Q4 2023 Seagate Technology PLC Earnings Call
Good day, and welcome to the Seagate technology fourth quarter and fiscal year 2023 conference call.
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I would now like to turn the conference over to Shane you Hudson Senior Vice President Investor Relations. Please go ahead.
Thank you good afternoon, 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 June quarter and fiscal year 2023 result on the investors section of.
Our web site.
Today's call 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 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 differ materially from those contained in or implied by these forward looking statements as they are subject to risks and uncertainties associated with our business.
And more about the risks uncertainties and other factors that may affect our future business results. Please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, as well as the supplemental information all of which may be found on the investors section of our <unk>.
Website as always following our prepared remarks, we'll open the call for questions.
Now I'll hand, the call over to Dave for opening remarks.
Thank you Shannon and Hello, everyone. We appreciate you being here with us on today's call amid a tough business environment. So you get delivered fourth quarter revenue of $1 6 billion.
While holding non-GAAP operating margin at three 5% to narrow our non-GAAP loss per share to <unk> 18.
These results demonstrate financial leverage and our focus on returning to profitability.
Importantly, we continued to generate positive free cash flow, achieving $168 million for the quarter and $626 million for the fiscal year, reinforcing seagate solid operational and financial execution amid the business backdrop, we have seen in fiscal 2023.
This past fiscal year has been shaped by macro and end market conditions that have tested our resilience. In addition to our financial performance.
I am proud of our team's perseverance and execution.
As a result of our proactive actions, we've lowered our cost structure by more than $350 million on an annualized basis.
We've enhanced balance sheet flexibility, taking out nearly $800 million of debt funded largely by monetizing non manufacturing facility assets.
We reduced production output by approximately 25% compared with peak volume in order to drive better supply demand dynamics and enhanced profitability as the markets recover.
And all of these accomplishments were made while delivering on our 30, plus terabyte hammer product development and qualification milestones with volume ramp on track to begin in early calendar 2024.
Looking ahead, we expect the macro and end market conditions that we have flagged throughout fiscal 2023 to continue weighing on demand through at least December .
Consistent with our track record of managing what is within our control. We are taking additional measures to weather the near term business environment.
First we are adjusting pricing, which we believe will help to ensure a healthy industry supply chain for our customers over the long term.
And second we are carefully managing our manufacturing capacity through a build to order approach for certain areas of the business to align our future production output with customer qualification and demand plans.
It will take time to bring production capacity and associated support resources back online.
Therefore, it is crucial that we balanced lead times for mass capacity products with our ability to re ramp production.
We expect these efforts will enable seagate to efficiently manage supply for our customers as demand improves.
I'll now share some perspectives on near term demand factors in particular in the mass capacity markets, starting with our business in China.
As expected sales in China improved sequentially off of the March quarter lows, driven by increased demand in the via markets and certain regional cloud and enterprise OEM customers.
While these trends are pointing in the right direction sales are still well below historical levels.
Since the strict Covid protocols were eased last December the pace of economic recovery in China has been uneven.
For now we are forecasting sales into China to remain relatively stable for the balance of the calendar year.
We are encouraged to see Chinese authorities begin to inject more stimulus to reaccelerate economic growth.
Based on customer input economic improvement is expected to catalyze E Commerce drive cloud related AD revenue.
And spur new Smart city projects.
<unk> via and near line products are positioned to benefit from these anticipated improvements in end market demand.
Outside of China near line demand from enterprise OEM customers has remained soft.
<unk> continue to operate under tighter budgets in response to near term macroeconomic uncertainties.
Ongoing efforts to optimize existing workloads, both on Prem and in the cloud are helping enterprise customers defer mass storage deployments.
These trends have slowed the pace of inventory absorption among most of our U S cloud customers.
We have significantly reduced shipments to several large cloud customers in order to accelerate inventory absorption and protect our financial returns.
We projected we will take another couple of quarters for inventory levels to normalize.
We also believe the timing for demand recovery could be affected by spending priorities focused on accelerating the build out of compute intensive AI infrastructure.
While AI and ml had been around for quite some time generative AI has quickly emerged as the next mega trend.
This megatrend makes us as excited as ever about the long term growth drivers for Seagate.
In addition to the ongoing migration of workloads to the cloud, which we believe is far from over Gen. AI is expected to be a catalyst for data creation underpinning future demand for mass capacity storage.
In today's earliest stages of Gen. AI development, you are seeing the necessary first steps of building and training of AI models.
These efforts require significant investment in compute architectures, and we're seeing that investment ramp today.
The next stage of development will yield enterprise specific use cases that leverage trained AI models to convert data into value enhancing applications.
As this phase plays out cost effective mass storage will be critical and we see HDD as a long term beneficiary.
We're already seeing examples of content creators generating high definition images from text, which is growing in use as evidenced by four of the top services totaling 20 million images each day.
Development is well underway to create data intensive video and animation simply from voice commands.
The adoption of AI generated video bodes well for mass capacity storage.
For context today, nearly 4 million videos are uploaded daily to Youtube and their file sizes can be thousands of times larger than a single image.
Additionally, we believe that predictive AI will lead to advances in many fields, including science and health care.
For example, predictive AI can be used to analyze large collection of medical images.
Many created by Gen AI.
To provide insight for early detection prevent disease progressions and develop patient specific treatments.
Mass capacity data storage will remain both an enabler and beneficiary of these trends working in harmony with flash and DRAM memories to bring AI applications to bear.
While flash will continue to feed high performance compute engines mass capacity Hdds will remain the most cost efficient storage media to house, the enormous volumes of data being generated and used for predictive analytics.
Even in today's unsustainably low NAND pricing environment Hdds are still roughly five times more cost efficient than comparable flash solutions on a per bit basis.
And we do not project that gap to close in the next decade.
This level of conviction is due in large part to our leading technology roadmap.
He gave us leveraging magnetic recording technology innovations such as hammer across our mature 10 disk HDD platform.
Physician us very well to meet increasing demand, including from data intensive AI applications.
Given the current business climate Seagate is focused on product development execution and helping our customers qualified next generation drive capacities.
We are executing well on both fronts.
We continue to deliver areal density and Tcl advancements through our conventional <unk> hard disk drive products.
Development efforts on what may be our last PMO product are nearing completion and will extend drive capacities into the mid to upper 20 terabyte range.
As mentioned earlier, our 30, plus terabyte product launch plan is fully intact and initial customer qualifications are progressing well.
We are on track to begin volume ramp in early calendar 2024.
We are also preparing qualifications with a broader number of customers, including testing for lower capacity drives targeting via an enterprise OEM workloads.
While there is always work to do I am pleased with the progress the product development teams have made during fiscal year 2023.
Overall Seagate has consistently demonstrated the ability to quickly adjust and execute at a high level on every factor within our control.
We remain diligent in managing through near term business conditions.
At the same time I'm excited by the tremendous long term opportunities ahead.
Brought about by existing and emerging megatrends underpinned by data.
Cost effective mass capacity storage as a critical enabler and Seagate is poised to deliver with strong technology, roadmaps and improving financial leverage.
I'll stop there and hand, it over to John Luca.
Thank you Dave.
That got into industry down cycle, we deliver results that demonstrate our ability to maintain DCP in production output and strong cost control measures.
For the June quarter, we reported revenue of $1 6 billion.
In line with our <unk> and public commentary and non-GAAP loss of <unk> 18 per share slightly better as a mid point of our guided range.
Total out of these drive revenue declined 14% sequentially to $1 4 billion.
With shipments of 91 exit might.
Capacity revenue declined 20% sequentially to $1 billion.
Reflecting softer demand in the cloud in the airline market offsetting offset by an improvement in the <unk> business.
She meant into the mascot bucket the market totaled 75 exabyte.
Compared with 140 <unk> bites in the March quarter.
Mark I'd like the shipment and 10% of total HDD exabyte.
Was roughly 82% compared to the March quarter at 88%.
The expected slowdown in our cloud business led to near line shipments of 55, exabyte down 37% sequentially.
As Dave outlined earlier.
We anticipate making people will take a couple more quarters for CSP to consume inventory and demand to improve.
Specific to the VM market revenue was up sequentially from what we believe was a demand growth in the March quarter.
We expect and I think with stable demand and vital maintenance and they take one that solves a calendar year.
It's still below that on eight and before the downturn.
Within the legacy markets revenue was $101 million.
Up 8% sequentially, reflecting higher demand for emission clinical products.
The client and consumer market were down slightly quarter over quarter <unk> for the June quarter.
Finally revenue for non HDD business decreased 15% sequentially.
$2 million to $119 million at.
With anticipated tenant spending behavior in light of economic uncertainty impacted our enterprise system business.
We expect with the headwind.
The purchase timing for a couple of large customers.
So it is out in a meaningful decline in our system revenue in the September quarter.
Importantly, we shipped our first <unk> based quarter was system for revenue as planned during the June quarter.
We expect to grow the availability of this quarter with systems by the end of calendar 2023.
Moving to our operational performance non-GAAP gross profit in the June quarter was $313 million.
Down, 10% sequentially, reflecting lower revenue and a less favorable mix.
Obviously offset by lower <unk> costs.
non-GAAP gross margin expanded 80 basis points sequentially approaching 20%.
Underutilization cost decreased to approximately $40 million I think in the June quarter, as we temporarily increased production to be long lead time component.
Based on the current business outlook that Dave outlined.
We expect higher amortization costs in the September quarter.
However, we expect the gross margin to modestly increase and our cost is actually improvement are fully realized and we implement pricing adjustment in certain markets. During the second half of calendar 2023.
Okay.
We reduced non-GAAP operating expenses to 258 million down $91 million.
Year over year and $24 million sequentially.
Year over year decline reflect our cost, but actually improvement actions to date.
Lower variable compensation as well as disciplined cost management.
We expect non-GAAP opex in the September quarter to be seem inactivate June quarter, reflecting nearly full realization of cost savings from our restructuring effort announced in April of <unk>.
Setting an increase related to the recent sales and leaseback of three manufacturing sites.
Moving on to the balance sheet and cash flow.
We ended the June quarter with liquidity level of approximately $2 $3 billion, including our revolving credit facility of $1 5 billion.
Was lowered by $250 million as previously disclosed in the Canadian agreement Amendment.
Inventory was down $60 million quarter over quarter at one point to one 4 billion.
And we will continue to focus on reducing our own inventory in the coming quarters.
Capital expenditure totaled $50 million in the June quarter down 7% sequentially.
Fiscal year 'twenty, three capex was $316 million.
Or roughly 4% of revenue.
We target to lower Capex in fiscal year 'twenty four as we maintain our focus on shifting to a build towards our factory loading balancing supply to demand.
<unk> supporting our innovation that even product 12 months.
Free cash flow generation was $168 million for the quarter and $626 million for the fiscal year.
Reflecting solid operational execution and efficiency in working capital management.
We expect free cash flow to below audiences at the end of the quarter as we incurred a majority of the cash payment associated with the restructuring charges.
<unk> in April .
We used $145 million.
For the quarterly dividend.
And exiting the quarter with 207 million shares outstanding.
There were no share repurchases during the quarter.
Our debt balance exiting the quarter was $5 5 billion down $507 million quarter over quarter.
The montney, reflecting the 2023 notes at a tightening.
This debt reduction was mostly funded through the sale and leaseback of the three facilities noted earlier.
Additionally, we raised $1 billion in new nodes.
And use the proceeds to prepay $450 million of existing term loan and retire the March 2024 notes of $500 million.
As a result of.
These actions, we now have less than 12% of total debt coming due over the next two fiscal years.
Interest expense in the June quarter was $84 million and is expected to increase slightly for the September quarter, reflecting a full quarter or the debt restructuring actions.
Disconnect.
Adjusted EBITDA for the last 12 months totaled $974 million.
Resulting in a net debt leverage ratio of four eight times well below our mandates Canadian agreement terms.
Turning to our September quarter outlook.
What is the address business.
We expect incremental improvements in <unk> to offset declines in the legacy market.
For our non HDD.
For the system business is expected to decrease sequentially.
Due impart to demand timing among a couple of our large system customers as noted earlier.
With that as context, we expect September quarter revenue will be net age of <unk>, five 5 billion plus or minus $150 million.
At the midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the low to mid single digit range, which includes the proactive measures. We discussed today, partially offset by higher underutilization cost.
$70 million.
And we expect a non-GAAP loss per share in the range of 16, plus or minus 20%.
I would now towards I'll call back to Dave for final comments.
Thanks Gianluca.
I'm proud of the perseverance and agility as we continue to proactively respond to the market environment, we have faced over this past year.
Entering fiscal 2024, we are leaner our balance sheet is healthier and our product roadmap is stronger.
All of these factors enhance our ability to weather near term market conditions deliver financial leverage and position the company to capture attractive long term opportunities for mass capacity storage.
As we conclude our prepared remarks, I would like to thank our employees suppliers customers and shareholders once again for their support.
Thanks for joining us and let's open up the call for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question.
At this time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Chris Shankar with Gd Cowen. Please go ahead.
Hey, guys. This is Eddie for Krish from TD Cohen.
I understand you won't guide for December , but curious to know your thoughts on December New line Exabyte shipments like do you see them growing sequentially from September more like flat or maybe slightly down.
I'm asking because in case, we will remain at current revenue of $1 6 billion per quarter into next year I'm wondering if there would be a risk to the dividend.
Okay, Encase, especially you guys continue to invest in the business. Thank.
Thank you.
Yes, thanks, Eddy so we arent guiding for December I think.
We expect at this point.
To hold the line on overbuilding, and so thats one of the reasons, we're being very cautious, but there will be.
An indication of some natural flow through at the cloud service providers. For example, so we expect it to slowly start trending back up from here.
Don't expect a big hockey stick rebound I mean, I could be wrong on that but we do expect it to be.
<unk>.
Slowly go back up because mainly because we're not pushing it a bunch of our own inventory and relative to the dividend. We're planning for all of this in all of our plans right now and I think we.
We execute this plan, we should be just fine.
And we want to continue to be the.
The person for all of our stakeholders that we've always been before we've got.
<unk> focus on that right now.
Got it thank you.
The next question comes from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you so much I was wondering Dave if you could flush out a little bit too.
Two of the points that you made in your prepared remarks, one on adjusting pricing strategy in certain markets. What specifically are you doing in these markets.
And then secondarily.
The reduced production output to this build to order and lower Capex comments that you made.
How exactly will those build to order work is this specifically for our mass capacity, what kind of lead times will you require and are your customers and what do you expect here.
I'll follow through from customers and also from a from a competitive standpoint. Thank you so much.
Thanks, <unk>, yes. It is complicated because there is a number of different markets in play here.
For example, our distribution channel or some of the classic markets we have <unk>.
Consumer client server you just don't move things very quickly, but some places it's relatively easier to raise prices in and have that flow through into the system.
On mass capacity drives generally speaking, we we do the price increases through transitions of products. So we'll say this is the changing economics, we need to make sure that we get paid for that so as we go through the next product generation. They are still at Tcl benefit to the end customer to drive through that product trans.
<unk>.
The economics have to change largely so we can go back and pay our suppliers and keep everybody healthy theres been such a profound downturn in demand that we have to make sure the entire supply chain is.
Treated properly, but exactly what you said.
Different markets are behaving very differently and accept things very differently.
This is the direction, we're pushing at this point.
Yes.
On the cost side in <unk> and <unk>.
Production that is out of course, but I think on the utilization, we add anything to meet higher production in the June quarter, mainly on the wafer side and <unk> on the media, but I will say.
More on the wafer we.
We will not need to do that level of production line now so <unk> utilization targets that decline in the June quarter from almost 18 million to $40 million.
Going back to the meeting in September .
We estimated about $70 million, but of course towards a quarter that could change any debate.
Thank you so much.
The next question comes from Timothy Arcuri with UBS. Please go ahead.
Thanks, a lot I also had a question on pricing.
And sort of how you think about it versus market share.
We've heard examples of you raising prices, 10% to 15%, it's obviously a little bit counterintuitive in such a soft market. So I guess two questions one hour customers.
Reacting to that and then also are you willing to lose share as you kind of look out is there like a lineup of sand on share that you that you are going to draw where you wouldnt raise pricing. If you lost share or are you willing to lose share to get in a pricing reset to a more.
Cyclical level. Thanks.
Yeah. Thanks, Tim So yes, you are right.
Weak demand environment.
But I think also there is.
Generally speaking the whole industry is underwater. So I mean, we have to make sure we protect ourselves we protect the supply base as we as we talked about earlier.
And it's different in different products.
Across the market, obviously the different markets obviously.
How is it being accepted.
You can imagine the entire panoply of different responses. Some people are worried about supply longer term. They do believe that supply will.
Be short and demand will come back and so and especially with the long long lead times that they're RMS capacity products right. Now I think it's something that people are very much in tune with it so it's forcing good discussions.
Other people for various reasons need to make tactical procurement decisions and they will take whatever.
Deals are out in front of them and I get that I mean that happens from time to time in the business.
It's one of the big reasons, why we don't want to overbuild, we want to make sure. We we hold as much as we possibly can.
And as.
As we continue to play this forward I think we will we will see.
And adjusted Accordingly to make sure that we defend our.
Products I think.
Optimism for US is that we can actually go through the product transitions get to the higher capacity points provider, but our <unk> proposition get components out of the supply chain and so on and then we didn't dilute or extend the problem any by overbuilding or dilute the problem by.
Continuing to overbuilding.
Lowering price and Thats, what we have to hold onto.
The next question comes from Erik Woodring with Morgan Stanley . Please go ahead.
Awesome guys. Thanks for taking my question.
Dave I just wanted to ask if you could flesh out the comments you made in your prepared remarks about the timing of demand recovery being delayed by AI investments just in the context of you talking about market conditions weighing on demand through December .
Are you telling us we shouldnt expect sequential growth in capacity shipped until calendar 'twenty four just if you could help us connect some of these thoughts that'd be great. Thank you very much thanks, Eric.
Yes.
I think I mentioned in one of your earlier comments is it will be slight capacity growth but.
The way I.
Read through most of the results.
Our already coming through and in the cloud and in most of my conversations as well I think it's fairly consistent that there's priorities being put on.
Data center infrastructure, New data center build out power infrastructure that was already kind of things.
Things were biased that way instead of mass capacity storage the mass capacity being something that would come later and and we all know about.
The great new capacity capabilities that there are in some of the compute technologies and how.
Those.
<unk>.
New technologies are being applied in new applications.
And that's a high priority for cloud.
Cloud service providers and people doing stuff on Prem as well, we think data follows behind that.
<unk> it is going to be really tough, but we do think that that's going to be a bow wave at some point there'll be competition for the data that actually feeds.
<unk>.
<unk>.
AI engines, if you will right now it's there's a big battle to get the AI engine is up and running and show those applications as being meaningful and I think thats interesting space to watch behind it there's going to be a lot of data that actually has to feed those AI engines. Every day every day every day, and we think thats mass capacity infrastructure.
Net positive.
The next question comes from Thomas O'malley with Barclays. Please go ahead.
Hey, Thanks for taking my questions in the deck you guys mentioned that you were extending your PMO platform into the mid to upper 20 television capacities could you talk about where your original plan was to extend into the mid Twenty's and where that is now and why you made that decision. Thank you.
Yes, Tom.
No real change we've been talking about it I think for about a year. We said, we can get <unk> into the mid twenties.
And the product that we have now I'll talk about it very quickly here.
We believe that with <unk> variance that can get in the high <unk>. The product is in the mid <unk>, but it's highly highly leveraged.
Almost identical electronics and mechanics that takes us to hammer. So it's almost the same product you swap out the heads and disk for amarin in a couple of other component changes that have to happen.
So we're going to get a lot of leverage from that that platform has been planned for a long long time, we call that attend this platform in the prepared remarks.
So I have a lot of confidence that we can solution PMI anywhere the customer wants to stay there in the mid twenties.
Or we can go to.
Hammer variance with the same bag of parts are very very similar bag of parts.
I do think that there is a lot of.
Confusion out in the market I'll say this way about what capacity point is at 24% to $5 26 look there's customers who need all kinds of different variance and I think we.
We confused people frankly by kind of amalgamating all these things, although I will say is that I think those products that we have a very very competitive in the market right. Now the issue is if I added I am not going to try to force it into the market into.
Into our space.
People don't need the product simply because that poison the well for that product and maybe two quarters out three quarters out for when people do need it ended with.
Aurora erode the value proposition for the hammer products when they come so we've got to run the business. The way we are right now.
Yes, let me add to that desktop clarity when we say the mid <unk>.
If you go to say asset monetization of that of course will be adding Daniel mid to high <unk>.
The next question comes from Aaron Rakers with Wells Fargo. Please go ahead.
Hey, Aaron sorry, we can't hear you.
Yes, sorry about that.
Thanks for the question I just wanted to unpack some of the kind of considerations, we should be thinking about in terms of gross margin.
As we move forward appreciating that you're not guiding explicitly but.
I guess first of all if I look at the pricing discussion based on the math it looks like Youre mass capacity.
<unk> per terabyte was up by about 10% sequentially.
I guess as we look forward should we be thinking that the asps on that basis continues to trend higher or how much of that capacity shift have you already kind of imposed price increases upon and then also when we look at the capacity shift in total with a 25% reduction in production capacity.
Do we take prior peak capacity shipment levels and take 25% of that and that should be a level for which you think you would get back to kind of that 30% gross margin level I know theres a lot in that but I was just trying to think about some of the variables looking out just just not this current quarter, but beyond.
Thanks, Eric I'll take my cut and then I'll give John Luca cancer.
I think as I look at the tactics of what's going on right now I think it's dangerous to say.
What what changed quarter over quarter and extrapolate from there.
You can draw straight lines, but I'm not sure that like whether we take a deal at the end of the quarter or not is is a good way to think about what's going to happen over the long haul.
We've said that pricing needs to go up or stabilize depending on that.
Different.
Capacity points Prada.
Product transitions that we are going through whether whether or not.
Suppliers still want to stay around for a certain product line I mean, theres a lot of different.
Things to unpack there to your point relative.
Relative to our manufacturing capacity, we talked about 25% of course thats not perfect across every single factory, we have nor is a perfect across the supply chain and we're only as good as our weakest link.
I have to make sure those weakest links are still well cared for and so that's largely what's driving that the ability to go put the capacity back online would severely hampered because it's not just.
The capital if you will that we havent invested enough for peak capacity, but it's also the people would have to bring back Unfortunately, our people and a lot of the people in the supply chain dramatically.
Taken down so do you want to add something Jonathan add on you were asking about.
But I expect data by team, particularly in Q4.
And as alcohol sales in east.
So we.
We have an adoption in the cloud.
And of course, with our capacity usually assay lowest.
<unk> picked that up but also the lowest cost per cabinet.
And do we have any Canadian via so meet capacity denied.
Again higher on.
That iceberg antibiotic and NSAID meet higher cost per terabyte Nobody's had any submit the NDA filing of course, when the volume is not there.
Very high.
<unk> by the financing in the defense segment, Ken Ken's leaning and does the pricing cost per terabyte.
Very helpful. Thank you.
Thermal capacity.
With 25% I would not take if it does at the peak or whether we were probably more than a year ago. We have done a lot of that.
<unk> got lots of adjustments and that they said, we will need time to advanced warning and it means that capacity also in Panama.
Thanks <unk>.
Yes.
We don't need to get back to the full capacity in order to get back into our margin model, though because we've taken so many cost actions across the business I think we've been very very aggressive on that knowing that our footprint had to change I think we will be able to scale much better from a.
<unk> margin perspective, as some of the demand comes back.
Thank you.
The next question comes from C. J Muse with Evercore ISI. Please go ahead.
Okay.
Hi, This is Kurt Swartz on for C. J. Thank you for taking my question, hoping to delve into general AI applications for both HDD and SSD demand.
Perceived timelines for storage demand uplift in data creation accelerates and is there any concern regarding more workloads moving from HDD to flash within NII datacenter paradigm. Thank you.
Yes. Thanks.
Don't think of things that way.
People and data centers are not making decisions like you would make for example, if you are building your own PC.
Or that or this combination instead, they know how to manage data across multiple tiers and geographies very very well and make sure that the right data gets the right place at the right time, there are some gen AI.
The discussions that are very transactional and probably don't need a whole lot of HDD and then there is a lot that are very video intensive and.
One of the <unk> data to be.
Sequestered in the certain.
Certain tank and so that nothing else can.
Such it and we believe that's going to be the normal tier that you see today. So I think it's win win for memory and storage.
Long term.
Honestly its win for compute and I think as some of these new applications are lit up im really excited to see it we haven't seen it yet I mean, unless you start to look back at some.
Traditional cloud service provider capabilities, let's say all along that was AI, but I do think there is a whole host of new tools coming there'll be it'll be a very competitive space and the data <unk> infrastructure will become a critical part of that as we go forward.
The next question comes from Karl Ackerman with BNP. Please go ahead.
Yes, yes. Thank you I have two questions.
First I may have missed this but why did average capacity per drive or the mass capacity.
Area of your business shrink this quarter and then second I guess, how should we think about mass capacity unit growth from here.
And where do you believe we are in the replacement cycle and whether that should continue to elongate or whether that returns to some form of normal from a.
Unit perspective, thank you.
Yes, Thanks Scott.
So we are not overbuilding, especially the high capacity drives are trying to push out into some of the cloud service providers. We are waiting until the inventory actually goes down and so I think thats why I made reference to this earlier that's why some of the metrics may look weird like you just pointed out on.
Capacity per drive.
Diving down I don't think Thats, a long term trend either I think of course thats going to go back up.
Yes.
Average capacities are down because of mix so as I said before.
The June quarter, we shipped less to cloud and more through the year and of course the capacity there is an Italian getting into cloud.
Im sorry, Carlos was the second part of your question.
Yes, sorry about that yes, it's.
It's about how we should think about mass capacity unit growth from here and where do you believe we are in the replacement cycle I asked because it appears your mass capacity unit shipments peaked in the first quarter of 2022. So it's been about five consecutive quarters of decline at the same time.
Units are down over two thirds.
In that same period. So if we could just discuss perhaps the corollary between units and exabyte growth I think it's relevant here.
Would be helpful. Thanks, good there are hundreds of.
Sorry, one hundreds of millions of.
Cloud drives if you will in data centers around the world and some of them are aging to your point and.
Unit shipments go down it's extra bytes can still go up even though unit shipments are going down because the ones that are aging offer lower capacity points 848.
12 terabytes whatever.
But over time, it's much more efficient actually its more efficient power wise and for a lot of other features system level features to.
To put the newer drives on so it's about all of these things in balance and I do believe that unit shipments are down largely because of this inventory digestion that we've been talking about.
That will turn again will it go back to the peak of where it was five or six quarters ago and how fast. We will go back. These are tough questions for our customers right now it comes down to their prioritization of their spend but all indications are in the latest numbers ended and if I think about these latest numbers of cloud service providers are announcing.
Versus where they were six to nine months ago. There was a very positive trend and I think to the questions about Gen. AI and other feature sets were not a peak cloud yet so I do think it will come back fairly strongly from a units perspective when it does.
The next question comes from Tristan <unk> with Baird. Please go ahead.
Hi, Good afternoon couple of questions. The first one is about the production cost curve and if you could talk about the percentage decline per year that we should expect in the medium term on a per bit basis.
And then second question about HD percentage of production, that's coming from China and also the true demand that you see from China as a percentage of fuel revenue.
Yes.
I think.
The relative aggregate answer the China.
Question first and then.
And Luca can take the cost discussion.
China is down quite a bit but relatively as part of our portfolio about the same relative numbers that it was even with the peak of the.
Portfolio so.
I wouldn't over overly analyze.
China versus csp's versus consumer spending and all of these all these other things that have affected our revenue downturn I think it's a fairly consistent number across the entire portfolio.
We're looking for.
Sure.
Demand upswings in every one of those.
Sections as well as we go forward, but.
We're also managing that business really carefully because we don't think it's going to come back in the next six months like we said in our prepared remarks.
Now he has a cost per terabyte and of course, we don't guide that fully out of what <unk>, what I will say is there.
In a in a down cycle it depends a lot from the level of.
Utilization of the <unk> factory, so can vary a lot from one quarter to another quarter in Janet as no. We are continuing to do our rather.
Rather our roadmap and as Dave said, we have a new PMI.
Rather coming out soon I got a capacity that means nobody phosphate databank and then we will have handler, knowing that pick up a little quarter. So all of those new products will add passing the anti abuse gains a cluster petabyte.
Alright.
Like our chances in the cost per derivate arena going forward and I think as we continue to work yields and scrap on these new products and so on have the highest capacity points out there have the ability to take that aerial density.
Lower capacity points as well it helps our cost per terabyte immensely.
Yes.
Great. Thank you very much.
Yeah.
The next question comes from Mehdi Hosseini with Susquehanna. Please go ahead.
Yes. Thanks for taking my question a couple of follow ups, given your lower Opex list around to $1 60.
How should they think about scaling, especially on the revenues side before you would need to increase opex materially.
Yes, I think we can hold the line on where we are right now and get a lot of scale I mean, we've been through the product transition.
Far enough on the PMA product, an hammer product that we can we're pretty much done with the development phases, all the experimentation and so on and so forth. So I don't think we need to grow opex until we build back quite a bit of revenue.
And so we'll get we will get very efficient scale. There I appreciate the question.
And then.
Gianluca.
Should I assume that.
Free cash flow would be down in <unk>.
September and then up in.
In December .
While in Jan and I don't know, we Havent and we have generated good free cash flow through.
The quarter.
Sadly in the prepared remarks that bandwidth the ability below it because we have to pay for that is tackling challenges that we executed in the end of June and during July right.
We also said that we expect every quarter could be positive.
Okay.
No.
Slight negative just sequentially down in September and then rebounding in December on a sequential basis.
Yes, that's it.
<unk>.
I wanted to I guess clarify we don't have viable compensation when I know in our numbers. So we could have a little bit olivine Canadians a future gives us is a business mix stronger okay.
That would be normally.
Yeah.
Got it thank you guys.
The next question comes from Mark Miller with Benchmark Company. Please go ahead.
I'm just wondering.
Eric It sounds like the March going further than I. Originally thought it would be is this a change or was that always in your plan.
It was always in the plan, yes, I think mark.
<unk>.
We've kind of been focused on 16, 2024, and bringing on the technology that way.
We believe we have great heads and media on TMR, it's getting towards the top end of the curve right. So it's harder and harder to squeeze things and we've worked really hard to make sure that the drive was taking US there would also take us to hammer. So we're leveraging as much as we possibly can and then only only changing.
Areal density critical components.
It gives us the areal density to get us into the <unk>.
Building much more confidence on that new S curve actually as time goes on so.
I am convinced theres going to be 40, terabyte drives in the world not too distant future.
We've talked about the capabilities of these things are the LIBOR ready to grow five terabytes per disc.
So teams incrementally more positive every time so that's good the teams are making progress.
Was there any specific technology advances, allowing you to push that now up to almost 30 terabytes.
Sorry, you mean beyond hammer.
So I mean, taking the PMO or up to the high <unk> in terms of terabytes any anything new in the technology and any breakthroughs advancement.
Well, we're always working.
New readers.
Designs that are applicable to go to 30, and 40 terabyte drives as well do it.
It's not only about the right technology. If you will there is because <unk>, implying the right technology.
That's right with the W. R ITE.
So.
It's not a hammer just versus PMI, there's other technology things that are being worth technology vectors of your workforce.
Mid mid Twenty's as <unk> high <unk> than SMS.
There is many different kinds of investment of our variance for different customers. So I think you have to be a little bit careful with picking individual capacity points.
And thank you by the way <unk> can use <unk> as well on top of it so when we get into the <unk> there might be the same kind of spread of.
Capacity points because of how people are choosing to use.
Employee hammer in their data centers.
Thank you.
The last question today comes from Vijay Rakesh with Mizuho. Please go ahead.
Yeah, Hi, just a quick two questions.
When you look at the Hammer, obviously ramping well and then we are looking at what makes a bad mix would be as you look at calendar 'twenty for you in calendar 'twenty five.
Yes, I do think that as we.
This is a delicate balance between the capacity will still have to make drives the lead times associated with those big drives.
And.
The economic returns that we're going to be getting so how many do we start now how many parts do we start now to be able to answer that but theoretically.
Hammer, allowing us to jumped quite a bit of an extra bytes per box. If the demand is strong enough then the exabyte growth will be strong very strong. So a lot of this first order driver still demand, we're going to answer that call with the components that we have we're very much leaning into the product transition on hammer because.
We have that much confidence so I think the customer qualifications going well and the customer interest is high because they see such.
Our market <unk> proposition as well and if all of that stuff lines up into good good.
Good box demand like somebody.
Asked earlier.
That means good exabyte growth, that's where we're all hoping for.
Got it and then on the data center inventory side.
Anyway.
Kind of gauge how much how.
How much how many weeks of inventory is still there.
How that compares to the prior year.
<unk>.
Trough, I guess and get us in the inventory.
It's not an exact science I would say we have.
Evidenced that it's going down.
And not only that's what.
People are telling us our customers are telling us, but also we're not putting any and so definitely the seagate inventory going down we're even managing our own owned inventory down as well I can't speak for the rest of the industry, but.
All indications are that things are getting healthier and but we don't think that it's going to be fixed overnight. We think it's going to take another couple of quarters before the upturn in.
That's something that I'm very cognizant of we didn't project originally going into this downturn that this would be this long, but I don't think it's going to last forever either I think.
It will turn north again here, we just we just basically said not till the end of the calendar year.
Got it thanks a lot.
Okay.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks, Betsy as you heard today seagate's continuing to take proactive actions to navigate this tough business environment over the near term. However, we remain excited as ever for the long term opportunities for mass capacity storage.
And it's brought about by existing and emerging trends that are underpinned by data like AI like we talked about today, our leading technology roadmap positions us really well to address future demand and enhance value for both our customers and for Seagate's financial performance.
I'll close by thanking all of our stakeholders for their ongoing support thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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