Q1 2021 Seagate Technology PLC Earnings Call
And welcome to the Seagate technology fiscal first quarter 2021 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.
Following the prepared remarks, there will be a question and answer session as you are.
As a reminder, this conference is being recorded for replay purposes. At this time I would like to turn the call over to sheeting Hudson Senior Vice President Investor Relations and Treasury. Please.
Please proceed shading.
Thank you good afternoon, everyone and welcome to today's call. Joining me are David Ridley Seagate, Chief Executive Officer, and Delucca Romano, Our Chief Financial Officer, We posted our earnings press release and detailed supplemental information for our September quarter on the investors section of our website during today's call, we'll refer to GAAP and non-GAAP net.
Shares 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 SEC, we have not reconciled certain non-GAAP outlook measures because material items that may impact. These measures are out of our control and or cannot be reasonably predicted air for a reconciliation to the course.
Funding GAAP measures is not available without unreasonable effort. As reminder, this call contains forward looking statements, including our December 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 COVID-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 and should not be relied upon as of 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, and 10-Q filed with the SEC our form 8-K filed with the SEC today and the supplemental information posted on the investors section of our website.
As always following our prepared remarks, we'll open the call for questions with that ill turn it over to you David.
Thanks, Jamie welcome everyone and thanks for joining us today.
We began fiscal year 21, executing well across several key objectives, keeping us on pace for our full year revenue outlook one.
First we delivered on our financial commitments navigating challenging market conditions to achieve September quarter revenue of $2.31 billion and non-GAAP EPS of 93 cents.
Both exceeding the midpoint of our guidance range.
Second we advanced our innovative products and technology, Roadmaps, which position the company for future data growth opportunities include.
Including the introduction of cortex, and open source object storage software and live rack, which offers a simple and cost effective solution for enterprises to manage their massive volumes of data and in turn unlock data value.
And third could demonstrate cdis long term commitment of returning cash to our shareholders. The board approved a 3% increase to our quarterly dividend and a 3 billion dollar increase to our existing share repurchase authorization.
These actions exemplify our confidence in the business potential and future cash generation capabilities.
In my comments today I will summarize a few highlights from the September quarter and share some perspectives on the current market environment, then I'll outline how we have been positioning seagate to capture a significant opportunities created by longer term data trends.
The results for the quarter reflects good execution against the backdrop of continued macro disruptions that impacted several of our key end markets.
These disruptions were most pronounced in the enterprise market as the anticipated slowdown in enterprise IP spending impacted sales of our enterprise Nearline and mission critical dress.
Many enterprises reacted to the pandemic by prioritizing funding to support their remote workforce and accelerating their digital transformation plans.
Accordingly, Nearline revenue in cloud was solid in the quarter, although below the record levels of June.
The adoption of cloud services and the rise of new virtual economy digital remote and intelligent is driving ongoing cloud data center investments. According to ITC 2020 may be the first year in which cloud infrastructure hardware spending surpasses traditional infrastructure hardware spending.
However, they also project enterprise IP spending will pick up in calendar, 2021, which aligns well with our outlook for gradual recovery in the enterprise on Prem market.
Data center investments very among cloud service provider and internet content customers, depending on their respective end market demand outlooks expansion plans and architectural needs risk.
Responding to these trends HDD storage investments depend upon mass capacity transition readiness and installed base replacement timing.
Taking these factors into account, we currently expect cloud datacenter demand to improve in the December quarter and throughout the fiscal year.
Which supports a more elongated cycle than we've seen in the last couple of years.
In other markets recovery is already well underway for example, we realized solid double digit revenue growth for our consumer drives reflecting both the returned to seasonal patterns and strength of the seagate's brand among prosumers and gamers.
And then the video and image applications or via markets revenue doubled quarter over quarter falling resurgence in on Prem security and smart video projects.
Recall these markets were heavily impacted in the first half of the calendar year by co.
By cold related restrictive measures that precluded installations from taking place.
Over the long term the use of AI and other data analytics continues to drive new VA edge use cases that extend well beyond security, including smart cities smart factories, healthcare and even frictionless retail all.
All of which generate massive amounts of data and the need for cost effective edge storage.
We now believe the September quarter marks the bottom of the Cobi related demand disruptions.
And we expect a gradual recovery from this point forward, which along with the existing secular trends were exposed to underpin our outlook for flattish revenue in fiscal year 21, and reinforced the relevance of mass capacity storage in both the cloud and at the edge.
Seagate is a leader in mass data and we continued to deliver innovative technologies and secure cost effective data solutions that address our customers needs today and in the future.
Building on the strong momentum over 16 terabyte products, we are qualifying our 18 terabyte drives at multiple customers and progressing very well we are aligning our volume production ramp to customers timings and HDD capacity transition readiness.
We also remain on track to ship 20, Terabyte Hammer drive starting in December.
Which is an important milestone as we believe hammer technology will be the industry's path to scaling aerial density and increasing drive capacities.
Seagate will be the first to ship this crucial technology with a path to deliver 50 terabyte hammer dries forecast in 2026.
Higher capacity drives not only enabled data centers to cost effectively store more data in the same footprint.
But also to do so in an environmentally sustainable way.
The power consumed by an 18 terabyte Seagate drive is actually lower than a 10, terrabyte HDD on a per bit basis.
That means by replacing 110 terabyte drive with our latest 80 terabyte product customers can securely store, 80% more data and do so more efficiently.
However, the challenges for mass data storage posed by data growth extend beyond capacity cost and sustainability.
Increasingly businesses are challenged by data sprawl, and data security, which impact their ability to harness the value of their data.
Last month Seagate hosted its inaugural data sphere event during which customers partners and other industry thought leaders joined our team to discuss strategies for attacking these data management challenges that.
If you haven't had the opportunity yet you can still catch the videos on our website.
Seagate's life platform Leverages, our deep knowledge of data storage and architectures to help enterprises address the complexity of securely managing data across a distributed enterprise.
Live mobile is a series of seamlessly integrated as arrays and data shuttles design.
Designed to cost effectively and securely move data between endpoints edge and into core cloud environments.
Cortex has an open source object storage software with a growing community of developers.
Cortex enables enterprises to easily and efficiently manage massive pools of storage resources across our distributed enterprise.
Finally live rack is a simple and easy to deploy solution preconfigured with Cortech software and up to 1.5 petabytes of storage and a four year rack.
Slide rack helps enterprises build their own mass capacity optimized private storage clouds with less cost and complexity than ever before.
We see multiple use cases across a diverse range of Ed centric vertical markets that all have a common need for mass data management.
For example, Raytheon technologies as using cortex to develop large scale secure storage clouds for their federal and commercial customers.
Two of the world's top automakers are evaluating this platform to efficiently move data across their fleets of autonomous vehicles.
While alive is still in its infancy customer reception has been tremendously encouraging which to.
Which together with our outlook for mass capacity storage makes me excited by the future prospects for Seagate.
With that I'll now turn the call over to John Luca and have him walk through the September quarter results.
Thank you David.
We achieved what we set out to do in the September quarter, delivering financing is not consistent with our expectations, we face of a dynamic and challenging market environment.
Revenue was $2.31 billion on both.
Moving to guidance midpoint and down 8% sequentially.
We spoke last month, but if that gets thrombotic already knew that Ido and you make application or the VM market.
The strength in the market.
Along with healthy demand from cloud data center customers.
Yes, Ed dented, the maybe the weakness is enterprise market, which impacted our near line each company to guidance and CSM safe.
So if I was an idea, but I've got a bunch of achievement, we had a 114 exabyte in the September quarter down about 2% sequentially.
Yes capacity shipments were 87 exabytes.
Better with 91, expediting that vital quartet and 64 in the year ago beta that the damping down year over year growth.
Our outlook for the December quarter debt Superbugs kind in yen Twentytwenty exabyte shipment growth and he is well ahead of the long term demand CAGR of 35% to 40% forecasted photomask market.
On the revenue Bandaid Mockup advocate thought it represented 58% of September 4th that Amy.
And 63% of these diabetic no change from a percentage basis with the June quarter, and up from 47, and 51% respectively in the piloting of medium.
As anticipated the Atlanta revenue declined sequentially by cutting main healthy and within easy study covering centered on 70% of markup I think these days.
The airline key men, but 60 forward estimate down from what ecolab as in June.
Look at 6% and Onea that banking roadmap as demand for our high capacity near line dive.
We estimate that about 15% of the airline capacity shipment accurate update existing guidance.
Which equates to about 10 exabytes in the September quarter.
We can see that amazed at an irobot diving in saying that it should grow over time, along the way as they fill as Dave.
Evidenced capacity, but Nearline drive increased 8% sequentially two would have influenced the satellite supported by payers, allowing a highly successful 16 data by the time, we have been that company highest revenue guidance for three consecutive quarters and the highest the elanco that for the fourth consecutive quarter.
We continue to achieve highlighting that I made that ice and make positive profit on qualifications and at the market, both cloud customers with volume and nine with that timing.
Revenue for the EPS increased sharply in the September quarter, and insecurity as modified installation resumed following that Covidien related Bose. We described to you that first hand, how is that kind of going ahead.
We anticipate healthy VF is over then yes, Pam and you have these applications is an untenable Tyler for months capacity storage, particularly as new use cases for smart comment systemic and and I think our software to manage ITC product revenue from video security comp.
China is growing at a compounded rate of nearly 13% total 2020 high which is.
Which is a strong indication of anything service need at the edge.
The legacy market, but as Andy Turkey for best sense of photos at them, but what that having the same percent that as a vital quartet and down from 46% in the yen I will be it.
It's phase for consumer that eyes actually offset the decline in the enterprise mission critical market and.
And sub seasonal demand for Pcs.
Exabyte shipments into this market.
It is 5% sequentially to 28 exabyte supported by the uptick in the consumer product. We can have a capacity of 2.7 satellite, but a consumer that IPH.
We can invest bad consumer demand to remain stable in the December quarter, we saw an improvement in the mission critical market consistent with a gradual enterprise vertical already met Dave effect.
I want to know not divide business may not the remaining 8% of that Dan, but what that opinion.
Flat on a percentage basis with the prior quarter.
Non HDD revenue is still below our pretty closely to the service.
Sales of our SSD product trended lower usually challenging pricing environment, while we saw a slight improvement in that these engagements.
Bunkhouse, but many of our system customers as more to midsize enterprises, which has stated being impacted by the funding.
Accordingly, we have bet between take a capital more quarter before demand fully Nicola.
In the September quarter, non-GAAP gross profit was $614 million, which.
Which includes $25 million of Covidien related cost.
We are taking steps to partially offset costs associated with higher fate by using more orszag fate.
I'll, let it as being non-GAAP gross margin was thinking 6.5%.
Including in 110 basis point impact from these covidien related cost as well as and as favorable product mix and under utilization of the factories.
Consistent with our expectations non-GAAP operating expenses came in head count and $20 million.
I think the ongoing benefits of working from loan along with savings from our previously announced as saturating activities.
Looking ahead, we now expect operating expenses to normalize at approximately $350 million within the next one to two quarters as we continue to assess and market position and investment.
I was asking non-GAAP operating income was $294 million and non-GAAP operating managing was close to 15% of revenue with you.
We view the low end of our lung Phantom target range.
Based on a share count of approximately 259 million shares.
Non-GAAP EPS for the September quarter was 93 cents.
Capital expenditures were slightly lower in the September quarter at $111 million.
We took a bit of an add on 5% of revenue.
Based on the investment made over the past seven on quota, we believe the industry and sufficient capacity in place so that as the data as market demand grows and that is as we had a focus.
During our investment to support our technology transition at other than founders capacity expansion.
We have been successful in transitioning more of our shipments torsion slate, which as I mentioned earlier decreased the cost related input costs on gross profit.
We are also being studied inventory for some physical components to protect against potential future supply chain risk is that.
As a result.
Inventory increased sequentially to $1.3 billion, which was in line with our plan.
We expect inventory levels to decline as we consume these components over the next few quarters.
We generated about $186 million of free cash flow in the September quarter.
Which includes the one time impact of restructuring cost.
While these levels are still relatively healthy we expect free cash flow to return to historical levels over the next few quarters.
Supported by our focus on operational efficiency.
And an improving demand environment.
In the September quarter, we utilized $68 million to retire approximately 1.5 million ordinary shares.
Exiting the quarter with 258 million shares outstanding.
We also use $167 million.
To fund our dividend.
As Dave mentioned earlier, the board approved a 3% increase to our quarterly dividend.
Raising the quarterly payout to 67 cents per share.
The board also will increase to our share repurchase authorization of $3 billion, which.
Which brings the total amount available to $4.2 billion.
The share repurchase authorization as no specific expiration date.
Timing of execution on our formulation is dependent on several factors, including our financial position available cash is feasible reserve and capital requirements with.
These actions illustrate the confidence in our business strategy and long term cash generation ability.
We had cash and cash equivalents relatively stable at $1.7 billion.
As we approach the end of calendar year two in Ytwenty. We are encouraged by emerging signs of recovery in the larger enterprise market and improvement in beer demand.
We expect solid cloud data center demand to container in the December quarter supportive of our view for a more elongated cycle.
While we are still facing headwinds from Covidien related costs. We expect this will gradually decline over the next couple of quarters.
Taking all these factors into account our.
Our outlook for the December quarter is as follows.
Revenue is expected to be $2.5 billion, plus or minus $200 million up 10% sequentially at the midpoint.
Non-GAAP operating margin is expected to improve sequentially in may in the lower half of our target range of 13% to 16% of revenue.
Non-GAAP EPS is expected to be one dollar and 10 cents plus or minus 15 cents and.
An increase of 18% sequentially at the midpoint.
In closing Seagate is continuing to execute well during this period.
During this period of prolonged uncertainty.
We are navigating the current market and executing a strategy to capture the significant opportunities associated with the secular demand growth for mass capacity storage and they're managing mean to manage a massive volume of data from the endpoint to edge to cloud core.
I will now turn the call back to Dave for final comments.
Thanks, John Luca.
As we conclude the first quarter of fiscal year 21, we are encouraged by the recovery trends, we're seeing in key end markets, but still expect macro uncertainty to persist near term we have.
We have demonstrated the ability to manage through challenges in the past and with our teams strong execution. The resilient financial model I remain confident that we will emerge stronger from this current situation.
Our improving December quarter outlook suggests we are on track to do it again.
I'm proud of our pace of innovation and how we are attacking the critical customer needs posed by data growth, Dave a sprawling data security.
We are delivering on our technology roadmap and developing cost effective solutions to address the secular demand growth for mass capacity storage and data management.
I am confident in our business outlook for fiscal year 2021, due in part to the tremendous momentum we have built with our highly successful HDD business and I believe our new initiatives, including our life platform position us for even greater opportunities in the future.
As a result, I'm more excited than ever about seagate's growth opportunities ability to generate cash and enhance shareholder value over the long term.
Our performance would not be possible without the tremendous efforts of our employees and the ongoing support of our customers partners and shareholders.
Thanks to all of you.
With that John Luca and I are happy to take your questions.
At this time as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the culinary roster.
Your first question comes from the line of Karl Ackerman from Cowen Your line is open.
Hey, Thank you for taking my question.
I.
Last one Luca you spoke during your prepared comments about shipping 20, terabyte hammered drives for revenue this quarter.
First could you quantify the number of design wins, you've won to date for hammer.
Second your earlier comments.
Jesse will materially ramp 20 terabyte hammer.
Perhaps because it's cost prohibitive.
Dollar per terabyte basis versus your existing CMR offerings.
I guess is it possible to achieve 35% to 40% exabyte growth for calendar 2021, if the plan is to leapfrog to 24 terabyte Hammer drives and how do we think about the margin mix associated with that thank you.
Hi, Karl back to you like you said its new platform out there in the world and so we're going to introduce it this quarter and we'll be watching yield the customers that we are qualified with which is pretty competitive highly competitive. So we don't talk about that.
We'll watch the performance and up and dial that knob, Accordingly, I would say that until to your point until we get to 24 terabyte theres not really a compelling transition and so.
Transition and so we have to keep continue working that drive towards that over the course of the next calendar year.
Yes, I would say that they bought them for IP that technology milestone that we are achieving in the current quarter was our first shipment of the AMA.
It's also important that I now know how many units we shipped to the important thing is that technology is working and that and we are doing exactly what we have said and start shipping to NTT data by the AMA before the end of the calendar yet 2020.
Okay. Thank you.
Your next question comes from the line of kidney from Morgan Stanley. Your line is open.
Thank you good afternoon, Dave given the higher than average margins in the markets that are recovering enterprise and video markets why wouldn't gross margins improved materially in the second half of your fiscal year and then just a follow up for John Luca how do we reconcile the modest share.
Share repurchases in September relative to the new 3 billion share repurchase authorization why not be more aggressive buying back the stock given the signs of recovery you see in the business.
Yes, thanks, Kevin ill take the gross profit gross margin points.
Points first we do still have some cobot overhang and then obviously last quarter. The factories were relatively empty compared to to what we can do from a demand perspective. So we're pivoting some of the capacity overcome some of the legacy markets that are still challenged in into the mass capacity exactly to your point so.
Over the course of many quarters, we will see that recovery in gross margins. So if that helps you think about it.
I am very confident of the product portfolio that we have it's just a matter of reequip liberating all the supply again, the demand against our existing supply.
Yes, and maybe the quarter.
And talking to their capital allocation I share buyback.
We said that last quarter, an event that brought that to before.
And I was kind of in that Twentytwenty was going to be impacted by non they additional cost of Colgate in Panama gross margin and operating margin. So.
We think that when than when they call the situation will improve our gross margin because of our mix and because of their national Interstate call would cost without improve so we expect some improvement in the second part of the fiscal year.
In Denmark share buyback this quarter.
As you know, we we get past that.
Even during the last earnings related.
You would incorporate.
We want to be a little bit more conservative in that now instead of cash preservation.
Matt The board authorization is a is that a.
A more strategic and loan Pan operation is not something for that for that very few of them. We would think about al.
Alex who use and how to maximize.
They impact our business utilization and with Dave We will decide in the next week.
Weeks and months.
Thank you.
Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is open.
Yes, thanks for taking the question.
Apple is maybe the gross margin I know in the car and the prepared remarks, you had alluded to taking lots of strategic.
Supply inventory I think there's been a little bit of questions out there around some of the component pricing dynamics that maybe you guys have been seeing.
Be it the dual motors are off of maybe on the substrate. So can you help us understand exactly what you are seeing.
The component supply chain, and whether or not you are seeing some deflationary pressure and how you're managing that thank you.
Aaron Thanks, certainly turned colder and wetter factories were so strange there were people that needed help and so we were out aggressively addressing that to make sure. We had gotten notice supply and that's the comments that we made in the prepared remarks about the.
The strategic inventory buys that we've done just to make sure that we have the right inventory placement.
Relative to the.
The management I think thats.
The supply chain I think thats really starting to a quarter is now in a fairly high.
Fairly happy with where we are we've got our suppliers in line with our capacity planning again and they are not getting turned up because of some of the cold related stuff and I think it's very manageable for beer. That's that's the way I look at the.
And I know you have seen from that from our guidance in the current quarter and how we guided the fourth it's kind of you know we ask that.
As this quarter ends the next couple of quarters to be to be a strong quarter. So we don't want to be limited by one component of two components. So we effectively into the debate over strategic inventory, but we will do it in the next two or three quarters.
Great and just as a quick as a quick follow up can you just give us.
In update on how we think about the capital expenditure plan, whether or not you're going to have to increase.
Increase some of the wafer capacity as if any any update on capex number as we move forward.
Yes, so mass capacity such strong growth for many many quarters now and probably many years to come as well, we'll be continuing to pivot more of our capital.
Allocation to GIMSA, we'll watch the legacy markets very carefully some like we mentioned consumer markets.
We're still fairly strong others may be reaching a new normal is they continue to ramp down or the needle we're not investing in those and so we can pivot the capacity with us wafer capacity or media capacity or drive capacity or whatever we could get that capacity over that by the way that goes against the supply cost.
Comments or the suppliers comments that you made as well it already making sure. We work all the way up stream or supply chain with suppliers to do that also what we said specifically in the script is that.
We believe the industry has enough capacity in aggregate for that we make those could there will still be needing to invest in what we called technology transition capacity. So the ability to make the new 80 terabyte in the hammer drive and things like that but thats not adding capacity. If you will that system investments in the technology transitions.
Perfect. Thank you.
Your next question comes from the line of Ross from.
Loss from capital your line is open.
Hi, good afternoon guys.
Got you that's taking the question.
Yes, if I could I ask him at the same time.
Dave I believe last quarter, you talked about fiscal year 20 line near line growth of I believe was the least 35% exabyte is.
Is that still the case, you're reaffirming the flattish revenue guidance for the year and then also just the en masse capacity just had a quick calculation.
No and I'd love some context on that this is like kind of like a dirty cow, but the difference.
Turning over on that capacity exabytes shipped in year Allied ships.
It was the largest ever and it ties the largest ever in the larger delta.
Our quarter, you're talking about pretty.
Pretty substantive growth anecdotally in coming quarters, and then you said kind of.
Years.
Any context around sort of what.
What's going on with that market, obviously, there is it sort of supply chain stuff.
And China related stopped so there is congestion pent up demand, but is that something that Ken yes are we talking about sequentially, 35%, yes, Nearline exabyte growth and then plus meaningful NAV.
Math capacity, great yeah sort of.
Sort of the fiscal year 21 that just would love some context, because it clearly came back secret strong.
Yes, Thanks Amanda.
The first thing you are on was the 35% to 40%. We believe we're still on track to outstrip that this this year, we've been talking about that.
Even as mass capacity was struggling earlier in this year because of surveillance market and so on.
These via markets came back really strong and that's the answer to your second the second part of your question. So that was definitely.
Back in his normal traditional representation, maybe even a little bit greater given all the disruption thats going on the via markets were quite strong last quarter, we can expect that to persist as well going on thats.
Logical recover I Wouldnt recovery I would say in some of the new applications that are coming there whether it's.
Smart city applications or or.
Hospital applications things like that so we see.
The healthy demand profile for that segment of mass capacity throughout the remainder of the fiscal year as well so.
That's why we have a lot of confidence in those capacity numbers being so high.
And so is it just and just a quick look at to clarify that.
Thanks, Joe is it is it new.
Near line growth soda.
Sort of greater than 35% fiscal fiscal year, and then mass capacity will be or whatever it is coming back but that yeah, sorry, not mass capacity video related is going to be something.
Something in addition to that so we could see much more significant mass capacity growth. In addition to the 35% to 40% new lines.
Yes, so I wouldn't say near line right now because of the remember the on Prem discussions that we had last quarter and so on premise still hovering, but it's just not strong. So you have a 35% to 40% is mass capacity all in yes to your point that it got it. Thanks.
Your next question comes from the line of Steven Fox from Fox Advisors. Your line is open.
Thanks, Good afternoon, just a follow on those those questions real quick can you just sort of go into.
Why you think we're at a bottom in terms of the enterprise on premise spending that you talked about in the prepared remarks, and how strong that comes back.
Say over the next few quarters to get to your full year outlook and in a similar manner can you talk about the video markets. Obviously they came back strongly like what's is it a different shape of of.
No business that you're doing now post cobot versus pre covered how would you compare sort of mix now versus then thanks.
Thanks, Phil So were so on Prem.
I think you know in hindsight now which is a.
We have really good visibility.
I would say what happened with the early covert supply reactions by a lot of customers caused pull ins and then the demand reality came later than that when people couldnt get back on Prem. So thats still the bullet thing if you will that cause a little bit too much inventory in the chain, we're still recovering from that frankly.
Don't expect it to recover to the prior levels because some of those markets. Some of those on Prem markets like mission critical we're actually in decline anyway. So we think they'll come back to and maybe the prior declining run rate. If that helps you think about it the nearline piece of the on Prem will actually come back.
Because that's that's moving up in Exabytes as wells and there's still a lot of value in near line on Prem storage.
Relative to the Geo markets and how they recover so strongly I think when when people could generally speaking when people could get back on Prem. They were looking for new applications. Some of them may have them you know.
Facial monitoring, but some of that may have been temperature monitoring and some things like that and when you do those installs those upgrades. If you will not install you don't have to upgrade your entire network, you're upgrading typically the boxes that.
The brand in the back room, and Thats hard drives associated with it. So that that's why we think that I was so strong very global as well so.
All all happened at the same time and we again, we expect these kind of smart building smart city applications to be.
Continuing to be a good investment team.
Such those.
Look back year over year, we'll definitely get back to where we were year over year, we did last quarter and were probably will going forward as well.
The the muted the front end of this calendar year.
Yeah.
We don't know perfectly about the back end of the year, but we think that the via markets will be significantly stronger than that muted demand.
Great. That's very helpful. Thank you.
Your next question comes from the line of Patrick Ho from Stifel. Your line is open.
Thank you very much Dave maybe just following up some of the comments you made earlier about capacity expansion or how you're transitioning.
To the Nearline drive capacity demand that's out there.
I know typically capex is you're looking at a longer period of time on demand where you are.
Your products are going as you speak in transitioning to hammer one how do you feel.
The capacity in place at the 20 Terabyte Hammer drive gets released and then secondly over the next two to three years do you believe your capacity expansion to meet that demand for HAMR over the next few generation.
Thanks, Patrick So so couple of things.
We have quite a bit of capacity that.
As part of our install base and we've been thinking for many years about those tools those tools that we use to make the HAMR transition. They are not too many incremental tools. So we feel like we can we can manage the transition quite well, we do need a little bit of a.
What we called technology transition capacity to do that.
Due to the first part of your question. The bigger issue is really how we forecast whats going on legacy markets and how much we pivot to mass capacity. So we're going to be watching those legacy markets and what they'll do over the course of the next year and then it also started wafer which is relatively long lead time, so we will.
Probably just judiciously I do think over time, we will need more technology transition capacity to Samara continues to ramp so I think thats a.
Fundamental limit or if you will and then you know the market goes.
The market goes bigger than we can react very quickly I think on on Capex, and especially with the Bakken test last year media capacity to react if the market goes dead.
Great. Thank you.
Your next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your line is open.
Thank you for taking my question.
On the video and image market.
Thats coming back strong can you say geographically, which which area of the country World is it coming.
Yes, Kevin I would say the.
The areas of almost everything was depressed in almost everything is coming back the distribution channel came back quite nicely in Asia, Southeast Asia and India.
And a little bit less so in Europe, just last quarter based on timing, but we are seeing it come back everywhere and I think it was a fairly healthy quarter for us widespread geographically.
Okay great.
And going forward, you're expecting it to continue to grow and can you give an estimate of how much of.
How much of the capacity of this or how much of your life.
Why do we see.
We talk about that market by the volume and.
We also.
In forums and hate about any annalynne Jose the near terms between the two is mainly meter anemic application, yes, theres a little bit of a massive in the non airline if you will but we said I think 70% is near.
Near line on the call so.
You think about that other 30% is the bulk of that 30% although nasons.
Nice contributor as well and growing index, but.
Okay, great. Thank you.
Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is open.
Great. Thanks for taking my question.
Maybe two questions first question is relates to walk away.
I want to confirm that can you talk about whether you are continuing to ship to walk away and that one is included in your December quarter guidance. It looks like your competitor may have stopped shipping maybe.
Maybe back in Middle of September and do you think you are seeing some benefits of that in your December quarter.
Well I would say Sydney, we don't talk about individual customers I think if I go back.
Five or six quarters now we've been talking about how demand has been fairly disruptive in particular in China.
And there is a lot of reasons for pulling in or pushing out demand different projects that people are doing financial planning them right.
I'd be doing we really focused on the end market demand and that's how we construct our guide.
I do think that relative to some of the products products that we're talking about there's fairly healthy demand have healthy supply it.
Inventory in the chain, if you will and.
That gets to the mission critical question and whatnot, where global Tech company, we have a broad network of suppliers and customers, we continually monitor and remain in compliance with all the rules and regulations around.
I think relative to some of the legacy markets I think birds were just watching too much inventory out there. So I don't think its material, but thats all factored into our guidance about what's going on in the end markets and then.
Our long term view as the mass capacity storage will buy multiple routes to market and that's what's growing and thats the way were.
Positioning ourselves.
Okay, maybe switching gears to talk about the Nearline side Dave.
Dave you talked about the timing of 18 terabyte drives it will really depend on the customer spread.
Do you have any insight as to when you will see maybe a unit crossover 16, terabyte and maybe going forward with the when I start thinking about began a 10 terabyte do you think do you expect the market to do from taking terabyte next year going straight to the 24 terabyte Hammer or do you think there is it someone between say the 20 terabyte.
A period, where 20 terabyte, it's picking up and how do you address that opportunity.
Interesting.
16, terabyte as a very very strong platform for us. So so the unit crossover we don't really think about it as units, it's actually such as similar bag of parts as we've talked about before that it's really a transition slightly in head capacity from our wafer fabs and and some a little bit of media turns and a couple other piece.
So it's not a hard transition for us to make we've been saying for multiple quarters now we really like our 18 terabytes good quality drivers sailing through the qualification so right at the right level. So it's really about aligning with what the customers need from a volume perspective, and I don't think this is going to cross over the next couple of quarters, we could drive it.
Harder, if we want to but there's no real reason to do that especially against.
The demand certainty that I think everybody needs to the other.
The other point I do think that ultimately 18 terabytes becomes a big volume I don't think people wait for Twentys, although if an individual customer wants to do that we'll we'll go there with them, we're going to get back above what our plans are there competitively but.
I think there will be 20 turbines in the market I don't think everyone. We'll wait from 16 to 24, though I think you know the TCR proposition about requalifying.
In 18, or 20 or something like that a significant them and I think people will do that so we're.
Were you know deep conversations for all of our customers about this these qual cycles take a long time, so were locked and loaded with.
With them on all this stuff and making sure we get about the need to high volume.
I would say for a base calendar year 16 data by days for sure as a leading product in any capacity.
And we expect that kind of 21 to transition more and more accrual 18 kind of bite and.
And and then have you know we are developing the first generation undertaken in Asia and that will take it.
That will take a bit longer.
Longer time to transition back.
I think we have a very stronger pradman.
Great. Thanks, Dave Thanks, Alex.
Your next question comes from the line of Mark Miller from the Benchmark Corporation. Your line is open.
Thank you for your question I'm, just wondering what's your what's your outlook for Jamie in terms of sales in the gaming applications solid state memory has been showing up more and more and more.
Your feelings about that.
Yeah. Thanks, Mark some gaming become very strong as part of our consumer business.
The last two quarters now I think thats part of the work from home learn from home and play from home too.
You know that the interesting thing is happening there is that.
Not just the PC space, where some of the some of the interesting titles are getting the maps are getting bigger and bigger but also the refreshes that are coming in the console, which we're tremendously excited about we've been talking with customers for quite some time ago.
It says the consoles were going to get.
Bigger faster more powerful.
Experience is going to be awesome, we're very supportive of that I think when it.
When it comes to supporting information from the old generation to the new generation, we think that we have a tremendously relevant a role to play there and then helping the architecture of a lot better performance in a liar capacity, we have a lot to offer there as well. So we're super excited to always have been.
Thirdly, I'd heard people talk about the segment before and.
Not really know where it's going and so maybe say come to the wrong conclusions, that's starting to become a little bit more obvious as people are going through these transitions, but we're super excited about gaming, obviously and I think it's a representative of what's going to happen to the edge over the next five years.
Data has to get bigger faster to be able to satisfy all the applications and.
We believe this is kind of one of the the lead.
The lead dogs on that hub, it's we're very active in participating.
If you talk a little about the inventory inventories were up but you said they are going to be coming down to just a little more color about what's going on with inventories.
And your book.
Yeah like we said you know we.
We said in the prepared remarks that we done some strategic the time when the market was relatively low even willing to make sure we didnt get into any situations, where we had any losses in our factories, because we couldn't get parts and a lot of suppliers I think we need to appreciate that a lot of suppliers and sub suppliers, we are having issues in their supply chain.
Because of Covance and things like that we didn't want to get in any of that so we pulled a little extra inventory and we'll do that over the next couple of quarters Rick will vary.
Yes.
Your next question comes from the line of Jim Suva from Citigroup investment Your line is open.
Thank you very much.
Many of the questions were asked when you gave the details on our pivot and ask one more about the stock buyback.
It's kind of interesting to note the timing of it when you still had over a billion. If my math is right about a billion to lap and.
And I believe in your prepared comments, you mentioned youre kind of do it opportunistically or kind of as you go. So I'm just kind of thinking about that comment about why announce a big 2 billion. In addition to the 1.2 you have left or are you, meaning to imply you're going to put the capital to use a little bit sooner because.
The current cadence you have it would still be well over a year to exhaust the one point to that you had some disconnect train going bankrupt timing in what you meant and the size of it which is very impressive yes.
Yes, just referencing our past authorizations.
Elastomers in October of 2018, better when phases up with our October Board meeting, so thats part of our process to.
Dress these things the dividends as well.
The last one was.
2.3 billion of new authorization in October of 2018, the previous one before that was that was April of 2015.
I think we to your point, we had 1.2 billion left we wanted a little bit more flexibility. So we look out over the long term and make those decisions.
Okay. Thank you very much.
Your next question comes from the line of Mitch Steves from RBC capital markets. Your line is open.
Okay.
Hey, Thanks for taking my question I kind of want to turn back a little bit at a gross margin discussion there.
It sounds like the higher end companies or customers are starting to purchase four product. So I guess why is it they are going to be a year over year improvement in gross margin, particularly calendar 21, assuming that some of these operational issues kind of fade away due to covert all that stuff that happened this year plus a mix shift to the high end I guess why are we seeing that kind of kind of flow through.
More next year.
Well I think it will flow through more next year I think we're just in the to your point, we're in the still in the throes of having factories that are underutilized and moving a lot of capacity from some of the legacy markets, which are underrepresented and into mass capacity.
We just can't do that that fast because we've got some a little bit of overhang or what we've just been through but I have confidence that we will fill up the factories with the right.
Product after that and be able to get solidly back into our margin range.
Yes, I went when we talk about bad quality costs and the impact we just communicate they did that impact and I bet on it.
And also that.
Negative the impact that we had for example, they end up with mutation that days mentioning is not quarter youre, including what we communicated at call. It impacting pull it up so is that as more cost of it. So we think actually the next two or three quarters that we didn't lower.
And basically it is also on the line to our Capex discussion that we just had.
So we ask that gross margin and operating margin that is more important to us to improving there. The next two or three quarters hopefully.
Okay, then just a follow up on that just.
Assuming that you're able to operate as usual, meaning that no decision, saying are in effect out of the factory et cetera can you maybe help us understand what type of margin bridge you would normally see so so what I'm trying to get out here as you probably saw some operational savings just care.
Just given the work environment, it's probably make some reductions there adjustments there. So how do we think about the I guess organic gross margin number if we didnt have this kind of onetime intact.
Yes, first frozen organic gross margins, we'd be we'd be in a range I think we do based on the full utilize.
Full utilization if you will would be you know we focus more on operating margin and we we didnt tending towards the high end of our range. The reason we're at the low end of our range right now really is to your point, it's the gross margin.
Issue with the under absorption of the factories, but.
I think we'll continue to manage the operating margin range to try to get back to the high end of our range as quickly as we can.
And as a function of the.
The footprint.
But we need from an opex perspective, which we benefit from motor.
No travel and everything else everybody else everyone else is talking about just spending control, but but also the gross margin that you're you're asking about.
And then last quarter before causing heme flat, we've actually above our long term range of 13% to 16% in them all of the operating mines and so they need today, even slightly better, but I would say.
I think that meeting so we expect to move back to that level and and even even.
Even higher than that.
And then on the make impact when was that the declining globally.
Okay perfect. Thanks much.
Yes.
Your next question comes from the line of Nick.
Hi, guys were from outside you your line is open.
Yes. This is actually Mehdi hosseini from Exane I have.
One final question and I want to go back to your.
Nice capacity, excluding near line on it.
Double on a Q over Q basis is that driven by sort of variance, especially.
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Yes.
It is I mean, especially APAC I am not sure I would say, especially if I could because I think it's it's picking up around the world, but it was still are underrepresented around the world the quarter before because.
Through our point before nobody could get back on Prem surveillance came back quite nicely, we reacted well to it.
Some of that we were predicting that some of that we had to to to reactivate. It soon.
Those recovery in every market some markets are recovering faster than our projection some are not as fast as our projections that we have such confidence, especially later in the quarter.
That's that's why we kind of were communicating that.
And surveillance was a strong part of it.
And I have a question of object storage efforts are to see Marty.
Fit into your long term strategy, but maybe you can help you better understand how you can avoid daily meeting your existing customers as you.
Pursued the strategy essentially to the see that moving up the stack.
Yes.
I don't look at his ailing simply because there really isn't an object store the designed specifically for mass capacity.
So many object store the fantastic job to expose the are out there. Some of them are very proprietary others have come and gone, but a lot of them have been purpose for many other reasons not just mass capacity and so were the ones designing the drives a little ones designing this object store opening up the community. So other other people can help us.
Yes.
You know in that we've been getting great response for the community. So thanks for pointing it out.
I look at it as a great opportunity for Masterpass, the storage, whether its on prem or in the cloud or something like that and we want partnerships.
And we think the best tailored to all the features that we need.
Whether it's to draw.
To drive to or hammered drives or any other features that we want to go develop I think this will be the fastest route to market. The fastest the best Tcl proposition for people using it and then we're open to any partnership with anyone I don't think its going to be a threatening.
Got it clear thank you. Thanks.
Thanks.
Yeah.
Your last question comes from the line of Nikolay turnaround from Longbow Research. Your line is open.
Yes.
Thanks, Dave I think in your last analyst day, you guided to Capex to grow as a percent of revenue and I believe it's time understanding was that your capacity mix between legacy and mass capacity was optimal.
Now you're alluding that there's someone the realization because of access legacy capacity I guess can you give us some color on what inning are we in that transition I mean I understand that this is a continuous dynamic but linking investor expect for you to optimize that capacity mix.
Yes, that's a good question and what inning are we in it's kind of hard to say because we're going to have to wait a little bit longer until we see the number.
No recovery out of coverage of all the reps the markets, but it's exactly the way we're thinking about it what you described before we could have said.
These markets will transition. According to some game plan. These legacy markets will will go out in five years or four years or whatever we were we were expecting there's been some changes to that because of coated we either have to know if we get back on that curve or maybe maybe that curve as a permanent downshift and then we can trends there.
In the past is we're making that investment and I think the key point is that from our perspective in the industry I think everybody's going to have to go through this relative the footprint and the and we like our chances relative to that we're just we're just so.
Telling you that we will probably be below art are 6% to 8% range that we would have to talk about that analyst day because of the impact to covert.
Okay and related to that I think you guided to mass capacity exabytes growing that 35% to 40% for fiscal year 21, I guess are you willing to give us a number for total capacity for fiscal year 21 growth including legacy.
Yes, no we've never really done that before and we've been very focused on the growth market of mass capacity. Another surpass legacy significantly I think thats a growth driver.
The legacy markets.
Very Frank we're still studying them because like I said things like consumer.
So we're maybe ahead of where we thought they would be because of beloved and other markets may be underrepresented.
Okay, and if I can just squeeze one more you mentioned different crop demand profile by cloud customers can you maybe talk about that in terms of job geography, particularly interested in hearing your take on the China cloud demand and maybe where is the volume in terms of capacity with those customers. It's a very complex question. It's a very good question something we.
I struggle with is well there's many different types of applications. There's not just one kind of cloud service provider one kind of application one kind of drive if you will.
So from our perspective the investments the the cloud customers are making dependent on all these different strategies they might have.
From our perspective, we had.
We have a great portfolio lineup, we can transition from.
Our son or factory in from one customer to another given enough lead time, and we have good relationships with all those customers. So I do think that theres some things in the cloud depending on where your geography geographically where their logistics challenges to grow and we said this a little bit last quarter, you can't build data centers that we can't get people on prem to build.
So there are priorities being made for service level agreements.
Where people in.
In the cloud may have real strain on them at the front end with computer networking or something like that and that may push out some of the mass capacity installed we're working with customers on that too. So we know the demand is coming we just have to make sure we're tight with that with the customers about what they need exactly when.
June quarter kind of April to June quarter, whether inc. for cloud at September was not at the same level of much was very healthy and we ask that December quarter to be a very strong.
Got it thank you.
So.
There are no more questions I'll turn the call back to management for closing remarks.
Thanks, Jason.
Seagate continues to execute well through the current business environment. We're very encouraged by the improvements that we're seeing in some of the end markets and we expect gradual recovery throughout this fiscal year longer term, we see no change to the secular growth of mass capacity data and we're very excited by the opportunities that we can foresee ahead I'd like to once again thank.
All of our customers suppliers business partners and our employees for their ongoing support a seagate thanks, everyone for joining us today.
Thank you everyone for joining todays call that concludes the conference call and you may now disconnect.
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