Q1 2024 Seagate Technology PLC Earnings Call

Welcome to the Seagate technology fiscal first quarter 'twenty 'twenty four conference call.

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Please note this event is being recorded.

I would now like to turn the conference over to Shane Hudson Senior Vice President of Investor Relations. Please go ahead.

Thank you good morning, 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 September quarter results 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, 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.

And as they're subject to risks and uncertainties associated with our business to learn 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 website as always following our prepared remarks, we'll open the call up for questions I'll now hand, the call over to Dave for opening remarks.

Thank you Jamie and welcome everyone.

Before I discuss our financial results I want to acknowledge situation taking place in the middle East our thoughts are with all of the people in the region, including our Seagate team members their families and loved ones.

Moving onto our September quarter results revenue came in at 145 billion with non-GAAP loss per share of <unk> 22 cents.

With our recent public commentary, we experienced softer than anticipated demand in the legacy markets while.

Unknown Executive: Welcome to the Seagate Technology Fiscal First Quarter, 2024 conference call. All participants will be in listen on the mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

While the ongoing cloud inventory correction and weak economic trends in China continued to restrain near term demand for hard drives.

Looking ahead, we expect the pace of economic recovery in China to be uneven. However, we are encouraged by the positive progress of U S cloud inventory consumption.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Do withdraw your question, please press star then two. Please note, this event is being recorded.

Importantly, we continue to demonstrate financial discipline and strong execution on the priorities, we outlined at the onset of this downcycle, namely to drive cash generation and strengthen our balance sheet and position the company for enhanced profitability as the markets recover.

Shanye Hudson: I would now like to turn the conference over to Shanye Hudson, Senior Vice President of Investor Relations. Please go ahead. Thank you.

We also continued to hit all key hammer product development milestones, demonstrating our ability to drive significant areal density gains with this technology.

Shanye Hudson: Good morning, 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 September quarter result on the investor's section of our website. During today's call, we'll refer to gap and non-gap measures. Non-gap figures are reconciled to gas figures in the earnings press release, posted on our website, and included in our form HK.

These gains translate into lower storage costs on a per bed basis, enabling seagate to offer a compelling <unk> propositions for our customers, while enhancing our future profitability.

Qualification and revenue ramp plans for our 30, plus terabyte products remain fully on track with high volume ramp starting early.

Shanye Hudson: We've not reconciled certain non-gap outlook measures because material items that may impact these measures are out of our control and or cannot be reasonably predicted. Therefore, reconciliation to the corresponding gap measures is not available without unreasonable efforts.

Okay.

A competitive differentiator and increasingly important in light of the Green shoots we are starting to see with respect to cloud demand trends.

Within the mass capacity markets, we saw a modest uptick in demand for our high capacity near line products among U S cloud customers.

Shanye Hudson: 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're subject to risks and uncertainties associated with our business. To learn more about the risks and uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our FDC filing, including our most recent annual report on form 10K and quarterly report on form 10Q, as well as the supplemental information, all of which may be found on the investor's section of our website.

We project incremental revenue growth from U S cloud customers again in the December quarter and are encouraged by constructive customer dialogue regarding our transition to a build to order model, making us more confident on demand fundamentals entering calendar 2024.

Additionally, industry analysis of cloud customer behavior suggests that their cost optimization efforts are nearing a conclusion, while enterprises continue migrating new workloads to the club.

Include both core workloads as well as AI specific workloads.

In addition to cost optimization efforts spending priorities for csp's have temporarily shifted towards AI related infrastructure.

Shanye Hudson: As always, following our prepared remarks will open the call up for questions.

Which are further slowed the pace of demand recovery for mass capacity storage.

Dave Mosley: I now hand the call over to Dave for opening remarks. Thank you, Shaney, and welcome everyone. Before I discuss our financial results, I want to acknowledge the situation taking place in the Middle East.

While AI related spending remains a near term priority several cloud customers have indicated that investments in traditional servers and other hardware will resume in the coming quarters.

Dave Mosley: Our thoughts are with all of the people in the region, including our CK team members, their families, and loved ones. Moving on to our September quarter results, revenue came in at $1.45 billion with non-gap loss per share of $0.22. Consistent with our recent public commentary, we experienced softer than anticipated demand in the legacy markets, while the ongoing cloud inventory correction and weak economic trends in China continued to restrain near-term demand for hard drives.

All of these trends bode well for HDD demand recovery in both the cloud and enterprise OEM markets.

The same markets in China are lagging these early positive signals due to the regional economic conditions that I mentioned earlier.

However, video and image applications, where a notable exception reflecting demand both within China and globally.

Public and private investments in Smart city, and Smart security projects have been key demand drivers for the VA market.

Dave Mosley: Looking ahead, we expect the pace of economic recovery in China to be uneven. However, we are encouraged by the positive progress of US cloud inventory consumption. Importantly, we continue to demonstrate financial discipline and strong execution on the priorities we outlined at the onset of this down cycle, namely to drive cash generation, strengthen our balance sheet, and position the company for enhanced profitability as the markets recover. We also continue to hit all key hammer product developed in milestones, demonstrating our ability to drive significant aerial density gains with this technology.

While we believe these underlying demand trends remain intact over the long term the severe slowdown in China's property sector and broader global macro uncertainties are likely to temper demand over the next couple of quarters.

Near term conditions aside we are optimistic about the via market given the increasing use of AI and deep data analytics and enhanced the effectiveness of your systems.

These systems are evolving from basic monitoring tools, some more fulsome solutions, incorporating advances like high definition AI cameras that offer more valuable insights and lead to longer data retention rates.

Dave Mosley: These gains translate into lower storage costs on a per-bit basis, enabling Seagate to offer a compelling TCO proposition for our customers while enhancing our future profitability. Qualification and revenue ramp plans for our 30-plus terabyte products remained fully on track with high-volume ramps starting early in the competitive differentiator, and increasingly important in light of the green shoes that we are starting to see with respect to cloud demand trends. Within the mass capacity markets, we saw a modest uptick in demand for our high-capacity near-line products among U.S, cloud customers.

These data intensive solutions are well suited for hard disk storage in terms of cost capacity and performance.

Looking back across our 45 year history cost effective high capacity storage has been vital to the enterprise's ability to harvest the benefits of every generational technology Mega trends that we have experience from personal computing to the internet mobile to big data to the ongoing migration to the cloud we anticipate the <unk>.

Same will be true with the rise of AI and generative AI applications, which contributes to our long term view for a return to healthy exabyte growth.

You gave some mass capacity storage portfolio sets us up strongly with this growth backdrop.

Last week, we announced our latest high capacity near line products boasting two four terabytes per disc and leveraging our proven <unk> platform to.

Dave Mosley: We project incremental revenue growth from U.S, cloud customers again in the December quarter, and are encouraged by constructive customer dialogue regarding our transition to a built-to-order model, making us more confident on demand fundamental entering calendar 2024. Additionally, industry analysis of cloud customer behavior suggests that their cost optimization efforts are nearing a conclusion while enterprises continue migrating new workloads to the cloud. These include both core IT workloads as well as AI-specific workloads.

To deliver capacity starting at 24 terabytes.

We continue to offer customers the flexibility to deploy these drives as a conventional <unk> drive, whereas the shingled SM or configuration.

Based on their specific capacity in architectural needs.

We are engaging with a number of cloud and enterprise customers on qualification.

And expect volume shipments to begin in the first half of calendar 'twenty four.

We also expect to begin aggressively ramping three terabyte for disk products based on Hammer technology in early calendar 2024.

Dave Mosley: In addition to cost optimization efforts, spending priorities for CSPs have temporarily shifted towards AI-related infrastructure, which have further slowed the pace of demand recovery for mass capacity storage. While AI-related spending remains a near-term priority, several cloud customers have indicated that investments in traditional servers and other IT hardware will resume in the coming quarters. All of these trends both well for HDD demand recovery in both the cloud and enterprise-oam markets. These same markets in China are lagging these early positive signals due to the regional economic conditions that I mentioned earlier.

These drives deliver capacity starting at 30 terabytes and offer customers the same flexibility to adopt either CMS or S. EMR configurations.

To further boost areal density into the mid 30 terabyte range.

Initial customer qualifications are progressing very well and.

And we continue to hit our reliability and yield metrics were getting extremely positive customer feedback and we are broadening the number of customer qualifications as planned.

We've been very thoughtful and building our product roadmap to stage hammer technology, leveraging existing product design and process commonality where possible.

Dave Mosley: However, video and image applications were a notable exception, reflecting demand both within China and globally. Public and private investments in smart city and smart security projects have been key demand drivers for the via market. While we believe these underlying demand trends remain intact over the long term, the severe slowdown in China's property sector and broader global macro uncertainties are likely to temper demand over the next couple of quarters. Your term conditions aside, we are optimistic about the via market given the increasing use of AI and deep data analytics that enhance the effectiveness of via systems.

For example, virtually all of the capital invested for the 20, plus terabyte <unk> drives is compatible with hammer products.

30, plus terabyte hammer drives utilize many of the same components and electronics as our 20 plus terabyte products.

They represent a fourth generation product using our <unk> platform and the seventh generation that Leverages glass substrates.

These actions improved capital efficiency reduce manufacturing complexity ensure reliability in haste and time to market.

Dave Mosley: These systems are evolving from basic monitoring tools to more wholesome solutions incorporating advances like high-definition AI cameras that offer more valuable insights and lead to longer data retention rates. These data-intensive solutions are well suited for hard disk storage in terms of cost, capacity, and performance. Looking back across our 45-year history, cost-effective high-capacity storage has been vital to the enterprise's ability to harness the benefits of every generational technology mega-trend that we have experienced.

While many aspects of our product design are evolutionary in nature Hammer revolutionize areal density advancements through years of persistent research and development investment to <unk> design iterations and optimization cycles across all elements of the drive.

From mechanical and electrical designs to wafer processing and firm, where we have now reached the appropriate balance between areal density gains cost optimization and reliability to launch hammer in volume.

Our execution in cycles of learning have enabled us to continue strengthening our portfolio and we expect to launch products, yielding four terabytes per disc and less in two years' time.

Dave Mosley: From personal computing to the internet, mobile to big data to the ongoing migration to the cloud, we anticipate the same will be true with the rise of AI and generative AI applications which contributes to our long-term view for a return to healthy ex-micro. Hegates Mass Capacity Storage Portfolio sets us up strongly with this growth backdrop. Last week we announced our latest high-capacity near-line products, both in 2.4 terabytes per disc and leveraging our proven 10-disc platform to deliver capacity starting at 24 terabytes.

Significantly different cheating seagate and addressing the full spectrum of mass capacity demand.

Architecturally speaking in today's data driven business economy mass capacity storage is a crucial tier.

The HDD areal density advancements that we are delivering a firm and sustain the existing <unk> advantages relative to demand for mass capacity storage.

Simply put we offer customers mass data storage at less than one fifth the cost of comparable NAND solutions on a per bit basis.

We don't foresee that value gap closing over the next decade relative to data center architectures.

Dave Mosley: We continue to offer customers the flexibility to deploy these drives as a conventional CMR drive or as a shingled SMR configuration based on their specific capacity and architectural needs. We are engaging with the number of cloud and enterprise customers on qualification and expect volume shipments to begin in the first half of calendar 24. We also expect to begin aggressively rampeting three terabytes for disc products based on hammer technology in early calendar 24.

In addition to optimizing costs customers are intensely focused on conserving datacenter power in floor space.

Customers can realize benefits across each of these objectives by upgrading their existing installed base of hdds to higher capacity drives.

The 30, plus terabyte Hammer drives currently in qualification are more than two times the capacity compared to the average installed base across large datacenters.

This hammer based upgrades would more than double their existing storage class footprint.

Dave Mosley: These drives deliver capacity starting at 30 terabytes and offer customers the same flexibility to adopt either CMR or SMR configurations to further boost aerial density into the mid-30 terabyte range. Initial customer qualifications are progressing very well and we continue to hit our reliability and yield metrics. We are getting extremely positive customer feedback and we are broadening the number of customer qualifications as planned. We've been very thoughtful in building our product roadmap, the stage hammer technology, leveraging existing product design and process commonality where possible.

Or offer a 50% reduction in operating costs for the same storage capacity using about half the power and floor space.

These are compelling savings for customers and offer valuable optionality to best monetize their storage assets or reallocate floor space and power budgets for other uses or even defer new data center build outs to maximize their capital dollars.

As we deliver these benefits to our customers. We are also focused on capturing the value of our product portfolio.

As noted on our last call. We are continuing efforts to adjust price commensurate with that value, which ensures both a healthy industry supply chain and offers customers the opportunity for improved TCE over the long term.

Dave Mosley: For example virtually all of the capital invested for the 20 plus terabyte PMR drives is compatible with hammer products. The 30 plus terabyte hammer drives utilize many of the same components and electronics as our 20 plus terabyte products. They represent the fourth generation product using our 10-disc platform and the seventh generation that leverages glass substrates. These actions improve capital efficiency, reduce manufacturing complexity, ensure reliability and hasten time to market. While many aspects of our product design are evolutionary in nature, hammer revolutionizes aerial density advancements.

We have already seen some benefit from this strategy, which we anticipate will take a few quarters to implement more broadly across the end markets we serve.

I'll now hand, the call over to John Luca for further details on the September quarter results and share our outlook.

Thank you Dave.

September quarter financially it that were consistent with our revised expectations.

Revenue of $1 $45 billion, and a non-GAAP loss of 22 per share.

Dave Mosley: Through years of persistent research and development investment, innumerable design iterations and optimization cycles across all elements of the drive, from mechanical and electrical designs to wafer processing and firmware, we have now reached the appropriate balance between aerial density gains, cost optimization and reliability to launch hammer and volume. Our execution and cycles of learning have enabled us to continue strengthening our portfolio and we expect to launch products yielding four terabytes per disk in less than two years time, significantly differentiating C gate and addressing the full spectrum of mass capacity demand.

Like a sequential decline in revenue, we expanded total company non-GAAP gross margin by about 30 basis points.

And HDD, knowing that the gross margin by more than 130 basis points.

Selecting our focus on enhancing profitability.

Does he know what how does that business and having a declining 6% sequentially to $1 3 billion doing that.

Reflecting a modest improvement in mass capacity sales offset by steeper decline in the legacy market than we had originally expected.

Dave Mosley: Architecturally speaking, in today's data driven business economy, mass capacity storage is a crucial tier. The HDD aerial density advancements that we are delivering affirm and sustain the existing TCO advantages relative to NAN for mass capacity storage. Simply put, we offer customers mass data storage at less than one fifth the cost of comparable NAN solutions on a per-bit basis. We don't foresee that value gap closing over the next decade relative to data center architectures.

The mix shift toward higher capacity right now.

In total HDD shipments of 19 exabyte.

Actually flat with the prior accordingly.

Having this capacity per drive increased 17% sequentially, we're actually seven five petabyte goodbye.

Mass capacity revenue increased 3% sequentially to just over $1 billion.

Driven mainly by the anticipated improvement in the market.

Dave Mosley: In addition to optimizing costs, customers are intensely focused on conserving data center power and floors. Based. Customers can realize benefits across each of these objectives by upgrading their existing installed base of HDDs to higher capacity drives. The 30 plus terabyte hammer drives currently in qualification are more than two times the capacity compared to the average installed base across large data centers. This hammer based upgrade would more than double their existing storage capacity, or offer a 50% reduction in operating costs for the same storage capacity using about half the power and floor space.

I'll get back in the shipment.

79, exabyte compared with 75 exabyte in the June quarter.

And Mark up I think shipment and the percentage of silicon HDD exabyte, whereas the 88% up from 82% in the June quarter.

But on the airline, but all of that achievement of Ptc's exabyte, that's slightly up quarter over quarter.

Average capacity per in the airlines right.

What kind of scientific rationally at demand trends among U S cloud customers.

Got to modestly improve.

We believe that the industry continues to ship below end consumption and he's making progress you know they've using existing inventory at our cloud customer.

Dave Mosley: These are compelling savings for customers and offer valuable optionality to best monetize their storage assets or reallocate floor space and power budgets for other uses or even defer new data center buildouts to maximize their capital dollars. As we deliver these benefits to our customers, we are also focused on capturing the value of our product portfolio. As noted on our last call, we are continuing efforts to adjust price commits rate with that value, which ensures both the healthy industry supply chain and offers customers the opportunity for improved TCO over the long term. We have already seen some benefit from this strategy, which we anticipate will take a few quarters to implement more broadly across the end markets we serve.

As we mentioned last quarter, we anticipate that it will take at least through the end of the calendar year for inventory levels among CSP estimate.

What are your balance and for demand to improve more broadly.

Specific to the Ria market.

It was up sequentially as expected and as I said to him.

However, as David noted earlier.

That's an economic environment in China.

Unlikely to change hands and yet there.

And that is that we anticipate the VM market, we got to flat and uneven pattern over that quality going forward.

Legacy product revenue was $278 million down 31% sequentially with lower demand in each of the three markets there.

Gianluca Romano: I'll now hand the call over to John Luca for further details on the September quarter results and share our outlook. Thank you, Dave. See gets the September quarter financial results, where consistent with our revised expectations, we generated revenue of $1.45 billion and a non-gap loss of 22 cents per share. Like the sequential decline in revenue, we expanded total company non-gap loss margin by about 30 base points and HDD non-gap loss margin by more than 130 base points, reflecting our focus on enhancing profitability.

Great He got cut off.

And consumer.

Finally revenue for non issues he be isn't it because he is a slightly more than anticipated to $159 million compared with 218 million last quarter.

Okay.

Spending patterns and lack of economic uncertainties.

The main headwind while that enterprises can be isn't it.

And we have that excuse me that they renew 11 is anything but a quota.

Moving to our operational after four months.

Consistent with lower revenue levels in the September quarter, non-GAAP gross profit decreased by $25 million up to $288 million.

Gianluca Romano: Within our artist drive business, revenue declined 6% sequentially to $1.3 billion. Reflecting a modest improvement in mask capacity sales offset by steeper decline in the legacy market than we had originally expected. The mix shift toward higher capacity drives resulted in total HDD shipments of 90 exabytes, essentially flat with a prior quarter. Every capacity per drive increased 17% sequentially to roughly 7.5 terabyte per drive. Mask capacity revenue increased 3% sequentially to just over $1 billion, driven mainly by the anticipated improvement in the via market.

non-GAAP gross margin of 19, 8% expanded slightly compared to the prior quarter.

I think a detriment enacted during the quarter and a cost saving from Ornette attack I think activity is more than mitigated the ninth of Sandy could easing of anything you any particular in underutilization cost, which were approximately $59 million.

We expect to see further margin benefits in future quarters, as we continue to execute the price adjustment across the entire portfolio and achieve Ford elevation of projected cost savings.

I note that beginning with the September quarter, I wonder that I referred to.

Gianluca Romano: Mask capacity shipments total 79 exabytes compared with 75 exabytes in the June quarter. The mask capacity shipments at the percentage of total HDD exabytes were at the 88%, up from 82% in the June quarter. For near-line products, shipment of 56 exabytes was lightly up to quarter over quarter. Every capacity per near-line drive increased 12% sequentially, as demand trends among U.S, cloud customers began to modest improve. We believe that the industry continues to ship below end consumption and is making progress in reducing existing inventory at our cloud customers.

The change in the estimated useful life of certain capital equipment used in manufacturing.

Our ability to increase the efficiency of our existing fleet. You said that this has enabled us to extend the useful lives. So in the range of three to seven years.

Angel three to 10 years.

This change reduced depreciation that span in the September quarter by approximately $90 million that within cost of goods sold and is expected to increase by about $20 million in the December quarter.

We reduced non-GAAP operating expenses to $248 million.

Down from $258 million that individual quarter.

Gianluca Romano: As we mentioned last quarter, we anticipate that it will take at least through the end of the calendar here for inventory levels among CSP customers to rebalance and for demand to improve more broadly. Specifically to the via market, revenue was up sequentially as expected in the September quarter. However, as David noted earlier, the uncertain economic environment in China seems unlikely to change in the near term. As a result, we anticipate the via market will reflect an uneven pattern of recovery going forward.

Why do we continue to actively manage all areas of spending we do is that non-GAAP opex in the December quarter to be up slightly at certain minor spending an additional measure begin to conclude.

Moving to cash flow antibody in sheet, we have continued to take actions to improve our debt profile and manage working capital to support positive free cash flow generation.

September quarter, we reduced inventory by 8% sequentially to just under $1 1 billion.

Capital expenditures were $17 million compared with $50 million that thing in that particular quarter.

Gianluca Romano: Seagate product revenue was $278 million, down 31% sequentially, with lower demand in each of the three market served, niche on critical, clients and consumers. Finally, revenue for our known HZ business decreased slightly more than anticipated to $159 million, compared with $218 million last quarter. Reserved IT spending patterns in light of economic uncertainties remain headwind to our enterprise system business, and we expect similar revenue levels in the December quarter. Moving to our operational performance, consistent with lower revenue levels in the September quarter, non-gap growth profit decreased by $25 million to $288 million.

For the fiscal yet we're still planning a significant reduction in capex spend.

Compared with fiscal 'twenty, three and that spending will be more heavily weighted to the first task or the physical layer.

Free cash flow generation was $57 million that.

After giving effect to approximately $90 million of that factoring related payment.

Yes, we had highlighted on our last earnings call.

The U S $145 million.

For the quarterly dividend and exited the quarter with 208 million shares outstanding.

The September quarter with $2 3 billion in.

In available liquidity.

Building, our undrawn revolving credit facility.

During the quarter, we raised $1 $5 billion in new capital through the issuance of convertible notes, leaving a low interest rate of three in the out of the tank.

Gianluca Romano: Non-gap growth margin of 19.8% expanded slightly compared to the prior quarter, passing adjustment inactive during the quarter and cost saving from earlier startling activities, more than mitigated the 9% decreasing revenue, and increased in underutilization cost, which were approximately $59 million. We expect to see further margin benefit in future quarters, as we continue to execute price adjustment across the entire portfolio, and achieve full realization of projected cost saving. I note that, beginning with the September quarter, our results are expected to change in the estimated useful life of certain capital equipment used in manufacturing.

A portion of the proceeds were used to found a Catholic close transaction that increases the effective convert applied to any other to nearly $108 a share.

They are using potential future dilution.

The majority of the remaining proceeds were used to retire the outstanding balance on our term loans, which totaled approximately $1 3 billion.

As a result or is that sort of factoring gotcha, we expect to realize cash interest savings of about $15 million and annual basis.

Additionally, we renegotiated the terms of our agreement.

And with support from our lender group, we significantly reflect the debt covenants through fiscal 2025.

Gianluca Romano: Our ability to increase the efficiency of our existing piece of access base has enabled us to extend the useful lives from a range of 3 to 7 years to a range of 3 to 10 years. This change reduced the precision expense in the September quarter by approximately $9 million, within cost of goods sold, and is expected to increase by about $20 million in the December quarter. Produced non-gap operating expenses to $248 million, down from $258 million in the June quarter.

Accounting for the auction that I just described our debt balance was $5 7 billion.

At the end of the September quarter.

The $115 million quarter over quarter.

non-GAAP interest expense was sequentially flat at $84 million.

And we expect to see when that expense level in the December quarter.

Turning to our outlook.

Yes, Brett mass capacity sales to move slightly higher.

Gianluca Romano: While we continue to actively manage all areas of spending, we do expect non-gap objects in the December quarter to be up slightly as certain minus spending reduction measures begin to conclude. Wood, moving into cash flow and the balance sheet, we are continuing to take action to improve our debt profile and manage working capital to support positive free cash flow generation. The timber porter will reduce inventory by 8% sequentially to just under 1.1 billion dollars.

For the quarter supported by incremental demand.

And the online product from both cloud and enterprise customers offsetting self testing franchise via demand.

It is the legacy business, we are projecting higher seasonal demand mainly from the consumer market.

While non HDD revenue is expected to be essentially flat.

It isn't that he had contact with that December quarter revenue to be in that Angel 1.55 billion, plus or minus $158 million.

Gianluca Romano: Capital expenditures were 70 million dollars compared with 50 million dollars in the prior quarter. For the fiscal year we are still planning a significant reduction in cap expand compared with fiscal 23 and the spent spending will be more heavily weighted to the first half of the fiscal year. Free cash flow generation was 57 million dollars after giving effort to approximately 90 million dollars of restructuring related payments that we had highlighted on our last earning calls.

At the midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the mid single digit percentage range with analog validation costs.

That it to be relatively flat with the September quarter.

We expect to narrow our non-GAAP loss per share to Tencent, So that's sort of minus 20%.

Based on a share count of approximately 210 million shares and then non-GAAP taxes band.

Is that $15 million range.

Gianluca Romano: We use 145 million dollars for the quarterly dividend and equate it to the porter with 208 million shared outstanding. We close the September quarter with $2.3 billion in available liquidity, including our underowner evolving credit facilities. During the porter we raised $1.5 billion in new capital to the issuance of convertible notes being a low interest rate of 3.5%. A portion of the proceeds were used to found a capital transaction that increased the effective convert price to nearly $108 per share, reducing potential future share dilution.

I will now turn the call back to David for final comments.

Thanks, John Luca.

We are operating in a longer than typical cycle and I'm very proud of our team's shared determination and resilience. We've continued to drive our financial operational and innovation priorities, which is evidenced by the actions we've discussed today.

We are focusing our tactical business decisions on free cash flow generation, we are strengthening our balance sheet through debt restructuring actions.

And we are executing on our mass capacity product roadmap to address future data growth.

Signs of recovery has started to emerge as we look past the end of calendar 2023, and as industry conditions improve seagate is ready to capitalize.

Gianluca Romano: A majority of the remaining proceeds were used to retire the outstanding balance on our terminals, which total approximately 1.3 billion dollars. As a result of this debt restructuring action, we have spent to realize cash interslaving of about 15 million dollars on an annual basis. Additionally, we really consider the terms of our case agreement, and we support from our lender group with significantly relaxed the debt covenants through fiscal 2025. Accounting for our action that I just described, our debt balance was $5.7 billion at the end of the September quarter.

We are a stronger more efficient company with a technology roadmap that extends our aerial density leadership positioning seagate to deliver enhanced value to our customers and shareholders.

Thanks to all of our stakeholders for your ongoing support of Seagate, operator, 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 telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

In the interest of time, we ask that you. Please limit yourself to one question.

Gianluca Romano: Up to $115 million quarter of a porter. Non-gap interest expense was sequentially flat at $84 million, and we have spent similar expense levels in the December quarter. Turning to our outlook, the expense must capacity says to move lightly higher in the December quarter, supported by incremental demand for our near-line products from both cloud and enterprise customers, of setting software sequential via demand. This is a legacy business where projecting higher seasonal demand, mainly from the consumer market, while non-HZ revenue is expected to be essentially flat.

You have further questions you may reenter the question queue.

Once again that with Star then one to ask a question at this time, we will pause momentarily to assemble the roster.

The first question comes from Erik Woodring with Morgan Stanley. Please go ahead.

Super Thank you for for <unk>.

My questions. This morning, guys. So Dave I kind of want to take a step back and if we go back to your prior analyst day, the expectation was that mass capacity exabyte shipped could grow at a 35% annual rate now the world is clearly different today, both from a from a macro outlook and the emergence of AI is.

Gianluca Romano: With better context, we spent December quarter revenue to be in a range of $1.55 billion dollars plus or minus $150 million dollars. At the midpoint of our revenue guidance, we have spent non-gap operating markets. Engaging to be in the mid-single digit percentage range, with underutilization costs expected to be relatively flat with a September quarter. We expect to narrow our non-gap loss per share to 10 cents plus or minus 20 cents. We are on a share count of approximately 110 million shares and a non-gap access spend in the 15 million dollar range.

Kind of a board level investment priority. So curious as we look forward. How are you thinking about kind of the long term three to five year rate at which mass capacity exabyte could grow and maybe help us think about the linearity of that could that strengthen over time is that relatively linear just any.

So you have kind of longer term on what mass capacity exabyte growth could be.

Thank you.

Thanks for the question Eric.

Yeah, we were coming off the back of a number that was almost 80% in one year so to your point.

Back in the last analyst day. The 30, the mid thirties was feeling pretty good for us given all the data growth that we know is happening and then we've gone through these.

Dave Mosley: I will now turn the call back today for a final comment. Thanks, Gianluca. We are operating in a longer than typical cycle, and I'm very proud of our team's share determination and resilience. We've continued to drive our financial, operational, and innovation priorities, which is evident by the actions we've discussed today. We are focusing our tactical business decisions on free cash flow generation. We are strengthening our balance sheet through debt restructuring actions, and we are executing our mask capacity product roadmap to address future data growth. Signs of recovery has started to emerge as we look past the end of calendar 2023, and as industry conditions improve, Seagate is ready to capitalize.

These current events I will say that we're all seeing.

Look at to your point about linearity I don't think its a very linear function I think it can be very choppy.

Up one year down the next it can be.

As we look out three to five years now I would temper that somewhat and say in the mid <unk> is probably good modeling range.

But we will see probably more growth from time to time I do think that given the move of that happened in the middle of the pandemic of data into data centers for <unk>.

Enterprise applications that were being running data centers I think that data is still going to grow in those data centers. So we're not at peak data center growth and then you leather on top all of these new applications that will be.

Shanye Hudson: We are a stronger, more efficient company with a technology roadmap that extends our aerial density leadership, positioning Seagate to deliver enhanced value to our customers and shareholders. Thanks to all of our stakeholders for your ongoing support of Seagate, operator, let's open up the call for questions.

Sped up with with features like AI degenerative AI on top of them I think that there is a there is a big healthy demand growth coming.

5% would be healthy for for any kind of CAGR, that's going to go out for three years to five years or a decade or something like that so we think theres healthy demand growth, but I do think it won't be linear.

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star event one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.

Unknown Executive: To withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourself to one question. If you have further questions, you may re-enter the question queue.

Periods of.

Big growth and then there will be periods of digestion as well, we'll continue to see this as the economy floaters.

Great. Thanks, so much.

Unknown Executive: Once again, that was star then one to ask a question, and at this time we will pause momentarily to assemble the roster.

The next question comes from Romsey Mohan of Bank of America. Please go ahead.

Yeah. Thank you good morning, Dave can you talk about hammer qualifications, how many customers are you expecting qualifications in the near term and maybe share.

Erik Woodring: The first question comes from Eric Woodring of Morgan Stanley. Please go ahead. Super, thank you for taking my questions this morning, guys.

Color on what you expect in aggregate.

Given what you know about the ramp in terms of unit shipments maybe one two years out.

Dave Mosley: David, I kind of want to take a step back. If we go back to your prior analyst, the expectation was that mass capacity, X-byt shipped, could grow at a 35% annual rate. Now, the world is clearly different today, both from a macro outlook and the emergence of AI as kind of a board level investment priority. As we look forward, how are you thinking about the long-term, three to five-year rate at which mass capacity X-byt could grow?

Dave Mosley: And maybe help us think about the linearity of that. Could that strengthen over time? Is that relatively linear? Just any thoughts that you have longer term on what mass capacity X-byt growth could be? Thank you. Thanks for the question, Eric. Yeah, we were coming off the back of a number that was almost 80% in one year. So to your point, back in the last analyst day, the mid-30s was feeling pretty good for us, given all the data growth that we know is happening, and then we've gone through these current events.

And if you could maybe just comment on how this higher aerial density shift might change the dollars per terabyte relative to current product.

That'd be super helpful. Thank you.

Yes interesting I can I can take a crack at that.

So relative to qualification, we are prioritizing customers not necessarily the easiest customers first sometimes that can be more difficult challenging customers, but we're.

We're staying very tight with customers and we're trying to make sure that every of the initial drives that we built has a home.

Make sure that we as we bring on more quality qualifications like we've talked about it in our prepared remarks that we will make sure that we have the supply that's adequate for those because I do think there will be a.

With strong demand.

What we're showing customers right now exactly to your point on the value proposition is.

Projection for what Theyre Tcl benefits will be.

Dave Mosley: So I'll say that we're all seeing, look, to your point about linearity, I don't think it's a very linear function. I think it can be very choppy. Up one year down the next, it can be. As we look out three to five years now, I would temper that somewhat and say in the mid-20s is probably good modeling range. George. But we will see probably more growth from time to time. I do think that given the move that happened in the middle of the pandemic, of data into data centers for, you know, enterprise applications that were being run in data centers, I think that data is still going to grow in those data centers.

Part of that is the acquisition cost of the of the drive itself part of its the power.

Uh huh.

Floor space improvements that they will get as we modeled TCR with some of them.

So I do think that theres going to be a big push for the higher capacities just like there always has been in our industry and I think that this is going to be one of the biggest jumps in areal density than we've done in the last five years so the healthy.

Growth was right ahead of US we are filling the lines with.

The wafer lines with Hammer parks, and we expect to see volume shipments in the millions of drives next next year next calendar year.

Dave Mosley: So we're not a peak data center growth. And then you leather on top of all these new applications that will be really sped up with, with features like AI and generative AI on top of them, I think that there's a, there's a big healthy demand growth coming. 25% would be healthy for, for, you know, any kind of keger that's going to go out for three to five years or a decade or something like that.

At all time out based on when the qualifications are but the parts of our tenant.

Okay.

Thanks, Dan.

The next question comes from Sidney Ho of Deutsche Bank. Please go ahead.

Great. Thank you, it's great to see some green shoots in the U S cloud market Dave.

Last quarter, you talked about expecting quality inventory to normalize in a couple of quarters can you give us an update about the timing there, but more importantly are you getting indications that the rate of recovery, it's going to what kind of rate of recovery can look like beyond the December quarter.

Dave Mosley: So we think there's healthy demand growth. But I do think it will, it won't be linear. There will be periods of, you know, big growth. And then there will be periods of digestion as well. We'll continue to see this as the economy flutters.

Unknown Executive: Great. Thanks so much.

So given your efforts to increase visibility to early collaborations.

And the longer term collaboration with your customers. Thanks.

Wamsi Mohan: The next question comes from Ramsey Mohan of Bank of America. Please go ahead. Yes. Thank you. Good morning. Dave, can you talk about hammer qualifications? How many customers are you expecting qualifications in the near term and maybe share a color on what you expect and aggregate given what you know about the ramp in terms of. In a unit shipments maybe one to years out.

Good thanks.

Yes, I think as we are giving predictability on what products that we have in our pipeline customers are likewise, giving more predictability on what they will need out there in time so.

I would say if you look at <unk>.

Two years ago. The demand was quite strong and then we entered into this period about six quarters ago now where.

Dave Mosley: And, and if you could maybe just comment on how this higher aerial density shift might change the dollars per terabyte relative to current product that would be super helpful. Thank you. Interesting. I can, I can take a crack at that. So relative to qualification, we are prioritizing customers not necessarily the easiest customers first, you know, sometimes they can be more difficult challenging customers. But we're staying very tight with customers and we're trying to make sure that every of the initial drives that we build has a home, you know, make sure that we, as we bring on more qualifications like we talked about in our.

Some customers were saying, we really don't need very much and we're going to make.

Allocations of what we've already got in our data centers.

Last for another year or something like that in the entire industry has been suffering through that.

It's very hard to run factories like that and so that's why we've gone out and said, okay, let's get predictable what we're showing.

The numbers that we're showing for customers right now in these long term forecast for.

Build to order or nothing compared to the volumes of where we were at two years ago, they're much smaller.

But I think the customers are showing us predictability and then asking us for upside on top of that so it gets into a really interesting discussion about what's the true demand and exactly to your point I think it will help us get through the back of this period, but then.

Dave Mosley: Prepared remarks that we will, you know, make sure that we have the supply that's adequate for those because I do think there will be a strong demand. What we're showing customers right now exactly to your point on the value proposition is is a projection for what their TCO benefits will be. That part of that acquisition cost of the drive itself part of its power and, you know, floor space improvements that they'll get as we model TCO with some of them.

I think ultimately we're not satisfying true demand when the because of the growth of data is still large 25% CAGR is still very very large and so we're trying to make sure that we start the parts that ultimately we'll get paid for.

And showing people exactly what we have in process for them.

And Theyre trying desperately to show us a more predictable schedule that we can all managed vantage better for better economics on both sides of ourselves and our customers.

Dave Mosley: So I do think that there's going to be a big push for the higher capacities just like there always has been in our industry. This is going to be one of the biggest jump scenario that we've done in the last five years. So the healthy growth is right ahead of us. We are filling the lines with the wafer lines with, you know, hammer parts and we expect to, you know, see volume shipments in the millions of drives next year, next calendar year. You know, it'll all time out based on when the qualifications are, but the parts are telling us. Thanks.

Thank you.

The next question comes from Karl Ackerman of BNP Powerbar. Please go ahead.

Yes, Thank you and good morning.

Hi.

On Hammer can you discuss the reliability metrics and.

Perhaps power efficiency metrics relative to your existing as Kumar drive I am.

Ask because that Otp last week, it's clear that hyperscale are continuing to prioritize those.

And those metrics have they introduced newer technology and I guess as you address that question could you also discuss maybe the number of customer engagements you have.

Sydney Ho: Next question comes from Sydney Ho of Deutsche Bank. Please go ahead. Great. Thank you. It's great to see some green shoes in the US cloud market. Dave, last quarter, you talked about expecting cloud inventory to normalize in a couple quarters.

With hammer.

Perhaps beyond the existing customer thank you.

Yes, as we said before Karl were bringing on multiple customers right now so we've already shipped.

Dave Mosley: Can you give us an update about the timing there, but more importantly, are you getting indication that the rate of recovery is going to, what kind of rate of recovery is going to look like beyond the December quarter, especially giving your efforts to increase visibility through early collaboration, a longer term collaboration with your customers. Thanks. Very good. Thanks. Yeah, I think as we are giving predictability on what products that we have in our pipeline, the customers are likewise giving more predictability on what they will need out there in time.

Vacation units out to multiple customers I won't talk about them in particular.

The the hammer reliability metrics will be identical to the reliability metrics of traditional drives.

So there is really no change there and there is no change in the power either I mean the <unk>.

People have pointed to the laser subsystem and things like that yes. There are some very small changes have.

According to that but we're also working power down.

<unk>.

In normal course on these products I think one thing important to realize about the families that the.

Dave Mosley: So, you know, I would say if you look at two years ago, the demand was quite strong and then we entered into this period about six quarters ago now where some customers were saying we really don't need very much and we're going to make allocations of what we've already got in our data centers last for another year or something like that and the entire industry has been suffering through that. It's very hard to run factories like that and so that's why we've gone out and said, okay, let's get predictable.

Mechanical and electrical design points of the 2.4 terabyte <unk> drive that we just announced is are very similar to the three terabyte per drive.

Nodes or even beyond that we should get into the mid three terabytes per disk drives.

With those same.

Parts. So same electronics same mechanics, so theres really no change in power there is no change in reliability expectations either.

Super helpful. If I may sneak in another one just on your systems business.

Dave Mosley: What we're showing, the numbers we're showing for customers right now in these long-term forecasts for builds order are nothing compared to the volumes of where we were at two years ago. They're much smaller, but I think the customers are showing us predictability and then asking us for upside on top of that. So it gets into a really interesting discussion about what's the true demand. And exactly to your point, yeah, I think it'll help us get through the back of this period, but then I think ultimately we're not satisfying true demand because the growth of data is still large.

You know that that has moderated roughly 40% last two quarters just curious.

And I, suppose why and kind of the outlook for that.

And then within that.

How much of that is maybe softness in flash.

Prices versus perhaps the core vault harddrive offering thank you.

Yes, I don't really think flash is much to do with it its more what I'll call on Prem traditional enterprise applications in.

Thankfully that space has not been as bad as we thought it was at the back of the year, it's not nearly as cyclical.

Dave Mosley: 25% keg or is still very, very large. And so, you know, we're trying to make sure that we start the parts that ultimately will get paid for and showing people exactly what we have in process for them. And they're trying desperately to show us the more predictable schedule that we can all manage better for better economics on both sides of our sales and our customers. Thank you.

Cyclical is what the cloud has been in this recent cycle, but it was down.

Year over year, and I think it will recover over time as well because I think on Prem enterprise should benefit from.

All of the growth of data and in many cases, you can't move the data off site or into the cloud, it's either two massive or you've got regulatory requirements or sovereignty requirements and you want to keep multiple copies anyway. So I do think on Prem enterprise should have.

Karl Ackerman: The next question comes from Carl Ackerman of BNP Paraba. Please go ahead. Yes, thank you. Good morning. On Hammer, can you discuss the reliability metrics and perhaps power efficiency metrics relative to your existing SMR drives? I ask because that OCP last week, you know, it's clear that hyper-scalers continue to prioritize those metrics as they introduce newer technology. And I guess as you address that question, could you also discuss maybe a number of customer engagements you have with Hammer, perhaps beyond the existing customer? Thank you. Yeah, we're, as we said before, Carl, we're bringing on multiple customers right now. So we've already shipped a qualification units at the multiple customers.

A good recovery at some point and we're happy with the systems business and our penetration into multiple accounts.

Dave Mosley: I won't talk about them in particular. The Hammer reliability metrics will be identical to the reliability metrics of traditional drives. So there's really no change there and there's no change in the power either. People have pointed to the laser subsystem and things like that. Yeah, there's very small changes according to that, but we're also working power down in normal course on these products. I think one thing important to realize about the family is that the mechanical and electrical design points of the 2.4 terabyte per platter drive that we just announced are very similar to the 3 terabyte per drive.

On that front to recover when the on Prem enterprise business does recover.

The next question comes from Aaron Rakers of Wells Fargo. Please go ahead.

Yes, thanks for taking the question I wanted to maybe just unpack the gross margin a little bit appreciating that you guys don't give a defined kind of guide on a forward basis.

Could you help us understand kind of the impact of Underutilization, you expect going into the.

The December quarter relative to the 59 million reported this last quarter and how do we think about as maybe that starts to lift out of the model kind of the.

The glide the glide path to back to that 30% level as hammer starts ramping et cetera, I'm just curious of how we think about or how you guys are thinking about the gross margin trajectory kind of.

Kind of the variables within that looking out over the next couple of quarters.

Hey, good morning, Han and thank you for the question, Yes, I would.

Guidance for the December quarter is of course, implying an improvement in gross margin.

It is not coming from Underutilization, we think.

And the authorization will be fairly flat with the September quarter, but is coming from of course, the pricing actions. We have taken and we have already started doing that in the prior quarter and a better cost structure no part those improvement as for sure coming from there.

Dave Mosley: Those are even beyond that. We should get into the mid 3 terabytes per disk drive with those same, you know, parts, so same electronic same mechanics, so there's really no change in power. There's no change in reliability expectations either.

Unknown Executive: Super helpful.

The full impact of cost cutting plan that.

Dave Mosley: If I may speak in another one just on your systems business, you know that that has moderated roughly 40% glass to quarter is just curious. I suppose why and kind of the outlook for that and within that, you know, how much of that is maybe softness and flash prices versus perhaps the core vault hard drive offering. Thank you. Yeah, I don't really think flash has much to do with it. It's more what I'll call on-prem traditional enterprise applications and thankfully that space has not been as bad as we thought it was at the back of the year.

We started in the prior quarter. So now we start seeing that they're fully in putting that in our cost structure.

Those are the major drivers for the improvement in gross margin.

Then no we will continue to.

In Peru, our structure and we see in Carolina right.

And we continue and will certainly increase sequentially.

Now to go back to the let's say the 30% the gross margin.

We think we need to where they are having of it here.

Lower than the prior peak.

Dave Mosley: It's not nearly as as cyclical as what the cloud has been in this recent cycle, but it was down, you know, year over year. And, you know, I think it will recover over time as well because I think on-prem enterprise should benefit from all the growth of data. And in many cases, you can't move the data off site or into the cloud. It's either too massive or you've got regulatory requirements or sovereignty requirements and you want to keep multiple copies anyway.

We think at least 20% low and so we can achieve that level of profitability with a muscular with it.

Dave Mosley: So I do think on-prem enterprise should have a good recovery at some point. And, you know, we're happy with the systems business and our penetration into multiple accounts on that front to recover when the on-prem enterprise business does recover.

Yeah.

Very helpful. Thank you deal with it.

Thank you.

The next question comes from Timothy Arcuri of UBS. Please go ahead.

Thanks, a lot I also wanted to ask on gross margin John Luca as as <unk>.

Hemmer ramps.

I think there is some controversy in terms of whether it's initially negative for gross margin or like what the crossover point will be for when it becomes positive to gross margin I think it depends on on your yields obviously, but can you just talk about sort of how that plays into the answer to your question the trajectory of margins off the bottom here.

Aaron Rakers: The next question comes from Aaron Rakers of Wells Fargo. Please go ahead. Yeah, thanks for taking the question.

Thanks.

Yeah, Dave.

And before I don't know.

Yeah.

Gianluca Romano: I wanted to maybe just unpack the gross margin a little bit, appreciating that you guys don't give a defined, you know, kind of guide on a forward basis. Could you help us though under, you know, understand kind of, you know, the impact of underutilization you expect going into the December quarter relative to the 59 million reported this last quarter. And how do we think about, you know, as maybe that starts to lift out of the model kind of the glide, you know, the glide path to, you know, back to that 30% level as hammer starts ramping, etc. I'm just curious how we think about or how you guys are thinking about the gross margin trajectory kind of, you know, kind of the variables within that looking out over the next couple quarters.

Wrangling plays out a lot of capacity and better price and that related to that for sure improve our gross margin.

No it will be accretive to our gross margins since the beginning.

But of course, when we go to.

345 with antibody pair that I have you will see even even if bigger improvement.

Now we think with that.

I Wanna.

Our revenue fairly strongly in the first six months of the kind of 24.

I think we've asked about immuno unit and there is opportunity to be sold.

That will add of course is every time you go into a new technology, a new product, we could have any cause a bit lower yield and that could limit in the fourth quarter of two.

Gianluca Romano: Hey, good morning, Aaron. Thank you for the question. Yes, our guidance for December quarter is of course inclined and improvement in gross margin. This is not coming from underutilization. We think underutilization will be fairly flat with the September quarter. Carter, but he's coming from, of course, the pricing actions that we are taking and we have already started in the prior quarters and the better cost structure. Now, part of the improvement is for sure coming from the full impact of the restructuring plan that we started in the prior quarters.

The improvement to the gross margin might we see gross margin improving sequentially.

And Tim just I would add remember that it's not just about the highest capacity point, although that does drive a lot of heads and media and our factories.

It's also about <unk>.

Mid range, if you will capacity points like 20, terabytes or 24 terabytes again are those the areal density enables us to go address those capacity points with improved cost structure.

Gianluca Romano: So now we start seeing the full impact in our cost structure. So those are the major drivers for the improvement in gross margin. Then now we will continue to improve our structure and we think our revenue will continue also to increase sequentially. Now to go back to the, they say the 30% gross margin. Oh, we think we need 12 revenue with his lower than the prior peak. We think at least 20% lower. So we cannot achieve that level of profitability with a much lower revenue. Very, very helpful.

Great Great. Yes. Thanks, Thanks for that so I also jumped on just a smidge late so maybe you.

<unk> talked about this but can you talk about how the change to build the order is.

Impacting bookings, so I know that.

Revenue is being guided pretty flat, but it seems like bookings are improving and I wonder how much of that is due to the shift to build to order and how much of that is due to just the customers having to work through inventory.

And what do the bookings tell you about the trajectory of where revenue is going to go into the first half of next year. Thanks.

Yes.

It's actually an interesting question. So we do have some customers that are embracing the.

Stability.

And there are reasons for that.

Unknown Executive: Thank you, Judith. Thank you.

Maybe some of it is because they have burned through their inventory completely and so they know that theyre going to be buying I think there are customers who are not leaning into.

Timothy Arcuri: The next question comes from Timothy Arturi of UBS. Please go ahead. Thanks a lot. I also want to ask on gross margin. John Luca, as, as Hammer ramps, I think there's some controversy in terms of whether it's initially negative for a gross margin or, you know, like what the crossover point. It will be for when it becomes positive to gross margin. I think it depends on your yields, obviously. But can you just talk about sort of how that plays into the answer to your question, the trajectory of margins off the bottom here?

Multiple years just yet.

For various reasons, they make procurement decisions all the time.

So do we write everybody has to make these tough decisions, but generally speaking I think it's giving us better visibility at least at the lower rate of it that the industry now runs because remember.

Remember the industry just doesn't have the money to speculatively startup a bunch of products right now we have to make sure that what we do start the suppliers are going to get paid for it and so on.

I think the model is generally working out pretty well and as we show higher and higher value like the three plus terabyte per disk capacity points and then the four plus terabyte <unk> point I think people will want to make sure that they can take advantage of that Tcl proposition, we put out in front of them so far.

Timothy Arcuri: Thanks. As they said before, no, Hammer will strongly increase our capacity per drive and that will for sure improve our gross margin. It will, no, it will be a critical to our gross margin since the beginning. But of course, when we go to, you know, three, four, five terabyte per drive, you will see even even a bigger improvement. Now, we think we will start our Hammer revenue fairly strongly in the first six months of the kind of 24.

Anticipated it will pick up steam we are still doing things that are two quarters or four quarters or something like that and so there is negotiations and everything and that can be frustrated by that but you know as those negotiations.

Continue on I think we will.

<unk> to make sure that we write the industry and ourselves are suppliers. So that we can you know.

Timothy Arcuri: Now, we think we have about a million units as opportunity to be sold. That we let, of course, as every time you go into a new technology, a new product, we could have a little bit lower yield and that could limit in the first quarter or two the improvement to the gross margin. And Tim, just I would add, remember that it's not just about the highest capacity point, although that drop does drive a lot of heads and media in our factories.

At least get back to a point, where we're a.

Returning returning value to everyone. So we can keep investing in the industry I think that's the important point is that's one of the reasons we've done this.

Got it thank you so much.

The next question comes from Krish Shankar of TD Cowen. Please go ahead, yes.

Yeah, Hi, Thanks for taking my question.

Two part question first is on.

<unk> shipped to 156 extra bike in the airline customers in the quarter.

Timothy Arcuri: It's also about mid-range, if you will, capacity points like 20 terabytes or 24 terabytes again, or the aerial density enables us to go address those capacity points with improved cost pressure. Great. Yes. Thanks. Thanks for that.

Given the you know your line is going to improve in calendar 'twenty do you think you can hit the 100 extra by run rate some time in calendar 'twenty four.

Then a follow up.

David and John Luca It seems like you've been most concerned about Hamlin bump in gross margin.

This quarter versus all of the prior quarter was kind of curious what is the reason for that.

Dave Mosley: So I also jumped on just a spingelade. So maybe you talked about this, but can you talk about how the change to build the order is impacting bookings. So I know that, you know, revenues being guided pretty flat, but it seems like bookings are improving. And I wonder how much of that is due to the shift to build the order and how much of that is due to just the customers having work through inventory.

The improvement in the quarter that hit the milestones or was it more increased customer demand a better visibility into the purchasing of Hamlin makes you any color on that would be helpful. Yes.

Yes, I would say all of the above as time marches on our teams make progress against the yield targets the reliability targets and the qualifications progress and we can see and we have more and more certainty we get towards the end of the qualification. So all of those things are factoring into our confidence.

Dave Mosley: And what do the bookings tell you about the trajectory of where revenue is going to go into the first avenue? Thanks to your thanks. Yeah, it's actually an interesting question. So we do have some customers that are embracing the predictability. And, and there are reasons for that, you know, maybe some of it is because they have burned through their inventory completely. And so they know that they're going to be buying. I think there are customers who are not leaning into, you know, multiple years just yet.

And I think we'll continue to update everyone going forward as to exactly how this is going remember that we're also starting into qualification with this 2.4 terabyte per platter, which again I made the point before.

It's almost the same box and so.

So we have a PMO or outlet for the St parts and were driving the vendors to that commonality most of the vendors the lion's share of the vendors have.

Dave Mosley: For various reasons, they make procurement decisions all the time. And, you know, so do we, right? Everybody has to make these tough decisions. But, you know, generally speaking, I think it's giving us better visibility, at least that the lower rate of the industry now runs because remember the industry just doesn't have the money to speculatively start a bunch of products right now. We have to make sure that what we do start the suppliers are going to get paid for and so on.

Common parts through these two platform. So we can drive that much more volume in and predictably get people paid and things like that.

And then on the Exabyte Sydney airline can you hit the 100 extra bytes next year or is it too aggressive.

Yes, I think cash for their content.

Fiscal year end, probably the calendar 'twenty four is.

Dave Mosley: I think the model is generally working out pretty well. And as we show higher and higher value, like the 3 plus terabyte predict capacity points and then the 4 plus terabyte predict best points, I think people will want to make sure that they can take advantage of that TCO proposition we put up in front of them. So I am just paid, it'll pick up steam. We are still doing things that are two quarters or four quarters or something like that.

<unk>.

Very probable that we can double the exabyte, but we think we will grow sequentially in the in those quarters.

That is normal consumption.

Thank you.

The next question comes from Blayne Curtis of Barclays. Please go ahead.

Okay, sorry about the name mixed up there this is Tom O'malley on for Barclays.

Dave Mosley: And so, you know, there's negotiations and everything. And, you know, I can be frustrated by that. But, you know, as those negotiations, you know, continue on, I think we will continue to make sure that we write the industry and ourselves, you know, our suppliers so that we can, you know, at least get back to a point where we're, you know, returning, returning value to everyone so we can keep investing in the industry. I think that's an important point. That's one of the reasons we've done this. Got it.

I just wanted to understand the timing of the recovery a bit better here.

Krish Sankar: Thank you so much. The next question comes from Krish. Thank our of PD Cowan.

You previously talked about Q4, and then you talked about the end of December and this is a near line in particular.

It's kind of pushed to Q1 Youre seeing this U S. Cloud uptick you said again, so kind of in September and in your.

<unk> for December, but when do you expect the market step up within the market is that still expected for March or have things kind of elongated just given the inventory situation any update on that on that recovery would be helpful. Yes, Yes, Tom. Thanks, I think we're still on the same plan that we talked about last quarter. It's a gradual uptick so we're watching the inventory.

Dave Mosley: Please go ahead. Yeah. Hi. Thanks for giving me a question at a two-part question. First is, you folks shift towards 56 exabytes in airline customers in the quarter. Given the view that, you know, airline is going to improve in calendar 24, you think you'll hit the hundred exabyte, run rate sometime in calendar 24. And then a follow-up is Dave and John. Look, I see the giving most content about hammer ramp and gross margin in a discord versus all the prior quarters kind of curious.

Being depleted were seeing new orders come in I think the.

The one variable would be maybe some of the global cloud customers not the U S cloud customers with maybe some of the global cloud customers given some of the economic issues that we haven't various parts of the world, but generally speaking we're still on the same plan and you.

You will see a gradual uptick rather than a hockey stick.

And then just on the gross margin side as well.

Just taking the midpoint of guidance.

Youre talking about operating expense is actually up slightly in the December quarter. It implies 200 plus basis points of sequential improvement in gross margin.

Dave Mosley: What is the reason for that? Were there any improvement in the quarter that you could hit some milestones or was it more increased customer demand or better visibility into the area? What do you think of hammer next year? Any color that would be helpful? Yeah, I would say all of the above is time marches on. Our teams make progress against the yield targets, the reliability targets and the qualifications, you know, progress.

No I understand that.

You pointed to some pricing increases, but that'll be pretty quick in terms to get the full benefit. There is there any other levers that are contributing to December obviously, you have some mixed benefit with via dawn or going down in near line up but.

Dave Mosley: And we can see and we have more and more certainty. We get towards the end of the qualifications. So all of those things are factoring into to our confidence. And I think, you know, we'll continue to update everyone going forward exactly how this is going. Remember that we're also starting into qualification with this 2.4 cherubiper platter, which again I made the point before it's it's almost the same box and so. So we have a PMR outlet for the same parts and we're driving the vendors to that commonality.

Any other levers that you could point to other than the pricing that are impacting December. Thank you.

Yeah, I don't know if David but I think the only thing that.

Driving gross margin up actually at the cost side is very important.

We have the full impact of all the restructuring plan that we executed in the prior quarter better than our going in through our Cogs.

Of course, obviously not about opex.

This could be a little bit higher but not much higher so we're talking about a few million dollars.

Dave Mosley: Most of the vendors, the line share the vendors have common parts through these two platforms. So we can drive that much more volume in and predictably get people paid and things like that. And then the exabytes in your line, can you hit 100 exabytes next year or is it your addresses? Yeah, I think for the current fiscal year and probably the calendar 24 is not very probable that we can double the exabytes, but we think we will grow sequentially in all those quarters. Thank you.

So I would say both pricing and cost should.

<unk> that action to improve our gross margin sequentially.

And sorry, just to be clear, we were also going through product transitions right. So as we we may raise price on one of the older product or products and then.

The customer can offset some of those increases by a better <unk> proposition in the next drive and we can go work the cost on that so the mix plays a role in the customers can see the TCE benefit they are incentivized for them.

Tom O'malley: The next question comes from Blaine Curtis of Barclays, please go ahead. Hey, sorry about the name. Mix up there.

The next question comes from Steven Fox of Fox Advisors. Please go ahead.

Thanks for taking my question.

Dave Mosley: This is Tom O'Malley on Barclays. I just want to understand the timing of the recovery a bit better here. You previously have talked about Q4 and then you talked about the end of December, and this is a near one in particular and you know it's kind of pushed to Q1. You're seeing this US cloud uptick. You said again, so kind of in September and in your expectations for December, but when do you expect the market step up within the market is that still expected for March or have things kind of elongated just given the inventory situation any update on that on that recovery would be helpful.

<unk>.

Understanding everything that you said about sort of a cyclical recovery there is theres still a lot of macro headwinds out there.

And obviously your decline in sales over the last 12 18 months is as I've done with the macro is doing so I'm just curious how can we get comfortable with the idea that as you see more macro pressures that business. Your business keeps recovering is there anything you would point to in particular.

That may not limit cloud spending is much more than you think.

Dave Mosley: Yeah, Tom, thanks. I think we're still on the same plan that we talked about last quarter. It's a gradual uptick. So we're watching the inventory being depleted. We're seeing new orders come in. You know, I think the one variable would be maybe some of the global cloud customers, not the US cloud customers, maybe some of the global cloud customers, given some of the economic issues that we have in various parts of the world. But generally speaking, we're still on the same plan and, you know, we'll see a gradual uptick rather than a hockey stick.

Or just like other cycles, where you outgrew in tough environments. Thank you alright. Thanks.

You are right. It is a tough environment I will say that.

Data continues to grow and people want to you know.

Improve their economics, all the time so.

The data centers that exist in the world have.

Enormous number of hard drives so we're going to we're going to see some.

Refresh of those for for various reasons power. Some of them are just aging off the upgrades are can be actually fairly large if you think about buying a 32 terabyte drive in replacing four eight terabyte drives it may still be in your system I mean those are.

Gianluca Romano: And then just on the gross margin side as well. To take in the midpoint of guidance and you're talking about operating expenses actually up slightly into the summer quarter. It implies 200 plus basis points of sequential improvement in gross margin. You know, I understand that you, you know, you pointed to some pricing increases, but that'll be pretty quick in term to get the full benefit there. Is there any other levers that are contributing to December?

Market economical benefits that will ripple through the data centers and so I do think that in some in some cases since data is growing so big Bucks.

Gianluca Romano: Obviously, you have some to mix benefit with via gone or going down and near lineup, but just any other levers that you could point to other than the pricing that are impacting December. Thank you. Yeah, I'll not say that pricing is the only thing driving the gross margin up. Actually, the cost side is very important. We have the full impact of all the restructuring plan that we executed in the prior quarters that are now going into our cogs.

Bucks the trend of what's going on in the macro I mean, obviously that.

Everyone's paying attention to the macro.

But I do think that there will still have to be some investments to make and there will also be <unk>.

Opportunities to go save cost with some of the new products that we have coming and we've also been through the cycle on the early side already have.

Already the inventory is being depleted around the world. So there's not that massive inventory bubble out there anymore.

Thanks for that that's interesting color and then John Luca can you just I mean, I assume you don't want to give specific underutilization charge charges likely for that <unk>.

Gianluca Romano: Of course, also in our outfits, outfits could be a little bit higher, but not much higher. So we are talking about a few million dollar higher. So I would say both pricing and cost should go into that action to improve our gross margin sequence. And sorry, just to be clear, we're also going through product transitions, right? So as we may raise price on one of the older products and then, you know, there's a, the customer can offset some of those increases by a better TCO proposition in the next drive. And we can go work the cost on that. So the mix plays a role and the customers can see the TCO benefit there in sentiment.

First half of next year, but can you just sort of directionally give us a sense for how long you think we should keep modeling even if they're smaller charges.

In calendar Q1, and Q2 keep that in their gross margin calculations.

Yeah, we expect to add Underutilization cost also in kind of Q1 and kind of out of Q2, probably a little bit debatable.

They could be lower than what we have in December of course, but oh.

Of course, the volume that we had at producing Instillator beat.

So what we know adding stores in.

Unknown Executive: Lewis Ruener.

At the top of the cycle before.

Great. That's helpful. Thank you.

Steven Fox: The next question comes from Steven Fox of Fox Advisors. Please go ahead. Thanks for taking my question. Dave, understanding everything that you said about sort of a cyclical recovery, there's still a lot of macro headwinds out there. Um, and obviously you're decline in sales over the last, you know, 12, 18 months is out done, you know, what the macro is doing. So I'm just curious, how can we get comfortable with the idea that as you see more macro pressures that business, your business keeps recovering? Is there anything you would point to in particular that, you know, may not limit cloud spending as much more than you think of, or just like other cycles where you grew in tough environments.

The next question comes from Ananda Baruah of loop capital. Please go ahead.

Yeah. Thanks, guys good morning.

Thanks for taking the question I guess, Dave.

Just given that you're starting to see things that are.

Start to firm up.

Im talking about.

Yeah, Luca Q over Q increases.

And your line is as you get into 'twenty for what what's the opportunity for.

To get tight.

As you go through 24, just given given the capacity that you've taken offline.

Well I think that tightness is actually kind of interesting because.

Like we said before.

Data is growing in the data centers, we all know that.

Dave Mosley: Thank you. Right. Thanks. You're right. It is a tough environment. I will say that data continues to grow and people want to, you know, improve their economics all the time. So the data centers that exist in the world have an enormous number of hard drives. We're going to, we're going to see some refresh of those for, for various reasons, power, some of them are just aging off. The upgrades are can be actually fairly large.

Dave Mosley: If you think about buying a 32-serivite drive and replacing 4-8-serivite drives, it may still be in your system. I mean, those are market economical benefits that will ripple through the data centers. And so I do think that, you know, in some, in some cases, since data is growing so big, it bucks the trend of what's going on in the macro. I mean, obviously that everyone's paying attention to the macro. But I do think that, you know, there will still have to be some investments to make and there will also be opportunities to go save costs with some of the new products that we have coming. And we've also been through the cycle on the early side already of, you know, already the inventory is being depleted around the world. So, you know, there's not that massive inventory bubble out there anymore.

The amount of data being generated is growing quite quite quickly.

And I think relative to the hard drive industry.

Quickly reacting to anything right now because of some of the damage thats been done on the supply chain and just some of the frankly the lead times that exist on current parts, especially at the highest capacity points theres not as much flex is there used to be and so I think we may see we may enter into an environment, where people say, okay I see the economics.

Of upgrading part of my fleet here now, let's go ahead and do it it'll save me power It will save me space.

Allow me to answer the call for the data that's growing and then once they get their orders and we will say well the lead time is X and that might that might be the challenges. So that's how I think things may get tight.

And that will manifest itself I don't know exactly when but I certainly think that we could get into a situation like that just simply because the hard drive industry does not have the immediate capacity gains that it used to.

And then what is so what are the downstream impact of that I mean in the past has been pricing goes along.

Gianluca Romano: Thanks for that. That's interesting color. And then, Jungkook, can you just, I mean, I assume you don't want to give like specific underutilization charges likely for the, you know, the first half and next year. But can you sort of directly give us a sense for how long you think we should keep modeling, even if they're smaller charges, you know, in counter Q1 and Q2 keep that in there. Of course, margin calculations.

Gianluca Romano: Thanks. Yeah, we expect to have an underutilization cost also in counter Q1 and counter Q2 probably a little bit could be to be lower than what we have in December. Of course, of course, there's a volume that we are producing is still a little bit below what we, you know, add installed in at the top of the cycle before. Great. That's helpful.

The long term agreement that type of deal is that is that still some of the stuff that could occur if that's right, but that's exactly why we're addressing the customer base with these build to order models because we.

Unknown Executive: Thank you.

Thank you.

In some sense, we're helping the customers get a predictable financial outcome. It if they can give us at least some predictable visibility.

Yeah.

That's super helpful. Thanks, I'll keep it there yet.

The next question comes from Mark Miller of the Benchmark Company. Please go ahead.

Yeah.

Thank you. Thank you for the question you mentioned AI opportunities via cameras and other areas. So I'm just wondering.

When do you think these opportunities will really start to ramp and any idea on the magnitude of these opportunities just in terms of sales for next year.

Yes, Mark I think it's really hard to quantify just yet, but there is a lot of stuff going on in <unk>.

Ananda Baruah: The next question comes from Ananda Burua of Loop Capital. Please go ahead. Yeah. Thanks guys. Good morning. Thanks for taking the question.

I'll say, it's a big data around AI.

People appointed Chief data officers now to be able to track, whereas the data what's its value.

Dave Mosley: I guess Dave, just given the start to see things start to, start to firm up and talking about, you know, sort of, I think, John Luke, the Q2 increases in their line as you go through 24. What's the opportunity days for things to get tight? As you go to 24, just given the capacity that you've taken offline. Well, I think that tightness is actually kind of interesting because, like we said before, the data is growing in the data centers, we all know that, you know, the amount of data being generated is growing quite, quite quickly.

Might we want to retain that just in case that we ended up with some tools that are.

Allowing us to monetize it or understand more about our process. So.

So on and so forth with customer base factories.

So.

My personal opinion is we're in the.

Early innings of a move from you.

Throwing data away to keeping some of it longer term four four.

The benefits of the corporations and.

And I do think that a lot of that will be edge I don't think all of it will end up in the cloud I think a lot of it will actually be on the edge and so.

Dave Mosley: And, and I think relative to the hard drive industry, quickly reacting to anything, right now because of some of the damage that's been done in the supply chain and just some of the, frankly, the lead times that exist on current parts, especially at the highest capacity points. There's not as much flex as there used to be. And so I think we may see, we may enter into an environment where people say, okay, I see the economics of upgrading part of my fleet here.

This is something that we're tracking very carefully.

I think it's really manifest itself just yet I think people were using some of the new application capabilities.

That are being branded AI applications.

To get to know them and understand them and.

Certainly.

Dave Mosley: Now, let's go ahead and do it. It'll save me power. It'll save me space. It'll, you know, it'll allow me to answer the call for the data that's growing. And then, no, once they get their orders in, we'll say, well, the lead time is X and, you know, that might, that might be the challenges. So that's, that's how I think things may get tight and it'll manifest itself. I don't know exactly when, but, you know, I certainly think that we could get into a situation like that just simply because the hard drive industry does not have the immediate capacity gains that it used to.

Like things like generative AI, which.

I believe is kind of a.

A new user interface. If you will that allow the applications be used much more efficiently than and maybe queries to be made of these applications much more efficiently, but I think we're still in the early innings and I think once once it does latch, we're going to know that data and the longevity of that data and the integrity of that data is all critical and so I think that's good for us.

You mentioned lower Capex for fiscal 'twenty, four and can you give us a range or any idea.

Would you be.

I think it will probably stay inside of our existing range, 4% to 6% of revenue, but we are since revenues so far down we are.

Vijay Rakesh: And then, what are the, so what are the downstream impacts of that? I mean, in the past, it's been pricing as long-term agreement. That's like the deal. Is that, is that still some of the stuff that could occur? That's right, but that's exactly why we're addressing the customer base with these build order models, you know, because we, I think we're, in some sense, we're helping the customers get a predictable financial outcome at, you know, if they can give us at least some predictable visibility. That's super helpful. Thanks. I'll, I'll keep it there guys. Thanks.

Very mindful of the spending however.

We can see the tools that we need to bring hammer up according to a certain pace and as soon as the pace quickens, we will get there as quickly as we possibly can.

So we understand what the recipe is and we understand what's needed to make needed to make the recipe really well and we'll spend accordingly.

Thank you.

Okay.

Unknown Executive: The next question comes from Mark Miller of the Benchmark Company. Please go ahead. Thank you. Thank you for the question. You mentioned AI opportunities and, and via tamers and other areas.

The last question will come from Vijay Rakesh with Mizuho. Please go ahead.

Yeah, Hi, guys just.

Quickly on the Hamlin side I was just wondering when you look at exiting kind of going forward, what your mix of hammer would be that by exabyte or units.

Dave Mosley: I'm just wondering, what do you think these opportunities will really start to ramp and any idea of the magnitude of these opportunities in terms of sales for next year? Yeah, Mark, I think it's really hard to quantify just yet, but, you know, there's a lot of stuff going on in, I'll say, big data around AI. You know, you've got people pointing chief data officers now to be able to track, where is the data?

Calendar 'twenty four you said yeah yeah.

Yeah, I don't think we guide so finding time precisely answer that makes yes, we're not going to guide that but I will say that we will be very aggressive when we talked about.

Four terabytes per disc and cost optimization of these platforms and things like that I mean, this is something the hard drive industry has been doing for years and years and years decades right. So we know how to do these transitions very we're very confident in the technology and we will look to be very aggressive there. The wafer lead times are also quite long.

Dave Mosley: What's its value? You know, might we want to retain that just in case that we end up with some tools that are, you know, allowing us to monetize it or understand more about our process, you know, so on and so forth, the customer base, the factories. So my personal opinion is we're in the early innings of a move from throwing data away to keeping some of it longer term, you know, for, for, you know, the benefits of the corporations.

So we're already starting on this journey, because we're already in wafer and so populated.

Populating the wafer fabs with with the parts that will support it.

Got it and then on the on the near line side obviously.

The the shipment ex regiments have come down quite a bit.

As you look at the Green shoots some data center coming back.

Dave Mosley: And, and I do think that a lot of that will be edge. I don't think all of it will end up in the cloud. I think a lot of it will actually be on the edge. And so this is something we're tracking very carefully. I don't think it's really manifested itself just yet. I think people are using some of the new application capabilities that are being branded AI applications to get to know them and understand them.

Do you feel pretty comfortable given what the what the inventory levels started the Oems and what you see in terms of it had been on the spin how would you characterize that.

You look at those two things.

Yes, I do think that the inventory has been depleted now to levels that if you think about the complexity of all the data centers of the world and how much material needs to be parked out of them in front of them for replacement and then and then what the data growth is in the data center I think the inventory levels have come down to a point, where we feel comfortable now that people are going to get back to more.

Dave Mosley: And I certainly like things like generative AI, which I believe is kind of a new user interface, if you will, that allow the applications to be used much more efficiently and maybe queries to be made of these applications much more efficiently. But I think we're still in the early innings and I think once, once it does latch, we're going to know that data and the longevity of that data and the integrity of that data is all critical. And so I think that's good.

Predictable buying patterns.

Thank you.

<unk>.

This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.

Thanks, Ed.

As you heard today Seagate remains focused on our key priorities, including executing our leading technology roadmap, which we believe positions us well.

Well to enhance profitability over the near term and to capture long term opportunities for mass capacity storage I'll close by once again thanking all of our shareholders for their ongoing support of Seagate. Thanks for joining us today, and we look forward to speaking with.

Unknown Executive: Rakesh Rakesh Rakesh Rakesh Rakesh Rakesh Quickens, we will get there as quickly as we possibly can. So, you know, we understand what the recipe is and we understand what's needed to make the recipe really well and we'll spend accordingly. Thank you.

With you during the quarter.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

[music].

Vijay Rakesh: The last question will come from Vijay Rakesh of Mizuhau, please go ahead, of these platforms and things like that.

Dave Mosley: I mean, this is something the hard drive industry has been doing for years and years and years and years decades. Right. So we know how to do these transitions. We're very confident in technology and we'll look to be very aggressive there. The wafer lead times are also quite long. So, you know, we're already starting on this journey because we're already in wafer and so we're, you know, populating the wafer fabs with the parts that will support it.

Dave Mosley: Got it. And then on the, on the near line side, obviously, you know, the shipment, experiments have come down quite a bit. As you look at the green shoots with some data center coming back, you feel pretty comfortable, given what the, what the inventory levels are at the OEMs and, you know, what you see in terms of a return on the spend. How would you characterize that if you look at those two?

Dave Mosley: Thanks. Yes, I do think that the inventory has been depleted now to levels that if you think about the complexity of all the data centers of the world and how much material needs to be parked out of them in front of them for replacements and then what the data growth is in the data center. I think the inventory levels have come down to a point where we feel comfortable now that people are going to get back to more predictable buying patterns. Thank you.

Shanye Hudson: This concludes our question and answer session. I would like to turn the conference back over in a management for any closing remarks. Thanks, Edward. As you heard today, C-gate remains focused on our key priorities, including executing our leading technology roadmap, which we believe positions us to well to enhance profitability over the near term and to capture long term opportunities for mask capacity storage. I'll close by once again thanking all of our shareholders for their ongoing support of C-gate. Thanks for joining us today and we look forward to speaking with you during the quarter.

Unknown Executive: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect. Thank you.