Q2 2021 Seagate Technology PLC Earnings Call
Yeah.
[music].
Good afternoon, and welcome to the technology fiscal second quarter 2021 financial results Conference call.
David 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 Shane Hudson Senior Vice President Investor Relations and Treasury.
Please proceed chain.
Thank you good afternoon, everyone and welcome to today's call. Joining me are Dave the only eight days Chief Executive Officer, and Gianluca Romano, Our Chief Financial Officer, We've posted our earnings press release and detailed supplemental information for our December quarter on the investors section of our website during today's.
Colin 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 SEC, we've not reconciled certain non-GAAP outlook measures because material items that may impact based measures are out of our control or cannot be reasonably predicted.
For a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
As a reminder, this call contains forward looking statements, including our March quarter financial outlook and expectations about our financial performance market demand industry growth trends planned product introductions ability to ramp production future growth opportunities.
<unk> 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 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.
I'll now turn the call over to you Dave.
Thank you Jamie welcome everyone and thanks for joining us today.
Seagate calendar year 2020 on a very strong.
Delivery in December quarter performance that exceeded our debt.
Compared with the prior quarter, we grew revenue 13%.
<unk> non-GAAP operating profit of 31%.
And significantly increased free cash flow to $314 million.
We began executing our recently increased share repurchase authorization and retired over 18 million shares of Seagate staff were approximately seven percentage of the shares outstanding beginning of the quarter.
Through the combination of share repurchases and our quarterly dividend, we returned a total of $1 $2 billion in the quarter.
Okay.
Despite the challenges of a global pandemic Cds grew annual revenue to percentage of calendar year 2020.
The TV revenue growth inside of our long term financial target range.
At the halfway point of fiscal 2021, our performance puts us well on our weighted to achieving our objective to deliver relatively flat revenue for the year.
And the remainder of my comments today I'll provide an update on end market trends.
Sure the progress we've made on our technology and product Roadmaps and.
And offer some insight into how these advancements position seagate with a strong secular bounce data growth trends ahead.
Against the backdrop of dependent.
<unk> 2020 was headlined by diverging and market trends.
Strong cloud investments to support remote economy, a digital transformation were countered by significant disruptions to enterprise it spending.
However, during the December quarter, the enterprise markets begin to recover for the first time since the onset of a competitive.
The improvement was most pronounced amongst large enterprise OEM customers.
Which led to strong sequential revenue growth for both the airlines and mission critical drives.
We anticipate this positive trajectory to continue which is consistent with analyst expectations for on Prem <unk>.
Hardware investments to pick up in calendar year 2021.
Cloud data center demand remains healthy with the overall data demand drivers intact.
Analysts project strong double digit growth in cloud Capex in 2021, which bodes well for Seagate and aligns with our expectation for cloud HDD storage demand to increase through the balance of the fiscal year and drive significant growth longer term.
For a second consecutive quarter, we experienced stronger than expected growth in video and image applications for beta markets.
Due in part to pent up demand following the significant impact incurred in these markets. During these economic shutdowns early in the pandemic.
Video and image applications are a key growth market within mass capacity storage.
As the number of devices generating data explodes at the edge mass capacity hdds are vital to preserving and putting that data to work.
For example, the rollout of <unk> and rise of edge computing supports further growth in smart and safe city initiatives as well as smart factory opportunities.
<unk> projects the number of <unk> enabled outdoor video cameras to exceed $15 billion by 2023.
A six fold increase from current levels.
That would translate to as much as one exabyte David generated each day, Vanessa filled about 2 million security surveillance drives every week.
Proliferation of video and image sensors and other Iot devices is expected to be a major driver of data accretion at the edge in the coming years and will play a key role in the growth and evolution of the massive data storage industry.
Finally, strong seasonal demand for our desktop Pcs and consumer drives contributed double digit sequential revenue growth in our legacy business during the December quarter.
Overall, we expect demand for mass capacity storage to improve across the cloud and enterprise markets in the March quarter more than offsetting an expected decline in the beer markets and the typical seasonal slowdown in the consumer space.
With the broader market environment continued to firm Seagate is executing well on our technology roadmap and hitting our committed milestones highlighted by the shipments of our first 20 terabyte <unk> drives in late November.
With Hammer, we could drive areal density compound growth rates of 20% or higher to support the scale of our customers' infrastructure investments and enabling seagate <unk> seen a significant economic advantage for mass capacity applications relative to enterprise Ssds.
That is expected to persist over the foreseeable future.
<unk> first to market dual actuator technology is gaining interest among a broader customer base, who require mass capacity storage with higher performance for certain applications such as content delivery.
We are increasing shipments of dual actuator drives today and expect to see higher volumes as drive capacity increase.
We are also continuing to strengthen our PMO product roadmap anchored by our industry, leading 16 terabyte drive based on our common scalable platform.
We broadened the adoption of <unk> 16, terabyte drives in the December quarter, gaining new cloud customers globally.
We are starting to increase the pace of the 18 terabyte product ramp, which will continue through the calendar year consistent with the strong progress of our qualifications and customer readiness timing.
As drive capacity increase the qualification process, often takes longer and adds complexity.
Common platform approach is helping customers simplify the qual process.
In fact, a number of leading cloud customers commented that the qualification of 80 terabyte systems, the smoothest to cover it.
Additionally, we expect to continue to leverage the quality of the scalability of this platform, which is extendable through 20 terabyte <unk> technology the.
The strength of this platform offers <unk> the flexibility to meet customers' timing of mass storage needs.
For Seagate, the common platform strategy drives manufacturing efficiencies that allow us to ramp new technology and production more quickly and then use our systems business to accelerate the pace of learning and market adoption.
We are maintaining solid momentum in our systems business, securing multiple customer wins in the December quarter, including our biggest system deal ever a multi quarter deal representing close to eight ex advice a scalable storage.
Overall with our leadership in HDD technology and execution on our product roadmap.
Dave is an excellent position to capture the $24 billion mass capacity storage opportunities that we forecast for 2025.
Which is driven by the burgeoning demand for data.
However to capture value from the avalanche of data being created CIO as must overcome cost scale and complexity challenges associated with moving analyzing and storing more data across the distributed enterprise.
As a result.
Economics are forcing enterprises to keep proportionately less of the data that's being created.
Threatened to business performance and competitive advantage.
This dynamic is at the foundation of Seagate innovation agenda.
We are enabling <unk> to address the key challenges of cost scale and complexity to preserve and put to work more of the valuable data as they are already creating.
Our lives towards platform offers a simple cost efficient and secure way to manage massive volumes of data across the distributed enterprise.
Slide mobile enables mass data transfer between the endpoints edge and core and live rack powered by cortex Open source object based software provides enterprises with the lowest cost per petabyte.
Cortex software is the foundation of live sports platform is maintained by our growing community of data scientists and enterprise storage experts many of whom participated in our first ever and highly successful hackathon event held last month at <unk>.
We have a growing customer interest for the life portfolio and continue to receive positive feedback on our existing engagements span multiple vertical including media and entertainment and autonomous vehicle technologies.
Driving platform level innovation and addressing the growing challenges faced by the distributed enterprise is a mandate that will help define our long term growth strategy.
We plan to share more details on the life storage platform in the rest of our unfolding strategy on February 24th.
And we will be hosting a virtual analyst and investor event.
I look forward to having you join us.
With that I'll now turn it over to Gianluca to walk through the December quarter.
Thank you, David Seagate continues to execute well and adapt to the rapidly changing business environment as shown by our strong December quarter performance, which was supported by the anticipated critical abate the enterprise market and record revenue for the video and you make application and seasonal demand for our consumer.
<unk> and desktop PC product.
We achieved revenue of $2 eight 2 billion.
Our 13% sequentially and above our guidance midpoint.
Non-GAAP EPS of $1 out of end 2019 at 39% sequentially exceeding the high end of our guidance range.
And free cash flow of day ended and $14 million.
After nearly 70% sequentially.
Our ongoing focus on operational efficiency.
Additionally, we had April sales $18 2 million shares of Seagate Doug.
Our decision to invest in our share.
Current environment underscores our confidence in the long term outlook and future cash and net <unk>.
In the December quarter, we have debt aching about 100009, exabyte of additive to that capacity up 13% sequentially and 21% year on year.
But I think it's a quarter of our total exabyte leadership into the mass capacity market.
We can growth in the airline media and non product.
Mass capacity human.
<unk> two at 890 day of an exabyte in the December quarter.
We shipped a total of <unk> 65 ex of I think the current net yet 2020.
59% year over year, which is well ahead of.
The long term CAGR forecast of about 35% for the waste market segment.
Our current outlook for the massport debt support <unk> exabyte shipment growth.
At transact for the calendar year 2021.
Our net revenue base HDD accounting for 92% of total bill standby to quote that IV and mass capacity thought it represented 62% of HDD anatomy.
Revenue from mass capacity storage was $1 5 billion up 12% sequentially and 15% year over year.
The Atlanta revenue increased sequentially, driven by stronger than expected demand from enterprise and OEM customers.
<unk> was 71 exabyte.
11% sequentially and 45% year on year, reflecting ongoing demand what I'll add 16 terabyte capacity right.
Well as in tenant demand for the mid capacity net I'm proud debt at the enterprise market bipolar.
These dynamics resulted in average capacity in the airline Dave staying at as David said at $11 four terabyte.
That continues to expand adoption cost 16, terabyte side and expect 16 terabyte two remains a company and highest revenue product over the next capital reported.
We also contacting to achievement of our 18 terabyte size and make positive progress on qualification plan at multiple clouds customer with volume brands aligned with that timing.
And that the end market revenue was above our expectation for the second consecutive book debt as pent up demand from the Covid related <unk> in the first half of the calendar year led to a strong recovery in the September quarter and record revenue in the December quarter flow.
During this period of strong demand, we anticipate March quarter sales.
Sequentially lower.
And below typical seasonal thing.
Net agency market represented 38% of December quarter HDD AAV.
Compared with 37% in the prior quarter and down from 47% in the year ago period.
Revenue and net of ICU looking today at 15% sequentially.
I think in a total of 32 exabyte shipped into the legacy market.
The growth was driven by a seasonal uptick for our consumer and desktop Pcs.
And improving demand for mission critical drives consumer.
And is that a quality in the enterprise market.
We chose to impact demand for our <unk>.
We kind of day expand them going enterprise market critical right.
A moderate that seasonal dip.
Client with efficacy even last quarter.
Our non HDD business made up 8% of December quarter revenue.
I think reset whenever that day.
That's weighted with Empire cortex.
At <unk> for Microsoft Xbox expansion path.
They get to benefit from strong holiday demand, which supported both double digit growth, what our SSD products and net sequential improvements in non STB AAV.
Within our system business, we saw early signs of a quality at large OEM customer.
Which along with customer wins, Dave mentioned earlier should benefit our system business in kind of 2021.
In the December quarter, non-GAAP gross profit increased to $704 million compared with 614 million units.
September book.
While we get related cost increased slightly from $28 million, primarily due to elevated shipping costs.
We are currently planning to income team in Atlanta is a matchbook debt as.
We finance customer demand timing within crazing, IFA cost and opportunities <unk> low weighted cost candidate.
Our resulting in non-GAAP gross margin was 26, 8%.
Including about 110 basis points impact from based Covid related costs.
<unk> margin expanded slightly quarter over quarter offset by a less favorable non HDD product mix.
Non-GAAP operating expenses came in at $319 million down $31 million from the same period last year, reflecting ongoing benefit from working from home and overall operational efficiency.
Looking ahead, we expect operating advances that we had missed Hyatt in the March quarter.
Our non-GAAP operating income was put down to the 85 million and non-GAAP operating margin was 14, 7% of revenue up 200 basis points sequentially ending the alpha has.
Our loans 10, starting at the range of 13% to 16%. Despite the COVID-19 headwinds I mentioned earlier.
Based on diluted share count of approximately 251 million shares.
Non-GAAP EPS for the December quarter was $1 net and 2019.
The 19 outlet format.
I'll, let David to our guidance midpoint was driven mainly by higher revenue and operational evidence.
While <unk> had a purchase activity and then EPS by five.
Capital expenditures.
That's $159 million in the December quarter, which represented approximately 6% of revenue.
We expect capex to represent between 45% of revenue for the fiscal year.
Which is below our prior side of debt of 6% to 8% of revenue.
We believe this capex level with align supply with demand when considering the existing installed base capacity and continuing demand growth for mass capacity storage.
David inventory standing revenue by eight days sequentially he.
We maintain value was relatively flat at $1 3 billion.
In anticipation of continued strong mass capacity storage demand.
In the net data as well as the need to look at a higher level of strategic inventory to better manage logistics and put debt against potential future supply channel.
We expect inventory levels to gradually decline at day costs to return to a more normalized level and we consume this critical components.
We generated $314 million of free cash flow in the December quarter up from $186 million in the September quarter, and up 10% year on year.
Supported by our focus on operational efficiency and improvement in demand and economic dynamics.
In the December quarter, we used $167 million.
To fund, our dividend and utilized $1 billion to retire approximately 18 million ordinary shares.
Sitting in the core debt was 240 million shares outstanding.
We will continue to opportunistically retire to Seagate stock and return capital to our shareholders.
Additionally, with a total of $1 billion in capital.
Issuing two tranches of debt at the lowest average interest rate of any of our book.
Including the new notes gross debt was $5 1 billion.
And the net debt was $3 3 billion.
We expect the interest expense for the March quarter to be approximately $59 million.
The $9 5 million.
On the two new branches.
Cash and cash equity loans remained relatively stable at $1 8 billion.
As a new calendar year begins we expect strong cloud data center demand and consumer enterprise inequality in the March quarter to more than offset the seasonal decline.
Some of our other end markets.
While we are still facing headwinds some COVID-19 related costs, we expect advanced we'd rather be a decrease over the next few quarters.
Taking all these factors into account our outlook for the March quarter efficacy that's volume.
Revenue is expected to be $2 65 billion.
Thus, our minus $200 million.
Non-GAAP operating margin is expected to be in the meat of our target range of 13% to 16% of revenue.
And non-GAAP EPS is expected to be one bill Atlanta, and 30% plus or minus <unk> 15.
In closing Seagate is executing well.
Growth multiple levels.
Delivering on our financial commitments, demonstrating the ability of our business model for that customer demand and maintaining our commitment to return cash to our shareholders.
I would now turn the call back to Dave for final comments.
Thanks, John Luca 2020 was a very challenging year and when we have and continue to face hardships. We're encouraged by progress with vaccines and signs of recovery.
Through the efforts of our extended team Seagate exited the year firing on all cylinders. So we're well positioned to capture mass David growth opportunities in calendar 2021 and beyond.
We are executing our technology innovation roadmap to continue delivering the lowest cost mass data storage.
We are strengthening our mouse data infrastructure portfolio by building on the positive momentum.
Of our scalable common platform family of 16, and 18 terabyte drives.
And we're gaining interest for a live storage platform, which expands seagate market opportunities paving the way for future growth.
Our success is founded on the dedication of our employees and the ongoing support of our suppliers customers and shareholders.
Employees remains the lifeblood of our company and we are focused on maintaining and strengthening our culture to provide an open seats and respectful workplace to mature all employees are able to thrive.
Earlier this month Seagate released its latest diversity equity and inclusion report.
I'm proud of Seagate strong track record and reputation for promoting inclusion both within and outside the walls of the company and recognizing diversity is key to our ongoing success.
We are equally focused on contributing to our customer success.
Which we believe will lead to higher revenue for Seagate and greater value for our shareholders.
We collect data quarterly to measure overall satisfaction across the breadth of our customer base.
The December quarter indicators were among our highest ever which reflects procure we take in providing high quality reliable products for all of our customers.
In summary, I'm excited about seagate growth opportunities ability to generate cash and enhance shareholder value over the long term.
Without gianluca and I are happy to take your questions.
You ask a question you will need to press star one on your telephone to withdraw your question press the pound capacity.
Please standby, while we compile the Q&A Robson.
Your first question comes from the line of Karl Ackerman column, one zone.
Hi, good afternoon, everyone. Thanks for taking my question Dave.
Dave I have got a question for you to start.
On Prem is still recovering are you able to achieve 35% ex by growth where near line business in fiscal 2021.
I ask because I think you indicated in your prepared remarks that net.
Debt, while customers are still suggesting 18 terabyte offers a very attractive upgrade past.
Maybe adoption timing is a bit elongated and then second I think you noted.
That your 20 terabyte drive could facilitate ex by growth of I think 20% or more a year.
So if you could just touch on your longer term ex by growth expectations as well that'd be very helpful. Thank you.
Thanks, Karl Thanks for the question.
Net 35% is still in the cards.
Answer your question directly there is.
What's the student about your question is there is a mixed became the highest capacity and then the on Prem tends to be a little lower capacity in the airlines. So it could be eight or 12 terabytes, but we think still think 35% is a good number through the through the fiscal year exactly to your point.
Longer term.
We said, 35% is fairly consistent the cloud may actually growth bigger than that but we have to wait and see kind of some of the reverberations after COVID-19, but I still think thats a good number for bit growth in the mass capacity markets. Even further than just the end of this fiscal year.
Got it.
If I may just hoping if you could.
Touch upon shortages I think with shortages of semiconductor components.
And even diodes does that preclude you from ramping your higher capacity drives and even particularly 20 terabyte drive and then second are you able to extend your volume commitments within.
With datacenter providers, given the shortages across the supply chain. Thank you David Yes.
Interest and questions under the first thing is one of the reasons, we really liked the common scalable platform as we're flexible on questions exactly like you just asked so relative to componentry, we have long visibility, but if we were changing platforms over and over and over again some of those things might be hard to chase.
We have more.
Capacity at an air show on all levels. Those platforms. I think is also a lot of flexibility but to your point.
Across all of the supply chain people are witnessing some of these kind of constraints.
People are managing way out in front of them and I do think it's forcing discussions to be a little bit more mature relative to what the mass capacity needs are what the needs are of Silicon. For example, I think you've made reference to some of the other components of making making sure everybody has enough for the growth of our customers.
Especially during recovery times or what they might need later on in the calendar year.
Thanks Bill.
Your next question comes from the line.
With more than four ma'am your line's open.
Sure.
Good afternoon, and thanks for the question just with the improvement in demand that you've seen in a number of the end markets can you talk just qualitatively about where you are in terms of manufacturing utilization versus either a quarter ago or a year ago and I asked because we have started to hear that some hyper scalar is can't get all the products.
We've seen some price increases in the channel and just wondering.
How tight things got in the in the seasonally strong December quarter, and what that might mean for the next couple of quarters.
Yes. Thanks.
Yes.
And some of those markets that were tremendously disrupted some of the legacy markets. For example, we had ample capacity.
Throughout the period of Q1, and Q2, the Covid impact of pandemic impact and a lot of supply chains were disrupted as well.
The cloud demand has been fairly strong and predictable for us. We're building what we had predicted I think the way I think about our capacity constraints are manufacturing constraints. If you will is more of a long lead time stuff like wafer capital in some of those things wafer process time of things things like that staging for the future that's the <unk>.
It's Paul.
Drive level, we still have some flexibility and we did.
Last quarter, and so we were able to chase really aggressively via markets. In particular that were kind of ratio going ahead, and there was some seasonality there, but some of it was just pent up demand based on how the impacted.
The pandemic has impacted Bullock bill the all the supply chain. So if that's helpful.
The longer lead time upfront manufacturing capacity, we have it is filling up to your point, we still have some flexibility to drive them.
Okay, and then just to follow up Gianluca can you just bridge, how youre thinking about the March quarter gross margin relative to December just some of the pluses and minuses sequentially on gross margin, which seems like it's up slightly based on your guidance.
Yes first of all of their December quartile margin has already improved sequentially, especially in the additive part of the business. We had maybe some negative impact on day, SSD and system solutions segmented by day starting.
Is that going to improve or at the end of December quarter linearity is going in that direction.
As we said in the script.
Enterprise OEM was strong in December cloud was still very healthy and now when we go into the March quarter, we have fed bolus.
Segment to actually continue to improve sequentially.
We will lose their data they are.
The legacy.
Segment EBITDA of surveillance, we think mission critical will be maybe less seasonal than what we have seen in deposits and then I'll add things that both debt and the gross margin in the quarter. So I think we will continue to grow in day in the same debt action of course weighted.
San Jose Costa from Covid net.
Continuing to be there.
It was fairly high in the December quarter is a little bit higher than what we're what ASP I think.
We think last year, we'd probably be fairly similar.
Great. Thank you for that and Craig Congrats on the quarter. Thank.
Thank you.
Your next question comes from the line.
Home loans.
The loans.
Yeah.
Thanks for taking my questions I've got a couple of them maybe first one on the airline side.
Maybe two parts here on the enterprise side, you talked about some recovery you've seen last quarter. How far do you think we are still below the trend line. The question is more on the on premise near line drives about future you talked about mission critical but on the cloud side have you seen any kind of delays or a pull forward.
Passing transitions and some of the large cloud data center customers compared to what you think a few months ago.
Yes, okay. So I'll take the kind of two parts. So first just the enterprise if you will be on Prem that we said during the early days of the pandemic. This is probably the most impacted.
That is recovering somewhat I think.
It's recovering slowly because some of the on Prem dynamics are not have not fully resolved themselves and probably still won't but it is recovering slowly and its more predictable now so thats why we feel like we understand the market.
<unk>.
This is kind of in line with the IDC numbers, we've quoted in the prepared remarks as well above the traditional Ips is going to be up 3%.
I think that goes exactly to that point on.
The bigger cloud service providers around the world.
There's a lot of dynamics going on because there's no one size fits all cloud, obviously, but I would say in general.
A lot of applications pushed into the cloud and people have to react there with the budgets that they have with the technology. They had with the platforms that they have zone.
And in some cases, they prioritized away from whatever storage infrastructure. They were building out in other cases, they prioritized to it so its fairly complicated right now.
My opinion is that because of the dynamics. We've just seen the cloud is going to grow EBIT bigger level moving forecast on the silver the long term.
We're projected mass capacity would be $24 billion market in 2025. So we think there is strong secular growth coming in the club, but it is still still choppy based on some of the dynamics that we just talked about.
Yeah.
Okay, maybe a quick follow up I know asked this question last quarter on Huawei, but given the current restrictions on the shipment to Huawei does that change the way you think about the total addressable market for.
For this calendar year.
For the online guys.
Yes.
One last one we don't comment on any specific customer so I think that bill.
The market demand globally.
We will not change and how it's ultimately serviced so that that answers your question. So.
The net demand for data storage products was out there and it will get serviced by one customer or another.
By one supply chain or another and these are very very complex supply chains.
Okay. Thank you.
Your next question comes from the line of Tom O'malley with Barclays. Your line.
Good afternoon, guys. Thanks for taking my questions. My first one is really around capital returns you. Obviously thought it was strategic to spend a decent amount in the quarter and picked up some shares can you talk about what your view is on buying back more shares over the next couple of quarters, and then obviously with the new debt rolled into the model as well how would you view the pros and cons between paying some of that Jonathan.
Also buying back shares.
Yes, Tom obviously, there's kind of two parts of the question. There is what we just went through in the pandemic.
The way we were looking at the market, but the bigger part is that looking forward I really believe in the long term cash generation capabilities of the company. So our decision to invest in our shares as is weighing current environment.
Long term business outlook and cash generation capabilities I do think that if this is helpful that we're kind of at an inflection point and data growth.
From Seagate perspective, we had to do a lot of transition from client server businesses factory transitions and so on into mass capacity. We've kind of finished that and now were seeing mass capacity growing just simply because of the demand for data is growing with the edge opportunities and things like that so so I think that this is an interesting time relative to all that.
We look at the.
Opportunistic is the ability to retire stock returned capital we look at the investments we have to make in and ourselves we had a.
Fairly strong thesis on on all of this and its good to have.
Cash generation capabilities to underpin. It also we can make the tradeoffs.
That's really helpful. The next one is just a high level question totally fair. If you answer from a very high level as well, but clearly there is a lot of concerns about flooding the market with debt capacity demand this year.
How do you think in a market in which the cost environment on the flash side is decreasing.
Particularly your legacy markets will react obviously, you mentioned some seasonality in the first quarter, but do you think that you'll see greater than expected declines. There can you just talk through the pros and cons of.
What you may see happening throughout this year, if that flash environment weakens yeah sure if it helps at a.
A few years ago. The narrative is very different when notebooks, having transitioned over and now they largely have transitioned over to NAND. So I look at things like that as places where the two technologies are competing head to head in.
That doesn't really exist anymore people talk about for example mission critical drives and this is a little bit of inside baseball here, but mission critical drives for US we haven't really done a new platform in quite a few years, where continuous service market. That's out there there is bill.
Large number of tens of millions, maybe even more than that of slots that are out there with SaaS interface automd have good value proposition. So we will continue to service those markets, but I don't think a small change or even a fairly large change in the NAND price changes that dynamic because the new architectures or non SaaS architectures generally speaking some of their entity Amir architectures.
That's where you need to be designing products were so so.
The overlap if you will between the two markets was not super relevant and.
Mass capacity markets.
It's night and day difference in massive massive data infrastructure, a small change in costs, we get a large change in cost is not going to make a difference in the architecture decisions that people are making.
I think Dave.
It is important Brian teens in this segment really growing.
Like cloud and enterprise OEM, and even surveillance, but doesn't really overlap between out of <unk> NAND and base volume and we don't just bad debt to opinions that the next debt ceiling section.
Yes, the way I look at the data here for softer time will split.
There is there is a big growth in edge and cloud and Theres lots of different architectural components NAND has definitely come of age and so it's got a lot of opportunities that have yet to design the right solutions for the customers.
For mass capacity perspective, we have we are in the exact same problem, we keep driving our roadmap and we're going to be just fine.
Okay.
Sure.
Next question comes from the line of Bob.
Ex with thoughtful Dalton.
Yes.
Hi, Thanks for taking the question good afternoon.
I'm, just having trouble putting everything you said with the new Capex advice of four to five percentage of sales I know you were thinking it might not be as high as 6% to 8% previously but can you just sort of talk about what's going into that decision and then I had a follow up.
Yes, I'll, let gianluca tickets.
Yes, basically what's happening.
In the last couple of EPS.
Seagate and I think in general the industry installed more capacity than what was needed.
It had been growing.
Growing demand is now up solar being debt capacity is obviously good news for that for the industry and post they getting but EBITDA.
We know we can still see.
Some of.
Additionally capacity not being fully utilized so we don't need to invest more in the short term needs in order to absorb that demand.
And so that demand so we think that sustaining bad thing.
Thirdly high amount that is now 405% of our revenue is not similar but it is a day number now that Dave that ideal level for us.
To align supply and demand in the next Ted I would say two or three quarters.
Okay. That's helpful. And then just maybe David if you can give a little bit more color on the AT&T TV rollout I know you have said consistently it is dependent upon when your customers want some uptick but is there any any other color you can provide in terms of what may drive it sooner rather than later or later later than you expect.
Better.
Yes, we did say in the script that the.
18, terabyte qualifications have gone very well.
To the earlier point.
I don't think.
Mass capacity perspective, we are not in the ore in the industry anymore, just build a bunch and then try to ship and then at the end of the quarter something like that you have to have a real good relationships with the customers know exactly what they want so we over the last few quarters, we've been on a.
Theme.
Communicating this with you that we knew were 18 terabytes was going to be with the customers that we're going to be asking us for and so we were fairly clear that the ranch has begun though and so and it starts by.
Going back to wafer, which is many many months ago, and then making sure. We started moving parts, we're making the transition to that product right now and we feel really good about it we feel good about the quality levels of yield levels the ability to ramp all the components that we need because it's a common platform.
I think we've been signaling this.
Pretty well I can't really comment on what the rest of the industry is or isn't doing because I just don't know, but that's relative that's the way I look at our plans.
I appreciate that color thanks very much.
Your next question comes from the line of Aaron.
Fulton with Wells Fargo loans.
Okay.
Okay.
Aaron Rakers with Wells Fargo.
Oh, sorry about that guys I was on mute.
I wanted to build on the last question with regard to kind of the visibility discussion.
I look at kind of growing your mass capacity at 35% plus this year.
It seems to really imply a very very healthy uptick in capacity shipment growth into the next couple of quarters. So as we think about the visibility in the business. The change in dialogue that you've had with kind of your key customers.
How would you characterize visibility into that kind of demand profile that pick up of capacity shifts into the back half of the year and I do have a <unk>.
Quick follow up.
Hi, Eric Thanks, Yes, I think it's not just about the highest capacity point exactly what youre pointing out we have good visibility on 16th and what our customers needed with good visibility on Atms, because we talk to those customers about exactly what they need and multi quarters out as well.
But theres also something going on at eight terabytes, and 12 terabyte and so on.
So if you see that kind of transition based on the products that serve the lower capacity points of the of the NAV capacity market. If you will that's where we start to see some significant growth as well and that's that tends to be more global than isolated a few accounts. So.
The debt.
<unk> gives us confidence and by the way the platform that we have the platform transitions, we're making.
Take cost in desks and heads and things like that out as we as we increase capacity, we can actually do that there. So we are.
Our ability to go solution that better as the mix increases. So go ahead with your follow up.
Yes, I think as a quick follow up given the mix of business and kind of what's transpired over the last year.
<unk>.
I'm just curious how do you think about the variables the drivers that get you back to that kind of what I think you've characterized with a normalized gross margin.
And of that 29 to 30 plus percent range.
Yes. It is Gianluca mentioned before HDD is almost there I mean, there's some other dynamics of other businesses, but.
To your point.
We have these new platforms coming that will necessarily take cost out we have to make sure that.
There is.
Actually getting with the customers what they need but I do expect some demand growth recovery again in some markets, but also growth as well.
Allow everything to equilibrate more and get us back into the range.
It was a very competitive market in.
The times of Covid 2020, and people were trying to keep their factories full and things like that now we're into a period of with this growth and recovery.
Like like Carlo asked earlier, there was a.
Lot of questions about supply availability and making sure you have the right supplies at the right time.
We're into those kinds of discussions as well and we expect that to stabilize.
I think Dave that's in the quarter.
I don't know I think it's a combination of different items of course, the focus for US is all based on cost reduction and I think we are achieving that level of cost quarter after quarter.
The second very important item.
Alignment between supply and demand that should bring.
And Kate pricing environment towards a interesting.
And then of course, but as those additional costs that we are adding cutting I know because of the COVID-19 situation that we don't this debt to continue Florida.
We think a few more quarters and then hopefully in the in that part of the cost will go away.
That's great. Thank you thank.
Thank you Sir.
Next question comes from the line of Kevin Chiang.
New loans.
Thank you for taking my question and congratulations on the strong results.
Maybe first with the enterprise customers coming back.
Have they been qualifying higher density drives or is that kind of just start now and was there a delay and what are the expectations going forward.
Yes, typically Kevin.
Some of the enterprise customers do lag.
They don't qualify the <unk>.
Highest capacity points are the branded product as fast as some other people do theres exceptions to that rule, but.
Do lag there has not really been any slowdown in the qualifications for any reason I think people have even through the challenges the logistical challenges of Covid people who've kept focused on what they need to do because.
We're seeing efficiency gains as well there so but as we make some of those transitions. So I think that helps us to answer the enterprise demand the right way as the enterprise demand is starting to grow again.
Okay. Thanks.
And just as a follow up with the <unk>.
16, terabyte and moving over to the 18 terabyte and the visibility you had talked about it.
You'd see a crossover of shipments anytime in 2021 or is that more of a 2022 calendar year event.
Yes, it's not it's not going to happen this quarter next quarter, but just because of the sheer volume of the 16th but I do see it at some point and we're going to ramp really hard and it's the same platform. So it's not hard for us to ramp per se. There is also other efficiencies that we get by driving to the 18 platform. So that's why we're pretty.
So I did about it.
Okay, great. Thank you.
Next question comes from the line of Patrick Ho.
Okay.
Thank you very much and congrats on a nice quarter.
Maybe as a follow up to Kevin's last question about the 16 to 18 terabyte transition.
Obviously, the 16 terabyte has been a share gainer.
For Seagate, and you mentioned the EV platform transition to 18 terabyte.
How do you look at new customer wins with 18 terabyte and maybe secondly on top of that question do you see.
Incremental share gains when you get I guess, when you move to 20 terabytes and above on the Hamra platform, where there are.
Significant differentiation versus your peers.
Thanks, Patrick.
I don't really think about market share per se I think about talking to the customers about what exactly they need now to your point. There are people who will have 14 for example, our 12 and said I'm going to 18, and so they've been waiting the transition.
A little bit.
We'll work with them on those transitions.
And make sure that we have an ample supply for them.
As we go even higher I can't really speak to and I can only speak of the discussions that we're having I have confidence in 20 terabyte ramps. We made comments in the script about PMI capabilities to get there we have the hammer capabilities to get there I think we control those levers very carefully so whatever specific customer would want.
Performance wise or.
Whatever we can get them for their new architecture old architecture, because theres still a lot of legacy architecture that is even replacement architectures. We have the service will go out and do that so.
So let me flip it but I just don't think about share gains rather I think about.
What do these customers that we're talking to need exactly from us and making sure we're aligned.
Great and as my follow up question, if I can look at in terms of Opex.
Opex guys have done a really good job flexing opex during especially in these challenging times in 2020, how do you look at Opex, and especially R&D given now that you are starting to release.
<unk> based products.
There is an ability to flatten out R&D in the near term with maybe a lot of the heavy lifting related to hammer I don't want to be out of the way or at least a lot of the initial ramp.
Startup costs.
Got it.
Yes, actually we have we haven't done debt already so youll see that is out there or at least partially in outlet added that those of course debt.
Florida.
For the long term I think last quarter, we said probably a good a good model is around 330 million per quarter.
Now we have it would be below.
And we will try to stay below that as much as possible of course, we know we always look at opportunities for cost reduction, especially right now in the technology space, where we have developed and that's so we don't have the need for maybe a day or the spending that we add in the in the past.
Yes, it's a really good point.
Yes, it's a really good point.
The hammer technology.
Laser ever shipped on the smallest wave guide ever shipped in.
Dialing it down to something 30 nanometer spot size or whatever it is this is a really really difficult technology.
We've invested a lot to get to where we are really proud of where we are being able to ship some units and get the learning out there and start building the volume and everything else we.
We don't have to go through that investment again, so that we get a lot of scale from here. So I appreciate your question.
Great. Thank you.
Your next question comes from the line.
<unk> with loop capital markets your line.
Bill.
Hey, Thanks, guys. Good afternoon, happy new year and congrats on.
Solid results here.
So if I could Dave.
I guess sort of the <unk>.
35%.
That's the exabyte growth for the year actually implies that the June quarter, and then the March Q guide implies that June quarter is really the quarter, where it kind of kicks up.
And then you had made.
Mark I think in the prepared remarks about calendar 'twenty, one I don't want to really act looking for clarification, you said sort of continue through the year.
Alright, Love I'd love to get well first of all could you just sort of.
Comment on if the June quarter does kick up.
In a meaningful way from the March quarter, and then what your thoughts are with September and December quarter.
Well and then I have a follow up for us the gianluca.
Yes, Thanks, Donato Im happy New year do you see so yes.
Looking forward, we do see recovery in mass capacity. There was obviously the VA markets that grew last quarter, and then have their normal seasonal downtick, but but the cloud will continue to grow from here and ex device and so that underpins the bill.
The forecast that we have right now.
Still early haven't seen through Chinese new year, but but things feel like very different than they did last year.
There was a lot of.
Of disruption due to Covid I think it's time for some of the people who are who pull off investments frankly to say, okay now I need to make those investments in.
Our pivot to mass capacity.
Getting over to the same platform and everything allows us the flexibility to really go address the markets with high volume. So that's what that's what underpins our confidence.
Okay, Great and then Gianluca.
You guys are doing sort of on the op margins youre doing sort of the higher end of the range right now I would like to sit at the upper 50%, perhaps the range.
And it sounds like Youre also talking about.
A couple a handful of things as we go through the year that can cause the growth margin to go up.
100 basis points, keeping 100 basis points, putting numbers on that but I think <unk> had 200 basis point because the card.
And then.
Keen to get net you get pricing pricing feels a little bit more normalized right now.
Sure.
What drives et cetera, et cetera, so what does it mean.
How should we think about I guess, the normalized margin range, if youre going to if you're already sort of at the upper 50% on the op margin range and youre going to capture it Q3 hydro debts on the.
The gross margin would.
Would you show that in a normalized fashion are there areas to go into that I guess, that's really what I'm asking.
Thank you.
And <unk>.
If you look at our performance before Covid, our operating margin was already at the top of debt ancient although we're already at 16%, even if that made higher.
And then the quarterly debt and as Tina happening in scale impacting that but we are right now in the 15%. So we are going back to that level, even with the COVID-19 situation. So of course, we have spec.
<unk>.
And David of course on the impact from the Covid additional cost too.
To grow at the level that we were before the pandemic situation and.
And even debt.
And we are always looking at internally at opportunity and are we just cathay there'll be a day gross margin before we are willing and debt that actually in Panama mix, we are seeing.
Industry pricing is also going in a better man that actual compared to for example, a year ago.
So all those elements and of course pointing to.
Our gross margin net operating margin.
And I am sure we will get the casualties more at our analyst day.
Gianluca that sounds like 18% to 20% operating margins to make.
I didn't say that.
Bill.
Let's say in thanks, guys.
Thank you. Thank you.
Next question comes from the line of moving.
Your line is open.
Yes, thanks for taking my question.
Just as a follow up to the prior question.
It seems to me that you have made some changes to procuring components and I wanted to see or get an idea of when those cost savings would actually.
<unk> compute with growth in operating margin and I have a follow up.
Yes.
Thanks.
Discuss the biggest impact was.
Gross margins was with Covid drivers and that's largely freight and logistics related in the world is still got a lot of challenges on those on those fronts.
And so I think a lot of people are feeling that relative to components I think we feel fairly solid about our component supply chain. So.
It was tough.
In the early days of Covid, we had to make sure that people have the right factories open and we have to.
<unk>.
Get in their work with all of our suppliers, especially the ones that are positioned for some of the products that are continuing to grow that they're making the right investments in times that are pretty lean but.
Confident about how we did that so I don't really maybe to the earlier question I don't really foresee any supply constraints, but it is forcing a different dialogue, we've had maybe cheer blood in your commentary.
Gotcha, and then looking at the composition of the near line.
Especially as you highlighted opportunities with video and surveillance.
Would there be increased diversification of EMEA online and into.
Both cloud service providers as well as.
Sure.
The mix of surveillance and other voice surveillance moving into a higher capacity in the airline and this way you get some diversification of end market demand drivers.
Interesting because because if you read the script gets to the point about all these cameras generating all this data at the edge.
And we expect that to be kind of a bellwether for smart cities Smart factory Theres a lot of data some of its video David but there's other kinds of data being created at the edge a lot of that data today actually dies of the edge. It doesn't make it back up into the clubs you do start to see the nation.
The beginnings of models, where people say, how do I get that data from the micro edge all the way back up to the core of the core cloud because the cloud has some of the great applications to be able to process. The data you just have to physically get out there and I would point to our life product strategy for so that's what exactly what we're thinking there.
<unk>.
It's not small the amount of data that's being created at the micro edge today, and like I said, either being overwritten or you have to make a decision what you process. The data and you never get to make that decision ever again.
It's a question of that decision again things like autonomous vehicles, you want and learning to go on so.
You need the data kind of resident for quite some time. There is a lot of different models that are very very interesting to us right now and it is forcing a.
Symbiosis I guess thats, the right word for between micro edge and cloud and the same kind of drive thru service level, yes.
Thank you.
Next question comes from the loans.
Loans.
Thank you and I just have one question.
Seems like on both gross and operating margins.
Every indicator hand, while there would be pricing looks better COVID-19 costs are peaking shipping costs are likely to get.
Lower.
New innovations rolling out are helping.
Am I right that just simply pork operating and gross margins should just continue to trend higher through 2021 or is there some actually negative.
Or headwinds that we should be mindful of.
Going forward no.
No headwinds Jim.
The world is still fairly volatile place.
That everyone's through Covid of course, and it's still impacted communities quite a bit so.
From our perspective.
Narrow down our product.
Portfolio to have the right products made sure our factories, our supply chains are ready to talk to the customers and things like that.
The stories coming out and we do believe there is data growth ahead, but we want we want to make sure that we're mindful of the realities.
And the economics today.
That's why.
To our comments, we think we're positioned really well.
We will guide you quarter over quarter like we normally do.
Thank you so much for the details thanks, Jim.
And final question.
And the Commonwealth with Longbow Research.
Yeah. Thanks, guys. Good afternoon. Thanks for squeezing me in I just wanted to go back to the Capex question, and maybe trying to get a little bit more color can you tell us a little bit more where do you see that.
Supply and demand fully balanced from your perspective.
I have I guess, what I wanted to hear from you and maybe can you try to quantify how much of a headwind is that underutilization. So your profitability right now that are on the gross margin line.
Nicholas Thanks.
Thanks.
A little bit tough because if you think about what the demand environment that we're in in calendar year 2020, and how disruptive it was.
Have some of the legacy products that were impacted quite a bit some of them are growing back a little bit some of them that capacity can be repurposed back into.
That capacity as well and then desktop.
The growth the 18 terabyte drive if you will that requires what we call technology transition capacity.
So we actually have to spend so blending all these things together the world through this demand disruption supply disruption period that we got through early last year.
What we're saying is we think that we can manage from here at the 4% to 5% range based on based on our modeling and that'll be ample.
Supply can be bringing online.
What's the demand that's out there.
Okay.
Quantify the headwind do you see a meaningful headwind from that Underutilization.
Sure.
Sorry, not really not whats the maybe way back to Casey's question, what's the factories fill up heads media drive I think that headwind will be gone into that that'll happen here a quarter or two.
Okay. Just a quick follow up on the legacy price per terabyte decline for a second quarter in a row double digit year over year I think over the last four or five quarters and then the mid single digits a lot more benign I just wonder can you give us any color on what drove that I think thats all about mix.
Segments like consumer.
Sure.
<unk> grew quite a bit actually last last quarter, so and Thats. Some of Thats worked from home play from home the gaming things like that mission critical obviously as was still recovering, but still still light compared to what it had been previously so I think thats that could.
As to the mix part of that question.
Got it thanks, guys. Good luck.
Thanks Nicholas.
We will conclude the question and answer session I'll turn the call back over to loans.
Thanks, David and thank you to all of you for joining us today and we look forward to speaking with you again is Gianluca said on our upcoming analyst day on February 24th please join US there I'd like to once again, thank all of our customers suppliers business partners and our employees for their ongoing support of Seagate will talk to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you Bill. Thank you.
No.
Okay.
Net.
Yes.
Sure.
Okay.
Okay.
Net.
Okay.
Okay.