Q2 2022 Seagate Technology Holdings PLC Earnings Call
Wild with the SEC, our form 8-K filed with the SEC today and the supplemental information posted on the investors section of our website as always following our prepared remarks, we'll open the call up for questions now.
Now I'll hand, the call over to you Dave.
Thank you, Jamie and Hello to everyone joining us on today's call.
Seagate ended calendar year 2021 on a high note delivering another solid performance in the December quarter highlighted by revenue of $3. One 2 billion our best in over six years.
And non-GAAP EPS of $2 41, representing the highest level in nearly a decade.
This performance is all the more impressive in light of the supply chain disruptions and inflationary pressures, we are experiencing today and further demonstrates the consistent execution operational agility and sharp focus on expense discipline that we have displayed throughout the year.
To that point in calendar year 2021, we achieved revenue of nearly $12 billion.
Up 18% compared with the prior calendar year, we expanded non-GAAP EPS by more than 75%.
And we grew free cash flow by nearly 40% truly an outstanding year of growth that shows we are capitalizing on the secular tailwind driving long term mass capacity storage demand.
As we've shared many times before driving profitability and free cash flow generation remains to seagate's top priority and underpin our focus on enhancing value for our customers.
And shareholders.
Since the onset of the pandemic, we have consistently executed our product roadmap and made investments to deliver cost efficient higher capacity drives that offer business value for our customers, while also enhancing <unk> financial profile.
We extended our proven common platform drive family from 16 to 18, and now to 20 terabytes and beyond.
We also address cloud customers performance needs through our industry, leading dual actuator technology.
We've made these advancements while notably returning more than $4 billion to our shareholders through our quarterly dividend and share repurchase programs.
Our execution and product momentum position seagate to deliver a third consecutive calendar year of topline growth.
We currently expect calendar year 'twenty, two revenue to increase 3% to 6% with further growth beyond consistent with our long term model range.
Let me spend a few minutes discussing the current business environment.
In the December quarter, we again generated record mass capacity revenue with growth led by demand from cloud customers.
We achieved our highest ever cloud customer revenue supported by sales of our 18 terabyte near line products with significantly increased quarter over quarter consistent with our plans.
Hdds are critical enabling technology for the growing data center.
As we shared a year ago at our analyst event and our results demonstrate.
Hdds have a well established place in the data center ecosystem.
And we do not expect that to change over the next decade or longer.
For the past couple of years Seagate has been a beneficiary of increasing cloud data center investments to support remote work remote education and the digital transformation trends that continue to take place.
Analyst forecast another year of strong double digit cloud capex growth in calendar 2022.
Several powerful themes emerged from this year's CES conference that support our longer term demand outlook and underscore our clear business needs capture access and analyze massive and growing volumes of data.
New use cases highlight how data intensive applications, such as AI autonomous vehicles, or smart cities can improve business or social value and drive demand for mass capacity storage, both in the cloud and at the edge.
We have previously shared our emerging use cases at the edge are driving meaningful opportunities within the beer markets.
These applications utilize high definition video and AI analytics.
To capture and extract data value.
In the December quarter sales of our <unk> products remain healthy.
And we expect the march quarter to be seasonally slower consistent with historical trends.
Longer term, we continue to forecast exabyte growth in the mid teens supported by expanding opportunities at the edge.
Moving to our other markets.
Sequential growth from the cloud in the December quarter was somewhat counterbalanced by lower revenue in the enterprise OEM in legacy PC markets.
We attribute primarily to the COVID-19 related supply challenges the dominated broader industry headlines.
As we indicated last quarter non HDD component shortages are disrupting some of our enterprise and OEM customer shipment plans, which impacts both mass capacity near line and legacy mission critical drives.
We are mindful that these supply pressures and other COVID-19 related measures could further weigh on the typical march quarter seasonality that we anticipate in the via and legacy markets.
However, our customers are managing through the tight supply environment and expect conditions to ease over the next couple of quarters.
Seasonality and temporary constraints aside the long term mass capacity demand trends remained strong.
In this environment, we remain focused on exercising capital discipline to align supply with demand and continue to engage with customers on their longer term demand requirements to ensure that our production capacity plans align with their future ramp timelines.
With lead times for high capacity Hdds are six months or longer and increasing portion of our near line drive revenue is under long term agreements with momentum to expand even further.
We are executing our innovative mass capacity roadmap and cost reduction plans to.
To offer a compelling value proposition for our customers that is also financially attractive for seagate.
We are ramping 20 terabyte drives extending our common platform to a third generation.
For a couple of quarters now cloud data center customers have shown very strong pull for these drives.
The tcl value proposition for transitioning to higher capacity drives as compelling.
Consider first that have moved from 18% to 20 terabytes represents a 11% boost in storage capacity and then layer on the savings realized across the data center build out.
At the system level customers required less debt networking gear and other ancillary parts to support the same storage capacity.
On both fronts these gains translate to meaningful cost efficiencies.
Which may be further enhanced given the parts shortages and inflationary pressures in today's market.
All indications point to a very steep production ramp for our 20 terabyte products with the potential of surpassing the record setting ramp we saw for our 16 terabyte drives.
As a result, we are using the seasonal slowdown in the March quarter to stage, our factory operations to support strong 20 terabyte demand as the year unfolds.
Our common platform approach helps to facilitate this process by enabling us to quickly transition and ramp new products into the market.
Our 20 terabyte drives highly leveraged the head and media technology to power, our 18 terabyte product family, making the production process well understood in haste and time to yield.
This strategy also provides manufacturing flexibility improves our overall cost efficiencies across the breadth of our common platform family, which currently spans 16 through 20 terabyte capacity for CMO products with some customers stretching to 22 terabytes using SMS feature sets.
We are driving additional manufacturing and cost benefits by incorporating the same media and head technology to produce cost optimized drives spanning capacities down to two terabyte drives.
In addition to improving manufacturing flexibility these cost optimized drive can require fewer heads and disks.
Which offset some of the near term inflationary component pressures in the December quarter. The revenue contribution from products using higher aerial density drives increased to nearly 40% of total HDD revenue.
Wrapping up we entered the March quarter amid a challenging supply environment. However, I remain optimistic for conditions to gradually improve importantly.
Importantly, our strong product portfolio and operational execution put seagate in excellent position to deliver on our long term revenue growth model and generate strong free cash flow in 2022 and beyond underpinned by growing demand for mass capacity storage beyond 20 terabytes.
I'll now hand, the call over to Gianluca to cover the financial results.
Thank you, Dave Seagate continues to execute well and navigate a complex business environment to deliver solid financial performance aligned with our expectations.
In the December quarter, we grew revenue to <unk>, one 2 billion.
Up 19% year over year.
Many of our non-GAAP operating margin of nearly 20% up 520 basis points year over year.
And increased non-GAAP EPS to $2 41.
87% year over year.
In our advertising business, we achieved a six consecutive quarter of record capacity achievements.
Totaling 163 extra back up 3% sequentially and up 26% year on year.
Ongoing client demand for our <unk> line card that supported the mass capacity revenue of $2 billion.
And 1% sequentially and up 35% compared with the prior year period.
Key brands into the mass capacity markets total 137 exit Mike up 4% sequentially and 41% year over year.
Near line remains our fastest growing product segment with revenue outpacing the broader mass capacity business.
In the December quarter, we increased shipment to 111, exabyte up 4% sequentially and 56% year on year.
Supported by the ongoing cloud adoption of 18 terabyte drives as well as healthy demand for our mid capacity product from enterprise and OEM customers.
Our 20 terabyte product family is growing strong customer interest and Nevada, continuing to scale 18, terabyte <unk>, while also preparing for an anticipated deep 20 terabyte <unk> inside.
Coming quarters to support demand.
Passing to the VM market remain healthy in the December quarter, following two quarters of rapid growth and near record revenue in September .
We project a seasonal slowdown in the VM market.
During the last quarter back, but expect revenue to remain up on a year over year basis.
Within the legacy Markit revenue came in at $775 million down, 7% sequentially and 15% year over year.
Seasonal demand for tumor types.
Partly offset weaker than anticipated PC states due in part to ongoing PC component shortages and lower mission critical service.
As we discussed last quarter component shortages are also impacting sales in our system business as.
As customers delay San Jose product due.
Due to constrained supply of non drive components.
Despite these headwinds non HDD revenue increased 17% sequentially and 48% year over year to a record $294 million.
We'll set by strong SSD demand.
While we continue to face near term supply challenges for both the system and SSD businesses, we remain confident in growing as a non HDD business in fiscal 2022, particularly what our system solution, what do we see ongoing demand and continuing to capture new customer logos.
Looking at our operational performance non-GAAP gross profit in the December quarter was $958 million.
Our corresponding non-GAAP gross margin was 37% down 30 basis points sequentially laptop, nearly 400 basis points year over year.
The ongoing transition to both higher capacity drives and cost optimized products, mostly offset higher freight and logistic costs and the less favorable.
Mix with a regular non agency sales.
Notably HDD gross margins remaining of the <unk> of our long term target range of 30% to 33% flat with the prior quarter.
We maintained relatively flat non-GAAP operating expenses at $337 million.
This lower than expected.
<unk>, our disciplined expense management and the timing of certain spending.
We expect opex to be somewhat higher than last quarter due to an increase in the expanses and business outlook.
Our resulting non-GAAP operating income was $621 million down, 1% sequentially and up 61% year on year non.
non-GAAP operating margin remained relatively flat with the prior quarter and 19, 9%.
And at the top end of our long term targeted range of 15 to 20 plus anti <unk>.
Based on diluted share count of approximately 225 million shares non-GAAP EPS for the December quarter was $2 41.
We have big Santa Board our guidance midpoint.
We increased the heme mentally by approximately 100 million.
With days inventory outstanding of 54 days to support the upcoming 20 terabyte product ramp.
Capital expenditures were 90 $95 million for the quarter now 19% sequentially for fiscal 'twenty. Two we continue to forecast capex at the low wind our target range of two 6% of revenue.
Which is sufficient to support our future product roadmap, while maintaining alignment between near term supply and demand.
Free cash flow generation increased to $426 million up 12% quarter over quarter and 36% year over year.
We delivered strong performance in the December quarter, and expect to improve free cash flow generation was Ics carrier.
Enabling us to continue to fund our strong capital return program.
In the December quarter, we used $151 million for the quarterly dividend and $471 million.
To repurchased $5 1 million ordinary shares.
Exiting the quarter.
219 million shares outstanding and approximately $3 3 billion, that's any meaning in our authorization.
We ended the December quarter, with cash and cash equivalents of $1 5 billion.
And total liquidity was approximately $3 3 billion.
Including our revolving credit facility.
Adjusted EBITDA increased to $723 million in the quarter, our highest level in seven years.
And it was $2 6 billion for the 12 months period ending in December .
Total debt balance at the end of the quarter was $5 9 billion.
And as we previously reported we plan to repay the $120 million in debt coming due in March.
In summary, we delivered solid financial performance, maintaining our focus on driving profitability and free cash flow generation, while navigating a dynamic business environment.
Looking ahead to the March quarter.
We expect a continuation of the healthy demand environment and the near line market with anticipated seasonal decline in via and the legacy markets.
As Dave noted, we are mindful of the ongoing impact related to Covid dynamics and will continue to manage through supply chain constraints and other inflationary pressures.
We expect to prestige to at least this fiscal year.
We expect March quarter revenue to be net age out $2 9 billion.
Plus or minus $150 million.
We expect our operating margin to be impacted by Covid related pressure maintains as discussed over the near term. However, we believe that <unk> changes in the industry combined with Seagate DCP and execution, we support a higher operating margin over time.
And that is that we are raising our long term target non-GAAP operating margin range to 18% to 22% of revenue compared with our prior range of 15% to 20% of savings.
With that in mind, we expect our March quarter, non-GAAP operating margin to be at the low end of our revised long term range of 18% to 22% of revenue.
And finally, we expect non-GAAP EPS to be in the range of $2 plus or minus 20%.
Looking further ahead on global demand for mass capacity storage combined with our strong product pipeline give us confidence to further raise our fiscal year 2022 revenue growth to be between 12 and 14%.
<unk> from our prior outlook in the low double digits range.
I will now turn the call back to David for final comments.
Thanks, John Luca I am very proud of the results Seagate posted in the December quarter, and also our ability to deliver consistent performance. During this unique period of transitory issues.
Through it all the trends driving explosive growth in data remain powerful longer term demand tailwind that will push growth in mass capacity storage in 2022 and for years to come.
<unk> has the right product portfolio operational Knowhow and partnership focus to capture these opportunities and lend confidence in our ability to deliver on the annual growth targets, we've outlined today as well as achieved strong profitability and cash generation to fund our robust capital returns program.
C. J, that's been a technology company innovation leader for over four decades, we are now leading the industry into a new era of technology with hammer and multi actuator drives.
The industry has undergone a positive structural change with the transition to mass capacity markets.
These innovations are the result of years of intense focus and significant investments that bring value to our customers and to their customers by unlocking the power of their data.
We are focused on capturing an appropriate return to continue fueling our mass capacity innovation engine, which we believe is healthy for seagate and for the industry at large.
In closing I would like to thank our employees, who deserve the credit for Seagate's outstanding performance this past year.
We are a values driven company and last week, we published our third annual diversity equity and inclusion report that captures the many ways, we put our value of inclusion into action.
Among the many positive measures in the report I want to highlight an increase in the overall percentage of women and director and executive roles as well as an increase in minorities in our U S workforce.
These are important areas of focus for the company and reflects positive progress on our efforts to build a more global diverse and inclusive workforce, which we believe leads to better business sustainability.
I would also like to thank our customers and suppliers for their continued support and our shareholders for their trust and Seagate.
Gianluca and I are now happy to take your questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
I would like to withdraw your question again Press Star One. Your first question comes from <unk> <unk> with Bank of America. Your line is open.
Yes. Thank you.
David your outlook when you.
Looking at the gross margins that came in slightly down quarter on quarter and 30 basis points.
Can you talk about the moving pieces there not just for this quarter, but as you think through gross margin trajectory in terms of both price and the very strong inflationary cost pressures that everyone seems to be absorbing you guys have done a great job on a year on year basis, but how should we think about the next two quarters.
Yes.
Sure.
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Hi, This is speaking.
Thank you.
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Your first question comes from the line of <unk> Mohan with Bank of America. Your line is open.
Yes.
Hi can you hear me.
Hello.
Hi can you hear me.
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Your first question comes from oil Warms Hemo Han with Bank of America. Your line is open.
Okay.
Yes, Dave can you hear me.
Yes, I can hear you wanted to.
Okay great.
When you when you look at the gross margins coming in slightly down quarter on quarter can you talk about the moving pieces. There just in terms of price versus the inflationary pressures that we've seen over the last few quarters.
Yeah, you guys have done a great job on a year on year basis, but how should investors think through these moving pieces over the next few quarters.
Alright I appreciate the question we've tried hard as you know to be.
Be as predictable as we can there are a lot of our near term margin headwinds that we described.
In the prepared remarks.
Still remain focused on is prescriptive as we can over time, we don't view that our current range is some kind of ceiling or anything like that.
But there are there are.
Near term headwinds at all I'll ask John Luca.
To illustrate with a few numbers here and just the second big.
Big picture, what's going on in our industry is a.
Our our drives are becoming more and more mass capacity of course in which means inside the drive there is.
More heads more desk all the time so.
For last quarter. It grew yet again and probably will for the course of the next few years also and so as we do that those are long investments long term investments in factories in.
The entire supply chain around heads and media that those constituents of the bomb become more under our control and I think it allows us to go drive.
For for a little bit more predictable return on investment, but obviously this is a challenging periods of agility you want to highlight the.
The challenges Yeah, I would say first of all the change quarter over quarter is mainly coming from mix.
If you look as a out of these drive gross margin is a completely flat to the prior quarter. So we don't have any any changing profitability falls out of it.
We have an increase a lot how are known out of these cut Avenue main knee they add to the part of the business and that is driving some.
And adoption in that means overall gross margin but of course. It was also the real pulling at a revenue level and their free cash flow level.
Now when you look inside that.
They out of these.
Mass capacity was at a record high.
Fairly close to September as we were expecting about 1% higher busty lead alright, good that Acorn high.
Legacy was a was sequentially down in a mission critical of it as you know is a high gross margin and segment and it was actually hiring consumer bad debt is actually a lower gross margin segment. So there is a lot of mix the going on into.
In December by finally, they know as AT&T teased out of these are in total was flat gross margin compared to September and then leasing and none of these part what's driving the slight decline at a tech company label now when you go into the March quarter.
When it's still that don't mix impact is a different kind of makes me it is more seasonality impact.
San Jose a segment that will be seasonally low iron fairly high gross margin like cat sort of valent lie.
<unk> care and mission critical.
Other segments actually fairly.
Let's say not low, but lower gross margin like a <unk>.
Humana.
And and we'll assess that Abbvie is Boeing some declining in the SSD passed those at a billion. So when you put all together.
Again, the mix is probably driving the gross margin in the March quarter slightly down from the December quarter, but is not coming from the business is coming mainly from the mix as Dave was saying before of course, we have also some cost increases.
Mainly in the freight and logistic costs.
We thought that two quarters ago to be known as they already have a high level out the freight cost, but continuing to increase in September and the gaining the sandler.
And this we have spared no tool to start declining in the next day air fuel few months, but.
With that now with our standing control, we have the strong mass capacity a business that we have with mainly offset the bad news coming from the cost.
Leaving the mixed impact of course there are.
And part of that without a doubt.
Okay. That's great. Thanks, a lot for all the color.
Your next question comes from the line of Karl Ackerman with Cowen and company. Your line is open.
Yes. Thank you two questions if I may.
One is a follow up to <unk> most recent question but.
Gianluca you spoke about non HDD component shortages are disrupting some of your enterprise customer shipment plans.
If I may are you referring to mission critical here or is this weighted toward mass capacity can I have a follow up.
No I would say.
The shortages we had this.
Experience in two parts of the business money that D C.
And while many of the system solutions.
Understood that's clear.
The break down a little bit garbled. There there is some mission critical and there is some near line components to that.
That makes sense.
Great.
I <unk>.
Yes.
From an end demand perspective, as you know to me it sounds like.
Most end markets are you know may moderate in March except for the near line hard drives, but I was hoping you could discuss the visibility you have across your datacenter customers today for high capacity drives which some of these are some of these customers are shouting signing long term agreements.
And then second just the visibility in the trajectory you have for the remaining areas of your business as you contemplate that 3% to 6% growth for calendar 2022. Thank you Fred good. So as we said in the prepared remarks, the 20 terabyte demand is quite strong.
So we're using this period this.
This quarter to transition between whatever components that are flowing through that our 18th specific there aren't very many because it's sort of leverage the platform to the 20th and really get staged for high growth on the twenties.
And the visibility is very good for those products. So I think the customer demand has been new customers are quite receptive to that.
PCL benefit.
On an all of the other <unk>.
Markets, we continue to watch and forecast and have you know in some cases, we have <unk>.
Very deep relationships with the customers that can also provide some level of confidence.
Confidence there as well so.
In aggregate I think its going be a very strong year for <unk> as well and we'll translate that into revenue.
There are some temporary problems that are going on right now because of supply chain issues that are affecting everyone is more affecting our demand, but it is our supply, but we're mindful of that and paying attention to it I think the demand picture for mass property data in particular remains strong.
Helpful. Thank you.
Your next question comes from the line of Tim Arcuri with UBS. Your line is open.
Okay.
Thanks, a lot. This is Jason Park onboard Kmart carry our first question is on how we can how can we think about the June quarter. Its June as close to normal of these languages.
Using the flat or up a little and the implied second half of calendar year has pretty strong like.
83% up a year, which is about the strongest.
Second half of the calendar year loading we have seeing so just wanted to ask what are the drivers there and what gives you the confidence.
And then I've got a quick follow up.
I think youre on the right point, which is so if you look at the tail of the tape. We go back to when we entered this calendar year, we were talking about Lowe's low sorry high single digits for revenue and then we said maybe low double digits now and in these remarks, we said, 12% to 14% and we're already more than halfway through the fiscal year.
So exactly you can start to look at Q4 and see that we are right now forecasting strength some.
Some of Thats coming on the back of the 20 terabytes that I've just talked about him to the responses Carl some of it's also the transition to the cost optimized drives that we made reference to as we transition to that platform.
We all the way from two terabytes eight terabyte center of US we can actually.
You know predict that market pretty well and.
And have great conversations with customers there as well so we feel fairly comfortable with that got that part of the guide and then we talked about the entire calendar year as well as growing on top of last calendar year.
Baked into our forecast.
Okay.
Got it.
My follow up question is on the demand in China. So just wanted to gauge your level of.
Turns in China, as we think most of the new language and it is correct rather than to a channel and but there are a lot of concern about demand weakness there due to some of the covenant restrictions. So my question is what are you seeing from the hyperscale or in particular in China. Thank.
Thank you.
There have been pockets of buildup.
Build out that's been pushed out largely because of other supply chain issues not necessarily mass capacity issues I think those those investments are still plan now some of that push out may be be maybe be happening because of component shortages. It may also be happening because of prioritization of budgets into.
<unk> co.
Covid measures or other things that the end customer is actually prioritizing, but we're not really that worried about it long term, we have great relationships with the Oems and I think.
And the cloud service providers that I think long term I think these these continued build outs are going to come.
Not just in China, but.
I would say for all of Asia, There's a lot of new applications that are coming online, although smart city applications. We're quite excited about it and so do we see weeks and that's all baked into our revenue forecast that we just gave yes.
Yes, I think we need to be careful on not confusing seasonality with lower demand.
So when we go into the massport that our mass capacity part of our mass capacity, we'd be impacted by seasonality as patient as a investor debate is part of the business Marvell is not because they're now a high level of inventory on a unusual lower level of demand is it the normal seasonality of it we aspired for vet segment.
In the March quarter, and then in the June quarter, usually start to improve and get very strong into September and December .
Thank you so much.
Your next question comes from the line of Tom O'malley with Barclays. Your line is open.
Hey, good afternoon, and thanks for taking my question.
My question was related to the VA business Youre, describing some seasonality into March.
But you made the comment on the call that from a revenue basis. It would be up year over year. Obviously when you look at Exabyte March was a extremely low for the business in terms of exabyte shipments of yet can you just try to dial us at a little bit between those two feel goalposts there.
When you look at what is traditional seasonality into that March quarter, what should that look like just because it's hard to get a gauge given how weak March of 'twenty one was.
That's a great point is the compare back to a year ago when.
I think anybody trying to forecast off of.
<unk> kind of <unk>.
Investment behaviors is going to be challenged.
I would say that there there's strength in smart city applications that are coming online.
In Q2.
Things could have been even a little bit better it was clearly better year over year, but it could have been even a little bit better I think to the earlier question. There are reasons to believe that some of those some of those build outs are getting pushed out.
And on.
Unfortunately, the Covid pandemic is still with us and some of his priorities are still being made this quarter, we do forecast over over time the market should strengthen in wheat, and we talked we've talked about.
Mid single digit or sorry, mid double digit.
Growth in <unk> in the via markets I think it all depends on applications and then the.
The economics of the investment that will have to be made across the board.
Rest of the.
The component supply chain.
From our perspective, the demand for data products is quite.
Quite strong in these markets and so we should still see that growth and maybe even more.
As time goes on.
Okay and then my follow up was just on the inventory side. There's obviously an uptick you mentioned in your prepared remarks that was mostly related to a buildup in 'twenty T are there other parts of that inventory that are acquiring just because of the supply dynamics of the market, where you're not shipping product. I think you mentioned also that some of that was.
Actually demand related that could be because of componentry et cetera, but can you just dive into that inventory number is it is it all of the increase due to 22 years. There are some other pieces in there as well that'd be helpful. But largely it's the 20 T. We are.
Able to use those parts against a broader portfolio than just one is of course, we can go to 18 sixteens or all the way like we talked about some of the some of the components are very very similar down even further so at the end of the cost optimized drives. So that's the way we think about it is that yes. There are some there is some inventory buildup going on right now some of that stuff.
Staging for bigger growth.
In subsequent quarters after this quarter.
But the cost of the components are very usable across multiple families or really not worried about the growth.
Thank you the last at the last few quarters, we have built some strategic inventory of course to be adequately protected by a VSAT and our supply chain situation.
By no means a December quarter trials, Dave you have donny to have before.
<unk> seen in the last reminds me there mainly related to the 20 terabyte ramp.
Thank you.
Thanks Bill.
Your next question comes from the line of Katy Hubert <unk> with Morgan Stanley . Your line is open.
Yes. Thank you good afternoon March quarter revenue is typically down mid to high single digits, which aligns perfectly with here with your guidance and in your prepared remarks, you didn't mention that supply pressures could could put some additional pressure and I wasn't sure whether that could be incremental to downside to the <unk>.
The new guidance or if that's something that you had baked in for the March quarter, and then just connected to that the implied June revenue looks to be better than seasonal upside at 2% to 3% is that because you would expect some of these supply headwinds too.
You'd have to resolve themselves as you go into June and then I have a follow up. Thank you, yes. Thanks gave.
There are a number of different dynamics and I think the latter part of your question first yes.
There are components that we feel will break free in the next few weeks and so and yes, we've tried to bake that into our guide as much as we can for this quarter. There are some comfort with the won't breakthrough for quite some time and you have to make sure that you're staging those well it's your build plans.
Goes maybe for our builds but we're also trying to look at the broader tech ecosystem, because we do know that there are customers generally speaking are the smaller customers, but they've had trouble getting some of these complete kits.
And so yes.
All of this is tough for the customers right now, we're just trying mainly to help them.
Get through the periods. There are some things that will get better near term and there are some other things that are going to stay for a little bit longer.
Okay. That's helpful. And then maybe John Luca if you can extend the discussion you had with moms Xeon gross margin into how we should think about.
The March quarter, your revenue and EPS guide is really in line with consensus but on the gross margin line consensus was.
Thank you you could hit north of 31%, which would be an improvement do you see that mix shift back towards hdds, helping you expand gross margins sequentially in March.
Well in Montana, the main impact will be coming from the mix now and.
Veda asthma and via marketing gain at all either very high gross margin segment. So we will have some impact from from better.
Business declining and also a mission critical.
When we look at that is on ITT.
Oh and you look at the segments that are really impacting that segment that had a fairly high gross margin.
Of course, now, they're they considering raising our mass capacity selling the cloud is in the airline and then Jose OEM Park of any airline.
<unk> is all positive and I think the vacancy rate to.
To see improvement in our gross margin after the March quarter or when we go into an L. M. A less seasonal part of the business and of course, even stronger when you go into September and December . So there is an impact that is due to seasonality and that is normal for this industry and all of it I would not there.
Look that as a unexpected.
So gross margins sort of flat to down and in March seasonally and then and then improvement off of that base.
Yes, let me say, how we guided here.
That we could drive the gross margins is is to continue to transition to more mass capacity products get more the constituents of the bomb.
On to the drives that are heads and media.
Alright, perfect. Thank you so much.
Your next question comes from the line of Mark Miller with the Benchmark Company. Your line is open.
Thank you for the question Chris was wondering you mentioned that there's some near near line people were mid facings from suppress supply constraints for perhaps your own supply of chips is that.
Holding up.
Yes, I think we have deep partnerships.
With our suppliers.
And with them for for a long time.
There are a lot of dynamics that.
Smaller customers have that we try to help them with and then.
From my perspective, there is.
A certain amount of volatility with that but like I said before.
Stuff is becoming more predictable over time.
Even if it might not be the levels with some of those customers want so.
We're getting better visibility I think as time progresses.
Is there anything you mentioned SSD sales anything else driving the as your other sales in terms of enterprise, there's very strong growth over the last year.
I do think there is demand for data out there on prem and some of Thats, probably not being serviced.
<unk>.
As well as there could be if there were some of the supply constraints Marcella.
I think there's probably some underserved demand but it.
It may be part of other build outs as well you know it may have problem getting compute or the makeup from getting network. So they don't do the entire buildup.
This is going to shake out over the next few months.
Thank you.
Next question comes from Leidy Hosseini with <unk>. Your line is open.
Thanks for taking my question I wanted to get your thoughts on near line mix.
Expectation for 'twenty, two and how issues, we should think about the migration from 16 to 18, and then to 'twenty, especially given your commentary there was focus on 20 terabyte and then I have a follow up.
Yes.
We're.
Largely transitioned to the platform that can actually give.
<unk> or 'twenty is that we wanted to or back to the 16th that we wanted to so we mixed according to what the customer demand is we don't really build a theoretical mix.
So we're talking to customers some people aren't ready for transitions to 'twenty.
Some people want to stay on <unk> and some people want to stay on 16 Zubair here serve them.
The fact that we have these new platforms or whatever changes tweaks there with this common platform will actually put us in a little bit better cost position.
And I would I would say relative to the to the aggressive ramp that we've made.
We referenced in our prepared remarks, the 20 terabyte ramp is going to be a very very aggressive ramp so.
That's where we stay.
Staging for us in this quarter last quarter and this quarter, but.
That'll be transitioning over the next over.
The course of this calendar year to higher and higher volumes.
Got it and then on the <unk>.
Going back to the gross margin topic I understand the mix impact you also highlighted.
Material cost.
Has gone up.
And I want it.
Did I understand how you're able to.
That's on that.
Incremental costs to your customer.
Would it be fair to say that.
There isn't really unusual pricing.
The dynamic for different products.
And in that context would you be able to pass on that incremental cost increase to customers.
To be specific most of the cost increases that we saw not all but most of them are freight logistics related, especially when we don't or the customers don't predict demand perfectly and again, it's very hard difficult world to get the right kids in the right place at the right time that everybody is trying and then then you have to.
Pay the freight and logistics fees.
We used to get the stuff there as quickly as possible that becomes problematic. We don't necessarily look first to pass that along we work with our customers who are supply chain experts themselves to find weighted ways to mitigate those costs because everybody really wants that.
In the spirit of partnership of Vanilla supply chain, there may be places, where we will ultimately have to pass those costs along.
And that will that there's a time lag associated with that of course as we run the plays that we have but.
From my perspective that we have deep discussions with our customers on this.
They understand in some cases, they they run massive supply chains themselves. They understand exactly what's going on so we worked together with them on it.
I will save us the favorable price environment is mainly related towards a good alignment between supply and demand not too much on them.
Transferring of cost from an electronic supplier because of customer.
Most of it.
They had some media for mass capacity now there really long lead investment cycles and things like that.
We're focused on.
Got it thank you.
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Hi, This is Jack brand Entre said.
How should we think about the trajectory of operating expenses as we go through calendar year 2022, I would assume you will see an uptick in travel and labor costs, but perhaps a decline in some COVID-19 safety costs.
Yeah. It's a good question and I will say in the December quarter, Opex came out a little bit lower than what we were expecting auto the reasoning. It's exactly what you are saying we were not as bad thing at all.
Jose area storage or Z, I'll say COVID-19 situation and install our private it was kind of limit that they are gaining names in December quarter.
We think this there now with that visitation will start to improve possibility in the March quarter end and is that in following quarters.
So probably our opex will increase a little bit through the calendar year.
Daily and the range that we now have we discussed that last.
Last quarter between the three for 10 to 15 million per quarter. If he says I know what what we expect.
Great and then on the near line side, how do you think about your gross margins of your higher capacity drives as you continue to increase capacity and should the 20 terabyte habits similar gross margin profile to the 18 terabyte when fully ramped.
Yes, I think there is opportunities of course to two.
To increase as we introduce any new technology node, where theres 20 terabytes or.
Generations that come after it.
A lot of that comes down to how fast can we get up to the media and head yield curves.
Our scrap bills are and things like that they're firmly under our control. So we.
We transitioned according to what customers need with transition according to <unk>.
How fast we can base based on all of our all of our internal metrics as well and so I think there is opportunity to build out over time.
Great. Thank you.
Your next question comes from Ananda Baruah with loop.
Loop capital your line is open.
Yes.
Hi, Good afternoon, guys. Appreciate you taking the question.
Two quick ones, if I could I guess, one for each of you David any any change over the last 90 days in your perspective on.
So the near in near line demand.
Either in terms of you guys gave gave a growth outlook, but I guess either in terms of length of cycle are a punch of cycle would love any context, there and then just a quick follow up.
Another against the big backdrop, I think Noah.
Going into the start of the pandemic, we knew that work from home and and.
A bunch of those.
Challenges that people have giving it professionals.
Work on on Prem solutions, all that meant people pushed into the club.
Dan.
The cloud is growing faster than we thought because of a lot of that push I think and it's not just storage of course. There is there is confusion there is network and there is other parts that are really stressing those businesses as well.
But the storage will come.
And so we think it's been fairly predictable in that in the conversations with our customers about what will kind of build us we want to do and we think theres more opportunities because the value of the data just gets better and better so.
There hasnt, even though there are temporary supply chain problems for a lot of people out there I don't think theres been any real significant change shift in the in the mass capacity demand.
Okay. That's super helpful. And then just the follow up is for Gian Luca Gianluca you you sort of made mention briefly.
Asps.
Yes, Pierre lumped together.
Can you just describe to us.
How you view AFP and am.
And you had mentioned sort of a pretty aligned supply demand could you also just sneak in some context about your capacity situation and do.
You need to put out more capacity to meet the demand as you go through the year and that's it for me. Thank you.
Yes Ananda.
As you know we are spending it.
On 11th of amount of Capex every quarter, though.
And the fact that they have.
Supply and demand are now very well aligned is not because we are not investing in because demand is strong and there we put in place the capacity that is needed and try not to put more than what is requested.
Of course, because there is some seasonality it was a year, where our core fairway I don't know that capacity is not.
Exactly matching demand.
But in general no part of our job is to.
Estimate demand and define what is a capex that is needed to match the demand and satisfy our customer demand without.
14 capacity that is not needed that is the main driver for the pricing and are now in the last several quarter that'd be athene.
The pricing environment has been much better than a year ago or two years ago and we.
We think with the with the industry and deserve an appropriate return.
For rose and a significant investment that we're making and the industry in general is making and all the value that we deliver to support the mass capacity growth.
And now here's what we add we are driving for.
Okay. That's great. Thanks, a lot guys I appreciate it.
Okay.
Your next question comes from the line of Patrick Ho with Stifel. Your line is open.
Thank you very much.
Maybe first off it seems like you're getting really good traction and adoption for <unk>.
One terabyte drives over the next few quarters can you give us your thoughts on the hammer glaad, whether the common platform could potentially delay adoption of hammer or is that still on track and house customer acceptance of the next generation Hammer drops.
Yes. Thanks.
So the hammer has always been planned to go into the common platform. There will be have to be some changes specifically for that exactly to your point.
We plan to continue to do customer evolves to the customer and know exactly what kind of behaviors they'll get they'll be higher capacity drives when they ultimately come with amber to.
Very happy with the progress actually on Hammer.
So I think we said couple of quarters ago. This is happening right now we are in intense product development engaging with customers, they're partnering with us on it.
As far as transition goes exactly to your point of view.
A lot of people know fab.
They know that you have to take some stuff offline to replace it with other stuff and we'll do that as we see the yields come up and the opportunity there to work with the customers as well on their adoption profiles, but.
We're in the middle of all those discussions right now.
Great and just my follow up question, maybe for John Luca in terms of.
The investments into the company, you've obviously invested a lot into hammer.
And the common platform can you discuss.
Some of the investments maybe on a big picture basis.
Stuff like Youre live platform, how much investments are needed to kind of build up that business.
Additional solutions and offerings that will come out of that platform over time, how much more do you need to invest as it relates to life. Thank you.
He is a very good question.
The life business is.
Mainly based on.
Out of this is that is a cloud storage that is based on no out of this is not really requiring.
A lot of additional Capex is part of our what we used to call our normal production.
That we know depending from from demand, we move between that and all customer location and a 10 nanometer.
Yes, these arent big investments, Patrick, but what I would say is that we constantly look for ways that we can develop go to market change in particular that can use.
The products that we're making into it in different ways, So think circularity and recycling product in.
And having outlets for product.
There's a lot of opportunities that we have in our systems business and also inside of the live platform and we think about this as a way to help.
Help us not only construct channels that are economic great benefit to customers, but also it will ultimately help us manage the monopoly of different.
Bart's issues that we're going to see in the world given our scale.
Thank you.
Your final question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you for fitting me in my question is on pricing of your products. It seems like you know the past jeez must have been two years has been much stronger than historical.
Precedence for pricing do you foresee that happening how much longer because you mentioned some of your components are going to be freed up here in the next few weeks. Then you mentioned some others are going to be elongated. So I was wondering for pricing how long do you think will be in this environment of much more historically stronger.
Then what normalize thank you right Jim.
It's right to point out that if you look back five or 10 years ago. When we had so many client server drives that were in our factories.
Different environment than when you have basket passenger with really long lead times and things like that so as we transition over the last couple of years.
To the mass capacity then we can actually say these are the investments youre rank and these are the starts were doing and we can get working on long term agreements.
Predictability with within the markets.
That of course.
There can always be some disruption to the extent that there are more more heads and media related that's under our control if their external piece parts then.
Covid has affected.
Quite a number of suppliers of ours, but also customers and end markets, that's where things get a little bit more volatile, but I think if you.
From my perspective, generally speaking as we go to more and more mass capacity drives as the draws have more heads and media and then when things get a little bit more predictable because we have to get the return on investment.
Thank you so much it's greatly appreciated.
Thanks, John .
There are no further questions at this time I will now turn the call back over to management for closing remarks.
Thanks Brent.
As you can all see calendar 'twenty two was an outstanding year for Seagate, and we believe that our strong product and technology roadmap combined with our ongoing solid execution position us well to capture secular growth opportunities for mass data infrastructure for years to come.
Once again, thank our employees for their outstanding efforts, and our customers and suppliers and investors for their continued support of Seagate. Thanks for joining us today.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Okay.
Okay.
Okay.