Q3 2022 Seagate Technology Holdings PLC Earnings Call
People impacted by the devastation as we continue to hope for rapid end to this conflict.
As this crisis unfolded distribution channels across the region were understandably impacted adding to an already strained global supply chain.
Specific to our business, we ceased shipments into Russia, and Belarus at the onset of the invasion, which typically represents 1% to two percentage points of revenue on a quarterly basis. We expect these impacts to persist at least through the fiscal year.
Turning to Seagate's March quarter financial performance revenue of $2 8 billion and non-GAAP EPS of $1 81.
We are within the ranges provided on our last earnings call and consistent with our revised outlook, we shared last month.
We continue to see solid cloud demand and that boosted revenue for our near line products to a fifth consecutive quarterly record.
The strong new airline performance was offset to a degree by demand disruptions and other end markets.
These include non HDD component shortages as well as new Covid lockdown measures that intensified toward the end of March sharply impacting the video and image applications or via market.
Rising inflationary pressures, where an additional burden on profitability for the quarter as we continue to operate amid an unusual mix of external challenges.
Our team is executing at a high level in this environment and that is best illustrated with a few key year over year comparisons relative to Q3 of fiscal 'twenty. One we grew total revenue, 3% and near line revenue 24%.
We improved margins and demonstrated strong financial leverage with operating income growth of 12% significantly faster than revenue growth and we generated free cash flow of $363 million up 32% year over year.
These achievements reflect the resiliency of our financial model and our focus on driving profitability and cash generation and an environment, where we are poised to capitalize on strong secular growth for mass capacity storage.
While the underlying storage demand trends remain intact, the industry wide supply challenges impacts from the ongoing conflict in Ukraine, and Covid restrictions are constraining growth over the near term, which we factored into the June quarter guidance, we're providing today.
Throughout the past couple of years, our strong supplier relationships combined with our vertically integrated business model have enabled us to navigate supply risks to support HDD customer demand.
All the while we remain highly focused on protecting profitability in.
In addition to maintaining strong expense discipline, we have recently started to adjust pricing to help combat inflationary impacts in future quarters.
Finally, we continue to strategically manage production and execute our product and technology roadmap.
These actions are intended to reduce our cost per terabyte.
And realize operational efficiencies, while delivering cost efficient higher capacity solutions to our customers when they need the most.
As we indicated on our last call we leveraged the seasonal slowdown in the March quarter to begin staging our factories to support strong 20 terabyte demand.
I'm delighted to report that we are shipping 20, plus terabyte products in high volume and expect unit shipments to more than triple quarter over quarter in F Q4 to well over 1 million units.
This puts us on pace for the company to achieve crossover with 18 terabyte drives early in the new fiscal year.
The ability to quickly ramp and yield higher capacity products is especially important considering the strong cloud datacenter demand for near line drives.
Recent CIO surveys confirm that even in today's challenging macro environment digital transformation AI and machine learning remain among the top handful of investment priorities.
With current non HDD supply shortages impacting new datacenter build outs many of our cloud customers, particularly in the U S.
Our operating at or near record utilization levels and upgrading to higher capacity drives in an effort to keep pace with demand.
Seagate is addressing these needs by being the first to high volume with the 20, plus terabyte products, which represents the highest capacity drives commercially available today.
With more than half of our cloud business currently covered under long term agreements, we have visibility to healthy cloud demand into the back half of the calendar year.
In the March quarter mass capacity revenue increased 18% year over year and decreased 6% sequentially off a record December quarter.
Strong double digit sequential growth in cloud near line sales, partially offset the impacts of demand constraints and the other mass capacity end markets.
In the enterprise and OEM market.
Some customers continue to grapple with non HDD supply shortages that have impacted their ability to get parts and address their own in demand.
Covid Lockdown measures are limiting near term demand in the <unk> markets.
In the March quarter, New security surveillance, and smart city infrastructure projects were delayed.
Due in large part to physical installations being hindered this situation is similar to what the VA market experienced in the early days of the pandemic and based on input from our customers. We remain confident that these projects will resume once conditions improve which we now expect to occur in the back half of the calendar year.
At a high level demand for video and image applications is on the rise.
Increasing adoption of high definition cameras longer data retention rates and the use of AI and analytics enable end users to identify patterns for months of captured data and extract value.
Analysts predict that nearly two thirds of network video cameras will have embedded AI deep learning analytics by 2025% compared with about 15% in 2020.
Indicative of these demand trends Seagate offers purpose built via drives that support the heavier workloads and firmware to optimize video AI applications.
Our strong customer relationships and breadth of knowledge and storage devices and systems and software architectures have enabled us to develop product and technology solutions that address the evolving mass capacity storage and infrastructure needs.
For example, Seagate's live cloud platform is aimed at meeting the growing need for a simple predictable and cost efficient mass data storage as a service solution.
To date, we've qualified nearly 30 ecosystem service providers offering capabilities, such as backup and recovery that are interoperable with live cloud.
We recently launched live cloud, Singapore, our first platform in the Asia markets.
We are continuing to responsibly build out our infrastructure and selectively work with new customer use cases.
Overall, I'm really pleased with our progress in ongoing customer momentum.
We look forward to sharing more in the year ahead.
Looking ahead, <unk> remains well positioned to achieve our long term financial and business goals. We are focused on driving profitability towards the upper half of our long term margin ranges over the next few quarters at the same time, we expect to extend our track record of strong cash flow generation, while executing our product and technology roadmap.
The collectively puts us on the right path to capture mass capacity storage opportunities and enhanced value for all of our key stakeholders.
We are taking aggressive actions that spanned cost management pricing strategy and operational efficiencies that target margin expansion and further strengthen our competitive position.
Ill now hand, the call over to Gianluca to cover the financial results.
Thank you David.
When you get to navigate its way through a very dynamic macro environment and keeping any is lowest seasonal period of the year to deliver on our financial performance consistent with our advisor expectation from the beginning of March.
In the March quarter revenue was $2 8 billion.
Is that a 3% year over year increase.
non-GAAP operating margin was nearly 17% up 140 basis points year over year.
non-GAAP EPS was $1 81 up.
22% year over year.
This guy's business keep approximately 154 exabyte down.
The expressed anti financially and 10% year on year.
Strong demand for high capacity near line drives.
Boosted average capacity per total HDD denied to a record $6 seven petabyte.
10% sequentially and 32% year on year.
The amount for our near line products supported mass capacity revenue of $1 9 billion.
One, 6% sequentially, but up 18% compared with the prior year period.
Shipments into the mass capacity markets total 133, exabyte down, 3% sequentially and up 20% year over year.
Our new online product segment continues to grow with revenue outpacing the broader mass capacity business once again.
In the last quarter, we increased shipment to 117 exabyte.
6% sequentially and 23% year on year.
Supported by the ongoing adoption of our 18 terabyte dies and initial volume shipment of our new 20, plus data by product.
Our leading airline portfolio, coupled with a very agile supply chain that is allocated in April the cloud market revenue in the March quarter.
Once the extent with our enrollment in early March.
<unk> for the VM market, we had lower than anticipated <unk>.
Primarily to delayed project spending in China.
The resulting from disruption related to Covid and shifting government priorities.
We do expect demand to improve once global delighted as patients begin to ease and project installation cannot assume.
Within the legacy markets revenue came in at $642 million.
Down, 17% sequentially and 26% year over year.
After the quarter the pace of decline will see minute across each of the legacy end markets.
The year over year decline was more pronounced in the PC market.
Two OEM continuing to balance component inventory.
Non HDD revenue was down 19% sequentially to $137 million.
Coming off a record December quarter.
Both of our system and SSD businesses were impacted by key component availability, which left us unable to fulfill all of the customer demand.
A trend that we expect to continue in the June quarter.
Despite these challenges non HDD revenue was essentially flat year over year and demand remains solid notably for the system business.
With a record order backlog exiting the quarter.
Moving on to our operational performance non-GAAP gross profit in the March quarter was $817 million.
<unk> two $749 million in the prior year period.
Our corresponding non-GAAP gross margin was 29, 2% down 150 basis points sequentially, but up 180 basis points year over year.
The ongoing transition towards higher capacity drives and cost optimized products, providing some offset to the slowdown in the VM market.
And continued elevated logistic and component cost.
Gross margin was inside of our long term targeted range of 30% to 33% and we expect our HDD and total company gross margin to trend higher in the June quarter.
non-GAAP operating expenses were $345 million.
In line with our expectation.
We estimate that Opex will move slightly higher in the June quarter due to an increase in business that either in sales and marketing activities.
Our resulting non-GAAP operating income was $472 million, which translating to non-GAAP operating margin of 16, 8%.
And is that in lower sequential business volumes and a temporary margin pressure discussed earlier.
Based on diluted share count of approximately 222 million shares.
non-GAAP EPS was a nice quarter was $1 and 81 thing.
Within our original guidance range and consistent with our update in early March.
Inventory increased by $192 million.
Approximately $1 5 billion.
As we continue or making strategic purchases of critical component optimized use of ocean freight to reduce logistic costs.
And support future product demand.
Even if they cut into macro environment, we believe inventory at this level is appropriate for the next capital forecast.
Capital expenditures were $97 million for the quarter.
Slightly quarter over quarter.
We expect to be at or below the low end of our target range of 4% to 6% of revenue for fiscal 'twenty two.
Which is adequate to support our future product and services roadmap.
While maintaining our focus on aligning supply with demand.
Free cash flow generation for the March quarter was $363 million up.
Up 32% year over year fiscal.
Fiscal yesterday through our March quarter, we have generated nearly $400 million more in free cash flow as compared to the previous year.
Enabling seagate to continue its strong return of capital to shareholders.
In the March quarter, we used $154 million.
The quarterly dividend and $417 million to repurchase $4 2 million ordinary shares.
Exiting the quarter with 216 million shares outstanding and approximately $2 8 billion.
Remaining in our authorization.
We ended the March quarter, with cash and cash equivalent of $1 1 billion in.
And total liquidity was approximately $2 9 billion.
Clothing, our revolving credit facility.
Adjusted EBITDA was $2 $7 billion for the 12 months period ending in March.
With our leverage ratio declining slightly to two one times.
Total debt balance at the end of the quarter declined to $5 6 billion.
Setting the planned repayment of $120 million in debt during the March quarter.
In summary was a march quarter. It was very challenging we delivered top and bottom line results with whether within our original guidance range with agile operational execution and ongoing focus on optimizing profitability and free cash flow generation.
Entering the June quarter, the operating environment has remained challenging.
We have not yet seen an improvement relative to COVID-19 shutdowns in China.
Dissipated in early March.
And non HDD component shortages and geopolitical dynamics have intensified.
And that is at the.
We expect with external factors to constrained demand growth over the near term.
With that in mind, we expect June quarter revenue to be net <unk> of $2 8 billion.
Minus $150 million.
We expect the actions that we're taking to mitigate external challenges combined with a more favorable product mix to support a June quarter non-GAAP operating margin at the low end of our revised non term range of 18% to 22% of revenue.
Finally, we expect non-GAAP EPS to be in the range of $1 90 <unk>.
Plus or minus 20%.
An increase of 5% sequentially at the midpoint.
I will now turn the call back to Dave for final comments.
Thanks, John Luca.
The fundamental demand drivers for mass capacity storage remain intact, while the external challenges discussed today are impacting our Q4 outlook I am confident in the long term growth trajectory of the business backed by the combined strength of our operational execution technology roadmap and strong product portfolio.
Demand for data continues to grow in both both public and private clouds and at the edge with a broadening of visa applications.
These trends support mass capacity revenue Tam doubling every five years or so.
And reaching $26 billion by calendar 2026.
<unk> leadership in mass capacity technology, and strong product portfolio make us ideally positioned to capture these opportunities from the 20 plus terabyte drives we are shipping today.
To the 30, plus terabyte hammer products under development, along with our cost optimized portfolio of mid cap drives.
We are taking actions to improve margin and cash flow as we move through the calendar year barring any additional macro disruption, which is consistent with our priorities is to drive profitability and free cash flow generation.
Finally embedded in seagate's culture of innovation and execution is our commitment to running a sustainable business.
That balances profitability with people and our planet.
We marked Earth day this year with the release of our 16th Global citizenship annual report and announcement of two important goals that reflect our deep commitment to sustainability.
The first goal is to utilize 100% renewable energy across our global footprint by 2030.
The second is to achieve net zero carbon footprint by 2040.
Done in collaboration with our customers to limited scope three emissions and in turn support their environmental goals.
We continue to see opportunities to partner more closely with customers for the benefit of sustainability as well as circularity.
The world's precious resources are finite and we are working to expand programs focused on reducing our impact of the planet through efforts to recycle and reuse drives components and raw materials.
I'm very proud of the important work our teams are accomplishing in fiscal 2021, we've recycled more than 1 million drives and recovered over one metric ton of rare earth materials.
I'd like to conclude by thanking our employees for their incredible efforts, our suppliers and customers for their partnership and our shareholders for their ongoing trust and Seagate.
Gianluca and I will now take your questions.
We will now begin the question and answer session.
A question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to please limit yourself to one question and one follow up if you have.
Further questions you may reenter the question queue.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from <unk> Mohan from Bank of America. Please go ahead.
Yes. Thank you good morning.
Can you talk a little bit about the demand trends in China more broadly beyond the video and image applications market and any impacts that you might be seeing from the <unk>.
Lockdowns from a supply perspective as well.
And maybe also comment on demand trends in Hyperscale.
Follow up.
Sure. Thanks <unk>. Thanks for the question.
A few things I'd say, just mindful of geopolitical challenges everywhere.
And I think the channels to your question the distribution channels are quite disrupted everywhere not just in Europe , but but all over the world. The Covid shutdowns, obviously affecting major cities to.
To the extent, we have customers in those cities the customers.
Ken.
Can deal with their demand predictably, they can't install geared at the rate that they were thinking about it because.
People are in Lockdown of course, having issues.
Don't really have any concerns over China cloud long term.
There is strong customer interest in <unk>, and <unk> and dual actuators and all the other things that we make for the cloud so that's actually.
Pretty good story for us still.
The VA markets like you mentioned, but also the distribution channels, what's really being impacted more and Thats, where you get value added resellers that just can't they don't have access to.
Either they are end customers very well or they don't have confidence so theres a lot of trepidation around the channel and they're not pulling a lot of inventory, which is from a disk drive perspective is actually.
I don't think there is too much inventory in the channels. There are some other component issues to your to your question.
So some people are having challenges getting smaller components relative to our logistics costs are up but there is no real impact to our supply for hdds.
But we are mindful of the fact that there, especially when we build the systems business.
Script, John Luca talked about some shortages, we hadn't systems business when you get into smaller piece parts and.
And more boutique parts that arent high volume it gets tougher, especially for all those people doing the integration Thats what effect, that's what's affecting demand.
Okay, great. Thanks, Dave and then as a follow up.
Given sort of all these macro headwinds and the changes in sort of the.
Demand trajectory at least in the near term.
Or are you thinking about the calendar year I know you had previously expected sort of a mid single digit growth on that it feels as though the second half now needs to have significantly higher growth in the first half and compares are also a little bit tougher in the third quarter. So anything you can help us to think about.
The second half of the calendar year. Thank you.
Yes, that's right.
The lockdowns in some of the other things that are going on macro level.
It affected the first half.
We still think that theres growth coming in the second half of it theres another.
Year of mass capacity revenue growth, which is.
Plugging along nicely there is healthy cloud demand, we see further out we do think some of these temporal things that I. Just referenced is will abate at some point, but I think it's a little bit too early to call that number. So we'll probably just talked to you about it on the next earnings call Dr. John Luke wants to add something.
I will say that as a quality situation in China, and Asia and Canada.
It's Bonnie.
<unk>, our visibility right now so as being equal to now have a clear estimate column ball plant at all but as Dave said.
We are confident on is today very strong uptake on that for the calendar year.
Okay. Thank you so much.
The next question comes from Tom O'malley from Barclays. Please go ahead.
Hey, guys. Thanks for taking my question you mentioned a couple of times in his script that youre going to continue to take actions to help margins and cash flow can you talk about the pricing environment are you looking strategically at how youre pricing your product given the way that market trends have gone I know specifically outside of the Covid impact you've already seen just talk about the broad market and are you using pricing to you.
The advantages you see inflation and some other factors impact your supply chain.
Yes, Thanks, Tom I, Wouldnt say pricing to our advantage, but I would say is we're very mindful of all the trends that are going on so there are freight and logistics costs, which we've talked about fairly openly.
In the early days, we called some of that Covid impacts, we really didn't quantify it any more of it.
There was other raw materials that the prices are going up and the way we address those things are product transitions.
Complexity reduction, which is actually helping with some of the supply chain challenges and working with our customers.
Come up with more creative alternatives.
For example ocean freight.
And the customers can help there as well so we work in partnership, but we do need to be very mindful of the fact that as we go through product transitions to higher and higher content drives we need to get paid for our investment as well so pricing will be a factor in all of those things.
That's what we're driving.
Driving with the discussions that we have with our customers the pricing environment in March was still favorable so.
Is now that we see any attenuation on on that.
Standpoint.
However, I don't know we need to improve our gross margin.
Improvement will come from Iowa to mix.
Much higher 20 terabyte.
Volume.
But we also need to work on our pricing in order to offset that in the spot of any oil.
It was a cost increase but we know we add.
We are getting from higher inflation and is still very high freight cost.
So and also I think that meet those impacts on the EBITDA.
Segment EMEA segment Aes.
With a good gross margin quarter, so, adding lower volume is of course impacting our our financial performance we.
We think in the June quarter, and I think the segment that will start to improve last stated at not at the level we were expecting.
<unk> may be three or four months ago. So all of these together now as there is but I think our decision tool what anything to nathan's advising side and and.
And as we said jeans that fit their remarks that we expect the June quarter with higher profitability quarter for Seagate.
Gotcha, and then just as a follow up you've given some color on the VA market, but just on the legacy market in terms of Exabyte you saw a pretty substantial step down I think you mentioned Pcs year over year.
What do you see that market doing in June obviously that is probably external from some of the COVID-19 in China impacts that you've seen.
Where do you see that business trending into the June quarter and could you just describe some of the factors that are moving that around right now. Thank you.
Yes, I think the large for the large part C.
It's not really exposed to the PC market anymore, there is a little bit, especially gaming Pcs and some specialty BCS theres a little bit then theyre still.
The distribution channels still uses some PC drives as well, but the volume is very small compared to what it was historically.
The other things like consumer obviously consumers impacted by inflation.
Mission critical there has still been there because there is a $100 billion SaaS lots out there in the world some some of them.
Placement drives and things like that so I would say generally flat.
It's.
It is impacted by spending reductions that happened when things happened in the world, but what we saw in the front end of the pandemic as it came back really relatively strong I don't expect consumer to come back strongly like the work from home trends created.
This part of the pandemic to create the same thing, but the law.
<unk> market is not going down very much anymore. So.
Flat is probably the way I'd call it for a couple of quarters.
The next question comes from Patrick Ho from Stifel. Please go ahead.
Thank you very much Dave maybe you can add a little more color in terms of the supply chain issues, you mentioned that it wasn't so much seagate, but your customers is there a possibility that it could be a large ramp up when some of these supply chain issues.
Pete.
Youll have to ramp up to meet.
I guess pent up customer demand and how do you look at your current capacity in meeting that kind of potential surge down the road.
Thanks, Patrick.
A couple of things on that point.
We talked to the customers deeply trying to understand their forecasts and things like that for what they need. So we know there is pent up demand out there we always all of us the customers and ourselves are always asking us a double booking or something like that but.
The way the orders are getting filled today when the supply does break free I'm confident that there is some snow club pent up demand that are coming so that's.
That's a good trend it doesn't mean that it will be solved overnight.
It's not one particular type like everyone talks about semiconductor.
Parts being the gate or something like that I mean.
From what we see there is small.
Small piece parts passives, there is even sheet metal.
Lot of it comes down to whether people can get people into factories, where the suppliers can get people in the factories to build all the parts and that that's where the shutdown start having some problems, but are creating some problems just like the front end of the pandemic I do think it is going to abate a little bit quicker. This time and so we'll see we're working with the customers. We are also.
So building up a little bit of inventory right now and so we have inventory to answer the call for then we're kind of happy with our balance of supply and demand today.
And have to go into the back half of the year, but we do have a little bit of extra inventory should show the customers need it.
Ramping 20 terabyte.
Very very rapidly and.
As we said before we will move that and important volume in the June quarter, but we are in the ramping production. So that we wouldn't have even higher volume for September and December .
Great that's helpful and maybe as my follow up question for you Jim in terms of gross margins I know there are lot of moving pieces in terms of price.
Pricing capacity drives.
Maybe just focusing on the core.
Cost fronts.
Our freight and logistics costs, the largest I guess headwind that has faced.
Facing gross margins or the other.
Other costs.
There are having a bigger impact at least in the near term.
I will say in the near term for sure our freight and logistic.
Major item, we also have pharma as a component cost of it.
And good evening.
That enables inclination by that increasing a little bit compared to what was maybe announced September quarter ending December quarter last year.
And now we are taking our auction.
To improve our efficiency internally.
To move our mix as much as we can to capacity drive and some of the pricing action. We discussed before so we think already in the June quarter, we will have a bath added gross margin and operating margin.
Great. Thank you.
Thank you.
The next question comes from Krish <unk> from Cowen. Please go ahead.
Hey, Hello, guys. This is Eddie for Chris.
Congrats on strong results in challenging environment.
Hum.
Have a question on gross margin.
Not asking for them.
Second half, but it seems like June implies improvement in gross margin.
And the way I'm thinking about it as <unk>.
The video comes back and 20 terabyte.
Continues to run.
We should see improvement in second half.
For gross margin isn't the right way.
Thank you.
Thanks Eddie.
As we.
The first order supply and demand being balanced is the thing that affects it the most.
To the extent that we can ramp the new programs and sell those I think and they're yielding well and the scrap is low and everything else, which I'm very happy with I think that's the best way to address the market.
The 20 terabyte high volume that we talked about in the back half of the year will certainly be a great product from margin perspective, but even though these mid cap cost optimized drives that we've launched in the last six months those are really hitting their stride as well. So I think we've got a good portfolio to go forward when all the demand comes back to Patrick's question right. We've got a good portfolio.
Please go go forward factories will be full so the margin should improve.
Okay.
The next question comes from Steven Fox from Fox Advisors LLC. Please go ahead.
Hi, Good morning, two questions. If I could first of all can you just be a little bit more specific on your expectations for how the lockdowns in China impacted business relative.
In the June quarter relative to where we're at right now I'm just wondering what you're factoring in there and then secondly, if I look at the margin guidance for the June quarter. It looks like the operating margins call. It roughly flat on slight decline in sales on a year over year basis can you talk about.
Puts and takes versus a year ago in terms of the flat margins, what you're dealing with now versus a year ago and how that mix is helping et cetera. Thanks.
Yes, I'll say for Jose Colby Oes path. Unfortunately.
Creation tool last probably for the major part of the quarter maybe than third quarter.
As we have seen that.
The last two and half year.
Those things usually don't go away very quickly.
So it is part of what we guided.
Then in term of gross margin.
As I said before we have.
Items that we can work on in order to improve our profitability also in the short term and despite those cost increases that led to that.
We're experiencing right now.
We are very confident with the demand on our 20 terabyte savings, it's probably the nature of that either our improved 19 nine gross margin as a short term.
And as you know every every quarter that we are able to improve our internal efficiency and and get into the details of cost down despite the despite jose extending our cost to that.
But we need tool.
We need to offset.
Great. That's helpful. Thank you.
Okay.
The next question comes from Erik Woodring from Morgan Stanley . Please go ahead.
Great. Thank you for taking my question, maybe just to start Dave do you mind, just providing a few more details just on some of the pricing actions you guys are taking in this market in ways that you can offset some of those component cost inflation.
Yes, obviously, Eric theirs.
Distribution channel.
Worldwide.
That's the stuff that we can move fastest things that we have for example.
Long term agreements or.
Key OEM relationships, where we're trying to drive predictability that substance move slower.
Sometimes the inflationary pressures come really quickly sometimes there are things that are affecting everyone until I think everyone gets it we deal with procurement people who are experts themselves. They know what's going on.
They know what we're suffering with again, our first answer isn't pricing, it's usually to try to help each other.
For ways around it but ultimately we have to get paid for what we do so I mean, there's different time horizons I guess is the best way to say it for what we can go implement.
Okay. Thanks, and then maybe just as a follow up to get back to one of the questions about legacy markets earlier, maybe can you just dig a little one level deeper and try to parse out maybe how you guys are thinking about the supply challenges that your customers are going through versus any kind of impact.
To demand that they might be seeing that might compound the supply challenges or more than offset those supply challenges and thats. It from me. Thanks, Yes.
Yes, not too much on legacy I think it does.
Theres some interesting trends going on.
Sure.
Opine on this too much other than to say that.
I talk to different customers. There are some people who are being forced through product transitions.
Sometimes thats a way to alleviate ultimately the supply challenge, but you go through a product transition to the new product to make it more efficient so that people can get more parts, but then your legacy stuff. If you will goes end of life and that becomes a challenge for you as well because you need some of the legacy stuff that will make your products. So it's a complicated world.
And when there's when suppliers behind demand in all of these parts because people are trying to get you more parts, but they're ticking through these product transitions and not everybody goes at the same speed through them and we don't really have that issue too much in the HDD business, but we see it a lot outside of us. So we're mindful of that and we'll have to work with the customers on it.
Great. Thank you.
The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions I wanted to go back to <unk> question at the beginning around kind of the full calendar year I could appreciate that there's a lot of moving parts and you don't want to give a full year guidance, but I guess my simple question is do you think this calendar year, you can grow revenue and the reason I'm asking is that.
Even on a flattish revenue basis, it would imply seemingly healthier.
Ramp into the second half of the calendar year than we've seen over the last couple of years. So I'm just kind of any thoughts around that I know you talk about visibility on the cloud side into the second half being strong.
Again can you can you grow this calendar year.
Sure.
I'll give my my take on it here and then I'll hand, it over to Gianluca.
I think it all comes down to.
What are the dynamics that we're seeing tactically in the channels right now I mean, I think the demand is out there.
And certainly from the cloud side the demand is ultimately out there.
And then even on the enterprise side.
Your line Enterprise, if you will there's demand people hitting the entire.
The entire kit of parts is probably more of the issue so.
I referred to earlier were actually snow plowing some of that demand right now.
We can get all of that we've got a great product set coming as well. So we're really happy about that we do think theres going to be revenue growth in the back half of the year, but when you get into these compares I think it just gets a little too early given exactly what we're going through right now so yes.
Yes, I'll say, if you just look at demand.
Neiman could drive revenue above what we need in calendar 'twenty one.
<unk> is how much of that demand we can't answer.
And I know, we don't have therefore beneath it will give you a.
Can you add indications.
No. We said before we have got a confidant on.
On demand that we are confident that the second calendar year will be strong.
Again, we are not today in a position to.
Quantify that because we don't know how much weekend.
Yes.
As a quick follow up and I appreciate that.
Thinking about gross margin you've said for the last couple of quarters HDD gross margins been solidly in your 30% to 33% range. How do we think about the trajectory of the non HDD gross margin as we look forward.
Yes.
It's actually an interesting question, we think that we were definitely snow plowing some demand on the system side, we made reference to that's where we had some of our component challenges that we couldnt get enough components and so had we probably been able to attain that I think the margins would've been higher.
I will say at the same level of the HDD gross margins unit per our plans.
But.
No.
Just wanted to drop too much then we might not do that business, but we think that on the system side. There is quite a bit of opportunity in the rest of the stuff in the consumer markets in SSD origin, we are opportunistic and we take advantage of the kind of current environment user brand well, so I would say.
Think about it as flat we were just challenged because we couldn't get enough parts less last quarter.
Thank you.
This quarter in SSD, we also on the component cost increases. So we didn't have a particularly high gross margin. So obviously is also impacting our total gross margin, Florida for the quarter, but on the additive side as you just heard Lulu.
Turning to the range.
Yes.
Yeah.
The next question comes from C. J Muse from Evercore. Please go ahead, yes. Good morning. Thank you for taking my question. Another gross margin question.
Slide in your guide it looks like roughly 75 to 100 bps increase in gross margins on flattish revenue. So curious.
What are the key kind of positive drivers are there is that entirely higher pricing or.
Is there a little kids from via mix or or is there something else in there that we should be thinking of.
I think it's largely mix.
Not just be a mixed with via mix is a little bit of it I mean, we do see that market starting to recover like this so there is there is a pen.
Up demand that ultimately gets served as people find the right components, but.
20 terabytes, the mid cap drives that we talked about the cost optimized mischaracterized, which a ratchet ramping as well I'm happy with the yields the factories are full those are the things that really help us drive the margins.
Very helpful.
And I guess as my follow up.
Is there.
Is there a way to put a number on.
What kind of demand from the dealer side has been pushed out to the second half and if you assume there is no demand destruction, what kind of incremental revenues that could look like.
Tough question.
I don't know that we've ever really thought of it like that.
But I do think that.
Well I'll, let gianluca answer here.
What I would say CJ is that at a high level theres big customers and small customers. The small customers in the channel are the ones that are the most disrupted.
The business is being service around the world via business is being serviced by.
Individual operators I call it a white van business, sometimes and so.
Thats a fairly profitable.
Set of channels for us.
So I think.
That's what we're going to have to watch the recovery of in order to predict how it goes.
And now <unk>.
I'm trying to quantify.
Last quarter, we said, we were expecting a fiscal 'twenty two to be between 12 and 14% higher.
Then in fiscal 'twenty one.
And what I know based on what we guided it will be probably around.
Between 10 and 11.
So the Delta is mainly is mainly the VM market.
So this is what is public pushing out more or less yes.
The one big customer to new customers.
The diverse channels are the ones that are really being impacted.
Very helpful. Thank you.
Yes.
The next question comes from Kevin Cassidy from Rosenblatt Securities. Please go ahead.
Yes. Thanks for taking my question. Maybe my question is around the same inventory builds that you saw this quarter.
Is that via products did you say and also how fungible is your manufacturing can you move from via too.
The more of the near line products.
Yes, thanks, Kevin.
There is some view.
Product that is actually near line product yes.
And to the extent that we're ramping those cost optimized mid cap.
Satisfy those markets is the same product exactly.
Not too much most of what we're talking about as far as inventory whip in raw materials is really driving 20 terabyte transitions.
Still selling what we had on the older products, but making sure we.
We wind up for this big ramp that we've got on <unk>.
The big play there.
Some small via and Theres some small even legacy just because the demand is down a little bit we keep the factories going in there.
And then we repurpose the factories towards more mass capacity later that we've been on that trajectory of transition. If you will for the last five years.
Yeah.
Okay, and maybe just.
What visibility do you have.
I guess, what lead time are you, giving your.
Customers, if they place an order today.
Totally depends on the product of course, but.
One of the reasons why we are driving the discussions that we are with the cloud just because the volume is so high and not just a number of drives it and heads and media and things like that we want to make sure we have the right thing.
For their transition so those those.
Visibility if you will the lead times can be six months.
That's from wafer start to drive out its longer than that for some of these big cloud drives.
No no.
Other markets. We may have we may want six or eight week visibility.
Not too much of our business is highly transactional at the end like it used to be but if.
If that helps you.
Markets are different the cloud being the longest.
Okay, great. Thank you.
The next question comes from Ananda Baruah from loop capital. Please go ahead.
Hey, Thanks, guys for taking the question.
A couple if I could Dave what's your what's your guys view on.
This cloud cloud demand as cloud cycle.
Kind of going into calendar year 'twenty three at this point and then I have a quick related follow up thanks.
Yes, I think there is a lot.
Hard to manage data centers that high.
At high volume I think like a lot of people are learning in the world.
Think about some of the smaller providers around the world, it's not easy to ramp and scale.
And things like that so there are all kinds of distractions, especially with the supply chain things that are going on in the world.
The bigger you get the more you have to take offline some older stuff and refurb and upgrade and so it becomes a enormous operational challenges.
I really appreciate how hard that is for everyone to manage it. So therefore, you hear people going through various trends my sense is right now.
Higher capacity drives are.
And in a hot commodity.
I think that the world will go to more.
Bigger percentage of higher capacity drives in the future I think when we talked about these utilization rates being larger than they ever have been kind of record utilization rates in the cloud I mean people, it's really kind of squeezed as much as they could out of the existing data infrastructure, there's not a lot of drives that arent working 24 seven or.
Our full or is that kind of thing in the in.
In that environment and data just keeps growing so from my perspective directly to question see why 'twenty three we will continue to grow in <unk>.
And we're on a trajectory here in five plus years to double the revenue out of mass capacity.
And our products are staged really well for that so the discussions over the long term discussions that we're having with everybody again everyone's going through temporary problems right now on supply chain, but the long term discussions are quite favorable for us.
That's super helpful and I guess, a follow on to that as you guys are hot.
You did some.
So to have some conversation last year about increasing.
The number but you continue to be some of your larger.
Cloud related customers, I think 15, or so from 10 or so.
Sure.
Are you seeing.
With what's going on in the supply chain and macro et cetera are you seeing any impact to the pacing of.
The development of those customers.
Yes.
You read that if you read that into my last answer.
There is definitely some of the smaller players that are trying to grow more quickly that are having their own issues and with supply chain.
That is a function of maybe just experienced so far they have aspirational goals to grow much bigger we can try to help them, but they are going through various supply chain issues and we think some of that will abate over time.
And some of it actually frankly they'll bill.
Pick architectures that are much more common out there in the world versus trying to optimize their own architecture as well to satisfy the application set just to just because of the supply chain problems. So that will probably help the supply situation as well.
Alright, Thats really helpful. Thanks, a lot.
Thanks, Don.
The next question comes from Jim Suva from Citigroup. Please go ahead.
Thank you you've been very clear about the challenges in China on the video imaging.
And also the visibility you have kind of in the second half of the year.
Question I have is is there a risk that if.
And who knows but if COVID-19 continues to remain an issue in certain locations have kind of a zero tolerance policy.
This actually could not come back in the second half of the year or is there.
Visibility that regardless of the demand for the video imaging in Asia will come back in the second half of the year I'm, just trying to understand that a little bit. Thank you.
Right.
I think Jim.
It's too early to tell but there is uncertainty yes.
And you can tell that in our comments.
Talking to our customers the demand is out there they continue to innovate on feature sets in.
Smart city feature sets and surveillance feature sets and.
These things are needed around the world to make people safer.
To drive all kinds of efficiencies, we've had some great conversations about consumer behavior and getting some efficiencies out of that that would help everybody's margins. So there's there's.
There is all of this.
These ideas usually that comes with installing new envy, our DVR boxes at the edge, because that's where a lot of the analytics are done.
Right now I think.
These channels are fairly disrupted worldwide.
And the vars or.
The integrators are not willing to stick their necks out too far because they don't know exactly whats going to happen next in and I do think that Covid is a significant part of that especially in China.
I think that once that abates, then the new feature sets will be in demand and I think we will start to see it come back.
The last two and half year.
We haven't even with a lot of uncertainties.
So we think we have manage those fairly well.
Of course, depending upon what that magnitude then we don't know what will happen next month and next quarter.
But as Dave said.
We expect that to start to improve hopefully soon and that demand will come back quickly.
Great. Thank you.
Thanks, Jim.
The next question comes from Mehdi Hosseini from Sci. Please go ahead.
Thank you thanks for that.
Quick follow up I'm just curious.
How do you guys forecast near line demand.
For more than one quarter, and specifically for North American customers.
Well I think we've talked we've talked about quite a bit of our LTA is that we have.
It's not really even forecast at some level.
Strong discussions that we're having with customers and when you start talking in the millions of millions of units then.
And staging the right product for what they need and filling hubs.
Even a 10% error is just.
Something that we actually put in the hubs around so we're not even forecast more co planning I would say the co planning exercises that we're doing now.
Thank you.
The next question comes from Mark Miller from the Benchmark Company. Please go ahead.
Thank you for taking my questions. First question can you give us an update on hammer and then the follow up question is youre talking about being at the low end of your capital spending for fiscal 'twenty. Two do you anticipate youll have to add component production capacity in fiscal 'twenty three.
Thanks Mark.
So yes hammer.
Started talking couple of quarters ago about being in product development. So if you watched our company's long enough you know what that means.
We are.
Kind of in the final throes of development doesn't mean, the product's done by any stretch of the imagination, but confidence is pretty hot the gains that have been made in hammer and reliability testing has been fantastically I mean to the point where.
We have product available.
Components right now we've got to get the yields up we've got to solve all the other problems. It's not just about heat assisted magnetic recording its about all the other things that have to come together in a 30, plus terabyte drive, but we have confidence we've been staging for for quite a long time, we're very communicative with our customers on this because this is a.
<unk> debt free.
Frankly, they want really badly because that helps their <unk> proposition and so and there's a whole host of new features that come out on some other schedule that we're working with them on as well so.
We're in the throes of product development customer communications and everything else. We will keep you posted on that has gone quite well.
The second question was on Capex I think so far fiscal 'twenty tool we added.
No the low $5, therefore to 6% range.
Range of driving of course.
I know, we don't guide since Cal 2020 today, but I don't see any reason why we should be out of that range also for next year, yes.
Implication Mark was about components around Hammer I think we've been planning for that for quite some time. So the tools that we're using that we have to buy our hammer compatible to <unk>.
First order and we know how to integrate those.
I was also thinking about the ramp of 20 terabyte.
Yes.
It's the same tool set yet.
Okay. Thank you.
Okay.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Yes, thanks, Jason in summary, long term growth drivers for mass capacity infrastructure haven't changed and it's all underpinning growing demand in the cloud and the edge, it's all about data.
Seagate's strong operational execution product roadmap position.
Our technology.
We're really well positioned to capture these opportunities.
We'll expand profitability enhance value for all of our stakeholders.
Like to thank our employees again for their outstanding efforts in these tough times and thank our customers suppliers and investors for their continued support.
Thanks for joining us.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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