Q1 2023 Seagate Technology Holdings PLC Earnings Call
We work through the final weeks of the September quarter.
These factors incrementally impacted sales volumes in the economically sensitive consumer markets as well as certain U S cloud customers.
We currently expect customer inventory drawdowns will remain a factor through at least the December quarter.
We reacted quickly to adjust our production levels.
The current demand environment and our gross margin performance reflects the resulting factory underutilization cost.
That increased markedly through the month of September .
It is important to note that consistent with some of the U S. CSP comments end user demand for core data and analytics applications remains solid which supports our view that the business will improve as elevated inventory levels are consumed.
In the meantime, we continued to respond to the changing market conditions and further reduce production output across all product lines with the exception of our 20, plus terabyte products, where demand has held firm and pricing relatively stable.
Our actions underscore our focus on maintaining strong supply discipline and we believe this will enable us to quickly return to a more favorable pricing environment across mid to lower capacity products as conditions normalize.
Stepping back today's highly uncertain macro environment stems from multiple factors outside of our control such as rising interest rates inflationary pressures and.
And geopolitical dynamics.
With that in mind, we are focused on managing what we can control and taking aggressive actions to appropriately respond to the near term market environment and enhance profitability over the long term.
In addition to adjusting our production output to drive supply discipline in pricing stability.
We are implementing a restructuring plan to sustainably lower costs, including a reduction in our global workforce.
These are very difficult decisions to make and ones that we do not take lightly.
However, we believe they are necessary to align our cost structures with the realities of the near term market.
While still enabling us to support future mass capacity storage opportunities as demand recovers over the longer term.
We are improving working capital by reducing our inventory levels over the next couple of quarters.
And we are significantly lowering our fiscal 'twenty three capital expenditures, while maintaining investments that support the launch and ramp of the 30, plus terabyte product family based on Hammer technology.
These cost saving actions together with our supply discipline enable us to drive increased leverage to earnings as conditions improve over the near term.
Longer term, we remain confident in the secular growth of mass capacity storage and believe our technology leadership positions us to capture the significant future growth opportunities.
Consistent with our focus on enhancing longer term shareholder value, we're maintaining our quarterly dividend.
However, we are temporarily pausing our share repurchase program to ensure we can continue to make necessary investments to support our current business and underpin our longer term strategic plans.
Let me now share some perspectives on the end markets starting with VA.
The global economic slowdown has continued to impact via related project budgets and installation timelines, which has led to a buildup of customer inventory.
These trends have dampened the typically strong seasonality in the back half of the calendar year, particularly in the China market.
Stimulus programs to help boost the local economy have been announced however timing for economic recovery is not yet apparent while COVID-19 lockdown restrictions remain in place.
Our long term expectations for via demand have not changed.
While we have significant direct customer exposure in China end market demand is global and continues to expand as smart video applications are adopted to address real world challenges for example, reducing traffic congestion is one areas of focus for smart cities, which costs us driver's alone an estimated 50.
$3 billion in 2021.
These savings can only be realized after capturing and storing large volumes of data and application best served by hdds.
And the new airline markets, we saw double digit percentage sequential revenue declines across both cloud and enterprise OEM customers, reflecting the broad based inventory adjustments that I described earlier.
Recall, we had been anticipating the customer inventory correction to be largely complete in the December quarter. However.
However, amid intensifying macro uncertainties customers have grown more cautious with their spending plans, which we believe will extend the recovery into calendar year 2003.
U S cloud customers are still reporting healthy demand tied to digital transformation artificial intelligence and other applications that unlock data value and continue to rank amongst cio's highest investment priorities.
While enterprise CIO has continued to move workloads to the public cloud. According to a recent study 80% of cloud users also have a hybrid cloud strategy illustrating the desire to operate seamlessly across a network of public and private clouds.
We believe these trends support our view for mass capacity exabyte growth to return to the upper 20% range as the broader markets recover.
These same trends underscore the positive market momentum, we are seeing in our enterprise systems business, which recorded revenue growth of.
Over 45% sequentially.
While we expect sequential sales levels to reflect some lingering supply challenges in the December quarter or.
Our systems results illustrate our customers are still allocated budget dollars towards areas that drive business value.
The data trends that rely on cost efficient higher capacity storage solutions remain intact.
As a leader in HDD technology, Seagate is well equipped to address demand by continuing to execute our strong product roadmap.
We are leveraging the current production slowdown to double down on our development actions and accelerated cycles of learning to continue delivering tcl value to customers.
Sales of our 20, plus terabyte product family grew meaningfully quarter over quarter supported by strong demand from cloud customers.
20, plus terabyte drives now rank as our highest volume and revenue platform.
Surpassing 18 terabytes as expected.
We are extending this product family using conventional TMR technology into the mid 20 terabyte range, which also offers SMA capabilities into the upper 20 terabyte range.
Development of our 30, plus terabyte platform based on Hammer technology remains firmly on track.
In addition to hammer. These drives incorporate many new technology innovations to reflect years of development design and integration knowhow to form the backbone of our future product portfolio.
We continue to execute our development plans meeting key milestones, including reliability metrics scenario density gains that also positioned us to extend drive capacity well beyond 30 terabytes.
As I shared on our July earnings call customer revenue shipments are expected to begin around mid calendar 2023.
And I could not be more pleased with our great progress this quarter.
In closing we are navigating through the macro challenges that are impacting our business over the near term.
Over the long term growth trajectory for mass capacity storage remains solid driven by the fundamental demand for data.
And the need for businesses to harness its value.
We believe that the actions we have undertaken will ultimately strengthen our position over the long term.
Looking ahead as we incessantly pushed the technology innovation roadmap, we believe our customers will continue to value Seagate as their primary storage solutions provider.
Gianluca will now cover the financial results in more detail.
Thank you David.
Revenue came in at $2 4 billion.
Reflecting the evolving macro landscape.
David can add on that.
Sure.
non-GAAP operating margin for the quarter was 9%.
Below our expectation at the end of August due to lower revenue.
Less favorable market mix and higher Underutilization on strategy as we continue to lower our production output as we gain visibility into the December quarter demand.
That taking decisive actions to reduce expenses instead of cash and improve profitability, which include reducing production output to enable rapid inventory correction at our estimate and on our own balance sheet.
Significantly lowering capital extended to US was the rest of the fiscal year.
Regarding capex as a percentage of revenue to be below the long term target range of 4% to 6% operating.
And executing and restructuring plan to sustainably reduce our cost by approximately $110 million annualized.
We believe these actions will put the company in a strong financial position when the global macro business environment against political events and expand operating profit faster without having a growth.
Moving to our end market and we have mentioned intensifying macroeconomic pressure and Morris with customer buying behavior.
Talk about why did that across both mass capacity and a negative market.
In the September quarter total ethane side capacity shipments were 118, exabyte down 24% sequentially and 26% year on year.
Mass capacity market made up 88% of Victoza with achievement of 104, exabyte down, 25% sequentially and 21% year over year.
Average capacity per drive increased three percentage points sequentially to 11 eight terabyte.
Yes, I think continued broad demand.
Thank you for that terabyte product family.
We should have the advanced over 40% of total mass capacity extra but shift in the September quarter.
Yes. Thank you.
Total 85, exabyte down 28% sequentially, reflecting the ongoing inventory adjustment at both cloud and enterprise OEM customers.
We had expected to last through the <unk>.
And I know you had and.
On a revenue base mass capacity, representing 78% of total HDD revenue at $1 4 billion.
In the quarter.
As a percentage of revenue.
Capacity was down two percentage points sequentially and up seven percentage points year on year.
Consistent with our view at the end of August .
Revenue was down quarter over quarter, Youll, mainly because of a prolonged economic slowdown in China.
Through our market by market, we expect the prevailing macroeconomic challenges will extend through the December quarter negating the traditional seasonality.
Uptick you've already seen in the market.
That said, we remain confident in the long term growth of the mass capacity market.
And at the edge.
Within the legacy market revenue was $91 million.
Down 20% sequentially.
Quarter over quarter, the pace of decline it was more pronounced in the mission critical market due to a soft enterprise spending, particularly in China.
And deteriorating consumer spending.
Even after the avs market, we do not expect to see a typical seasonal uptick in overall demand for legacy market.
Number four.
Finally revenue for our non HDD business was $263 million up 21% sequentially.
The increase quarter over quarter, reflecting.
Improving component supply.
Our petabyte scale solution in our enterprise system, giving them.
Moving to our operational performance non-GAAP gross profit in the September quarter was 498 million corresponding to a non-GAAP gross margin of 24, 5%.
Down more than expected quarter over quarter.
And our utilization and cost.
<unk> 160 basis points of headwind to gross margin and <unk>.
Marketed by the adjustment, we made to lower production output throughout the quarter.
Bonds to market condition.
Leasing, but were compounded by a less favorable market mix.
Given by a lower percentage of revenue derived from managing of HMS capacity market.
An increase in the non out of these type of business.
non-GAAP operating expenses were at.
<unk> $314 million.
Down $35 million quarter over quarter.
Due to lower variable compensation and proactive expense management, which included strong controls over discretionary spending and therefore, inc.
In the December quarter, we expect Opex to further decline by about $10 million, including savings associated with our restructuring plan starting later in the fourth.
Based on diluted share count of approximately 110 million shares.
non-GAAP EPS for the September quarter was 48.
Moving onto balance sheet and cash flow.
We ended the September quarter with a total liquidity position of approximately $2 5 billion.
Including our revolving credit facilities, which are sufficient to support our strategic plan and meet the customer demand.
Despite lower than expected revenue for the September quarter.
Inventory ended fairly flat at just over one 6 million.
We expect inventory to decline significantly over the course of fiscal 2023, as we align our supply chain and finished goods level.
The prevailing demand environment.
Reflecting the payment of previously committed amount.
Capital expenditures were $133 million for the September quarter.
Free cash flow generation.
$112 million.
Essentially flat with the prior quarter and an improvement in cash from operations was offset by higher capital expenditures.
We used $147 million.
The quarterly dividend.
And $408 million to.
We reported $5 4 million ordinary shares.
Hitting in the quarter with 206 million shares outstanding and approximately $1 $9 billion.
Remaining in our authorization.
In light of current and near term priorities.
Early pausing our share repurchase program.
We remain flexible and opportunistic as conditions develop.
In August we raised $600 million in capital through a new term loan during fiscal 2028.
The other thing in total debt balance of $6 2 billion at the end of the quarter.
Adjusted EBITDA was $2 1 billion for the last 12 months.
With total debt leverage ratio just below three times.
We expect interest expense for the December quarter to be.
Approximately $74 million.
Looking ahead, we continue to say that challenging business environment.
By macroeconomic and geopolitical team.
Okay great.
Estimate yes.
Gently managing cash and investment Amit is that the demand environment.
We expect these factors and ongoing customer inventory corrections to wait on revenue in the December quarter.
With that in mind, our financial outlook for the December quarter is as follows.
We expect revenue to be net <unk> of 1.85 billion.
Plus or minus $150 million.
At the midpoint of our revenue guidance.
non-GAAP operating margin is expected to be in the mid single digit range.
The impact from higher end utilization costs and.
And we expect non-GAAP EPS to be in the range of 15%.
That's sort of minus 20%.
I will now turn the call back to Dave for final comments.
Thanks Gianluca.
<unk> team is acting with determination and agility to rapidly adjust to a highly uncertain environment I'm incredibly proud of their unwavering focus.
Throughout our 40 plus year history <unk> has successfully operated through many adverse conditions and we're putting that experience to work with.
We're taking the right actions to strengthen our near term financial position and optimize liquidity through this period, where.
We're driving forward on our technology roadmap, which makes us poised to quickly recover as market conditions improve as well as capture the significant future opportunities ahead.
Finally, we continue to operate with a deep sense of commitment to all of our stakeholders our people our customers the communities in which we operate and of course to our shareholders.
Gianluca and I would like to now take your questions.
And we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble the roster.
And our first question today will come from <unk> Mohan with Bank of America. Please go ahead.
Hi, yes. Thank you good morning.
As you look into the December quarter.
<unk> reported a sub $2 billion revenue quarter, I went back and checked all the way since back in 2005.
What is your view on the inventory levels and how much below demand levels are you currently shipping and do you expect to exit the December quarter with a lower inventory level.
And if I could also ask just are you expecting higher underutilization charges in December or should we expect the same magnitude.
Thanks, Rob the OLED Gianluca quantify the underutilization charges.
Blunt answer to your question is yes, we are expecting to get the inventory levels of our own owned inventory and then of the customer inventories down this quarter.
We'll watch the customers what they have with the builders, what's the flow through hopefully we would have hoped that it would have happened by now, but I think macroeconomic conditions.
Our weighing on everybody a little bit that way and we believe that by controlling our own build plan.
Which results in higher Underutilization charges that we can actually get our own owned inventory down as well so.
Yes during the September quarter with reduced production twice as the beginning of the quarter and then again.
During September .
And we actually can even more towards the end of September .
So we had more than $50 million of Underutilization charges in the September quarter December will be higher.
So we start already with <unk>.
Lower production than the beginning of the prior quarter in October .
In November and then as the month of December we will of course look at.
Demand for the March quarter, and see if we can start to add back production.
Or do we need to keep it lower and I think David wants to add something.
Yes, I think also just to your other point about this is pretty low historically it certainly is.
There is still macro challenges ahead of all of US I think in FQ, two the consumer's pretty weak.
Channel inventories are still fairly high not on absolute unit basis, but on a run rate basis, certainly in and there is kind of muted the no seasonality at all this year in FQ, one or Q2 for us and we're not expecting the cloud recovery in FQ. Two we just are watching the inventory levels in China, China will also the recovery will be slow there.
We've been predicting some sort of recovery for about three quarters.
There is a little bit of sentiment that things will start to get better, but we want to see that in hard purchase orders just to be really Frank so.
The recovery is all dependent on the pace of the customers working through these inventory levels.
Okay. Thanks for that color, David and if I could.
I mean this is.
I know you guys said, you really cant talk a lot about.
This export regulation area, but could you just give investors some sense of why you believe the shipments are not subject to export regulations does it does it have to do with the IP for the products and where it resides or or any color. You can share about why you have confidence in your position thoroughly youll articulated that you do.
So it's the wise I guess important from an investor standpoint, Thank you.
Yes, <unk> I think like you said, we don't really think it's appropriate for us to be commenting on it at all at this time and we'll cooperate transparently and we believe we have a really good compliance program in place with all the policies and procedures. So that's what builds our confidence, but like I said, we'll communicate transparently I just don't think it's appropriate for us to be commenting.
Okay. Thank you so much.
And our next question will come from Krish <unk> with Cowen <unk> Company. Please go ahead.
Yes, hi, Thanks for taking my question I have two of them first one for David I'm, just kind of curious.
Heading into 2020, how should we think about the pricing environment is going to be to quantify it or qualitatively.
Due to the last downturn in 2019 and.
Extrapolated, how to think about revenue growth for FY 'twenty three calendar 'twenty three and then I had a follow up.
It's still a little too hard to call revenue growth.
I'll, let gianluca quantify some of the pricing environment discussions but.
I would say at the high cap the 20, plus terabyte family.
Pricing was relatively benign I think there was a really competitive space, especially in legacy and the low cap near line because those markets are so depressed right now so it was fairly competitive.
And.
I think this is just a sign of the times in the industry when factories aren't full people want to get as much demand as they can to keep running their factories and we're all mindful of that right. Now so I think we need to see supply and demand come back into balance to see a better environment.
In the in the legacy market, we saw some pricing pressure so low capacity drives.
Maybe also.
Coming from a very low price of the NAND right now.
On the high capacity drive as Dave said.
This environment is still there it's still very very favorable as they are fairly stable.
I would say different from what you have seen in prior down cycles.
Got it got it very helpful and then just.
As a follow up clearly your cloud customers.
Obviously very high levels of inventory digestion does pricing pressure.
Have you seen any market share shifts in this environment aided in Youll see little again skew, especially among the U S. Hyperscale.
We're not really.
Trying for market share I would say at this point in time, we're watching all these inventory levels that were saying, let's make sure we build the right absolute rates stuff. So I think there are.
Various challenges that I can articulate various hyperscale or because they have different business models different dynamics within them somehow multiple business models. So theres macro applications. As you are hearing from some of their comments and there are also architectural transitions and there is still supply chain shortages and some <unk>.
Some of those supply chain shortages.
Two situations, where people bought too much of the wrong stuff and then there's even overages in the supply chain. So I think thats really complicated as to how this inventory built.
Fundamentally the creation vectors for data and the consumption of mass capacity drives has not changed there is an aging of the fleet going on there is replacement of old mass capacity drives with the new ones with showed weather Tcl proposition.
Higher capacity drives better that way and so all of the relevant trends still exist and we believe that the drives that are in the data centers today are being used.
More full than ever of.
The data keeps coming at them because of all the hyperscale or.
Product offerings that are in.
And advising people to move to the cloud. So we think this is just a temporary.
<unk> environment.
Downcycle for EMEA in a down cycle.
Market share is not or should not be the priority.
The important thing is to focus on free cash flow and keeping their now free cash flow positive.
And also to keep.
The pricing environment as stable as possible and this means reduced production try to keep supply and demand and a good balance.
Of course preparing for the long term demand that we for sure we still see very very solid.
Got it thanks, Thanks, Steve.
And our next question will come from Karl Ackerman with BNP Paribas. Please go ahead.
Yes, good morning, Dave and John Luca two questions for me as well please.
The first one is on hammer.
And so I guess as you think about ways to reach demand equilibrium.
How are you thinking about transitioning capacity to hammer. During this software period, I guess does the transition to hammer create the need for retooling head and possibly media production.
You addressed that question could you also discuss the volume on hammer from your cloud customers and some of the progress you referenced.
Your prepared remarks.
Yes, Thanks Carl.
Okay.
What I would say is that in the current environment, where you have three capacity in your Fabs, you use that to run more and more experiments to accelerate things.
One lesson from numerous downturns in the past that I have.
So we're definitely taking advantage of that to do all we can to accelerate not only hammer, but get the yields up in the scrap down and get to the <unk>.
Cost platforms and things things like that we're gaining so much confidence on hammer that not only we're talking about the data, but we're also talking about the ability to move capacity up beyond just an introductory say 30 terabyte platform.
Up to higher capacity points that also allows US then to take.
Take comp.
Componentry out of 20 terabyte drives for example, so that we can address the market that way so.
All of that is going on right now and so I'd say again I would say, it's not just about.
One small piece of technology Hammer.
It's also about readers and <unk>.
Mechanical subsystems in electronics and everything else is really being brought together we're in full stage product development right now and like I said in the prepared remarks, very happy with the progress relative to Capex. We've been planning for these transitions for a long long time. So there is.
Only a few tools that are tremendously complicated the tools that we use that are making average recording heads and recording media those tools can be repurposed and theyre pretty sophisticated we know how to run them. So.
A lot of confidence on being able to hit the ramp that way.
Yeah.
That's very helpful. If I may squeeze one more in.
Given the strength of your systems business this quarter or are there still match set challenges for you in that business and are you still facing long lead times for other hard drive in.
Put components or have those challenges loosened and I guess, maybe back to what you would consider normal. Thank you.
Yes, I think from a hard drive perspective, it's an easy answer we have plenty of inventory right now so we need to bleed that off.
Relative to the drive side are starting to the systems side.
<unk>.
We have had shortages and I think the broader industry has had shortages.
Sometimes just individual one dollar components, sometimes assemblies power supplies are nyx or things like that.
What I would say it.
Is that the.
Most of that is.
Breaking free it's not completely done yet.
One of the reasons for the success of our systems business.
The complexity is.
Not very high.
And so people are used to very bespoke solutions in that world, but they won't take what they can get and.
They're aggregating on less complex simpler simpler too.
Achieved from a supply chain perspective designs, we see some smaller competitors really struggling for that and maybe even.
I mean, they have to exit the market. So I think we've had quite a bit of success in our channel business as well. So I think all of these trends are really supply chain trends, we believe by building.
Very very few Skus and building.
Adding them well that will have an in market advantage.
And our next.
Our next question will come from Timothy Arcuri with UBS. Please go ahead.
Hi, Thanks.
To recall that the term loan I think has some covenants maybe four four exit the covenant on the term loan and it seems like you might be reaching this over the next few quarters. So I guess the question is sort of how comfortable can we be with the dividend can you sort of talk to that.
Yes, we are active with that liquidity that we have actually an hour.
Our cash balance is higher than prior quarter as we have seen and we have anything as our debt during the September quarter.
We are of course looking at call they announced they're looking at.
That structure and if we have to take options available we will for sure do it but we are as we said in our prepared remarks.
We are comfortable with the level of our dividend, but we are imposing on our share buyback, Florida for a while.
So I guess just following up on that so is the is the commitment I am just trying to figure out in the continuum of the commitments.
Capital is the dividend right at the top of the list in other words, you would do what you would have to.
To not cut the dividend is that a fair statement.
Yes, we want to protect the dividend as you know.
One of our priority is shareholder return.
And dividend is an important part of it and we know that and we want to put that the dividend will continue to invest in ourselves and all the other things that make us seagate through these periods of time, we have to come up with a plan and execute the plan relative to two all those things and Thats what were off to do it's one of the reasons why we're dipping into.
Our inventory working getting working capital flowing a little bit more right now not just the pause on the share buybacks, but we definitely want to.
Execute this plan as aggressively as we can as early as we can to make sure that.
Yes.
Great. Thanks for that and maybe as my follow up I had a question on this on this on this letter from dish.
And maybe can you help us I'm sort of trying to.
Handicapped the revenue what the right normalized revenue would be if if something were to come from this letter.
I'm trying to handicap, what the right normalized revenues so.
Yes.
I'm, sorry, the <unk> sorry.
We actually.
As I mentioned earlier.
Just sort of two things again, we believe that we've actually complied with all relevant export control laws.
We continue to cooperate with Gis as it as it relates to this matter, but we're not going to comment any further call.
Okay. Okay. Thank you. Thank you so much.
And our next question will come from Erik Woodring with Morgan Stanley . Please go ahead.
Hey, good morning, guys. Thanks for taking my questions I have two if I may maybe Dave just first for you can you maybe marry the comments you had in your pre announced.
The premium tax today with what you talked about at the beginning of September meaning.
At the beginning of September you mentioned for the first time that that certain U S hyperscale or terminology the cautious buying terminology.
And then today talked about.
Uncertainty worsening in the latter part of September does that imply that.
Demand or purchasing habits from U S. Hyperscale has incrementally deteriorated since the pre announcement or cover the trends that you saw in September is still relatively in line with what you spoke about back in early September .
Do you think things have been changing through the course of the summer Eric So yes, let me, let me give you a little bit of color and in some cases and in many cases, we have LTA is that we're constantly negotiating to give us predictability, we need that predictability to kind of run our factories and communicate with our supply chain partners. So that we can get efficiency and lower cost and so.
On <unk>.
Typically the customers had been in the past pulling above <unk>.
What you saw through the course of the summer was a market change.
I won't say exactly when it happened because we have lots of Lps that are some are longer than others. The time out of different times.
Subject to change as things come up for renewal.
So.
It's fairly complex, but as we get close to some of them ending within a quarter at the end of the LTA say for example, we are negotiating the next one we get us up to the inventory the datacenter build outs that have happened or that are going to continue to happen and that's what really changed this summer if that helps.
The color.
Okay. That's helpful. Thanks, Dave and then maybe John Luca just one for you kind of to think about the impact of your restructuring plan.
Is the view that kind of your quarterly run rate opex can be closer to let's call. It $290 million starting in the March 2023 quarters. After you go through this restructuring or.
Or is your current Opex space incorporate some not just September but then December incorporate some of the early parts of your restructuring efforts.
<unk>.
Yes, we are executing satisfaction and plan in.
In November so you will see already some impact in the December quarter.
I will say 2019 is very diverse.
Probably annoying thing that $300 million range, Florida for the next few quarters.
Okay. Thanks, so much thank.
Thank you.
And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yes. Thanks.
For taking my questions I've got two as well if I can.
With regard to going back to the LTA and kind of just trying to establish better predictability in the overall business.
I'm curious how your discussions have gone over the past couple of months, how they've changed with the cloud vendors and what you hear from them is for as far as assessing.
The level of inventory that they have relative to I think the comments in the call was that you have.
Not seeing any change as far as the demand drivers for the business I'm just.
That degree of visibility that you're actually able to get at these cloud cloud vendors of what Theyre holding appreciating that each one is probably a little bit different.
Right there and they are.
It's fairly complex space, but I will say that if you look at what's aging off the extra bikes that are aging office is actually pretty small the exports that are putting on is relatively large so that.
We believe the growth in usage of Exabyte is large but we also believe there is a little too much inventory and I'm not going to say it.
I'm not going to try to quantify how much that is I think there's other reasons why some of the pauses in datacenter build outs have happened and depending on which customer you're specifically talking to it.
Can be complexities of their supply chain.
Necessarily their business models that are that are driving that.
There so.
And it's a complex space globally, theres lots of different kinds of Lps.
We would just I would say that is what I said before is as we've timed out.
People have given us visibility to the next one and the next one significantly lower insulin therefore were.
And we're in a period of.
Coming to reality on that relative to what we're building and making sure we're disciplined through it.
And then I believe in the comments in the call you had suggested that the expectation was we return to kind of a high 20%.
Growth rate in near line capacity shipments at some point as we work through this.
And we see recovery start to materialize.
Correct me, if I'm wrong I think in the past, we've talked about north of 30 or even mid 30% growth is there is there something thats changed in your mind structurally as.
As far as the growth underpinning the near line business going forward.
So there is a difference between mass cap and the airlines so mass capacity typically would run a little bit higher or lower in the near line would run a little bit higher. So that's the reason for the difference, but I think.
Our fiscal 'twenty three will be in <unk>.
<unk> this year for sure.
<unk>.
But what kind of new trajectory, we get into is obviously as we continue to build <unk> in the cloud the growth rate will probably come down over the next 10 years, but.
I do think that.
We believe the fundamental drivers are still there for data.
We're pretty excited about answering that with more and more efficient drives as well so which is why we are using this period to kind of.
Get those drives into the factories to to come out as aggressively as we can afterwards.
Okay. Thank you.
Thanks.
And our next question will come from C. J Muse with Evercore. Please go ahead.
Yes. Good morning. Thank you for taking my question I guess first question.
I was hoping to dig a little bit deeper into gross margins.
You talked about further utilization cuts.
Is there any math you can kind of provide how to think about kind of fixed versus variable Cogs and also as part of the restructuring what kind of impact will that have on gross margins.
Time frame.
I'll, let gianluca.
Answer quantitatively for Ya.
But I would just say that.
Lot of it comes down to this fundamental premise just don't build anything speculatively when you're trying to manage cash. So we're not managing gross margin outcome as much as we are just watching and making sure that any start that we have that we pull from stores and we use our cash that we're going to get ultimately get paid for it we don't want our cash tied up at this point.
We are going to make because of that we're going to make a big dent in inventory and we're very mindful of the impact of the factory workers in the supply chain and so on.
Believe it's critical to resize the business for the future right now so John Luca do you want to answer.
And that utilization strategy as I said before we had a little bit more than $50 million in.
The September quarter.
When we go into the December quarter, we expect that to be higher.
And then having nationally respectively, a little below what I saw the impact to gross margin percent that is of course higher.
On top of that you need to look at the mix.
In the September quarter.
We add.
A lower mass capacity percentage.
Within total HDD revenue compared with the prior quarter.
And we also had higher system and system actually have.
It would be lower gross margin than at least in Canada.
And also how the mix would be exactly in December about debt.
Have you seen from that from.
The guidance now we expect.
The decrease in gross margin in the short term, but we are very comparable with the long term.
They are there.
The micro economic situation will improve especially in Asia and that mean, China.
And this inventory correction will be over and we go back to our more normalized revenue level, we actually expect to.
Our strong gross margin as we were doing or does that three quarters ago.
And there is no reason why we should not be on that range again.
Very helpful. As a follow up question I guess specific to the beer market in thinking around surveillance and China and totally separate question from kind of the pis issues.
You referred to earlier, but curious if you're worried at all about increased regulations coming out of the POC.
As it relates to further entities in China being placed on the entity list are unverified list.
Something that.
Youre contemplating as a potential risk to that part of your business.
We still watch all of the regulations that come out in process, but not only for how it might impact our products, but how it might impact the broader market as well right not just if demand in other parts of the market.
And we've seen some impacts there over time for all markets I think.
Broadly speaking there is.
A healthy diversity of different customers satisfying and demand and I do think that.
Ultimately the demand is going to shift somewhere else because of the demand for smart city applications. As we said in our script is still there people want efficiency, whether it's in traffic control like we talked about our healthcare.
Or video surveillance around the world make people safer so.
We think that the.
That market has been underserved probably for the last year and we think ultimately it's going to come back. So it just we're not.
Building their packing into the products right now because we want to make sure that we see the purchase orders.
Thank you.
And our next question will come from Shannon Cross with Credit Suisse. Please go ahead.
Thank you very much Jim maybe could you talk a bit about beyond inventory and lower capex any other levers you see that you could pull within working capital or other areas to drive incremental cash flow and then I have a follow up thank you.
While we focus on all we can manage their working capital, but for sure the inventory level.
The main driver that we can use right now.
Our inventory has grown from.
One 1 billion before.
The start of the Covid.
One 6 million.
The September quarter, So we add opportunity right now to reduce our inventory of course that will not happen all in one quarter about that.
We will diligently regulus, our our <unk> mentioned in the next couple of quarters, it's not as big Shannon, but we can go with yields and scrap and neither of these are still material numbers that the team can use.
Use the the time, the excess capacity and so on.
Do the right experiments to drive those on the right products.
Okay. Thank you and then Dave.
Dave I don't know if you can talk a little bit about this but it seems like this restructuring is very obviously head count okay.
But are there other areas, where you're reducing costs because it seems like this is kind of a flex down given the macro environment and obviously the challenges with inventory on that more than maybe a structural.
A structural restructuring if I can say that.
Or am I off on that and there are some actual big structural changes, you're making to the business.
Yes, I would say, we'll still have the ability to flex up obviously.
People impacts are the toughest parts of the job and where we're.
Really sensitive to not only the people, but the communities in the supply chain there are big impacts happening right now.
We are lowering output of some of the legacy products and completing product transitions to future products, which are more efficient products as well.
First from a support perspective, some of the complexity of the product product line is coming down and resetting the factory footprint, a little bit we havent talked about that very much but.
Third demand realities out there.
We have where they actually impact the factory footprint. So there is opex support around that as well.
Will all help.
As we restructure and then come out we're very mindful of the fact that.
We do need to accelerate into the future with the right products as well.
That's been the nature of this business I don't think there is a.
Massive structural change in mass capacity data that we're planning at this point in time, we're just dealing with the reality of the current environment.
Okay. Thank you.
Yes.
And our next question will come from Jim Suva with Citigroup. Please go ahead.
Thank you very much you've been very clear about the restructuring.
It's going on in the December quarter, and given the September quarter, which just ended.
Timber outlook.
Do you think that's sufficient to rightsize.
Global supply and demand are equal that's going to be like a more prolonged.
You look at the <unk> and all the demand characteristics and inputs from our customers is going to be a little bit.
Longer prolonged recovery.
After the December quarter were going to be pretty clean clear then.
While it is a bit difficult to say right now so what we're doing is the key.
Keeping that level of production down for the month of October and November for sure.
And then at the end of November we will lap.
Look at.
Yes.
More tangible demand for for the eighth quarter of Martin also June and see if at the right time to ramp.
Check.
Or if we need to keep it down in Florida for a few more weeks.
Yes, I think Jim maybe this ties back to Shannon's question as well mass capacity was up almost 60% in fiscal calendar 'twenty.
Mid thirties in 'twenty one.
FY 'twenty three is likely going to be negative thats. The first time, that's ever happened before so.
It's not that data is not growing it's certainly growing in all the application space I, just think that we've got to make sure we reduce our manufacturing build plans to maintain this healthy supply discipline and we may see a pop back to some of those big spikes again, it may be a more muted growth, we don't know, but we're really confident in the long term.
Drivers.
So we'll take this reset right now and then deal with the future of the comps.
Great. Thank you so much.
And our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Great. Thanks for taking my question. My first question is on gross margin. So it sounds like your gross margin.
We'll be down quarter over quarter in December based on your answer to previous question, but more importantly, how much are you under earning a gross margin versus normal normalized level, maybe help us breakdown by the various components between on the utilization charges COVID-19 costs logistics costs may be ready to make anything there would be helpful.
Therefore follow up questions.
But based on the level of production that we have today underutilization charges will be substantially higher than the September quarter.
Because at that period of time, why do we keep that production level.
Law would be we'd be at least two months, we are still not exactly for the dealers to go a little bit longer.
While that is the main the main reason why the.
Gross margin is declining and of course with the top line being lowered.
Was it a stamp that impacted even more.
So if anything I would say the majority in Panama as they call it cost.
<unk> been.
Sadly.
Fairly flat quarter over quarter, we don't see that path will deteriorate casually neurons is right. We know we are spending a bit less because we ship less unit.
So those are the main drivers and then with the restructuring.
When we go in the next in the March quarter that attachment with that glad some positive impact to our P&L of course.
Okay. That's helpful. My follow up question is you talked about customers inventory drawdown through at least the December quarter.
Are you, suggesting that revenue will grow in the March quarter, and then to.
Policy, how do you see this cycle playing out for the near line market competitive with previous cycles. In 2000 22018 to 2016 those cycles, usually takes it by dropping two to three quarters and then it comes back on maybe a quarter or two quarters. Later do you think that'll be comparable at this time.
I think 2016 was kind of a double dip.
A real oddball.
Don't expect thats going to happen here.
I think what we have is a phasing up of.
Confluence of factors.
Macroeconomics and architectural transitions like we talked about some supply chain issues that people still have.
I do think we will see some people start to come out of it sooner rather than later and other people may be more conservative so.
It's too early to call exactly when when it's going to happen, but we're going to be watching it very carefully.
And then making sure that we use our cash to only build what's absolutely necessary for the market through that period.
Okay. Thank you.
And our next question will come from Ananda Baruah with loop capital. Please go ahead.
Hey, Thanks, guys. Good morning for taking the questions.
Yes real quick.
Okay.
When our gross margin and then went onto restructuring plan on the gross margin. So so is it are you guys I get the question is are you guys adjusting.
<unk> production capacity at all.
Or are you holding Pat.
And just observing the restructuring charges right now and I guess.
And as a follow on to that is that.
Sort of that would sort of suggesting that any pickup in gross margin is all production related going forward and then I have a quick follow up.
Alright.
<unk> heard.
Of course, the level of production.
The majority of the impact on our gross margin in the future.
But also the restructuring.
Sure.
We are the statute of the company.
Basically that will give us some benefit and some financial benefit in the future.
A part of this restructuring a significant part of VSS factoring is actually in that in.
In manufacturing so when production level goes back up to where it was before.
And then on our top line was that improve at <unk>.
Before we expect gross margin to go back to where it towards any of them yet.
Got it so the restructuring will also evolve.
Adoption is it production capacity as well John Luca I guess could you give us any sense of what and how do you think about the split of the restructuring program between <unk> and <unk>.
As you know there's many different types of.
Factories that we have and so summer.
Dramatically underutilized others will keep.
Running relatively.
Heavy because were doing experiments to make sure that we can do product transitions and get the yields up on the products that are.
We're going to bring us out of this period some of those products are way more efficient as well. So we can use that not only the investments that we're making from an opex perspective, but to guide ourselves towards what restructuring we need to do of our manufacturing footprint through this period. So I think they go hand in glove.
But long that Emma Ananda longer then we would also have the benefit of.
Our new technology. So we think with a 30 terabyte hammer and future product based on their technology. We also said that will be.
Two our gross margin so, but our remaining things that you need to see that when you start to model longer term.
And yet when do you think youre at run rate or.
The opex portion of the restructuring program.
Liquidity out of the run rate yes.
So if we.
Execute there that is fracturing as we as we are planning in November I will say the March quarter. We had included a fuller therefore benefit.
Got it.
Thanks, guys I appreciate it.
Okay.
And our next question will come from Thomas O'malley with Barclays. Please go ahead.
So I just wanted to ask kind of an overarching question on the recovery here, obviously, there is pretty limited visibility right now.
Clearly youre working through negotiations with your customers, but could you just help give us a picture.
How long and how deep this recovery may laugh, obviously, youre guiding substantially down for December as.
As you look into the March quarter, obviously customers are acting differently, but would you expect the total company revenue to be down again or do you think that you could see a recovery starting at the beginning of the calendar year.
But of course, it's difficult to predict the future and we have been it could be a.
Pfizer recently, but I can tell you in our internal plan with the we see an improvement in the March quarter compared to what we have got in December and.
And Tom certainly what we're planning on building.
And then moving.
We intend to reduce our builds right now to make sure that the inventory gets properly adjusted we said that last quarter as well I mean, so we're watching the inventory.
Tire market has but we also.
Do think that at some point mass capacity is going to start climbing again and so we just wanted to get there with the right products to make sure we control the builds.
Any equation in China will start to improve compared to what they are convenient.
Six months that would be a major benefit to our.
While our business.
Got it and then my second one is just on the right path capacity exabyte growth rate for the long term. So I think Dave you talked about conversations with U S. Hyperscale is right now most of them are coming in kind of below where the long term agreement was they were pulling above that previously would you really only taking the mass capacity.
The growth rate down from 30% to upper <unk> range, obviously near line has been running above that but with all of these <unk> or these conversations that you have with these cloud guys coming in below like how do you get comfortable with the fact that that math capacity is still at that high twenty's rate shouldnt it be normalize a little bit lower than that given that these guys look to be order.
Looking at a slower rate coming out of this higher growth period of time, yes, that's good.
This year it will be so far down. The question is does it snap back or I made reference earlier in the call here.
The calendar 'twenty, where it was 60% so I don't expect that just to be blunt, but this is exactly why we go work. Those LTA is give people predictability ourselves predictability on what exactly the the demands are for our factories and then give the customers the predictability so that they can understand.
The pricing environment and so on.
Number of exabyte, theyre going to need to pull in.
We are still.
Having those conversations.
Economic business architectural transitions that were happening their effectiveness.
Yeah.
And our next question will come from <unk> Goldman Sachs. Please go ahead.
Hi, Thanks, so much for taking the question.
Joined late so apologies if you've already addressed these questions first one on pricing on a per exit by basis for your math capacity business I think in the quarter.
That number was down kind of mid single digits on a sequential basis down you kind of low teens your year.
I think there was a 12 months stretch from mid 21 through early twenty-two or or pricing per exit bite was down in the in the single digits pre covered it was down 15 per cent plus or minus should we expect pricing and your math capacity business on a <unk> basis to be down low to mid teens going.
[noise] forward.
And kind of it kind of benign conditions last year were.
One time, if you will or should we expect pricing to improve as you as you come out of this inventory digestion phase.
Oh.
Of course.
But of course, they meeks is also very important we shifted out of Iowa.
I think.
So let's look at the.
Look at that and thought that you really need to look at that guy.
Like what like what are the same product.
What they said before like maybe.
Didn't get.
Does he not here.
The legacy, but their business, we have some pricing pressure on.
The masked capacity.
They meet capacity that he has some great action, but.
But I think it's based statement.
Got it that's helpful Gianluca on free cash flow.
As you go through this inventory.
Digestion phase and lower levels of revenue.
Should we brace for a quarter or two of negative free cash flow I don't think that's happened with you guys in a very very long time or do you think you have enough levers on the working capital side to stay positive free cash flow for the next couple of quarters. Thank you.
Oh, we think we would stay positive.
I said before we also have.
The inventory with we added he was seeing so at least we'll add clothes somebody's LSA cash flow.
So we don't have we got this bad debt, so far to any negative quarter on vacation.
Thanks, so much.
Thank you.
And this will conclude our question and answer session I'd like to turn the conference back over to management for any closing remarks.
Thanks Gulf.
As always I'd like to thank all of our stakeholders for their ongoing support and confidence Seagate will navigate through these near term difficult.
Conditions and be in a stronger position to meet our customers needs for innovation for cost effective storage solutions well into the future. Thanks for joining us today, and we look forward to further engaging with our shareholders over the next few months.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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Yes.
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