Q3 2023 Seagate Technology plc Earnings Call
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I would now like to turn the conference over to Shane Hudson Senior Vice President of Investor Relations. Please go ahead.
Thank you Hello, everyone and welcome to today's call. Joining me are Dave Mosley, Seagate's, Chief Executive Officer, and Gianluca Romano, Our Chief Financial Officer, We've posted our earnings press release and detailed supplemental information for our fiscal third quarter 2023 result on the investors section of our website.
During today's call, we will refer to GAAP and non-GAAP measures non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our form 8-K that was filed with the SEC.
We've not reconciled on certain non-GAAP outlook measures because material items that may impact. These measures are out of our control <unk> cannot be reasonably predicted therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
Before we begin I'd like to remind you that today's call contains forward looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date actual results may vary materially from today's statements information concerning her risks uncertainties and other fab.
Actors that could cause results to differ from these forward looking statements are contained in our most recent Form 10-K, and 10-Q filed with the SEC our form 8-K filed with the SEC today and the supplemental information posted on the investors section of our website as always following our prepared remarks, we'll open the call up for questions.
With that I'll now turn it over to you David.
Thanks, Jamie and Hello, everyone.
You gave some march quarter revenue came in at $1 6 billion.
Just above the low end of our guidance range, while we reported a non-GAAP loss of 28 per share. These.
These results reflect rising economic uncertainties, and then elongated inventory correction that impacted demand among a few large customers late in the quarter.
As a result, we've altered our outlook regarding the timing and trajectory of recovery to now begin later in the calendar year.
In response to the current market environment, we are taking aggressive actions to further reduce costs and rightsize the business to navigate this downturn and position seagate to thrive when recovery ultimately comes.
Beyond this cycle, we remain excited about the long term opportunities presented by the secular growth of data and the relevance of mass capacity storage as new data centric applications emerge and more workloads migrate to the cloud.
We continue to make strong progress on our industry, leading technology roadmap, including launching hammer based products this quarter, which we believe put us an outstanding longer term position.
In my remarks today, I will share some perspectives on the current market dynamics provide greater context on our restructuring initiatives and update you on our product plans.
First let me address the settlement, we announced with the U S Department of Commerce Bureau of industry and security or Bas.
The agreement resolved <unk> allegations regarding seagate sales of hard disk drives to a certain customer between August 2020 and September 2021.
Under the terms of the settlement agreement <unk> has agreed to pay a total of $300 million.
And $15 million quarterly installments that will take place over the course of five years.
I want to emphasize that Seagate maintains its strong commitment to export compliance and we believe that we complied with all export regulations at the time, we made the shipments.
<unk> and working towards a mutually acceptable solution with Pis, we balanced factors such as the risks and cost of protracted litigation involving the U S government the size of a potential penalty, which could have been a significant multiple of the settlement amount and our desire to focus on current business challenges and our long term business goals.
<unk>.
We believe the outcome, we have reached and putting this matter behind US is in the best interest of our customers shareholders and other stakeholders.
Turning now to the near term business environment for the past year Seagate has been navigating a complex market shaped by a few primary factors.
Inventory digestion, among our large cloud customers that is impacting our near line business.
Lower economic activity in China, owing to the country's COVID-19 lockdown policy.
And weakening macro conditions that initially impacted consumer demand and is now affecting all end markets.
These pressures have been compounded recently and weighed on our end of quarter dynamics.
In the near line markets <unk> are now facing constrained it hardware budgets, which has raised the bar for projects to get funded and resulted in efforts to optimize existing workloads, both on Prem and in the cloud.
In turn cloud service providers are focused on maximizing utilization of their existing infrastructure rather than deploying new capacity.
Combination of these factors dramatically slowed the pace of cloud customer inventory consumption and led to the pronounced slowdown in cloud and enterprise storage demand that we experienced exiting the march quarter.
However, we don't foresee a strategic shift in customer spending patterns or change to what remains a robust long term outlook for cloud storage.
Digital transformation trends will continue as enterprises realize significant cost benefits and operational efficiencies by transitioning workloads to the cloud.
Industry analysts have observed that once applications and workloads are moved to the cloud they generally stay there and growth.
Digital workloads rely on data, which bodes well for mass capacity storage as the number of new cloud workloads multiply every year.
Within the China market customers remain constructive on their end market demand outlook as the economy continues to reopen however, rising macro uncertainties are pushing timing for recovery to begin later in the calendar year.
Despite the push out we are seeing some positive demand movement and the consumer and service sectors. After Covid lockdown restrictions were lifted these.
These trends support a digital economy growth that bodes well for China cloud demand as growth in consumer demand has historically led to revenue growth for regional cloud customers.
Within the beer markets future demand pickup is based on two factors.
First you will recall that several existing via projects were delayed during COVID-19 lockdowns.
Customers expect these projects to gradually resume as the economy reopens in the coming months, which will consume the existing HDD inventory that was earmarked for these projects.
Second, we expect new smart city, and smart manufacturing initiatives to build momentum as government funding and enterprise budgets free up and the global economy improves.
In this dynamic environment, we are continuing to manage what is within our control.
In late March we extended the first phase of our restructuring efforts to adjust our factory head count to align with lower production volumes.
<unk> efficiencies across various operational.
Support functions and reset our lives edge to cloud business plans.
We are scaling back new investments in live cloud as we focus on filling our existing infrastructure.
We expect to drive operational and cost synergies across all platforms to accelerate time to profitability, while growing the business over the long term.
Since fiscal Q1, we've taken more than $150 million out of our cost structure lower debt by 5% and significantly reduced manufacturing capacity.
Given the prevailing market conditions and our reduced near term demand outlook. We are undertaking the next phase of restructuring actions targeted to yield at least an additional $200 million in annualized savings from both Cogs and opex as well as implementing temporary cost savings measures, including salary reductions.
We're taking a programmatic approach focused on three key areas.
First we are reassessing the levels of production output and functional support required to meet both near and long term business needs. These.
These actions are intended to ensure that supply and demand are appropriately balanced.
Second we are simplifying our product roadmap to create operational efficiencies, we plan to reduce the number of drive configurations, and major capacity no transitions to lower supply chain and manufacturing cost and complexity.
We're taking these actions in concert with our customers, who can also capture cost benefits from fewer product qualifications.
Finally, we will continue prioritizing resources towards higher return products and end markets, while rationalizing support levels and investments aimed at noncore businesses.
Our goal is to emerge a stronger more agile company able to navigate well in all demand environments return to profitable growth and preserve our technology leadership momentum.
To that end, we have not let up on executing our hammer based product roadmap to preserve our significant time to market advantage. We are tracking well to our stated plans and achieved a key milestone last week a shipping initial qualification units to a cloud launch partner and we expect to recognize initial revenue from 30 plus 10.
By platform this quarter as part of our core volt system solutions.
The decades of development that have led us to hammer product position or even more important today is highly cost efficient mass capacity storage will be a competitive enabler in a world where data is rapidly growing and increasing in value.
We believe hammer will further extend the large and sustainable cost advantage multiple compared to other storage media, even with current market prices.
Additionally, seagate's ability to service this growing demand through areal density gains by increasing capacity from three to four to five terabytes per disc or more provides far greater capital efficiencies compared with current PMO technology over time.
We are confident in <unk> ability to translate aerial density leadership into the most advantaged <unk> across a broad range of customers from the highest capacity drives used in cloud data centers to lower and mid cap drives more typically used by enterprise and via customers.
We currently expect the high volume ramp to begin in early calendar 2024, depending on customer qualification timelines and prevailing macro conditions at that time.
Tactically, we're very focused on realizing our targeted savings, which along with an improved demand environment should create the foundation to move towards our targeted financial model.
And as we transition to a strategically vital hammer platform. We believe that we are positioning the company to drive differentiated financial performance for Seagate over the long term.
And now I'll turn the call over to John Luca.
Thank you David.
<unk> the intensifying economic uncertainties, we still had I think declining demand in certain parts of the business over the last couple of weeks of the quarter pressuring supply demand balance.
These factors along with Underutilization on Tasiast and <unk>.
<unk> will be on profitability.
For the March quarter, we reported revenue of $1 8 billion.
And non-GAAP losses of 28 per share.
Despite these conditions, we generated free cash flow of 170 $400 million, demonstrating our ability to maintain discipline and strong cost control measures.
In response to the near term business environment, we have and it will be.
We'll continue to evaluate and take steps to improve our cost structure and our balance sheet.
Evidenced by the expansion of our <unk> efforts, which we announced in late March.
Exiting the June quarter.
Actions that we committed to and taken targets for I would expect it to deliver cost savings of $40 million to $45 million annually with about 60% realized in cost of goods sold.
As Dave described in his comments.
We are taking additional actions to 5 billion improved our cost structure kind of getting at least $200 million of annualized savings exiting fiscal Q1 2024.
Now turning to the end market.
Total <unk> revenue declined 4% sequentially to one 6 million.
<unk> Avenue, what do you mean, essentially flat quarter over quarter at $1 $2 billion.
But lower than our expectation due to a more prolonged cloud customer inventory adjustment and lower demand for nickel over in China.
<unk> into the mass capacity market totaled 104, exabyte compared with 19 salmon exabyte in the December quarter.
Insistent with the prior quarter, roughly 83% were derived from the airline parlay that.
Into cloud and enterprise OEM customers.
The online shipment of <unk> were up 9% sequentially.
And by growth in 20, plus data by Tonight at.
As a percentage of our EMEA line exited like humans 20, plus terabyte capacity drives have grown from high single digits to approximately two thirds of our EMEA <unk> by year over year.
I think our customer first.
Of higher density storage for their data center needs.
Looking ahead, we expect near that extra by humans to decline over the next capital quarter as cloud customers intensify their efforts to reduce inventory and improve the productivity of that existing infrastructure.
Specific to the VM market, having a decline sequentially narratively anticipated.
As we outlined earlier based on interaction with customers, we expect gradual recovery.
On behalf of the calendar here.
Within the legacy market revenue was $371 million down 12% sequentially.
Letting a steeper than anticipated decline in mission critical status I mean, a more cautious.
Spending environment and weakening demand.
Demand.
One of the client and consumer market.
Flat at typical seasonal demand patterns.
Finally, an avenue for our non HDD business in <unk>.
14% sequentially to $256 million.
Bright spot for the quarter.
As anticipated we grew sales, what our enterprise system and component supply constraints continuing to improve.
And we expand our market coverage.
Moving to our operational I put a four month non-GAAP gross profit in the March quarter was <unk> $47 million.
Letting them know revenue and a less favorable mix than what we anticipated.
Utilization cost of approximately $75 million that similar to the prior quarter, but higher than we will regain the forecasting as we can and that is staffing production to later in the quarter as noted at anything desktop buffet.
Our accounting for our recent Underutilization cost.
Late into more than 400 basis points of monitoring headwind.
We recorded non-GAAP gross margin of 18, 7% compared with 21, 4% in the prior quarter.
Based on our current outlook, we expect underutilization cost to improve in the June quarter, even if production output remains well below the year ago level.
We expect both gross profit and gross margin to move higher as demand in it call. It towards the end of calendar year 2023.
And our cost structure improvement are fully realized.
With a newest non-GAAP operating expenses totaled $182 million.
Now in the $63 million at the end of linear and $12 million sequentially.
A linear decline and in fact, our cost structure improvement options to date.
Lower variable compensation as well as disciplined cost management.
We expect non-GAAP opex in the June quarter to be cement within last quarter.
Our <unk> satellite GAAP operating expenses for the March quarter included <unk> million.
Associated with the settlement.
Settlement agreement.
And it will be paid in quarterly installment of $15 million over the course of five year staffing.
Starting in fiscal Q2 of 2024.
We incurred a non-GAAP tax expenses $36 million nothing in the March quarter.
Our tax expense is largely based on a full year of GAAP forecast by geography.
And allocated between the quarter based on expected profitability.
We expect total non-GAAP taxes fancies of for fiscal year, 'twenty three to be approximately $45 million to $50 million.
Based on diluted share count of approximately 207 million share.
GAAP loss per share for the March quarter were $2 19.
We can reflect that a service that I mentioned earlier.
non-GAAP loss per share was <unk>.
Moving to balance sheet and cash flow.
We ended the March quarter with liquidity level, our costing I think $2 5 billion.
Building on what it was in training facilities.
<unk> was relatively flat sequentially at $1 2 million.
Consistent with our plan.
With our newest capital expanding to $54 million I think the demand quarter.
132% sequentially.
We expect capex to remain relatively flat in the June quarter.
Free cash flow generation was 174 million.
Slightly quarter over quarter, and reflecting our ongoing focus to optimize free cash flow.
We currently expect to generate positive free cash flow through calendar year 2023.
Dependent on the timing of that factoring costs.
We used $145 million was a quarterly dividend and exited the quarter with the 170 million shares outstanding.
We are not currently planning to repurchase any shares in the next David on quarters.
Consistent with our near term focus on optimizing cash balances.
Our debt to finance the exiting the quarter was that below $6 million.
About $71 million quarter over quarter.
Adjusted EBITDA for the last 12 months totaled $1 3 billion.
<unk> gross debt leverage ratio of four five times.
Since fiscal Q1 of 'twenty, three we have reduced debt by approximately $290 million.
In fiscal Q4, we plan to further reduce debt.
<unk> $560 million.
Ethernet that's dancing in the March quarter was $81 million.
And it is expected to be similar in the June quarter.
Turning to our outlook.
In the context of the market challenges that we have outlined today.
We expect the June quarter revenue to be net age of one 7 billion.
Lastly, minus $150 million.
We project incremental declining demand capacity business, mainly driven by customer focused on the inventory drawdown in our EMEA online cloud market.
As a midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the low to mid single digit range, reaching.
Which include between 50 and $60 million.
In Underutilization cost.
And we expect a non-GAAP results in the range of 20, plus or minus 20%.
I will now turn ons that goes back to Dave for final comment.
Thanks, John Luca <unk>.
The past year has presented a set of challenges that have impacted seagate and our industry to a degree not seen for more than a decade.
As our outlook and commentary today demonstrate we believe that we are still a couple of quarters away from seeing a positive turn in demand for data storage.
However, there are a few key takeaways that underpin our confidence in the business and our long term potential.
We are aggressively managing through this environment and taking appropriate actions to generate positive free cash flow strengthen our balance sheet and enhance future profitability all the while executing our technology roadmap.
To that end, we've continued to prioritize investments on our hammer product Road map.
These drives offer the highest density most cost efficient mass capacity drive storage, which.
Which we believe translates into a competitive advantage for our customers and we are focused on driving appropriate returns for the value we are delivering.
And we continue to receive indications from our customers the demand will pick up as the global economy improves.
The secular drivers powering long term demand for storage are intact and this fact is at the root of the conversations we're having with customers across our key markets and geographies.
I'd like to thank and recognize our global team for your resilience and perseverance through this challenging period, we are keeping our heads down and aimed to make continued progress towards our goal as we move closer to market recovery.
Thanks, again for joining and let's open up the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
And our first question will come from Erik Woodring with Morgan Stanley . Please go ahead.
Thank you so much good morning, good morning, guys Dave.
Can you maybe help us understand kind of as we sit here today, what gives you the confidence to kind of talked about a recovery towards the end of the calendar year I guess, what I'm hearing from you in a worsening of demand in the last few weeks of the quarter greater macro concerns amongst customers, obviously challenges and in the near line market and.
So like what data points are you seeing today or what are customers, saying to you that gives you the confidence that the recovery will happen towards the end of the year as we sit here today and then I have a follow up thanks, yes. Good thanks, Eric.
<unk>.
As you alluded to we've been anticipating returned to X by demand growth in near line for a few quarters, but what we saw coming out of the last quarter is still reflects that there is too much inventory against just a very slow near term mass capacity demand I would say that.
The customers are.
Spending money, they're not necessarily spending money on mass capacity storage right now they may be spending on compute or other investments that they are choosing to make and then as we look through into their data center.
Behaviors, if you will.
We are somewhat encouraged that the data continues to grow so in the data centers.
The drives that are in there are being strongly utilized there are some drives are living a little bit longer and datacenter applications, but there's also really compelling value propositions, we're putting in front of them with tire capacity drives like 30, plus terabytes and new features that are coming that should drive adoption and we should get a refreshed so as all of these things.
<unk> needs to be factored into our planning they're all important.
But the most important thing right now is this reflects.
Our sentiment coming out of last quarter is we don't want to push too much in especially the older technology products, we want to really stage ourselves to the new technology products and make sure that that inventory flows through timing is everything exactly to your point, but I do think with the with the way data is growing the evidence that we have.
The data is growing even anecdotally I can talk about <unk>, we can see the data growing in the cloud much further than our our projections were a long time ago and this was fairly consistent with discussions that I have with <unk>.
Other.
Fellow travelers.
Do think that we're not at peak cloud or anything like that I think the cloud applications are growing tremendously in data size. It is just a prioritization issue that we're in the middle of right now.
So we just focus on taken actions to.
Further manage the downturn like cost and footprint.
Still to keep driving the technology leadership.
Are there when markets recover that's how we think we can create the best Foundation to.
Quickly move back into the targeted financial range with us demand reasons.
Okay. Thank you. Thank you for that color and then I guess Luca I know you mentioned talking about paying down the 540 million dollar maturity in June but can you maybe just help us understand some of your sources and uses of cash over the next let's call. It six to 12 months, how youre thinking about.
Your liquidity situation just given your leverage is kind of <unk>.
<unk> kind of creeping up towards that five five times number and then you know for example, how are you thinking about the stability of your dividend and any potential drawdown of your revolver adjustments to covenants, maybe if you could just on package that a bit that would be helpful. For us. Thanks. So much yes. Thank you Eric.
We renegotiated our covenants in the December quarter.
We have paid down already a big part of our debt between December and even the last quarter.
As you said, we already discussed about the repayments coming in June and.
<unk> 560, <unk>. So we're very focused on using the data to show ads with average.
We are generating free cash flow of positive free cash flow.
Every quarter anti Anomaloscope heartfelt debt.
Free cash flow. He is also going to add with the repayment of the debt. We have other sources that we have at <unk>.
We can get.
While no $1 that we discussed in the past is there.
I'd say its entities back no manufacturing buildings.
We are working on it now.
So all of this we will.
We have with our debt covenants and if we need to do more we can do more.
Perfect for the color.
Okay.
The next question comes from Tom O'malley of Barclays. Please go ahead.
Hey, guys. Thanks for taking my question I, just wanted to dive a little bit into the dynamics of the full year. I think you just said that you expect some declines in near line for the next several quarters just given the size of how big that end market is for you guys. Do you expect any sequential growth for the remainder of this calendar year.
If so are you getting out with about a via market or a recovery in legacy could you just walk through the puts and takes of total revenue and when you may see that inflection given the new outlook. Thank you.
Sure. Thanks, Tom So a few points.
I would say that the next quarter will be fairly muted as weak as what we just described I do think that there will be exabyte growth as we all say late in this calendar year as we get towards the end of the calendar year.
That comes from many cloud service providers of the world that are getting through their digestion phase if you will.
Because again there is a lot of data that we get from them about utilization rates being high inside.
The data centers and data continued to grow so I do think this is <unk>.
Going to be over at some point relative to the VA market and maybe the broader macro we're not really calling the end of June .
<unk> any macro uncertainty as part of this but we do think that some of the.
Investments that have been put off and put off for quite some time may actually come back towards the back half of the year. So there's there's positive sentiment it hasnt translated into pose yet.
But that's the way we're feeling about it.
And only one other point that I would make there is that inside of the cloud.
Workloads that we see the data.
Data growth is actually fairly profound.
So I think people can make tradeoffs with older drives that they have running as and.
Throwing data away and things like that but at some point the world runs out of gas. We all know, we're creating more and more data all the time in the form of videos and communications.
And AI and things like that all are all going to need the data and so we're just really focused on making the space for it.
I don't think the world can.
Ken.
Can deal with this kind of supply demand imbalance for.
For very long, but we need to take the actions that we're taking on the supply side to make sure that we're not waiting too long.
Got it and then the second one as far as I look at just on the gross margin side Underutilization charges went up slightly.
Quarter over quarter, and you kind of laid out what the charges would be for the guided quarter, but in terms of the impact to gross margin gross margins are down substantially more than the impact on the math that I'm doing with under utilization, obviously theres some revenue.
Impact as well, but could you talk to is it just mix with via being a bit higher than mass capacity is there any pricing pressure that youre seeing from the new airline customers could you just walk through why you're seeing more gross margin pressure and just the other utilization charges. Thank you.
We're creating more and more data all the time in the form of videos and communications and.
And AI and things like that are all going to need the data and so we're just really focused on making the space for it.
I don't think the world can.
Yeah. Thanks, <unk>, So I will say the March quarter of course has some mix impact also.
Ken.
Can deal with this kind of supply and demand imbalance for.
Very long, but we need to take the actions that we're taking on the supply side to make sure that we're not waiting too long.
For example, a mission critical was sequentially down and that it is.
Good day, thus managing generation.
Got it and then the second one as far as I look at just on the gross margin side Underutilization charges went up slightly.
<unk> was also sequentially down so we had a couple of segments that they're in it.
Quarter over quarter, and you kind of laid out what the charges would be for the guided quarter, but in terms of the impact to gross margin gross margins are down substantially more than the impact on the math that I'm doing some underutilization, obviously theres some revenue impact as well, but could you talk to is it just mix with via being a bit higher than mass capacity is there any.
<unk> 2019 debt in March because of seasonality.
Down so we see that.
<unk> actually in in the June quarter.
As you said, but it also has some pricing pressure, especially towards the end of the quarter, we must have some customers.
We decided to take.
Pricing pressure that youre seeing from the new airline customers could you just walk through why you're seeing more gross margin pressure and just the underutilization charges. Thank you.
Take some of those.
And we just had to take not to take add on deals.
And.
So this is what we are focusing on trying to <unk>.
Yeah. Thanks, So I would say the March quarter of course has some mix impact also.
Supply demand balance where do we can we see is why we are doing that and add that is transferring option. We want to keep capacity that we have internally aligned towards a short term demand and then of course in the longer term keeping that balance in a way that they're putting.
One example of the mission critical was sequentially down.
It has a good day for us.
Managing generation.
<unk> was also sequentially down so we had a couple of segments that.
But it is not too much pricing pressure in <unk> and to the industry in general.
<unk> 2019 in March because of seasonality when Atlanta down so we see that.
And Tom I would add onto that just you can see the pricing stress in the fairly readily and the dollar per terabyte trends and so thats, where we have to be very discerning about what deals we're taking but I think it's reflective of a world where manufacturers are just trying to convert inventory back to cash as quickly as they can.
<unk> actually in the June quarter.
He has had many of those saw some pricing pressure, especially through the end of the quarter tenant with most outbound customers.
We decided to take.
Take some of those.
And we just had to take not to take their ideas.
Our answer long term has got to be you don't build too much. So that we don't get ourselves into that position and focus on the transition to a more substantial value proposition proposition like higher capacity year lower cost like via the.
<unk>.
So what we are focusing on trying to keep.
Supply demand balance, where we can see is why we are doing that and add that is transferring option. We want to keep the capacity that we have internally aligned to their short term demand and then of course in the longer term keeping that balance in a way that.
The aerial density gains that we might have and we apply that to lower capacity drives.
Order to rebuild the margin.
For ourselves and for the industry.
Thank you.
Yes.
But it is not too much pricing pressure not to seagate and to the industry in general.
The next question comes from Moms <unk> Mohan of Bank of America. Please go ahead.
Tom I would add onto that.
You can see the pricing stress in the fairly readily and the dollar per terabyte trends and so that's where we have to be very discerning about what deals were taking big but I think it's reflective of a world where manufacturers are just trying to convert inventory back to cash as quickly as they can.
Yes. Thank you I was wondering if you could just maybe talk about the outlook on pricing as well.
Seems like your.
Timeline for the airline demand recovery is kind of late in the year.
Handler shipment starting like in volume maybe early next year and then to Ram.
Our answer long term has got to be you don't build too much. So that we don't get ourselves into that position and focus on a transition to a more substantial value proposition proposition like higher capacity year lower cost like via the.
Clearly like memory pricing NAND demand and pricing has been under significant pressure. So would you say that.
As Youre thinking about this comment about gross margin improvement as you go through the course of the year is that predicated on stable pricing and per wing or worsening pricing any color you can share in <unk>.
The aerial density gains that we might have and we apply that to lower capacity address just in order to rebuild the margin.
For ourselves and for the industry.
Do you think that that pricing environment could deteriorate a lot more as you go through the course of the year and I will follow up.
Thank you.
The next question comes from Moms <unk> Mohan of Bank of America. Please go ahead.
I'll, let gianluca talk about the restructuring because I think thats a significant part of your of your question, but I would say relative to the pricing environment.
Yes. Thank you I was wondering if you could just maybe talk about the outlook on pricing as well.
Really where we believe we have good products.
It seems like your.
Terabytes to mid 'twenty capacity points.
Timeline for the airline demand recovery is kind of late in the year.
Not theres not great demand right now, but we are we have good products that we can yield and so on the way out of it of course is to continue the areal density gains into the mid <unk>.
To get the chance to reset things a little bit.
From my perspective, the demand environment, so low that the way pricing becomes more strained as when we overbuilt and so thats, what we have to make sure we don't do.
Because we can't continue to.
To stress ourselves and our cash that way. So we have to wait this thing out a little bit and so John look if you want to talk about a good part of that.
Improvement in our gross margin SaaS team gas fiscal Q1 is related to that is transferring actions that we're taking and I know.
We said it is about.
200 million annualized savings.
<unk> will be.
Fully realized probably towards the end of Q1.
The plan is based on our current visibility of pricing.
As you know and all of that can.
Can change and we added.
Trying to reduce our capacity so that we do.
David that I'd level product for the current demand and we take out some pressure on pricing.
Okay. Thanks for that color and if I could follow up on the comments around positive free cash flow for the remainder of the year.
Your free cash flow and EBITDA levels.
Have the potential to deteriorate from current levels.
When we look at that on an LTM basis. It does get you pretty close.
Existing covenants I know you mentioned certain actions that you can take on sale leaseback and <unk>.
Other elements, but how should investors think about the dividend in this in this context given that you have some cash restructuring charges coming up you do have other.
Yeah.
Uses of cash as well.
You are paying down debt, but in the context of dividend should investors team that's pretty secure as we go through the course of this year or is not going to be another lever to use to balance the cash sources and uses for you. Thank you.
Seagate has always been very focused on shareholder return as you know we are suspending share buyback days on that and those are current.
Economic situation, but we have protected our dividend with <unk>.
Inc. No we can deal with our leverage in the next few quarters.
Our holiday discussed that leverage level with our banks.
But I will say until now we have all of this protected our dividend.
Yes, I'd say <unk> I'm proud of who we have been over if you look just over the last 15 years. When we came up with some of the policies that were talking about.
Im really proud of what we've been able to return value to shareholders times are tough right. Now we have a lot of levers that we can look at I think over time, but we want to continue to be that company that we have that and so we're factoring this into all of our discussions right now.
What our priority is already trying to keep the exact same priorities, we've always had for shareholders and one of the reasons why we're being really aggressive on the cuts that we are.
We're also.
As aggressively trying to turn some of the assets that we have into cash.
We'll continue to look at all those options.
Okay. Thank you so much.
The next question comes from Timothy Arcuri of UBS. Please go ahead.
Hi, Thanks, I had two so John Luka, just on free cash flow so.
Are you implying that it's going to be positive for the June quarter. Because you did extend payables a lot in March and you probably have to bring that down maybe 25 days or so so it seems like maybe June free cash flow could be quite a bit negative. So so what's the message on June .
Particularly around cash flow.
We see we see June still are positive free cash flow.
Of course, we need also to locate it.
The exact timing of <unk> payments clause edits structuring actions.
Now in our plan, we have positive free cash flow position.
You do okay. Okay, then I guess I had a bigger picture question. So Dave in your prepared remarks, you talked about.
Some evaluation of the longer term capacity needs for the business and that that's kind of a new.
Angle and.
We've gone from a year ago thinking that the industry didn't have enough capacity and now we are.
Thinking about having too much on that.
Structural basis, So I guess could you talk about that and maybe in the context of that just given how low NAND pricing has gone we're now basically a cash cost.
Is there a risk that there is some cannibalization happening now in.
Near line and sort of what's the Tcl differentiating ESD and near line now in the data center is that part of what's driving you to talk about maybe rethinking what the longer term capacity needs are for the business. Okay.
Let me, let me address the second problem or the second question first.
I had a bigger picture question so Dave in your prepared remarks, you talked about <unk>.
No is the answer to that question I think.
We believe that.
Evaluation of the longer term capacity needs for the <unk>.
Some of the SSD pricing that we're seeing is unsustainable fundamentally unsustainable may go on for a while but it's unsustainable. So we're not really factoring that into our.
And that's kind of a new <unk>.
<unk> and we've gone from a year ago thinking that the industry didn't have enough capacity and now we are.
Calculation drove exabyte demand over time I don't think.
Thinking about having too much on that structure.
Even at the rates that we're seeing today, our ability to continue to take cost out.
Structural basis.
I guess could you talk about that and maybe in the context of that just given how low NAND pricing has gone we're now basically at cash cost.
Deliver more terabytes over time is going to keep us with a substantial gap to any competing technology.
Is there a risk that there is some cannibalization happening now in.
I will say that your questions Super appropriate it's over the last year.
Near line and sort of what's the Tcf difference in SSD and near line now and datacenter is that part of what's driving you to talk about maybe rethinking what the longer term capacity needs are for the business.
Industry Hasnt been putting on capacity either suppliers that we have.
Unfortunately bearing the brunt of this.
Bill assessing their own investments are consolidated factories and things like that so.
Hey.
Let me, let me address the second problem or the second question first.
From an equipment perspective, there is less capacity than there was a year ago, but definitely from a people perspective, there is less capacity, whereas there was a year ago because of significant people take downs, which we know is really hard and nobody wants to do.
No is the answer to that question I think.
We believe that.
Some of the SSD pricing that we're seeing is unsustainable fundamentally unsustainable may go on for a while but it's unsustainable. So we're not really factoring that into our <unk>.
And that capacity can recover but not quickly. So if you start staring out a year from now.
Calculation for exabyte demand over time I don't think.
Even at the rates that we're seeing today, our ability to continue to take cost out.
Does the industry have the same amount of capacity that it did a year ago. The answer is no.
Deliver more terabytes overtime is going to keep us with a substantial gap to any competing technology.
Yes.
Theoretically it can grow back that it's a matter of time and investment.
And from my perspective, the biggest thing we're focused on is the lead times are so long on.
I will say that your questions Super appropriate.
Some of the starts for example wafer starts.
Over the last year.
Industry hasn't been putting on capacity either suppliers that we have.
You have for the new products.
We're making sure the customers understand that it's not going some snapback and we better have discussions right now about what the true demand is there.
Unfortunately bearing the brunt of this.
Theyre still assessing their own investments are consolidated factories and things like that so.
They're going to need fulfilled out there a year from now.
From an equipment perspective, there is less capacity than there was a year ago, but definitely from a people perspective, there is less capacity than where it was a year ago because of significant people take downs, which we know is really hard and nobody wants to do.
In some sense, the kind of consumer behavior, where you say I don't need to buy any for a while and then I can go always go to the store and get some that's that's.
The thing that will be challenged because I think that's what a lot of enterprises are kind of assuming it to make their models look okay right now.
And that <unk>.
Capacity can recover but not quickly. So if you start staring out a year from now.
And Thats, what Thats why the factory workers are getting strained, but we're going to.
Does the industry have the same amount of capacity that it did a year ago. The answer is no.
We're going to have some navigate our way through this and be as communicative as we can I don't think the industry capacity is what it was a year ago and I think.
Yes.
Theoretically it can grow back, but it's a matter of time and investment.
If you don't tell us now.
And from my perspective, the biggest thing we're focused on is the lead times are so long on.
It may it may actually be even more stressful 40, a year from now.
Some of the starts for example wafer starts.
Got it okay. Thank you.
For for the new products.
We're making sure the customers understand that it's not going to snap back and we better have discussions right now about what the true demand.
The next question comes from Aaron Rakers of Wells Fargo. Please go ahead.
They're going to need fulfilled out there a year from now.
Aaron we can't hear you.
In some sense.
Consumer behavior, where you say I don't need to buy any for a while and then I can go always go to the store and gets on.
Yes, sorry about that guys can you hear me okay, yes.
Yes, sorry about that so thanks for taking the question I guess I've got two real quick Dave just on the heels of that last the last question I'm just curious if.
The thing that will be challenged because I think that's what a lot of enterprises are kind of assuming to make their models look okay right now.
That's why the factory workers are getting stream, but we're going to.
If you ask kind of a longer term growth of near line capacity shift.
We're going to have to navigate our way through this and be as communicative as we can I don't think the industry capacity is what it was a year ago and I think.
Trends.
Where do you think that is today like as we come out of this do you think we maybe I'll stop there what do you think that long term capacity shift growth trend looks like now.
If you don't tell us now.
It may it may actually be even more stressful 40, a year from now.
Yes.
Is an interesting question because I think if we go back a couple of years, you remember where there was a a stall and then there was a enormous growth pop back I think it's not going to happen like that again, I mean from an exabyte perspective by that time, we were on.
Got it okay. Thank you.
The next question comes from Aaron Rakers of Wells Fargo. Please go ahead.
Mid three terabytes per disc or even potentially four terabytes per disc.
And we can't hear you.
Then our exabyte.
Yes, sorry about that guys can you hear me okay.
The output is going to be significantly higher at better economics for us as well, but.
Yes, sorry about that so thanks for taking the question I guess I've got two real quick Dave just on the heels of that last the last question I'm just curious if.
But will we have enough capacity for everyone out all at the time I think the answer to that is probably no. So.
If you ask kind of a longer term growth of near line capacity shift trends.
And I don't think we will see the magnitude of the swing that we did before maybe we can from theoretical demand, but I don't think theres going to be supply right now because of the stresses that are going on in the industry.
Where do you think that is today like as we come out of this do you think we maybe.
And maybe I'll stop there what do you think that long term capacity shift growth trend looks like now.
And the fact that people just cant start materials. They won't have a whole lot of inventory and won't have a lot of materials. They won't be leaning forward into some of those really great value propositions nearly as hard because they just can't.
Yes, it's an interesting question because I think if we go back a couple of years, you remember where there was a a stall and then they're really enormous growth pop back I think it's not going to happen like that again from an exabyte perspective by that time, we're on.
Do that speculatively on long lead time so.
Actually an interesting problem set versus what it was a few years ago.
Yes, and then the follow up question just trying to think about gross margin.
Mid three terabytes per disc or even potentially four terabytes verdict.
Normalizing itself or I guess taken another way if we kind of think about the progression of lifting out the underutilization charge.
Our exabyte.
Output is going to be significantly higher at better economics for us as well, but.
Will we have enough capacity for everyone out all at the time I think the answer to that is probably no. So.
Appreciate it youre not guiding beyond this next quarter, but.
As I look back in time what.
When I look back and say Hey, if this model gets back to total capacity shipment levels of 150, <unk> the quarter 130 activate the quarter.
And and I don't think we will see the magnitude of the swing that we did before maybe we can from theoretical demand, but I don't think theres going to be supply right now because of the stresses that are going on in the industry.
How do we think about that relative to lifting out the underutilization.
And the fact that people just cant start materials. They won't have a whole lot of inventory that won't have a whole lot of materials. They won't be leaning forward into some of those really great value propositions nearly as hard because they just can't.
Charges in the P&L.
Well of course depends on what will be the capacity installed at that point and as you know we are reducing capacity right now so.
Do that speculatively on long lead time so.
Gross margin, what we see today or.
So an interesting problem set versus what it was a few years ago.
The next several quarters.
Despite this short term decline in revenue.
Yeah and then.
The follow up question, just trying to think about gross margin.
<unk> is in a way that is implying an improvement in gross Lansing already in the June quarter. So I think that will continue for the next several quarters and of course as as Dave was saying before Lehman we come back.
Normalizing itself or I guess taken another way if we kind of think about the progression of lifting out the underutilization charge.
Preceding youre not guiding beyond this next quarter, but as.
I look back in time.
And that capacity will be.
When I look back and say Hey, if this model gets back to total capacity shipment levels of 150 exabyte the quarter 130 activate the quarter, how do we think about that relative to lifting out the underutilization charges in the P&L.
<unk> has been 11 in off lease supply and demand would be well balanced and.
And we have to manage the short term.
Demand decline.
But again, we haven't we are able to do it we haven't done that in the past and we think we know how to do it.
Well of course, it depends on what will be the capacity installed at that point.
So underutilization charges continue.
We are reducing capacity right now so.
Beyond the June quarter through the back half of the calendar year, we will have some I think also in that in September .
Gross margin, what we see today.
Now the next several quarters.
Batiste batiste declining sequentially.
Despite this short term decline in revenue we got.
Yes, some of that reset the fixed and variable cost as well are in so.
<unk> in a way that is implying an improvement in gross margin already in the June quarter. So I think that will continue for the next several quarters and of course as as Dave was saying before we come back.
As we as we look forward we have to project, what we think the supply that will need to meet that demand is of course, and we will be adjusting and trimming.
And there are no <unk>.
As need be.
Capacity.
Alright, thank you.
We'd be this has been 11, and hopefully supply and demand would be well balanced and aligned and we have to manage this short term.
The next question comes from C. J Muse of Evercore ISI. Please go ahead.
Demand decline.
Thank you for taking the question I was hoping to maybe drill down a little bit deeper on the near line outlook.
Again, we havent, we are able to do it we haven't done that in the past and we think we know how to do it.
If you think about your vision three months ago versus today, obviously, a change in I guess I was hoping you could kind of isolate between cloud enterprise in China.
So underutilization charges continue.
On the June quarter through the back half of the calendar year, we would have some I think also in that in September .
And maybe.
<unk> quarter, the change statements there in terms of the slowdown as well as from a.
But these declining sequentially.
Yes, some of that is preset to fixed and variable costs as well and so.
And demand overall perspective versus just.
I think as.
Realizing that there's just too much inventory.
As we look forward, we have to project, what we think the supply that we will need to meet that demand is of course, and we will be adjusting and trimming.
Downstream and then that's what kind of caught you by surprise, so we'd love to hear kind of maybe the moving parts there and if you could prioritize what has really driven that change that would be helpful.
As need be.
Okay. Thank you.
Thanks C J I think.
It is going to break it down into a few different pieces. The most relevant obviously is the major cloud service providers around the world.
The next question comes from C. J Muse of Evercore ISI. Please go ahead.
Good morning. Thank you for taking the question I was hoping to maybe drill down a little bit deeper on the near line outlook.
And there are a few different behaviors, depending on geography and so on.
I think if I think about.
If you think about your vision three months ago versus today, obviously, a change in I guess I was hoping you could kind of isolate between cloud enterprise in China.
The big applications in the cloud, they're growing a lot.
Right now there are priorities being made on compute and their priority is being made on other investments and then there's questions people.
And maybe.
Rank order the change statements there in terms of the slowdown as well as from a.
People questioning business models and all of that just takes time to sort out but the data keeps keeps growing so I think that that's largely what we're seeing we would have forecast six months ago that we would be coming out of it by now just based on that.
And demand overall perspective versus just.
Realizing that there's just too much inventory.
Downstream and that that's what kind of caught you by surprise, so we'd love to hear kind of maybe the moving parts there and if you could prioritize what has really driven that change that would be helpful.
All of these trends and run rates and I think people can always hold on for another three months or six months they can't hold on much longer than that so that's the way I think about the major cloud service providers.
Thanks C J.
<unk>.
It is going to break it down into <unk>.
Few different pieces. The most relevant obviously is the major cloud service providers around the world.
The difference with Mike the subtle difference might be in China, where you've got cloud providers there that.
There are a few different behaviors, depending on geography and so on.
Really has been kind of on a pause for quite a while and are starting to to.
I think if I think about.
Get a little bit more optimistic again like I said I alluded to earlier not necessarily purchase orders, just yet, but get a little bit more optimistic about their investments and so.
The big applications in the cloud, they're growing a lot.
I think right now there are priorities being made on compute and their priority is being made on other investments and then there's questions.
That's a watch item for all.
When that might come back on the enterprise side, and I know Theres a lot of discussion about servers and other componentry from from our perspective data does continue to grow on Prem.
Questioning business models and all of that just takes time to sort out but the data keeps keeps growing so I think that's that's largely what we're seeing we would have forecast six months ago that we would be coming out of it by now and just based on the.
Sure.
Stressed budgets and CIO in the world today.
All these trends and run rates and I think people can always hold on for another three months or six months they can't hold on much longer than that so that's the way I think about the major cloud service providers.
Today.
But I think some of the offerings are actually pretty efficient right now so I do think.
For totally different reasons.
Martin unless you consider macro being the underlying driver of everything I think xeon.
The difference, but Mike the subtle difference might be in China, where you've got cloud providers there that.
The on Prem enterprise is going to take.
Six months, probably as well I.
Really it's been kind of on a pause for quite a while and are starting to to.
I do think that theres not too much inventory there.
So we've got anecdotal evidence that that inventory has been well managed and so if there is an opportunity to break north into some of those investments we could go necessarily quicker.
Get a little bit more optimistic again like I said I alluded to earlier not necessarily purchase orders, just yet, but get a little bit more optimistic about their investments and so.
Very helpful and I guess as my follow up to Joe Luka.
That's a watch item for all.
When that might come back on the enterprise side, and I know Theres a lot of discussion about servers and other componentry from from our perspective data does continue to grow on Prem.
Thinking about liquidity.
You talked about.
The intention to pay down the debt that's coming due in June .
Curious, how youre thinking about gross cash and is there a plan today to draw on the revolver or that's TBD, depending on kind of the free cash flow generation into June and September .
Sure.
Stressed budgets and CIO in the world today.
Today.
But I think some of the offerings are actually pretty efficient right now so I do think.
No I think our cash bonus will be fairly stable at the end of the quarter compared to the end of March so.
For totally different reasons.
Unless you consider macro being the underlying driver of everything I think Jan.
I don't think we need to use them when going into that of all of that sometimes we use that have more of it if.
The on Prem enterprise is going to take.
Six months, probably as well I.
I do think that there is not too much inventory there.
During the quarter.
So we've got anecdotal evidence that that inventory has been well managed and so if there is an opportunity to break north into some of those investments we could go necessarily quicker.
All of our Florida in a few weeks.
<unk> cash by accessing look differently.
Similar to what we had at the end of March.
Thank you.
Very helpful and I guess as my follow up to Joe Luka.
The next question comes from Krish Shankar of TD Cowen. Please go ahead.
Thinking about liquidity.
Talked about inter.
The intention to pay down the debt that's coming due in June curious, how youre thinking about gross cash and is there a plan today to draw on the revolver.
Hi, Thanks for taking my question. My first one is for John Luca just wanted to follow up on <unk>, how much of a drag is that on margins today and when do you think it'll improve towards the corporate average.
TBD, depending on kind of the free cash flow generation into June and September .
It's purely a function of volume in <unk> that helps you improve the hammer margins and then as the long term gross margin target still 30% to 33% digging in Hamler, then had a follow up for Dave.
No I think our cash minus will be fairly stable at the end of the quarter compared to the end of March so.
I don't think we need to use that we don't need to use that if all of that sometimes we use that word.
Yes. Thank you what I will say and I know we are we.
We are very happy with how we are progressing with Hema and as we said in the prepared remarks.
During the quarter.
Moreover, Florida in a few weeks.
Mustang Pamela cash balance I think we'd be friendly.
We have shaping.
But all of that four quarters or so.
Fairly similar to what we had at the end of March.
Right now we don't have revenue coming from manner, so as not really impacting our gross margin.
Thank you.
The next question comes from Krish Shankar.
But we think of course in the future.
<unk> our.
Andy Cowen. Please go ahead, yes, hi, Thanks for taking my question. My first one is for John Luca just wanted to follow up on <unk>, how much of a drag as it on margins today and when do you think it'll improve towards the corporate average.
Three five <unk> four terabytes underneath those out there.
Any interesting propositions for our customers and we think would it be.
Is it just purely a function of volume and <unk> that can help you improve the hammer margin.
After they have any profitable.
Gross margin improvement for Seagate.
And then is the long term gross margin target still 30% to 33% digging in Hammer and then had a follow up for Dave.
Why this product is so important to us and knowing Jana Haynes, our longest standing for us therefore, the entire industry.
Got it got it very helpful and then a follow up for Dave <unk>.
Yes. Thank you what I will say and I know we are we are very happy with how we are progressing with Hema and.
Sorry, just to come back to the SSD versus HDD dynamics I agree with you that the non prices are unsustainably low.
As we said in the prepared remarks.
We have shaping.
If you look at in the last down cycle versus the prices of almost <unk> higher than <unk> on a per gigabyte basis now it's more like two to four times. So that gap is definitely closing so I'm kind of curious when you talk to your cloud customers.
But all of that fourth quarter.
So right now we don't have revenue coming from Ams. So is not only impacting our gross margin, but we think of course into the future <unk>.
<unk> our.
Is it a bigger.
How does that discussion progressed and.
Three five <unk> four terabytes underneath those out there.
Is that the second part of your weak pricing per terabyte or is that part of your weak demand from our cloud customers or just kind of curious about it thinking.
Interesting propositions for our customers and we think would it be.
After they have any profitable.
No I would say.
Gross margin improvement for Seagate museums, why this product is so important to us and knowing Jana Haynes, our longest standing for us therefore, the entire industry.
When you get into mass capacity, the highest capacity points.
I don't subscribe to the notion it's 2% to <unk>. So I think it's a significantly higher net and we'll have an ability to continue.
Got it very helpful and then a follow up for Dave.
To drive.
To better and better value propositions, as we add more capacity for.
Sorry, just to come back to the SSD versus HDD dynamics I agree with you that the non prices are unsustainably low.
For drive through the transitions that we're talking about so.
What I would say is that.
Okay.
Downcycle SSD prices are almost <unk> higher than <unk> on a per gigabyte basis now it's more like two to four times. So that gap is definitely closing so I'm kind of curious when you talk to your cloud customers.
Right now demand is low for everyone and so what you see the dynamics you see is just manufacturers trying to take some of their cash they have tied up in inventory and turn it back into cash as quickly as possible.
Is it a bigger.
If you start to look and say thats below cost or something like that hopefully people stopped doing that and try to look for other options.
How does that discussion progressed and.
Is that the second part of your weak pricing per terabyte or is it quite a few of the demand from our cloud customers or just kind of curious about it thinking.
And Thats.
Exactly how we're thinking about ourselves as well right you have to make sure you don't build so I think in that kind of environment, it's really hard to extrapolate on trends.
No I would say.
When you get into mass capacity, the highest capacity points.
Exactly to your point, Chris I think.
I don't subscribe to the notion that's two to Forex. So I think it's a significantly higher net and we'll have an ability.
Some of these other things that we're comparing against are unsustainable theyre going to have to re equilibrate at some point don't know exactly when that is.
To drive.
To better and better value propositions, as we add more capacity for.
The more we push into the value chain the more we pushed inventory in there the more people will build buffers and then continue that that so I think thats one of the reasons why from our novel and defense We've continued.
For drive through the transitions that we're talking about so.
What I would say is that.
Right now demand is low for everyone and so what you see the dynamics you see is just manufacturers trying to take some of their cash they have tied up in inventory and turn it back into cash as quickly as possible.
Decided to really pull back on our builds and reduce our footprint.
Very helpful. Thanks, a lot David.
Okay.
If you start to look and say thats below cost or something like that hopefully people stopped doing that and try to look for other options.
The next question comes from <unk> Hari of Goldman Sachs. Please go ahead.
And Thats.
Hi, Good morning, I had one for Dave and then one.
Exactly how we're thinking about ourselves as well right make sure you don't build so I think in that kind of environment, it's really hard to extrapolate on trends.
Quick one for John Luca as well, so Dave I know, it's a bit of a black box, but I was hoping you could give kind of your assessment of.
Exactly to your point, Chris I think.
Your line inventory.
Some of these other things that we're comparing against are unsustainable theyre going to have to re equilibrate at some point don't know exactly when that is.
Our customer inventory.
<unk>.
In the near line market.
Relative to six months ago 12 months ago.
The more we push into the value chain the more we pushed inventory in there the more people will build buffers and then continue that that so I think that's one of the reasons why from our not whole in defense we've continued.
What's your view there.
When you compare and contrast, what you are selling into the new airlines space versus what's truly being consumed whats the percentage delta at the moment.
<unk> decided to really pull back on our builds and reduce our footprint.
Yes, it's actually interesting.
Because if I.
Normally talked about inventory like a distribution channel inventory for example look at weeks of supply or something like that but then that is based on the last four weeks or 13 weeks I mean, if we base things on a couple of years ago. The demand is low and theres not too much inventory out there based on the run rates of the number of drives that we're a few years ago even on <unk>.
Very helpful. Thanks, a lot Dave.
Okay.
The next question comes from Chris <unk>.
Of Goldman Sachs. Please go ahead.
Hi, Good morning, I had one for Dave and then one quick one for John Luca as well so Dave.
I know, it's a bit of a black box, but I was hoping you could give kind of your assessment of <unk>.
The demand is fairly low.
The inventory is fairly low.
Your line inventory.
But I will say that most cloud service providers need to have some inventory around based on the data center populations.
Our customer inventory.
In the near line market.
Relative to six months ago 12 months ago.
Data center buildup, theyre doing and the refresh the spares that they need and and things like that so they need normally need to have a few months of inventory anyway.
What's your view there.
When you compare and contrast, what you are selling into the near line space versus what's truly being consumed whats the percentage delta at the moment.
It's more than a few months right now, but it's not significantly more than the gross number of drives is not.
Yes, it's actually an interesting.
There's not huge I think so that's the way I think about it the exabyte growth will be substantial coming some time and what we've got to do is just make sure we're not pushing any.
Because.
Normally talk about inventory like a distribution channel inventory for example look at weeks of supply or something like that but then that is based on the last four weeks or 13 weeks I mean, if we base things on a couple of years ago. The demand is low and theres not too much inventory out there based on the run rates of the number of drives that we're a few years ago, even on exabyte.
Any more into those change but I.
I don't know if a good way to think about it is really three months or six months like we might we might want to say because if you go back two years historically on the number of drugs that were being pulled by people.
The demand is fairly low.
It's not really six months is probably more like three.
The inventory is fairly low.
But I will say that most cloud service providers need to have some inventory around based on the data center populations.
Yes.
Got it and then any view on sell in versus and consumption or is that is that too hard to really say.
New data center build outs are doing and the refresh the spares that they need and and things like that so they need normally need to have a few months of inventory anyway.
Yes.
Here's what I'd say is that.
We see a lot of the new drives the higher capacity drives going into.
It's more than a few months right now, but it's not significantly more than the gross number of drives is not.
Replacing lower capacity drives obviously with the lower capacity drives get put it into other purpose applications as well.
Not huge I think so that's the way I think about it the exabyte growth will be substantial coming some time and what we've got to do is just make sure we're not pushing any.
So I think drives are living longer theyre still going to be demand for higher capacity drives, especially just the efficiencies of the disease.
Get out of that in the data Center and then there is new data center build out as well so.
Any more into those change but I.
I don't know if a good way to think about it is really three months or six months like we might we might want to say because if you go back two years historically on the number of drugs that were being pulled by people.
I actually.
Thanks for that.
If this is not a problem of not needing any product. This is a problem of reshuffling.
Our priorities inside of the <unk>.
It's not really six months, it's probably more like three.
Data centers.
And then getting ready for the next level of data center expansion.
Yes.
Got it and then any view on sell in versus and consumption or is that is that too hard to really see.
That makes sense. Thank you and then John Luca on gross margins.
Longer term, obviously, you've had this target of 30%.
Yes.
Here's what I'd say is that.
We see a lot of the new drives the higher capacity drives going into.
To 33% if I'm not mistaken.
Youre, obviously significantly below that today, but as you think about the path toward your long term model over the next four to eight quarters, given the reduction to manufacturing footprint that you're executing to what sort of quarterly revenue run rate would you need to be at to be at that.
Replacing lower capacity drives obviously with the lower capacity drives could put it into other purpose applications as well.
So I think drives are living longer, but theres still going to be demand for higher capacity drives, especially just the efficiencies.
Get out of that in the data Center and then there is new data center build out as well so.
At 30% range I assume it's lower than where you were about a year ago, which was about $3 billion, a little bit below $3 billion.
I actually.
This is not a problem of not needing any product. This is a problem of reshuffling.
Yeah of course dependent also from <unk> and <unk>.
Priorities inside of the <unk>.
And that affects us, but as you just heard that we are taking and alcohol.
Data centers.
And then getting ready for the next level of data center expansion.
Stature so.
What we also said last quarter is when we go back to the prior level revenue of Aetna, We peaked at about three.
That makes sense. Thank you and then John Luca on gross margins.
Longer term, obviously, you've had this target of 30%.
$3 billion, we expect gross margin to be actually better than working towards at that time. So we are still confident in the medium and long term, we are taking actions to be.
To 33% if im not mistaken.
You're obviously significantly below that today, but as you think about the path toward your long term model over the next four to eight quarters, given the reduction to manufacturing footprint that you're executing to what sort of quarterly revenue run rate would you need to be at to be at that call.
Even stronger.
When we come out from this down cycle.
We are executing our roadmap we are executing on a ladder.
Cost of revenues and then we think we are at 84 that Nicole.
At 30% range I assume it's lower than where you were about a year ago, which was about $3 billion, a little bit below $3 billion.
Nicole Veil BSM.
This up cycle when it comes.
Thank you.
Yes of course dependent also from <unk> and <unk>.
And operator, I think we have time for Cumulus question.
And then our thoughts about and just add that we are taking and alcohol.
The next question comes from Sidney Ho of Deutsche Bank. Please go ahead.
Our snapshot so.
What we also said last quarter needs. When we go back to the prior level revenue of Aetna, We peaked at about three.
Great. Thanks for taking the question. So I have two quick ones one on the handler side.
Sounds like high volume starting in early twenties for Fran can you give us any goalposts in terms of when you expect to hit a certain unit volume on a quarterly basis and maybe when you expect camera to be gross margin accretive it may be and maybe what kind of volume level and I have a follow up.
$3 billion, we expect gross margin to be actually better than working toward us at that time. So we are still confident in the medium and long term, we are taking actions to be.
Even stronger.
When we come out from this down cycle.
Yes, I think Sydney, our gross margin is going to come back based on demand.
We are executing our roadmap we are thank you.
Executing on a ladder.
So I don't know that we can really break it out based on hammer Hammer transition right now because theres. So many other dynamics, but we are aggressively filling the pipeline full of the product working on the yields and scrap that we need to get down very very confident in the technology. So thanks for the question I would say.
Cost of revenues and then we think we are at 84 to four.
Nicole Veilleux BSM.
This upcycle when it counts.
Thank you.
And operator, I think we have time for two more questions.
The next question comes from Sidney Ho of Deutsche Bank. Please go ahead.
We will hit what I'll consider a significant volume ramp in early 2024, and then we're going to continue to ramp from there because we have that much confidence.
Great. Thanks for taking the question. So I have two quick ones one on the handler side.
Sounds like high volume starting in early 'twenty four to your plan can you give us any goalposts in terms of when you expect to hit a certain unit volume on a quarterly basis and maybe when you expect <unk> gross margin accretive it may be and maybe what kind of volume level and I have a follow up.
Okay. That's helpful. Maybe a follow up question is on the demand side. It seems like you are more optimistic about the enterprise market compared to the cloud market.
Do you expect further correction in the enterprise market, maybe I'll, maybe just a UK U shaped recovery considering comments from some of the storage OEM seems to be quite subdued and it looks like they are just going through the demand correction in theory.
Yes, I think Sydney, our gross margins are going to come back based on demand.
It's still it still in the early stages for them, Yes, I think the only the only did subtleties as to your comment.
So I don't know that we can really break it out based on hammered hammered transition right now because theres. So many other dynamics, but we are aggressively filling the pipeline full of the product working on the yields and scrap that we need to get down very very confident in the technology. So thanks for the question I would say.
I would say that my comments earlier were about inventory theres, just not too much inventory out there and those change. So when we did start to see some recovery I think there is room for the inventory to repopulate.
No.
We will hit what I'll consider a significant volume ramp in early 2024, and then we're going to continue to ramp from there because we have that much confidence.
To your point I know that people are talking about fairly subdued.
Summer at least maybe no recovery until the back half in there and so we are watching that.
Okay. That's helpful. Maybe a follow up question is on the demand side. It seems like you are more optimistic about the enterprise market compared to the cloud market.
I do think there is.
Unlike some of the other markets, where we look at maybe too much inventory to be digested I don't think thats necessarily the case there has been managed better.
Do you expect further correction in the enterprise market, maybe I'll, maybe just a UK U shaped recovery considering comments from some of the storage OEM seems to be quite subdued and it looks like they are.
Okay. Thank you.
The next question comes from Ananda Baruah of loop capital. Please go ahead.
Just going through the demand correction.
Hey, Thanks, guys. Thanks for taking the question.
It still is it still in the early stages for them yes.
Two quick ones.
The only the only did subtleties as to your comment.
At the same time here.
One might be more of a clarification Dave.
I would say that my comments earlier were about inventory theres, just not too much inventory out there and those change. So when we did start to see some recovery I think there is room.
When you talk about you believe.
The question about I think sort of sequential growth of one point.
For the inventory to repopulate.
Later in the year when you say towards the end of the year you think.
No.
To your point I know that people are talking about fairly subdued.
We will pick up again is that to say you think December quarter.
Summer at least maybe no recovery until the back half in there and so we are watching that.
<unk> be up sequentially.
Does that also mean the applications, you think tegra quarter to be down sequentially.
I do think there is.
Unlike some of the other markets, where we look at maybe too much inventory to be digested I don't think thats necessarily the case there has been managed better.
And then I have a quick follow up there we have a quick follow up.
I think another thing thanks for the question I think it's a little too early to guide I mean, I think we're still frankly.
Okay. Thank you.
The next question comes from Ananda Baruah of loop capital. Please go ahead.
Frankly, digesting, we're just telling people what we're building.
I do think at some point Expedites pickup of course right in there.
Hey, Thanks, guys. Thanks for taking the question.
Two quick ones.
If we want to think about the December quarter or something like that.
At the same time here.
That's fine because I think there should be some pickup barring any other macro.
One might be more of a clarification Dave.
When you talk about you believe.
Issues or something but it's too early to guide I think very specifics what we're doing right now is curtailing the builds.
It's about I think sort of sequential growth at some point.
Later in the year when you say towards the end of the year you think.
Thanks.
Tim a quick follow up is on the on the beach.
And we will pick up again is that to say you think December quarter.
Is there a revenue impact.
But the up sequentially.
We should take into account walls of all of that work yet.
Yes.
I mean, the implications you think accurate quarter to be down sequentially.
No no revenue impact.
Okay.
Bob.
And then I have a quick follow up there I have a quick follow up.
Thanks, a lot.
Yes.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks for the question I think it's a little too early to guide I mean, I think were still.
Frankly, digesting, we're just telling people what we're building.
Thanks, Andrew.
As you heard today, seagate's acting with speed and agility to manage through a tough near term market environment. At the same time, we are executing our strong mass capacity product roadmap that positions us to serve our customers.
I do think at some point Expedites pickup of course right.
If we want to think about the December quarter or something like that that's fine because I think there should be some pickup barring any other macro.
And improves we use for our financial performance I, just want to close by thanking all of our stakeholders for their ongoing support and thanks for joining us today.
Issues or something but it's too early to guide I think very specifics what we're doing right now is curtailing the builds.
Thanks.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
And a quick follow up is on the on the D.
Is there a revenue impact.
Sure that take into account, while as well with that.
No no revenue impact.
Okay.
Bob.
Thanks, a lot.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks Andrea.
As you heard today, seagate's acting with speed and agility to manage through a tough near term market environment. At the same time, we are executing our strong mass capacity product roadmap that positions us to serve our customers.
And improve seagate's per financial performance I, just want to close by thanking all of our stakeholders for their ongoing support and thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].