Q3 2020 Earnings Call
Third quarter 2020 financial results Conference call. My name is duration of over your coordinator for today.
Starting all participants are in listen only mode.
Following the prepared remarks, there will be a question and answer session.
A reminder, this conference is being recorded for replay purposes.
At this time.
During the call over to shape, the Hudson Vice President Investor Relations. Please proceed chimney.
Thank you good afternoon, everyone and welcome to today's call. Joining me are Dave Mosley Seagate's, Chief Executive Officer, and on the go Romano, our Chief Financial Officer.
We posted our earnings press release and detailed supplemental information from March 2020 quarter on the Investor section of our website.
During today's call, we will refer to GAAP and non-GAAP measures non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and form 8-K that was filed with the FCC.
We've not reconciled certain non-GAAP outlook majors, because material items that may impact. These measures are out of our control and or cannot be reasonably predictable. Therefore reconciliation to the corresponding GAAP measures is not available without unreasonable effort. As a reminder, this call contains forward looking statements, including our June quarter financial outlook.
Expectations about our financial performance market demand industry growth trends planned product introductions ability to ramp production future growth opportunities possible effects in the economic conditions worldwide, resulting from the cobot 19 pandemic and general market conditions. These statements are based on management's current views and.
Assumption should not be relied upon other any subsequent date actual results may vary materially from today's 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 our form 8-K filed with the FCC today and the supplemental information posted on the investors section of our website.
Following our prepared remarks, well open the call for questions.
With that I'll turn the call or where do you Dave.
Thanks, Jamie good afternoon, everyone and thanks for joining us.
I would typically start the call by sharing highlights from the quarter. However, we're living in an extraordinary times shaped by declaring a virus outbreak.
Therefore, I'd like to take a moment to send our thoughts to those affected by the virus and recognize the health care professionals. Another workers were selflessly supporting our communities through this crisis.
For Seagate health and wellbeing of our employees customers and suppliers have always been the Trump or sorry.
Throughout this crisis, we have taken decisive actions to safeguard our global workforce and maintain continuity of the business to support our customers.
In this period of Unprecedent enough certainty Seagate teams performed very well.
We delivered March quarter revenue and non-GAAP EPS above the midpoint of our guided ranges supported by record sales of underlying products and strong cost discipline and we also continued to generate healthy free cash flow.
In January before last earnings call, we mobilized <unk> global enterprise crisis team and immediately put strong protective measures in place. This cross organizational team has been very effective and identifying issues developing protocols and mitigating risks, which has enabled seagate to rapidly deployed site specific learnings and best practices across <unk>.
Our global footprint and share them with our partners and suppliers.
In addition to health and safety concerns that's very dynamic situation has caused disruptions in our supply chain and those of our manufacturing partners and our customers as they also adapt to rapid shifts in demand.
Our teams acted with speed and agility to tackle a wide range of operational challenges from securing parts to produce or drives obtaining materials to package them and addressing logistics challenges to ship finished goods in order to support customer demand in the March quarter.
As a situation evolve more governments began instituting measures to prevent the viruses spread.
Putting limiting the moving to people and restricting business operations.
We continue to comply with government rules and guidelines across all of our sites.
All of our manufacturing facilities are operating in compliance with local government regulations.
Our R&D organizations are able to continue their efforts through a combination of telework and skeletons support staff in our lab.
Today, our supply chain in certain parts of the world are almost fully recovered, including China, Taiwan in South Korea, and we see indications for conditions to begin improving in other regions of the world.
We are engaging with our suppliers the manufacturing partners on a daily basis.
We'll continue to take action to mitigate supply risks, including building inventory levels on critical components.
Supplementing our own supply with external sources where possible.
And utilizing external labor resources to support our workforce needs.
Based on her current assumptions, we do expect some supply related impact in the June quarter.
The demand environment was equally dynamic.
The surface the quarter played out largely as expected with the seasonal slowdown in the consumer facing legacy markets.
Offset by growing demand for mass capacity storage supporting cloud and data center growth.
However, the underlying drivers and customer buying patterns were shipped more by the onset of the current a virus outbreak rather than any historical trend.
Looking at the markets Seagate's third quarter revenue from mass capacity storage increased 18% quarter over quarter and 68% year over year supported by record sales of our near line products.
Demand from cloud and Hyperscale customers was strong and accelerated towards the ended the quarter due in part to the overnight rise and data consumption driven by the remote economy brought on by the pandemic.
In this remote model work moves from the office tour homes education shifts from onsite to online and entertainment is delivered at high bandwidth digitally tour living rooms.
With millions of people simultaneously adopting these changes endpoint devices, such as mobile phones and laptops are overwhelming the edge of the network.
This is a real time example, <unk>, we have referred to as I T Board I do.
The move of data to the edge.
To address latency and bandwidth issues compute and storage infrastructure is required at the edge.
A recent posed by a leading U.S. hyperscale companies. Further supports this view speaking of plans to rapidly deploying new capacity in order to address the increase in global demand well also encouraging customers to seek solutions at the regional level to address their specific requirements closer to their needs at the edge.
We believe these trends drove a broadening of cloud customer demand for our nearline products towards the ended the quarter, which has continued into the June quarter.
The strength in Nearline demand more than offset below seasonal sales for video and image applications, such as smart cities safety and surveillance as cobot 19 related disruptions impacted sales early in the quarter.
More positively within these applications average capacity per drive increased to over four terabyte in the March quarter.
Consistent with our expectations for both average capacity and total exabytes to increase with the advent of high definition video and the desire to maintain more data for longer periods of time at the edge.
We've also spoken in the long term demand drivers associated with the I'd been invitee Ford auto and adoption of video in image sensors to support new applications.
One such example surfaced over the last couple of months as healthcare workers and municipalities employed biometric sensors is a protective screening measure against the virus.
As a matter of fact seagate use the same technology to help protect our own employees.
These applications combined with the transition to higher capacity drives create meaningful growth opportunities for our mass capacity storage solutions in this market over the long term.
Finally, let me touch on legacy markets, which encompass the consumer electronic space desktop and notebook Pcs and performance mission critical applications.
Mark just typically slower demand quarter for these markets following the holiday Russian and Chinese new year.
With the consumer markets among the first to get impacted by the onset of the grant a virus, we saw greater than expected revenue declines for consumer desktop PC drives.
Well, we see pockets of healthy demand in certain markets and are starting to see improvements across our supply chain. The full extended to cope with 19 related impacts to the broader economy and associated impact to our market and business operations are yet unknown.
Recovery will likely be dictated by the duration of the outbreak.
Timing of containment and duration of restrictive measures.
Given the fluidity of the situation, we're not going to provide detailed view for the second half the calendar year at this time.
We're seagate, we stand on solid financial footing with a strong balance sheet ample liquidity and exposure to secular growth trends that are tied to the world's insatiable demand for data and the need for mass capacity storage and data management solutions.
We continue to advance our technology and execute our product road map to address that need.
Our 16 terabyte high capacity drives continued to successfully ramped to meet customer demand with exabyte and unit volume shipments more than doubling quarter over quarter.
We remain on track with or 18, terabyte plans and began shipping in limited quantities to select customers as part of our system solution.
Because the two terabyte drives employ the same architecture is the 16th they can be deployed quickly and seamlessly in our systems.
Providing customers with the storage building block of up to 1.9, petabyte sort of very attractive price per bed about in the industry.
Last quarter I spoke of Seagate live drive a series of seamlessly integrated storage solutions to cost effectively moved data between endpoints edge in court cloud environments.
Our systems will play an integral part of Seagate data management solution platform, particularly for enterprise customers as they move to a hybrid cloud approach for their workloads.
This quarter, we introduce Seagate live labs.
Which is a collaborative platform intended to help our enterprise customers and partners develop data management solutions tailored to their future work with requirements.
While still in its infancy. This program has garnered tremendous feedback from customers and I'm incredibly excited by early engagements.
With that I'll turn the call over to Gianluca to go into more depth on our March quarter results ensure our outlet for the June quarter.
Thank you, Dave see get as they must sandeep its ability to adapt quickly to changing my inclination.
Oh, I see and we are successfully manage the business.
Well I pass can digest competed yield what do you think I try to Indian and macroeconomic uncertainty.
Well they wide we maintain our focus is indeed beeping on managing expenses.
You might think profitability engine anything strong free cash flow.
And nice quarter I've answered why not go most challenging operating environment and we continue that even inside the financial performance because he's been with minimum guarantees.
We have achieved revenue of $2.72 billion.
The 1% sequentially and up 18% you know very you know.
Non-GAAP, but 18 managing of 15.5%.
And I think we've had what I don't think one at that end up 282 basis points, you know media.
And non-GAAP earnings per share.
One dollar that and 38 cents.
To Pakistan equates any unforeseen I've been saying you know video.
We also getting at 18 cited free cash flow maintaining strong balance sheet.
And believe I wanted to community and financial flexibility, we continue to meet they need or the business.
And I want to be V NAND, and they'll put anything any any patterns yes.
I will finish night execution was equally so I think as we she went on to Mtwenty exabyte of HCV capacity.
And in either of 12% wanting to one point that.
Additionally, and that's capacity, but I don't look that up by.
Interest expense came down from last quarter, and nearly 70% films and dialing in theater.
If that means the ongoing shift.
So what must capacities thought edge and think loud and yes.
And then last quarter my follow up I think he thought I'd increased to 57% that we thought that having ended up with Andy that 62% of don't <unk> Expedia diving.
Yes, he goes.
From 49%.
And 53 been sand and effectively you said you stand up one day.
Except my Shimon and because it might go up I think he thought X amount of guest.
It is 28% sequentially.
I think Atlanta, but all the 91 exabyte.
We started sequentially <unk> was underpinned by demand for the near line died.
I see we can bring mightily to cloud and I was getting cost than us.
Revenue from 16 antibiotic <unk>.
More than doubled quarter over quarter affecting that some momentum we see it wouldn't be as products.
But then you had like human increased to 17 seeks exabytes with inevitably capacity of nearly 10 terabyte that I and I don't even England.
Looking ahead, because they don't want them.
We see seem that demand thing I'm on global cloud and <unk>, that's the nice and believe the investments land that we remain generally aligned with each customer and cycling.
Following a very strong December quarter revenue from video anemic application wasn't down double digits. Thanks, any lysine up when you get all that he got to be anyway.
Well, we 1980 does that option. If that's had a maintains mtc painting season has slowed down you then my support that.
And what have you started to see some demand improvement Seth and Asian markets and expect that anything you can one of my eyes, when they find anything but it needs on it but all by Bdcs.
And having a contribution from the legacy might get decreased to 36% of much work that I haven't done from 43% that he's saying but of course there.
And then he shouldn't be to south them back and extend the Chinese new year impacting demand for consumer electronics.
Exabyte shipments into these markets.
Declined 18% sequentially do 29 Exabytes.
For Seagate the impact was most pronounced you know what consumer and desktop PC that eyes.
What do we ended the greatest exposure.
Conversely mission critical status letting nine without what expectation.
One of them typical seasonal but that wasn't worth it.
Nishan any kind of having you and exabyte shipments declined quarter over quarter. However, on a bolus <unk> out when they get away you Gotta Bailey supporting our view for the long demand paid.
And he meaning seventh Santo must work that I haven't you, what's that I am I want to non HDD business.
Which was down 10% sequentially.
And my joint go to decline that we did do unless he's been business in coffee 19 at eight is lycos thing is that what money fetching part and that's what impacted by factory shutdowns and able to shopping yes.
Looking ahead to the June quarter, we're seeing an improvement in this is Blake on deal, but equally among I went well the m. Boston.
I like it would take a couple of quarters to political though.
On that Adam we anticipate meaningful growth opportunities is that once he's been a solution that even a by increasing demand for data and the edge and adoption of private cloud.
Non-GAAP gross margin declined 67 made these boeing to 28%, which includes an approximate went onto a bit his point.
But from higher logistic under utilization and operational cost associated with Kabi 19 years adoption.
When I think when he told me they think its contribution from my pickup I see that I've, Oh sad means higher cost. There's I think you know that's usually fad HDD managing.
However, I learned not actually the business, but also impacted by Kabi 19 relate each I didn't use and weighted down they gross margin as they caught up in Atlanta.
Non-GAAP operating expenses went to the ended in 40 million Donna.
Down 3% sequentially, it's likely be though I would probably got estimates if anything at all when five and and I've got a business that's painted for things like what we 19 outbreak.
Actively working an opportunity to know what I want to close that I've said and I find it operationally feature.
The combination of stay with us managing and control spending we didn't even non-GAAP operating income of 122 million to others.
And adjusted EBIDA Abu <unk>.
This translates to non-GAAP operating managing of approximately 15.5 for the Santo revenue.
We see that south at end of our loan data financial model change.
Based on the share count of approximately 263 million shares.
Non-GAAP PPS wasn't much sport that wasn't $1.38 cents above I want to guidance midpoint.
I'd be done they spend it though whether one out of then $30 million asking them my support that if anything I want confidante they'd be isn't it and flexibility to align I wouldn't that be done. These was my inclination.
Yesterday, we had invested approximately 6%, though what having means or not what got in outlook. We would this past fiscal year to capex to be at most likely be though they know and a lot like that I get that age of between six and 8% over Navy.
We generated free cash flow of $160 million asking them I support that.
And continued to dip like I'd be that's what he worked at all that's two hour long standing up without it doesn't Providence, almost anything I want to compete there and you sustainable free cash flow generation.
Well utilized went under 95 million, though enough to tied up us money for me and ordinary share.
Actually thing they've gone better with 157 million shares outstanding.
And we use $170 million that to find out one of dividend.
I want to bottom well supported with a quarterly dividend payment of 65 cents per share.
<unk> on July eight 2000 clean.
We remain committed to I wouldn't that be desktop Angie I'll be investing in our business flows and finding I went dividend and opportunistically, adding shifts.
Oh, I don't last night I shade.
Liquidity as they foundation about a finite since then.
As I was ended the quarter cash and cash equivalents, we had a $1.6 billion that.
And we have access to off to an additional $1.5 billion, that's why what and one of them.
But also that was 4.1 billion dollar isn't that net of 2.5 billion dollar.
Well, it's fairly flat with impact of course.
Our net portfolio and if I could at maturity with less than 13%, though the button I mean, you within the next two fiscal year.
But that he meant that the declined slightly to $1.1 billion, Italy supported strong demand for near line called that white proxy bodybuilding, he meant that equal or some critical components to better manage it was a current market and vitamins.
Looking ahead <unk> outlook for the June quarter, we have spent demand, but I'll, let me outline probably best.
Continuing to the June quarter supported by ongoing cloud and I suppose getting Bethany.
In China, we have started to see demanded accommodating sat down markets, including video any major application.
However, when you see the considerable uncertainty as the micro level, which limits I wanted to be they'd be oneq.
I mean, these highly dynamic and by domain, we focus on what we can control to minimize they financially, but 12 out of business like when can't put that asked challenges to meet customer demand.
Based on I want to kind of until but he's not he's got asked me.
<unk> expenses as a costing but from clogging 19, we'd be somewhat higher they do important though.
We see mine we have spent the following for the June quarter.
Revenue to be $2.6 billion, plus or minus 7%.
As they need to find till about why revenue guidance, yes bed non-GAAP operating margin to be in the I pad and although not alone and that to get that age of 15% to 16% of saving.
Non-GAAP, yes, because they're spending to be one dollar and twinkie thing that's sort of minus 10%.
In closing I want them ask one tenant that demonstrate our ability to execute when infill finally challenging business conditions.
I'm confident they Taiwan now like if other portfolio financial strain and sustainable cash flow generation position us well for navigate the antenna business challenges.
Copter known Panama opportunities associated with the secular demand for myself I think is doing it.
I will now doing as they put it back to Dave for fine outcome.
Thanks on Luca.
In summary, our March quarter performance demonstrates the resilience of Seagate's business model, our focus on execution and the dedication of our employees.
Despite the current business environment, we're tracking to the financial model, we outlined last September.
Delivering operating margins at the high end of our target range of 13% to 16% of revenue.
We are forecasting annual revenue growth of 2% based on our midpoint of our June guidance range.
And we have remained committed to returning at least 50% of free cash flow to our shareholders.
Started fiscal year 2020, we shared an expectation for mass capacity stores shipments to be well above the long term compound annual growth rate of 35% to 40%.
We still expect to exceed that range for the fiscal year as well as calendar year 2020.
Increasing demand for data is fueling long term secular growth for mass capacity storage.
I shared examples today that suggests an even greater reliance on data in this new remote economy brought on by the pandemic and likewise greater need for compute and storage in the cloud and at the edge.
But there are strong technology roadmap and broad product portfolio I'm confident that seagate will emerge from this challenging business environment well positioned for these opportunities.
I'd like to express my sincere appreciation to our employees for their extraordinary efforts during the quarter.
I'd also like to thank our suppliers and our partners and customers for their close collaboration through this period and for their ongoing trust and Seagate.
With that Gianluca and I are happy to take your questions.
At this time, if you would like to ask your question. Please press Star then number one on your telephone keypad.
First question today comes from the line Oh, Karl Ackerman from Cowen Your line is open.
Hey, Thank you I had one I hope you are healthy and sake <unk> current environment.
Two questions if I may.
The first one is I guess.
More of a a clarification if I may.
How disruptive from a manufacturing standpoint or margin standpoint.
Worthy shutdowns across Asia Pacific countries in the March quarter.
Just kind of curious and how you expect any if you've checked any manufacturing disruptions in the June quarter snowfall.
Yeah, Carl I would say fairly disruptive not just a for us.
The specific facilities that we run, but also upstream and our supply chain. There were a number of shutdowns that affected us and started really in late January.
Right after Chinese new year, and then downstream of us as well the Oems and I think that's gotten a lot of for us.
Also disruptive so quantitatively, we're not going really break it out but you can imagine the kinds of disruptions and then the biggest or logistics issues. Because we did have inventory in a lot of positions that were able to.
To flex around but and we run multiple sourcing strategies as well, but just the logistics getting stuff through checkpoints and making sure we have the right parts and the right place three times it was an issue.
I guess, just a follow up on that if I may I mean.
Has that had the.
Yes, sorry go ahead about that you were asking about the impetus <unk> I guess and yes, correct any update you said about a 1%.
That's helpful. Thank you.
[laughter].
<unk> to the extent you can how do we think about the exabyte trajectory in the June quarter.
And perhaps for the balance of the calendar year, given an extension of the current investment cycle for Nearline drives you know it no longer lead times associated with these new airline tribes, what sort of order visibility or backlog do you have for your and your line production. Thank you.
Yeah.
Again.
Given the downstream of us there's a lot of disruption still you don't know exactly how people are going to build through or even get to be able to get the parts and the people required to build through what they need but I would think of it is relatively flat, we do see demand but.
Demand demand actually be monetized in this quarter's at push out.
And the reason that the demand. We think is out there is because of all the changes and work location that we talked about if that helps him.
Your next question comes from a line of Aaron Rakers from Wells Fargo. Your line is open.
Hi, This is Jack unfair and congrats on the great quarter I was wondering if you could delve a little bit deeper into the competitive landscape for the 18 terabyte drive.
I don't really know how much about I can't really speak much about the competitor I would say that it's a fairly disrupted environment for all the customers right now so certainty of supply on sixteens is something that we're very focused on our 16. If you remember has the same platforms are 18. So we changed the heads we changed the disc a few other minor changes we get pre.
The good leverage now that we're way up the the curve and we understand what the supply chain needs to look like for that so we're we're fairly confident going to 18 you know.
I think that over the next six months or year.
Probably people or going to be a little bit more bashful, one product transitions. That's just so I think about it they'll they'll go with more certainty towards what they can get what they can integrate.
Okay, and then I'm just a follow up on that can you talk a little bit about the adoption you're seeing for the 16 TB like the breadth of adoption or customer profiles anything along those lines.
Yeah, I think it's a the growth has been good. This is the fastest ramp we've ever done and heads and disks and we talked about that last quarter as well. So the ramp continues to go well and we're working with a lot of partners to make sure that we're getting them what they need through this transition period. So adoptions clearly good with a you know what's being.
3 million dries, plus under our belts now and.
Significantly and driving significant or from there we've got a good adoption across multiple customers in all geographies.
Okay, great. Thanks, so much.
Your next question comes from a line of Amanda Brewer from <unk> capital. Your line is open.
Hi, Good afternoon, guys. Thanks for a thanks for taking the questions I have a couple of I could too as well at least that I'm sorry, John Luca could you I just want to make sure I understand the the full.
Gross margin bridge it sounds like it's 100 basis points from from co bid.
<unk> costs logistics et cetera.
Could you also quantify for US you mentioned not hard drive business with margin impact.
Is there anyway to quantify that for us and then.
My Hunch is that you know, there's just sort of maybe other category.
Given that you had such strong.
Your line exabyte shipments Q over Q.
Is there something else it would have not allowed some of that it's a fall through to the Bob.
And then I've a follow up if I could point.
Yeah, what I would say they make sense actually.
Im talking about what about them right.
Came out to be they still need yes.
Demo that gross margin.
But from the coffee 19, we do not safe, but it between though they are these going on I'd be it back into it that it.
For the corporation on these about that no I'd be at this point.
And they meet as actually add <unk> gross margin for the out of these days and we think that even if it must capacity.
And I thought they'd be isn't that we actually got more or less flat sequentially just.
Yes, I did these but also managing.
Well, they know and ideas.
We had no of course, but of course they didn't them of course, we also had this aim but on the supply chain. So a lot of sees them.
So bullish on thought they'd be and that's what they'd be little better than what we what it's bad thing.
But as I know negatively impacted things and on.
<unk>.
Oh they'd be isn't isn't done over those nitrogen so.
But all of that because modeling was down.
67 basis points.
If you just look at today.
The out of these bought those would be isn't this was basically flat and again.
If you would take out the they buy those probably 19.
But I think there's a bit higher sequentially.
Yeah look at that that's up when I guess, why why would with 50% with such strong growth.
And in near line Q over Q and it's it seemingly just backing into the implied.
Yes, Pete you know sort of growth as well why wouldn't the margins have you kind of apples to apples have been up more than 100 basis points.
I I just wanted to make sure that said, we're not missing anything here.
No I don't think you had anything anything you know I think has.
The big increases in volume and of course has also some.
<unk> buttons, they advertise declining pricing and.
I think we had a very good caught that I think we moved the they make a as it no at the level that we want it and we are what position for that the next quarter, then and then your future they must capacity about the they'd be isn't there isn't really growing strongly.
No kidding, yeah really all I can just won't take one quick follow David if I could you imagine that some of that some of the hyperscale demand could potentially moving just sit as of September quarter based on what you're saying you have an expectation just in general I know, it's cheaper early but that hyperscale data.
Could we made solid into the September quarter for the September quarter any context, there would be helpful. Thanks.
I made reference to the fact that.
We think the change in locality of data is actually going to have to get answered by the cloud customers and also by some edge installs as well.
So if you listen to the prepared remarks, there's there's specific comments about that we still think that's going to happen.
It's early relative to all the global disruptions as what we've seen this to know.
Exactly happens when or what can happen when because of the logistics of what's going on this quarter, but.
From my perspective, I do think that.
This change in data locality and the growth of the cloud will.
The effective next cycle.
Sure.
Thanks, a lot Guy that's really helpful.
Your next question comes from the line of TV Hubert He from Morgan Stanley. Your line is open.
Thank you good afternoon, congrats on the really great execution. This quarter I guess first question for gave a lot of companies as I'm sure you've seen have pulled guidance in so can you put some context around.
The visibility you feel you have into demand and supply in the June quarter relative to normal period, and then what do you think are that the biggest potential variables that would put you at the upper end or or lower end up the guidance ranges. You provided then I've a follow up.
Yeah, Thanks, Katy I I think that.
Reflecting the fact that are ranges are opened up we're still signaling to everyone that it's a more volatile time than were normally a cousin to say exactly to your first point.
These are not normal times for anyone.
Supply has risks and demand has risk for the demand side I would I would point to the question I just answered as to why on the supply side. You know there's been a number of different shutdowns and border closures and things like that that that effect not just our facilities, but also our upstream facilities.
So you know we were cognizant of that so it's not a normal quarter relative to visibility, but you know I do think that it's incumbent upon our management team to come out until everybody what the visibility that we have is today.
We are two and half weeks into the quarter already so so we're doing that.
That's great. Thank you John look I think you said on gross margin that the impact on coal bed will be bigger in June than it was in March. So in that context should we think about gross margins falling sequentially because of that that bigger headwind or does that strengthen in near line offset.
Go ahead.
Yes. Good it you know we don't guide the most magazine and.
Yeah, we ask that anything to be targeted cost, possibly higher cost.
He does a coffee 19 of course, they do then from how long those.
We'd be in place.
And then all gross margin.
Yes that.
We have spent they meet families human data ported over the quarter.
So in other Manny good quarter with that with myself I think he started.
And I know they of course that additional cost.
William boxes going to beat how what I, what do you have yes and.
And now what have you new ways all snow we got it.
The question, yes, so we factored that as soon as much as we could into the existing.
Okay. Thanks, and just one quick follow up to that on Opex done. Okay. I think you've talked about holding at relatively constant with that 340 million. It's that's still the case. It is kind of I'd give you some opportunity to to remove costs in the next couple of quarters.
Well, we always look at <unk>, mainly to get them, what if he can't and not only do and all they do is what it cost.
They have any short that am I don't see.
We will reduce our cost I wonder if he has got acuity denim of Opex was very low cost.
So we expect to be fairly see me that I mean, if he's got Q4, but no Dave and I got a little bit looking at that at all but when they do so okay and.
And decide if we have anything any annual booked anybody we want to taking the next few.
Yeah, there are to the point there are opportunities as well that we may want to redeploy against so you know the world is changed considerably and as we still see some of those opportunities. We made this slightly against.
Okay. Thank you so much.
Your next question comes from the line of Stephens folks from Fox Advisors. Your line is open.
Thanks, Good afternoon, Dave couple of questions on just the supply chain. So in prior downturns. There has been periods, where some of your smaller component suppliers have run into trouble you've helped him out but there's been interim issues don't like this but could you sort of talk about the relative health and getting those you know last 5% of the bomb filled out right now.
And I had a follow up.
Thanks, and it's something I'm very mindful of if she gave we have 40000 people roughly a stream in our supply chain my estimate wouldn't be that's half a million people, we need to make sure that.
Economically they have they're getting what they need because otherwise if some of those companies.
Go away then you know we have our own issues as well so it's important for us to to make sure that is our supply chain as healthy as it possibly can be we feel that responsibility.
Yeah, you know there there are issues for sure.
But we're working with suppliers very closely to make sure that they're getting through those issues that I think everyone under who participates in our supply chain since it's so large understands and appreciates the complexities and.
Understands how <unk> role in this together in some respects right. So that we have to make sure that we take care of each other.
That's helpful. And then just so I understand sort of the base case thinking here in the guidance you mentioned sort of some improvements in sort of you know manufacturing, obviously, China, but is there thinking here that like my time to get through the month at June that things are materially better or operating about the same been.
Turning to supply chain out how can we think about what kind of level of improvement broadly you're thinking about logistically. Thanks, well gosh, the the I wish I could say predicted well, but the period. We've just been through from supply chain disruptions perspective was pretty big compared back to 2008, when I was run operations are 2011.
Very very different times now a global and a there's been a lot of Ah you know just called the call. It multi week disruptions. So you know I do like to hope that some of this is becoming a little bit more predictable to manage although I think that there will still be surprises and that's why we've got all.
Very communicative up and down the supply chain and I really appreciate that our customers appreciate this as well.
Are there they are making sure that they help out and everybody's been as predictable demand as they can right now because that's the way that but we can tell everybody exactly what we need.
That's helpful. Thank you.
Your next question comes from a line of Jim Suva from Citigroup investment Research. Your line is open.
Thank you very much when you talked about the additional coal that expenses I believe you said approximately 100 basis points. If I heard correctly do you think that those are kinda per dimension. We should just kind of build that ends for quite a long time or have you learned.
Through this quarter, maybe those are near term cost that you find a way too quickly get back to back out of this system. Thank you.
Thanks, Jim Yeah, I think there's there's a couple of different buckets.
Virtually the ones that are impacting us or more temporary because you know you look at under absorption from factories that were actually shuttered or.
Are running not at full capacity or if you look at logistics in particular.
No.
So slow March was so busy a lot of air freight was needed and they're just weren't a lot airplanes to be had so you know we have a lot of logistics costs that that went up in the period and there's we're still reverberations of that you know those all those kinds of things are temporary.
We do believe at some point, we'll figure that out or you know add a little bit of inventory take of in the advantage of other lanes and things like that there are some some back to the supply chain questions that Stephen asked I think there's some things that we have to watch out for on the supply base as well that maybe maybe more permanent and so we're still working with individual supplier soon.
To make sure that that that held throughout the entire supply chain doesn't affect us all in demand.
Great. Thank you so much for additional details.
Thanks, Jim.
Your next question comes from the line of tourist and girls from Baird. Your line is open.
Hey, guys. This is actually duston speaking for trust and I know you mentioned the man in China.
Consumer segments coming back I'm wondering if you could you give little more color on.
Topic tracking and.
Potential impact on revenues just for this coming quarter and maybe.
Thanks.
Sure Yeah. Thanks it.
As you can well imagine.
After Chinese new year things turned off and especially on the consumer side I would say the distribution channel as well and then in places like Europe or in the Middle East. We saw that turned off later you know, but the same kind of behavior. Later, there were also pockets of a large pops because.
As you know people went to working working from home there were large by cycles that went on you know people are buying destroys basically to move data around so very intriguing to watch the the tactical signals in the quarter.
Some of it's becoming a little bit more predictable in Q4, but theres still fairly massive disruption and you know it's not back to a point where its not a impacted by the you know the week to week buying patterns of people, but you know.
This is not what we forecast for for our fiscal Q3 or acute Q4, if it for that matter and we're just.
In the consumer markets in particular, more and reactionary mode.
That's great. Thank you.
Your next question comes from a line of pattern coal from Stifel. Your line is open.
Thank you very much and glad to hear everyone's well.
Dave maybe on a qualitative level given the strong demand that you can see you see for mass capacity drives and from the datacenter and cloud.
Segments.
Can you just give your thoughts about what's actual demand what potentially could be some inventory building even by that segment.
You know, even though we are hearing positive stuff on data centers, where do you think a I guess that <unk> kinda demarcation between inventory building versus actual demand that's out there right now.
Okay. Thanks, Patrick.
I don't think there was a lot of inventory demand building I think people are very.
Cautious with their investments right now or you know.
That's for my discussions with most of my customers they understand the.
Some of the larger cloud service providers know how fast it's gonna be before they can actually monetize the capacity that they are putting on line. So they are mindful of those lead times, but they also see demand you know that's further out in time.
Than I do I would also say that on some of the mass capacity drives a surveillance is what I'm thinking about now the the market was actually quite soft we talked about this in our prepared remarks, although the capacity points moved up. So you know things moved about four terabyte drive for the first time there it could go to six as an ace over the next.
You are too and so I think that mass capacity. If you will the demand will will come back because it was so impacted by the early days of this.
This pandemic.
Great. Thank you very much.
Your next question comes from a line of Mark Miller from Benchmark. Your line is open.
Thank you for the question and a great job on Hill in New York.
Situation, which is difficult for everyone. I'll just was wondering give us an update on hammer. That's still look like a goes out the door late late in the here and I'm just wondering about the margin profile hammer drugs compared to your other other drugs.
Yeah, Mark I think we've talked about before that the the hammer platform. This platform that we've ramped with the sixteens as the is where we're going to introduce camera as well so from all the other component tree. If you look at us outweigh the cost impact is we're already down the cost curve quite a bit. So we think the economics of a hammer will still be very favorable.
Yes is the answer your question, we're still on target with Hammer. It's a it's hard to do experiments at the same clip that we were doing them a few months ago, but the experiments also have long lead times, so things don't change that much.
Some of the wafer lead times that we have now and and so we still have pretty good visibility and I'm really proud of the progress that seems make it.
And just wanted to.
To clarify.
I think you'll be shipping 20 terabyte by the end of your Uh Huh.
That's right.
Okay. Thank you.
Your next question comes from the line of Shannon Cross from Cross Research. Your line is open.
Oh. Thank you very much I was just curious have you seen any delays in customer qualifications for 16 terabyte drives given.
Now some of the challenges with that and plays in the office in that related to Kobe and I've a follow up thanks.
Oh, Shannon I would answer that question is a no we were already pretty deep into the qualification cycles. When when this thing for sit.
I I do think that you know running the big scale say for example, reliability test beds that are sometimes done. It you as you ramp programs there weren't a lot of people to plug those beds, sometimes you couldn't get the attention of the of the builders because they weren't even in the office. So yes, there are impacts to some of the late stage qualification.
And maybe the early stage of the next generation I made reference to that earlier, but I don't really I think it impact and impacted our plans because we were already so deepened 16th.
Okay, Great and then just a question on capital return I talked about you know maintaining a long term framework I'm just curious in discussions I mean, there's been a number of companies have either halted share repurchase or or others. You. Obviously have a strong balance sheet and cash flow, but I'm I'm just curious as to how some of those discussions are going when you talk to the board you know what what the puts and.
Takes our as as you look at sort of questionable or I guess, it's sort of unknown second half at this point. Thank you.
Ah, Yes, Shannon, but as you said, we out as to generating a very strong free cash flow and Oh, we have a very good the liquidity level.
Between between our no cash at the 1.6 convenient and a lot or whatever water that old 1.5 billion.
I think we cannot that eight more or less than a normal Wayne Democratic allocation of course no.
Focus as usual.
Definitely force, so supporting our business and and of course had paying our dividend.
Some of that she had a buy back.
We always look at Oh, how about TV is that you know for clean D.. So we will that we've been doing more or less depending from that.
From a week once he does they show size to be at times.
Thank you.
Thanks.
Your next question comes from the line of maybe see.
Some Sig your line is open.
Yeah. Thanks for squeezing me in there just one follow up question on the good ones have been asked what would be your expectation for Nearline exabyte shipments in calendar year 2020.
The corporate 19 had not taking place.
Gosh, maybe that's a that's a tough question.
I think we were talking about 35% to 40% and being above that range as well before and you know I think theres been a lot of dynamics because of this locality changing locality of data.
Which suggests to me that maybe some of the typical cyclicality is changed I don't know that we can actually see that yet because covert as disrupted a lot more than just this of course.
Theres a lot of pieces of the supply chain and your ability to build it through but my my thing my thinking is from the fundamental data demand perspective.
There the the cycle is bigger next time, just because that you know.
All the working from home the reliance on the cloud that everybody has and then the frankly speaking to the the data demand for.
And surveillance and other other tools that might be used to go invest is bigger I know there are lot of businesses that have been disrupted as well and so you know seeing our way through that into the final demand is still pretty hard.
If that helps your.
Yes, that's right. Thank you for you. So just one quick follow up.
If these shifts to the cloud is there had been in.
Who we see a scenario where.
Sir your line Exabyte.
Account for much stickier mix, a pure told exabytes shipped been turbo revenue to extend that even need.
The new game console were to be disruptive to hard disk drive that it's.
Near line.
Strength would more than offset that.
Yeah, I you know.
We've been involved in the gaming consoles for almost 20 years now and I'm a big fan the market its from an exit by perspective to your question. It's it's relatively immaterial I mean in in the last two quarters, we shipped 225, plus exabytes and only one less than one exabyte is going to gaming console. So when it comes.
The pivoting heads and disks over.
Think we could very easily do that we'll continue to support that market, but you know.
Getting all on what our customers need will will be there to answer the call.
Okay. Thank you.
Your next question comes from the line of Mitch Steves from RBC capital markets. Your line is open.
No.
Yeah, I got two questions one of them the opex side of the one guy kinda up on the demand side. So I'll start with the Opex. One so something we heard a lot of these companies in Silicon Valley is that they were actually going to get savings long term awfully. This virus outbreak have you want a phrase it because they're going to allow certain employees to start working from home, reducing travel costs and it generally reduce.
Opex, So I guess I'm wondering why or potentially if you guys are going to go down that path and why you wouldn't go down that path to reduce hop back.
I think that's probably I'll, let Tom look answer, but it's I think that's probably less relevant for us.
Most of our Opex is around our core technology development.
And not as much SGN, a if you will go ahead.
In a in fiscal Q3 would and use that would opex by my about $10 million. So I know I think we did that ought to incent them up cost reduction in general how about Opex as a no as a percentage of revenue and also as a as <unk> and thought that value is it's fair to these movies. So we have all of this been Betty.
But do then Tankless said about the with our Opex spending of course as I said before it or we will that couldn't you went to look photo for doing it. The we then at all what do we score sorta or that all right and prove out what if he can't see and that knows that tie that oh, it out or not that'll benefit though from their working from home. If it is something that would benefit the company.
Fourth we will take care and we'll get that we're very happy with where we're managing from an operating income at the top of arrange again.
You know if something changes yet the world and there's a lot of things changing and we look for investments. We may take advantage of that investment at the time, you know to to go after some new revenue streams or something but.
I look at a very differently I think the most tech companies because you know most of our Opex is really pointed our core technology rather than sales marketing.
Okay got you and then the second one hate to be this blunt about it but it's kind of one of the big ones are going to get a lot of two cents legacy was was down pretty substantially Q over Q I mean.
Do you guys have any conviction that this could potentially being some share shifts because cool we've heard a commercial Pcs and kind of peace in general actually a little bit better than that appeared at least from a channel checks. So maybe you could also help us understand where you guys think happened there and what numbers you guys think we'd be surprising if you sort of kind of the PC share shift.
Yeah, it P.C., becoming less and less relevant for US every day, you know to the point certainly notebook PC.
You know, which continue to support a few customers, but but its really.
The those parts of the legacy market aren't as relevant legacy being consumer electronics or legacy, which was dramatically disrupted in the quarter Q on Q right, a little bit more than we even forecast and then mission critical which you know to our point before as <unk> has a fairly long tail out there just given the preponderance of slots that are out there in the world There's a lot going.
Going on inside the legacy so it's a little bit more.
A pronounced than we thought but not really because a PC cyclicality or anything like that you know and.
Small temporary head fake P.C. bump is not going to help us tremendously either we're just not as exposed to it.
Got it thank you.
Your next question comes from the line of Nick Tutterow from Longbow Research. Your line is open.
Yeah, Thanks, Dave and Gianluca can you. Please talk about the pricing environment for some mass capacity I mean, you know for sure. We heard a efforts by you and orders in the industry to pass to higher costs due to Colvin two customers. How does the same terminal looking about flattish near line exabyte common for June quarter end Duncan.
Wise dollar per terabyte, the clients into high end of the historical range. So can you give us any color if there's anything changing in the pricing environment right now.
I'd say the pricing is relatively benign the higher costs are largely.
Associated with logistics, you know as you can imagine, especially a it has to get positively get their overnight, but we just don't have the the routes that are you know at the same cost is the worst three months ago or six months ago.
So from my perspective.
Those are the hardest problems that we have operationally or temporary we will get through them at some point, but those are the hardest problems that we haven't and.
We're sharing some of the burden downstream, especially for people who are expediting us I think you know overtime, we could obviously go to different routes.
But I don't think that that's a super meaningful in the trajectory of near line.
A dollar per terabyte, if you look at that trajectory over the last couple of years I don't think is a meaningful shift.
Okay, and if I can just follow up but I think maybe asked the question, but I'm just trying to understand the impact too.
Potential disruptions to the jump quarter. If there was no call with 19 know what are you seeing your line Exabytes would've been them you can give us a range for June quarter.
Yeah, I think I think just too hard to do all the puts and takes there you know that there's there's too many disruptions I think to really.
Go there I I do think that.
Cloud service providers or we're continuing to invest it gets a secular growth of data that we see and you know some of that is disrupted whether or not it at all times out in June or you know whether or not.
Gets pulled and because people are you know more full than they thought they would be in the cloud.
And they can actually find ways to get to put on line I mean, it's just it's too hard to say versus prior baseline I will say that.
You know our capacity that we have is still a little bit underutilized and that's affecting our costs you know.
So we could we could clearly have done more but.
That we may depending on how we see that on those very very short lead time capital we may.
You know pull back on that on the long lead time capital, we're still investing because it's against this massive secular growth.
Okay. Thanks, guys. Good luck.
Your final question comes from the line of C.J. Muse from Evercore ISI. Your line is open.
Hi, This is Kevin on for CJ on so just wanted to think on how to think of the contribution in the quarter over quarter weakness and surveillance from either cobot impact where potentially maybe inventory. They built kind of last Q and so you still think I guess normalized rate is like higher than what you said this quarter.
Oh interesting yeah, I think it's more covert related because basically the month of February all the channels were were turned off. So you know I think <unk> companies are still out selling their solutions and somebody solutions are becoming more and more relevant you know in today's world and like we talked about the <unk> right to the edge, we can see that but the ability.
He for us to get product to market the for those customers to integrate it and then get it to their end users I mean with everybody at home and you know around the World I think that's the.
Primary driver of what's going on in Q3.
Okay. Thank you and then I think you mentioned that similar platform on 18 times I missed it became so curious if you will see potential shorter qualifying times, there and if so maybe like how many months could you share in that light.
Yes, we believe so I think to your point Kevin's as it's been a long but.
These these technology transitions take a long time, they're not something we just turn on like a lytswitch and you know going through all the qualifications all the different parts that we have in the dry so we're really happy with the 16 platform being up the ramp.
The first time in a long long time, we'd be able leverage for multiple.
Generations and the confidence that we haven't all those parts is going to translate into confidence in the call. A timely completion as you know I don't really want to quantify it right now because I think some of it someone asked earlier I think was chatted about the so the.
Overall cycles, given how disrupted everyone is that has to run these tests and things like that I don't really want to.
Try to quantify it yet, but I do think from our perspective, it adds to our confidence for sure.
Thank you.
That concludes cumulative I would now like to turn the call back to management for closing remarks.
Okay. Thanks, Jason.
To summarize seagate's doing an outstanding job managing through these uncertain times and we continue to generate cash and have a strong balance sheet and liquidity to weather. The storm over the long term, we see no change to the strong secular growth in mass capacity storage and we'll continue to execute our strategy to meet that demand.
I'd like to once again think or customers suppliers business partners and our employees for their incredible efforts during the March quarter.
And our investors for their ongoing support a seagate thanks, everyone for joining us today.
That concludes today's conference call. Thank you everyone for joining you may now disconnect.
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