Q4 2022 Seagate Technology Holdings PLC Earnings Call
As well as the supplemental information all of which may be found on the investors section of our website as always following our prepared remarks, we'll open the call for questions now.
Now I'll hand, the call over to Dave for opening remarks.
Thank you <unk> and welcome to those of you joining us on today's call.
Our June quarter financial results reflected near record data center demand.
Contrasted with impacts from a confluence of macro headwinds in other end markets, particularly in the consumer facing legacy markets.
We believe the secular data trends driving long term demand growth for mass capacity storage and infrastructure remain intact as I will discuss a bit later.
However, the impacts from Covid Lockdowns in Asia, non HDD component shortages and global inflationary pressures intensified late in the quarter.
Our resulting June quarter revenue and non-GAAP EPS declined quarter on quarter to $2 63 billion.
And $1 59, respectively.
While macro events are weighing on our near term performance Seagate's financial achievements for fiscal 2022 were noteworthy.
We grew revenue by 9% year over year fueled by 24% growth in our mass capacity products.
We expanded profitability even faster than revenue.
Leading the fiscal year, non-GAAP gross margin above, 30% and non-GAAP operating margin above 18%.
And we achieved record non-GAAP EPS of $8 18.
In fiscal 2022, we generated $1 3 billion and free cash flow our highest level in four years.
<unk> maintained our commitment to returning cash to our shareholders funding.
<unk> $610 million in dividends.
And repurchasing 9% of our shares outstanding.
We are also demonstrating technology leadership and executing our product roadmap to support the growing demand for data.
We obtained our fastest ever ramp with the 20, plus terabyte near line platform handily, beating the projections that we made at the start of the quarter.
We are on track to achieve volume and revenue crossover with the 18 terabyte drives in the current quarter.
The 20, plus terabyte product family is based on our highly successful common platform design, which has enabled us to scale and ramp to yields quickly as evidenced by the results I just shared.
We have the flexibility to extend into the mid to upper 20, terabyte capacity points with minimal changes to our design, which allows us to meet customers' timing readiness and offers an attractive cost profile for both customers and for Seagate.
We have worked tirelessly over the last three years to four years, improving the resilience of our supply chain aligning our mass capacity product portfolio to our customers needs and strengthening our financial Foundation.
Our operational execution combined with structural changes that have taken place in the industry.
Really the transition to mass capacity products and increased supply discipline.
Support our view that the company is fundamentally stronger today and better positioned for the future.
Let us now turn to the current market environment.
Despite the ongoing impacts of Covid, lockdowns and supply challenges mass capacity revenue was flat quarter over quarter.
Due in part to strong cloud customer adoption of our 20, plus terabyte near line drives.
U S cloud data center demand remains strong however, persistent non HDD component shortages have led to inventory imbalances precluding new data center build outs from being completed.
These along with other supply disruptions.
Have led to a buildup in inventory levels across a broad spectrum of customers of <unk>.
That continued through the end of the quarter.
As macro uncertainties and inflationary pressures intensify we expect customers will increasingly focus on reducing their inventory levels, while maintaining the ability to address and market demand.
At the same time, our Asia based cloud customers are dealing with the impacts of Covid restrictive measures.
Which have had far reaching effects across all of the end markets that we serve in the region.
In the VA markets recall that many of the major projects driving demand or in the Asia region, particularly in China, where lockdowns are impacting our near term revenue.
While the situation remains fluid we are confident that mass capacity demand growth will resume once lockdowns ease and inventory levels normalize.
Within the legacy markets.
<unk> rapidly deteriorated at the end of the quarter as Lockdowns and surging inflation severely impacted consumer spending for Pcs and external drives.
Exiting the June quarter, the legacy business represented only 20% of our HDD revenue.
Which is a historic low.
In response to the current business conditions, Seagate is taking actions to maintain strong supply discipline and a favorable pricing environment.
We are reducing our manufacturing production plans.
Continuing to focus on driving efficiencies in the factory and across supply chain.
We're maintaining prudent cost controls across the business and.
In executing our product roadmap, which also helps to support our customers' tcl objectives.
While the current environment is challenging the multiple secular drivers fueling long term demand for mass capacity storage have not changed and in fact continue to expand.
Digital transformation is still in the early innings. According to leading cloud service providers, who have estimated that only 10% of corporate it has moved to the cloud.
New AI applications continue to emerge with the AI engines, requiring a massive amount of new data for training.
Data that must be captured analyzed stored and moved across a more distributed multi cloud network.
And as the digital and physical worlds begin to converged enterprises are employing data intensive digital twins to enhance decision, making and overall business efficiencies.
These trends dovetailed into a view that businesses will need technology investment strategies to remain competitive in a data driven world.
Which includes the need for mass capacity storage and infrastructure.
Seagate is poised to benefit with a broad product portfolio of cloud and edge infrastructure solutions for mass capacity hdds to enterprise systems.
Our live cloud and mobile service offerings.
We are executing our development plans for the 30 terabyte plus product family based on our innovative <unk> technology.
Which enables capacity points of 30, 40, 50, terabytes and beyond to support future data demand growth.
TJ, it's innovation extends beyond our HDD technology leadership.
We're garnering recognition for our systems portfolio.
Capturing the covenant product of the year award for hardware infrastructure at this year's Nab show for our core volt storage system.
<unk> has also gained customer retention with its unique autonomous drive regeneration technology, which combines our device and systems expertise to enable self healing capabilities.
These systems provide enterprise cio's with peace of mind that their data will be protected while offering a strong <unk> value proposition.
Additionally technologies, such as self healing distributed data protection and secure race play.
Play a critical role in reducing the environmental impact of our products.
Lives with these technologies can be repaired reused or recycled rather than just discarded thus helping to preserve the earth precious resources.
These efforts are critically important to seagate and a key pillar of our product circularity strategy.
We are also receiving very positive feedback from customers on a global basis for our work in this area.
In closing <unk> has broad exposure to the strong secular tailwind driving demand for mass capacity storage.
These trends remain intact, which lends confidence that growth will resume as supply constraints and COVID-19 lockdown impacts ease.
Seagate is fundamentally a stronger company today and is exceptionally well positioned to endure the current market market environment.
We have the right product portfolio deep customer relationships and operational agility to optimize profits and fuel growth.
I'll now hand, the call over to Gianluca to discuss the financial results.
Thank you Dave.
While demand for our advanced capacity product at a very healthy in the June quarter, the intensifying economic pressures.
Depth of inventory at our estimate and causing us take the measure that David discussed earlier.
And the most significant impact on our results than we were anticipating.
In the legacy business.
Despite lower than anticipated revenue level and the accelerating any cost pressures.
Our non-GAAP gross margin expanded slightly to 29, 3% in the June quarter.
We as HDD gross margin remaining comfortably inside our target range of 30% to 33%.
Our <unk> are due impart to the steady demand, while our mass capacity products and a mix shift toward higher capacity right.
In the June quarter total additive side capacity shipments increased slightly to 155 exabyte.
The mass capacity market made up 90% I would've thought that with <unk> of 130, <unk> up 4% sequentially and 12% year over year.
Our near line products contributed 119, exabyte up 1% sequentially and 17% year on year, mostly by strong U S cloud customer demand for our 20, plus terabyte product family.
We ask that each of high capacity near line drives supporting record total HDD capacity per drive of seven eight petabyte compared with $5 four petabyte, Jeff blending at Eagle.
When the revenue base mass capacity represented 80% of total HDD revenue at $1 9 billion in the June quarter flat compared to the prior quarter and slightly higher than prior year period.
Strong U S cloud demand combined with the sequential improvement in the VM market, albeit of a very weak months David.
Lower than expected status into the Asia market, which have also been affected by public love them.
Why do we believe the end market demand that options at <unk>.
Mindful of prevailing macro uncertainties, which influenced how quickly the via and added a month capacity market will return to strong annual growth.
Within the legacy markets and revenue was $489 million.
Down, 24% sequentially and 43% year over year.
The decline was most pronounced in the client PC end market.
Which now represent a mid single digit percentage.
Our overall revenue.
Consumer demand also deteriorated more than anticipated, reflecting is characterizing inflation impacting consumer discretionary spending.
Finally revenue for our non HDD business.
$218 million.
Now only about 8% sequentially and 21% year over year.
We saw a sharp uptick in our system business.
We were able to mitigate some of the component shortages, we have been experiencing.
We can enable us to begin shipping some of their record order backlog.
However component availability.
The challenge and impact because the SSD business during the quarter, leaving us unable to fulfill the customer demand.
We continue to work with our suppliers to support customer demand as constrained.
Moving to our operational performance.
non-GAAP gross profit in the June quarter was $771 million.
Corresponding to a non-GAAP gross margin of 29, 3% up 10 basis points quarter over quarter.
As noted earlier, the increase mix of mass capacity products and transition to higher capacity drives more than offset lower business volumes and higher component costs.
non-GAAP operating expenses were $349 million slightly up quarter over quarter and in line with our expectations as business driver and sales and marketing activity and assumed.
Okay.
Our resulting non-GAAP operating income was $422 million.
Or 16, 1% of revenue.
We will continue to focus on managing cost and balancing supply with demand to position the company to expand operating margin back into the target range of 18% to 22% when top line growth and as units reached.
Which we believe could begin later in the fiscal year.
Based on diluted share count of approximately 117 million shares non-GAAP EPS for the June quarter was $1 59.
Moving onto the balance sheet and cash flow.
Inventory increased to approximately $1 57 billion.
As we ended the quarter with a higher finished good consistent with our rapidly changing business environment.
We continue to maintain a higher level of critical components and the use of ocean freight to reduce logistic costs and support future product demand.
Based on our current outlook, we expect inventory to decline slightly as we move through the calendar year.
Capital expenditure were $72 million for the quarter and totaled $381 million for the fiscal year or just over 3% of fiscal year <unk>.
Reflecting our focus on aligning supply and demand.
Even if the economy is in this environment, we will continue to carefully manage our investment and supply.
Free cash flow generation was $108 million that means the June quarter.
Down from $363 million sequentially due to a combination of factors, including higher inventory levels.
The timing of SaaS and received and linearity, which was heavily weighted to the bank handles report.
We are seeing but should normalize in subsequent quarters.
Overall, we are pleased with our free cash flow for fiscal 2022, which increased 13% year over year to approximately $1 3 billion.
We currently expect continued growth in our annual free cash flow generation in fiscal 2023 <unk>.
Depending on the pace of economic inequality.
Consistent with our commitment to returning cash to shareholders, we use $152 million for the.
Quarterly dividend and $486 million to repurchase 6 million ordinary shares.
In the quarter was 210 million shares outstanding.
And that approximately $2 $4 million remaining in our authorization.
Over the past two years, we have reported more than 20% helps he gets share outstanding.
<unk> price of approximately $71 per share.
We ended the fiscal year with cash and cash equivalents of $615 million in.
And total liquidity was approximately $2 $4 billion.
Including our revolving credit facility.
Total debt balance at the end of the quarter was relatively flat.
With a prior period.
At $5 6 million.
Adjusted EBITDA was $2 5 billion for fiscal 2000, resulting in total net leverage ratio of two two times.
As we enter fiscal 2023, we expect macro uncertainties and non HDD component shortages to continue wrestling, our end markets over the near term.
Drilling on our decades of experience in managing the company through dynamic industry environment. We.
We are taking action to carefully manage our cash and safeguard profitability.
Managing our supply for restore L Pic estimate inventory levels.
With that in mind.
Our outlook for the September quarter is as follows.
We expect revenue to be in that age of $2 5 billion plus.
So that's sort of minus $150 million.
At the midpoint of our revenue guidance.
non-GAAP operating margin is expected to be slightly above 15%.
And we expect non-GAAP EPS to be in the range of $1 40.
Sort of minus 20%.
I will now turn the call back to Dave for final comments.
Thank you Luca.
Last quarter I expressed confidence in the long term growth trajectory of our business and that view holds firm today the.
Multiple secular trends fueling demand for mass capacity HDD storage also catalyze growth for our system solutions and live services business at Seagate is well positioned to benefit.
Our products are funded on our drive innovation and we continue to execute our strong HDD product roadmaps.
We are shipping the 20, plus terabyte family of near line drives and high volume and we are well down the development path towards launching our 30, plus terabyte family of drives based on Hammer technology.
We expect to begin customer shipments of these hammer based products by this time next year.
Seagate will navigate through the near term market dynamics by focusing on what we do best namely run efficient and predictable operations.
Partner closely with our customers.
Put in place prudent spending controls and align supply with demand.
We believe that these actions position us to quickly return to our long term financial model. Once these macro pressures abate delivering 3% to 6% revenue growth and operating margins of 18% to 22% of revenue all the while maintaining our commitment.
Of returning capital to shareholders.
While the dynamic market environment is disrupting typical demand patterns the underlying demand for data remains strong which supports flat or even slightly higher revenue in fiscal 2023, depending on the timing and pace of the economic recovery.
I'd like to conclude by expressing gratitude to our employees for their incredible efforts through the fiscal year.
I would also like to thank our suppliers customers and partners for their contributions to our results and our shareholders for their ongoing support.
Gianluca and I will now take your questions.
Ladies and gentlemen at this time well begin the question and answer session.
Ask a question you May press Star and then one on your telephone keypad.
If you are using a speaker phone, we do ask that you. Please pickup your handset prior to pressing the keys to ensure the best sound quality.
To withdraw your question you May press Star and <unk>.
Once again that is star and then one to ask a question.
Our first question today comes from Aaron Rakers from Wells Fargo. Please go ahead with your question.
Yes. Thanks, Thanks for taking the question.
I guess I wanted to go down the path on the near line business as you look back over this past quarter relative to the 119 X device that your chip I guess the first part of the question is did that play out largely as we expected did you see demand.
Slowdown at all through the course of the quarter any kind of changes relative to your initial expectations coming into the June quarter, and how are you currently kind of thinking about the demand profile of that end market. Considering your comments on inventory as you kind of look at your current quarter guidance. Thank you.
Hey, Thanks for the question Eric.
If I.
Look at where we were two quarters ago predictability of the cloud 20, terabyte transition those fuels kind of.
Tactics that you that you referred to I think it's been fairly predictable through the end of last quarter, we do see in particular in China and some of the Csp's some inventory overages. So.
What we're doing that too.
Try to compensate for that is to not make sure. We don't pack into it not building too many sixteens and eighteens if you will and hurrying up the transitions to the twenties. There. So it's more of a looking forward.
Where I see issues, it's not really with U S. Csp's I mean everyone's having the same supply chain issues out in the world, but some people who are navigating it differently and I think there is good market demand.
For mass capacity, especially in the cloud businesses I do think there are some temporary issues that people are getting through given their supply chain.
Points, or COVID-19, lockdowns or things like that.
Yes.
Any thoughts on how we think about the end demand I know in the past we've talked about kind of a longer term growth rate in that near line market being kind of in that 30% plus range.
Do you think that the kind of get back to that flat to slight revenue growth into our fiscal 'twenty three that that's how we should kind of think about the demand profile into the back half of the fiscal year is that kind of how youre thinking about it yes.
Yes.
We're going to pause a little bit because of the mixture of the inventory flows through here in the front half of the year, but we will eventually get back on that and we do have products coming higher capacity points, which actually helps drive the exabyte demand as well as those customers wake up maybe they were.
Stuck on sixteens before and now they're going to be a 20 year plus 20 plus right. So.
That will help the exabyte demand as well ultimately we're going to be driving out of the back of this fiscal year like we said 30 terabyte. So.
We should get back to some healthy exabyte growth, but I think what we're seeing right now is very tactical.
Okay. Thank you thanks.
Thanks.
Our next question comes from <unk> Mohan from Bank of America. Please go ahead with your question.
Yes, Thank you and thanks for taking my question. David You mentioned return to growth later in the fiscal year I was hoping you might give us some color around.
How you're thinking about.
The trajectory of recovery.
Walt and mass capacity are you assuming that.
You basically have a two quarter sort of slowdown here as inventory gets worked down and the demand headwinds abate.
And as gross margin going to be following a similar trajectory you saw or are we sort of at the bottom of gross margins or should we expect gross margins to contract further from here.
Yes.
Thanks, <unk> I'll, let gianluca answer the gross margin point from a demand perspective, the legacy was hit pretty hard as we've as we've talked about in the prepared remarks and thats.
There are a lot of the legacy products that are the inventories too high now in things like Pcs, So de Minimis as a part of our.
Of our portfolio now that we're probably not going to pack anything into it but some of the legacy products will will suffer this quarter and then they'll come back a little bit on the stuff that's more salient for us now because 80% as mass capacity there still are some.
Things like the VA market that are not going through their normal.
Seasonality gyrations, there are actually more impacted just because of COVID-19 lockdowns and so on but we do think that after we get through that period, whether that starts at the end of Q1 or Q2, we don't know right now but.
We think that there is a lot of pent up demand that's coming and so that's one of the reasons. What we're doing is we're.
Changing over from some of the more.
The older products that might be going into of life to some of our newer products like the 20, plus terabyte. Some of the mid cap near line products are just making a making sure that the inventory that we do have is more current and when those customers are ready for the strong pulls again, then we have the best stuff out in front of John do you want to talk about gross margins clearly we had a we had a positive view on our expectation.
The business with the cover so an excellent so sequentially.
I think seasonality will be different than what we have seen in the last year for example.
I will say must capacity is actually stronger than we have done.
Five consecutive quarters of <unk> revenue and volume.
And gross margin absolutely.
And in gross margin.
It can be different depending upon which segment you are looking at.
Data and efficacy part and then non HDD part.
We've seen some decline in gross margin in the last four quarters.
And Moscow positive path has been very strong so.
At the total level you don't see a lot of change because they increase the mix was a mass capacity basically offsetting the decline for the legacy and knowing that it needs.
In future.
Im getting to maintain in mainly mass capacity.
And it means continuing to go into the 80% last August .
Being masked capacity that should bring in getting approval maintain that in gross margin.
Okay. Thank you so much.
Our next question comes from Krish Shankar from Cowen and company. Please go ahead with your question.
Yes, hi, Thanks for taking my question. The first one is for Dave you mentioned the U S. CSD is a pretty strong how do you think about the demand into the calendar second half of this year.
Do you think the next shoe to drop and then.
Question for John Luca you said like.
The $2 4 billion remaining on the buyback what are your cash levels will come down. So how do you think about the sustainability of a buyback for the next few quarters. Thank you very much. Thanks.
Thanks, Chris.
I don't think theres, another shoe to drop to be.
Clear.
Depending on which customer there may be very specific.
<unk> that they have in their data center build outs, but in general they're the cloud storage.
Demand growth continues.
Capex investments continue and so I think in some places is becoming very predictable with them and so that's one of the reasons why we've.
Kind of establish the businesses, we have as we because of the mass capacity.
It's.
It's.
Interesting right now I think most of the.
Capacity transitions that we're talking about with 20 terabytes and beyond.
Are the people, we still have yet to transition are the people who are in the markets that are actually most impacted by some of the COVID-19 shutdowns and things like that so that's the way I think about it if that so that helps and then John Luca can answer the question.
We adder.
Vertical media to outline a shareholder letter on our program and so to Boston and D V NAND and the share buyback as just added $2 $4 billion and all of that.
As the amount authorized for our share buyback.
Our free cash flow in <unk>.
Q4 was lower than what we what has been saying now for the Nissan with.
Claiming that they're in.
Our remarks.
Of course, we expect our free cash flow to improve strongly in pool.
In the next few quarters and that will add to <unk>.
<unk>.
Our shareholder return and also increase our cash balance.
Thank you very much thank you.
Our next question comes from Timothy Arcuri from UBS. Please go ahead with your question.
Alright. Thanks, a lot this is Jason on for Tim from UBS.
Couple of questions. So my first one is.
As you noted there has been a lot of concerns around makena.
Consumer demand I know consumer electrical market, it's still a much smaller portion of your business and your land market, but how can we think about the trajectory of your legacy businesses in terms of extra by shipments for the second half of this calendar year also could you provide the same color on the EIA margins themselves exabyte shipment as well and I have a follow up thank you.
Thanks, Jason so.
On the legacy demand.
Consumer facing so for example, the USB drives and the like it's been a strong market through the Covid work from home period.
Now the consumers in the world.
Decided that there.
<unk> spending money on other things I think everyone knows this around.
You can see these consumer spending patterns in many many different markets and we're not immune to any of that I think thats. Some of the stuff that we have to make sure we pull back and position the right inventory those markets in particular are not going away, they maybe slowly going down but.
They're not like the PC or notebook markets, which are effectively already gone. So we wouldn't have to debit those markets anymore. Because they are effectively gone mission critical has been a little bit choppy through the COVID-19 period. It is slowly declining as well, but it has a long tail.
So that's another place where theres, probably a little bit too much inventory. So when we lump it together in those legacy markets. They will have longer tails that we're talking about now because the ones that we're going to go to zero effectively already gone there. So.
Thanks Bye.
Basically at a fairly low in the in the June quarter.
We expect September as Dave was saying and not to be a strong quarter for legacy and are usually it is the core.
What are you seeing some improvement from seasonality, we don't see that happening. This year by testing December is the quarter, where you would see some improvement in and then the second part of that fiscal year.
Should continue into February .
Got it. Thank you and my second question is on the product roadmap.
Your main competitor share some color on their $20 million and 22 turbine part of brands we have.
They are expecting the <unk>.
Crossover by the end of this shift.
I was wondering if you could share any color or timelines on the product brands for 2020 two drivers. Thank you.
Yes, we said in the prepared remarks that our 'twenty would crossover relative to our 18, if you will.
This quarter so the quarter, we're in right now so we're ramping the 20 very hard we met the.
The fastest growth target that we've ever had before we said that a couple of quarters ago, and we've actually met the very happy with the 20, plus terabyte family. There is a lot of variance of this family their variance that continue to be CMO or theres variance that are S. Tomorrow. Those drives are out there in the world. Various places a matter of fact, I think I said last quarter that most of the.
The.
Twenty's or actually be used above 'twenty because of some of these variance. So we're fairly happy with how thats latching onto the world is already at high volume.
And with small changes, we can continue that a little bit.
So the conventional platform, we don't need it.
Any major technology transitions with a bigger change to the heads and media and the recording channel and so on by the end of the year, we'll take that platform to 30 terabytes.
So we're very confident in our product portfolio, we don't really talk about all the details of 2022 23, whatever people are using things out because I don't think Thats <unk>.
Setting the right narrative, it's more of just one.
Want to make sure that we have flexibility with our.
Platform that we're on today and then launching the 30 share by platform in the future with all the technology that comes in there, we're confident and we're driving it as hard as we can.
Thank you very much.
Our next question comes from Patrick Ho from Stifel. Please go ahead with your question.
Well. Thank you very much maybe Dave first off on the Big picture basis, you talked about.
In introducing hammer technology at 30 Terabytes next year, given the common platform that you have.
That you mentioned about 20 terabytes to the mid <unk> in the upper <unk>.
How do you correlate to demand trends from your customers in supplying these very attractive cost efficient drives that you just talked about all along versus say the 30 terabyte <unk> drives, which I assume are going to be a little more costly.
Its initial ramp.
Yes. Thanks for the question Patrick So it is a question of what can you make in high volume, where do we get our scrap and yields and since theres. So many heads and disks and there are component.
Readiness for the ramp is critical in our margins.
And then.
Going to the 30 terabyte there are cost adders, there's a number of different technology transitions not just to the writer of the Hammer. If you will of the media is to change the redirect to change all the platform things electronics several mechanics, everything that gets you to 30 terabyte Hasnt changed.
So we're very confident in that but how fast do we make that turn there. That's a good question a lot of it is our ability to grow the yields and scrap costs to the point, where we need to be I think from a customer perspective, that's a fairly big jump from one to the other and the Tcl benefits. When you think about building a data center and running it for <unk>.
Five to seven years, you are willing to entertain the discussion and then the more positive feedback you see on those initial drives the more you'll be able to drive it hard we've had customers that have been working with us on these technologies for a number of years now and I think when we launched the product I think will be there'll be very open to those discussions because they see tremendous bench.
If it as well so I think but balancing all of these things is exactly the point of what we have to do in our operations and that's what we're focused on.
Great. That's helpful and just as my follow up question for Jen Luca in terms of the cost pressures from Covid.
Elevated component costs logistics costs, how much of an impact was it this past quarter and.
How do you see I guess those additional.
<unk> points pressure on a going forward basis.
Yes.
June quarter, we had a lot of.
Cost pressure not only from Covid, but also for inflation on some of our component costs have increased.
As you have seen we were able to keep their gross margin stable actually slightly up quarter over quarter the spike.
Lower revenue, though we add.
Now we are taking our measure to offset the majority of <unk>.
Those cost increase.
Makes these also of course very important to us.
I would say for the future.
As a part of it is coming from inflation is probably not going to abate vanni quickly. So we probably instead the same impact for the next capital forecast.
On the Cogs side on the logistics side, we have seen a lethal detailed improvement in the June quarter compared to the prior quarter.
But I think I said in the past the COVID-19 costs of about <unk> 200 may at this point, although our gross margin for.
For June it was probably around 1%.
It is not of course, including all of the extra cost coming from inflation.
Great. Thank you very much.
Okay.
Our next question comes from to Shire Hari from Goldman Sachs. Please go ahead with your question.
Hi, Thanks, so much for taking the question.
Dave you talked about cutting production.
I was hoping you could expand on this I.
I guess, specifically in terms of utilization rates.
Where do you expect to be over the coming quarters relative to the past couple of quarters and I guess, given the production cuts and given how youre vertically integrated I guess im a little positively surprised by how well gross margins are hanging in.
What are some of the offsets that you're incorporating in your in your September quarter guidance.
Yes, thanks for that.
Question, I think I'll ask John Luca.
To breakdown some of the.
The FQ1 bridge if you will on gross margins, but let me let me give you a little perspective.
Where we see too much inventory in the chain.
As in some of the markets that we were planning on building towards.
And we don't want to do that if I've learned one lesson in my life, when you see too much inventory to pack into it.
It's exacerbated a little bit by the linearity of last quarter was poor and therefore almost by definition you go to the next quarter and linearity is poor again and especially in these times when you get out to the back of the quarter you don't have opportunity to cross ship because freight logistics lanes are choked and that drives costs, we're trying to.
Put on a little bit more inventory, so that we can use ocean freight.
It becomes very problematic and so that's one of the reasons why we're intentionally not packing into it.
Relative to the build plan so yes by slowing things down on some lines that does have some financial impact what we're really doing is pivoting over since.
Since the lead times wafer lead times are quite long product lead times are quite long for say 20, terabytes pivoting more towards 20, terabytes and beyond or pivoting more towards the new Midcap near line drive we can do it it just doesn't happen very quickly and so the factories are still relatively full if that helps exactly your question.
You don't see as much absorption hit net net even though youre taking down the old products is pushing out the new but it is there is an intention around not pushing too much into the change not having to price that stuff to move eventually into customers that really don't need the product right now.
This is where inflation is playing a role for everyone. Because you have the CFO of those companies seeing a slowdown a little bit and we have to be able to help our customers do the sort of <unk>.
Yes, we will have.
Some cost coming from the under utilization, while we also add an increase in their volume from Alba 20, terabyte sequentially and that is positive for gross margin.
You also have to say the pricing environment as <unk> seen very favorable so we don't see a despite the declining that.
And we don't see a major impact to our gross margin would have been 18 agenda.
Great as a quick follow up I guess to your last statement Gianluca just on the overall pricing environment.
Generally speaking when when demand softens and you've got excess inventory in the system. There is theres typically downward pressure on pricing, but at the same time.
The industry overall has been very disciplined in the past I guess several.
Several quarters, if not a couple of years, you've got inflationary pressures as well so I guess, you've gotten incentives to potentially pass through some of those inflationary pressures that so net net how should we think about pricing across the legacy markets and mass capacity over the next cut.
A couple of quarters is there a possibility for you guys to raise pricing or is that difficult just given given the demand demand backdrop. Thank you.
But first of all we need to align supply and demand NBC is know what Dave was saying before when he is extra inventory.
<unk> in the business, we need tornadoes hail loss of the ISO that demand and supply out of well aligned when we have better alignment of course, the pricing environment get better and so right. Now we are the innovation all transition from high inventory to a more healthy.
Business equation, and then of course during the rest of the year when demand.
Stronger.
And well aligned to our supply we wouldn't take care.
Any foreseeable iPhone pricing, but that we wouldn't look at that data I think this is where the lta's have served us pretty well over time to understand the all of the macro economic inputs and.
Like.
I always say that some of the procurement people that are sitting on the on the other side of the table from us or they understand what's going on in commodity pricing and ray.
Just as well as we do so we work together.
Come up with a predictable outcome, we believe in the mass capacity markets at least that theres going to be a strong rebound.
<unk> and <unk>.
Everyone factoring all of these things and I think it serves us well to know exactly what we are building, what we've qualified and will supply and so that's what we're trying to do right now is to change that.
Pivot the operations towards that future supply.
Great. Thank you.
Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question.
Alright. Thanks. Good afternoon two questions. Please first of all Gianluca any help on what you're thinking for Capex spending this fiscal year and then secondly, Dave.
Given that.
Basically were surprised negatively just a few weeks ago.
I'm just trying to understand the biggest factors that make you come out and say that you should start to see a recovery in a couple of quarters.
You've touched on a few things, but just maybe give us a sense about where that confidence is growing that one demand holds up on the data center side and.
To that.
You're you're not overbuilding into like what could be the worst macro thanks.
On the Capex side as you have seen we have already.
Reduce our spending.
In fiscal Q4.
34.
For fiscal year 'twenty three.
I don't want to change that aimed ethane for two 6% of that annual is there you think.
<unk>, but.
For sure will be in the lower part those at Ames and <unk>.
Similar to what we have done in fiscal 'twenty two.
Yes, and I think longer term discussions with our customers.
<unk>.
The bigger the customer there are the more they're convicted they are on there.
Ultimate need to add capacity because they are the ones that manage cloud storage.
Some of the customers that are having I've mentioned.
A few people that are smaller csp's that are having some of the inventory issues. We are working closely with them to make sure that we transitioned to the right product set so we don't build the wrong thing into it.
That's a very tactical thing and Thats why we have conviction that.
This thing's going to be over pretty soon.
All cognizant of all the macro trends and watching them and every day. So I don't want to gloss over that but I think as far as demand for data products. I do think there is there will be a rebound coming with all these issues abate.
Great. That's helpful. Thank you.
Our next question comes from Erik Woodring from Morgan Stanley . Please go ahead with your question.
Awesome. Thanks for thanks for taking the question maybe Gianluca any comments you can just share on cash flow thoughts as we move into this next fiscal year. After a strong 2022 should we should we expect growth maybe similar to your comments on revenue or just maybe help us parse out how to think about that and then I have a quick follow up thanks.
Free cash flow and I just heard it was that was good in fiscal 'twenty tool we place.
About 400 million.
Over fiscal 'twenty one.
We gave an indication of what we have said for that Avenue in fiscal 'twenty, three and noise that comes through.
Free cash flow, we continue to increase.
We'd be at the same level of <unk>.
<unk> fiscal 'twenty, two maybe even it could be higher.
Yes.
Especially in these times, we will manage cash very carefully but we also see.
The mass capacity rebound is what we're projecting that we should be able to get them to.
To continue to grow cash flow.
Okay Super Thanks for the help and then maybe along those same lines Gianluca just yes.
Obviously.
A more challenging macro environment, but any comments you can help us to help us better understand kind of how youre thinking about opex.
Run rate is still kind of a $3 50 or any puts and takes so you can help share there would be great. Thanks.
Yes, I think between $3 <unk>, we'd be at that age through there.
For the fiscal year, we have done is strong control of the Opex Angela.
Two or three years already so we think we start from a good point.
<unk> demand, where we have a lot of online the salary increase though we expect a little bit.
<unk> seen basically the December quarter, Boston embedded H <unk> safety should be it should be that at the range for us.
Awesome. Thanks, guys.
And our next question comes from Sidney Ho from Deutsche Bank. Please go ahead with your question.
Thank you.
I had a quick clarification I think Jonathan can you talk about expecting revenue growth could resume later in the fiscal year, yet, but you are not necessarily meaning the December quarter will change.
I guess that's it.
Right.
My question is when I look at the inventory adjustments at your customers when they're in the PCL elsewhere.
One what is your.
Thinking about when they will get to the equilibrium point that your customers stopped training inventory and what gives you that can accommodate.
I will say in general we are trying to use these quarter to realign inventory of course as you said, it's not it doesn't depend on thing from us, but we are reducing our production and now we are taking a.
The lower revenue in the quarter in order to deliver the alignment.
I would say after that we actually get fit to increase revenue sequentially, though December now it would be better than that.
In September quarter end.
Steve is that an avenue that David indicated in his remarks, we need pool and a fairly good level of revenue or is it three quarters offset after September .
Okay, Great maybe I'll just jump into my second question, there's a lot of questions on <unk>.
Cloud already but im curious on the enterprise OEM side of the near line business.
Last quarter, you mentioned you were limited by non HD supply shortages I'm. Just curious are you seeing any changes in demand on that side of the business and that business is also covered by the LTA Azure cloud customers. Thanks.
Yes is the answer to your question to your last question, it's a little bit more complicated than some of the cloud customers, but what I would say for example in our prepared remarks on the systems business, we talked about how we saw a flood of the components that we needed to go chase after revenue and we did that.
That's because I think some of the supply demand picture is changing very rapidly the things that were constrained components six months ago may not be constrained anymore because of a lot of macro issues.
It's not.
<unk> all clear yet there are still.
Component shortages that are affecting the enterprise I think also the spending reductions by.
Again, I always say nervous CFO , which youre talking to the CIO in the world.
I think impacting us a little bit right now is well look long term I believe that on Prem enterprise is going to be healthy.
Because theres going to be hybrid clouds not just.
Not just in the public cloud, but also in the private cloud as well and so I think those will be strong businesses there.
Still.
Theres various.
Challenges there supply related still and I think some of that will start to break free over the next six months.
Okay. Thank you.
Our next question comes from C. J Muse from Evercore ISI. Please go ahead with your question.
Yes, good afternoon, and thank you for taking the question I guess two questions first you.
On the call about excess inventory in the channel for your various end markets. I was curious if you could rank order, perhaps worst to best buy and markets, where you get a flavor.
Where things need to correct and then I guess, specifically for U S data centers you talked in your prepared remarks.
Around the correction there it sounds like.
A handful of players could you provide perhaps more color.
On what Youre seeing there and when you think that will start to recover for Ya. Thanks, So much.
Yes C. J, let me just make sure I got all this right.
The first one was ranked order I think China generally has the biggest impact.
There is impact in distribution channels worldwide consumer and <unk>.
So Europe .
Americas, they're both down significantly year over year, and Thats part of the macro malaise that we've been talking about the China itself has not only that but also the via markets and some of the the <unk>.
Cloud service providers, there is inventory challenges each place I think that we're staring at working through it with those customers. Some of that is macro some of it is COVID-19 lockdown sirs kind of.
Just trepidation in the market because some of the Lockdowns happen and then they go for reopening the pull inventory in and then they can't reopen I think the world is going to get through these things.
We just have to kind of wait it out can you answer or ask the second part of your question again.
Yes sure.
Your prepared remarks, you spoke to.
What I thought I heard was.
Inventory correction at select.
The scale players and so I guess.
Did I hear that correctly and then if you could provide more color on your expectations for that to be cleared up.
Well I don't think there is too much inventory problems.
U S hyperscale.
I think everyone's having supply challenges not necessarily hard drives or whatever.
Maybe maybe the way I would characterize it is that to say that.
There is.
Pent up demand for data storage and a lot of markets.
And.
Once the world gets through all of these supply challenges whether there.
Power supplies or or.
Chassis or compute or memory or whatever it is for the each one individually I think we'll be in a better place people were working this very hard and.
Everyone's got their own challenges, but I think we are.
That's the thing that.
The World is just not firing on all cylinders like it was maybe three or four years ago, and I think we will be able to get back to reach some kind of equilibrium over time.
Very helpful. Thank you.
Our next question comes from Thomas O'malley from Barclays. Please go ahead with your question.
Hey, guys. Thanks for taking my question. My question was just on the long term agreements that you guys talked about on the call here when micron took down numbers. They were asked specifically about whether those long term agreements with take or pay and they kind of talked about the fact that they can't really force customers to take their products. What gives you guys the confidence that when youre looking at the back half of this year your customers aren't going.
To walk away from those long term agreements if the market looks a little bit worse than it does today.
Thanks, Tom.
Agree with what you said.
We have to work with our customers on these things.
I said I think last quarter I talked about co planning more it's just how many units do you need what kind of products you don't need to be qualified and it has to go up further because as we're making 20 plus terabyte products.
Or even starting 30, plus terabyte products, we need to know exactly how many of the customers are willing to take and how much to use our factory use inside of our factories.
If something else happen, then I think we'd have to work through with the customers at the time, so it's not really take or pay in.
From my perspective.
The customers have been great working through that just trying to give us the right visibility and we hold.
Each other accountable on both sides of the table there is working pretty well.
Great and then just my follow up is is even if you do assume some accelerated growth in the back half obviously the inventories working down so that helps a bit free cash flow. It does become a bit challenged if you were to look at an environment in which free cash flow from a quarterly perspective gross negative can you just talk about your rank order of capital returns.
That you would buyback less stock first or do you think that you would rationalize the dividend can you just talk about priorities. There in terms of where you would be where you'd be cutting first if the environment kind of persist like it is.
So I don't see.
That coming through I don't see any quarter, where our free cash flow will be go negative so.
We have a capital allocation strategy has made as said before we want to stay focused on <unk>.
I think our free cash flow will be strong in fiscal year 'twenty three.
<unk> designation would you add.
Showing here.
Yes, the way I would say Tom is that we're going to go work the cash flow we had some period.
Very specific things that John Luca talked about in Q4, I think we can go recover some of those things over time and some of it's too much inventory like I said.
<unk> makes it making sure we're building the right thing. So I think once we get through that period, I think we're going to be.
Just fine from a cash flow perspective, and even have the opportunity to grow it year over year, we have a lot of levers that we can still continue to control.
Great. Thank you guys.
Okay.
And our next question comes from K Cassidy from Rosenblatt Securities. Please go ahead with your question.
Thanks for taking my question.
Just two quick questions.
With all the long term agreements you have in place what are the lead times are what is the visibility that you're getting from your customers.
Second is are you seeing a.
Any change in the trends of Lockdowns in China.
Yes, Thanks, Tim.
There is.
There is different kinds of LTA is depending on the market.
Depending on which specific customer and their appetite is typically six months to a year.
Visibility that we're working together so and over the last few years has gotten longer. So that's good just making sure we have the right product stage for what theyre going to need at that point in time.
Predictable economics for them and so on.
And us.
Relative to China.
I think I made a comment earlier, even our own factories have been impacted recently.
So making sure that we're doing the right things.
For the employees.
Not working them at <unk>.
<unk>, where we don't need the materials and things like that is.
Challenge I've heard.
I personally think that things are already getting better but I also think part of the problem is that we said that three or four or five times and people pulled inventory against our reopening if you will it's not even some management or what you are capable of in your factory. It's also what your customers are ready for and whether you can get to just like in the front end of Covid, whether you can get.
People in to build the data centers and all these other things that are going on.
The thing I'm focused on the most is the small business aspect of.
Talking to some of our customers about people who have to actually go in and do the builds in the smart city builds to the smart buildings hospitals things like that that's where any kind of lockdown, just really throws that for a loop.
I do think that we're going to continue to see some of it it will be a little bit.
And then we're all looking for.
Improvements in Q2, it's going to have to break free at some point soon.
And our final question today comes from Vijay Rakesh from <unk>. Please go ahead with your question.
Yes, hi, thanks.
Dan John Luca I know you guys mentioned slightly higher inventory levels.
Just wondering if you could help us level set what the inventory levels with the chain.
In China was at an issue versus the U S and is your expectation that the inventory normalizes.
Within the quarter here, because I think you've talked about maybe December quarter revenue start to improve.
Right.
We're taking action to make sure it improves this quarter.
Gianluca made the point earlier that I don't think it will improve all the way, but we will get.
The lion's share of what we do need to get done this quarter and again, depending on the pace of.
Some of these recoveries like Covid and some of the other pressures that people are feeling it will happen faster.
The thing for US is that we make sure that we pivot the customer qualifications and our product towards the stuff that's more moderately higher margins for us that we can make with.
That we can make the people actually want to buy that we don't have to go disrupt the market anymore.
Got it and I think you mentioned.
Utilization levels.
I believe you indicated maybe gross minus will be flat sequentially is that right.
That utilization.
To stay high with the.
<unk>, Delaware ramping I guess right now if you talk to us on the supply back is that the way to look at it.
But we did not guide diamanti in gross margin, but I was answering <unk> question.
I said well if any are there any of the negative impact in the December quarter, because of some underutilization cost, but it also depositing.
Impact coming from higher 20, terabyte and I also said the pricing environment.
It also seems inevitable. So overall, we don't see major changes to our profitability.
Got it great. Thanks, a lot. Thank you.
Yes.
And ladies and gentlemen at this time I'd like to turn the floor back over to management for any closing remarks.
Thanks, Jamie.
I'd like to take the opportunity to once again, thank our employees for their incredible efforts and recognize our suppliers and customers for their ongoing support this quarter, it's a challenging environment across the ecosystem and we appreciate all of your partnerships.
Likewise I appreciate our shareholder community for your ongoing trust and Seagate.
It will continue to take actions to manage through the current macro dynamics silver long term I'm confident that the secular demand for mass capacity storage and infrastructure remains high and remain excited by seeking opportunities to deliver value for all the stakeholders. So thanks for joining us everyone.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining you may now disconnect your lines.