Q4 2020 Seagate Technology PLC Earnings Call
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Good afternoon, and welcome to be CB technology fourth quarter and fiscal year 2020, <unk> financial results Conference call. My name is Jason and I will be your coordinator for today at this time all participants are in a listen only mode.
Following the prepared remarks, there will be a question and answer session.
As a reminder, this conference is being recorded for replay purposes. At this time I would like to turn the call over to Shany Hudson SVP Investor Relations and Treasury, whose proceed shooting.
Thank you good afternoon, everyone and welcome to todays call. Joining me are Damon or Green Seagate, Chief Executive Officer and down at the Romano, Our Chief Financial Officer, We posted our earnings press release and detailed supplemental information for our June quarter in fiscal 2020 year and 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 measures because material items that may impact. These measures are out of our control and or can't.
Not be reasonably predicted therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
As a reminder, this call contains forward looking statements, including our September quarter financial outlook and expectations about our financial performance market demand industry growth trends planned product introductions ability to ramp production future growth opportunities possible effects of the economic conditions worldwide.
Resulting from the Cobot 19 pandemic and general market conditions. These statements are based on management's current views and assumptions and information available to us as of today should not be relied upon as of it.
Actual results.
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, and 10-Q filed with the SEC our form 8-K filed with the FCC today and the supplemental information posted on the Investor section of.
Our website as always following our prepared remarks, we'll open the call up for questions I'll now turn the call over you Dave.
Thanks, Jamie good afternoon, everyone and thanks for joining us.
I will begin the call by summarizing our June quarter performance given context for the current market environment, and then share some perspectives on the longer term data trends before turning the call over to John Luca to discuss details our June quarter results and provide our outlook for the September quarter.
Following the prepared remarks, we will open the call for questions.
Results for the June quarter came in within our guided range amidst a deteriorating demand has environment across several key end markets, coinciding with Coca 19 related economic impacts.
We delivered June quarter revenue of $2.52 billion.
And non-GAAP EPS of $1.20 cents.
We increased free cash flow by 5% sequentially to $274 million over 80% of which we return to our shareholders through dividends and share repurchases.
Demonstrating our commitment to our capital return program.
I will address in a few moments why we see the impacts the developed in the June quarter, continuing in the September quarter.
I'll also discuss why we remain confident that the company will emerge stronger from this current crisis.
It's only been a few months since cobot 19 was declared a pandemic. However, its impact on the macro economy and global Society has been profound.
Economists predict global GDP will sharply contract this year to levels, we've not seen and six decades.
Which has wide reaching effects on how businesses are planning and investing near term.
Additionally, the restrictive measures envisions closures have created emotional and financial hardships on people communities and businesses.
I'm proud of how our team has adapted quickly to this tough environment to continue serving our customers and partners. While also supporting our local communities and one another.
As a team we have donated equipment and supplies to hospitals and healthcare workers.
Provided funding and support for food banks schools on elderly care facilities.
We've also leveraged our data science expertise to volunteer resources through our data for good program.
And have granted free access to our patent portfolio in support of the open coated pledged to aid research efforts to diagnose treat and ultimately prevent the virus.
For Seagate, ensuring the protection and safety of our employees customers partners and suppliers remains our highest priority and is vital to the continuity of our business.
At this point all of our manufacturing facilities are fully operational and we've worked through a majority of the supply chain and logistics challenges that we had faced early on although there are cost implications that I will touch on later.
The impact on our customer base has been more varied across our end markets.
The increase in remote work in education, as well as acceleration and streaming video online gaming and the rapid shift to public cloud drove ongoing datacenter investments by cloud service in content providers.
These investments spurred strong demand for our new airline products in the June quarter, and we expect these trends to ultimately accelerate the transition to mass capacity storage.
Conversely, economic uncertainty and the extension of restrictive measures began playing out in other markets as the quarter progress, causing smaller and mid size enterprise customers to scale back their IP budgets municipalities to delay certain projects and consumers to spend more selectively.
These macroeconomic factors ultimately impacted sales of our video and image applications and led to a deeper than seasonal decline for our legacy products.
Amidst this overall environment, we're anticipating a continuation of these demand trends to impact our legacy markets in the September quarter.
We will also continue absorbing meaningful cost to navigate the disruptions to normal business operations.
These are factored into our guidance for the September quarter.
While there remains limited visibility near term the underlying data demand trends have not changed the rapid growth and data and race for businesses to extract value from that data is fueling need for more compute and mass storage. Accordingly, we believe current demand patterns will shift favourably as enterprises adjust to the new normal in the meantime were being.
Cautious and carefully managing our cash and expenses to maintain our strong financial foundation.
Seagate has a track record of being good stewards of cash and taking a disciplined approach to managing capital, while maintaining the health of our supply chains.
We are focused on continuing that track record, while staying true to our legacy of returning excess cash flow to our shareholders.
While we've been focused on navigating the tough near term business conditions. We also made important strides in fiscal year 2020 to place the company an excellent position to capitalize on the world's burgeoning growth and data that is driving secular demand for mass capacity storage and data management solutions.
I will highlight three key examples.
First.
Despite tough business conditions, we grew both revenue and exabyte shipments in fiscal year 2020 supported by strong demand for mass capacity storage revenue from the mass capacity markets increased 25% year over year with exabyte shipments up 57%.
Second we continue to execute our technology roadmap, our fiscal year performance underscores the success of our 16 terabyte Nearline drives and launch of our common scalable platform.
These drives are now used by the world's leading cloud and Hyperscale names.
We target achieving the same success with our 18 terabyte drives.
This common platform approach helps to simplify the qualification process for our customers, while allowing seagate to improve operational efficiency.
We began shipping 18 terabyte drives as part of our system solution in the March quarter with shipments to select cloud customers and channel partner starting in the June quarter.
We expect to begin ramping 18 terabyte drives later in the calendar year, which aligns well with market readiness.
We remain on track to begin shipping our first commercially available hammer drives in late 2020 on 20 terabyte capacities.
Camera technology will be the industry's path to achieving drive capacities of 30, 40, 50 terabyte, an even higher we plan to offer 20 terabyte hammer drives to customers on a limited basis and as part of our system solution to collect production.
And field data.
Third we announced Seagate live drive an integrated solution intended to help Ceos cost effectively move data from endpoints to edge to court.
And we launched live labs, and innovation center to work collaboratively with customers on solutions to their data management challenges.
These three accomplishments demonstrate that seagate is firmly pointed towards capturing market opportunities that are emerging and an ever growing data world.
Earlier this month, we launched the rethink data report, which is based on the survey Commission with ITC of 1500 global enterprise business and IP leaders.
The findings not only reinforce the massive growth and data, which is steady predicts will grow at a compound rate of 42% over the next two years, but also reveals how data is being widely distributed across multiple datacenters and cloud environments. We refer to this in the report as data sprawl.
With massive data growth and data sprawl that comes as no surprise the data management is a top concern among respondents.
The emerging role of data ops organizations are intended to address the challenges of collecting moving storing and curating data securely across complex and disparate networks.
Through seagate's innovative technology roadmap and broad product portfolio, including our system solutions and evolving live platform. We believe seagate is the ideal mass storage partner for data ops organizations.
With that I'll turn the call over to John Luca to go into more depth on our June quarter results and share our outlook for the September quarter.
Thank you Dave.
And the BNS environment in the June quarter that remain highly dynamic due to the half that does have been Danny.
However, we are continuing to manage the business wed like to tighten the high as Inc. They continue to safety I'll, let employees and meeting customer demand.
We continue to see if planting demand from cloud data Santana customers as they add that asked determination onto a more take on any and migration to cloud services.
But we saw weaker than expected demand now what are the key end market demand by economic on 17 and business did option, but aratana by calling 19.
Despite the anthem, telling he has a revenue and EPS west data within our guided at eight years.
And our during the quarter performance compared favorably on a innovative mandates.
With that revenue of 2.52 will be under that App expressed and yet of Indiana and down 7% sequentially.
Non-GAAP operating managing of 14.8% up to 160 basis points year over year and down 70 basis points sequentially.
And non-GAAP earnings per share of $1 that unplanned contain.
From better with 95 sand in the year negotiated a twentysix best Hanting creates a year over year and down 13% quarter over quarter.
Additionally, as an aside into of all our financial model and focus on operational piquancy, enabling us to generate as the free cash flow and strengthened our balance sheet.
In the June quarter, we shipped at both on a 117 exabyte of at least that ice capacity.
91, exabyte or that Delta, what a shift into the must capacity started market that sequentially and up from 52 exabyte integral period evidencing based on growth.
On the revenue May of this mass capacity is started represented 58% of June quarter revenue.
And about 60% of HDD at Aevenia up from 49% of HDD revenue in the years ago period.
Additionally, we achieved our second highest revenue flow that in Moscow class. They started in June.
The driven by robust demand of our high capacity any airline that eyes.
They are building base of cloud and ask as customers.
Yes. Thank you meant increase to at 880 exabyte with average capacity in creating to 10.8, Ted I would like that at the right.
Our performance was supported by strong demand, what our 16 tab.
That ice, which remains a company highest revenue proud that the in the quarter.
Looking ahead to the September quarter.
We expect the tough demand from as a OEM and enterprise market as data online earlier, while cloud data center investment remain relatively healthy.
Accordingly, we expect to see someone deterioration in overall demand, but I'll, let me outline proud that yes there.
Over the long term, we believe demand for must capacity started in the cloud and at the edge with that I had strong revenue growth for needling product.
Revenue for video and image application decline what has taken the consecutive quarter, primarily as a result as at holding has situation.
Why do we so indication early in the quarter that demand condition, when improving we've began seeing when somebody's enforcing tied into the effective measures and divesting pounds per hour totaling 19, and they leave half look.
In the base of a new security as Montevideo installations.
However may dynamics application will remain as strong loans to Adam secular growth driver.
And the thought of whatever Thats better growth is projected to come from base and that obligation, including that originated from security devices and Aiotv Sansa using smart safety and monetize that is worldwide.
The legacy markets represented 34% of total June quarter revenue down from 36% in the March quarter Exabyte shipments into this market declined 9% sequentially to 26 Exabytes.
Sequence human MPC markets has remained pretty soft during the quarter as anticipated by the shadow slowdown in enterprise idea spending, particularly among small to medium enterprise customers.
Resulted in weaker than expected demand, what our mission critical dies.
We currently as Pat Enterprise 18 spending to remains low over the next capital quarter, which is also impacting demand that akoti, what our system solution.
This dense out including in our non HDD business. We took advantage of 8% of total June quarter revenue up from 7% Indians in last quarter.
Instead of absolute dollars non HDD revenue was flat quarter over quarter as high as demand, what our enterprise class Ssds offset the decline in systems.
To summarize we sustained strong demand for our mainline product with a broadening of customers. However, staffing because they have either an image application and mission critical market out of being temporarily impacted by that pandemic and that does a sequential revenue decline in the June quarter.
Non-GAAP gross margin was 27.3% in the June quarter down about 70 basis points sequentially due to lower contribution from that margin at each product method as described as well as high as probably 19 related costs.
These higher costs include Underutilization logistic worker safety and that labor related expenses that negatively impact the June quarter gross margin by approximately 130 basis points.
As of today, our factories are fully operational however, we will continue to wind down to the cut integration, which remain fairly.
Even as a major impact with the global funding is adding on our lighting industry with better Encata elevated cost for at least that next couple of quarters.
Non-GAAP operating expenses were down 8% sequentially with any added $13 million left and below our previous plan.
In addition to lower expenses, reflecting a full quarter impact of working from home. We also incurred in the second one time saving remodeling ready to lower variable compensation and benefits.
Separately, we announce at attraction in plan in early June to drive additional operational efficiencies.
We plan to invest in most of the saving from this plan back into that business. While also lowering operating expenses by about $10 million per quarter relative to our pretty cold level of approximately $350 million.
Non-GAAP operating income was $373 million and non-GAAP operating margin of approximately 14.8% of revenue was in line with our guidance expectation to remain in the Apatoff all our loan 10, a financial mother lanes of 15% to 16% of that.
Based on a share count of approximately 260 million share non-GAAP EPS for the June quarter was one dollar into anything.
We estimate that thought that impact to EPS from Covidien team was between 25 in Turkey, Sands, which reflected lower revenue as well as higher cost.
Previously outlined.
We did use capital expenditure of by 12% sequentially to $114 million Thats in the June quarter, consistent with our planned to align our capital needs with ICANN into market environment.
For the fiscal year Capex evident anted, approximately 6% of thought that Avenue.
Looking ahead, we believe it's prudent to keep our investments head on with level given that kind of market uncertainty over the next capital Corp.
We continue to work closely with our customer and money that are business condition as we progress so that kind of here.
We remain focused on cash management and generated $274 million of free cash flow in the June quarter, we utilized $55 million stood at approximately 1.1 million ordinary share exiting the quarter with 257 million shares outstanding.
We used $168 million to fund our dividend and our board also prove their quarterly dividend payment of 65 cents per share payable in October set in 2000 Tweens.
Our liquidity position remains strong with cash and gas equivalent totaling 1.7 billion dollar at the end of the quarter in excess of up to an additional 1.5 billion dollar through our Undrawn revolver.
Additionally, we find this and on our balance sheet Leidos tightening our debt profile in the June quarter.
And our average maturity level to about $70 and low what our average into this past.
As we ended the quarter gross debt was 4.2 billion dollar with net debt of 2.5 billion dollar.
We now have only at around 6% of principal debt coming due over the next two fiscal years.
Inventory remained relatively flat quarter over quarter at $1.1 billion.
Better respond to current market conditions, we will continue into productivity bid supply for some critical components to mitigate potential supply chain areas.
Fusion and also plans to increase use of Orszag fade to offset some of the elevated freight charges.
We adoption with as asking is likely higher inventory levels.
As we enter the fiscal year 21, the level of uncertainty remains high and we can update to the timing or shape of an economic recovery.
Now for two weeks into the September quarter, and that based on demand as being as low assuming that apart there. The what we saw in both the mats and during the quarter.
We continue to foresee healthy cloud data center demand over the long path, but the main cashless and they're not planning for a broader market demand improved this quarter.
With this in mind I want to guidance and if that an appropriate level of conservative in our cash management and our production plan.
We expect the following for the September quarter.
Revenues to be 2.3 billion dollar plus or minus 200 and media.
Non-GAAP operating margin Atlas slightly below our loan to M&A range of 15% to 16% of saving.
Non-GAAP EPS is expected to be 85 cents. So that's an a minus 15 thing.
In closing Seagate is executing well during this period of unprecedented uncertainty.
With our robust balance sheet and solid free cash flow generation, we believe seagate isn't in the healthy position on to navigate the current market, while continuing to capitalize on that team secular growth opportunities, which will play out longer Stan.
Ill now turn the call back to Dave for final comments.
Thanks, John Luca.
Looking ahead, the near term outlook is unclear. However, we will continue to execute on what is in our control.
We have an agile business model strong balance sheet and ample liquidity that we believe allows us to operate efficiently and intelligently through stress business environments.
We will manage our cash carefully while maintaining our commitment to return at least 50% of our free cash flow to our shareholders.
As a covered at the top of the call a bright spot through the course of this year has been the strong performance of our mass capacity portfolio.
Thats capacity now represents 58% and seagate's revenues up from 46%, one year ago, and 24% five years ago.
This pivot has been intentional and is powered seagate's resilient performance through the first leg of this crisis.
Going forward, we remain confident that our strategic focus on mass capacity storage and data management solutions is the right one.
And that long term trends tied the data growth will continue to drive secular demand for these products.
Both in the cloud environments and at the edge.
We anticipate demand across our end markets to improve within the next six months and currently model revenue to be fairly flat in fiscal year 2021.
Supported by the strength of our mass capacity product portfolio.
Reiterating the outlook, we provided or analyst event last year, we believe the mass capacity storage, Tim will nearly double over the next five years.
Growing from approximately $12.5 billion in the last 12 month period to around 24 billion.
By calendar year 2025.
The innovation of our technology roadmap and product pipeline make seagate well position to capture these opportunities grow revenue and drive strong free cash flow over time.
While the mass capacity opportunity alone is sufficient to drive solid growth over this medium term horizon. It's worth noting that we also expect edge data opportunities and legacy markets to meaningfully contribute to revenue and cash flows as well.
Prior to opening the call for questions I want to briefly address the important movement underway to finally drive much needed racial and justice reforms as a company guided by the core values of innovation integrity and inclusion.
This is a vital moment for us to set a leading example, with all of our stakeholders.
We acknowledged that we do not have all the answers, but we are committed to taking this opportunity to look inward and create positive change across our global organization.
We have already taken actions to raise awareness open lines of communication expand our training and further our inclusion efforts.
Inclusion is foundational to our success and extends beyond our employee base and I'm looking forward to this opportunity to make seagate even stronger.
My confidence is seagate's potential is reinforced by the determination of our people to support of our diverse supplier base and the strength of our relationships with partners and customers.
With that John Lukemire happy to take your questions.
The slogan lets you would like to asking questions. Please press star one number one on your telephone Pete.
We'll pause for just a moment compile the today or Australia.
Your first question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.
Thank you good afternoon, I think I heard Gianluca say that you expect moderating growth and in near line in the September quarter. If that's right. How should we think about this sequential drop in near line exabyte shipments and and as a follow on to that is there any visibility at this point into whether there.
Do you have recovery and expedite shipments going into the December quarter.
Yes, Hey, Katy I think we've been on a tear of course year over year, we talked about 57% growth in exabytes.
As far as I can see that does period, that's going on we continue to see large growth.
And John because we can quantify it from here, but you from my perspective this.
Digestion period, so that people been talking about is really quite different it's more of a race to get things online and thats, what we see so there's a fairly strong demand we expected that strength is going to continue up throughout the rest of the fiscal year, we don't really have visibility into the customers' inventory levels, but believe any disruptions or just very tight.
Prairie it at least the cloud service providers. Moreover, the thing that affected near line. All in was a smaller portion of the near line, which is the I'll call. It on Prem enterprise.
So thats the small medium business enterprises.
Impact is and we're expecting that to slightly recover or started its recovery, but some of that was just because in Q4 and going into Q1 small medium businesses are not really registering very much.
So over the long term, there's a big data growth trends, even on the in even an on Prem where people arent necessarily buying right. Now there is anecdotal evidence that the utilization rates are going up of the capacity. So data is growing everywhere, but.
That on Prem part to watch right now.
And we do expect some some recovery over time I don't think the I don't think you should take away from our comments the cloud is.
Softening or anything else is depending cloud is racing to get everything online to meet their service level agreements surgeon look, yes, I will say ignore first of all we had day at eight quarter over quarter in FQ four saw lithia, they're very high starting point.
And demo no exabyte volume.
And what we said in the safety is and we will not see this statement at Villa in FQ. One we don't expect to see the same level in FQ one platform over the long term for sure we ask that being said and need for data add to be there and to continue to contribute to that I have VSS take loan growth.
And so we're very confident with the long term situation and even Q1, maybe is not to the level of FQ four but that doesn't mean that is that noise.
At very low David for Air Force uplift.
Okay. Thank you.
Your next question comes from the long hauls outflow from Stifel. Your line is open.
Thank you very much maybe gave as a follow up to Caseys question regarding.
Near line dry and the demand trends.
Given that overall datacenter and cloud spending does remain healthy right now what's the timing between purchases or drives first just say servers.
In memory products that are seeing strong demand is there a little bit of a lag time when storage purchasers are made.
After those server or buys are completed.
It's a very interesting question I think it back to make my point about digestion period stood expand on on that whole topic Patrick.
In the past digestion period might have been more around storage optimization of software in the datacenter and things like that I think right now to your point.
In order to meet the service level agreements as everything's been pushed into the cloud the cloud service providers generally have really tough challenges responding on all fronts with whether its network year or us servers to to meet compute requirements stood.
For people that are using the computer aspects and then I think storage does lag that a little bit but the data is growing as well very quickly in those service level agreements and so generally speaking I think theres a race to get everything online, it's not really a typical digestion period.
Characterized by by software and I think that this push that that you've seen from the client server models quickly into the cloud models is ultimately good for mass capacity.
It's just we have to back to the answer to Caseys question, we have to make sure that were satisfying this demand as its growing very quickly and then make sure that we are patient with the on Prem demand because the on Prem right now is kind of stagnating.
Greg maybe as a quick follow up are you talked about the the release and the introduction of the 18 terabyte drives and the common platform, which is very beneficial for a lot of your customers that are already on the 16 terabyte platform or how do you drive quote new customer wins a country.
We knew the share gains that you've achieved over the past year with that 16 terabyte as you move to 18 terabyte.
Yes, Thanks, Homi, we think about.
Serving the customers and what they need so for those customers that are still maybe ramping sixteens in and not buying eighteens yet we'll continue ramping them on 16, some people want to make the transition and I think we're ready to go. So we have lot of confidence our that platform now because we're deep into the platform.
But we can also changed make the necessary changes that we want which are fairly minor to get to 18 terabytes and remember that this same platform allows us to go back down to 12, and Fourteens and all the other thing so as one of the reasons we drove it for so so hard.
I think the the pipelines around all of those products relative to customers qualification in availability or are quite good we have great dialogues with the customers and when they want to pivot will pivot.
Yes, I would add to that Dan no we.
Not not really focusing on they show up their market share the market share is a than outcome will allow our.
Good product and how we manage the business.
He is now that is that no our top faultless, Florida for they show up and we will just focused on free cash flow as as they were saying before and profitability. One other thing we said in the prepared remarks to take you back about four quarters or so as you noted time like this you make sure that you watch or cash really carefully and that means we watch.
What I've learned over time as flush production. So don't build in anticipation of some of those things stay really tight with your customers and build exactly what they need I think thats the best way for us to watch our cash and that's what we'll continue to do.
Thank you.
Your next question comes from mobile oils.
Our mobile.
No no loans.
Hi, Good afternoon, guys. Thanks for taking the question Hey, David Yellow could just just to start a clarification or I guess, maybe just just a little bit more on.
I'll bet, you are expecting suited to normalize as the guilty fiscal 21.
On our near line Hyperscale do you think that Weve reached the.
The teak exabyte ships in the June quarter or.
As as you said, a digestion period and you think we get settled.
We've brought back and Gil above 80 over the next few quarters and data fields, and maybe that has to happen to delta.
Flat growth given the September quarter guidance, and then and then also allow that any any detailed contact Stein.
In that flat flat outlook, how you're expecting or sort of accounting for on trial.
We'll bounce back as well and they have a quick follow up. Thanks, Yeah. Yeah. That's good I think it is a question between on Prem If you break down near line between cloud service providers, which I said was a little bit more than 50% and that the changes quarter over quarter. And then then you have the rest of near line, which is on Prem I think on premise. The things are really watts of them in the near term.
You know fairly uncertain like we talked about and we do need the on Prem to to come back at will and that's my point about utilization levels I think as far as the data everywhere is growing.
Very healthy and.
The demand for data is exploding with although I OTN smart cities and autonomous vehicles, and all that stuff going on.
And to take advantage that the cloud service providers gonna have to put a lot of cell phone line. I think there's also a lot of up on current opportunities for long term, we feel more certain but it's this near term period of.
Small medium businesses people can't get in or even if they can there they've got other priorities right now that we've got to just get through that period.
Good day anything to hit that sorry, Jim again.
Are you asking about an hour there needs to be the long, Ghana, and tandem outlook and things that they bear in mind, we are seeing that for fiscal year 21.
We are looking at I now at their revenue is now fairly flat, we as I always fiscal year two NT of course, but is there any impact from troms economic situations to allow assumption is based on no an impact from all of it that we did start to decline in the next few months.
But that all we are still very very confident in seagate outlook of that it's got yet 21 and dancing on that on pen.
Anything do you think near line or I guess I'll, just say new light overall, you think you reach is it gets above 80 does it need to get above 80.
As we go through the fiscal year test to hit that flat revenue outlook. Yeah. I think is the other mass capacity markets like surveillance and as they come back on and they start moving higher and higher capacity points I think you'll see the exabyte growth. So we need those those more on prem type of mass capacity applications. The on premise you know.
Well see a private datacenter applications, we need those those to grow in Exabytes and come back up we think that will happen then you'll see exabyte growth again, yes.
Got it got a great. Thanks, guys.
Your next question comes from the loan of Schulman clouds phone call switching to a wolfbone.
Hi, Thank you very much for taking my question I was curious on cash flow you talked about.
Some insight into flat.
Revenue for next year, how should we think about cash flow opportunity to drive maybe from working capital improvement. Thank you.
Thanks, Shannon I'll, let John look to answer this but.
Loosely speaking we have quite a few levers to pull through as you know should we need to and from my perspective cash flows exactly what we're driving right now as the metric we're watching our cash very carefully like I said before not bringing on too much inventory. Although we do a may have to make sure that we cover.
Potential factories being down that's the reality, where we were last quarter and that may still happen again, so we have a little bit more inventory, but we're going to watch our cash very carefully not overbuild mixture that we're we're running things are the right way, we're still making investments in ourselves.
We're still bringing in quite a bit of capital as release as we did last quarter, but ill, let gianluca talk about or color compared to the equity now and.
We have generated a very strong free cash flow in Frisco, you have to Andy and we said we are expecting revenue, but he is compatible and probably the free cash flow will also be compatible capex, we are investing fraud.
For the growth that we added setting in the long term.
But in general and no I would say pretty cash flows can be fairly simonetta year over year.
We have.
In terms of action on that at Dawn no we have a.
A commitment to record a lease safety percentile of our free cash flow through shareholder.
And this is Don in there in the form of dividend and therefore model that share buyback.
So we will continue as we assemblies BSS policy and now we expect day in and out fairly strong year into more free cash and we don't look at it as a tactical discussion either it's more in old manage the cash tactically, but the shareholder return is more long term, that's who we want to be.
Thank you.
Your next question comes from along all Kevin Cassidy from Rosen Watson loans, Oklahoma.
Thanks for taking my question.
The video and image business and applications can you say, yes is it all covert related that they're not being deployed ER and is there a buildup of you sum up.
Yes, some anticipated deployments as soon as the Kobe this release or there is a virus.
Immunity.
Are you expecting it to a surgeon that business or is it going to be more gradual.
It is a really interesting space to watch I think Kevin so.
Loosely speaking you know these are on Prenup on from applications and people just couldnt get on Prem and even if you could sometimes or were there is nobody else there to be on trend to surveil or whatever you would say right. So.
It's not surprising to see that these markets were were down they are starting back up again.
Sputtering to start but starting back up again, we believe long term. The these products are actually quite strong because of smart cities and smart factories and smart hospitals and.
So we believe these on prime applications will come back fairly.
Fairly strongly.
So timing is everything and we believe we have the best product portfolio to go satisfy that it'll probably growing capacity point to that one of the earlier questions. There's more exabytes coming this way. So you know the trend that we saw in the last couple of quarters with surveillance in particular being so far down is not going to continue we think it will start.
Picking back up there's some early indications this quarter that it's back coming back to life.
And it's geographically very dispersed of course, there's there's lots of different regions of the world where people are going to be doing this spending but.
That's what that's what we see is that should start to improved quarter over quarter. This quarter I don't know how fast will accrue improve into Q2, but it's certainly a market, but long term we're watching.
Okay, Thanks, and just for a little more detail what to drive capacity for those system.
Typically in the past its been four terabyte now, it's going up to six and eight terabyte. Some so you know that happens is a function of these technology transitions.
So all the while that the markets are going through with the markets are theres, a march towards higher and higher capacity points, because theres more value in those drugs on the edge.
Okay, great. Thank you.
Okay.
Your next question comes from along from Stephen Bauxite from Fox Advisors. Your line is open.
Thanks, Good afternoon.
Two questions if I could just first one is you touched on some of this but I was wondering.
Dave when you talk about getting the flat revenues for the full fiscal year.
You started off in about a 300 million dollar hole and you've talked about some pressures that you know in the back half the year could still be there. So how do you map out sort of a recovery. So that's a full years roughly flattish and then is the second question going back to the cobot related costs that hurt the gross margins by 70 Bips.
What surprised you most in the quarter that what you weren't prepared for and.
To be under utilization have anything to do with just the miss topline or is that related to specific manufacturing issues. Thanks.
Ill, let the Stephen I'll, let John look at pick the latter part first.
Yes, so in general for there for the impact of quoted in the quarter, We've had 130 basis point Vcs.
R&D related to that that add cost. He is an automated was a lower revenue that was actually know generated an impact by Colgate.
So in that area, we said.
And that that add cost about $35 million I suppose I went out at June 30 basis points and then we also said when you look at as USA segment impact.
And that take on impact is.
He is related to the low revenue and of course, there they manage those revenue and we quantified for a total EPS impact of between 25 and Turkey Dan.
And there is the level of as you add that and are currently you its impact in the quarter from quoted in the prior quarter, we add that additional cost met where it could be below what button on steel as can be attributed about 25 million dollar we didn't have an article and having an impact.
We probably add that in Austin impact on the legacy part of their business.
But the cloud was probably offsetting that.
At adoption.
In that in fiscal Q4 compared to what we were expecting held in the outlined came out as 11, we were expecting might we add Tom impacting that on the legacy business and also on sort of beta. So overall, we lost some that some EPS because of illuminating.
And I'd say you know to your question Stephen about to the longer term going out through the up throughout the fiscal year note. Some of the legacy markets have been very slow of late we don't anticipate there's some natural decline year over year, because they are by by nature legacy, we're not investing in them and.
So were watching them develop but I think some of them are temporarily down and they'll come back to some level of previous it's a good business for us with good free cash flow and minimal incremental investments that we have to go make so it will watch that and some of them have already shifted to the flash like notebook in gaming and things.
Like that but theres things like mission critical which we expect to come back to some level.
The other part of of I'll call. It on Prem that we talked about before on Prem near line has actually been fairly slow as well.
Satisfied via some of the same channels that we have but what that will come back because data is growing at at the edge and in private data centers and things like that so.
You know there's this enormous shift in locality going on between client server business and cloud business. It doesn't mean all client servers gone. It's just some of us on temporary or how it is and that's what we're expecting to recover somewhat if you will to make up the fiscal year guide.
Great that's really helpful. Thank you.
Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is open them.
Yes, hi, guys. Thank you for taking the question. This is Michael on for Aaron.
And set a quick one on pricing could you guys comment a little bit on what you saw in the pricing environment, particularly on the best capacity side.
Then I'm just curious how you're thinking about that going into the back half of the year edge. One of your big competitors style begins to ramp 18 terabyte. Thank you.
Yeah as far as what we saw in the rear view mirror.
I think that getting the right supply to the right places we had a long plan, we've talked about the solar 60 terabyte.
Big volumes for four.
Most of the mass capacity people I don't think prices were unpredictable by any means for us I mean are fairly predictable I do think that out in some of the distribution channels of where the supply demand picture is and so clear. The early on there were some supply gaps that later on there were some demand there is some their demand promises.
The on premise enterprise, especially in the smaller distribution markets I think that's that's where you can see a lot of dynamics from our perspective that should stabilize pretty quickly casino.
Supply is there so.
And do what are they.
If you compare to a couple of quarters ago for sure one of their pricing environment is that is more stable believes there is a better situation on I know.
Perfect. Thank you and one more if I could just on the Opex given that he has outperformed carrying the current quarter. How should we think about opex in the September quarter relative to June and then also kind of the 340 level that you had communicated previously thanks.
I saw and what we've got to saying Gan.
In this creep tease that longer term, probably you want to moderate around that 340 million dollar basis, probably know after they colvin impact and that and when people are we did not be over the life to work from home was the September quarter will be phony no in the mid between.
What we're going to 40 to four FQ four and these loans Adam view.
I think there's two elements were obviously, there's some things that you save money on and the current work environment and then the other thing is that there's.
Very tight cash management like.
Investments are really being scaled back for US right now and so I think it should reequip hybrid like Gianluca said to the above the 340 level that so we should think about a longer term.
Alright, thank you.
Your next question comes from alone all CJ moves from Evercore ISI fall will line is open.
Yes. Good afternoon. Thank you we're taking the question.
Yes. My first question is on gross margins, both both short term and long term, so I guess short term.
Can you walk through what you're seeing in terms of under absorption co related costs and perhaps competitive pressure.
As you look at at September quarter, and then longer term.
Yeah. This is this is not easy stuff to make and Theres. Three players. This should be a 40 plus percent gross margin business. So as you think about dogs.
Im assuming you agree with that assessment.
What gets you there is is it volumes.
At higher price points on our next generation technologies.
What gets journeys power from the industry.
To the level that is consistent with the technology being profit.
Yeah, It's all a gianluca walk walk you through the details of.
The gross margin impacts last quarter, but to your point, you actually where the quarter ended up last quarter, we feel pretty good about our gross margin operating profit was above the midpoint of a range of 14.8% gross margins had we not had some of the cobot impacts which.
John Lucan can walk through what they were.
Then we probably would have been in the gross margin range as well is to your point.
Supply demand balance is.
Usually the way I answer that question.
Demand for Exabytes will continue to grow and we have put capacity online to go get that in times. Like this you you know we were actually putting capacity online for growth in in Exabytes and we've got a temporary.
Low in some of the legacy markets right now so we have extra excess capacity to that so that's not a long term trend thats, a short term trend, but to your point you know managing supply demand properly is the way that you add that value go ahead, John Luca.
Yes, what to say for the June quarter data, we said that cold weather related impact intermodal gross margin that stand that was 130 basis point.
So if you look at where do we closed the quarter at 27.3% you add that 130 basis points that we have 28.6% as you know they at least part of the Visanet ethic rose modestly met is little bit higher than their full corporation.
So I will say no as Dave said before we are close to known they miller mile or.
Yes to many of unknown 29 with over 50%.
And stay there as well.
At December quarter, we have stantec corporate costs to be fairly flat at sequentially. So I would probably more the same level up cost. Thanks.
Thank you if I could add one quick follow up can you help modeling with.
Stock based comp interest expense and tax rate. Thank you.
So I can repeat the question.
As you look at September can you help us model interest expense on stock based comp in the tax rate.
Yeah, I will say stock based comp is there.
Little bit lower than 30 million.
And that type of 80 is that a mid single digit.
As a team and asked.
Various even after the FQ four so you can you update as an FX.
Thanks, So much yes, sorry, just one other point is to make sure that.
Richard this.
Gross margin percentage perspective, we're not really run of the business like that right now so if we see deals for cash we'll take it I mean, and we were able to increase free cash flow by 5% last quarter, which is ultimately our focus.
Yes.
Some of the legacy businesses might recover faster you know, even if it's not great gross margin percentage will take the cash.
Okay.
Your next question comes from will.
Well more local.
Thank you.
Good afternoon, everyone.
First of all I want to get your longer term view on not just the mix of your hard drives.
Units between.
Enterprise non enterprise, but also the absolute level of units for the industry.
Hi, I know I know you on peers have shoot units over exabytes for some time.
But your capital expansion plans factor a resumption of unit growth over the next several quarters I ask because the last restructuring action taken by the industry was contemplated in late 2018, when the hard drive Tam was annualizing year 400 million units.
And CQ to that number appears closer to 40 now clearly cobot has materially disruptors in the supply chain and demand as you described I guess, how do you think about the capital allocation in opex longer term as it relates to stable or most likely improving hard drive volumes and mix towards airlines.
Yeah, I think from a space perspective, if I think there first I think we have plenty of space. It what's what's a subtle underneath this is obviously the nearline drives have a lot more heads and disks and so the heads and disks spaces Paul.
The number of drives we make is actually not so relevant in the space that we have I mean, we.
Our manufacturing line footprints are pretty small so we can pivot up in number of drives if we had to exactly to your point.
I don't know we've cut a lot of space, if we had fewer necessarily fewer drives.
It depends on how many fewer of course, but.
And from our perspective of almost or all of our Capex has really been pointed at that exabyte growth that we're expecting in the cloud you know you believe $24 billion of Tam out in 2025, we've Gotta go at the right capacity online that looks like heads and disks and that's what that's will deliver filling things up and using our capital for that as well.
And I think one other point is even the the big drives in the old days, you had a test, Florida and a clean room. Today, you have 10 test floors and a clean room you know there's it's the test is actually the thing that's consuming most of the space. The most of the capital and that's all associated with airlines will manifest as well.
Very helpful. Thank you.
Your next question comes from along.
Two small home from Goldman Sachs your local.
Good afternoon. Thank you very much for taking my question John Luca I just wanted to go back to gross margin you talked about there being a 130 basis point impact from covered in the quarter I was curious on what level of impact was initially embedded in your thought.
Process, we'll give guidance three months ago, and I guess importantly.
I guess in response to see Jays question, you mentioned that you expect relatively flattish.
We told the cobot impact in the September quarter, but at what point do you think at least some of the under utilization rate.
Headwinds start to abate in your business and I've got a quick follow up thank you.
In the guidance, we really need there it covered the impact as likely Apple watch we add in the prior quarter ethanol and say between 25 and $30 million so not not very higher from letter we ended up.
And yet Florida for September we ask path.
The cost to be very similar.
He is a full quarter impact and so we have spent more lantus team at the same amount.
We don't know exactly when a base will there will end and what we.
What we have modeling to Adnan internally is of course lead to consummate web and Avi impact.
In FQ, one and Sq tool and no marketing this April impact on sales at fiscal year, but of course is there is a modern and that we we don't we don't know exactly what would happen.
Ladies and.
Impact also into the demand or not on the on the cost money is the other part let is maybe even more important at this point is the demand and and the impact on our mix.
So overall you need to look at.
The cost and the demand and the sign on the EPA implied Florida FQ four we have estimated that.
Overall impact to be between 25 in northeast and met is a huge impact no. When you consider allied and as it has not fully book and it kind of points to the the products, especially the on premise enterprise products.
Airline mission critical and some of the surveillance.
You know that mixes fairly rich has the media rich and actually these are tough drives to make as well so that that would have been accretive to gross margin I think is the point.
It's very outdoor that's Albert.
Okay very add muscle we.
We tell you what we have you now are now monitor we don't pretend to be correct.
Got it no that's super helpful. Thanks to the color and then as a quick follow up.
At this one's probably sort for days I think historically you guys have talked about 35% CAGR.
In terms of Exabytes figure mass capacity business, obviously, you grew significantly north of that in fiscal 2020.
Within the context of the flattish revenue outlook you provided for fiscal 2001 are you expecting.
Exabytes enough capacity to be sort of consistent with that 35% or or giving the outperformance in fiscal 2000 should we be.
Ill prepared for a slightly slower growth rate what are your thoughts today based on your customer conversations. Thank you, yes, thanks to share I think.
It'll probably be above the 35, 40% range I mean, certainly in calendar year 20.
Rick Spacex, we've said that we expected to be greater than that and if you called out the slow part even with mass capacity then they'll still be you know that's a front end of year I think as we come out of the back of this I think it will the exabytes will accelerate as well so.
This is why you know we've made this pivot I think we've kind of proves that it's the right pivot of our portfolio. It's why we want to get this our product lines really tightened very manufacturability be flexible and get the right margins in there. So you know I I have to your point I think we'll start strip the 35, 40% certainly a calendar year.
20, and probably up throughout the fiscal year.
Thank you.
Your last question comes from the long goes can you.
Storage from Robert Baird. Your line is open.
Hi, Thanks for taking the question right at the end. This is duskin speaking for interesting.
Just a quick one on 18 terabyte I know you guys talked about ramping it in the later part of this year, but I'm wondering at what point as 18 crossover.
16 in the future and then do you expect to gain market share and tell them. Thank you.
Yes, it's an interesting question does I am not being cavalier with it but I'll say, we'll cross over when we're ready and when the customers are ready and I think.
When we have such high volume on the Sixteens and people were demanding the sixteens I think we have to be careful to make sure that we don't again build the wrong product is wrong time for people, we can transition to the teams as you know.
Fairly quickly I think we do need some lead time, because thats heads and media starts and and and whatnot, but I think we have great relationships with the big customers that would be demanding that are there. There you know were lockstep with them on what those transitions would look like in a in a lot of confidence of dry I don't think it's going to be the significant revenue country.
What are certainly in the next two quarters.
We like we've said before but we can transition whenever the customers iridium will take their Q on it.
Okay. Thanks for that day.
Okay ill now turn the call bulk lump sum for closing remarks, yeah, but thanks, Jason I'd like to take an opportunity to just think our customers and suppliers employees and investors for their support a seagate and we look forward to update you on future calls thanks, everyone.
That concludes today's conference call now this model.
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