Q3 2021 Seagate Technology PLC Earnings Call

Good afternoon, and welcome to the Seagate technology fiscal third quarter 2021, and financial results Conference call. My name is Gabriel and I will be your coordinator for today at this time all participants are in listen only mode. Following prepared remarks, there will be a question and answer session.

A reminder, the conference is being recorded for replay purposes.

At this time I would like to turn the call over to <unk> Hudson Senior Vice President Investor Relations and Treasury. Please proceed Chen thank.

Thank you and good afternoon, everyone and welcome to today's call. Joining me are Dave Mosley, Seagate's, Chief Executive Officer, and Gianluca Romano, Our Chief Financial Officer, Dave We posted our earnings press release and detailed supplemental information for our March quarter on the investors section of our website. During today's call, we will refer to GAAP and non-GAAP measure.

Non-GAAP figures are reconciled to GAAP figures and the earnings press release posted on our website and form 8-K, and it was filed with the SEC, we've not reconciled certain non-GAAP outlook measures because material items and may impact. These measures are out of our control and are cannot be reasonably predicted therefore, a reconciliation to the corresponding GAAP measure.

And is not available without unreasonable efforts as a reminder, this call contains forward looking statements, including our June 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.

And conditions worldwide, resulting from the COVID-19, pandemic and general market conditions.

These statements are based on management's current views and <expletive>umptions 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.

And 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 will open the call for questions I will now turn the call over to you Dave.

Thank you, Jamie and welcome everyone and thanks for joining us today.

<unk> delivered an outstanding March quarter, executing well across multiple dimensions, we grew revenue quarter over quarter and year over year. Please.

And we expanded non-GAAP operating margin into the recently increased target range and we achieved non-GAAP EPS above the high end of our guidance range.

We also continued to drive forward on our commitment of enhancing value for our shareholders returning to a combined $912 million during the march quarter through dividends and share repurchases.

Fiscal year to date, we have repurchased approximately 12% of our common shares outstanding the statement that demonstrates our confidence and Seagate long term business prospects.

So and Luca will share more details on the financial shortly for the remainder of my remarks, I'll focus on the business trends that we see unfolding this year and how seagate is well positioned from a product and technology perspective to unlock more value for our customers.

Strong cloud data center demand and ongoing recovery and the enterprise markets drove our highest ever HDD shipments of 140 ex device and record m<expletive> capacity revenue of more than $1 6 billion.

These trends underscore the strong secular demand dynamics, we're seeing and the m<expletive> capacity markets and support our outlook for the Tam thats more than double by 2026 to roughly 26 billion.

Cloud customers are helping drive this market expansion by investing and scale and infrastructure to support the acceleration and digital transformation and businesses worldwide as well as growing demand for AI and data analytics.

Seagate's high capacity near line drives are a vital component of these infrastructure investments and we believe that our strong technology roadmap and focus around delivering the best total customer experience is helping drive broad adoption by the global cloud ecosystem.

These factors were a driving force behind the number of new strategic partnerships and agreements formed last quarter with several of the world's leading cloud providers.

These multiyear collaborations are focused on delivering innovative and reliable m<expletive> capacity storage exabyte scale.

And the enterprise markets, we're seeing a continuation of the recovery trends that we discussed last quarter as businesses increased investments and traditional on premise hardware.

Recent CIO surveys highlight increased 2021 budget growth expectations to support their post pandemic application and infrastructure needs and.

We realized strong double digit sequential revenue growth for both our enterprise and airlines and mission critical products and the March quarter, and currently anticipate healthy demand through the calendar year.

The record demand that I cited in the near line markets more than offset anticipated seasonal declines for video and image applications.

We see via market demand, improving and the June quarter and sustaining through the calendar year as planned smart city projects are slated to begin in the coming months.

Video analytics extends well beyond public safety as I discussed and a recent analyst event. There is a growing list of and edge applications that leverage video image sensors and areas such as retail manufacturing and healthcare to derive valuable data insights.

These applications support our longer term exabyte and revenue growth projections.

<unk> is well positioned to benefit from these trends as we continue to lead the via market at all major capacity points, driven by product areal density competitiveness and strong customer engagement.

Finally, looking quickly at the legacy markets higher enterprise mission critical sales and relatively stable desktop PC demand led to better than anticipated revenue and the March quarter. Despite this period's typical seasonal slowdown.

With a broader industry shift to m<expletive> capacity storage, forming the foundation of our future revenue growth outlook. We have built a strong technology roadmap streamline product portfolio and are growing our pipeline of solutions and services that make us ideally suited to address the big data demand now and well into the future.

Average capacity per drive increased 17% sequentially to top five share by Mark a milestone and reflects the growth and m<expletive> capacity storage and demand for seagate's high capacity near line drives.

Today Seagate is servicing the vast majority of the market demand for 16, terabyte and higher capacity drives.

We have started to aggressively ramp 18, terabyte volume and current demand suggest strong sequential growth through at least the calendar year.

We are also rapidly gaining traction with our industry, leading Mach two dual actuator technology.

<unk> has been proven to address <unk> and performance requirements for certain applications with heavy data traffic such as content streaming.

We've recently begun to high volume ramp of Mach two drives with a leading hyperscale customer and plan to expand shipments to additional customers later in the calendar year.

And that brings me to Hammer, we believe hammer is the technology to achieve drive capacities of 30 terabytes and beyond.

Today customers are testing 20, terabyte hammer drives and their production environments, which offers valuable feedbacks and we are factoring into our product roadmaps.

I would highlight that through our innovation capabilities and our common platform approach, we have the flexibility to offer multiple versions of 20 terabyte drives to meet customer needs not only with <unk> technology.

We are focused on delivering solutions to customers that meet their roadmaps and lower their tcl and do so and a way that also drives value for seagate.

So that and we plan to begin shipping a few versions of 20 terabyte drives this quarter, we introduced new key components of our live edge to cloud platform.

We launched live data trends.

And just based storage as a service solution delivered and collaboration with Equinix and strategically located.

And a recent survey conducted.

And its considered and increasingly important.

Important to co locate data adjacent applications or cloud services.

We are progressing our build out plans.

And are on track to have four live cloud sites up by the end of the calendar year.

We are gaining ecosystem support and have now been certified with each of the leading backup software vendors.

We are very excited about the future potential for life products and services.

Which opened a large and growing market opportunity for Seagate estimated to reach about $50 billion by 2025.

However, I do want to reiterate that we are still and the early innings.

We're being deliberate and how we build out the platform and capabilities to position Seagate for long term success, we're listening closely to customers to make sure we are designing and evolving our services to best serve their needs, particularly as the distributed enterprise itself evolves and the growing data sphere.

And the March quarter, we hit a milestone for decades, and three zettabyte of HDD capacity shipping over $3 3 billion distress.

For perspective at the 140 extra byte rate, we shipped and the March quarter, we would ship our next III zettabyte and about five years.

That is an amazing commentary on explode and global data sphere, we live and today and I think seagate and an outstanding position and drive great future value for our stakeholders.

I'll now hand, the call over to John Luca to cover details of our financial results.

Thank you Dave.

Seagate, continuing to execute exceptionally well and demonstrated by our strong March quarter performance.

We delivered revenue of $2 7 billion up 4% take Brian Kenney and above our guidance midpoint.

We achieved non-GAAP gross margin of 27, 4% up 60 basis points sequentially.

And we expanded non-GAAP operating margin to 15, 4% and side recently and payers loan tab and ethane of 15% to 20% operating.

Strong demand for and our m<expletive> capacity product support and maniacal and how to describe capacity shipment of 140 ex debate.

Up 8% day, Brian Kenney, and 16% and EMEA.

Nearly 80% of our total exabyte were shipped into the m<expletive> capacity markets, which include the airline data and human definitely.

And as capacity shipment increase due in April and from 111.

Up 21% compared with 92020, which was our prior statement of income.

And outlook exabyte shipment growth and continuing through the calendar and again consistent.

With our long term CAGR forecast of about 35%.

$6 billion.

Okay.

8% sequentially and up 5% compared with the tire and yet period.

M<expletive> capacity represented about 65% of total HDD revenue.

The Atlanta revenue increase happening quarter over quarter, driven by strong recovery from enterprise and OEM customers.

And as well as healthy growth from cloud.

Yeah, and non human where 95 ex Dubai, and 34 percentage by Anthony and 25% year on year.

Evidenced provocative and OEM and and died in phased and 12 terabyte driven by strength of our hydro basket that.

16, terabytes and higher capacities.

Contributed approximately 60%.

And our total March quarter extra by humans.

And trained and the EMEA market and are playing out much as we expected and anchor team and we saw in the December quarter.

We are already seeing beam and improve and families as much safety projects and David.

And so the second highest on their call and going ahead.

Okay made up 75%.

Our March quarter, SPD and adding.

These markets and Boswell in the seasonally slower period as the revenue of eight now.

And down 5% sequentially.

And 11% and our linear.

Improving demand and for our mission critical drives and stronger than anticipated demand for our best RPC, partially offset anticipated declines in consumer debt.

We shipped and Tony.

Yes, the market down, 9% and a sequential basis and.

Yes.

Looking ahead.

Through the next few quarters, we extensive data OEM and EMEA are any decline for more than eight supported Olympic and a stable demand for <unk> and consumer overnight.

Revenue from our non HDD business.

And sequentially to $200.

And a march quarter and items.

The strong growth was driven by our system business and we began to ramp revenue from our customer win in the December quarter.

We expect growth momentum to continue.

In the June quarter.

And the March quarter, non-GAAP gross profit increased to $749 million.

Compared with $704 million in the December quarter and.

And included $24 million of Covid related costs.

We're adding to the branding to improve his team in Atlanta Bill of Covid related costs throughout this calendar year.

Mainly driven by higher freight charges.

Our resulting non-GAAP gross margin.

Including about 1% impact from these COVID-19 related costs.

HDD margin expanded quarter over quarter, driven by favorable mix offsetting the sequential growth of our non HDD business, which carriers and <unk> gross margin profile.

Today, our Max capacity and gross margin and the R&D and the low and our target range of 30% to 33%, but we have line at our recent analyst day and.

And that on track for total company gross margin to be in the low and all of our new long term range by the end of fiscal 'twenty two.

Supported by the ongoing shift to m<expletive> capacity product.

Higher revenue contribution from cost optimize towards and I'd like to share these guys.

Which make up less and 20% of revenue per day.

And can add water and natural and COVID-19 related costs.

And our continuing focus on aligning supply with demand.

Non-GAAP operating expenses came in at $329 million.

And our $10 million day banking and finance and reflects higher variable compensation <expletive>ociated with its strong performance and in Trinidad and the material expenses to support and new product development.

Comparing with it.

It was down $11 million.

By supporting and slightly higher revenue ex <unk>.

Offsetting operational leverage and disciplined expense management.

Moving ahead, we expect operating expenses to be a bit higher in the June quarter, as we gradually resume normal onsite.

And maintenance activities and Tyler.

Our resulting non-GAAP operating income was $420 million and non-GAAP operating margin was $15 four day.

Okay, and operating at 70 basis points sequentially and inside our Athens, and increased non term kind of get the range of 15% to 20% operating.

And on the diluted share count of a personal and GAAP EPS was the March quarter was $1 <unk> and <unk>.

Up 15% sequentially and exceeded the high end of our guided range.

The 18th outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage.

While our share repurchase activities and analyst EPS by <unk> <unk>.

Capital expenditure, and we had and 104 million approximately 40% of revenue and in line with our expectation for capex to be in.

And so revenue for the fiscal year.

We will continue to focus on capex discipline to better align supply with demand.

Sure.

And platform simplification and manufacturing and <unk> and improvement.

We can.

And with our sales.

Okay.

Even at the border.

And market dynamics and.

And when.

And that will decide component shortages and we're continuing to look at a higher level of stability.

Inventory to protect against potential future supply chain risk as well as to help manage paid logistic.

We believe these actions enable us to support customer demand.

And we'll continue to monitor the current market conditions.

Net inventory outstanding reduced by three days sequentially to 59 days.

We generated $274 million of free cash flow in the March quarter compare with standard and $14 million.

In the December reported and $260 million that's moving.

A year ago period.

And the March quarter, we used $151 million to fund the dividend and $751 million to retire $11 3 million ordinary shares exiting the quarter with 130 and Nino share outstanding.

The investment and Seagate share underscores our confidence and into long term business strategy and future cash generation abilities.

As a reminder, moving into the quarter the board authorized an increase of $2 billion.

And at existing share repurchase authorization.

And over the end of the quarter, we had $4 4 billion remaining in our authorization.

Net to availability, obviously with a low dose.

And we communicated at our shareholder in fiscal 2022.

We will do this while maintaining a strong balance sheet and liquidity profile.

Cash income.

These levels and a more than that.

And the unmet needs.

Looking ahead to our outlook.

We expect revenue to be net aims to eight 5 million.

Platform.

Supported by continuous.

And from cloud data center, and enterprise customers, along with increasing demand.

Of our new long term targets.

Okay.

And the expenses.

And non-GAAP EPS to be and that Angel.

Of one <unk> and Nancy <unk>.

As a a minus 50 and themes at that entering and sequential growth of 8% at midpoint.

At the midpoint of our fourth quarter guidance range.

Fiscal 'twenty one revenue.

Could be $10 5 billion.

Flat yes.

And on the year and alliances and goal we set at the start of the fiscal year.

In closing, we continue to deliver on our financial commitment and.

And remain on track to achieve our fiscal 2021 and goals. We have set while also demonstrating <unk> to meet the long term of that Dave outlined at our analyst day event.

I will now turn the call back to Dave for final comment.

Thanks, Gianluca and summary, we had a great quarter.

Our growing m<expletive> capacity markets are showing strong demand and enterprise spending is and recovery.

And we're executing on our technology and product Roadmaps and seeing positive customer engagement with our newest m<expletive> capacity offerings.

We currently expect annual revenue growth of at least 10% and calendar year 2021, as the shift towards the less seasonal m<expletive> capacity markets supports a more stable revenue outlook through the year.

We're also making deliberate steps to build out our line platform, particularly live cloud and are excited by the early reaction from customers.

All of this lends confidence to our positive outlook for the company and that confidence is illustrated by our active return of capital to our shareholders.

And recognition of Earth day. It is fitting to highlight that we published our 15th Global citizenship annual report this week.

We are proud of our longstanding commitment to build sustainable supply chain and products to conserve the world's precious resources.

And the most recent reporting period, we increased water recycling by nearly 9% and recycle the equivalent of 1100 Olympic sized swimming pools.

We reduced our production energy consumption by about 19% on a per <unk> basis, and we are executing plans to reduce our carbon footprint by 20% by 2025 and 60% by 2040 in accordance with science based targets.

Consistent with our core value of integrity, we will continue striving to balance our business decisions around people, our planet and profitability.

Prior to closing I would like to thank our employees for their extraordinary efforts as well as our customers suppliers and shareholders for their ongoing trust and support and Seagate.

With that Gianluca and I are now happy to take your questions.

Thank you and at this time, if you'd like to ask a question simply press star one on your telephone keypad.

Our first question will come from <unk> of Bank of America. Please go ahead.

Yes, Thank you and congrats on the strong results.

Could you maybe help us think about.

Gross margins and tons of utilization rates across components, and where you see the most room to improve I. Appreciate the color you share built around where you are with m<expletive> capacity and when you are.

Getting to the low end of that long term.

Range.

Maybe some color around the main factors that can cause you to achieve that that level, a little faster or maybe.

And what will cause us to get pushed out would be helpful.

And that will flow Loveseat I'll, let gianluca go through a couple of details, but I'll just break it down and real quickly is and we're going through the transition to the <unk>.

And that same kind of platform, we have the 16 to 18 terabytes and even beyond.

And we obviously control out of the internal compounds and we've said that we like the transition with Toro and our ability to control cost a little bit better as well so that does help the margin probably the most.

Important part of that relative to our manufacturing transactions and third transitions and you said, obviously gross margins are still very impacted by framework just ex worldwide and even if customers want product immediately we have to it's pretty expensive to go get it to and so that's that.

The other.

Headwind that we have right now and we do see that some of that abating over the next six months.

But I would say first of all we are fairly satisfied with day improvement in fiscal 2008 and growth by 60 basis points and <unk>.

And the dumping that one quarter, we are expecting further improvement and when.

And this past day analyst day, we had a and the ads that again are.

Are there non Filipino docket, and he's I think and depth few quarters from now.

And we communicated and today that our m<expletive> capacity segment is operating in that range and EPS also of course net in Boston and philosophy.

As you know, we we have 65% of IV side their teeth and bad segment.

And we need to look at the mix.

One example, and non additive part of the business as Bill and then the market rally and the last quarter and you know best buy for the business and the low at 19 percentage buckets and vertical containment worthwhile order as any cash flow. So a very important part of our business.

As Dave <unk>.

Dave head.

One big element is COVID-19.

And the second and being added and is that the container and transition to a managed capacity, we expect a fairly strong quarter in June and and the airline path and.

Good day at Koala, and koala quality and sort of Elan.

Net that gives more seasonal and other fast all day and.

M<expletive> capacity and stagnant so was was.

It was down and miles and yes vessel.

Hello, ladies and gentlemen.

And then navigate contains alignment and between supply and demand and as you know we are using our capex.

And in order to loan growth growth in paint capacity and by and paid and a way that he is now quarter after cost and aligning their.

And demand that is coming fairly strong.

And we guided growth led leasing guidance gross margin module can extrapolate the gross margin, Florida East coast to Florida.

And it has a life improvement sequentially and I would say potentially and we can do better than what we imply and the guidance and now we need for growth for the quarter by format and optimistic on oncology and with it at that.

No that's great I appreciate the color and if I could.

Really interesting to see that the legacy XL by tough stabilized and you called out the higher mission critical and desktop PC demand.

Holding that up.

When you think about the sustainability of that frankly.

As if if you're right on OEM and on Prem demand increasing through the course of the year and also desktop PC potentially going to a replacement cycle, let folks more and back into the offices.

And and even a stronger PC cycle and the second half of this year would you say the doors actually and opportunity for our legacy <unk> two to grow meaningfully and the second half of the year. Thank you.

And I would say there is.

It's possible, but as you said strong demand and a lot of these segments will obviously low over the long haul we expect.

Continued erosion, but.

Most of the big erosion has already happened to your point and so a lot of the systems that are out there and certainly mission critical replacement rates and PC that still exist I think they are much more stable and to the extent that.

Some of the.

The recovery that happens after the pandemic in certain places and the world.

They actually drive needs for that kind of equipment, there may be a temporary home.

Brian on that stuff and it's possible.

Thank you so much.

Our next question will come from Katy Huberty of Morgan Stanley. Please go ahead.

And then a couple of questions.

And Dave you mentioned when you were talking about.

Cash capacity business and 18 terabyte that you expect sequential growth through at least this calendar year was that just for 18 terabyte or that was for m<expletive> capacity near line and more broadly speaking right and all of the above.

Okay all of that and then what was the.

Drivers of material upside in the non HDD business this quarter and how should we think about the growth rate of that segment and for calendar 'twenty one.

Yes, I think that there is some that is m<expletive> capacity again the systems business. For example, which is largely boxes full of m<expletive> capacity drives but to the extent that there is incremental revenue from the boxes from the.

Ch<expletive>is themselves and.

Controllers, and we use and things like that there's revenue and that and there is high demand for that as well.

As I came to burst capacity and then the consumer and the consumer SSD business doing quite well and strong demand and I think our brand is moving a lot of product there as well. So so I think those are the big drivers there and it's a little bit of a seasonal to your point.

And when we discussed the last time of it.

<unk> is.

And then and bolt on cash flow manner and.

And then also now we are executing on that theme between lag between last also within the June quarter still respectable EBITDA close linkage encore.

Okay, and then just lastly, I think I asked you last quarter about supply demand dynamics and <unk>.

And Joe fried and improved pricing environment. There has been some more evidence that in some channels prices are increasing.

Scalar has are talking about having to pay a little bit more for drive how would you characterize the pricing environment and adult that you saw in the March quarter, but also what you expect over the next couple of quarters.

I think as you know we've.

We have long.

And of cycle times, and so therefore, we have long long planning cycles with most of the.

The biggest scale customers and so I think the things on that front are fairly predictable everyone's going through certain kind of those component shortages I think that may actually it doesn't really affect our supply, but it may actually affect the and demand.

Based on what everybody can get and kit together and.

Things like that so I think it's a relatively benign environment from that perspective, there are <unk>.

Interesting trends that are going on out and the world about what people are doing with vast capacity storage I think theres a lot of innovation vectors.

And that are taking off and especially as recovery happens and these are things that we're watching and I think as you look through the distribution channel, you'll see fairly strong demand for for that as well again, its m<expletive> capacity and demand but.

Some of the.

File sharing platforms that exist out there.

And by PFS is one that we're watching really carefully.

And the interesting dynamic of a lot of.

Kind of vibrancy, the kind of just love to see a lot of creative professionals, just coming up with.

New types of applications and these are driving demand as well so.

I think that's probably something you see if you look at those channels in particular.

Okay, great. Thank you.

Next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yes, thanks for taking the question.

I believe and I want to make sure I Didnt hear incorrectly.

And Dave at the end of your prepared remarks, you had commented that.

You expect to see at least 10% year over year growth in calendar 2021 can you just help us understand or appreciate how that has changed.

First of all is that correct and secondly, how has your outlook kind of changed what's been the drivers of that change over the course of the last three months or so.

Yes, Thanks Erin.

And obviously looking back at 2020.

And there was the there was supply and demand disruption. So first when the supply was disrupted and people were shutting down factories. There was a lot of pull in of demand and then the demand realities and about July timeframe came to reach right. So that so we look to read out in 2020, and I think 2021, there and still some kind of us.

Apply concerns that people have about components everywhere and so there are people pulling things in.

And from my perspective m<expletive> capacity is relatively insulated from some of that and we are pretty predictable relationships exactly the cadence question. So we look at this this year is not having as.

Provided impact as we did in 2020, and that's where that's where we get the.

10% and it's largely on the strength and m<expletive> capacity.

Some of them are via markets and things like that and will be contributing as well as largely the cloud and enterprise on Prem coming back.

And we said that <expletive>ociated with that and leaves 10% and we also said that we expect.

And revenue to be maybe more stable throughout the quarter. So we don't expect that our seasonality and I think that is that.

And that gave important menu when you more than the headquarter sales.

Yes, that's helpful. And then just as a real quick follow up or second question is under gross margin trajectory. You've now got I think a 65% of your revenue coming from m<expletive> capacity you had talked about that business now running at the low end of that 30% to 33% guidance long term target model.

And how do you think about that longer term do you think actually that m<expletive> capacity gross margin can trend up at the high end or even above the high end of that long term model range that you've outlined and thank you.

Yes, simply put yes, I think we have to get our all of our.

Manufacturing capacity pointed and the right direction, there and as legacy comes down and that helps us and then there's other opportunities as well as by platform commonality and things like that.

And we've kind of said.

The 16th turbine was getting a little long and the two so that's why we want to accelerate and to 18 terabytes, and then 20 terabytes and and.

Each one of those points you get a chance to refresh and and maybe take some cost out as well, but based on what new designs are and the factory. So.

And when we get the leverage of the platform to do so if that helps you.

Yes. Thank you.

And.

And your next question will come from Karl Ackerman of Cowen. Please go ahead.

Yes, good afternoon.

Dave are you.

I guess, Dave you referenced this and then.

And your question.

And in recent days there have been reports of.

Some significant price hikes in the retail aftermarket as hard drones are being used for new applications like crypto mining.

While you have less control over the retail market from a pricing perspective.

I was hoping you could discuss how demand in the channel may be impacting your factory utilization.

And lead times across your customer base.

Yes.

Yes, I would say that.

We always budget enough capacity for the channel and and the channels the customers and the channel are varied and important to us and so we always budget enough capacity to make sure that we're servicing the channel as well, we do see the uptick and demanded that you're referring to like we said and we're watching the different trends that are causing us some really interesting <unk>.

Trends.

And and we love that what I would say is that it's a little early in this.

And I know how.

Prolong it is however, along that will be so.

I think we're even early and this quarter.

So it's really hard to our day know exactly what the distribution channel reaction is going to be.

Also thanks, Dave getting people things immediately as a problem and the world today because back.

Back to your question about the manufacturing capacity.

Capacity that we have.

Even if we even if it came out and the back of our factory getting it around the world to that channel location might be a problem right. So I think we'll have to look at all of these dynamics look at the the lag or lead times, if you will.

How that demand is developing and figure out how we service it.

Understood.

And if I may just law and the topic of crypto currency I could be wrong, but I believe you still maintain your stake and referral.

And I have over the last few years and.

And Thats appreciated five ex since you last reported so I guess do you still maintain the stake there and then secondarily are there ways to monetize that day to day. Thank you.

Yes, we won't talk about the latter part, but we yes, we do maintain a stake these are.

Well, I guess and vibrant six segments and we've been watching for quite some time, we have share.

And our amount of people.

Or because it's all about data flow and and and.

And the case of the recent trends a lot of it's about data storage and particular so.

These are things that we watch and and.

And.

Determine how we make investments not only in.

External.

Investments and we might make but also internally and what kind of technologies we're developing.

We are maintaining the stake.

Thank you.

Your next question will come from Thomas O'malley of Barclays. Please go ahead.

Hey, guys nice results and thanks for taking my question.

Martin was really related to the VA market on the last earnings call I think Dave you described environment. There was like down mid teens in terms of revenue.

And at least with ex advice that you guys breakout you saw it down like and by 40% range should you see some of that snapback more violently and the June quarter, given how hard it fell off in March and just could you walk through what are the reasons why you saw it down so hard in March and washed and come back and Jean. Thank you. Yes. This is typically Doug I'll, let gianluca answer and certainly as well, but this.

Typically a.

Seasonal market and it's tied to.

The government spending and Buildout.

Now obviously a lot of that has been disrupting various places and the world right now and then I think if you go back.

Four quarters ago, the edge markets, where generally really depressed because I think my comment at the time was nobody's on Prem.

Anyway. So people are just now and making on premise. So I think there has been.

And high degree of cyclicality of this year to the point I think what we're seeing right now is.

Not only a replenishment of the supply chain. So were disturbed would also and early in the year investment cycle and smart city applications and some of that may be.

<unk> healthcare data or maybe because of.

Buildings reopening and haven't they haven't been making investments for a while but it seems to be relatively earlier and maybe a seasonal right now some of them.

And and insight.

Non-GAAP items segment.

<unk> <unk> Ethernet.

So he is not unexpected we knew that.

And to the March quarter, and leveling Plaza and decline and ahead.

Before moving forward with that.

<unk>, Therefore, Liang and we'll continue to do today as a net in the September and December and we may be Saturday day, and with a stronger quarter for them and.

Sorry, one other point to our central thesis is that the data is the extreme edge is not being properly utilized and matter of fact it bill.

A lot of times, just gets deleted and.

And we think there are people who are starting to answer questions about how do I store that for a little bit longer and that process and the data with AI or ml and Mig.

And value based decisions on the data, maybe but not necessarily in the next day, but maybe a day later or a week later and so as that happens we expect some of this seasonality to be more muted over time.

Great. That's helpful. And then my follow up is really around near line. Obviously, you guys don't like to talk about share, but let's just look at <unk>. If you look at kind of what the market. The market was forecasting for March and and you have 50% share of that market a better way to ask it other than share is could you talk about the dialogue that you're having with customers with near line drives what kind of success.

Are you seeing over the next couple of quarters, and what kind of led you to the position where you are right now where youre maintaining this higher percentage of share gains.

And so that however, you want but I just wanted to dive and there yesterday and I don't.

Really think about it as share because to your point, we go out to the customers we have.

Since the lead times on the products are so long we have good dialogues about low you need and six weeks and what do you need and six months and I think thats working quite well our customers appreciate that we still have flexibility for them, but we're kind of co planning in that respect and I think that serves us both very well and both of them. So.

And.

The the bouncing ball on share if you will.

And I don't have a great visibility into how that's going to change I just know what our demand is and Thats why I said I do think there's a little element and the last few quarters of.

At the end of quarters, sometimes seagate gets pulled a little harder than we thought and.

And that may be a competitive dynamic or it may just be that.

The customers were holding a little bit and they're back pocket, but in general it's become a way more stable environment than it used to be and we're not building things speculatively either.

Witness our 18 terabyte ramp we've been we were ready for that drive mid last summer and the customers weren't really ready to have been going up a very predictable ramp for that and keeping our factories for the sixteens, while that was happening and having good dialogues too. So I think thats, a serving as well and so we're not in the.

And the era of building and having a hard to building a bunch and then speculatively trying to moving at the last minute it anymore.

Thanks, Dave.

Next question will come from Ananda Baruah of loop.

Please go ahead.

Hey, Thanks, guys for taking the question appreciate it yes.

And congrats on solid results and good execution.

Two quick ones if I could.

Those are kind of clarification Dave.

Dave just.

And you sort of going back to pricing and you said that things are fairly benign.

And I guess.

Does that mean that they're really just trying to understand if there I think there's an opportunity for pricing to and.

Improved as we go through the year relative <unk>.

Maybe what you thought.

And 90 days ago.

And and just wanted to get your thoughts there and see if my last meeting and translation and then I have a quick follow up.

I think relative to the 90 day early on and yes, Yes, sorry go ahead, Matt, Yes, Hi, Dave.

And your line pricing, specifically, yes, I would say.

<unk> to 90 days ago again.

Been fairly predictable and giving our customers what they needed.

To the extent that that's locked in with our manufacturing capacity.

Not much has changed on that front I do think across the broader world procurement people tend to be more concerned about supply and so some of the discussions that are being even more mature than we had thought 90 days ago.

The way I think about it and and we've made reference to this and the prepared remarks.

About some of the long term agreements that we've been able to establish and the last quarter.

Quarter.

Got it and similar to the LTA is it is it useful for us to think about <unk>.

And an increasingly structural said kind of our 2012, which was an extreme case.

Bye.

It was sort of material here.

Financial impact.

Is it useful day at all to think about it and a structural sense like that or is this more on the margin.

I think that was much more profound back then.

From my perspective supply and demand is a lot more imbalanced and.

And back in those and.

And those days and matter of fact can supply, let's say disrupted last year and demand and disrupted as well.

Bill feeling the river, but it's very different than the 2012 environment I would say that David.

The biggest difference is the lead times on our products and in wafer starts that we're doing right now.

Realistically are hitting from the m<expletive> capacity drives are hitting the back end of our testers, probably around Christmas and if you think about that and that's that's driving.

Really good healthy discussions with what people exactly need and what kind of flexibility and indeed.

That's helpful context I appreciate it.

Thanks, a lot.

Your next question will come from maybe you Hussaini of Seg. Please go ahead.

Yes. Thanks for taking my question two follow ups I believe.

In <unk>.

And you guided to near line Exabyte growth of 35% is that correct.

Right.

Yes, that's right.

That's right that's what we've been saying that 35%, it's been a little bit stronger from that for the last couple of years for us but net so.

And that's what we think the long term growth rate is $35 and 40%.

And.

It seems to me, maybe youre, a little bit more on the conservative side, and I say that because if I just take <unk>.

Sure, it's an <expletive>umption for the June quarter that would imply.

The acceleration into the back half of the.

Yes, and the second half of the calendar year to get to that 35%.

I think we do think that m<expletive> capacity is going to continue to grow I think.

Sure.

And we've talked about this a little bit of cloud service providers around the world have to make tough decisions on exactly how they are making investments and so not all of those investments are necessarily m<expletive> capacity related.

We do expect a.

<unk> continued growth and m<expletive> capacity into the back half of the year and that's it.

And when Gianluca made the comment earlier about a seasonality that's when he was talking about.

Net negative impact on volume, we see the oil and gas.

And enterprise OEM Baidu opening to consider that a day.

The sequential improvement into the data and the beer market and get out of that.

Yes.

And as engraving and volume and in revenue through the calendar year.

Got it and just to be clear.

Youre referencing year over year growth or sequential growth.

Right and.

And then with that 10% and year over year.

Of course.

And Paul maintain and sequential depending if you're looking at to take on that account and then a year competitive force and 40 like that comparing year over year.

Sure got it and just very quickly as a follow up to your 'twenty.

20, terabyte commentary that youre going to have several different.

Ex.

And especially in the context of lower Capex.

Is this going to basically enable you to.

Extend your market share from.

<unk> to 'twenty, especially it seems to me that camera may have been pushed out. So now you have alternative technology is that how we should think about.

Again, I don't really think about it as market share I think more about what customers want and what technology portfolio that we have and how we might services and and I think it is important to say.

And remember that.

And the cloud if you will and the Max capacity is not one size fits all and there are many different types of firmware loadouts applications that require different performance levels that can tolerate different performance low summer colder storage and summer.

Very much near line right. So they are very active and 20%. So there are going to be multiple flavors of the technology. It's all of the service level the same common platform.

And again from my perspective, I think we're locked and pretty tight with customers and that's why we've got confidence and theirs.

And multiple flavors that doesn't mean, one or two.

Thank you Manny and thank you.

And your next question will come from Patrick Ho Stifel. Please go ahead.

Sure.

Nice quarter.

Dave first off it's good to hear some of the commentary about your 18 terabytes growing through the rest of this year can you just give a little qualitative color whether.

You're getting the 18 terabyte demand from existing customers and lower capacity points or are they from potential new customers. The average use.

Over the last few capacity points.

Maybe the way I would characterize it as there are some customers that were using <unk> and translation and but they're also other customers that we're not transitioning from previous 12 or 14 or wherever they were before and Dave I think we have a fairly broad representation I do think the markets are generally moving up from.

I guess, what bucket and if I think back to the six or eight terabyte day as people would be stuck on some of those lower capacity points much longer and general people, who are doing data center build outs around the world are using that capacity.

Leading edge.

Drive and much more aggressively.

So.

From my perspective, and the 18 terabyte is very broad adoption and already.

And we like the platform quite a bit because we're continuing to get cost leverage out of it.

Great and maybe as my follow up question for John and Luca you've given really good color in terms of the gross margin leverage and what's driving that and you gave a little color on the opex levers whats.

Driving that and how it given the income.

And the man.

Some of the moving pieces there.

Yes.

Ex was year on year EBITDA was about $10 million.

Low Ed.

And whether it's a net higher.

And they and Canadian sequentially, and basically due to variable compensation and a little bit higher <unk> spending.

And we said that capital growth and the goal of that.

We expect our normal plans will be at three and of that $40 million per quarter, and so we are very well aligned pool, so that expectation and we think that probably wouldn't be a lot of leather and the net capital forecast.

Great. Thank you.

Your next question and I'll come from Shannon Cross of Cross Research. Please go ahead.

Thank you earlier, you talked about challenges and shipping into the retail channel, but I'm wondering if you could speak to.

How the current supply channel issues are impacting other segments of your business and how you sort of incorporated them into the model and have a fall.

Hello, and thank you.

Yes.

And then search and so not so much on the supply of parts for us. Although I think everybody is watching the same kinds of long term supply issues by the short term.

We hear from customers that they are having problems getting the final kit and so usually what that does to us is that mix and maybe that in order to hit that revenue are secure.

Customer win for them they may be this differently and so.

And we're going to having to be very flexible.

Do you see it basically just pushing out demand bill rate and advertise day, taking any away from a long term perspective, yes, I think that's exactly to your point I mean, I think the demand is there and this is how exactly quickly. It can be served and then obviously.

Some customers and they can serve as somebody else will until there is a lot of those dynamics on the world growth.

Alright, and then my second question and I realize it's new but.

You mentioned you had some positive feedback on line cloud I was wondering which segments are seeing the non interest and maybe if you can give a little more color on what youre hearing from the customers. Thanks.

Sure.

And.

If you think about line cloud is almost like an external storage and external hard drive and the cloud.

Comments, you made about retail.

It's very simple there is no ingress and egress fees. There is there is a scratch pad. That's the way I think about it and you can use a temporarily ease and permanently if you want.

I think there are customers who are very.

All of these aggregating data out at certain locations and one of the temporary spot land and spot before they find out exactly where they're going to put their data and long term and so these are the kinds of customers that are giving us a lot of.

Interesting feedback for us to Bill continued development of the thing and it's we're not certified terabytes and at a time this is people.

It turns out that device or even bigger.

And thank you.

Our next question will come from Sidney Ho of Deutsche Bank. Please go ahead.

And to the first question is.

Dave can you talk about the 10% at least 10% revenue growth for calendar 'twenty one.

And if my math is right and that would imply the average revenue for calendar Q3, and calendar Q4 will be consistent maybe slightly below calendar Q2, our desktop and numbers could go could be keep going up on a sequential basis based on all the recovery you're seeing I know you said at least 10% but are there some things that we should consider here.

Sales are generally you'll and standard.

And of course, we don't we don't guide and the individual quarters, I think and <unk>.

And then related to for you to calculate and lease the emphasis and we can pay and how much more than 10 percentage and at least 10% for the calendar year and then we will move and that it's got that following quarter the net.

And all.

And as we had said.

And to be very strong and the current bill best Please wait for that.

More miles and and get more detail on the individual quarter, but certainly I would say that and what we are trying to say is that I think things are relatively full and we expect.

Muted seasonality if you will as we look forward.

Totally true.

Okay. That's helpful. Maybe my follow up question is relate to the 20 terabyte drives I know you started shipping the handling drives back in November and you seem to think that the PMI expandable to and Lisa 20, terabytes, and you talked about having multiple products at that capacity from a sales leader.

And second half I would think qualified multiple products at the same capacity point would increase the cost of your customers does it not make sense to say at a certain capacity point you only offer one type of technology or are there. Other things, we should think about that that may mitigate that yes.

Yes, it's interesting there are different types of customers, who want different performance levels I think I made reference to that earlier, but.

The extent that we already know the heads and media and say this platform family really well and we don't Thats turned out to me and Thats, one option and other options and various flavors and less or more like we talked about so there's lots of different ways to provide those customer solutions.

Is it more complex for us yet, but we have this kind of a platform and so the common platform can go multiple different directions, and we feel very confident and that and we're not really worried about qualifications or anything like that.

Okay. Thank you.

Thanks.

And we have time for one final question from Stephen Fox and Fox Advisors. Please go ahead.

Hi, good afternoon, Thanks for squeezing me and to kind of clarification first of all on the on the video side in terms of the recovery and that.

Sure if I understood that it's mainly surveillance still or were you, Dave we try and implies that Youre also seeing some of these other edge use cases really take off or if not now can you maybe talk about when and then secondly, as you buy ahead on components.

I understand building safety stock, but given how the supply chain is changing do you see that sort of delta increasing decreasing staying the same versus your actual needs.

Yes, I think the latter question first we do we have long lead times for our components internally and you asked around the factories every day 91 days a quarter or so.

And so to the extent that we know exactly what we want for this common platform and for all the other.

Price. So we're building I think we do make sure that we have enough stock.

And for.

Whatever contingencies, we have.

And from my perspective on the.

Smart city applications and we're seeing they are very this is not just this is not just <unk>.

Surveillance market anymore, so to speak.

There are many different tightens and edge use cases that are starting to develop.

And even that leave and some of the building security.

Type of applications or are they have a lot more features that are being demanded of them now.

Not just the same kind of security. We're all used to there is other other claims and features being.

<unk> put in and so therefore, if your volume the solution for a facility or the upgrading the facility you want all those features.

I think thats actually driving demand for higher capacity storage as well so.

And sorry Stephen.

And we said earlier was last year was so disruptive from a supply and perspective on those fronts and what people are investing and the edge and that's why we're seeing this kind of pull ins.

The market this year relatively.

Got it that's very helpful. Thank you.

And that's all the time, we have I will now turn the call back over to the presenters for closing remarks.

Thanks, Gabriel and thank.

Thanks to all of you for joining us today.

<unk> continues to execute well and we remain excited about the tremendous opportunities and we foresee a handful and the near term and longer term driven by a m<expletive>ive growth and data I'd like to once again, thank our customers suppliers business partners and importantly, our employees for their ongoing support and Seagate.

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

And then.

Yes.

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