Q2 2024 Seagate Technology PLC Earnings Call

Operator: Welcome to Technology, fiscal second quarter. North, NASA, I'd like to turn the conference over to you. Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and the detailed supplemental information for our December quarter results on the investors section of our website. During today's call, we'll 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 8K. We have not reconciled certain non-GAAP 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 GAAP measures is not available without unreasonable effort.

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 the information available to us as of today and should not be relied upon as of any subsequent date. However, actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. 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 in the Investors section of our website. As always, following our prepared remarks, we'll open the call for questions. I'm going to turn the call over to Dave for his opening remarks. Thanks, Shaney, and hello, everyone.

William David Mosley: First, I am going to focus on two key topics in my remarks today. First, we delivered solid fiscal second-quarter results, with revenue at the midpoint of our guidance and non-GAAP earnings of 12 cents per share exceeding the upper end of our guided range. And second, last week, we marked a major inflection point in mass capacity storage with the launch of our groundbreaking Mosaic platform. Mosaic is intentionally named to describe the fusion of innovative technologies, including Seagate's unique implementation of HAMR, that collectively enable us to extend our aerial density leadership.

Unknown Executive: Welcome to the C.A. Technology Fiscal Second Quarter 2024 Conference Call. All participants will be in listening mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star than one on your telephone keypad. To enjoy your question please press star than two. Please note this event is being recorded.

William David Mosley: As we shared in the past, growing aerial density is the most efficient way to enable data center operators to scale mass capacity storage, to lower their TCO, and to advance their sustainability targets. I'll discuss the platform in more detail shortly and also share progress toward qualification and volume ramp of our first HAMR-based Mosaic product, which lays the foundation for products boasting 5TB per disk and beyond. Let me start by highlighting our fiscal Q2 performance. Revenue of $1.56 billion was led by sequentially improving cloud near-line demand and a seasonal uptick in consumer drive, offset partially by the decline in VIA sales that we anticipated. Strong cost discipline and execution on pricing adjustments resulted in non-GAAP operating income tripling quarter over quarter and increasing roughly 17% year over year despite lower revenue levels. These performance and demand trends affirm our expectation for the September quarter to be the bottom of this prolonged down cycle.

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

Shayne Hudson: Hello everyone and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings fresh release and the detailed supplemental information for our December quarter results on the investor section of our website. During today's call we'll refer to Gap Measures. Non-Gap figures are reconciled to Gap figures in the earnings pressure release posted on our website and included in our form 8K.

Shayne Hudson: We have 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 a reconciliation to the corresponding Gap measures is not available without unreasonable efforts.

Shayne 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 the 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, uncertainties, and other factors that may affect our future business results please refer to the press release issue today and our SEC filings including our most recent annual report on form 10K and quarterly report on form 10QQ as well as the supplemental information all of which may be found in the investor section of our website. As always following our prepared remarks we'll open the call for questions.

William David Mosley: The enhanced discipline we've built into the business, including strict cost controls, management of supply, and strengthening of our balance sheet, gives us an excellent foundation to build on as we move into a broader recovery. Additionally, execution of our product roadmap is expected to structurally improve profitability and return us to our targeted financial model, which supports healthier industry economics. We enter calendar 2024 with increased confidence in our non-gap gross margin trajectory, including our ability to reclaim a 30% minimum benchmark level at quarterly revenues that are at least 20% below our prior cyclical peak. From a demand standpoint, gradual recovery within the U.S. cloud market has started to take shape, reflecting solid progress in consuming excess inventory, along with more stable end market behavior. Enterprise OEM demand trends have also stabilized within the U.S. market.

Dave Mosley: I'll turn the call over today before it ends up in remarks. Thanks Shady and hello everyone.

Dave Mosley: I am going to focus on two key topics in my remarks today. First we delivered solid fiscal second quarter results with revenue at the midpoint of our guidance and non-Gap earnings of 12 cents per share exceeding the upper end of our guided range. And second last week we marked the major inflection point in mass capacity storage with the launch of our groundbreaking mosaic platform. Mosaic is intentionally named to describe the fusion of innovative technologies including C-Gate's unique implementation of hammer that collectively enable us to extend our aerial density leadership.

William David Mosley: Customer feedback still points to macro-related concerns, although IT hardware budgets are projected to modestly improve in calendar 2024, and traditional server growth is expected to resume. Trends that support incremental HCD demand growth in the calendar year. We were also encouraged to see incremental demand among certain non-U.S. cloud and enterprise customers in the December quarter. Across the broader Chinese markets, we project a relatively slower pace of recovery given the ongoing economic challenges within the region.

Dave Mosley: As we shared in the past growing aerial density is the most efficient way to enable data center operators to scale mass capacity storage to lower their TCO and to advance their sustainability targets. I'll discuss the platform in more details shortly and also share progress toward qualification and volume ramp of our first hammer based mosaic product, which lays the foundation for products posting five terabytes per disk and beyond. Let me start by highlighting our fiscal Q2 performance.

William David Mosley: However, some local governments announced further steps to support the region's economy, which our customers believe will bolster local demand across mass capacity markets in China in the second half of the calendar year. These efforts support our view for demand in the via markets to pick up sometime after the Lunar New Year. Against the dynamic market environment, Seagate has continued to execute on a mass-capacity product portfolio that further advances our technology leadership and serves the breadth of our customers' unique workload requirements while also supporting our objective of improving profitability. I'll outline the execution path for our latest product launches and the relevance of the new platform, and then share how we believe our mass-capacity solutions deliver economic value both to our customers and to Seagate.

Dave Mosley: Revenue of $1.56 billion was led by sequentially improving cloud near-line demand and a seasonal uptick in consumer drives, offset partially by the decline in via sales that we anticipated. Strong cost discipline and execution on pricing adjustments resulted in non-gap operating income tripling quarter over quarter and increasing roughly 17% year over year despite lower revenue levels.

Dave Mosley: These performance and demand trends affirm our expectation for the September quarter to be the bottom of this prolonged down cycle. The enhanced discipline we've built into the business including strict cost controls, management of supply, and strengthening the overall balance sheet gives us an excellent foundation to build on as we move into a broader recovery. Additionally, execution of our product roadmap is expected to structurally improve profitability and return us to our targeted financial model which supports healthier industry economics.

William David Mosley: Our product qualification and grant plans are on track with what we've been articulating over the past several quarters. We began shipping initial volumes of our 24-terabyte CMR and 28-terabyte SMR drives in the December quarter. Customer reception has been positive, as illustrated by the numerous active qualifications underway across multiple cloud and enterprise customers. Our 3 plus terabyte per disk product is the first major release of the HAMR-based Mosaic platform.

William David Mosley: And we are rapidly nearing qualification completion with our initial Hyperscale launch partner. Qualification has gone very well, and we are working with this customer, at their request, to fully transition future Seagate demand to the 3 plus terabyte per disk platform. Volume ramp-up is starting in the March quarter according to plan, with a goal to ship about 1 million units in the first half of this calendar year. We then expect to continue to ramp through the balance of the calendar year, and we are currently broadening our customer engagement. Based on their planned timelines, we expect to complete qualifications with a majority of U.S. hyperscalers and a couple global cloud customers during calendar 2024. Starting at three terabytes per disk, Mosaic delivers a quantum leap forward in aerial density innovation, with a well-defined path that extends to five terabytes per disk and beyond. This transformative platform is the culmination of decades of development and numerous technologies pioneered by Seagate, including our Super Lattice Platinum Alloy Media that enables higher bit density, the revolutionary plasmonic writer with integrated laser, capable of reliably writing each bit, and Advanced Reader Technology that boasts one of the world's smallest reading centers.

Dave Mosley: We enter calendar 2024 with increased confidence in our non-gap gross margin trajectory including our ability to reclaim 30% minimum benchmark level at quarterly revenues that are at least 20% below our prior cyclical peak. From a demand standpoint, gradual recovery within the US cloud market has started to take shape, reflecting solid progress in consuming excess inventory along with more stable end market behavior. Enterprise OEM demand trends have also stabilized within the US markets.

Dave Mosley: Customer feedback still points to macro-related concerns although IP hardware budgets are projected to modestly improve in calendar 2024 and traditional server growth is expected to resume trends that support incremental HDD demand growth in the calendar year. We were also encouraged to see incremental demand among certain non-US cloud and enterprise customers in December quarter. Across the broader China markets, we project a relatively slower pace of recovery given the ongoing economic challenges within the region.

Dave Mosley: However, some local governments announce further steps to support their region's economy which our customers believe will bolster local demand across mass capacity markets in China in the second half of the calendar year. These efforts support our view for demand in the via markets to pick up sometime after the lunar new year. Against the dynamic market environment, CEO has continued to execute on a mass capacity product portfolio that further advances our technology leadership and serves the breadth of our customers' unique workload requirements while also supporting our objective of improving profitability.

William David Mosley: While Mosaic represents groundbreaking technology, the platform is fully plug-and-play with existing conventional drives and addresses the breadth of our customers' mass capacity workloads. These drives can also be deployed with SMR technologies for the few customers able to integrate SMR to take advantage of the additional capacity gain. As I noted earlier, aerial density gains are the most efficient way to scale storage capacity. Let me offer a few clear examples.

William David Mosley: First, as we execute our product roadmap, we can deliver increasingly higher-capacity drives with minimal changes to the bill of materials. This results in a better TCO value proposition for our customers and attractive economics for Seagate. Second, as we scale aerial density to four terabytes per disk, this enables extremely cost-effective product offerings in the low to mid-range capacity points used by a majority of our enterprise VN-NAS customers. With four terabytes per disk, we use half the number of heads and disks to produce a 20 terabyte drive.

Dave Mosley: I'll outline the execution path for our latest product launches and the relevance of the new platform and then share how we believe our mass capacity solutions deliver economic value both to our customers and a C-gate. Our product qualification and ramp plans are on track with what we've been articulating over the past several quarters. Readers.

Dave Mosley: We began shipping initial volumes of our 24 terabyte, CMR, 28 terabyte, SMR drives in the December quarter. Customer reception has been positive, as illustrated by the numerous active qualifications underway across multiple cloud and enterprise customers. Our 3-plus terabyte predict product is the first major release of the hammer-based mosaic platform, and we are rapidly nearing qual completion with our initial high-first skill launch partner. The qual has gone very well, and we are working with this customer at their request to fully transition future Seagate demand to the 3-plus terabyte predict platform.

William David Mosley: Prototypes are already working in our labs, with revenue planned for the second half of calendar 2025. As we ramp production to expand to other end markets, we gain tremendous manufacturing efficiencies, adding to the attractive margin opportunities that I just described. We continue to build on our technology and operational innovations with each successive product generation. For example, we are executing plans to vertically integrate the laser manufacturing process, which enhances supply flexibility, provides greater control of the technology, and provides opportunities to lower production costs.

Dave Mosley: Volume ramp is starting in the March quarter according to plan, with a goal to ship about 1 million units in the first half of this calendar year. We then expect to continue to ramp through the balance of the calendar year, and we are currently broadening our customer engagement. Based on their plan timelines, we expect to complete qualifications with a majority of U.S, hyper-scalers, and a couple global cloud customers during calendar 2024.

William David Mosley: Collectively, we believe these actions underpin our mass capacity cost reduction roadmap while also providing a very strong TCO story for a broad range of customers. While TCO remains the key driver for mass capacity storage, data center operators are also focused on power and space consumption, particularly as investments in compute-intensive infrastructure proliferate to support generative AI applications. For context, the latest AI GPUs consume up to 700 watts, which is roughly 100 times more power than a hard drive operating at maximum performance.

Dave Mosley: Starting at 3 terabytes for disk, mosaic delivers a quantum leap forward in aerial density innovation, with a well-defined path that extends to 5 terabytes for disk and beyond. This transformative platform is the culmination of decades of development and numerous technologies pioneered by Seagate, including our super lattice platinum alloy media that enables higher bit density. The revolutionary cloud's monocrider with integrated laser capable of reliably riding each bed, and an advanced reader technology that boasts one of the world's smallest reading sensors.

William David Mosley: Our products can help data center operators store more exabytes using less power and space. To quantify this, a single 32-terabyte Mosaic drive can replace three 10-terabyte drives, storing more capacity at one-third of the power input. TCO and sustainability gains of this magnitude are decision-altering when designing a new data center and offer a highly economical path to modernizing existing infrastructure. We believe that this dynamic can potentially accelerate the replacement cycle. As we move into the early stages of demand recovery, Seagate's strong focus on maintaining our product and technology roadmap through this path-down cycle positioned us to return to profitable growth and address data center operators' most important challenges, cost, power, and space. We believe we've got the right product at the right time heading into a gradual recovery of mass capacity. With that said, Gianluca will now cover details on our financial performance and outlook. Thank you, Dave.

Dave Mosley: While mosaic represents groundbreaking technology, the platform is fully plug and play with existing conventional drives, and addresses the breadth of our customer's mass capacity workloads. These drives can also be deployed with SMR technologies for the few customers that integrate SMR to take advantage of the additional capacity gains. As I noted earlier, aerial density gains are the most efficient way to scale storage capacity. Let me offer a few clear examples.

Dave Mosley: First, as we execute our product roadmap, we can deliver increasingly higher capacity drives with minimal changes to the bill materials. This results in a better TCO value proposition for our customers and attractive economics for Seagate. Second, as we scale aerial density to 4 terabytes per disk, this enables extremely cost-effective product offerings in the low to mid-range capacity points used by a majority of our enterprise via NAS customers. With 4 terabytes per disk, we use half the number of heads and disks to produce a 20 terabyte drive. Prototypes are already working in our labs with revenue planned for the second half of calendar 2025.

Gianluca Romano: Seagate's December quarter financial result reflects solid operational execution. Revenue was $1.56 billion, up 7% quarter over quarter, non-GAAP operating income more than tripled sequentially to $127 million, leading to non-GAAP operating margin expanding to 8.2% of revenue, up 540 basis points quarter over quarter, and Nongar BPS was 12 cents, improving 34 cents sequentially and exceeding the high end of our original guidance frame, reflecting both improving demand As these trends continue, we expect our results to improve and reach the target financial model over time. For example, within our Artist Drive business, extra buy shipments grew 6% sequentially to 95, with revenue growing 7% to $1.4 billion.

Dave Mosley: As we ramp production to expand to other end markets, we gain tremendous manufacturing efficiencies. Adding to the attractive margin opportunities that I just described, we continue to build on our technology and operational innovations with each successive product generation. For example, we are executing plans to vertically integrate the laser manufacturing process, which enhances supply flexibility, provides greater control of the technology, and provides opportunities to lower production costs. Strasst.

Dave Mosley: Collectively, we believe these actions underpin our math capacity cost reduction roadmap while also providing a very strong TCO story for a broad range of customers. While TCO remains a key driver from math capacity storage, data center operators are also focused on power and space consumption, particularly as investments in compute intensive infrastructure proliferates to support generative AI applications. For context, the latest AIGPUs consume up to 700 watts, which is roughly a hundred times more power intensive than a hard drive operating at maximum performance.

Gianluca Romano: Revenue performance was mainly driven by the expected improvement in cloud customer demand along with seasonal improvement in the consumer market. Within the mass-capacity markets, revenue increased 4% sequentially to $1.1 billion, driven mainly by strong near-line cloud demand, offsetting the expected decline in the VIA market. Mass capacity shipments totaled 83 exabytes, compared with 79 exabytes in the September quarter.

Gianluca Romano: Mass Capacity Achievement at a percent of total HDD exabyte was 87%, which is comparable to the title quarter's 88%. For an airline product, shipments of 65 exabytes were up quarter over quarter from 56 exabytes. Average capacity per near-line drive continues to increase sequentially, replacing modest demand improvement among both US cloud customers and Chinese cloud customers. We believe that inventory among many CSP customers is reaching more normalized levels and anticipates continuing near-line demand improvement in the March quarter and beyond. P.M. market revenue was down sequentially in the December quarter, consistent with our expectations.

Dave Mosley: Our products can help data center operators store more exabytes using less power and space. To quantify this, a single 32 terabyte mosaic drive can replace three 10 terabyte drives storing more capacity at one third of the power input. TCO and sustainability gains of this magnitude are decision altering when architecting a new data center and offer a highly economical path to modernizing existing infrastructure. We believe that this dynamic can potentially accelerate the replacement cycle.

Dave Mosley: As we move into the early stages of demand recovery, Seagate's strong focus on maintaining our product and technology roadmap through this path down cycle, position us to return to profitable growth and address data center operators most important challenges cost power and space. We believe we've got the right product at the right time heading into a gradual recovering mass capacity market.

Gianluca Romano: Looking ahead, we expect VIA to reflect more typical seasonal patterns through calendar 2024, with the March quarter representing the low point. Legacy product revenue was $324 million, up from $278 million in the private quarter, driven by higher seasonal demand in the consumer market. We expect the legacy market to be sequentially lower in the March quarter following typical consumer demand trends post-holiday season. Finally, revenue for our non-HCG business increased to $171 million, compared with $159 million last quarter, primarily driven by improved SSD demand. Moving on to the rest of the income statement, non-GAAP gross profits increased sequentially by roughly $80 million in the December quarter to $367 million, ahead of our original expectation. Long-term gross margin of 23.6% expanded nearly 400 basis points compared to the previous quarter, due in part to pricing adjustments and cost savings from earlier restructuring activities, as well as lower underutilization costs, which were about $40 million, consistent with our view of ongoing demand recovery. However, we expect underutilization costs to marginally increase for the next couple of quarters as we transition some of our production line to mosaics, accounting for which admin.

Gianluca Romano: With that, John Luka will now cover details on our financial performance and outlook. Thank you, Dave.

Gianluca Romano: Seagate December quarter financial results reflect solid operational execution. Revenue was $1.56 billion, up 7% quarter of a quarter. Non-gap operating income, more than 3% sequentially, to $127 million, leading to non-gap operating margin, expanding to 8.2% of revenue, up 540 basis points quarter over quarter. And non-gap EPS was 12 cents, improving 34 cents sequentially and exceeding the high end of our original guidance range. Reflecting both improving demand trends and our focus on profitability. As these trends continue, we expect our results to improve and reach the target financial model over time.

Gianluca Romano: Within our hard-distance business, extra-by-sheetment grew 6% sequentially to 95, with revenue grown 7% to $1.4 billion. Revenue performance was mainly driven by the expected improvement in cloud customer demand, along with seasonal improvement in the consumer market. Within the mass capacity market, revenue increased 4% sequentially to $1.1 billion, driven mainly by strong, near-line cloud demand of setting the expected decline in the VM market. Mass-capacity shipment total 83 exabyte, compared with 79 exabytes in the September quarter. Mass-capacity shipment, as a percent of total HDD exabyte, was 87%, which is comparable to the prior quarter 88%. For an airline product, she met of 65 Xabytes, Muraf Kortrowel Korter, from 56 Xabytes.

Gianluca Romano: We still expect to see margin expansion every quarter in calendar 2024, as near-length demand continues to improve gradually, and we ramp up our latest products along with continued execution of price adjustments across the entire portfolio. Non-GAAP operating expenses totaled $240 million, down from $248 million in the September quarter and reflecting ongoing spending optimization with the benefit of diligent expense management and higher margins. Chelsea Libida improved more than 50% sequentially to $216 million. Non-GAAP net income turned positive in the December quarter, resulting in non-GAAP EPS of $0.12 per share, based on a dutied share count of approximately 211 million shares and a tax expense of $17 million. Moving on to cash flow and the balance sheet, in the December quarter, we had inventory flat at just below $1.1 billion. Capital expenditures were also pledged sequentially at $70 million. A majority of planned capital expenditures were completed in the first half of Fiscal 24.

Gianluca Romano: Average capacity for an airline price, continues to increase sequentially, replacing modest demand improvement, among both U.S, cloud customers and China cloud customers. We believe that inventory among many CSP customers is reaching more normalized levels, and anticipates continuing near-line demand improvement in the Mars quarter and beyond. Via market revenue was down sequentially in the December quarter, consistent with our expectations. Looking ahead, we expect via to reflect more typical seasonal patterns through calendar 2024, with the Mars quarter representing the low point.

Gianluca Romano: Legacy product revenue was $324 million, up from $278 million in the prior quarter. Given by higher seasonal demand in the consumer market, we expect the legacy market to be sequentially lower in the Mars quarter, following typical consumer demand trends host all the decision. Finally, revenue for our known HZ business increased to $171 million, compared with $159 million last quarter, primarily driven by improved SSD demand. Moving on to the rest of the income statement, known gap growth profit increased sequentially by roughly $80 million in the December quarter to $367 million higher than our original expectation.

Gianluca Romano: Consistent with prior commentary, we still expect Fiscal 24 capex to be down significantly compared with Fiscal 23. Also, while still sufficient to support our innovation, we went further. We generated about $100 million in free cash and returned $146 million to shareholders through their quarterly dividends, exiting the quarter with 210 million shares outstanding. We closed the December quarter with $2.3 billion in available liquidity, including our under-owner evolving credit facility. Our debt balance was $5.7 billion at the end of the December quarter, with more than 90% of our long-term debt obligation beyond three years. Non-GAAP interest expense was flat quarter over quarter at $84 million, and we project a similar expense level in the March quarter.

Gianluca Romano: Long gap growth margin of 23.6% expanded nearly 400 basis points, compared to the previous quarter. Given part to pricing adjustment and cost saving from earlier the structural activities, as well as lower under-utilization costs, which were about $40 million, consistent with our view for ongoing demand recovery. However, we expect under-utilization costs to margin increase for the next couple of quarters, as we transition some of our production line to mosaic.

Gianluca Romano: Turning to our, we expect incremental improvement in mass capacity demand from both cloud and enterprise customers to more than offset seasonal related decline in VIA and the legacy market. With that as a context, March quarter revenue is expected to be in the range of $1.65 billion plus or minus $150 million, an increase of 6% sequentially at the midpoint. We are planning for non-GAAP operating expenses of approximately $260 million, as our temporary pay reduction ended late in the December quarter. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to expand to the low double-digit percentage range, including underutilization costs of approximately $50 million. We expect our Nunga PPS to be $0.25, plus or minus $0.20, based on a diluted share count of approximately 212 million shares and a non-GAAP tax expense of $27 million. I will now turn the call back to Dave for final comments. Thanks, Gianluca.

Gianluca Romano: Accounting for this event, we still expect to see margin expansion every quarter in kind of 2024, as near-length demand continuing to improve gradually, and we ramp our latest products along with continuing execution of price adjustment across the entire portfolio. Non-gap operating expenses totaled $240 million, down from $248 million in the September quarter, and reflecting ongoing spending optimization. With the benefit of dirigent expense management and higher margins, adjusted EBITDA improves more than 50% sequentially to $216 million.

Gianluca Romano: Non-gap net income turned positive in the December quarter, resulting in non-gap EPS of 12 cents per share, based on due to share count of approximately 111 million shares and taxes spent of $17 million. Moving on to cash flow and the balance sheet, in the December quarter, we had inventory flat at just below $1.1 billion. Capital expenditure were also flat sequentially at $70 million. A majority of planned capital expenditure were completed in the first half of fiscal 24. Charles, Consistence with Tire Commentary, we still expect fiscal 24 topics to be down significantly, compared with fiscal 23, also still sufficient to support our innovation driven product development.

William David Mosley: Heading into calendar 2024, we have increased confidence in a gradual nearline demand recovery that coincides with the launch of MOSAIC. We believe this platform delivers sustainable aerial density leadership with compelling TCO advantages, enabling data center operators to satisfy their increasing workload demands while conserving both power and space. This combination of capabilities is significant, and our timing is fortuitous. We've navigated the last seven quarters with discipline and focus while maintaining our product and technology execution plan. As a result, we are well-positioned to drive optimized financial performance to support our capital return commitments and return to our targeted profitability levels over time. Our strong execution is only possible through the tremendous efforts of our global team, and I would like to thank them for their resiliency and dedication through this dynamic period. I would also like to thank our suppliers, customers, and shareholders for your ongoing support of Seagate. Operator, let's open up the call for questions. Thank you. We will now begin the question and answer session. If you ask a question, you may press star then one on your...

Gianluca Romano: We generated about $100 million in free cash flow, and returned $146 million to shareholders through the quarterly dividend, exiting the quarter with 210 million shares of spending. We closed the December quarter with $2.3 billion in available liquidity, including our unruhner vaulting credit facility. Our debt balance was $5.7 billion at the end of December quarter, with more than 90% of our loan term debt obligation beyond three years. Non-gap interest expense were a flat quarter of a quarter at $84 million, and we project similar expense levels in the March quarter.

Operator: These are the speakers. Please like, comment, and subscribe! And take a cup of your hand sand before. To draw your question, please press the star... Next time, we ask that you limit yourself to one question. If you have further questions, please feel free to reach out to me. Thank you. You may re-enter the question.

Gianluca Romano: Turning to our outlook. We expect incremental improvement in market capacity demand from both cloud and enterprise customers, to more than offset seasonal related decline in via and the legacy markets. With better the context, March quarter revenue is expected to be in a range of $1.65 billion plus or minus $150 million, an increase of 6% sequentially at the midpoint. We are planning for non-gap operating expenses of approximately $160 million, as our temporary pay reduction ended late in the December quarter.

Operator: Once again, that was a starter than one to ask. Next time, we will pause momentarily. Today's first question comes from Wamsi Mohan with BMS. Yes, thank you so much.

Wamsi Mohan: Dave, you alluded to the progress that you've made on Mosaic. Given what you know now, how would you characterize the outlook for HAMR units in the second half of 24, perhaps into 25? And I think you mentioned your first customer looking to transition to 3TB HAMR. What kind of exabyte install-based opportunity is that? And maybe you could address it even more broadly across hyperscalers. That'd be great. Yeah, thanks, Wamsi. Hi.

Gianluca Romano: At the midpoint of our revenue guidance, we expect non-gap operating margin to expand to the low double digit percentage range, including under utilization cost of approximately $50 million. We expect our non-gap EPS to be 25 cents plus or minus $20 cents, based on its limited share count of approximately $212 million shares, and a non-gap tax assistance of $27 million.

William David Mosley: So we were very quantitative and prescriptive on the last call about the front half of this year. I think we won't be as much on the back half of this year, but the ramp is continuing on at a healthy pace. And we're continuing to look at all what customers need on the last generation platform and the next generation platform, trying to balance supply and demand really well. I think that's the primary metric that we're focused on. Make sure we get financial predictability. We'll drive the HAMR transition aggressively this year. And then Mosaic really gets into when we get to four terabytes of platters, and how are we populating that chain?

Dave Mosley: Are we not going to go back to Dave for final comments? Thank you, Shalmuga. Heading into calendar 2024, we have increased confidence in a gradual near-line demand recovery that coincides with a launch of Mosaic. We believe this platform delivers sustainable aerial density leadership with compelling TCO advantages, enabling data center operators to satisfy their increasing workload demands while conserving both power and space. This combination of capabilities is significant and our timing is fortuitous.

William David Mosley: I mean, we expect to drive as many HAMR X bytes into 2025 as we can. So, you know, we're off to a good start, I think, and we're going up the ramp and trying to work the yields and get everybody qualified like we talked about. Nothing really changed in the last 90 days, I would say. Problems are tough problems, but the team's knocking them down.

Dave Mosley: We've navigated the last seven quarters with discipline and focus while maintaining our product and technology execution plans. As a result, we emerge well-positioned to drive optimized financial performance to support our capital return commitments and return to our targeted profitability levels over time. Our strong execution is only possible through the tremendous efforts of our global team, and I would like to thank them for their resiliency and dedication through this dynamic period. I would also like to thank our suppliers, customers, and shareholders for your ongoing support of C-gate operator.

Gianluca Romano: So I'm pretty happy with that. Okay, thank you for that. And Gianluca, could you help us just think about...

Gianluca Romano: The margin ramp, I think you noted some headwinds that will continue from underutilization charges, but you're also expecting margins to increase all through calendar 24. Could you maybe also help us think through in that margin commentary how what the margin differential is between HAMR and PMR mass capacity drives and how that might change? Hi Wamsi.

Unknown Executive: Let's open up the call for questions. Thank you.

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Gianluca Romano: Yeah, good question. Well, first of all, our December quarter showed a good improvement in profitability or gross margin, up about 4%. Operating margin was up more than 5%. So, with profitability recovery already started, part of that is, of course, coming from all the cost actions that we have taken in the last almost two years, and of course, the mix improvement, and of course, the pricing action also that we have taken in the last several quarters. So this will continue to be reflected also in the future quarters, meaning we continue to go to more mass capacity, volume, and those cost functions, which, of course, continue to be very effective. In terms of underutilization, it depends a little bit on what we ramp up during the quarter.

Wamsi Mohan: And today's first question comes from Wamsi Mohan with B of A. Please go ahead.

Wamsi Mohan: Yes, thank you so much. Dave, you alluded to the progress that you've made on on Mosaic. Give it what you know now.

Wamsi Mohan: How would you characterize the outlook for maybe HAMR units in the second half of 24, perhaps into 25? And I think you mentioned your first customer looking to transition to three terabyte HAMR. What kind of exabyte install base opportunity is that?

Dave Mosley: And maybe you could address it even more broadly across hyperscalers. That would be very helpful. Thank you. Yeah, thanks, Wamsi. Hi.

Gianluca Romano: In the December quarter, we ramped up a little bit more of the wafers, but of course, as you know, high cost in our manufacturing to get ready for now the shipment of the current quarter and next quarter in terms of HAMR. And then we can maybe reduce a little bit the wafer and ramp up more on the media and, of course, have more drive in the final test. So depending a little bit on the mix inside our production, we said underutilization charges could be slightly higher, a little bit higher, but not very much higher, just a little bit higher.

Gianluca Romano: So we were very quantitative and prescriptive on the last call about the front half of this year. I think we won't be as much on the back half of this year, but the ramp is continuing on at a healthy pace. And we're continuing to look at all customers need on last-generation platform, next-generation platform, trying to balance supply and demand really well. I think that's the primary metric that we're focused on. Make sure we get financial predictability.

Gianluca Romano: We'll drive the HAMR transition aggressively this year. And then Bosaic really gets into, when do we get the four terabytes of platter and how are we populating that chain? I mean, we expect to drive as many HAMR exabytes into 2025 as we can. So we're off to good start, I think, and we're going at the ramp and trying to work the yields and get everybody qualified like we talked about. Nothing really changed in the last 90 days, I would say. Problems are tough problems, but the team's not going to be down, so I'm pretty happy with that. Okay, thank you for that.

Gianluca Romano: So I expect that for the next few quarters, NICs going in the right direction, meaning more high-capacity drives and starting to see the impact from some volume of MS. So March will not be particularly high volume, but we will have more in June. And as Dave said, we will have even more into the second part of the calendar here.

Gianluca Romano: With business improving, demand improving, we go into possibly higher revenue, and we are, of course, targeting... to bring back our gross margin into the target range of 30 to 33 percent. As we said in the prior quarter, that is a much lower level of revenue compared to the prior apps. Thank you. And our next question today comes from Erik Woodring with... Have a very good afternoon, guys. Dave, I was wondering if you could just double click again on some of the dynamics behind the hyperscalers. How long?

Gianluca Romano: And Jean-Luc, could you help us just think about the margin ramp? I think you noted some headwind that will continue from underutilization charges, but you're also expecting the margins to increase all through calendar 24. Could you maybe also help us think through in that margin commentary? How, what the margin differential is between HAMR and EMR mass capacity drives and how that might change over time? Thank you so much.

Gianluca Romano: I want to see. Yeah, good question. Well, first of all, our December quarter showed a good improvement in profitability or gross margin walls. Up about 4%, operating margin was at more than 5%. So I'll say this profitability recovery already started. Part of it is, of course, coming from all the cost actions that we have taken in the last almost two years, and of course it makes improvement and of course the rising action also that we have taken in the last several quarters.

Erik William Richard Woodring: or whatever, and then, again, how they're responding to any pricing at, Production or relative. Yeah, the dynamics for them are very interesting, and they have affected us quite a bit over the last year or so. I do think the inventory situation is much, much better than it was six months ago. So, I'll dare say it's basically cleaned up at this point.

Gianluca Romano: So this will continue to be reflected also in the future quarters. During the quarter, in the December quarter we granted it a bit more of the waivers, but of course as I know I cost in our manufacturing to get ready for now the achievement of the current quarter and next quarter in terms of hammer. And then now we can maybe reduce it to be the waiver and rent more on the media and of course having more driving the final test.

William David Mosley: And, you know, what's going into the inventory change is going out and being consumed by the data centers again. So, we're much happier with that. The rate of consumption isn't what it was two years ago, but I do think it's going to accelerate a little bit. And, you know, this is where we get into the forecast numbers of what the kegger is, the exabyte kegger. You know, in 2020, we were in the high 50s, and then we stayed in the 30s for 2021 and 2022.

William David Mosley: And then, you know, for the first time ever, for the last year, year and a half, we've seen negative, you know, exerbite growth, which doesn't make any sense. We're forecasting still in the mid 20s right now. And it may be a little bit higher as people get into some of these replacement cycles that we talked about. The interesting dynamic, as I look back on the last year and a half, was the push for AI and how it consumed a lot of compute dollars for the compute infrastructure that was going on in the data centers. And that's critical for most of our customers. They have been in a race to get as much compute memory for that compute online as they can to be able to handle all these AI applications that everyone's talking about.

Gianluca Romano: So depending a bit of the mix inside our production, so we said under the position charges could be slightly higher, a little bit higher, but not very much higher, a little bit higher. So I expect for the next few quarters to see no mix going in the right direction, meaning more high capacity drive and starting to see the impact from some volume of hammer. So March will not be no particularly high volume, but we will have more in June and as they said, we will have even more into the second part of the calendar here with the business improving, demand improving, we going to now possibly higher revenue and we are of course targeting to bring back our gross margin into the target range of not 30 to 23%.

William David Mosley: I do think, ultimately, there's a data back-end piece of that. And then, also, there's the fact that, as they were prioritizing that, they were letting the drives that they had in the data centers just continue to run. So, there's the replacement cycle for power, and... We're definitely having those conversations with our customers and then factoring that into what exactly our volume plans are for the next three years and saying, this is what we're intending to build, this is the economics that you could get it through, and we've talked about this build to order before. And I think we're getting a lot of good reception; there are a lot of other supply And we have to be careful, of course, because the factories have been decimated by this downturn that we need to make sure that as we grow back, we grow back in a smart way. And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead.

Eric Woodring: As we said in the prior quarters, it is much lower level of revenue compared to the prior upside. Thank you and our next question today comes from Eric Woodring with Morgan Stanley, please go ahead. Thank you very much for taking my question. I was wondering if you could just double click again on some of the dynamics behind the hyperscalers and where their inventory is, how long you see any more pain or what their behavior is, what your conversations look like. And then again, how they're responding to any pricing actions and production changes that you've been making over the last relative to 90 days ago. Thank you.

Dave Mosley: Yeah, the dynamics for them is very interesting and it has affected us, you know, quite a bit over the last year. So I do think the inventory situation is much, much better than it was six months ago. So I'll dare say it's basically cleaned up at this point and you know what's going into the inventory change is going out and being consumed by the data centers again. So we're much happier with that.

Aaron Christopher Rakers: Yeah, thanks for taking the question. I wanted to maybe just ask about, you know, the income statement, just the P&L trajectory from here. You know, this guidance that you've given looks like it's the first kind of sequential increase in OPEX that we've seen, and I can appreciate, you know, improving fundamentals, etc. But I'm just curious, how do we think about the pace of quarterly OPEX and maybe a normalized level of operating expenses looking out over a couple quarters? And then kind of building off of that with free cash flow generation returning, just remind us again how you think about the capital structure and possibility of coming back into the market in terms of share repo. Thank you. Thank you, Aaron.

Dave Mosley: The rate of consumption isn't what it was two years ago. And but I do think it's going to accelerate a little bit. And you know, this is where we get into the forecast numbers of what the keger is, the exabyte keger. You know, in 2020, we were in the high 50s and then we stayed in the 30s for 2021 and 2022. And then, you know, for the first time ever for the last year, year and a half, we've seen negative, yeah, exabyte growth, which doesn't make any sense. We're forecasting still the mid 20s right now.

Dave Mosley: And it may, may be a little bit higher as people get into some of these replacement cycles that we talked about. You know, the The interesting dynamic as I was back on the last year and a half was the push for AI and how it consumed a lot of compute dollars for the compute infrastructure that was going on in the data centers. And that's critical for most of our customers. They have been a race to get as much compute memory for that compute online as they could to be able to.

Gianluca Romano: Well, in terms of OPEX, if you look, our trend has always been very positive in terms of OPEX control and cost control. Just a few quarters ago, we were at well above $300 million. So, we went fairly low, especially in the last quarter, at $240 million. As I said in the prepared remarks, we have a little bit of a higher cost expected in this quarter because we took some extraordinary action on salary that ended at the end of last quarter. So we have a little bit of higher labor costs. As usual, we will focus on OPEX control. It's still a very, very good number now, and I think in the next few quarters, we will stay around this level of OPEX until next fiscal year. As you know, in the current fiscal year, we don't have any variable compensation, overall in our COGS and OPEX, but a big part is in OPEX.

Dave Mosley: And all these AI applications that everyone's talking about. I do think ultimately there's a data back in piece of that. And then also there's a fact that they were as they were prioritizing that they were letting the drives that they had in the data centers just continue to run. So there's the replacement cycle for power and space and just overall cost benefits. We're all we're definitely having those conversations with our customers and the factoring that into what exactly our volume plans are for the next three years and saying, this is, you know, this is what we're intending to build.

Gianluca Romano: So, I think this level is probably reasonable for fiscal Q2 and fiscal Q4. And then next fiscal year, probably a little bit higher cost in all that. But still, I think well below $300 million, probably between $270 million and $280 million.

Dave Mosley: This is the economics that you could, you could get it through and we've talked about this bill door to before. And, you know, I think we're getting a lot of good reception. This is that there's a lot of other supply chains that are actually managed this way by these people. So they understand it fairly well and they see the TCO benefits of the higher capacity drive. So they want to reach for that planet well and they and they'll get it.

Gianluca Romano: It's probably a reasonable way to model it, using free cash flow. We had another positive free cash flow quarter. Of course, it is always very important for us to generate positive free cash flow. Revenue is increasing, profitability is increasing, and therefore, now, we expect free cash flow also to improve sequentially through the next few quarters. Thank you. And our next question today comes from Krish Sankar with TD Cal. Hey, guys, this is Eddie for Krish.

Dave Mosley: And we have to be careful, of course, because we, you know, the factories have been so decimated by this down. And we need to make sure that as we grow back, we grow back in a smart way.

Aaron Rakers: Super, thanks so much guys. I have a next question today, how some air and rakers with Wells Fargo. Please go ahead.

Gianluca Romano: Yeah, thanks for taking a question. I wanted to maybe just ask about, you know, the, the income statement, just the PNL trajectory from here. You know, this guidance that you've given looks like it's the first kind of sequential increase in op-ex that we've seen and I can appreciate, you know, improving fundamentals, etc. I'm just curious, how do we think about the pace of quarterly op-ex and maybe a normalized level of operating expenses looking out over a couple quarters and then kind of building off of that with free cash flow generation, returning just for minus again, how you think about the capital structure and possibility of coming back into the market in terms of share repo. Thank you.

Krish Sankar: Congratulations on the HAMR launch. It's an exciting opportunity for you guys. I have a question regarding the customer value you are providing with these 32 terabytes HAMR drives. Will customers be enjoying a lower price per terabyte versus 22 and 24 terabyte CMR drives, for example? Or, because HAMR yields haven't matured yet, this benefit will be more about power and space, and the lower price per terabyte will take place in the future. Yeah, well, it's a good question.

William David Mosley: We will balance everything, of course, you know, what our yields are and our costs are, and then try to get the customers incentivized. But there is some incentive that is provided by their power and space reductions as well. We call that their TCO proposition.

Gianluca Romano: Well, in terms of op-ex, no, if you look, our trend has always been very positive in terms of op-ex control, cost control, or just few quarters ago, we were at, no, well above 300 million dollars. So we went fairly low, especially in the last quarter, not 240 million. As I said in the, in the paper marks, we have little bit of higher cost expected in this quarter because, you know, we took some extraordinary action on salary that ended at the end of last quarter. So we have a little bit of higher labor cost.

William David Mosley: So, all things considered, I do think that the price per terabyte, if you will, is nominally the same. It may be just slightly lower, but, you know, there's definitely going to be a TCO incentive for customers to move off of the lower capacities and onto the higher ones. That's a great color.

William David Mosley: Thanks, Dave. And if we juxtapose the HAMR transition to the transition from LMR to PMR that took place back in 2006-2008, you guys went from about 0% of the PMR mix to 100% within five to six quarters. Do you think the HAMR transition will be as quick, or do you see some reasons why this ramp may be a little bit slower than the transition from LMR to PMR back then? Cycle times are a little bit longer now, so I don't think it'll be as fast.

Gianluca Romano: As usual, we will focus on, on op-ex control is still a very, very good number, no. And I think in the next few quarters, we will stay around this level of, of op-ex until next fiscal year, as, as, you know, in the current fiscal year, we don't have any variable compensation. Overtoll in our COGS and OPEX, but not a big part is in OPEX, so I think this level is probably reasonable for fiscal Q4 and then next fiscal year probably a little bit higher cost in OPEX.

William David Mosley: I mean, I'd like it to be as fast as we possibly can. The one thing I will say is that our last generation PMR product, if you will, the 2.4 terabyte flutter drive that we just talked about, has a remarkably similar kit of parts as the HAMR drives do. So, relative to what we're making, one versus the other, it's not a big deal, and we can get through customer transitions easily. I think as we gain more confidence in a year over the four plus terabyte Mosaic platforms, then we'll definitely want to accelerate, because by the time you get to, say, five plus terabytes, then it's such a great replacement for every legacy product that Thank you, Dave.

Gianluca Romano: Still I think well below the 300 million probably not between 270 to 80 million if worth there is probably a reasonable way to model it. Precash Flow, now we have another positive free cash flow quarter, of course always very important for us to generate positive free cash flow, revenue is increasing, profitability is increasing, and therefore now we expect free cash flow also to improve substantially through the next few quarters. Thank you. Thank you very much.

Eddie: Questions from Krish Sankar with PD Cowan, please go ahead. Hey guys, this is Eddie for Krish, congrats on the hammer launch, exciting opportunity for you guys. I have a question regarding the customer value you are providing with these 32 terabytes hammer drives. What will customers be enjoying lower price for terabytes versus 22 and 24 terabytes? I would like to see them all drive, for example, or because hammer yields haven't matured yet, this benefit will be more about power and space, and the lower price for terabytes will take place in the future.

William David Mosley: Thank you. And our next question comes from Thomas O'Malley with... Hey guys, thanks for taking my question. I appreciate it.

Thomas O'malley: So I just wanted to understand the move from qualification to revenue recognition. It sounds like with your largest customer, you're finishing qualification right now, and you're obviously pointing to some big units in the first half. You mentioned on the call that you're expecting calls with a majority of the US cloud guys and a couple others in calendar year 24. Would you expect a similar timeframe between qualification and revenue recognition? AKA, like if those are getting qualified in the second half of this year, you could see revenue from a large number of additional customers. Just wanted to understand.

Eddie: Yeah, we will, this is a good question. We will balance everything, of course. What our yields are and our costs are and then try to get the customers incentivized. But there is some incentive business provided by their power and space reductions as well. We call that their TCO proposition.

William David Mosley: It's complex. There are some customers that have relatively shorter qualifications, and some of that's because of feature sets, making sure we get the feature set checked out. If they're on a generic feature set that we're already shipping versus, you know, their own unique feature set, we have to make sure we're doing all those things right. That's normal in any near-line transition.

Dave Mosley: All things in balance, I do think that the price per terabyte, if you will, is not only the same. It may be just slightly lower, but there is definitely going to be a TCO incentive for the customers to move off of the lower capacities and on the liarments. That's great color.

William David Mosley: And I will say that a lot of people are seeing the TCO benefits, so they're asking and, you know, trying to speed these qualifications through, right, because they want that benefit to flow through as well. But we will, you know, also be limited on our ramp as to what we can do, and those cycle times are quite long, so we're going to balance all these things together, if that helps you. Yeah, that's helpful. And then I just wanted to ask one on the on the margin side.

Dave Mosley: Thanks, Dave. And if we just to pose the hammer transition to the transition from LMR to PMR to place back in 2006, 2008. You guys went from like 0% PMR makes 200% within 56 floors. Do you think the hammer transition will be as quick or you see some reasons why this grant may be a little bit slower than the transition from LMR to PMR? That's a little bit longer now, so I don't think it will be as fast.

Thomas O'malley: So you guys have talked about, you know, 20% below peak but still getting back to that 30% gross margin target, or at least at the low end. You know, if you look at what you're saying for mass capacity growth for the industry, you know, mid-20s, if you just assign that to kind of your revenue ramp over the next couple of years, you know, it takes probably a year and a half to kind of get to that $2.5, $2.6 billion mark, just using a linear growth rate. Is that the timeframe we should be thinking about until you get back to that 30 to 32% gross margin? Or can you get there before, and what are the levers that get you there before revenue gets back to that $2.5 or $2.6? Thank you. Thank you, Zoom.

Dave Mosley: I mean, I'd like it to be as fast and we'll continue to drive it as quick as we possibly can. The one thing I will say is that our last generation PMR product, if you will, the 2.4 terabyte for flood or drive that we've just talked about, has a remarkably similar kit of parts as the hammer drives do. So relative to what we're making one versus the other, it's not a big deal and we can get through customer transitions easy.

Dave Mosley: I think as we get gain more confidence in a year over the four plus terabyte mosaic platforms, then we'll definitely want to accelerate. Because by the time you get to say five plus terabytes, then it's such a great replacement on every legacy product that you have that we want to drive the whole portfolio there. Because the utilization is much better in the factories and the cost can come way down.

Gianluca Romano: Well, now the major level is HAMR. So, the more we ramp up HAMR, the better the margin. So, we are becoming more and more positive about, of course, the timing of that continuous improvement in our margin. We gave an indication last quarter in terms of the level of revenue that we think we need to achieve in order to get a certain level of gross margin. That is probably, I'm getting a little bit more optimistic right now, so probably we can achieve an even lower level of revenue. As you said before, qualification of customers is important, but we are working hard on qualifying more and more customers, so assuming we can. Continuing our ramp on HAMR, now I'm fairly positive we can do it earlier than you said, and also at a lower level of revenue. Thank you very much.

Dave Mosley: Thank you, Dave. Thank you.

Thomas O'malley: And our next question comes from Thomas O'Malley with Barclays. Please go ahead.

Thomas O'malley: Hey, guys, thanks for taking my question. I appreciate it. I just wanted to understand the move from qualification to revenue recognition. It sounds like with your largest customer, you're finishing qualification right now and you're obviously pointing to some big units in the first half. You mentioned on the call that you're expecting calls with a majority of the U.S, cloud government and a couple others in calendar year 24. Would you expect a similar timeframe between qualification and revenue recognition, AKA, like if those are getting qualified in the second half of this year, you could see revenue from a large number of additional customers. Just one to understand the time it's complex.

Gianluca Romano: Thank you. And our next question comes from Karl Ackerman with BNP Paribas. Please go ahead. Thank you. Gianluca, it's encouraging to see an improving gross margin trajectory, but it doesn't appear to be driven by price yet, given our math to suggest that price per terabyte did fall to low single digits in a New York year. Could you perhaps address whether we should? Previous actions to raise prices across the channel may occur over the next... Take care.

Dave Mosley: There are some customers that are relatively shorter qualifications. And that's some of that's because of features that make sure we get the features that checked out if they're on a generic feature set that we're already shipping versus, you know, their own unique features that we have to make sure we're doing all those things right that normal in any near line transition. And I will say that a lot of people are seeing that the CEO benefits so they're asking and you know, trying to speed these qualifications through right because they want that benefit to go through as well.

Karl Ackerman: Well, I would say you can see the good improvement in our profitability. A good part of that is actually coming from pricing. Of course, you need to check into the Life for Life pricing. The mix has, of course, always a major impact on the average.

Dave Mosley: Well, we will, you know, also be limited on our rampant sort of what we can do in the cycle times are quite long. So we're going to balance all these things together with that ocean. Yeah, that's helpful. And then I just wanted to ask one on the on the margin side.

Gianluca Romano: We are very happy with what we are doing, both on pricing and on cost, that this quarter shows a fantastic improvement in profitability, both gross margin and operating margin. And if you look at our guidance, now this implies another strong improvement in profitability. Pricing is a good part of that. Mix is another part of that improvement.

Gianluca Romano: So you guys have talked about, you know, 20% below peak, but still getting back to that 30% gross margin target, at least at the low end. You know, if you look at what you're saying from mass capacity growth for the industry, you know, mid 20s, if you just assign that to kind of your revenue ramp over the next couple of years, you know, it takes probably a year and a half to kind of get to that 2.5, 2.6 billion dollar mark.

Gianluca Romano: And we will continue to do exactly, execute this strategy, and we are very pleased with the outcome so far. Yeah, I would say, Karl, the raw demand is still not what it was two years ago, and we have a supply chain that's not entirely healthy yet. We have to continue to work those actions. I do think over time, especially incentivizing transitions to the newer mass capacity drives, and then if there's a price raise, it tends to be more on legacy. And to the extent that everyone's under the same strain throughout the entire ecosystem, this is the trend that we're seeing.

Gianluca Romano: Just using like a linear growth rate is that the timeframe we should be thinking about until you get back to that 30 to 32% gross margin, or can you get there before and what are the levers that get you there before revenue gets back to that 2.5, 2.6.

Gianluca Romano: Thank you.

Karl Ackerman: Thank you, Tom. Well, not a major level is a number. So the more we ramp over and the better will be the margin. So we are becoming more and more positive on, of course, the timing of that continuous improvement in our margin. I would say we gave an indication last quarter in term of the level of revenue. But we think we need to achieve in order to get a certain level of gross margin, but it's probably I'm getting a bit more optimistic right now.

William David Mosley: I think we'll probably take advantage of it. My sense is that in the next year or two, we'll get to the point where we are high enough up the ramp that we can be very predictable, and then I think things will stabilize quite a bit. But we're not at a place where the industry has enough demand relative to the capacity that it has online yet. Erik Clarence, that's it for me.

Karl Ackerman: So probably we can do it even lower level of revenue. As you said before, qualification of customers is important, but you know, we are working hard on qualifying more and more customers. So assuming we can continue our ramp on HMR now unfairly positive, we can do earlier than what you said and also at a lower level of revenue. Thank you very much. Heather, I have a question.

Kevin Edward Cassidy: Thank you, and our next question today comes from Kevin Cassidy at Rosenblatt. Yeah, thanks for taking my question. And congratulations on the great results. You implemented a build to order program with your customers. Can you give an update on that? Is that still active? And how's it giving you visibility?

Karl Ackerman: The Cultural Karl Ackerman would be MP very well. Please go ahead. Thank you. Gianluca, it's encouraging to see an improved and gross margin trajectory, but it doesn't appear to be driven by price yet. Given our maths to suggest that price per terabyte, did fall low single digits sequentially in year to year. Could you perhaps address whether we should expect previous actions to raise prices across the channel? May occur in the next couple quarters? Follow, please. Hey, Karl.

William David Mosley: Yeah, thanks very much. It is, and it transitions from my last comments as well. You know, because the industry, just at the levels that we're at, it just can't fund the investments it needs to make in aerial density and exabyte growth over time with the revenue and margins where it was. And what helps us to run factories is the improved visibility and the predictability toward that growth in demand. And so I think that's why the HDD industry has changed fairly dramatically through this cycle, these six or eight quarters, because capacity did come off at the same time that people were saying demand was down. And the industry is therefore underinvested in capital, and lead times are going up, as we've talked about before. So we need this build to order framework to just get back to a healthy industry. And we are rewarding predictability with our customers, and we're incentivizing that predictability. And where people aren't predictable, and they come in at the last minute for a product that either we don't have, or they have to pay for our flexibility.

Gianluca Romano: Well, I would say you can see the good improvement in our profitability. A good part of that is actually coming from pricing. Of course, you need to check into the life for right pricing. I think the mix has, of course, always a major impact on the average.

Dave Mosley: We are very happy with what we are doing, both on pricing and on cost as this quarter show a fantastic improvement in profitability, both gross margin and operating margin. And if you look at our guidance, know this imply another strong improvement in profitability. So pricing the good part of that mixes with another part of that improvement. And then we will continue to do exactly the attitude of this strategy, and we are very glad without income so far.

Dave Mosley: Yeah, I would say, Karl, the raw demand is still not what it was two years ago. And so, and we have a supply chain that's not entirely healthy yet. We have to go continue to work with those actions. I do think over time, especially incentivizing transitions to the newer math capacity drives. And then if there's price raises that tends to be more on legacy, you know, and to the extent that everyone's under the same strain throughout the entire ecosystem, you know, this is this is the trend that we're seeing.

William David Mosley: I think that's the way we're thinking about it, and then making sure that we stabilize the supply base as well, because it's not just, you know, ourselves as the HDD supplier, but we have numerous upstream supplies that need to be stabilized as well. So it's still going to take some time. Okay, great. And you mentioned vertical integration of your laser technology. Is that a cost savings, or is it more controlling the supply?

William David Mosley: Yeah, I think at this point, it's been a long time coming, and we definitely value the suppliers that have helped us get HAMR products to market. But we also feel that, given how intricate this silicon photonic circuitry is, we needed our own capability to control. But right now, it's more of a technology second sourcing, if you will, and so we're going to continue to run with a few sources. I think, over time, there should be the opportunity to drive the cost down and balance all things with multiple sources and the ability to control the investments that we make in capital, for example, and things like that. But... It's been a long time coming, and part of the reason we're talking about it as part of Mosaic is it's very relevant as we get the four terabytes of platters and five terabytes of platters. I think also there's been some noise out there in the industry about, well, you know, as goes the ramp of that supplier, so goes the Seagate ramp, and that's clearly understood.

Dave Mosley: I think we'll probably take advantage of it. My sense is that in the next year or two, we'll get to the point where we get high enough up the ramp that we can be very predictable. And then I think things will stabilize quite a bit, but we're not at a place where the industry has enough demand relative to the capacity that has online yet. Very clear. That's it for me. Thank you.

Kevin Cassidy: And our next question today comes from Kevin Cassidy at Rosenblad Securities. Please go ahead.

Dave Mosley: Yeah, thanks for taking my question and congratulations on the great results. You implemented a build to order program with your customers. Can you give an update on that? Is that still active and how's it giving your visibility?

Dave Mosley: Yeah, thanks very much. It is and it's transitions from my last comments as well. You know, because the industry just at the level that we're at to build on my last comments, you just can't fund the investments that needs to make an aerial density and exit by growth over time with with the revenue margins where it was. And what helps us is to run factories is the improved visibility and the predictability towards that end demand.

Steven Bryant Fox: Thank you. And our next question today comes from Steven Brian Fox with Fox Adventures LLC. Thanks for taking my question. Dave, I was just wondering if you could zoom out a little bit, without putting any kind of time frame on it, to get to the 30% gross margin. It seems like you can almost get there from here on just the typical incremental margins from volumes. But based on everything you said, it doesn't seem that easy, especially at the early stage with HAMR versus later stage.

Dave Mosley: And so that I think that's why the HDD industry has changed fairly dramatically through this cycle is six or eight quarters because capacity did come off at the same time that people were that demand was down.

William David Mosley: So can you sort of walk through some of the puts and takes, say, over the next two to three quarters versus, say, when you hit that volume crossover where it becomes more smooth to get to the margin? It's just, there's been a lot of comments around this. Maybe you could just sum it up.

Dave Mosley: And the industry is therefore under invested in capacity and capital and you know, lead times are going up as we've talked about before. So we need this build the order framework to just get back to a healthy industry and we are rewarding predictability with our customers and we're incentivizing that predictability. And whereas people aren't predictable and they come in at the last minute for product that either we don't have it, or you know, they have to pay for our flexibility.

William David Mosley: Yeah, and Gianluca can share some insights as well here. I think that, first of all, we're ramping HAMR according to some prescriptive schedule. We can deploy it in certain mass-capacity hyperscaler markets. We can also deploy it into other markets, you know, depending on how we choose to do things. So we can put it in via markets, for example, over time.

Dave Mosley: I think that's the way we're thinking about it and then making sure that we stabilize the supply base as well because it's not just, you know, ourselves as the HDD supplier, but we have numerous upstream supplies that need to be stabilized as well. Okay, great.

William David Mosley: And the rate at which we are able to transition and our yields and scrap and things like that, especially once we get to four terabytes per platter, then, you know, I think that becomes more and more accretive of margins. Fundamentally, though, I still think that the demand picture is actually going to shape the next few quarters from a margin perspective. You know, my sense is that demand has still not come anywhere close to where it was two years ago.

Dave Mosley: You mentioned a vertical integration of your laser technology. Is that a cost savings or is it more controlling the supply chain? Yeah, I think at this point, it's been a long time coming and we definitely value the suppliers that have helped us get hammer products to market. We also feel like given how intricate this silicon photonic circuitry is, is that we needed our own capability to control. But right now it's more of a technology second sourcing if you will.

Gianluca Romano: We may see, with the growth of data and with the investments that people need to make in data around all these AI applications, demand pick back up again. And that'll be the fundamental driver. Gianluca, go ahead.

Gianluca Romano: Yeah, no, I said that before. I think the combination of stronger demand through the cycle and our very good product based on HAMR technology will drive further improvement in gross margin, sequential improvement. Now, I think we will have sequential improvement through the entire calendar year. And this is, of course, based on our view of the RAMP of HAMR and also the recovery from the prior down cycle that we expect, especially in the mass capacity, to continue through the entire calendar 24, and actually even into calendar 25. That's helpful. Just can you fill in one other blank, which is back-end testing capacity? How does that sort of, you know, help her margins as this ramp happens? You know, based on where we were with legacy products years ago on desktop and so on, and then even just the volumes we were at a couple years ago, I think we have plenty of back-end test capacity. But is it a longer test cycle, though? Isn't it a longer test cycle as you get to 4 and 5?

Dave Mosley: And so we're going to continue to run with a few sources. I think over time, there should be the opportunity to go drive the cost down and balance all things with multiple sources. And, and the ability to control the investments that we make in capital, for example, and things, things like that. But it's been, it's been a long time coming in part of the reason we're talking about it as part of mosaic is it's very relevant as we get the four terabytes of platter and five terabytes of platter.

Dave Mosley: I think also there's been some noise out there in the industry about, well, you know, the as goes the ramp of that supplier so goes the C gate ramp and that's clearly not true. Understood. Thank you.

Stephen FOX: And our question today comes from Stephen Brian Fox with Fox advisors. I will see please go ahead.

Dave Mosley: Thanks for taking my question. Dave, I was just wondering if you could zoom out a little bit without putting any kind of time frame on it to get to the 30% gross margins. It seems like you can almost get there from here on just the typical incremental margins from volumes. But based on everything you said, it doesn't seem that easy, especially early stage with hammer versus later stage. So can you sort of walk through some of the puts and takes over the next two to three quarters versus say when you hit that volume crossover where it becomes more smooth to get to the margin. It's just there's been a lot of comments around this. Maybe you could just sum it up.

William David Mosley: It is. It certainly is. The bigger the drive, the longer the test cycle, but we still have plenty of capacity to cover the demands at this level. Awesome. Thank you. Thank you, and our next question comes from Timothy Arcuri with UBS. This is Mayur for Tim.

Timothy Michael Arcuri: Thanks for taking my question. Just one for me, you don't report orders, but you could perhaps give us some color on book-to-bill and just some idea of where orders are relative to revenues and how that book-to-bill has been trending and where you think that's going over the next couple of years.

Dave Mosley: Yeah, and John Luke, it can share some insights as well here. I think that first of all, we're ramping hammer according to some prescriptive schedule. We can deploy it into certain mass capacity, hyperscaler markets. We can also deploy it at other markets, you know, depending on how we choose to do things. And so we could put it in via markets, for example, over time.

William David Mosley: Yeah, that does get into our build-to-order plans. You know, we are definitely, like I said before, very prescriptive on what we're building for people two, three, four quarters out. And, you know, as long as we all stay on that plan, I think that's predictable economics for our customers as well. So it's going, you know, better and better every quarter.

Gianluca Romano: And the rate at which we are able to transition and then our yields and scrap and things like that, especially once we get to four terabytes per platter, then, you know, I think that becomes more and more creative and margin fundamentally, though, I still think the demand picture actually shape is going to shape the next few quarters from margin perspective. My sense is the demand is still not come anywhere close to where it was two years ago.

William David Mosley: I think when we first launched this, there were questions that I was getting on these earnings calls about, you know, since supply is so far below, or sorry, since demand is so far below supply today, how can you do something like this? But we need that predictability in order to run the supply chain and reward everyone upstream of the supply chain. So, you know, so far, the progress has been fairly good, and we're getting better visibility into the next quarter and beyond. Thank you. And our next question comes from Vijay Rakesh with Mizzou. Yeah, hi, Devan, Gianluca.

Gianluca Romano: We may see with the growth of data and with investments that people need to make in data around all these AI applications. We may see demand take back up again, and that'll be the fundamental driver. John, look a go ahead.

Gianluca Romano: Yeah, no, I said that before, I think the combination of stronger demand through the cycle and our very good product based on MR technology will drive further improvement in gross margin sequential improvement. We will have a sequential improvement through the entire time that 24 and this is of course based on our view of the ramp of Hamer and also the recovering from the dial down cycles that we have spent especially in the mass capacity to continue through the entire 24 and actually even kind of 25 and that. That's helpful just can you film one of the blank which is back in testing capacity. How does that work?

Vijay Raghavan Rakesh: Just on the enterprise hard disk drive side, or on the hard disk drive side, do you see, given the 25% exabyte growth and recovery on the TC side this year, do you expect those servings to get back to the 2 billion run rate by 2040? Now, we don't guide after this quarter, so, no, we just gave good guidance for the March quarter in terms of revenue increase and profitability increase, and as we said, no, we are ramping up HAMR volume. We are seeing a better demand environment, so we expect sequential improvement through the quarters, but we don't give specific guidance on revenue for the end of the calendar year. Yeah, I would say that, you know, obviously, we're watching near-line demand, CSP demand, on-prem enterprise demand, continuing to build strength, but not nearly as big as it was a couple years ago, but that's very good, and we're being very careful building into it.

Gianluca Romano: That sort of you know help hurt margins as this ramp happens. Thanks. You know based on where we were from legacy products years ago on desktop and so on and even just the volumes we were at a couple of years ago I think we have plenty of back in test capacity. But is it longer cast cycle that isn't in a long cut cycle. It is certainly is the bigger the drive the longer the test cycle but we still have plenty of capacity to cover the demands of this level. Awesome. Thank you.

Timothy Arcuri: Thank you and our question comes from Timothy or Carrie with CBS. Please go ahead. This is my year for.

Vijay Raghavan Rakesh: The one point that you just raised, which was the whole AIPC demand, which I think is still very early innings in this, but we do see opportunity there. You know, high-end workstations, if you will, that are running AI applications may actually be an interesting opportunity. And then on the gross margin line, sorry to belabor that, Gianluca, do you see you guys getting back to that target window of 30-33% exit this year? And especially on the HAMR side, I think Dave mentioned you can do with 4TB+, you know, 5 disks for a 20TB drive versus 7-10 disks now. But on the gross margins on HAMR versus 7-10 disks, I think you can do with 4TB+, you know, 5 disks for a 20TB drive versus 7-10 disks now, uh... where do you see your corporate margins today? We know, as we said in the past, AMR drive gross margin is for sure accretive to the corporation, so it's always above our average.

Timothy Arcuri: Thanks for taking my question just just one for me. Now, you know, but you don't support orders but you have to give us a color on on book to blue and just some idea of the way orders are relative to revenues and and way that you know how that book to bill bill has been trending where you think that's going over the next couple of quarters that will be helpful. Thanks.

Dave Mosley: Yeah. That does get into our build the order plans. You know we are definitely like I said before very prescriptive on what we're building for people to three quarters out and you know as long as if we all stay on that plan. I think that's particularly economics for our customers as well. So it's going you know better and better every quarter. I think when we first launched us there was questions that I was getting on these earnings calls about.

Dave Mosley: You know, supply is so far below our sorry it's demanded so far below supply today how can you do something like this but we need that predictability in order to run the supply chain and reward everyone when upstream the supply chain so you know so far the progress has been fairly good and we're getting better visibility in the next quarter and beyond. Thank you and our next question comes from VJ Recast with Mizzou.

Gianluca Romano: Right now, as you know, there is no AMR drive in our result, but now we are starting the March quarter, and you already see some improvement in our guidance. It will be, I expect, more when we go into the June quarter and through the rest of the calendar year. So we are positive about the profitability from that product. And now we need to take our time to qualify the customers and then start ramping, because as Dave said, it takes a little bit of time to ramp up the high volume production for the new product. Alright.

Vijay Rakesh: Please go ahead. Yeah. Hi. I just on the enterprise hard disk drive side on the hardest I said you see given the 25 person exabyte growth and recovery on the PC side this year. We expect those seniors to get back to the 2 billion run rate exiting 24 I guess kind of 24. Now we don't guide after this quarter so no we just gave a good guidance for the March quarter in terms of revenue increase and profitability increase and as we said no we are ramping.

Ananda Prosad Baruah: Thank you. And our next question comes from Ananda Baruah with Loop Capital. Yeah, good afternoon, guys.

William David Mosley: Thanks for taking the question; really appreciate it. I guess Dave and Gianluca to jump in here too, you know, the hyperscalers are sort of having some conversation about data center redesign over the coming years. A lot of this is around GPU compute, but they're referring to it as data center redesign more generally and broadly. I guess there would be if that occurs.

Vijay Rakesh: Hammer volume we are seeing better demand environment so we expect sequential improvement to support us but we don't we don't give specific guidance on revenue for the end of the calendar year. Yeah I would say that you know obviously we're watching your line demand CSP demand on prem enterprise demand continuing to build strength but not nearly as big as it was a couple of years ago but that's very good. And we're being very careful building into it.

William David Mosley: Do you have any opinion on if there would be an incremental opportunity for near-line drives? In addition to whatever data growth is going on. So really, I just want to see if you have any thoughts on that, in any context, and that's it, thanks. Yeah, no, no, it's a really complex topic.

Vijay Rakesh: The one point that you just raised which was the whole AIPC demand which I think it's still very early innings in this but we do see opportunity there. You know high end workstations that you will that are running AIPC may actually be an interesting opportunity. George.

William David Mosley: What I would say is that computer infrastructure is changing dramatically, and memory architectures will change to support that computer architecture very dramatically as well. So there is a lot of redesign discussion going on. There are different types of applications, and things that are being branded as AI.

Gianluca Romano: And then on the gross margin, I tried to belabor that, Gianluca, do you see you guys getting back to that target window, 33% exceeding this year? And you know, especially on the hammer side, I think Dave mentioned, you can do with 4TB plus, you know, 5 discs for a 20TB drive versus 7 to 10. And this now, what are the gross margins on hammer versus, you know, where you see your corporate margins today, I guess?

William David Mosley: There's stuff that's very focused on text or large language models, and then there's image recognition and video creation, and, you know, so there's a lot of different types of applications that are spreading, and I think this is just normal application development that's been going on for years and years and years, but I do think there's different types of hardware. So I think there are some AI data centers now being discussed that are largely computed. I also think that some of these applications are spinning off a lot of data, and they're requiring data to be stored for a certain period of time and then brought back up to higher levels to be reprocessed.

Gianluca Romano: Yeah, we know we said in the past, MR drive, gross margin is for sure a creative to the corporation, so it's always above our average. Right now, as you know, there is no MR drive in our result, but now we see starting the March quarter and you already see some improvement in our guidance, it will be ISPED more when we go into the June quarter and through the rest of the calendar here, so we're positive on the profitability from that product.

William David Mosley: And so that's normal data growth as well. So I think the net of it is a lot of architectural redesign going on, probably not affecting the tiers that we're in. If anything, and we made reference to this in the prepared remark, there's cost because power and space are at a premium.

Gianluca Romano: And now we need to take our time to qualify big customers and then to start ramp, because as Dave said, we take a little bit of time to rent the high volume production for the new product. All right, thanks.

William David Mosley: There are many AI applications from what I'm hearing that there's just not enough power, and its power infrastructure is going to be critical, but to the extent that you can do your part by transitioning to higher capacity drives that, you know, net net give you the same exabyte capacity with less power, I think that's a good thing. It may be an opportunity for us. So that would be in addition to the 25% kind of data run rate driven. That sort of power is the catalyst. It's hard to say; it depends on the bills and how much people are having to pay for them.

Ananda Baruah: Thank you, and our next question comes from a non-nobrall with Loop Capital, please go ahead. Yeah, good afternoon guys, thanks for taking the question, really appreciate it.

Dave Mosley: I guess, I guess for Dave and Jean-Lucy jumping here too, you know, the hyperscalers are sort of having some conversation about, you know, data center redesign over the coming years. A lot of this is around GPU compute, but what they're referring to is data center redesign, more general and broadly. And I guess, would there, if that occurs, do you have any opinion on the incremental opportunity for a near-line drive, you know, that would, I guess, obsessively be like in addition to whatever data growth is holding on. Don't really want to know if you have any problems on that in any context, and that's it, thanks.

Ananda Prosad Baruah: Again, you know, I think in the AI applications that are really exploding right now, power is going to become one of the limiting factors, and so to the extent that there may be a really good payoff in not only cost savings, space savings, and so on, but also just freeing up that power infrastructure to go do other things, that might actually help us get above 25%. Thanks a lot. I appreciate it. Thank you, and our next question comes from Mark Miller at the Benchmark. Thank you for the question and congratulations on the launch of Mosaic. I'm just wondering, you mentioned it briefly, what kind of traction are you seeing from AI-related opportunities, and how do you see that ramping throughout the year? Yeah, Mark. You know me. I'm pretty cynical sometimes on these things. And I'm looking for POs that actually say AI on them.

Dave Mosley: Yeah, and it's a real complex topic. What I would say is that the computer infrastructure is changing dramatically, and the memory architectures will change to support that computer architecture very dramatically as well. So there is a lot of redesign discussion going on. There are different types of applications, and things that are being branded AI, there's stuff that's very focused on text or large language models, and then there's image recognition and video creation.

Mark S. Miller: And there they are starting to happen, but it's still fairly small. And again, I'll go back to my previous comments. These are really applications that have been developing on a lot of fronts over many years anyway, so say, for example, image recognition, whether it's at the edge or in the cloud, that application space has been evolving over time quite a bit. When we get into specific things like large language models where people talk about, I think the data infrastructure impact piece is still secondary to the compute piece, even at this point. So at some point, there will be compute, you know, enabling all these really cool applications and efficiencies that people in businesses like ours are taking advantage of, and then the data will continue to grow on the backside of that, but we're still in the early innings on that. So that's more 2025. For large language models, I'd say maybe.

Dave Mosley: So there's a lot of different types of applications that are propagating, and I think this is just normal application development that's been going on for years and years and years. But I do think there's different types of hardware, so I think there are some now AI data centers being discussed that are largely compute. I also think that some of these applications are spending on a lot of data, and they're requiring data to be stored for a certain period of time, and then brought back up to the higher levels to be reprocessed.

Dave Mosley: And so that's its normal data growth as well. So, I think the net of it is, there's a lot of architectural redesign going on, probably not affecting the tiers that we're in. If anything, we may reference to this in the, in the prepare remarks.

William David Mosley: I don't know exactly. Thank you. Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks... Thanks, Marco. Seagate is focused on executing our product roadmap, leveraging the advanced technologies in our Mosaic platform, which we believe positions us well to enhance profitability over the near term and to capture long-term opportunities for mass capacity storage.

Dave Mosley: There's cost power and space are premium. There's many AI applications from what I'm hearing that there's just not enough power for. And it's power infrastructure is going to be critical. But to the extent that you can do your part by transitioning to higher capacity drives that net net give you the same exabyte capacity with less power. I think that's a good thing. Maybe an opportunity for us.

Dave Mosley: And that would be in addition to like the 25% kind of data run rate driven. That sort of power is a catalyst. Yeah, hard to say, it depends on the bills and how much people are having to pay for it. Again, you know, I think in the AI applications that are really exploding right now, power is going to become one of the factors. And so to the extent that there may be a really good pay off in not only cost savings, space savings and so on. But also just freeing up that power infrastructure to do other things. I mean that might actually help us get above the 25%.

William David Mosley: I'd like to close by once again thanking all of our stakeholders for their ongoing support of Seagate. Thanks for joining us today, and we look forward to speaking with you during the quarter. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a...

Mark Miller: Thanks a lot. Appreciate it. Thank you.

Mark Miller: And our next question comes from Mark Miller is the benchmark company. Please go ahead.

Dave Mosley: Thank you for the question and congratulations on the launch of mosaic. I'm just wondering you mentioned it briefly. What kind of traction are you seeing from AI related opportunities? And what do you see that ramping throughout the year? Yeah, Mark, you know, me, I'm pretty cynical sometimes on these things and I'm looking for POs that actually say AI on them. And they are starting to happen, but it's still fairly small. And again, I'll go back to my previous comments.

Dave Mosley: It's these are really applications that have been developing in a lot on a lot of fronts over many years anyway. So say, say, for example, image recognition, whether it's at the edge or in the cloud, that application space has been developing over time quite a bit. When we get into specific things like large language models where people talk about, I think the data infrastructure impact piece is still secondary to the compute piece even at this point.

Dave Mosley: So at some point, there will be compute, you know, enabling all these really cool applications and efficiencies that people in businesses like ours were taking advantage of. And then the data will continue to grow on the backside of that, but we're still early innings on that. So that's more 2025. For a large language model, you know, I'd say maybe I don't know exactly. Thank you.

Unknown Executive: I'd like to turn the conference back over to management for the closing remarks. Thank you, Carpe.

Unknown Executive: Seagate is focused on executing our product roadmap, leveraging the advanced technologies in our mosaic platform, which we believe positions us well to enhance profitability over the near term and capture long term opportunities for mass capacity storage. I'd like to close by once again, thanking all of our stakeholders for their ongoing support. Thanks for joining us today and we look forward to speaking with you during the quarter. Thank you, this includes to the self-assault, we thank you all for attending today's presentation.

Unknown Executive: You may not expect your lives level.

Welcome to the Seagate technology fiscal second quarter 2024 conference call.

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Speaker Change: I would now like to turn the conference over to Sandy Hudson Senior Vice President of Investor Relations. Please go ahead. Thank you Hello, everyone and welcome to today's call. Joining me are Dave Mosley, Seagate's, Chief Executive Officer, and Gianluca Romano, Our Chief Financial Officer, We've posted our earnings press release and detailed supplemental information for our disk.

Sandy Hudson: Remember quarter resolved on the investors section of our website.

During todays call well refer to some 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>.

Gianluca Romano: Cannot be reasonably predicted therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.

Sandy 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 the 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.

Sandy Hudson: 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.

Sandy Hudson: <unk> Q as well as the supplemental information all of which may be found in the investors section of our website and as always following our prepared remarks, well open the call for questions I'll now turn the call over to David for his opening remarks.

David: Thanks, Jamie and Hello, everyone I'm going to focus on two key topics in my remarks today.

David: First we delivered solid fiscal second quarter results with revenue at the midpoint of our guidance.

David: non-GAAP earnings of 12 cents per share exceeding the upper end of our guided range.

David: And second last week, we marked a major inflection point in mass capacity storage with the launch of our groundbreaking mosaic platform.

David: Mosaic is intentionally named to describe the fusion of innovative technologies, including seagate's unique implementation of hammer.

Collectively enable us to extend our aerial density leadership.

David: As we shared in the past growing areal density is the most efficient way to enable data center operators to scale mass capacity storage to lower their T. C O N to advance their sustainability targets.

David: I'll discuss the platform in more detail shortly and also share progress towards qualification and volume ramp of our first hammer based mosaic product.

David: Which lays the foundation for products, posting five terabytes per disc and beyond.

David: Let me start by highlighting our fiscal Q2 performance.

David: Revenue of $1.56 billion was led by sequentially, improving cloud near line demand and a seasonal uptick in consumer drives.

David: I'll set partially by the decline in VA sales that we anticipated.

David: Strong cost discipline and execution on pricing adjustments resulted in non-GAAP operating income tripling quarter over quarter.

David: Increasing roughly 17% year over year, despite lower revenue levels.

David: These performance and demand trends affirm our expectation for the September quarter to be the bottom of this prolonged downcycle.

David: The enhanced discipline, we built into the business, including strict cost controls management of supply and strengthening of our balance sheet gives us an excellent foundation to build on.

David: As we move into a broader recovery.

David: Additionally, execution of our product roadmap is expected to structurally improve profitability and return us to our targeted financial model, which supports healthier industry economics.

David: We enter calendar 2024 with increased confidence in our non-GAAP gross margin trajectory, including our ability to reclaim 30% minimum benchmark level at quarterly revenues that are at least 20% below our prior cyclical peak.

David: From a demand standpoint.

David: Gradual recovery within the U S cloud market is starting to take shape, reflecting solid progress and consuming excess inventory along with more stable end market behavior.

David: Enterprise OEM demand trends have also stabilized within the U S markets.

David: Customer feedback still poised to macro related concerns, although IP hardware budgets are projected to modestly improve in calendar 2024, and traditional server growth is expected to resume trends that support incremental HDD demand growth in the calendar year.

David: We were also encouraged to see incremental demand among certain non U S cloud and enterprise customers in the December quarter.

Across the broader China markets, we project, a relatively slower pace of recovery given the ongoing economic challenges within the region.

David: However, some local governments announced further steps to support the region's economy.

David: Which our customers believe will bolster local demand across mass capacity markets in China in the second half of the calendar year.

David: These efforts support our view for demand in the VA market to pick up some time after the lunar new year.

David: Against the dynamic market environment <unk> has continued to execute on our mass capacity product portfolio that further advances our technology leadership.

David: And serves the breath of our customers' unique workload requirements, while also supporting our objective of improving profitability.

David: I'll outline the execution path for our latest product launches and the relevance of the new platform.

David: And then share how we believe our mass capacity solutions deliver economic value both to our customers and to Seagate.

David: Our product qualification and ramp plans are on track with what we've been articulating over the past several quarters.

David: We began shipping initial volumes of our 24 terabyte CFR 28, terabyte <unk> drives in the December quarter.

David: Customer reception has been positive as illustrated by the numerous active qualifications underway across multiple cloud and enterprise customers.

David: Our three plus terabyte per disc product is the first major release of the hammer based mosaic platform.

David: We are rapidly nearing completion with our initial hyperscale launch partner the quality has gone very well and we are working with this customer at their request to fully transition future Seagate demand.

David: For the three plus terabyte per disc platform.

David: Volume ramp starting in the March quarter. According to plan with a goal to ship about 1 million units in the first half of this calendar year.

David: We then expect to continue to ramp through the balance of the calendar year and we are currently broadening our customer engagements.

David: Based on their planned timelines, we expect to complete qualifications with a majority of U S. Hyperscale and a couple of global cloud customers during calendar 2024.

David: Starting at three terabytes per disc Mosaiq delivers a quantum leap forward in areal density innovation with a well defined path that extends to five terabytes per disc and beyond this.

David: This transformative platform is the culmination of decades of development and.

David: And numerous technologies pioneered by Seagate, including our Super latest platinum alloy media that enables higher bit density the revolutionary plasmonic writer with integrated laser capable of reliably writing each bid.

David: And it has advanced reader technology as opposed to one of the world's smallest reading sensors.

David: While mosaiq represents groundbreaking technology the platform is fully plug and play with existing conventional draws and addresses the breath of our customers' mass capacity workloads.

David: These slides can also be deployed with <unk> technologies for the few customers able to integrate <unk> to take advantage of the additional capacity gains.

David: As I noted earlier areal density gains are the most efficient way to scale storage capacity.

David: Let me offer a few clear examples.

David: First as we execute our product roadmap, we can deliver increasingly higher capacity drives with minimal changes to the bill of materials.

David: This results in a better <unk> value proposition for our customers and attractive economics for Seagate.

Sandy Hudson: Second as we scale areal density the four terabytes per disc. This enables extremely cost effective product offerings in the low to mid range capacity points used by a majority of our enterprise DNS customers.

Sandy Hudson: With four terabytes per disc, we used half the number of heads and disks to produce a 20 terabyte drive.

Sandy Hudson: Prototypes are already working in our labs with revenue plan for the second half of calendar 2025.

Sandy Hudson: As we ramp production to expand to other end markets, we gained tremendous manufacturing efficiencies, adding to the attractive margin opportunities that I just described.

Sandy Hudson: We continue to build on our technology and operational innovations with each successive product generation. For example, we are executing plans to vertically integrate the laser manufacturing process, which enhances supply flexibility provides greater control of the technology and provides opportunities to lower production costs.

Sandy Hudson: Collectively we believe these actions underpin our mass capacity cost reduction roadmap, while also providing a very strong tcl story for a broad range of customers.

Sandy Hudson: While <unk> remains a key driver for mass capacity storage datacenter operators are also focused on power and space consumption.

Sandy Hudson: Particularly as investments in compute intensive infrastructure proliferates to support generative AI applications.

Sandy Hudson: For context, the latest AI Gpus consume up to 700 watts, which is roughly a 100 times more power intensive than a hard drive operating at maximum performance.

Sandy Hudson: Our products can help datacenter, operator store more extra bytes, using less power and space.

Sandy Hudson: To quantify this a single 32 terabyte mosaic drive can replace 310 terabyte drives storing more capacity at one third of the power input.

Sandy Hudson: <unk> and sustainability gains of this magnitude our decision altering when architects and new data center.

Sandy Hudson: Offer a highly economical path to modernizing existing infrastructure.

Speaker Change: We believe that this dynamic and potentially accelerate the replacement cycle.

Speaker Change: As we move into the early stages of demand recovery Seagate's strong focus on maintaining our product and technology roadmap through this past down cycle position us to return to profitable growth and address data center operators, most important challenges cost power and space.

Speaker Change: We believe we've got the right product at the right time heading into a gradual recovering mass capacity market with that John Luca will now cover the details on our financial performance and outlook.

John Luca: Thank you Dave as he gets in December quarter Finance, how did that.

John Luca: Solid operational execution revenue was a $156 billion.

John Luca: Up 7% quarter over quarter.

John Luca: non-GAAP operating income more than tripled sequentially to $127 million, leading to a non-GAAP operating margin expanding to eight 2% of revenue.

Gianluca Romano: 540 basis points quarter over quarter.

Gianluca Romano: And non-GAAP EPS was <unk> <unk>.

Gianluca Romano: Improving Turkey for saying sequentially and exceeding the high end of our.

Gianluca Romano: Guidance range.

Speaker Change: I think getting Boston proven he maintained and our focus on profitability.

As these trends continue we expect our paths to improve and reached the target financial model over time.

Speaker Change: Within our R&D strike business expedite shipments grew 6% sequentially to 95 revenue.

Speaker Change: Revenue was one 7% to $1 $4 billion revenue performance was mainly driven by an expected improvement in cloud customer demand along with seasonal improvement in the consumer market.

Speaker Change: We think the mass capacity markets are having increased 4% sequentially to $1 $1 billion, even mainly by strong.

Near line cloud demand offsetting the expected decline in the beer market.

Speaker Change: Mass capacity shipment totaled 83, exabyte compared with 79 exabyte in the September quarter.

Speaker Change: Capacity shipments as a percent of total HDD exabyte was 87%, which is comparable to the prior quarter 88%.

Speaker Change: For an airline that's she met of 65 exabyte went up quarter over quarter from 56 exabyte.

Speaker Change: Average capacity for an airline pilot.

Continuing to increase sequentially, reflecting modest demand improvement among both the U S cloud customer and China cloud customers.

Speaker Change: We believe that inventory among many CSP customers is reaching more of them are isolated and anticipate continue in near line demand improvement in the March quarter and beyond.

Speaker Change: Yeah marketing revenue was down sequentially in the December quarter, consistent with our expectations.

Speaker Change: Looking ahead, we expect VR to reflect a more typical seasonal patterns.

Speaker Change: Through calendar 2024 within last quarters, representing the low point.

Speaker Change: I guess he put other revenue was $324 million up from $278 million in the prior quarter.

Have you been by highest seasonal demand in the consumer market. We have spent in the legacy market can be sequentially lower as at March quarter. Following typical consumer demand trends post holiday season.

Speaker Change: Finally revenue, Florida, our non HDD business increased to $171 million.

Speaker Change: Compare with $159 million last quarter, primarily driven by improved SSD demand.

Speaker Change: Moving onto the rest of the income statement non-GAAP gross profit increased sequentially by roughly $80 million in the December quarter to $367 million high end of our original expectations.

Speaker Change: non-GAAP gross margin of 23, 6% expanded nearly 400 basis points compared to the previous quarter due in part to pricing adjustments and cost saving from ordinary restructuring activities as well as lower underutilization cost, which were about $40 million consistent with.

Speaker Change: Our view for ongoing demand at Chipotle.

Speaker Change: However, we have to pay it down that utilization cost to margin increase for the next capital quarters as we transition some of our production line to mosaic.

Speaker Change: Accounting for this ethane.

We still expect to see margin expansion every quarter in kind of 2024 at.

Speaker Change: As near line demand continuing to improve gradually and we ramp our latest products along with continued execution of price adjustment across the entire portfolio.

Speaker Change: non-GAAP operating expenses totaled $240 million.

Speaker Change: Down from $248 million.

Speaker Change: At the end of the quarter and affecting ongoing spending optimization.

Speaker Change: With the benefit of diligent expense management and higher margins adjusted EBITDA improved more than 50% sequentially to $216 million.

Speaker Change: non-GAAP net income turned positive in the December quarter.

Gianluca Romano: <unk> non-GAAP EPS of <unk> 12 per share.

Gianluca Romano: On diluted share count of approximately 111 million shares and tax expense.

Gianluca Romano: $17 million.

Gianluca Romano: Moving onto cash flow antibody in sheet in the December quarter, we had the inventory flat.

Gianluca Romano: Just below $1 1 million.

Gianluca Romano: Capital expenditure were also flat sequentially at $70 million.

Gianluca Romano: The majority of planned capital expenditure welcome.

Gianluca Romano: Were completed in the first half of fiscal 'twenty.

Gianluca Romano: Consistent with prior commentary we had.

Gianluca Romano: <unk> fiscal 2000 and for the Capex to be down significantly compared with fiscal 'twenty three.

Speaker Change: Although still sufficient to support our innovation driven farther for the month.

Speaker Change: We generated about $100 million in free cash flow.

Speaker Change: And a third $146 million to shareholders.

Speaker Change: The quarterly dividend.

Speaker Change: Exiting the quarter with 210 million shares outstanding.

Speaker Change: Okay.

Speaker Change: We closed the December quarter was $2 3 billion in available liquidity.

Speaker Change: Including our Undrawn revolving credit facility.

Speaker Change: Our debt balance was $5 7 billion.

At the end of December quarter, with more than 90% of our long term debt obligations beyond 10 years.

non-GAAP interest expense were flat quarter over quarter at $84 million, and we project <unk> expense level.

Speaker Change: Nice quarter.

Speaker Change: Okay.

Speaker Change: Turning to our outlook.

Speaker Change: We expect incremental improvement in mass capacity demand from both cloud and enterprise customers to more than offset the seasonal related decline in beer in the legacy markets.

Speaker Change: Okay.

Speaker Change: With that as a context.

Speaker Change: March quarter revenue, you would expect it to be near range of $1 65 billion.

Speaker Change: Plus or minus $150 million.

Speaker Change: An increase of 6% sequentially at the midpoint.

Speaker Change: We are planning for non-GAAP operating expenses of approximately $160 million.

Speaker Change: As our temporary pay reduction and it lengthens the December quarter.

Speaker Change: At the midpoint of our revenue guidance, we expect non-GAAP operating margin to expand because of low double digit percentage range, including underutilization cost of approximately $50 million.

Speaker Change: We expect our non-GAAP EPS to be 25%.

Speaker Change: Sort of minus 20%.

Speaker Change: Based on a diluted share count of approximately 112 million shares and our non-GAAP taxes.

Speaker Change: $27 million.

Speaker Change: I will now turn the call back to Dave for final comments.

Gianluca Romano: Thanks Gianluca.

Gianluca Romano: Heading into calendar 2024, we have increased confidence in a gradual near line demand recovery that coincides with the launch of Mosaiq.

We believe this platform deliver sustainable aerial density leadership with compelling <unk> advantages.

Selling data center operators to satisfy their increasing workload demands, while conserving both power and space.

This combination of capabilities is significant and our timing is fortuitous, we've navigated the last seven quarters with discipline and focus while maintaining our product and technology execution plans.

Gianluca Romano: As a result, we emerge well positioned to drive optimize financial performance to support our capital return commitments and return to our targeted profitability levels over time.

Gianluca Romano: Our strong execution is only possible through the tremendous efforts of our global team and would like to thank them for their resiliency and dedication through this dynamic period.

Gianluca Romano: I would also like to thank our suppliers customers and shareholders for your ongoing support of Seagate, operator, let's open up the call for questions.

Gianluca Romano: Thank you we will now begin the question and answer session.

Gianluca Romano: I ask a question you May press Star then one on your telephone keypad.

Gianluca Romano: If youre using a speakerphone please pick up your handset before pressing the keys.

Gianluca Romano: To withdraw your question. Please press Star then two.

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

Gianluca Romano: If you have further questions you may reenter the question queue.

Once again that was started in the one to ask a question.

Gianluca Romano: At this time, we will pause momentarily to assemble our roster.

Gianluca Romano: And today's first question comes from warm seem Ohio with Bofa. Please go ahead.

Gianluca Romano: Yes. Thank you so much Dave you alluded to the progress that you've made on Mosaiq given what you know now how would you characterize the outlook for maybe hammer units in the second half of 'twenty, four or perhaps into 'twenty, five and I think you've mentioned.

William David Mosley: Your first customer looking to transition through three terabyte hammer, what what kind of extra byte installed base opportunity is that and maybe you could address it even more broadly across to cross hyper scaler that'd be very helpful. Thank you.

William David Mosley: Yeah. Thanks Hamzah.

William David Mosley: So we were very quantitative.

Hamzah: And prescriptive on the last call about the front half of this year I think we won't be as much on the back half of this year, but the ramp is continuing on at a healthy pace.

Hamzah: And we're continuing to look at all.

Hamzah: Customers need on last generation platform next generation platform trying to balance supply and demand really will be so I think that's the primary metric that we're focused on make sure we get financial predictability, we will drive the hammer.

Hamzah: Transition aggressively this year and then mosaic really gets into when do we get the four terabyte platter in Halloween populating that chain, we expect to drive as many of whom are ex slipped into 2025 as we can so we're off to a good start I think and we're going up the ramp and trying to work the yields.

Hamzah: Everybody quantified like we talked about.

Hamzah: Nothing's really changed in.

Hamzah: In the last 90 days I would say problems are.

Hamzah: Tough problems with the team's knocking them down so I'm pretty happy with that.

Hamzah: Okay. Thank you for that and so I'll look up but maybe could you help us just think about.

Hamzah: The margin ramp I think you noted some headwinds that will continue from underutilization charges, but you're also expecting.

Hamzah: The margins to increase all through calendar 'twenty four could you maybe also help us think through in that margin commentary, how what the margin differential is between hammer in TMR basketball drive them, how that might change overtime.

Hamzah: Right.

Hamzah: And what I'm, saying, yeah. Good question first of all our <unk>.

Hamzah: Remember quarter showed a good improvement in profitability gross margin was up about 4% operating margin it was up more than 5%.

So I'll say VSAT profitability recovery already started.

Sandy Hudson: Part of it is of course.

Speaker Change: Coming from Jose cost actions, we have taken in the last four.

Speaker Change: Almost two years.

Speaker Change: And of course, it makes improvement and of course, the pricing actions, we have taken in the last several quarters. So this will continue to be reflected also in that in the future forecasts.

Speaker Change: It makes a we continue to go to more mass capacity.

Speaker Change: Volume and those cost Hodgson out of course, continuing to be very effective.

Speaker Change: In Panama.

Speaker Change: Utilization definitive beat what we and union support in that in the December quarter, we had ample to meet more of the wafers.

Speaker Change: With of course, as I don't I cost in our manufacturing.

Speaker Change: It's at 84 that was achieved mentor for the current quarter and next quarter in Panama.

And then so now we can maybe reduce it could be that way for and plan for more on the on the media and of course.

Speaker Change: Adding more variety and they find out they are so dependent debates Jose mix inside our production. So we said underutilization charges could be slightly higher and a little bit higher but not now.

Speaker Change: Really much higher it's exactly to the day type.

Speaker Change: So I expect that for the <unk>.

Speaker Change: Next few quarters to see.

Speaker Change: Mexico and use it in the light that H, meaning more high capacity drive and starting to see the impact from some volume and mix So monster will not be.

Speaker Change: It's a high volume platform win at <unk> in June.

Speaker Change: And as Dave said, we will have even more.

<unk>.

Speaker Change: The second part of the calendar here.

Speaker Change: With that business, improving demand, improving we're going to possibly higher revenue and that we have.

Speaker Change: Of course targeting.

Speaker Change: To bring back kind of what the gross margin into the target range of 30% to 33%.

Speaker Change: No as we said at the end of the prior quarters 18 months ago.

Speaker Change: So they have a lower revenue compared to the prior upcycle.

Speaker Change: Thank you so much.

Speaker Change: Thank you and our next question today comes from Erik Woodring with Morgan Stanley. Please go ahead.

Speaker Change: Hey, good afternoon, guys. Thank you very much for taking my question.

Speaker Change: I was wondering if you could just double click again on on some of the dynamics behind the hyper scaler and where their inventory is.

Speaker Change: How long.

Speaker Change: Do you see any more pain or what their behavior is what your conversations look like and then again, how they're responding to any pricing actions and production changes that you've been making over the last relative to 90 days ago. Thank you.

Speaker Change: Yes, the dynamics for them is very interesting and it has affected us quite a bit over the last year or so I do think the inventory situation is much much better than it was six months ago. So.

Gianluca Romano: It's basically cleaned up at this point and what's going into the inventory changes going out and being consumed by the data centers again. So we're much happier with that the rate of consumption isn't what it was two years ago and.

Sandy Hudson: But I do think it's going to accelerate a little bit.

Sandy Hudson: This is where we get into the.

Sandy Hudson: Forecast numbers of what the CAGR is the exabyte CAGR.

Sandy Hudson: 2020, we were then.

Sandy Hudson: Hi, <unk> and then we stayed in the <unk> for 2021, and 2022 and then for the first time ever for the last year year and a half we've seen negative.

Sandy Hudson: <unk> growth, which doesn't make any sense.

We're forecasting still in the mid <unk> right now.

Sandy Hudson: It may or may be a little bit higher as people get into some of these replacement cycles that we talked about.

The.

Sandy Hudson: The interesting thing the interesting dynamic as I look back on the last year and a half as was the push for AI and how it consumed a lot of.

Sandy Hudson: Compute.

Sandy Hudson: The dollars for the compute infrastructure that was going on in the data centers.

Sandy Hudson: That's critical for most of our customers.

Sandy Hudson: I've been in a race to get as much compute memory.

Sandy Hudson: That compute online as they could to be able to handle all these AI applications everyone's talking about.

Ultimately there is a data back end piece of that and then also there is the fact that they were as they were prioritizing that they were letting the drives that they had in the datacenter is just continue to run. So there is the replacement cycle for power and.

Sandy Hudson: Space and just overall cost benefits.

Gianluca Romano: We're all we're definitely having those conversations with our customers and the factoring that into what exactly our volume plans are for the next three years and saying. This is this is what we're intending to build this as the economics that you could you could get it to and we've talked about this build to order book.

Gianluca Romano: Sure.

Gianluca Romano: And I think we're getting a lot of good reception. This theres a lot of other supply chains that are actually manage this way by these people so they.

They understand it fairly well and they see the tcl benefits of the higher capacity drives where they want to reach for that plant as well and they'll get it.

Sandy Hudson: We have to be careful of course, because we.

Sandy Hudson: <unk>.

Sandy Hudson: The factories have been so decimated by this downturn that we need to make sure that as we grow back will provide in a smart way.

Sandy Hudson: Yeah.

Sandy Hudson: Super Thanks, so much guys.

Sandy Hudson: And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead.

Sandy Hudson: Yes, thanks for taking our question I wanted to maybe just asked about.

Sandy Hudson: The income statement, just the P&L trajectory from here.

Sandy Hudson: This guidance that you've given it looks like it's the first kind of sequential increase in opex that we've seen and I can appreciate it.

Sandy Hudson: Improving fundamentals et cetera.

I was just curious how do you how do we think about the pace of quarterly Opex and maybe a normalized level of operating expenses looking out over a couple of quarters, and then kind of building off of that with free cash flow generation. Returning just remind us again, how you think about the capital structure and possibility of coming back into the market in terms of share repo.

Sandy Hudson: Thank you.

Okay.

Sandy Hudson: Thank you Adam well in term of Opex now if you look our plan has always been a.

Sandy Hudson: Very positive anytime all theyre, all pest control cost control just few quarters ago, we were at.

Sandy Hudson: And no available $300 million. So we went to fine needle, especially into last quarter at night to London and $40 million.

No I said in the prepared remarks, we have Nathan a bit of a higher cost expected in this quarter, because we took some.

As told me how to action on Saturday that ended at the end of last quarter. So we haven't even been higher enabled cost.

Sandy Hudson: As usual, we will focus on that on all pest control.

Sandy Hudson: Still a very very good number and I think in the next few quarters, we will stay around this level of.

Although opex until next fiscal year as a as you know <unk>, we don't have any variable compensation.

Sandy Hudson: Overall in our Cogs and Opex, but then a big pockets in Opex.

Sandy Hudson: I think <unk>, probably reasonable for fiscal Q2 and.

Sandy Hudson: Q4 <unk>.

Sandy Hudson: And then next to it seems kind of ethylene to be at a higher cost in opex still.

Sandy Hudson: I think that well below that at the end of the meeting I'm probably not between two.

Sandy Hudson: So 70% to $80 million for attending as probably a reasonable way to model it.

Sandy Hudson: Free cash flow, we had a positive free cash flow quarter.

Sandy Hudson: Of course, all of this very important for us.

Sandy Hudson: To generate positive free cash flow revenue easing teething profitability easing claims ink and therefore, we expect the cash levels that improve sequentially through the next few quarters.

Sandy Hudson: Thank you.

Sandy Hudson: Thank you Matt.

Speaker Change: Question today comes from Chris Shankar with TD Cowen. Please go ahead.

Speaker Change: Hey, guys. This is Eddie for Chris Congrats on the Hammer launch that's an exciting opportunity for you guys I have a question regarding the customer value you are providing with these pay two terabyte hammered right.

Customers be enjoying lower price per terabyte versus 22, and 2004 terabyte <unk> drives for example.

Because the hammer yields havent matured, yet this benefit will be more about power and space and the lower price per terabyte.

Speaker Change: <unk> place in the future.

Speaker Change: Yes.

Speaker Change: It's a good question, we will balance everything of course.

John Luca: Our yields are and our costs are in.

John Luca: Try to get the customers incentivize, but there is some incentives business provided by their power and space reductions as well we call that <unk> proposition. So.

All things are in balance I do think that the.

John Luca: The price per terabyte. If you will is nominally the same maybe just slightly lower but.

John Luca: There's definitely going to be a.

John Luca: <unk> incentive for the customers to move off of the lower capacities in under the <unk>.

That's great color. Thanks.

John Luca: And if we juxtapose the hammer to transition to the transition from LMR to PMI took place back in 2000 and 6008 <unk>.

John Luca: It went from like zero percent BMR makes it to 100% within five to six floors.

John Luca: Do you think the hammer transition will be as quick or you see some reasons why this trend maybe a little bit slower.

John Luca: The transition from LMR to BMR.

John Luca: And cycle times are a little bit longer now so I don't think it will be as fast I mean, I'd like it to be as fast and we will continue to drive it as quick as we possibly can.

John Luca: The one thing I will say is that our last.

John Luca: Last generation PMO product, if you will the two four terabytes or flutter drive that we've just talked about.

John Luca: Has a remarkably similar.

Kit of parts is the hammer drives do so relative to what we're making one versus the other it's not a big deal and we can see you can get through customer transitions easier I think as we gained more confidence and a year over over the four plus terabyte music platforms.

John Luca: We will definitely wanted to celebrate because by the time you got to say five plus terabytes, then it's such a great replacement.

John Luca: Legacy product that you have that we'd want to drive the whole portfolio there because.

John Luca: Utilization is much better in the factories and the cost can come way down.

John Luca: Thank you Dave.

John Luca: Thank you and our next question comes from Thomas O'malley with Barclays. Please go ahead.

John Luca: Hey, guys. Thanks for taking my question I appreciate it so I just wanted to understand the move from qualification to revenue recognition. It sounds like with your largest customer you are finishing qualification right now and you're obviously pointing to some big units in the first half.

John Luca: You mentioned on the call that you're expecting calls with the majority of the U S. Cloud guys. A couple of others in calendar year 'twenty four would you expect a similar timeframe between qualification and revenue recognition like if those are getting qualified in the second half of this year you could see revenue from a large number of additional customers just wanted to.

John Luca: And the timing.

Tom: Thanks, Tom It's complex there are some customers that are relatively shorter qualifications.

Tom: And that's some of us because of the feature set and making sure we get the feature set checked out there on a generic feature set that were already shipping versus their own unique features.

Tom Smith: We have to make sure we're doing all those things right that's normal in any near line transition.

Tom Smith: And I will say that.

Lot of people are seeing the CTO benefit so they're asking.

Tom Smith: Trying to speed these qualifications through right because they want that benefit to flow through as well.

Tom Smith: We will.

Sandy Hudson: <unk> also be limited on our ramp ups of what we can do and the cycle times are quite long. So we're going to balance all these things together if that helps you.

Yes, that's helpful. And then I just wanted to ask one on the on the margin side. So you guys have talked about 20% below peak, but still getting back to about 30% gross margin target of at least at the low end.

Sandy Hudson: If you look at what you are saying for mass capacity growth for the industry are mid Twenty's, if you're just assign that to kind of your revenue ramp over the next couple of years. It takes probably a year and a half to kind of get to that 252 $6 billion Mark.

Sandy Hudson: Using like a linear growth rate is that the timeframe, we should be thinking about until you get back to that 30% to 32% gross margin or can you get there before and what are the levers that get you there before revenue gets back to about $2 five to six thank you.

Phil: Thank you Phil.

Not a major lever is there is that so is it more we have ample them out and have better will it be at the margin. So we are becoming more and more positive on and of course at the time.

Phil: <unk> of <unk>.

John Luca: Continuous improvement in our margin I would say.

John Luca: Well, we gave an indication last quarter in Panama and the level of revenue.

Tom Smith: But we think we need to achieve in order to get to a certain level of gross margin that is broadly.

Tom Smith: I'm getting a little bit more optimistic right now so probably we can do with even lower level of revenue as you said before.

Tom Smith: Qualification of customers is important but we are working out of Taiwan, quantifying more and more test to myself.

Tom Smith: Sumit and we can.

Tom Smith: A lot of ample and hammer now I'm fairly positive we can do over there.

Tom Smith: You said at <unk> at a lower level of driving.

Tom Smith: Thank you very much.

Tom Smith: Thank you.

Tom Smith: And our next question comes from Karl Ackerman with BNP.

Please go ahead.

Tom Smith: Okay. Thank you.

Tom Smith: John Let's say, it's encouraging to see an improving gross margin trajectory.

Karl Ackerman: It doesn't appear to be driven by price yet.

John: Our math suggests that price per terabyte.

John: Did fall low single digits sequentially and year over year could you, perhaps address whether we should expect.

John: Previous actions to raise prices across the channel may occur over the next couple of quarters.

John: I have a follow up please.

Hey, guys.

John: What I will say you can see the good improvement in our profitability a good plateau vacuum is actually coming from pricing.

John: Of course, you need to check in to say hey.

Jamie Hello: Like for like pricing Jamie.

Jamie Hello: <unk> of course, all this had a major impact on there, but we are very happy with what we are doing both on pricing and on cost.

Jamie Hello: Thanks.

Jamie Hello: I think this quarter actually fantastic improvement in profitability, both gross margin and operating margin.

Jamie Hello: And if you look at our guidance now imply and add a strong improvement in profitability. So.

Jamie Hello: But I think it's a good part of it makes sense is not a part of that improvement.

Jamie Hello: And we will continue to do exactly execute <unk> Chan.

Jamie Hello: Really.

Jamie Hello: We've got a very glad with the outcome so far.

Jamie Hello: I would take all the raw demand is still not what it was two years ago, and so and we have a supply chain that's not entirely healthy yet we have to go continue to work those actions.

Jamie Hello: You think over time.

Especially incentivising transitions to newer mass capacity drives and then if there's price raises that tends to be more on legacy.

Jamie Hello: And to the extent that everyone's under the same strain throughout the entire ecosystem.

Jamie Hello: This is this is.

Jamie Hello: But the trend that we're seeing.

Jamie Hello: I think we will probably.

Jamie Hello: Take advantage of it.

My sense is that in the next year or two we will get to the point, where we get high enough up the ramp that we can be very predictable and then I think things will things will stabilize quite a bit but we're not at a place where the industry has enough demand relative to the capacity that has online yet.

Jamie Hello: Eric Sir that's it from me thank you.

Jamie Hello: Thank you and our next question today comes from Kevin Cassidy at Rosenblatt Securities. Please go ahead.

Jamie Hello: Yes, Thanks for taking my question and congratulations on the great results.

Jamie Hello: You implemented.

Kevin Cassidy: Build to order program with your customers can you give an update on that is that still active in.

Kevin Cassidy: How is that giving you visibility.

Kevin Cassidy: Yes, thanks, very much it is and it transitions from my last comments as well.

Kevin Cassidy: Because the industry just as the levels that we're at to build on my last comment is just can't funded the investments of these making areal density and exabyte growth over time with with the.

Kevin Cassidy: Revenue and margins where it was.

Kevin Cassidy: And what helps us is to run factories as improved visibility and the predictability towards that in demand.

Kevin Cassidy: And so I think thats why the HDD industry has changed fairly dramatically through the cycle was about six or eight quarters.

Because capacity did come off at the same time that people were the demand was down.

Kevin Cassidy: And the industry's therefore under invested in capacity and capital and.

Kevin Cassidy: Lead times are going up as we've talked about before so we need this build to order framework.

Kevin Cassidy: Just get back to a healthy industry and we're rewarding predictability.

Kevin Cassidy: With our customers and we're incentivizing that predictability and where the people aren't predictable and they come in at the last minute for product that either we don't have it or.

Kevin Cassidy: They'd have to pay for our flexibility I think that's the way we're thinking about it and then making sure that we stabilize the supply base as well because it's not just.

Kevin Cassidy: Ourselves as the HDD supplier, but we have numerous upstream suppliers that need to be stabilized as well. So it's good it's still going to take some time.

Kevin Cassidy: Okay great.

Kevin Cassidy: You mentioned vertical integration of your laser technology is that a cost savings or is it more controlling the supply chain.

Kevin Cassidy: Yes, I think at this point.

Kevin Cassidy: So it's.

Kevin Cassidy: Been a long time coming and we definitely value the suppliers that have helped us get hammer products to market.

Kevin Cassidy: We also feel like given how intricate the silicon photonics circuitry is is that we needed our own capability to control.

Kevin Cassidy: But right now it's more of a technology second sourcing if you will.

Kevin Cassidy: And so we're going to continue to run with a few sources I think over time, there should be the opportunity to go drive the costs down.

Kevin Cassidy: And balance all things with multiple sources.

Kevin Cassidy: And the ability to control the investments that we're making capital for example, and things like that but.

It's been.

Kevin Cassidy: It's been a longtime coming and part of the reason we're talking about it.

Kevin Cassidy: As part of mosaic because it's very relevant as we get to four terabytes of pleasure in flux here, but it's a pleasure.

Kevin Cassidy: I think also there's been some noise out there in the industry about.

Kevin Cassidy: Well.

Kevin Cassidy: As goes the ramp of that supplier. So goes the seagate ramp and Thats clearly not true.

Kevin Cassidy: Understood. Thank you.

Kevin Cassidy: And our next question today comes from Stephen Brian Fox with Fox Advisors LLC. Please go ahead.

Kevin Cassidy: Thanks for taking my question.

Kevin Cassidy: Dave I was just wondering if you could zoom out a little bit without putting any kind of time frame on it to get to the.

30%.

Dave: Margins. It seems like you can almost get there from here on just the typical incremental margins from volumes, but based on everything you said it doesn't seem that easy, especially early stage with hammer versus later stage. So can you sort of walk through some of the puts and takes say over the next two to three quarters versus say when you hit that volume crossover where it becomes.

More smoothed to get to the margin.

Dave: It's just there's been a lot of comments around this maybe you could just sum it somebody else.

Speaker Change: Yeah, and John Luca can share some insights as well here I think that.

John Luca: First of all we're ramping hammer according to some proscriptive schedule, we can deploy it into certain.

John Luca: Mass capacity Hyperscale are markets, we can also deploy it into other markets.

John Luca: Depending on how we choose to do things. So we can put it in via markets for example over time.

The rate at which we are able to transition and our yields and scrap and things like that especially once we get this four terabytes per platter, then I think that becomes more and more accretive margins.

John Luca: Fundamentally, though I still think the demand picture actually shift is going to shape. The next few quarters from a margin perspective.

Gianluca Romano: My sense is the demand is still not come anywhere close to where it was two years ago, we may see with the growth of data and with investments that people need to make in data around all these AI applications. We may see demand pick back up again and that will be the fundamental driver John Luca go ahead.

John Luca: Yeah no.

John Luca: I said that.

That's before I think it's a combination of all of that stronger demand towards.

Cycle.

John Luca: And a lot of very good products based on <unk> technology.

John Luca: We will drive further improvement in gross margin sequential improvement.

John Luca: <unk>.

We would have a sequential improvement through the entire time that 'twenty four and this is of course based on no I wouldnt be able offset impasse of hammer and also.

John Luca: Is that a quoting from that from <unk>.

John Luca: Downcycle, we expect especially in the mass capacity to continue it through the entire kind of 'twenty, Florida, and actually even even kind of 'twenty five.

Jamie Hello: That's helpful. Just can you fill in one other blank, which is backend testing capacity how does that.

Jamie Hello: <unk> helped hurt margins as this ramp happens thanks.

Jamie Hello: Based on where we were from legacy products years ago on desktop and so on and then even just the volumes that we were at a couple of years ago. I think we have plenty of backend test capacity.

Jamie Hello: But it's a.

Jamie Hello: Longer test cycles, though as you know pneumonia test cycles.

Jamie Hello: It is it certainly is the bigger the drive the longer the test cycle, but we still have plenty of capacity to cover the demands at this level.

Thank you.

Jamie Hello: Thank you and our next question comes from Timothy Arcuri with UBS. Please go ahead.

Mike: This is Mike.

Timothy Michael Arcuri: Thanks for taking my question just a.

Timothy Michael Arcuri: Just one for me.

Timothy Michael Arcuri: Wow.

Timothy Michael Arcuri: Doug.

Timothy Michael Arcuri: Port orders, but <unk>.

Doug: Could give us some color on.

Doug: Our book to Bill.

Doug: <unk>.

Doug: What is all relative to revenues.

Doug: And where that how.

Jamie Hello: How that book to Bill has been trending and where do you think thats going over the next couple of quarters that would be helpful. Thanks.

Jamie Hello: Thanks, Yeah, it does get into our build to order plans.

Jamie Hello: Sure.

Jamie Hello: It's really like I said before very prescriptive on what we're building for people 234 quarters out.

Jamie Hello: As long as.

Jamie Hello: If we all stay on that plan and I think thats predictable economics for our customers as well so it's going better.

Jamie Hello: Better and better every quarter I think when we first launched this there was questions that I was getting on these earnings calls about.

Jamie Hello: So the supply is so far below our sorry as soon as demand is so far below supply today, how can you do something like this but we need that predictability in order to run the supply chain and reward everyone upstream of the supply chain. So.

Jamie Hello: So far the progress has been fairly good and we're getting better visibility into the next quarter and beyond.

Jamie Hello: Okay.

Jamie Hello: Thank you and our next question comes from Vijay Rakesh with Mizuho. Please go ahead.

Jamie Hello: Hi, Dan.

Vijay Raghavan Rakesh: And then just on the enterprise hard disk drive side.

Vijay Raghavan Rakesh: How do you see given the 25% exabyte growth and <unk>.

Vijay Raghavan Rakesh: Cody on the DC side. This year when do you expect those revenues to get back to that 2 billion run.

Vijay Raghavan Rakesh: Run rate exiting 'twenty, four I guess kind of a.

Vijay Raghavan Rakesh: 24.

Vijay Raghavan Rakesh: No we don't guide.

Sandy Hudson: After this quarter. So we just gave a good guidance for the last quarter in term of revenue claims and profitability phase and as we said no we are emptying.

Sandy Hudson: Volume, we are seeing that data.

Sandy Hudson: Demand environment, So we have set.

Sandy Hudson: Sequential improvement was supported by we don't we don't give specific guidance on revenue for that that and those are kind of I guess, yes, I would say that.

Obviously.

Sandy Hudson: We're watching near line demand CSP demand on Prem enterprise demand continuing to build strength.

Sandy Hudson: But not nearly as big as it was a couple of years ago, but that's very good and we're being very careful building into it.

Sandy Hudson: The one point that you just raised which was the whole AI PC demand.

Sandy Hudson: Demand, which.

Sandy Hudson: I think it's still very early innings in this but we do see opportunity there.

Sandy Hudson: High end workstations, if you will that are that are.

Sandy Hudson: Running AI applications made may actually be.

Sandy Hudson: It's an interesting opportunity.

Sandy Hudson: Got it and then on the gross margin line, sorry to belabor that.

Sandy Hudson: Jim looked at do you see.

Sandy Hudson: You guys getting back to that target rate below 33% exiting this year and.

Sandy Hudson: Especially on the handler side I think Dave mentioned, you can do with four terabyte plus five discs.

Speaker Change: Dry versus wet.

Speaker Change: Underpinning this.

Speaker Change: Now what.

What are the gross.

Speaker Change: Margins on hammer versus.

Speaker Change: Where do you see carpet margins today I guess.

Speaker Change: We know we said in the past had amortized gross margin is for sure.

Speaker Change: Towards the corporation, so it's always above our average.

Speaker Change: Now as you know.

No <unk> driving a lot of that but.

Speaker Change: Now we've seen starting in the March quarter, and then you'll see some improvement in Atlanta.

Guidance it will be I guess pet mode, when we're going into the June quarter, and tours and asked Jose.

Jamie Hello: Yeah. So we had a positive on the profitability from that product.

Jamie Hello: And now we need to take our time to qualify the customers and they have to stop because as Dave said, we take a little bit of time to ramp at high volume production in Florida as far as the new product.

Jamie Hello: Alright. Thanks.

Jamie Hello: Thank you and our next question comes from Ananda Baruah with loop capital. Please go ahead.

Ananda Baruah: Yeah. Good afternoon, guys. Thanks for thanks for taking the question really appreciate it.

Ananda Baruah: I guess I guess.

Ananda Baruah: For Dave and John Let me jump in here too.

Ananda Baruah: The hyperscale or is.

Or sort of having some conversations about.

David: Yes, David datacenter redesign over the coming years.

John: Allows us is around GPU compute, but they have a frank.

John: And the reason why I'm going to have a little bally and <unk>.

John: I guess would there.

John: If that occurs.

John: Have any opinion on it.

John: The incremental opportunity for near line drive.

John: I guess, it's definitely like in addition to everything integrated coming on.

John: Several of the slides.

Any thoughts on that.

John: And any context and that's it thanks.

John: It is.

John: Real complex topic.

John: What I would say is that.

John: The computer infrastructure is changing dramatically and the memory architectures will change to support that computer architecture very dramatically as well. So there is a lot of redesigned discussions going on.

John: There are different types of applications and things that are being branded AI there is stuff thats.

John: Very focused on text or large learning.

John: Language models.

John: Then there's image recognition and video creation and so theres a lot of different types of applications. The propagating and I think this is just normal application development, that's been going on for years and years and years, but I do think there is different types of hardware. So I think there are some now AI data center.

John: It is being discussed that are largely compute.

John: I also think that some of these applications are spinning off a lot of data and the required data to be stored for a certain period of time, and then brought back up to the higher levels to be reprocessed, and so thats just normal data growth as well.

So I think the net of it is there's a lot of architecture redesign going on probably not affecting the tiers that we're in.

John: If anything and we made reference to this in the.

Our prepared remarks.

John: There's cost power and space are at a premium.

John: Theres, many AI applications from what I'm hearing that there's just not enough power for.

John: And.

John: Its power infrastructure is going to be critical.

Ananda Baruah: But to the extent that you can do your part to the by transitioning to higher capacity drives but net net gives you same exabyte capacity with less power I think that's a good thing.

Ananda Baruah: It may be an opportunity for us.

Ananda Baruah: So that would be in addition to like 25% kind of a data room rate driven.

Ananda Baruah: That sort of power of the catalyst data.

It's hard to say it depends on the bills of how much people are having to pay for it again.

Ananda Baruah: I think in the AI <unk>.

Ananda Baruah: Applications that are really.

Ananda Baruah: Exploding right now.

Ananda Baruah: <unk> is going to become one of the limiting factors and so to the extent that there may be a really good payoff in not only cost savings space savings and so on but also just freeing up that tower infrastructure to go do other things.

Ananda Baruah: Might actually help us get above the 25%.

Ananda Baruah: Thanks, a lot I appreciate it.

Speaker Change: Thank you and our next question comes from Mark Miller with Benchmark Company. Please go ahead.

Speaker Change: Thank you for the question and congratulations on the launch of Mosaiq I'm just wondering if you mentioned it briefly.

Speaker Change: <unk> are you seeing from AI related opportunities and what are you how do you see that ramping throughout the year.

Yes, Mark.

Speaker Change: Pretty cynical sometimes on these things that I'm looking for is that actually say a eye on them and they are starting to happen, but it's still fairly small.

Speaker Change: And again I'll go back to my previous comments.

Speaker Change: These are really applications that had been developing a lot of fronts over many years anyway. So say for example in image recognition, whether it's at the edge or in the cloud applications.

Speaker Change: Application spaces.

Speaker Change: Developing overtime.

Quite a bit when we get into specific things like large language models, where people talk about I think the data infrastructure impact piece is still.

Speaker Change: Secondary to the compute piece or even at this point so at some point there will be compute.

Speaker Change: Enabling all these really cool applications and efficiencies that.

Speaker Change: People in businesses like ours were taking advantage of and then the data will continue to grow on the back side of that but we're still early innings on that.

Speaker Change: Well, that's more 2025 you seem to.

Speaker Change: Yes.

Speaker Change: For large language models, I'd say, maybe I don't know exactly.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.

Speaker Change: Thanks Rocco.

Speaker Change: <unk> is focused on executing our product roadmap leveraging the advanced technologies, and our mosaic platform, which we believe positions us well to enhance profitability over the near term and capture long term opportunities for mass capacity storage.

Rocco: I'd like to close by once again thanking all of our stakeholders for their ongoing support of Seagate. Thanks for joining us today, and we look forward to speaking with you during the quarter.

Kevin Cassidy: Thank you. This concludes today's conference call. We thank you all for attending today's presentation.

Kevin Cassidy: You may now disconnect your lines and have a wonderful day.