacity. The next capital forecast. So unless aims enforced hot off kind of going here.

And Dave maybe they can damage, but yeah I think on Hammer, we'll do the right thing you know as time goes on movement can be managed for operating income and free cash flow.

Continue to work the cost of the earlier question I don't expect it to change the model you know obviously, we want to drive the bottle as far as again, we can drive to the high end or drive the bubble up that's great too, but I don't expect camera changed model.

Thank you so much for your clarification just greatly appreciate it.

I'd now like in the call back over to Dave mostly for closing remarks.

Thank you I want to once again, thank all of our employees customers suppliers business partners for all their contributions to our third quarter performance and thanks to our shareholders for their ongoing square will talk to all next quarter. Thanks.

This concludes today's conference call you may now disconnect.

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