Q1 2022 Seagate Technology Holdings PLC Earnings Call
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Before we begin I'd like to remind you that today's call contains forward looking statements, including our December quarter financial outlook and expectations about our financial performance market demand industry growth trends planned product introductions ability to ramp production future growth opportunities.
Effects of the economic conditions worldwide, resulting from the COVID-19, pandemic and general market conditions.
These statements are based on management's current views and assumptions and information available to us as of today and should not be relied upon as of any subsequent date.
Results may.
Possible interior lease 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 in the supplemental information.
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As always following our prepared remarks, we will open the call for questions.
Let me turn the call over to Dave for opening remarks.
Thank you, Jamie and Hello to everyone joining us on today's call.
C. J that's been outstanding start for fiscal 2022.
Very important by our September quarter results.
Revenue of $3 $1 billion was spot on with our expectations and reflects robust growth of 35% year over year and 3% above a very strong June quarter, non-GAAP gross margin expanded to 31% well inside of our multiyear target range and non.
Operating margin increased to 21% the company's highest level in nearly a decade.
Overall, our results reflect record demand for our industry, leading best capacity products and solid execution on cost reduction plans and our ongoing focus on balancing supply with demand.
We are confident.
And our ability to deliver excellent results for the fiscal year and based on our current view, we are raising our fiscal 2022 revenue growth outlook from the high single digit percentage range to the low double digit range.
Further reflecting on our long term confidence in the business I am delighted to announce.
GAAP Board has once again approved an increase to the quarterly dividend by four 5%.
I've been very proud of our team's ability to post consistent financial results through an industry environment that remains very dynamic.
We are seeing a confluence of factors, creating inflationary pressures and acute supply.
But our absorption.
These include semiconductor component shortages and freight and logistics challenges that are created cost pressures and impacting critical and product assemblies for certain customers.
Notwithstanding these obstacles underlying demand remained solid for <unk> products.
Particularly in the mass capacity markets.
Which is why we maintain.
I change a high level of confidence in our fiscal year growth outlook.
Revenue from the mass capacity markets exceeded $2 billion for the first time.
Reflecting broad based growth across each of the end markets.
The cloud is the strongest contributor to domestic capacity markets and <unk> revenue growth.
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And our efforts to build and equip new data centers are.
Have translated into stable healthy demand for multiple quarters now and we expect this trend to continue.
Over the past five years, the number of Hyperscale data centers has more than doubled to nearly 600 worldwide.
With approximately 200 more on the way.
Many.
The <unk> data centers are being built by large cloud customers, but the timing of their investments and infrastructure buildup is not synchronized.
Which supports a more stable long term growth outlook for Hyperscale investment.
He gave high capacity drives are central to the world's largest data centers we.
We have very close relationships with our cloud.
Of these tumors to ensure our manufacturing and technology Roadmaps.
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And performance requirements at a favorable total cost of ownership.
Yes.
In the enterprise and OEM markets, we achieved a fourth consecutive quarter of sales growth supported by increasing it hardware spending.
Over.
Cloud cutter term the broader supply constraints that I've highlighted may delay some of our customers' new product builds due to non HBV shortages.
However, based on customer conversations we believe any pause will be temporary until shortages are alleviated.
Demand for video and image applications increased significantly.
Over the near quarter supported in part by a broadening of use cases that extend beyond traditional security and surveillance applications.
The combination of high definition cameras and data analytics, enabling productivity gains cost savings and revenue generation opportunities are actually driving adoption by a wide range of industries, including.
During the tale manufacturing and healthcare.
High capacity Hdds play a crucial role in helping businesses economically manage and extract value from an ever increasing growth and data across a more distributed enterprise.
Without question the HDD industry is being driven by long term secular.
<unk> <unk> for mass capacity storage.
The market that we expect to more than double by calendar 2026 to 26 billion.
And Seagate is well equipped to answer the call.
We continue to leverage our strong arsenal of innovative technologies manufacturing agility and industry expertise to deliver attractive total cost of ownership.
Similar demolitions aligned with our customers' roadmaps.
Our common platform approach illustrates these points well.
We have been able to seamlessly transition from 16 to 18 terabyte drives and are now offering multiple varieties of 20 terabyte drives to meet the breath of customer demand.
We began ramping 20 terabyte products in the September quarter.
And I am thrilled with the strong customer interest.
I am equally excited by customer reception for our Mach two dual actuator drives which are now shipping at large scale.
As we were anticipating a few months ago, we are seeing greater adoption of our Mach two drugs for core and edge applications that benefit from the reason right performance gains that.
Quarter for what these products, we expect dual actuator drives to become more mainstream is capacity increase beyond 30 terabytes.
To support both cost and performance requirements I'm also confident in achieving 30 terabyte capacity and beyond.
We continue to execute our research and development Roadmaps and have recently achieved great Amber test results.
We delivered to areal density growth that supports future product launches based.
Based on these demonstrations our product development plans are on track.
But our product introduction strategy does not change.
We will leverage cameras subsidy gains to offer customer step function capacity increases to deliver a strong tcs proposition and enhance value.
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Our focus on total customer experience is top of mind for the lifestyle business.
Our simple secure and cost efficient mass data storage as a service platform is resonating well above customers.
Particularly for backup solutions.
Today lifestyle certified with the majority.
Are the vendors identified by Gartner Magic quadrant leader for enterprise backup and recovery software.
This quarter, we announced a multiyear deal with leading video communications provider.
I'm excited by this partnership and recognize the trust all of our live customers are placing at Seagate, we will continue to be deliberate and scaling infrastructure.
And developing an ecosystem to ensure that we delight our customers.
Wrapping up CJ continues to deliver consistent financial results underpinned by strong operational discipline focus on profitability and growing demand for mass capacity storage.
We believe these trends reflect the healthy structural changes that have taken place.
In recent years.
Seagate is poised to benefit with our technology leadership position and strong track record of execution.
I'll now hand, the call to Gianluca to cover the financial results.
Thank you David.
Our September quarter that I'd like to start.
Growth across nearly all financial and Anthony.
And then we'll take it.
Thank you. Thank you Richard and ongoing focus on driving profitability and free cash flow generation.
Revenue was $3 one $2 billion.
3% sequentially.
Non-GAAP operating margin expanded to 21% of revenue up to 100 basis points quarter over quarter.
And non-GAAP EPS was $2 35.
Up 18% sequentially and the high end of our guidance range.
We grew total and these drive revenue to $2 9 billion up.
A 5% sequentially and 24% year over year.
HDD capacity.
Increased 4% sequentially to 159 exabyte.
39%.
The priority of the EBIT.
Growth was driven by increasing demand for our mass capacity products, which contributed 71% of total HDD revenue and 83%.
HDD exabyte shipments.
Revenue from a demand capacity markets increased two 2 billion.
Supported by growth across each of the underlying end markets.
Including the airline via and Nash product.
Mass capacity revenue was up 8% sequentially.
Juan.
1% compared with the prior year period.
Once capacity shipments into this market.
Went up 7% sequentially and 53% year over year.
Based on our current outlook, we expect mass capacity exabyte shipments remained strong in the December quarter was <unk> 21.
And growth slightly above our long term CAGR forecast of about 35%.
In the September quarter, near Atlanta, ammonia demand was driven by improving enterprise spending and healthy growth from cloud data center customers.
The online human totaled 106 exabyte.
And 1% sequentially and 65% year on year.
And demand for our high capacity branded.
The loan growth quarter developed with organized and ongoing market momentum what our common platform product spending 16 through 20 terabyte drive.
Robust demand in the beer market.
Our next sequential revenue growth, which was above the average for the mass capacity markets.
And then we expect solid demand to continue in the December quarter.
And I guess the market made up the remaining 29% of HDD revenue.
All of these relatively stable at 830.
Down, 3% sequentially and up 5% year over year.
Improving enterprise demand boosted sales for mission critical drives.
Which partially offset the decline in consumer life.
Growing a strong June quarter.
We have Scott, we're starting to see a moderation.
I don't mean to phase of annual revenue decline.
Following the significant market disruption brought on by the pandemic.
While we could see some fluctuations in a given quarter, we've been even the most pronounced impact behind us.
Finally, turning to our non HDD business.
Revenue.
It means F $151 million.
Down 9% sequentially of record June quarter Atlanta.
Our system business.
Partially impacted by some of the supply constraints that David discussed.
We are working closely with our suppliers to mitigate.
And we continue to gain new customers.
The new games to support longer term growth in the business.
Overall strong demand trends combined with positive industry dynamics led to non-GAAP gross profit of $966 million in the September quarter.
Up 8% sequentially and 57% year over year.
Got it.
<unk> freight and logistics are continuing to incrementally.
While we will continue to take steps to reduce the impact of these costs. We believe that we remain a headwind to the business. It was a fiscal year.
Our resulting in non-GAAP gross margin expanded by about 140 basis points to 30.
Relating to ascent wedding side, our long term legacy range of 30% to 33%, including higher freight and logistic costs and component prices.
HDD, Montana, and now even via output out of the range.
And better alignment of supply and demand and the transition to.
The one positive right.
We anticipate continued gross margin performance with opportunity to increment higher as we ramp our cost optimized products.
Additionally, as COVID-19 cost headwinds abate.
We would expect margin to expand in.
The asset.
Our target for the <unk> or.
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Non-GAAP operating expenses decreased to $339 million.
Letting sets and a onetime savings.
Disciplined expense management, combined with higher revenue and margin expansion.
And non-GAAP operating income of 627 million.
Overtime.
15% sequentially and more than doubled the year ago period.
Non-GAAP operating margin expanded to 21%, which is a top hand of our long term.
The range of 15% to 20% of revenue.
Constantly the September performed.
<unk> demonstrated our ability to grow profit faster than our revenue supporting our strategy I was on San Jose and creation.
Based on the diluted share count of approximately 131 million share.
Non-GAAP EPS for the September quarter was $2 and 35.
The highest level equal.
Four months of data.
We have an inventory relatively flat the days inventory outstanding.
Dave.
We are working with suppliers and managing strategic inventory levels for meeting entity for the business, while we continue to monitor with dynamic situation.
Capital expenditures were 100.
In closing $10 million for the quarter we.
We currently expect fiscal year capex to be at the low end of our long term target range of 4% to 6% of branded which is sufficient to support our future product roadmap, while maintaining expense discipline.
Free cash flow generation increased to 379 million.
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7% quarter over quarter and more than doubled year over year.
We delivered a strong performance in the September quarter, and expect to improve free cash flow generation through the fiscal year, enabling us to fund our growth opportunity and a total capital while our shareholders.
We used one.
$53 million.
And in the quarterly dividend and 425 million.
We repurchased $4 9 million ordinary shares exiting.
Existing in the quarter with 225 million shares outstanding and approximately $3 8 billion remaining in our authorization.
As Dave mentioned earlier.
100, <unk> board approved a 3% increase to our quarterly dividend raising the quarterly payout to <unk> 17 per share.
We ended the September quarter, with cash and cash equivalents of nearly a billion dollars.
And total liquidity was approximately $2 $7 billion, including our revolving credit facility.
Adjusted EBITDA was $724 million for the quarter and $2 4 billion.
On a 12 months period ending in September.
Total debt balance at the end of the quarter was $5 1 billion.
Is there a leverage ratio of two two times.
In early October we took advantage.
Got it.
Market environment to raise $725 million in capital.
A new 600 million.
Everyone and Upsized, our existing terminal during fiscal 2020.
These actions are consistent with our growing business and provides the opportunity to repay.
It was like $130 million in debt coming due in March.
We reduced our average interest rate by 25 basis points and expense interest expenses for the December quarter to be approximately $66 million.
Looking ahead to our outlook for the December quarter.
Ctrip is a continuation of the strong demand environment that we experienced in the September quarter.
We expect revenue to be in a range of $3 1 billion.
Minus $150 million.
We expect non-GAAP operating margin to remain around the top end of our long term range.
We have a 15% to 20% of revenue.
And we expect non-GAAP EPS to be in the range of $2 35.
As a minus 16.
In summary, we had an outstanding September quarter, placing us on solid footing to deliver strong top and bottom line growth.
In calendar year, 2021, as well as fiscal 2022.
Now turn the call back to Dave for final comments.
Thanks, Sean look at fiscal 2022 is off to a tremendous start and I feel positive about the current healthy demand environment, which is reflected in our increased revenue growth outlook for the fiscal year.
James I'm equally bullish on <unk> longer term growth opportunities supported by secular demand for mass capacity storage.
Our mass capacity innovation roadmap with Seagate in excellent position to thrive in this environment and continue to deliver revenue growth beyond fiscal 2022 in line with our long term target of 3% to 6%.
We're in the right place with the right technology and innovative customers with whom we're partnering closely to enable their roadmaps.
Further our robust capital returns program, including today's dividend increase round out what we believe is a compelling investment story.
With the UN climate change conference scheduled to begin in less than two weeks.
I wanted to highlight <unk> commitment to ESG.
Starting in fiscal 2022, we've incorporated sustainability into our executives' long term compensation plan based on the achievement of specific quantitative environmental and social targets.
Our environmental goal just linked with established.
Stablish plans to reduce the company's carbon footprint in support of achieving our science based targets from.
From harnessing renewables in our California, and Northern Ireland campuses.
To installing solar capacity in our facilities in Thailand, CJ continues to put our commitment to the planet into action.
We are also.
Corporate and executive compensation goal to increase gender diversity in our leadership as we strive to cultivate a more diverse equitable and inclusive workplace.
Our third consecutive year <unk> is among the best companies for women. According to social media platform very good boss.
As well as one of the best.
Places to work for LGBTQ, plus equality by the human rights campaign.
In closing I'd like to thank the <unk> team for their tireless efforts.
Our customers and suppliers for their continued support and.
And our shareholders for placing their trust in <unk>.
So Luke and I are now happy to take your questions.
Also.
Thank you. Thank you I'd like to ask a question. Please press star followed by the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
Your first question will come from Karl Ackerman from Cowen <unk> Company. Please go ahead. Your line is open.
Yes. Thank you.
I have two questions. Please one for Dave and one for Gianluca.
Alright.
Greg it's great to see that over two third of your business is now transitioned away from consumer toward enterprise.
As you know, which tends to be higher margin jetson influenced by data Center Capex.
There have been some recent concern.
Bond investors at cloud spending will moderate after being robust the last six quarters. So I was hoping.
You could discuss how you see the demand trajectory playing out for near line.
Both in the December quarter, and also into the second half of your fiscal 2020. Thank you.
Yes, thanks for the question Carl.
I think.
In other words, you can follow up with Gianluca as well.
Sure the way I look.
Yes.
Oh, sorry go ahead.
So I was going to say that from my second one.
The improvement in your profitability has been.
And our own checks and I couldn't have been successful in passing along these rising input costs.
Some investors have been hearing that margins might moderate as enterprises also moderate but.
Was hoping you might discuss why that might not be the case with some high capacity offerings and what initiatives do you have at your disposal.
Paul.
We're also doing it regardless of demand.
Okay. Good.
Yeah. Thanks, so the jumbo could catch that.
Relative to cloud.
The demand has been steady now since the beginning of calendar 'twenty. So.
As we've talked about in the prepared remarks.
There.
Is the broadening of the customers.
<unk> not just a few hyperscale or is that's actually benefiting us tremendously as well as the transition the product transitions that we've talked about the higher and higher capacity points, which.
Better Tcl proposition for the end customer as well I think these macro trends whether.
Digitization.
Multi cloud the move to the cloud we're all.
Accelerated tremendously during the pandemic worked from home and all the other things.
Cause people to push into the cloud not all of these cloud customers Earle.
Whether it's up but we think the demand picture right now is an aggregate of all of that behavior and we at the same time, we've had longer product cycles. So we have great visibility we have strategic.
Long term agreements, we're showing people what we can do 234 quarters out and then we're asking.
Exactly they need and I think the economics play is happening now.
Well that way and I think that's why we're seeing the kind of stabilization that we are and why we can.
Our reinforced the fact that the back half of this fiscal year and even into the next fiscal year, we'll continue exabyte growth and being able to turn that into revenue.
You cut out on their own.
Profitability question I would say, we are executing well on that on our plan. We discussed a few quarters ago, how we could improve our profitability quarter after quarter.
Even in the last quarter, we improved our gross margin by 140 basis points and we are at the top of it.
2019.
And the model we had we are happy with that with the performance but of course, we are always looking at the opportunity for improvement.
As we were saying in the prepared remarks.
Some cost increase.
In closing and.
And we are looking into and how to moderate.
That impact and continuing to improve our gross margin and operating margin in the next few quarters will be a positive that we continue that trajectory.
And demand is strong so basically this is anthony when we have a good alignment between supply and demand that usually we come out we think with their profitability. So we are happy with.
So with that situation.
Thanks, Paul.
Your next question comes from <unk> Mohan from Bank of America. Please go ahead. Your line is open.
Yes. Thank you congrats on the strong results and outlook.
Two as well Youll returning cash.
Cash well above 100% of the free cash flow and you just raised your dividend as well I know you spoke about very strong capital return program at your at your Analyst Day earlier, just wondering as you're thinking about the outlook.
Here.
Thing that has changed in the market from a pricing.
<unk> or demand standpoint that is sort of bolstering our confidence and secondly last night Intel spoke about China cloud slowdown given regulatory pressures over there are you seeing any of that and is that contemplated in your raised fiscal year guide. Thank you.
Okay.
Thanks, a lot.
I think its part.
Parcel with Carl's question Theres both of the.
Your questions kind of tie back to that.
In visibility.
Yes, we do have a longstanding track record of returning cash to shareholders.
And we remain committed to the dividend.
For the first time or for the third time in a.
Our ROE through third year in a row that is really confidence in our long term free cash flow generation and that gets into our like Gianluca was just saying our thoughts.
Balancing supply and demand against the growth of data that's out there in the world. So we will continue to be opportunistic on share buybacks and then you can look at the track record over the last 10 years has lost 10.
Corners of the company.
You can see who they are relative to.
Returns.
We continue to budget. So we'll look at investing in ourselves with focus on.
Optimizing the use of our capital to generate the best value. We can over the long term and we've been pretty good stewards of cash even in the tough times.
That happened in the pandemic. So you know I'm pretty confident in that relative to China.
And the club slowdown.
I would say there's a couple of things we have good customer relationships and that therefore, we get out in front of the sixteens and eighteens in 10, 20, terabytes that theyre going to need.
And that's the.
Same kind of question Karl asked I think also that the way I see it is not all infrastructure investments that people are making sync up necessarily when it comes to memory and compute in networking and storage and so you may you may make one type of investment for a while and then and then pivot to another type of investment against.
Overall strong investment thesis that's going on in the cloud. So I think that that may be it may explain why certain people see different things.
Over the next two or three quarters.
We don't really.
We don't see any inventory buildup substantial we see that people when they need the disk drives to.
Actually populate the data centers and get those that mass capacity storage online we see that.
<unk> trend.
Quite far out and then the customers being very predictable on it so that kind of explains our confident we don't really see the the slowdown in exabyte growth at all.
Thanks, Dave.
Yes.
Yes, Thanks Ravi.
Yes.
Onesie.
Okay.
Your next question I'm sorry.
Your next question comes from Timothy Arcuri from UBS. Please go ahead. Your line is open.
Okay.
Hi, Thanks, a lot.
I had a question about capex.
Capex discipline and supply and supply demand balance you know.
Theres been a lot of structural changes in the industry that seem like they could be pretty significant longer term margin tailwind.
Some ways, maybe similar to what's happened in DRAM.
And I guess my question is as.
As we sort of enter a new cycle of Capex.
How do you ensure capex discipline and how do you think about that in the context of overall supply demand balance I mean.
Old axiom is that it only takes one supplier to sort of tip. The applecart. So I'm wondering if you could talk about capex discipline.
Yes, Thanks, Tim I mean it is.
Good to reflect back on where we've come from so I look at the peak of client server. The drive times. So we're making typically had one disk and two heads in them and there were a lot of those drives of our factories. We're very focused on flexibility back end capacity for notebook drives for example, now that we have mass capacity drives that have.
A lot of discipline a lot of heads in them.
It's much more like a <unk>.
Conductor process.
Significant differences in the processes themselves, but the lead times for wafer quite long.
Quite specialized for us and Thats, where a lot of our capex is actually being deployed now that pit.
If it has happened.
Over the last 10 years, where we're now fully enjoying as we as you can see from our numbers.
In heads and media.
Investment land not in drive not having over capacity for drive anymore. So.
Kind of interesting is how we made that pivot.
We talked about strong.
Export demand for mass capacity storage going all the way through 'twenty six it'll it'll keep going after that of course, but we point, we'd take the Tam of $26 billion five years from now.
We we are trying to balance supply and demand against that.
And I think you know exactly to your question. The governors are the lead times for wafer and ultimately.
The lead times for the capital equipment to actually increase and so as long as we continue to make this the smart investments, we should be able to keep supply and demand imbalance.
And you could read that as a as a form of our Capex discipline. Obviously, if we see for example on the hammer transition we want to accelerate at all we can invest a little bit more.
We have.
A lot of cash to be able to do that but we'll continue to really watch that supply and demand balance well and.
And deploy like that and we're working a lot with the customers on their specific needs. That's why I talked about the lta's when Carl asked his question you know so we know what roughly the buildups.
Then you have happened over time, so we can we.
We can do that very judiciously.
Yes.
On the Capex no we have a we have a guidance range of 4% to 6% of revenue.
We haven't lost a satellite for Louisiana, we wouldn't be probably in the low part of that range.
Family.
It's a supply and demand alignment at this point and the utilization of our factories and of course, we want to keep it.
Good alignment for our fallen for the future.
Thanks, a lot I guess as my follow up can you talk about channel inventory, where we're just channel stand at this point it did.
Sure.
And your mass capacity segment did that benefit at all from channel refill in the third quarter calendar calendar third quarter. Thanks.
And I think simply put the answer is no. So that we have multiple channels of course.
In this case, we're talking about distribution channel largely for legacy products. There is some small channel.
Didn't mass capacity, but I think a lot of people were focused on legacy products.
We love those legacy products, we love the customers there, we're not really investing there.
So we make sure that.
But we keep those channel inventories properly balanced.
The.
<unk>.
The swings that we might have seen say two quarters ago due to crypto currency or something like that that re equilibrated very very quickly and it doesn't impact the mass capacity channels at all so.
From my perspective, all the inventory levels that we have are quite good.
<unk>.
Inside of Seagate, our inventory actually went down quite a bit and that's a function of.
That's kind of how tough it is to manage supply and demand right now because the end customers are having trouble getting the right parts and what we want to make sure. We do is don't push too much into.
Some of.
From Prairie problems that they might have is there they're trying to build the final kit right.
It doesn't help us I think to your point of long term economics and industry structure and things like that so we have to make sure that we balance our supply and demand, even tactically really well and I think we're doing a good job of it.
Thanks, a lot.
Are those.
Your next question comes from Patrick Ho from Stifel. Please go ahead. Your line is open.
Alright, Thank you very much.
And the nice quarter and outlook gave me first a big picture question. It was really encouraging to hear about.
The efforts on the multi actuated dry Mach two.
Just wanted to get a little more color.
On the handler side of things.
You mentioned the progress there that continues to be on track, but can you talk about I guess customer.
Discussions and when you believe the inflection point will be when customers transition over the hamrick drives.
Yes.
Thanks for the question Patrick I think.
I'm glad you took away the optimism.
Team's desk.
Definitely feeling it with the results that we have these are not just.
Science projects anymore. This is product development full blown product development now and we.
We've talked a lot about hammer in the past.
I think we've built a lot of parts, we've given drives the customers. They can they can see how those drive will behave in their infrastructures.
We're locked in with customers talking to them specifically about even the recent results that we have but.
Just to be Super clear.
Hammer is really the pathway to get to 30 terabytes and beyond and we.
We're very confident about that right now and we've expressed that in the prepared remarks.
There's a lot of things we have to get together.
So that you've got the manufacturing capability, there's other parts of the recording chain that we have to make work. The you know the.
<unk> process.
About writing get the media.
Hammer enabled.
<unk> actually.
Starts from a new material set in the disc.
The ability to write dense bids comes from the media.
Technologies as you actually use and so we have to get all that right as well, but we're super encouraged.
By the the results.
I think the best way to say this I think the industry, probably hasn't done a great job of making things really clear, but I think the best way to say it is that.
We.
Our feeling confident in capacity points, not only at 2020, two and 'twenty, three 'twenty, four and things like that but significantly.
It can be higher than that based on what we're seeing right now and we are working really hard to make sure we get that done our customers know what they have seen samples of that in the end.
We're going to continue to raise rates to get there I don't want to really announce any new products, just yet, but we will let you know when they come.
Great that's helpful and maybe as my.
Jim Luka, obviously your results are highlighted strong execution and given the supply constraints that are in the industry today.
Again the results were really strong I was just wondering in terms of your Malaysia operations and just some of the labor constraints are you seeing that.
The fall, leading right now and how did you manage to do that.
Did you manage through the September quarter, given that there were some.
News on that front.
In the country itself with Covid.
Perfect.
Deliver the strong results delivered in September and the outlook for December.
Yeah.
Yeah and I.
Okay.
Thank you for that.
Before they come with automation I think that.
They bought that actually came out a little bit.
Our better than how we got into the beginning Mustang Tomo revenues very went on I and then the.
And the profitability of that either be better I would say in term of the legacy.
5000 business.
Right now we are seeing.
A better trend compared to maybe a year ago two years ago of course, not all of the segments out of the same inside legacy in the last quarter or so.
Rationally consumer whether it's a bit are down compared to June module and wasn't.
An extraordinary quarter for the consumer business now, we see consumers coming back fairly strong in December.
But at the same time, we see computer little bit week. So is now it's always difficult to look into it towards the details but.
But again, we see a better trend and also when you look at the.
So not only is the revenue we're thinking that in the future you will see maybe some more adoption and then and then a good stabilization of the business and Dave you want to add something yeah. Patrick just your comment about supply chains are being disrupted people supply chains are all about people after all and stuff.
Making people safe safe to come to work for.
At home.
The neighborhood around.
We've been working very hard on that with our employees and our suppliers and customers.
Everyone has the right.
Perspective on this up through the supply chain.
And.
There have been challenges indeed, like you said, but I think we're managing through them pretty well I mean people want their factories to run as well.
They have an.
Economic incentives to do that so we all have to see.
Touch with each other or treat each other right.
Make sure we're managing for the long haul certainly the scale at which we need out of our supply chain.
Thank you.
Okay.
Thanks, Patrick.
Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead. Your line is open.
Thank you Dave just given it's such an important driver of gross margins can you talk about what percentage.
<unk> of mass capacity is now coming from the common platform drives and where you think that revenue mix might exit the year and how the margins differ for the common platform drives versus the rest of the massive capacity portfolio, then I have a follow up.
Yeah, Thanks, Gary I don't know that.
A number off the top of my head actually.
So as a common platform being 16 18 to 20, there are some fourteens and things like that in there as well. We also have the mid cap near line drives that are very strong performers right now and we've just done a product refresh on which is actually.
I'm going to help us as well so.
I know that.
What I would say is that we continue to take cost out of the the common platform right. So as even as we transition from <unk> to <unk>. There are ways that we can take cost out of component new components that are in there and we continue to amortize over the tooling set for what we've.
Already installed so the all of those things are serving us really well from a margin perspective.
Yes.
We said that the 83% those exabyte volume easy masked capacity right now and.
I will say that the majority of that volume is from the common platform.
Okay, great and.
Gianluca.
Three months ago, you talked about gross margins improving every quarter of this year even with.
Some expected seasonality as you go into the back half of fiscal 'twenty. Two can you just talk about how if at all of those assumptions have changed obviously you are coming from there.
Impressive gross margin performance in September so you're starting from a higher base, but just any any update as to whether we should we should be modeling gross margin improvement every quarter and how you're thinking about revenue seasonality as you go into the March and June quarter. Thank you.
Yeah.
Yes, I would say probably compared to what we were discussing three months ago six months ago.
I see the COVID-19 cost a little bit higher than what we were expecting in particular, Florida for freight and logistics.
At the same time demand is.
Maybe it.
Stronger so our.
<unk> is really good.
Thing I Wanna unit cost to decrease quarter after quarter. So until we can give is that good alignment with the supply and demand I'm fairly confident that we can do further improvement in that gross margin is as we were discussing.
It would be.
And every quarter is a bit different so it is difficult to be very precise but for the next few quarters, but we are we are confident that we can do some more progress in that.
Yeah, I think Katy.
Demand is obviously the main driver of what's happening and we see that persisting.
I think we are well through.
The back half of this fiscal year and even into the next fiscal year.
Exabyte trends continue really well.
I think tactically whats going on with some of the cost source freight logistics things EBIT, if a customer said I wanted to do a swap in three weeks at the end of the quarter might be really hard.
To give them the product given where we are.
None of that is really going to contribute to demand destruction. So.
That's in front of them driver for us.
We think.
Thats the story, we want and.
Other thing I would say is that.
We believe that right now.
All of that into Q3 that there is a little some loans at the end of the year and Chinese new year and things that we typically see that should allow some people to start rebuilding their positions.
Supply chain. So that's yet another reason why we were confident.
Great. Thank you congrats on the quarter.
Okay.
As we get.
Your next question comes from <unk> Hari from Goldman Sachs. Please go ahead. Your line is open.
Yes.
Hi, Good morning, Thank you for taking the question and congrats on the strong execution.
I wanted to follow up on your fiscal 'twenty two revenue guide I guess now low double digit.
Relative to fiscal 'twenty, one if we take that in your December quarter Guide I think it's pretty clear that implicitly you're assuming.
A down quarter sequentially in March <unk> June <unk>.
Just curious what's embedded there is it seasonality in your legacy business is it something in your line.
Growth in services and supply chain all of the above any any context any color there would be helpful. And then I've got a quick follow up.
Yeah. Thanks, just yet so I think if you go back to last quarter would have been seasonality than it would've been more biased towards the legacy business, obviously vis a via markets are seasonal as well and I would say.
Even more muted seasonality in some of the strength in the exabyte growth that we see in the cloud.
Particularly at the top end of the mass capacity.
Markets So thats.
Kind of explains what's changed I think in the last three months.
Yes, we see the near line has stayed very strong and and of course every quarter. We will that we will have data on what.
Our visibility on their own as I see it got here.
Got it that's helpful and then.
My follow up is on the long term model.
Guys and I realize it's only been.
What is it eight months since you since you announced the update and I certainly wouldn't expect you to update your long term model every every six to nine months.
But it does look like.
From a gross margin perspective from an operating margin perspective.
Gross margins. Despite all the challenges youre comfortably in that range operating margins you are guiding to the second consecutive quarter of you guys being at the high end of of that range. So I guess my question is should we be thinking about.
<unk> bias to what you presented earlier this year or.
Is this is kind of as good as it gets and we should expect some sort of normalization of reversion over the over the coming quarters. Thank you so much.
Thanks.
Yes, we've been looking at exactly what Youre talking about I don't think we're prepared to say anything.
About it today, although I will say that it's all it all is predicated upon the supply demand balance and demand continues to be strong.
When you look back that eight months or nine months or whatever we were still kind of at the front end of the pandemic there were a lot of.
A lot of challenges that were.
Going on.
Positive in that we didn't have great visibility into so I think further time marches, along and we see how much.
Data has moved to the cloud and we see how much the edge is growing in all these new business models and things like that we can look at demand versus our supply picture and then youll see whether we update those models, we'll keep you posted.
How we got there.
But we had and cortex I think gross margin level that we generate in our mass capacity part of the business.
And then we need to see <unk> developing that next quarter.
In the next fiscal year, but that so.
So far we are very confident.
Very helpful. Thank you.
Yeah.
Your next question comes from Ananda Baruah from Loop capital. Please go ahead. Your line is open.
Hey, guys, yeah. Thanks for taking the taking the questions I have two if I could I guess the first days.
You had mentioned.
What.
Does your March a little earlier about seeing seeing demand sort of strength.
In fiscal year 'twenty three.
And so I guess really what I loved about well I think we all would love to get.
How are you guys thinking and how would you like us to think about.
Sort of the timeline.
Context of the cycle.
Does it need to fall off like like past cycles have at times.
And you'll see it extending his insight.
Half of calendar 'twenty two for US first half of calendar 'twenty, three and then as a follow up as well.
Yes, I think.
The fundamental trends for the secular growth, especially in.
Mass capacity cloud not changing from my perspective.
If you think about an order.
20 terabyte drives.
Next year late in the year versus what people.
We're buying 16, terabytes or 40 terabytes or whatever they were a couple of years ago. The tcl proposition for that a new data center build out is so big and the replacement cycle is still big.
The capacity point those matter. There is also other feature sets that are coming with these do drive that allow people to manage their data centers in different way more efficiently for power.
And.
Reliability and all these other things too so.
It's a package that says that.
These.
Investments that people are making will be a lot more programmatic and we're having those kinds of discussions with customers worldwide.
Thats, what builds strengthen our and our visibility.
Via markets as well I think the application space at the edge is just propagating really quickly so.
There's things like retail consumer behavior, there is health care, which we all see in.
It can kind of feel for what.
How important mass capacity data is there.
So there's a lot of edge applications that are just growing area as well. So that's why we continue to feel strength and you know that's why we put out to the earlier question that she asked we've included that kind of revenue growth and our long term models.
That's great. Thank you Super helpful and then.
I guess, just what are you guys as possible I'm sorry, good lead time.
<unk> talked in the past on.
On these calls about.
What lead times look like to get the highest capacity of many airlines right.
Some point the implied the ball I think in the spring Youre, saying December.
Yes, hi.
Kind of six months like that and so.
Would love to get just an update on what the lead times look like.
I was taking taking we get get the high cap drives out the door and then along with that.
Pricing question.
Right.
When you guys.
Take orders in there.
The pricing that you guys end up selling the drive that is it at the point of order, taking or is it where the price would be say six months from now when you ship it good luck.
Context around it that's it for me thanks.
Theres, so many different types of customers.
I don't think I'll comment on the pricing, but I will say that.
Your first question was really about how do you know these long term agreements and some of it is exactly you remember the comment I made nine months ago, roughly which was.
If you want something for Christmas you better tell me now I mean, that's the kind of lead time, we're talking about.
So we're doing start sooner wafer factory.
Right now for capacity points that are out there in time, and we're saying to people versus how many were roughly we're going to be able to build in that timeframe.
To make sure our plans are line, it's not just about.
Capacity points, though it's also about all the other things architectural as Theyre changing.
To make sure that we have the best value prop to put into their datacenter that intercepts that architecture.
And so it's a big planning exercise for our customers inside of their supply chain. If you wanted one drive then yes, we have one extra driving laying around but if you won hundreds of thousands or millions or something.
Then we need to be talking with a lot of lead time, and that's I think that's what's bringing stability to the business.
So.
Gotcha.
Yes, Okay very helpful. I appreciate it thanks, a lot guys.
Thanks.
Your next question comes from Tom O'malley from Barclays. Please go ahead. Your line is open.
Good morning, guys and congrats on the nice results, Dave I wanted to kind of double click into the non HDD business, obviously, you're raising the full year guide here can you talk about the contribution of the non HDD business has to that growth rate. What do you see that kind of growing this fiscal year.
Yes, Tom Thanks, it's the non HDD business has been a little.
I mean, there's certain places where we can use our brand.
Continued strength, but there's opportunities and we take advantage of them and sometimes those opportunities wax and wane, a little bit I think relative to the profitability of the non HDD business, it's actually climbing and so we believe we're using our brand appropriate.
Preet leads to get some more revenue and it's not so dilutive as it used to be in the past.
You know as especially on the systems business, you have to be a little bit careful because there's so many more components in such lower volumes than we're accustomed to dealing with in the HDD business that that's where supply chain stuff gets really tough and then those systems themselves.
Very large right so shipping freight and logistics are a big challenge.
And we still want to bring the same brand proposition to the customers. The same predictability that I just talked about on an anonymous question.
So you know from but from a revenue perspective, I think there's more opportunity for us out there, but it's actually.
Challenging to run some of those visitors as well given the supply chain challenges.
Yeah, let's say from a finance standpoint, even if they had known expertise and that's at the lower body, but it was minor game.
Radical contained with our for our free cash flow. So we had a we got ethane now keeping the air force on that side.
I have a business.
That's helpful and then David to your to your point earlier I just had a follow up on the systems business you called it out in your preamble is particularly being impacted by supply chain and I think we just reiterated that could you talk about what products that is obviously these are big complex machines that youre selling here. It just seems like youre selling here where are the.
Where are the constraints where are you seeing that supply chain holds up any kind of particular examples would be helpful.
Yes, I think all things silicon all things power all things.
Kind of the things that we don't typically don't control very much are are tight and.
I would say it's not.
Not only a matter of being able to actually procure something it's also a matter of getting through all of the factories that needs to get to be.
Finally consumed for US is that's been the complexity.
No.
We have tried really hard with our systems business over the years to reduce the complexity of our offerings.
So we can go a little longer on inventory positions to be more flexible for our customers, but it is a challenge right now as you can well imagine.
Thanks, Congrats again.
Okay.
Your next question comes from Sidney Ho from Deutsche Bank. Please go ahead. Your line is open.
Hi.
Great. Thanks for taking my questions I have two questions. The first one is on pricing how would you characterize it.
Current pricing environment, maybe you can.
Parse out the triple impact also interested in whether you're able to pass on the high cost to your customers how much of a tailwind.
Gross margin forecast.
Next few quarters.
Okay.
Now for the pricing I would say that the pricing environment is still very favorable no excuse me up to the prior quarter I'll say and I'll just spend via two lost even not knowing say in the current quarter and hopefully even that even into the future.
Last thing that caused that.
So they saw a dramatic way.
<unk> pricing based on demand and the alignment between supply and demand and not not too much on specific cost to our customers.
Okay, that's fair.
Maybe my follow up question is on the technology a little.
Thank you obviously you are starting to bring them up the 2020 terabyte now.
Hammer.
Likely being a high volume until it sounds like later, maybe 30 terabyte, how confident are you that you.
You can accomplish that cost reduction improvement you talked about at your analyst day, not just the magnitude, but also within the timeframe you talked about.
Okay.
Yeah. Thanks, Sidney So a couple of things, it's not only about the highest capacity point.
If you think about it we get to a point, where we can take heads and discs out of the lower capacity points, that's a way to introduce margin back into the system as well and then.
Fundamentally have more capacity, but you don't have to install with capex right, because youre being more efficient inside your own factories as well so I know a lot.
We do a lot of focus on 30 terabyte capacity points, but they're.
There are a lot of opportunities to do you can go back and sell 16 terabytes with fewer heads and disks.
Then you'll know that that's probably the way to think about.
<unk> March that we're on towards higher capacity points.
Introduces that kind of.
Cost oxygen back into the system proficiency.
If you compare ourselves again back to the ancient history of the peak of client server when Theres, one disk and two heads.
<unk>.
Huge jumps in aerial density to make Macy's cost jumps when you have eight or nine discs in a box and you can take one out of the same capacity for winter two out of three of the same capacity point, that's a lot of cost oxygen relatively and it's easier to transition through so if that helps you think about it.
Yeah that's helpful. Thanks.
Yes.
Your next question comes from Aaron Rakers from Wells Fargo. Please go ahead. Your line is open.
Yes, thanks for letting me ask the questions and congrats on the quarter.
My first question is back to kind of the capital return strategy.
The company has done a phenomenal job returning capital to these past several quarters, but we have seen the net debt position continued to decline. So I guess the question is as.
If you look at how do we think about the appropriate level of either liquidity or cash on our balance sheet as we gauge your continued propensity to be after lunch.
Share repurchase.
I think we discussed via today to the beat in Alberta.
Last analyst day, and we said no we are comfortable with a liquidity level.
At least of $2 billion of MBS include of course out of a lot of great intermodal there. So.
So we updated wearable that.
Levels, and so we have greater opportunity for us.
Because we generate very strong free cash flow.
Talking about that before.
The last quarter was very good almost $380 million, we expect free cash flow to continue to improve during the fiscal year. So it will give us opportunity Florida.
Part of that return to our shareholders and I think there's a lot of other levers that we have at our disposal you see us managing our working capital really well if you look at our inventory positions against what our final objectives are.
That's part of how we get done what we need to get done to maintain the liquidity flexibility that we want.
And then the quick follow up just kind of back on the pricing discussion, maybe a longer term way of asking it is.
The HDD industry, not just kind of concentrated from a competitive landscape, but also now 65% plus near line capacity shift and maybe even even more concentrated in the competitive.
And that's in that vertical.
It used to be thought of as kind of like a 10%, maybe 15% price per annum kind of decline price per gig decline in hard disk drives.
I think we should think differently about that do you think we should think about a much more disciplined flattening out price curve for hard disk drives as we think about.
Dynamic model implications.
I think as drives have changed towards content rich heads and media than I think the lead times of your investment are going to be longer and so therefore, I think youll see less fluctuation in supply demand.
The long term alignment now you can still have demand shocks like we saw at the front end of the pandemic.
There may be other supply shocks as well but.
From my perspective.
The industry is doing a good job of managing supply demand balance because the process content that's required to make a drive that the mask.
<unk> listened to the front end of it is really has a lot of long lead times and very complex parts. So I think thats whats changing the behavior.
Rather than anything else.
Yes, thank you very much.
Thanks Kurt.
Your last question will come from Jim Suva from.
To drive group. Please go ahead your line is open.
Thank you and I just have one question and that is on your cloud business that you are seeing.
Some suppliers to the cloud customers see very very lumpy business, a really strong quarter, then a couple of quarters of digestion I'm.
I'm wondering now that youre seeing such strong strength in cloud.
Is it something that you anticipate some lumpiness or with the visibility you mentioned that youre kind of installing and using an ordering what their needs be is there just less lumpiness for your products compared to some other servers switches compute.
Some cities products out there. Thank you.
Yeah.
Its interesting Jim I'll give you my perspective, I think we have to be very careful in the cloud of calling a one size fits all because obviously, there's so many different types of business models and different application spaces, even inside individual customers they have multiple application.
Applications.
I do think like in the front end of the pandemic when everything shifted to the cloud and work from home in these kinds of things, we're seeing massive investment that was happening in <unk>.
Would call transactional architecture, so very compute intensive very memory intensive and so on.
I think as is.
That did not mean that mass capacity was not growing but what it did made was that the priority immediately for some of those type of customers well it's to make sure. They can fulfill their service level agreements with their end customers who were pushing into the cloud.
Maybe that's maybe why as people look back over the last year they.
Start to talk about Lumpiness, just getting it all right can be heart rate and you may invest for one architecture or application and then see opportunity somewhere else and pivot over there and so these are difficult problems I'm sure the people who have to build cloud data and infrastructure and application.
Layers are grappling with relative to mass capacity I think.
The build out has been much more.
Thoughtful frankly overtime and.
Not to say that there arent.
Changes in strategies and opportunities as they see.
A ways to go gain more efficiency out of the other places, but I think the market is now diversified sufficiently.
Our predictability with customers has matured to a point where you know.
I'm comfortable in that.
We're seeing a stronger demand picture of this more consistent like we talked about.
Sure.
Thank you so much for the details.
Thanks, Jim.
Okay.
We have no further questions I'd like to turn the call back over to the presenters for closing remarks.
Thanks, very much everyone I want to.
Thank you for participating in this call and really think.
Thank our employees for all their hard work up and down the supply chain and the suppliers and customers.
Many thanks from the Seagate team as well and again, thank our shareholders for their continued support and Seagate will talk to you next quarter.
Yeah.
This concludes today's conference call you may now disconnect.
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