Q1 2025 Seagate Technology Holdings PLC Earnings Call
Welcome to the Seagate technology fiscal first quarter 2025 conference call.
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I would now like to turn the conference over to shiny Hudson Senior Vice President Investor Relations. Please go ahead.
shiny 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.
shiny Hudson: We've posted our earnings press release and detailed supplemental information for our September quarter results on the investors section of our website.
shiny Hudson: During today's call, we will refer to GAAP and non-GAAP measures non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our form 8-K, we've not reconciled certain non-GAAP outlook measures because material items that may impact. These measures are out of our control and.
shiny Hudson: <unk> cannot be reasonably predicted therefore reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
shiny Hudson: Before we begin I'd like to remind you that today's call contains forward looking statements that reflect management's current views and assumptions based on information available to us as of today should not be relied upon as of any subsequent date.
shiny Hudson: 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.
shiny Hudson: 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.
shiny Hudson: May be found on the investors section of our website.
shiny Hudson: Following our prepared remarks, we'll open the call up for questions.
Speaker Change: In order to provide all analysts with the opportunity to participate we thank you in advance for asking one primary question and then re enter the queue I'll now hand, the call over to you Dave.
Dave Mosley: Thank you Shane and low everyone.
Dave Mosley: So you get it delivered a strong start to the fiscal year with revenue growing nearly 50%.
Dave Mosley: And non-GAAP gross profit increasing over 150% compared with the prior year period.
Dave Mosley: These results demonstrate our ability to drive profitable growth, which is the outcome of sustained supply discipline.
Dave Mosley: And the strategic cost efficiencies that we've built into our operations.
Dave Mosley: Fiscal first quarter revenue came in at $2 $1 7 billion and non-GAAP EPS was $1.58.
Dave Mosley: Both were above the midpoint of our guidance range benefiting from better than anticipated mass capacity product mix.
Dave Mosley: And an improved pricing environment.
Dave Mosley: Continuing cloud demand strength, coupled with improvement in the enterprise and OEM markets.
Dave Mosley: Drove topline growth and also contributed to enhanced profitability.
Dave Mosley: Company non-GAAP gross margin expanded by 240 basis points sequentially to 33, 3% the highest level in over a decade.
Dave Mosley: This impressive performance was driven by our HDD business with non-GAAP gross margins now in the mid 30% range.
Dave Mosley: Amid a healthy industry supply demand environment, we anticipate further margin expansion opportunities as we ramp our portfolio of high capacity near line drives, including our mosaic based hammer products, which I'll discuss shortly.
Dave Mosley: The increasingly favorable business landscape combined with our industry, leading technology roadmap.
Dave Mosley: <unk> growing confidence in <unk> future opportunities.
Dave Mosley: Afflicting this confidence we are increasing our quarterly dividend by nearly 3%.
Our optimism is reinforced by our build to order model, which provides us with good demand visibility over the next few quarters.
Dave Mosley: We see the potential for significant revenue growth for fiscal 2025 inclusive of the seasonal demand fluctuation that is typical for the March quarter.
Dave Mosley: We are maintaining supply discipline.
Dave Mosley: And we will address near term exabyte demand growth by efficiently leveraging our available capacity.
Dave Mosley: Beyond that we are well positioned to support further demand growth mainly through technology node transitions with hammer, playing a vital role as we complete qualifications and ramp shipments.
Dave Mosley: Turning to the mass capacity market trends.
Dave Mosley: Demand for our near line drives remains robust and we believe customers are managing their inventory level as well.
Dave Mosley: In the September quarter revenue growth was driven by U S cloud providers.
Dave Mosley: So we continue to see positive demand trends globally.
Dave Mosley: For instance, some customers have highlighted the growing use of video content on E Commerce and social media platforms.
Dave Mosley: Data indicates that video is the most effective format for engaging digital audiences.
Dave Mosley: Furthermore, research suggests that longer form video content and personalization through AI technology can significantly enhance revenue generation opportunity for our customers.
Dave Mosley: These trends bode well for mass capacity, hdds, which are ideally suited for storing large and diverse data intensive video content.
Dave Mosley: Dd's comprise close to 90% of bytes stored in public cloud environments, and we are confident that proportion will hold for the foreseeable future.
Dave Mosley: Among the enterprise and OEM customers.
Dave Mosley: We observed the first meaningful uptick in near line demand following a multi quarter period of stability.
This increase reflects an improvement in traditional server demand as well as higher storage content per unit.
Dave Mosley: Pushing the average capacity per enterprise drive to a new record high.
Dave Mosley: In the via markets sales remained stable in the September quarter, and slightly ahead of our expectations.
We are witnessing a shift towards more cloud like storage solutions that utilize higher capacity drives.
Dave Mosley: This transition is due in part to longer data retention needs.
And increased video analytics.
Dave Mosley: Our HDD solutions, including Mosaiq camera products.
Provide cost efficiency and scalability to our via customers' evolving demands.
Dave Mosley: These same advantages are also crucial for generative AI applications, which is why we continue to believe gen. AI will be a driver of mass capacity storage simply by being a powerful catalyst for data creation.
Dave Mosley: Hdds provide a trusted economical and secured platform to host data that feeds into AI engines.
Dave Mosley: And preserves the content produced by AI powered applications.
Dave Mosley: This data is ultimately fed back into the air training models in a continuous cycle.
Dave Mosley: As datacenter architects prepare for Gen AI to move into the widespread adoption phase they continue to grapple with cost scale and power challenges.
Seagate's product roadmap is addressing each of these key challenges.
Dave Mosley: Compared with NAND based storage alternatives, our HDD solutions offer approximately six times lower cost per terabyte.
Dave Mosley: And hdds are roughly nine times more capital efficient.
Dave Mosley: Delivering the economies of scale necessary to support the anticipated surge in data demand.
Dave Mosley: And according to cloud customers Hdds have 10 times lower embodied carbon per terabyte relative to NAND, which can translate into a much lower carbon footprint very important given the worlds growing number of data centers.
Dave Mosley: That provides a good segue into our product ramp in qualification plans.
We have three primary areas of focus for fiscal 2025 aimed at driving profitable growth over the long term and we're progressing on all of them.
Dave Mosley: They include ramping the company's last TMR platform, expanding mosaiq adoption and executing our mosaic product roadmap that will enable <unk> to address the breadth of customers mass capacity storage needs.
Dave Mosley: Consistent with our plans we began to aggressively ramp our final PMI platform in the September quarter, which is currently up to 28 terabytes and capacity.
We are very pleased with the pace of customer adoption.
Dave Mosley: These drives are quickly catapulted to our second highest revenue product and we're continuing to both ramp volume and broaden our customer base in the December quarter.
We've expanded customer qualifications on our three plus terabyte per disc mosaic camera based platform with a few customer calls already completed spanning the enterprise near line via and mass market segments.
The qualification with our lead CSP customer is progressing well through what has been a very intensive and thorough testing process. The learnings that we have gained are already being leveraged in the future customer qualifications and product generations.
Dave Mosley: To that end Hammer qualification drives are now in the hands of multiple global cloud and enterprise customers.
Dave Mosley: Our expectation for shipment and revenue ramp timing across the broader customer base still points to mid calendar 2025.
Dave Mosley: Our confidence in Hammer technology remains strong and customer feedback has reinforced our value proposition that the mosaiq platform provides the foundational technologies required to satisfy high capacity storage requirements at the lowest total cost of ownership.
Dave Mosley: We expect to extend our technology leadership as we deliver on the next stage of our hammer roadmap the four plus terabyte per disc platform.
Dave Mosley: As a reminder, the step function capacity increased to four terabytes per disc is being achieved entirely through areal density gains.
Dave Mosley: Supporting our cost per terabyte reduction path with additional benefit to both customer Tcl and Seagate structurally improved margin profile.
Dave Mosley: In closing <unk> is performing well amid an improving demand backdrop with healthy industry supply dynamics.
Dave Mosley: We are in an exciting inflection point rooted in the structural changes we've made to our business.
Dave Mosley: And with our compelling technology roadmap. These.
These factors underpin our ability to build on the last four quarters of strong sequential performance and drive future profitable growth to create long term value for our customers and stakeholders.
Dave Mosley: Thank you and I'll now.
Dave Mosley: I'll hand, it off to John Luca.
John Luca: Thank you Dave.
John Luca: He gets started fiscal 2025, anybody's stronger revenue and profitability growth.
John Luca: <unk> fourth consecutive quarter.
Speaker Change: September quarter revenue was two applying to one 7 billion up.
Speaker Change: Up 15% sequentially and 49% year over year.
We increased non-GAAP operating income, 35% sequentially to $442 million.
Speaker Change: Late into a non-GAAP operating and managing of 24% operating.
Speaker Change: And our non-GAAP EPS was $1 <unk> at the high end of our guidance range and.
And that reflecting improving demand trends.
Speaker Change: Ongoing price adjustment and continued cost discipline.
Speaker Change: Within our RV.
Business expedite shipments grew 20% sequentially to 138 exabyte.
Speaker Change: Revenue increased 16% to $2 billion.
Speaker Change: Mass capacity revenue grew for the fifth consecutive quarter.
Speaker Change: More than offsetting the expected decline in the legacy business.
Mass capacity revenue was $1 $7 billion up 21% sequentially driven by continued strength in yen linked to that demand along with a significant uptick in near line enterprise sales.
Speaker Change: Last capacity shipment total 128 terabyte comparator, we used 140 <unk> in the June quarter up 23% sequentially.
Speaker Change: Last capacity shipment now represent an acre at 93% of total HDD exabyte.
Speaker Change: Reflecting the continued long term secular growth for the cost efficient scalable and storage.
As planned we began to ramp our 24 and 2008 terabyte PMI.
Speaker Change: Rich at both Seagate in the airline shipment to 190 <unk> reported.
Speaker Change: Up from 84 exabyte in the gate.
Speaker Change: As Dave highlighted earlier.
Speaker Change: Estimate adaption for this project.
Speaker Change: Has been strong and it presented more than 20% of our Atlanta Avenue in the September quarter.
Speaker Change: We expect near line demand will continue to improve in the December quarter at shipment, what our latest high capacity products rather than at first global CSP and enterprise customers.
Speaker Change: Demand for our products and it maintenance that's going to be stable in the September quarter, and we currently project <unk> Avenue in the December report so.
Smart city projects remain a key demand driver for our <unk> products worldwide.
And the regional economic conditions.
Speaker Change: And a key factor in <unk> decision was the new projects.
Speaker Change: The ongoing economic uncertainty in China.
Speaker Change: It's been a headwind once the VIP business in that market.
Speaker Change: We are cautiously optimistic.
Speaker Change: Recently announced stimulus plan in China will positively impact on via demand overtime.
Speaker Change: Sales of our legacy products.
Speaker Change: Total $270 million.
Speaker Change: Representing capacity, 12% of thought that Ed.
Speaker Change: The remaining 8% of revenue was derived from our other businesses, which as steady at $164 million.
Speaker Change: The other businesses include system, SSD, and if I missed it.
Speaker Change: A business that has grown by about 25% year over year and in close in pipes and that our quality of the products.
Speaker Change: Moving on to the death of the income statement non-GAAP gross profit increased 24% sequentially in the September quarter to $723 million.
Speaker Change: The significant increase reflects the favorable mix shift or what amassed capacity product.
Speaker Change: Unit price investment and ongoing cost efficiency and improving demand environment.
Speaker Change: Our resulting non-GAAP gross margin was 33, 3% at the company level overall.
Speaker Change: Overall, non-GAAP gross margin expanded by 140 basis points quarter over quarter, which was slightly more than we had originally anticipated.
Speaker Change: GAAP gross margin for the HDD business and mass capacity in particular remains significantly higher than corporate average.
Speaker Change: non-GAAP operating expenses totaled $281 million.
Up 10% quarter over quarter and above our original plan largely due to higher variable compensation commensurate with improved profitability levels.
Speaker Change: Other income and expense were $86 million and we project <unk> in the December quarter.
Speaker Change: Adjusted EBITDA, continuing to improve and was up 23% sequentially in the September quarter.
Speaker Change: <unk> hundred $98 million.
Speaker Change: non-GAAP net income increased to <unk> $37 million.
Speaker Change: <unk> non-GAAP EPS of $1 58 per share.
Speaker Change: Based on the diluted share count of approximately 113 million shares.
Moving onto cash flow antibody <unk>.
Speaker Change: Cash flow generation was $27 million.
Speaker Change: Reflecting our initial steps to normalized working capital to support our supply chain, while at the same time meeting engraving mass capacity demand.
Speaker Change: It will take a couple of more quarters for working capital to fully adjust.
Speaker Change: Which will have some impact to free cash flow generation.
Even so we expect free cash flow to improve in the December quarter and through the rest of the fiscal year.
Speaker Change: Capital expenditures for the quarter were $68 million for the fiscal 'twenty five.
Speaker Change: We will maintain capital discipline and continue to expect capex to be at the low end of the long term target range of 4% to 6% or whatever.
Speaker Change: We returned $147 million to shareholders.
Speaker Change: The quarterly dividend exiting the quarter with 211 million shares outstanding.
Speaker Change: As Dave mentioned earlier, the company approved an increase to our quarterly dividend raising the quarterly payout to 72 per share and reflecting our long term confidence in the business.
Speaker Change: We grow the September quarter, with $2 7 billion in available liquidity, including our Undrawn revolving credit facility.
Speaker Change: Inventory increased to $1 4 billion.
Speaker Change: Including material metric, we're staging in support of improving <unk> capacity with demand.
Speaker Change: Our debt balance was $5 7 billion at the end of the September quarter with more than 90% of our long term debt obligation maturing in fiscal 2007 and beyond.
Speaker Change: We exited the quarter with a net leverage ratio of three two times and expect to see further reduction in the coming quarters.
Speaker Change: Turning now to our outlook.
Speaker Change: <unk> processing revenue continues to trend higher with growth driven by robust customer demand for our high capacity near line drives.
Speaker Change: Along with ongoing improvement in the enterprise and OEM markets.
Speaker Change: These positive trends are expected to more than offset lower sales into the legacy in that market.
Speaker Change: We anticipate profit to further expand from the richer mix of mass capacity revenue at <unk>.
Speaker Change: As described and ongoing pricing actions.
Speaker Change: With that as a context December quarter revenue is expected to be net range of $2 3 billion.
Plus or minus $150 million.
Speaker Change: At the midpoint, which represent an increase of 6% sequentially and a 48% year over year.
Speaker Change: non-GAAP operating expenses are expected to be in the range of $285 million.
And the midpoint of our revenue guidance, we expect non-GAAP operating managing to expand into the low 20 percentage range.
Speaker Change: We expect our non-GAAP EPS to be $1 85.
Speaker Change: So that's sort of minus 20%.
Speaker Change: Based on the diluted share count of approximately 240 million shares and our non-GAAP tax expense of about $20 million.
Speaker Change: I will now towards that going back to Dave for final comments.
Dave Mosley: Thanks Gianluca.
Dave Mosley: In closing Seagate is achieving significant profitability expansion in a favorable demand environment.
Confident that the structural improvements we have implemented and our differentiated technology roadmap will further enhance said profitability and meet the evolving requirements of our customers.
Dave Mosley: Demand for our high capacity near line drives remains strong.
And we will build on that momentum to deliver scalable cost efficient storage solutions to support the anticipated growth in data demand, including from Jim AI applications.
<unk> dedicated global team strong business model and technology leadership form a winning combination that positions us well for future success and underscores our confidence in deploying capital and enhancing value for our shareholders. Operator, let's now open up the call for questions.
Speaker Change: We will now begin the question and answer session.
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Speaker Change: In the interest of time, we ask that you limit yourself to one question. If you have further questions you may reenter the question queue.
Speaker Change: Once again that was star then one to ask a question.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And our first question today comes from <unk> Mohan with Bank of America. Please go ahead.
Speaker Change: Yes. Thank you so much.
Speaker Change: I was wondering if you could flesh out a little bit your commentary around.
Speaker Change: This built water and very good demand visibility into this fiscal year.
Speaker Change: Significant demand growth, including.
Some seasonality that you would typically expect around around March quarter. I was wondering if you could maybe elaborate a bit on maybe some bookends around what youre thinking around demand growth is march quarter seasonality going to be different from what you've experienced before and I'd be curious to also hear your thoughts around if I could.
How you're expecting to compete versus your competitors' products, which have slightly higher capacities.
Speaker Change: Currently as you're ramping hammer it sounds like camera gets there sort of mid next year and volume. Thank you so much.
Speaker Change: Thanks, a lot.
Speaker Change: So a couple of things if I go back six months ago or a year ago. We didnt still these build to order model is largely to get predictability and I think it's working well.
Speaker Change: As we look into the next year, we are confident that we booked those quarters pretty well so.
Speaker Change: I am very happy the way, we're running the business.
Speaker Change: Given that predictability and we're only going to build what we what.
Speaker Change: What we need to build we're still not fully recovered as an industry from what we just went through a couple of years ago. So im quite pleased with how the build to order models have gone there is some seasonality in some markets as you allude to.
Speaker Change: And we will watch that carefully but I think everyone is.
Speaker Change: A little cautious on next year from a cloud perspective, I don't think inventory is built up any I think the buffers are still low.
Speaker Change: From my perspective, and and so I think we are happy with the cloud predictability of the mass capacity predictability.
Speaker Change: <unk>.
Speaker Change: On the second part.
Speaker Change: From a capacity.
Speaker Change: <unk> leadership perspective, we're shipping leading products.
Speaker Change: From a <unk> perspective, no one else is shipping over 30 terabytes for sure.
Speaker Change: And as we mentioned in the prepared remarks there is.
Capacity points, even higher net going up and it would put us tomorrow on top of that we can call even higher so.
Speaker Change: I'm very comfortable with our position there so I'm not quite sure exactly what you're referring to on.
Speaker Change: Capacity.
Speaker Change: Leadership or lack of leadership I mean.
Speaker Change: From our perspective, we've got to get all the calls and all the ramps done and so on and then.
Speaker Change: We get onto the four terabytes of disk and so on and we're very comfortable with the technology portfolio that way.
Speaker Change: Thanks, Dave.
Speaker Change: Okay.
Speaker Change: Our next question comes from Krish Shankar with TD Cowen. Please go ahead.
Speaker Change: Hi, Thanks for taking my question, Dave I had a question on your market share historically are more in the mid Forty's, but last few quarters.
Krish Shankar: Dip down to $30 into high 30% range can you talk about the factors that are beyond what Moshe is it potential disruption from Hamlin, causing temporary share loss is it customer specific where WT customers ordering more than yours.
Krish Shankar: And along the same path how do you think about the industry pricing in calendar 'twenty five has been extremely rational and ICD. How do you think about it in 2025. Thank you.
Speaker Change: Thanks, Chris.
Speaker Change: Yes for market share I've said, a number of times market share is an outcome of running your play in exactly the <unk> question.
Krish Shankar: We changed our place a year ago. When we said we want these build the orders. So we said I want predictability.
Krish Shankar: In a longer time horizon, rather than we are.
Krish Shankar: Building, a bunch and then hoping to push it into a channel.
Krish Shankar: <unk> for market share or something like that.
Krish Shankar: I think when we were at the bottom of the demand cycle.
Krish Shankar: Market share doesn't really matter, it's more of the predictability of the cash that you're generating and so on as.
Krish Shankar: As we get back into things you know obviously, we were taking now that the margins are higher we're getting rewarded for the money that we extend in the investments we've made and so on then we'll clearly take more.
Krish Shankar: More of that demand our way and so I think the market share of re equilibrated from an exabyte share perspective, I think we'll be just fine because customers want to continue to push the <unk> proposition going to higher and higher capacity points I think we're going to be fine there on the pricing side I think I'll, let gianluca answer the question there.
Speaker Change: Thank you.
John Luca: Yeah, I think the pricing environment continues to be.
Speaker Change: Positive for the industry.
Speaker Change: Every quarter, we have seen anything detailed improvement and basically is what is also driving our gross margin.
Speaker Change: I got a little bit every quarter as a nuance a cost side, we still are to some unused capacity in the June quarter and September quarter, and we don't have any of those extra costs. So we all said that it could be at or better than that.
Speaker Change: In fact gross margin and.
Speaker Change: And going into December if you look at how we guided we expect 5 million improvement in gross margin.
Further improvement in operating margin and that is of course very important to us and.
Speaker Change: And that is coming from the mix.
Speaker Change: Ramping more of our latest the amount of product of course, we also have a certain volume of hammer in our December quarter.
Speaker Change: And the pricing actions that is still ongoing and.
Speaker Change: We have had a good balance between supply demand and Jane and enforcing internecine for the industry and we are continuing for our long term strategy.
Speaker Change: Thanks, Dave Thanks, Jonathan.
Speaker Change: Thanks.
Speaker Change: And our next question comes from Amit <unk> with Evercore. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yeah. Good afternoon, Thanks for taking my question.
I guess my question really David around there's always the spear that the HDD industry broadly Seagate, specifically is sitting at the cyclical peak levels.
Speaker Change: I'd love to get your perspective as you look at the exabyte shipment that you have right now how do you get confident that would your shipping is that you're getting deployed by your customers versus perhaps ending up in inventory for them. How do you kind of gain that confidence and then really related that cyclical <unk> I would say you folks I'm very confident that there's a lot more upside to gross margins versus where you are today.
Speaker Change: <unk>, which is actually about your long term target.
Speaker Change: What do you think the appropriate margin framework for seeing as you go forward now.
Speaker Change: Yeah.
Speaker Change: Thanks, Amit.
Speaker Change: Yes, we have run a cyclical business over the many many years I think it's changed quite a bit as we came down from client server there used to be a lot of seasonality in that market and now we're in the cloud the cyclicality I'm not sure it's totally totally periodical but.
Speaker Change: The pandemic in particular caused a very big bubble and then a big crash on the back side of it. So I think thats kind of an anomaly there.
Speaker Change: How do we know what customers actually have we have to triangulate ourselves.
Speaker Change: I think we've really improved our processes for for being able to do that.
Speaker Change: But we're also not pushing in nearly as many drives total units or <unk>.
Speaker Change: <unk> points and some of the build to order model actually helps us with quite a bit so that we know that we're not overbuilding. If you were planning to overbuild.
Speaker Change: Exactly to your point on upside to gross margin I mean, we believe that the way we bring on more capacity is to drive for more aerial density gains and we have to go work the costs on those platforms and that's what we're really focused on doing making sure that we can introduce.
Terabytes in the Twenty's, and <unk>, and <unk> with lower and lower costs to be able to serve the market. Good Tcl proposition for our customers who are building data centers and want to support data centers for a long time is this to put more more capacity online because it's so much more efficient for them, but we need to be able to get that efficiency through our continued cost reductions also so.
I do think there is significant upside to gross margin still but it all starts to your point with supply and demand managing supply and demand properly.
Speaker Change: Okay.
And our next question today comes from Erik Woodring with Morgan Stanley. Please go ahead.
Speaker Change: Great. Thank you guys for taking my question.
Maybe if we just stay on this theme of gross margins here I think your guidance for the December quarter implies about a 34% gross margin.
Speaker Change: Roughly 70 basis points sequentially.
Speaker Change: You've been growing gross margins by about two to four points sequentially over the last four quarters.
Speaker Change: So I'm just wondering if pricing and mix are still favorable and obviously, Dave just made some.
Speaker Change: Comments on gross margins can you help me understand why we might not be seeing more gross margin expansion in the quarter again relative to the multiple points of gross margin expansion, you've been able to drive over the last 12 months. Thanks, so much.
Speaker Change: Yes, Eric.
Speaker Change: As I said before that in the September quarter. We also add there is support from better cost structure, we call at those.
Speaker Change: Higher capacity and the elimination of Jose Underutilization charges.
Speaker Change: It was about 100 basis points in our gross margin improvement.
Speaker Change: We are not going to add that.
Speaker Change: Improvement in the December quarter, because now we don't have any underutilization charges anymore, but we have stated progressing with our pricing structure, and we are making and grow with the ramp of our latest PMI, but all of that and we will see some volume on hand, so all of those are positive.
Speaker Change: Annualized we guide based on that on athletic assets, we have at the beginning of the book and then we execute during the quarter as best as best as we can and our focus is to keep improving quarter. After quarter. We are now try to increase that.
Speaker Change: Too much at one time, we want to be consistent and give this cycle up Florida, North, Florida as long as we can.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And our next question today comes from Toshi Hari with Goldman Sachs. Please go ahead.
Speaker Change: Hi, Thank you so much for taking the question I had a multipart one on hammer.
Toshi Hari: I think on the last call or at a conference you guys talked about.
Toshi Hari: Your expectation around getting qualification at our lead customer in Q3 I believe.
Toshi Hari: Is that now Q4 is that early 'twenty five.
Toshi Hari: Any thoughts on that would be helpful. And then Dave you talked about additional cloud companies or customers having.
Toshi Hari: Qualification.
Toshi Hari: Products on hand.
Toshi Hari: Should we expect the qualification process at some of those customers customers to be smoother than your lead customer given sort of the debugging process that <unk> been through over the past year or so thank you.
Speaker Change: Thanks Tricia.
The failure mode that slowed us down as we ramp to high volume. This spring and summer is behind US. The teams worked really hard to make sure. We get all the process improvements that we talked about last time in.
I did speak on last earnings call about our confidence was based on the test beds that we have running that are all designed to detect these fill modes with intense stresses that are way beyond our spec.
Speaker Change: And here we are another quarter later.
Speaker Change: We have more drives more configurations running.
Speaker Change: It's a test and we haven't seen heightened o'hara the failure mode. So we're confident that it's behind us that set initial learning that we get relative to proving it sometimes it takes a little bit of time with the customers to prove it but I'm confident we're going to be able to prove it right now and those tests are ongoing.
Speaker Change: Customers know exactly where we are when we think about qualifications. There is a lot of different facets of quality interoperability and different data center applications and so on and so forth no no significant concerns there. It really does come down. This one last issue in and Thats why we have confidence that confidence that no. One else is going to see it because as we ramp to high volume.
Speaker Change: Those other customer we've got this problem fixed size, let's say those other customers want some.
Speaker Change: Multiple non cloud customers have already qualified the product.
Already we're already getting volume shipments there they run tough quality themselves, but maybe I'll have these same kinds of stresses that now that we have the recipe I think we're going to apply it.
Speaker Change: Thank you.
Speaker Change: And our next question today comes from <unk> merchant with Citigroup. Please go ahead.
Speaker Change: Great. Thank you very much.
Speaker Change: I think as you guys ramp hammer and.
Speaker Change: And you start to see more qualifications and more shipments.
Speaker Change: December and into the March.
Speaker Change: How is that a negative to gross margins just given the shipment volumes are lower.
Speaker Change: There might be some ramp issues there how should we think about overall impact your margins as Panama ramps and I get the sense that you know obviously once you guys have much farther along that's a margin driver, but near term how should we think about the impact to your margin from Hammer Ramsey.
Speaker Change: Thank you.
Speaker Change: Thanks.
Speaker Change: Near term, we don't want to give it away long term, we don't want to give it away. So we definitely want <unk> to be accretive to gross margin and we think it does add benefit to our customers as well. So there's a trade off do they want to.
Speaker Change: Increase the higher the <unk>.
Speaker Change: <unk> for the data center build outs that Theyre doing and then we have to say you have to make sure you pay for it to replace that drives as we said before our factories are largely full so to take drives out of those that would.
Speaker Change: Take the supply out and turn it over to Hammer, we have to make sure we're getting paid for it and I'm confident we can do that in the near term as well, it's just a matter of managing the supply and demand picture properly.
Speaker Change: Now I will say on the cost side.
Speaker Change: Assuming that level of volume handmade across that data, but is below the PMI across the database. So four shortly as an advantage on MRI and.
Speaker Change: And the pricing of course, depending from the timing in there.
Speaker Change: And where do we add in the cycle, but alright.
<unk> sure Adam but he is not he is on why hammerson, albeit Atms to our gross margin.
Speaker Change: Yeah.
Speaker Change: And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead.
Speaker Change: Yes, thanks for taking the question. Thanks for taking the questions a couple of just real quick.
Speaker Change: Model questions.
Speaker Change: It looks like your Opex was a little bit higher than you expected in this quarter I am curious is relative to the $285 million guide how do we think about the trajectory of operating expenses as we look out into the March quarter beyond any kind of framework of what kind of we could think about from a normalizing operating expense perspective, and then as a kind of quick follow.
Speaker Change: As you as you get the I think it's $480 million of debt maturing in January.
Speaker Change: From that level, how are you thinking about the possibility of re entering share repurchase activity going forward.
Speaker Change: Yes on the Opex the increase between June and September is.
Speaker Change: Only due to variable compensation. So we are not hiring more people is testing method.
Speaker Change: Last year, we didn't have a valuable account NBC, Ed when we add valuable comp at a fairly good level.
Speaker Change: From <unk> I would say, probably we stay fairly flat. It was at <unk> 82 to 85, I think that it's at.
Speaker Change: The new range.
Speaker Change: That as you said is maturing in beginning of January so as we said before we are going to add that aspect with cash on hand. So we started using our net we want to be even at a bit lower.
Speaker Change: Before we would establish share buyback so I would say as you know we haven't paid a dividend.
Speaker Change: Are you already for as a company and then we want to take care of the debt and then after that we will locate share buyback probably 90 to the big five that anytime.
Speaker Change: Thank you.
Speaker Change: Thank you.
And our next question today will come from Timothy Arcuri with UBS. Please go ahead.
Speaker Change: Thanks, a lot.
Speaker Change: A question about the capacity outlook now given that you're kind of bumping up against your.
Speaker Change: Your Max.
Speaker Change: Today so.
Speaker Change: So unless you decide to add more you're I mean, you're going to ship close to that 130 <unk>.
Speaker Change: Your line, probably not in December but quite soon so I mean, you're growing nicely off the bottom.
Speaker Change: On mix and on <unk>.
Speaker Change: <unk> bites coming back, but if youre not going to extend.
Speaker Change: Capacity should we think of things starting to flatten out from here and I realize that pricing is going to go up but.
Speaker Change: But it seems like you kind of lose a degree of freedom in the model unless you start to expand exabyte capacity. Thanks.
Yes, Tim I think exactly to your point, we will.
<unk> expand exabyte capacity by transitioning to new products and so if you think about it.
Speaker Change: As I go to.
Speaker Change: From 20 terabytes ish to 30 terabytes ish to even 40 someday, we will be able to expand <unk> by capacity without adding significant capacity from a driver heads or media perspective.
Speaker Change: We will just use it much more efficiently on an exabyte basis.
Speaker Change: And that's where.
Speaker Change: We're confident that we'll be able to also take out cost at those higher capacity points.
Speaker Change: Which is what builds into the.
Speaker Change: Margin proposition into the into the model.
Speaker Change: Okay.
Speaker Change: And our next question today comes from C. J Muse with Cantor Fitzgerald. Please go ahead.
Speaker Change: Yes. Good afternoon. Thank you for taking the question Dave in your prepared remarks, you talked about good visibility for growth in fiscal 'twenty five notwithstanding seasonality for March. So I was hoping you can kind of speak to.
Speaker Change: Where your visibility is today for near line is at 369 months and then.
Speaker Change: Based on that backdrop, how should we be thinking about at least for mass capacity, what seasonality will look like into the March quarter.
Speaker Change: Yes, I think mass capacity is pretty full.
Speaker Change: It goes out that nine month period that you talked about C. J.
And that's a virtue of the build to order model that we've actually established and I think customers understand that they get predictable economics and we're all.
Speaker Change: Going through these qualification processes, so they get access to that technology as well.
Speaker Change: All serving as well I think.
Speaker Change: Right now I would say the total demand is not.
Speaker Change: It is not significantly higher than.
Historical demands and I certainly don't think there is inventory buildup going in or anything. So I don't think theres a cycle coming I think we're running at a fairly predictable.
Speaker Change: Business, and we will get better visibility as we get through obviously early next year people are.
Speaker Change: <unk> if you will.
Speaker Change: Build the order.
Speaker Change: <unk>, but right now I feel fairly confident certainly through the front half of the year and probably even into the back half of the year.
Speaker Change: <unk> hundred 90, <unk>, usually has a majority of this seasonality is the legacy parts of the business, where the March quarter is lower.
Speaker Change: So the worst quarter in <unk>.
Speaker Change: Since a year.
Speaker Change: But we also as part of a mass capacity in particular.
Speaker Change: So right on spot <unk> is usually fairly weak in milestones are set to grow in June and is fairly strong in September and December so when your Montana Youre at Euro four quarters for kind of 'twenty five of course see that event.
Speaker Change: This is a 19 not only in the legacy part about those savings in San Jose.
Speaker Change: Sure.
Mass capacity products.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you.
And our next question today comes from Steven Fox with Fox Advisors LLC. Please go ahead.
Steven Fox: For taking my question. Good afternoon, guys I guess just following up on the point on how much capacity you have available I think I understand how you create capacity when you go from like three terabytes per platter to before but from here going over say the next 12 months I think last quarter, you talked about Debottlenecking theres a potential that may be.
Steven Fox: You do get a better cycle in enterprise and via next year like how do we how do we get comfortable with the idea that you can manage all of that and still satisfy all your customer needs or any any further color on that would be helpful.
Yes, I think Thats a question a good question about how big the things get if the edge really turns on.
Steven Fox: Jen AI turns on which.
Steven Fox: I would say, it's still very very early innings of that.
Steven Fox: If there is some kind of macro recover recovery in all the markets.
Steven Fox: And we're we're not there yet we're still being very cautious on any supply.
Steven Fox: Any additional supply we would have to put on would be very long lead time.
Steven Fox: So we can satisfy more extra bytes exactly as you described and we've talked about earlier, but.
But additional drive demand if you will I think we'd have to add supply, which would be longer much longer lead time.
Steven Fox: As we spend 4% of.
Steven Fox: <unk>.
Steven Fox: Our revenue on Capex, we do add technology transition capacity. So you get some small capacity adds because of that as you're buying new tools there they tend to be more efficient.
Steven Fox: But the growth will be necessarily slow I think.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: And our next question today comes from Ananda Baruah with loop capital. Please go ahead.
Ananda Baruah: Yeah. Good afternoon, guys. Thanks for taking the question.
Ananda Baruah: I guess, Dave sort of sticking right now on the capacity question.
Ananda Baruah: Yes.
Ananda Baruah: Jamie.
Speaker Change: Thank you at this stage hammer.
Speaker Change: In the event that even with hammer.
Speaker Change: Will that be increasing.
Speaker Change: Yes sort of data increases.
Speaker Change: Jen AI.
Et cetera, yes, all of that.
Speaker Change: We're too.
Speaker Change: Thank you in a position, where you where you want to be.
Speaker Change: Increasing capacity.
Speaker Change: You just mentioned long lead times, what does that process can you give us some sense of what that platform would look like.
Speaker Change: We've also heard about.
Speaker Change: The whole component change that you have also needs to be candid.
Speaker Change: I guess, just what would be the way.
Speaker Change: <unk> and gentlemen.
Speaker Change: Thanks, a lot.
Yes. Thanks.
Speaker Change: I think that we.
Speaker Change: We fix it in our industry on the highest capacity point and obviously.
The Max capacity gets a lot of attention.
Speaker Change: When you get into the growth of some of these other markets, we would be talking about 20, terabytes or maybe even less than that what's your value prop at that level and by pushing forward in areal density we get to take components out of those those.
Speaker Change: Capacity points. So we can actually hit much more aggressive price brands if.
Speaker Change: If we want to.
Speaker Change: And still maintain really good margins and then those components that are freed up go.
Speaker Change: You can make twice as many drives with half the components going being dedicate steitz drive right. So so I think thats where.
Speaker Change: If we saw a resurgence.
Speaker Change: Areal density helps solve a lot of problems because you can go address those markets that are.
Speaker Change: Have capacity if you will is the Max capacity in a much more efficient way.
I got it.
Very helpful and just complete that does that mean like even in like a strong K with hammer.
Speaker Change: You guys feel pretty good when you sort of map out ability to halt exabyte shipped for the industry.
Speaker Change: For a for a good amount of time to come and the negative probably years not months.
Speaker Change: Well it depends yes.
Speaker Change: Have I lost supply plan.
Speaker Change: If the demand is much higher than how our supply plan of course, we will have a little bit of imbalance that.
We have time to address <unk>.
Speaker Change: Our focus is on technology transition is not on multi unit and we are seeing we see as the most.
Speaker Change: Profitable way for the industry to progress in this period of time and this is what we want at OXXO.
Speaker Change: Let's see where demand is in two or three quarters from now, but we know what our supply will be.
Speaker Change: Thanks, guys.
Speaker Change: Okay excellent.
Speaker Change: And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead.
Speaker Change: Yeah, Hi, David.
Speaker Change: Im just wondering you gave.
Speaker Change: Or do you think the unit shipments could be for <unk>.
Speaker Change: And then Luca I think in the past with customers trying to bring on some of the idle capacity and head count next year will start to bloom.
Speaker Change: Capacity background can you lay out how that Gordon.
Speaker Change: Thanks.
Thanks P. J, yes, we didn't we didn't speak specifically about how many units and how fast will push we just we said that mass qualification will be done for all these customers that we just ship to probably mid 2025.
Speaker Change: From my perspective.
Speaker Change: The factories are relatively full right now and so as we plan with those customers and they say hey, like the extra bytes in this form rather than this form we'll make the transition, but it will be probably less of a transition than we would've made say a year ago. When we had empty factories, we would ramp much more aggressively this time.
Speaker Change: I think we will.
Speaker Change: Make sure that we pivot accordingly.
Speaker Change: And carefully it's very important to realize that the components that we use in our last generation of TMR product are very very similar to the components, we use in hammer as well so not the critical competence heads and media, obviously, but all the other components and so we feel very comfortable being able to pivot from one product to the other.
Speaker Change: We have through the mechanics electronics, there is so much leverage there.
Speaker Change: So that's what allows us that flexibility.
Speaker Change: Yeah from a capacity standpoint, I would say at this point, we don't have much either capacity anymore.
Speaker Change: So what we are doing is now moving prosthetic haynesville technology transition with our latest fee amount of products that we are ramping very aggressively on <unk> September and December quarter, and then as it transitions to a monthly generate noise and Avalon addition on exercise.
Speaker Change: With the support of a closing demand.
Speaker Change: Yeah.
Speaker Change: Alright, Thank you Dan.
Speaker Change: Sure.
Andrew: Thanks, Andrew.
Speaker Change: And our next question today comes from Thomas O'malley with Barclays. Please go ahead.
Thomas O'malley: Hey, guys. Thanks for taking my question.
Just humor me.
Thomas O'malley: Tried to clarify things here, but just in the back half. It sounds like you are fully at capacity and technology transitions are giving you some growth and it sounds like that looks really good. It's obviously been a couple of really good quarters for you guys, but let's just say, we head out into fiscal year 'twenty six youre talking about more volume for hammer kind of coming in the middle of the next calendar year, and so you would imagine more substantial.
Thomas O'malley: Into the next fiscal year for you guys.
Thank you guys.
Speaker Change: See further delays on the hammer side, what actions would you guys take just given the fact that youre at capacity.
Speaker Change: From a factory perspective, and you wouldn't see the technology transitions just walk me through what you would do in that instance, obviously, it's not ideal and youre not planning for that but we've seen the qualification slip a couple of quarters with the largest guy. So I just wanted to understand how you guys think about things.
Speaker Change: Further delayed.
Speaker Change: Yes.
Speaker Change: I'm not really worried about it for exactly the reasons that you talked about.
Speaker Change: We seem to have the test that youre running we see all the qualifications are running and we're very confident in being able to make the pivot but exactly to the earlier question I think it was B J's question.
Speaker Change: We can pivot from the last generation TMR to the Hammer technology.
Speaker Change: Very very easily and lost generation PMI is a great product for us really good margins that were not fully ramped on yet either so.
Speaker Change: From that perspective, if it came to like one quarter of delay in some customer said I want it like this rather than like this we can very easily because it back.
Speaker Change: Helpful. And then in terms of just your outlook on AI. You. Obviously, you made some comments earlier on the call.
Speaker Change: It's still kind of on the come in terms of initial come variations with customers do you have a timeframe of when you may start to see some contribution there or is that something that would come as early as this next fiscal year.
Speaker Change: Yes. Thanks.
Speaker Change: Is a really complex topic, because I think theres a lot of different things.
Speaker Change: That are called AI.
Speaker Change: Some of them are traditional workloads that we've seen for years and years and some of them are brand new workloads and we are seeing demand this coupled to brand new workloads right with.
Speaker Change: Purchase orders that referenced specifically things that people would would identify as predictive AI or AI applications.
Speaker Change: What I would say is that the recent trends are really more towards video, which we talked about in our prepared remarks and thats. The biggest thing that we're seeing right now.
Speaker Change: And I'll call that AI for a while because I think it is.
Speaker Change: A much more efficient way to drive our customers' business models and that's we see that demand flowing through right now I don't think that there is a bubble going on in there I think there is.
Speaker Change: <unk> value.
Speaker Change: Competition happening in <unk>.
Speaker Change: And a bunch of different.
Speaker Change: Vectors with new technologies, new applications coming that could continue to drive video as a as a.
Speaker Change: Fundamental value store for our customers.
Speaker Change: That's why we're excited about it.
Speaker Change: I know some people all those traditional workloads, but.
Speaker Change: Ill give credit to AI, because I think they are being used in very interest in creative new ways.
Speaker Change: Our next question today comes from Mark Miller with the benchmark co. Please go ahead.
Mark Miller: Congratulations on your upside results in your good guidance I just wanted to go back to AI and the opportunity there.
Mark Miller: Do you believe that Pcs with AI.
Mark Miller: AI chips will drive a major refresh cycle and if so when second half of next year.
Speaker Change: Yes, Mark I don't have a ton of visibility into that although I do talk to some of these customers that I grew up with about that exact topic.
Speaker Change: Look I think that the.
Speaker Change: PC space has been relatively slow to adopt new applications of late and I think that's about to change how quickly.
Speaker Change: Legal change is still.
Speaker Change: Anybody's guess and of course, it's not about spending new hardware, it's about spec ing new applications that come in most of those applications that are to your point, they're video applications. So yes, I do think that when you can enable creative professional certainly too.
Speaker Change: Do.
Speaker Change: To create.
Speaker Change: Especially video audio accounts as well.
Speaker Change: No.
Speaker Change: All kinds of other analytical tools that happened at the edge you allow them to create much more aggressively I think they'll spin off more data.
Speaker Change: That data will be serviced by the cloud service providers that are already are and so we see those applications growing but some of it may be closer to the edge and we're really excited about that it's still very early but I can't really predict where AIP sis are going to be just yet I think.
Speaker Change: From what I'm seeing from application development I'm excited about it and I think it is going to be a driver in the near future.
Speaker Change: Hey, just one other question you mentioned there was little idle capacity at the moment.
Speaker Change: What is the factory utilization in your head and media Fabs are 85% or higher.
Speaker Change: Yes fairly high in both.
Speaker Change: We do have capacity as we.
Speaker Change: Transition to hammer, we can because we've dedicated a lot of that space to <unk>.
Speaker Change: Experiments, if you will in the last.
Speaker Change: Few years, and so now some of that can become production instead of experimentation.
Speaker Change: But but.
Speaker Change: Thank very high over 90% utilization right now and Thats the way, we want to keep it we don't want to.
Speaker Change: Dip down because as you know that has a lot of cost implications back into the business and we want to make sure. We maintain this path running Paul.
Speaker Change: Greater than 90% as both for hidden many fabs is that correct.
Speaker Change #100: That's right. Thank you.
And our next question comes from Karl Ackerman with <unk> <unk>. Please go ahead.
Speaker Change #101: Yes. Thank you.
Speaker Change #102: I was hoping you could discuss your build to order visibility.
Speaker Change #102: Whether it's based on take or pay contracts or if it would be better characterized.
Speaker Change #103: Our strong indications of interest as <unk> customers plan their storage capacity additions.
Speaker Change #103: In the coming quarters and secondarily, if I may sneak in another one I was just hoping you could also discuss the mix of SMB today, and perhaps going forward as we think about the mix of these higher capacity products going into December and into 2025. Thank you.
Speaker Change #104: Yes, thanks Carla.
Speaker Change #105: Let gianluca do to build the order question just on the SME I say Theres many times.
There's only a couple of cloud customers that really take US tomorrow. There's a couple of client server customers that take us more as well so we're shipping into multiple markets, but.
Speaker Change #105: We talk about <unk> versus <unk>, but I just look at it as drive strides how does the customer need them in and we can configure them for those applications for those particular customers, whether it's one or two people.
Speaker Change #105: Accordingly.
Speaker Change #105: From from my perspective, we have a.
Speaker Change #105: Great technology, so that we can deploy every place and we'll try to keep those factories as full as we possibly can to maximize it so.
Speaker Change #105: That's how I think about the <unk> mix.
Speaker Change #106: Yeah on the build to order that we have different kind of agreements with different end customers.
Speaker Change #105: The vast majority.
Speaker Change #105: Or designate had fully committed by by customers.
Speaker Change #105: Okay.
Speaker Change #107: Thank you.
Speaker Change #105: Okay.
Speaker Change #108: This concludes our question and answer session I would like to turn the conference back over to Dave Mosley for any closing remarks.
Dave Mosley: Thanks, Nick our strategic improvements in advanced technology roadmap position us well to meet evolving customer needs and drive future growth, we remain committed to delivering value and scalable storage solutions for our customers.
Dave Mosley: Like to thank our dedicated team our supply chain partners and our shareholders for your continued support thanks to talk to you next quarter.
Speaker Change #109: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].
Speaker Change #109: Okay.
Speaker Change #109: [noise].