Q3 2025 Seagate Technology Holdings PLC Earnings Call
Welcome to the Seagate technology fiscal third quarter 2025 conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Shane Hudson Senior Vice President Investor Relations. Please go ahead.
Speaker Change: 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 reports, we posted our earnings press release and the detailed supplemental information for our March quarter results on the investors section of our website.
Speaker Change: 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.
Speaker Change: We've not reconciled certain non-GAAP outlook measures because material items that may impact. These measures are out of our control <unk> cannot be reasonably predicted therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort before we begin I'd like to remind you that today's call contains forward looking statements.
Speaker Change: They reflect management's current views and assumptions based on information available to us as of today should not be and should not be relied upon as of any subsequent date actual results may differ materially from those contained in or implied by these forward looking statements as they are subject to risks and uncertainties.
Speaker Change: <unk> with our business.
Speaker Change: To learn more about the risks uncertainties and other factors that may affect our future business results. Please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, as well as the supplemental information all of which may be found on.
Speaker Change: On the investors section of our website.
Following our prepared remarks, we'll open the call up for questions in order to provide all analysts with the opportunity to participate we thank you in advance for asking one primary question and then re entering the queue with that I'll hand, the call over to you David.
Thank you, Jamie and Hello, everyone.
David: We delivered another solid quarter of profitable year on year growth and strong execution.
David: Our third quarter results were highlighted by a 31% year on year increase in revenue.
David: 81% growth in non-GAAP gross profit dollars, we continued to demonstrate strong financial leverage expanding gross margin for the eighth straight quarter and achieving the third highest operating margin in the company's history.
David: This performance supported non-GAAP EPS performance at the top of our guidance range and increased free cash flow generation.
David: These strong levels of performance reflect the combination of a healthy supply demand environment for mass capacity storage and the proactive steps we've taken over the recent cycle to transform how we operate.
David: Our supply discipline, the visibility we gain through our build to order strategy and our execution on strategic pricing actions, all contribute to sustainable and profitable growth over the long term.
David: In addition to strengthening our operating model. These factors further enhance our agility, which is critical to our ability to navigate the fluid business environment.
David: Based on the latest trade policy announcements, we expect minimal impact to fourth quarter financial performance due to tariffs. We are continuing to monitor the situation and evaluate strategic solutions, including geographically shifting certain of our manufacturing processes and aligning our supply chain to mitigate risks associated with <unk>.
David: Trade policies over the long term should the need arise.
David: In this dynamic macro landscape, we will continue to focus on managing controllable factors, while executing our aerial density driven technology roadmap, which delivers increasing value to our customers.
David: She gets hammered based mosaic drives represent the industry's only three terabyte produced products were ramping volume to qualified customers and remain on track to qualify a broader range of cloud customers with shipments beginning in the second half of calendar 2025.
David: Turning to the demand environment, we are mindful that tariff measures could affect customer buying decisions. However.
David: Current demand indicators remain intact, particularly among global cloud customers in the March quarter cloud near line revenue on extra boats were up by nearly 10% sequentially almost doubling year over year amid a very tight supply environment.
David: The growing demand for mass capacity storage aligns with the cloud Capex investment cycle and ongoing build out of data center infrastructure to support AI transformations.
David: Our drives continued historic close to 90% of the bits and large scale data center deployments datacenter architecture highly sophisticated and have consistently employed a strategic mix of storage solutions to optimize scalability cost efficiency and workload performance.
David: Reinforcing this approach Google recently unveiled details about their foundational Colossus storage system.
David: Highlighting the use of ssds for fast data access while depending on hard drives for mass storage and data retention needs due to their scalability and cost benefits. This hybrid storage strategy is particularly vital for AI workloads that require access to massive datasets for training and inference and subsequently generated valuable.
David: Data content that users want to retain.
David: For instance training in an AI model to generate images requires billions of static pictures well AI based video generation demands of thousands of hours of footage to accurately capture transitions and variations between frames at.
David: At 24 frames per second each hour of video equates to roughly 80000 images.
David: Our drives has historically benefited from the growth in video content on social media platforms and content delivery networks.
David: Emerging techs the video applications promise to revolutionize content creation and lower production costs likely to increase storage demand.
David: In this context hard drives are crucial for storing training data maintaining model checkpoints and preserving both interest and generated content.
David: Over the past 18 months large cloud and Hyperscale customers have driven HDD demand growth. However, we are also starting to see it pick up from smaller edge data centers and private clouds.
David: Seek to preserve their valuable data for privacy or sovereignty purposes.
David: In the year ahead near line Exabyte demand looks strong through calendar 2025, and we now have visibility of demand with several customers into the first half of calendar 2026, as we negotiate new build order agreements.
David: So you gave us in a strong position to address the favorable demand outlook as we ramp shipments of our high capacity drives.
David: Our 24, and 28 terabyte TMR platforms continue to ramp aggressively with exabyte shipments up roughly 60% quarter over quarter.
David: Additionally, we are continuing to ramp hammer based products with our first hyperscale customer and we are approaching the conclusion of our second major CSP qualification.
David: Feedback from other cloud customers has been positive as they progress through their respective qualification timelines.
David: We expect an appreciable increase in hammer product shipments over the coming quarters as these future qualifications conclude.
David: Based on the time required to fully scale hammer production, we plan to fulfill build to order commitments through a blend of hammer in TMR products over the next several quarters.
David: It is becoming increasingly evident.
David: Both our customers and the market that hammer is a groundbreaking technology that will extend <unk> advantages for hard drives over other storage media for many years to come.
David: More than a decade in the making hammers pivotal in enabling seagate to meet the world's exabyte demand growth through technology innovation, rather than supply expansion, thereby supporting seagate's ability to deliver sustained and profitable growth.
David: I'll stop here and turn the call over to Gianluca.
Gianluca Romano: Thank you David.
Gianluca Romano: Last quarter, we delivered strong earnings and free cash flow generation underscored by solid execution and that won't focus on profitability.
Gianluca Romano: March quarter revenue came in at $2.16 billion of bones. They made the point of all of our guidance and down 7% sequentially.
Gianluca Romano: Limited by the temporary supply constraint, we discussed last quarter.
Gianluca Romano: Despite having your name and we expanded non-GAAP gross margin by 70 basis points sequentially to 36, 2% supported by strong adoption of our.
Gianluca Romano: What a high capacity near line drives.
Gianluca Romano: non-GAAP operating margin increased to 23, 5% of revenue sequentially.
Gianluca Romano: Our resulting in non-GAAP EPS was $1 19, which is a top hand of our guided range.
Gianluca Romano: Within our business.
Gianluca Romano: Continued strength in the underlying cloud demand, partially offset the anticipated decline across most all of that end market due to typical seasonality and the allocation of our available supply.
Gianluca Romano: Revenue was $2 billion down 8% sequentially on volume shipment or went under and in 44 exabyte compared with 151 extra month ends in December quarter.
Gianluca Romano: Mass capacity revenue declined sequentially by one and $45 million the $1 $7 billion, we should do but it ain't a 48% increase year on year.
Gianluca Romano: I'm asking about the shipment of 133 extra byte went down 5% sequentially and up 50% year on year.
Gianluca Romano: Your line up with Andy, but actually 90% of mass capacity volume in the March quarter with shipments well went on to <unk>.
Gianluca Romano: Down 5% sequentially, while at 55% year on year.
Gianluca Romano: We continue to experience strong broad based demand what I like 'twenty, four and 'twenty eight that I'd like to see him out of products, which remains a highest revenue in excess of like volume probably the payment.
Gianluca Romano: They are easier to mix, albeit higher capacity drives.
Gianluca Romano: With initial volume ramp of amateur based products drove a sizable uptick in evidence in the airline that added capacity for the quarter.
Gianluca Romano: Sales of our legacy product.
Gianluca Romano: $254 million down 8% sequentially.
Gianluca Romano: Mainly reflecting expected seasonal trend in the consumer market.
Gianluca Romano: Finally revenue for our other businesses, which include systems, SMT and if that'd be surprised.
Gianluca Romano: Relatively flat at $157 million.
Gianluca Romano: Moving onto the rest of the income statement non-GAAP gross profit was $781 million compared with $825 million in the prior quarter and $432 million that's.
Gianluca Romano: <unk> already got a period.
Gianluca Romano: At the company level non-GAAP gross margin expanded by 70 basis points to 36, 2% sequentially and expanded by over 1000 basis points year over year.
Gianluca Romano: We continue to benefit from a favorable mix, including increased adoption of our latest generation products and ongoing pricing adjustment at.
Gianluca Romano: These factors.
Gianluca Romano: Support non-GAAP gross margin for that.
Gianluca Romano: Business at both the corporate average.
Gianluca Romano: non-GAAP operating expenses totaled $174 million down.
Gianluca Romano: Down 5% quarter over quarter.
Gianluca Romano: And that leads to our plan, we benefited from the timing from R&D related expenses and certain one off items.
Gianluca Romano: What are you gonna awareness this is Tim.
Gianluca Romano: But of course that will have 14 weeks instead of the D. Because 13 week period.
Gianluca Romano: And that is that we.
Gianluca Romano: We expect to incur I get operating expenses for the period, however revenue patterns tend to be based on calendar quarters and would therefore be largely unaffected.
Gianluca Romano: But at least not a week and we will provide further clarity on one or two and I order input.
Gianluca Romano: Other income and expenses decreased 7% sequentially to $80 million due to lower interest expenses from retiring debt and is expected to remain relatively flat in the June quarter.
Gianluca Romano: Adjusted EBITDA was $563 million compared to $591 million.
Gianluca Romano: Hi, great quarter and to $178 million a year ago, doubling you know what I mean.
Gianluca Romano: non-GAAP net income was $407 million.
Gianluca Romano: Is that thing in non-GAAP EPS of $1 19 per share.
Gianluca Romano: Based on a diluted share count of approximately 114 million shares.
Gianluca Romano: We are managing the business for long term stability optimizing both profitability and cash generation.
Gianluca Romano: In the March quarter, we increased free cash flow generation.
Gianluca Romano: $116 million compared with $150 million in the prior period.
Gianluca Romano: Based on our current outlook, we expect free cash flow generation to improve sequentially was that asked is it kind of it yet.
Gianluca Romano: Inventory remained flat at $1 5 billion.
Gianluca Romano: As we prepare to support future demand growth, including hammertoe products.
Gianluca Romano: Capital expenditures were $43 million for the quarter and represent have actually 3% of revenue for the fiscal year to date as we continue to maintain capital discipline.
Gianluca Romano: We returned $152 million to shareholders because.
It was a quarterly dividend and closed in March quarter, with ample liquidity of $2 1 billion.
Gianluca Romano: Building, our undrawn amount.
Gianluca Romano: One 3 billion from our then you would have a lot of integrated facilities.
Gianluca Romano: Our debt balance was $501 billion at the end of the March quarter after retiring approximately $536 million of debt during the quarter.
Gianluca Romano: Consistent with our intent to reduce debt.
Gianluca Romano: A lot of advancing net leverage ratio was two one times and.
Gianluca Romano: And we expect to see that adoption in the coming quarters.
Gianluca Romano: Turning now to our June quarter that outlook.
Gianluca Romano: We are continuing to see robust demand for our high capacity near line, but all of that across I think robust cloud customer base.
Gianluca Romano: Which along with incremental improve maintenance EMEA market had.
Gianluca Romano: Expect it to that I Havent Avenue and profits higher.
Gianluca Romano: Going forward there.
Gianluca Romano: As noted earlier, we currently forecast many months that had the impact from tariff policies and we'll be monitoring forsake one that impacts <unk>.
Gianluca Romano: Clothing changes in customer demand.
Gianluca Romano: Based on what we know today, we expect June quarter revenue to be in the range of $2 4 billion plus or minus $150 million.
Gianluca Romano: At the midpoint this.
Gianluca Romano: It reflects 11% improvement sequentially and 27% improvement year over year.
Gianluca Romano: non-GAAP operating expenses are expected to be approximately $285 million.
Gianluca Romano: And at the midpoint of our revenue guidance.
Gianluca Romano: We expect non-GAAP operating margin.
Gianluca Romano: Span into the mid Twenty's percent that your range.
Gianluca Romano: We expect our non-GAAP EPS to be $2.
Gianluca Romano: And 40% plus or minus 20%.
Gianluca Romano: Based on when the diluted share count of approximately 114 million shares and non-GAAP tax expense of <unk>.
Gianluca Romano: Lastly, $10 million.
Gianluca Romano: As a reminder, starting in fiscal 2026, we estimate a tax rate in the mid teens.
Gianluca Romano: If I just do the addiction in which we'll paint adult the pillar two global minimum tax.
Gianluca Romano: To close we are continuing to demonstrate strong financial discipline and operating leverage that support profitable growth and greater agility to navigate a dynamic macro environment.
Gianluca Romano: I will now turn the call back to Dave for final comments.
Gianluca Romano: Thanks, John Luca I would like to conclude by reiterating three key points that underscore my excitement for seagate's opportunities over the long term.
Gianluca Romano: First we've transformed our business model and made a cultural shift to prioritize profit and cash generation with a sustained focus on driving healthy industry supply demand fundamentals.
Gianluca Romano: Second these changes are taking place at mid secular growth tailwind for mass capacity storage that are underpinned by the ever increasing rise in data generation and data value.
Gianluca Romano: And third seagate's, winning technology platform and clear roadmap positions us to capitalize on those tailwind to deliver sustained profitable growth with agility.
Gianluca Romano: We look forward to sharing more about how this winning combination of technology leadership profitable growth and healthy industry fundamentals Seagate up for even greater success at our Investor and analyst event, taking place on May 20.
Gianluca Romano: I'd like to thank our global teams supplier partners and customers for your ongoing contributions to our success and to our shareholders for your continued support.
Gianluca Romano: Operator, let's open up the call for questions.
Gianluca Romano: We will now begin the question and answer session.
Gianluca Romano: To ask a question you May press Star then one on your telephone keypad.
Gianluca Romano: If you were 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 Q.
Gianluca Romano: Once again that was star one to ask a question.
Gianluca Romano: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Erik Woodring with Morgan Stanley. Please go ahead.
Erik Woodring: Hey, guys. Good afternoon, Thanks for taking my question and nice quarter here.
Erik Woodring: I know you guys were capacity constrained in the March quarter. So can you maybe just help us better understand how how and where you got some of the upside in the quarter with that supply shortage and as I just extend that to the June quarter, how do we think about.
The risk of pull forward impacting June quarter rapidly here, maybe if I ask you differently.
Erik Woodring: <unk> guided to the June quarter, a month ago would you have still guided to $2 4 billion of revenue at the midpoint or has anything changed over the last months as it relates to your ability to your customers.
Erik Woodring: Maybe needs to pull forward any demand.
Erik Woodring: Thanks, so much.
Erik Woodring: Yes.
Erik Woodring: Thanks for the question Eric simple answer is yes, we would have guided at the same thing a month ago and Thats largely this predictability that we've built in through the build to order process playing through we were under serving the market last quarter I think that's probably true not only for <unk>, but for other players in the market will be able to assess up more over time.
Erik Woodring: And some of Thats due to our operational issues that we had when we discussed this back in November really came through last quarter. Those operational issues have been fixed and so all of that's been planned for quite some time that affects the Q4 guide here that's in front of us.
Erik Woodring: As far as the longer term.
Erik Woodring: The build to order continues to serve us quite well.
Erik Woodring: We're doing it through product transitions as well which helps.
Erik Woodring: <unk> patients predictability and all other financial aspects of Seagate, So I'm quite pleased with that.
Oscar merchant: The next question is from Oscar merchant with Citigroup. Please go ahead.
Oscar merchant: Great. Thank you for the question and great quarter. If I can just if you can double click on where we are with hammer, where you are with your qualifications with your.
Oscar merchant: Other customers and how much did hammer contribute to the March quarter results and how we should think about the contribution of.
Oscar merchant: Hammer to your bid as you progress to calendar 'twenty five thank you.
Gianluca Romano: Thanks, Oscar Yeah, I'll, let gianluca speak specifically to the numbers <unk> is growing quite well.
Gianluca Romano: I would say quarter over quarter since the last time, we spoke we are still on the exact same plan. So I'm very happy with the qualification progress and we'll share a little bit more of that.
Gianluca Romano: The May 20, <unk> analyst day.
Gianluca Romano: So I would say please attend relative to how we are standing right now we talked about in the prepared remarks, one qualification at a major CSP almost complete and.
Gianluca Romano: We have another.
Gianluca Romano: Quite a few in flight as well so.
Gianluca Romano: Yes, and also adding back to a question.
Gianluca Romano: About the se revenue.
Gianluca Romano: And today as compared to the midpoint of our guidance I will say that he is actually coming from more volume on that on the Hamlin products.
Gianluca Romano: So when we were able to squeeze a little bit more supply during the quarter. It was mainly on day on their part.
Gianluca Romano: And Hema is ramping very very well and very rapidly and we will disclose more about.
Alexander: Future development in a few weeks from Alexander these days.
Alexander: Thank you.
Speaker Change: The next question is from C. J Muse with Cantor Fitzgerald. Please go ahead.
Speaker Change: Yeah. Good afternoon. Thank you for taking the question I just stated on the call today, you've discussed the industry under shipping in demand.
Speaker Change: Youre seeing new demand from near clouds and others. So the question is how has your visibility improved what.
Speaker Change: What kind of sense of urgency or are you getting from your customers and I guess is that extending.
Speaker Change: Beyond kind of a 52 week lead time and last part of the third part question would be how do you see that kind of playing out in pricing over time. Thanks. So much.
Speaker Change: Thanks P. J I think theres two components to your question, obviously, the build to order as we as we've discussed about the <unk>.
Speaker Change: Remainder of this calendar year and already into next calendar year, where we're starting to have visibility.
Speaker Change: We are building data centers and refreshing datacenters need that predictability of supply and we need that as far as running our own shop. So all of that is run fairly predictably.
Speaker Change: Occasionally swaps, where some for some reason somebody comes down and another person meets more more but I think that's what we mean by healthy supply demand and agility and relative to pricing.
Speaker Change: As we continue to plow through these product transitions, especially at higher and higher capacity points.
Speaker Change: We negotiate those newbuild order agreements with that in mind.
Speaker Change: You need to continue.
Speaker Change: Continue to get paid more and more for what we do because we're making the requisite investments to make these people more.
Speaker Change: Efficient and their own data centers, so there's a win win there.
Speaker Change: And we're factoring that into all forward looking financial discussions.
Speaker Change: The next question is from <unk> Mohan with Bank of America. Please go ahead.
Speaker Change: Hi, Yes. Thank you you just reported an increase of 70 bps in gross margins, even when the airline was down quarter on quarter in total.
Speaker Change: In the June quarter, you are guiding a similar gross margin expansion, but the airline I think should be up quarter on quarter. So why are we not seeing more upside on June quarter for margins and as the cloud versus enterprise mix changing significantly in the June quarter, because it feels like it was very cold to cloud and <unk>.
Speaker Change: March quarter, if you can square those thank you.
Speaker Change: Yes, thank you, what I'm, saying and that would be you have a strong expectations. I think we are doing a very good job in that I think our profitability.
Speaker Change: Seems like eight quarters as Dave said in the prepared remarks.
Speaker Change: It makes it important to us so of course on the online and cloud in particular will be higher in the June quarter.
Speaker Change: And we have no build to order, we have contracts and depending from the time of the negotiation of those contracts, we have but I think <unk> had some core tenets of that data.
Speaker Change: Maybe higher than other quarters, but that I would say is important is that the trend is continuing this strategy is strong and we will continue to deliver.
Speaker Change: The other thing we want to use that we we also underserved the market quite a bit in Q3 and now we're back to serving customers. The way we want to so all of this is long term planning, but we prioritized in particular.
Speaker Change: Certain segments that Q3 needed.
Speaker Change: We actually had product Florida.
Krish Shankar: The next question is from Krish Shankar with TD Cowen. Please go ahead.
Eddie: Hey, guys. This is Eddie for Krish. Thanks for taking my question.
The guidance includes a minimal impact from the tariffs in place that makes sense due to the 90 day exemption, but but I wonder if these tariffs were to take place in the September quarter, how should we think about the impact on the financial model like is there a time lag where you guys might take the tariff hit initially and that's a matter of a quarter or two until you raise.
Eddie: Prices or you.
Speaker Change: Do you expect to pass through tariff related costs right away like I, just wonder if you can share any color on how your conversation is going with customers about pricing how long. It would take you guys to pass through tariff related costs would be would be helpful. Thank you.
Speaker Change: Yes, Thanks, Eddy it's a complex world look you said theres, many scenarios being run and our first responses to go work the supply chain or operational details such as the rules are with our customers.
Speaker Change: And that will impact their demand, what they want where and when.
Speaker Change: Ultimately as we drive through these product transitions as we as we talked about before we're going to be adding more value. So we have a chance to reset the negotiation passing through the cost as a last resort option, but we'll factor that in any cost increases.
Due to whatever reasons into the go forward model I think everyone understands that we need those margins as I referenced before to go reinvest in our business and keep it.
Speaker Change: Driving forward, the technology, which is great value to the customer so.
Speaker Change: I won't get into specifics about what the different scenarios are because we just don't know yet but.
Speaker Change: Operationally, we've dealt with these kinds of problems before.
Speaker Change: And we will deal with them again, I think we're very agile and nimble operationally to do that.
Speaker Change: Hey, good day.
Speaker Change: The next question is from Amit <unk> with Evercore. Please go ahead.
Amit: Thanks for taking my question and congrats on a nice set of numbers here.
Amit: As we look at the predictability in the business and you sort of talked about you see near line Exabyte demand I think looking strong not just through the end of this year, but also into early 'twenty six.
Amit: Does that imply that you expect to see sequential revenue growth gross margin expansion in the back half versus what you folks are guiding to June I'd love to just understand how much would you be do you have into the back half.
Amit: Then maybe somewhat related to that no matter, how the whitepaper out I think in the last 90 days, which got a lot of attention in terms of how Q L. C could be used almost as a new storage medium between traditional flash of near line I would love to get your perspective on that and if you see that having any sort of dampening effect on the near line drives over the long term. Thank you.
Speaker Change: Sure Amit.
Gianluca Romano: I'll, let gianluca take the gross margin and then I'll take the flash discussion.
Gianluca Romano: Yes that makes our plan has not changed as we were discussing also entire quarters, we see.
Gianluca Romano: We need to grow revenue.
Gianluca Romano: Is it the ability of course, we see is our current expectation, we need to wait and see but.
Gianluca Romano: Any.
Gianluca Romano: Noodles met.
Gianluca Romano: Impacting these field, but currently.
Gianluca Romano: We havent nobody is going to change our expectations.
And on the discussion about the meta blog.
Gianluca Romano: I've read it.
Gianluca Romano: My first reaction was it's a fairly niche application and it makes sense I mean, there's a lot of different types of applications in the cloud some of which may benefit from <unk> NAND, especially if they're very read intensive.
Gianluca Romano: But I don't think that it comes anywhere close to disrupting the general blend of NAND, and HDD and the and the cloud and the larger cloud.
Gianluca Romano: Again, NAND is a very critical technology for everyone in the data center architecture know how to manage it.
Gianluca Romano: We pointed to.
Gianluca Romano: Google.
Gianluca Romano: White paper as well.
Gianluca Romano: The prepared remarks, and there are others out there.
Gianluca Romano: I think a lot of our customers who are some of the best storage architects of the world and they are making these decisions very consciously.
Gianluca Romano: Spreading the work load if you will to maximize cost power.
Gianluca Romano: Performance, so on and so forth and so.
Gianluca Romano: From a hard drive perspective, we still believe there is a certain very substantial cost differential between any kind of demand and hard drives, especially in the performance tiers that we have to operate in and hard drives are much much more capital efficient, we can add extra bytes to the world.
Gianluca Romano: In a much more capital efficient way.
What im kind of excited about on this front is.
Gianluca Romano: There is a bigger move to disaggregated storage, which will decouple compute from <unk>.
Gianluca Romano: Storage investments and if that's if that's the case I think.
Gianluca Romano: For some cloud service providers and even some on Prem instances, there's more opportunities for hdds rather than less.
Aaron Rakers: Thanks, a lot excuse me. The next question is from Aaron Rakers with Wells Fargo. Please go ahead.
Speaker Change: Hi, This is Jake on for Aaron and Thanks for taking the question and congrats on the results.
Speaker Change: Just wondering if you could give some color on how material you see emerging AI inference storage to your mid to long term Tam.
Speaker Change: And how if at all Hyperscale purchasing patterns have changed over the last few quarters or two to support.
Speaker Change: Ongoing shift from training and France, driven by some of these newer reasoning models.
Jake: Thanks Jake.
Jake: What we would have said three or four quarters ago was the first recovery. If you will of the cloud was largely based on video applications, which.
Jake: A lot of people might call that AI.
Jake: Hi.
Jake: Got it.
Jake: The models themselves.
Speaker Change: I think you have to be a little bit careful with this to the extent that.
Speaker Change: Large language models are opening up data analytics to much larger datasets.
Speaker Change: I think we're still in the early days of that and then relative to new video applications.
Speaker Change: I think that's still in our future so quite excited about it there's a lot of.
Speaker Change: And we've made some prepared remarks on this there's a lot of new video applications coming.
Speaker Change: We believe that stores will really benefit from and then there are bigger and bigger training sets. If you will.
Speaker Change: And some of those training such as their adjusted they have to spin off more data that has to be.
Stuart: Stuart So that you can go back and prove that they did it right.
Speaker Change: Data infrastructure Thats going to come behind AI is very exciting to us.
Speaker Change: Great. Thanks, and then I was wondering if you could just give a little additional color on.
Speaker Change: Your capital allocation priorities moving into the back half of the year and how that's changed if at all given the increased tariff uncertainties.
Speaker Change: Those changes, but I'll list.
Lucas: Lucas answer specifics, yes, we are still working on reducing our debt as you know we have done a big step forward in the March quarter, we had used more than $500 million.
Lucas: Although our debt, but we are still not at the level that we want to sell into next year.
Lucas: A few quarters, we will continue to assess the debt level and as we said after that we will.
Lucas: We will start working on the share buyback and of course, we must always focusing on the on our dividend.
Lucas: Great. Thank you so much.
Thanks Ricky.
Speaker Change: The next question is from Vijay Rakesh with Mizuho. Please go ahead.
Yeah, Hi, thanks, good quarterly or Dave just.
Speaker Change: Question on the ammo side.
Speaker Change: Wondering how the mix up how much it would be by let's say exiting fiscal <unk> and then Gian Luca.
Speaker Change: Are you still comfortable with that aren't back to the mid 40% on April Rd mid 40% gross margin as you look out thanks.
Speaker Change: Okay.
Speaker Change: Yeah, we havent guided.
Speaker Change: How fast our <unk> transition is going to be although.
Speaker Change: These qualifications complete as we referenced earlier, we're going to continue to accelerate so.
Speaker Change: I'm happy with the progress that the team has made right now and I think as we look forward.
Speaker Change: There will be more and more hammer drives in the world very very soon so.
Speaker Change: I'm excited about that.
Speaker Change: Yes, what is the gross margin as I said before we continue to improve every quarter. So this is our objective.
Speaker Change: Anything you need to wait a few more weeks to go.
I have a better idea of the model for the future, but as important is no no. We have a strong demand we have a very good mix and we see of course, helping in improving their profitability gross margin and operating margin I would like to bring your attention on the very strong operating margin that we engineered anything at this point.
Speaker Change: Thank you.
Speaker Change: The next question is from Timothy Arcuri with UBS. Please go ahead.
Timothy Arcuri: Thanks, a lot I had a.
Timothy Arcuri: Multipart question, so so you're guiding revenue up $250 million.
Timothy Arcuri: How much of that is related to the $200 million that you lost in March I know, it's probably a little hard to tell but I guess the question is like have you caught up with <unk>.
Timothy Arcuri: Demand yet.
Timothy Arcuri: That's the first part and then the.
Timothy Arcuri: That part is I would think that customers are probably placing double orders, but I I, how could you tell us where are their enforceable pieces that come with the orders I know you were talking about the ability now into next year, how do you know how how much of that to real are there.
Timothy Arcuri: Penalties that are.
Timothy Arcuri: Associated with these things.
Timothy Arcuri: Yeah. Thanks, Tim So the build to order model is especially when we realized that we had these supply constraints.
Timothy Arcuri: Now more than three months ago, we were communicating that specifically to the customers.
Timothy Arcuri: This is long before any of the current macro issues that have arisen from my perspective Q4 is happening to plan in Q1 will happen to plant after that as well.
Timothy Arcuri: Thats all these build to order models are giving us that predictability.
Speaker Change: Yeah, I would say, it's difficult to say how much of that too.
Speaker Change: The one that a median demand domestically, we're not able to serve a much is.
Speaker Change: Now as a demanding June of course wed be amended shift to the future and is probably bought in June and as I said before we expected <unk> to grow even in the following quarters. So.
Speaker Change: Is there a situation where demand is at bolt supply.
Speaker Change: I have no I don't think we have any evidence of double orders so.
Speaker Change: I don't share that comment from you but.
Speaker Change: I would just say demand is continuing to grow into that action that we had even before any of any quarter ago or two quarters ago. They built wardens and not changing in the next few quarters and as Dave said, we are staffing negotiating even kind of no. Thank you Steve.
Speaker Change: The other thing is the data center infrastructure investments that need to be made or not these temporal things anymore and there's not a lot of excess supply as we just said that.
Speaker Change: To pull forward or to do deals at the end of the quarters anyway. So as these new applications come online, we're not seeing any inventory buildup.
Speaker Change: Seeing people demand the <unk>.
Speaker Change: It would be fairly stable. This is the point of the build to order.
Speaker Change: We're happy that some of the new applications are starting to watch more and more data I think this has.
Speaker Change: It's been a fairly predictable world for us other than the supply issue that we had.
Speaker Change: Okay. Thank you.
Speaker Change: The next question is from Ananda Baruah with loop capital. Please go ahead.
Speaker Change: Yeah. Thanks, guys I appreciate you guys taking the question.
Speaker Change: Dave just.
Speaker Change: Sort of.
Speaker Change: New data center creation I guess the question is.
Speaker Change: Jen AI data centers.
Speaker Change: Like what's the what's a decent way is there a decent way to think about.
Speaker Change: So at a typical.
Speaker Change: Storage consumption.
Speaker Change: Yes into a journey I data center relative to like a classic cloud data center.
Speaker Change: I guess any context, there would be useful.
Speaker Change: It's really hard Ananda I think there are many different kinds of applications and we're all looking for which are the killer apps and what order do they take off.
Speaker Change: From our perspective some of the early applications around large language models are very <unk>.
Speaker Change: Compute intensive and opening up.
Speaker Change: Bigger and bigger datasets to be adjusted and analyzed maybe datasets that are old things from the past it makes it a more valuable.
Speaker Change: As I said before still early days of that and then if you get into the types of Gen AI that actually create new data.
Speaker Change: Video applications and things like that very exciting for storage long term storage as well so but it's still very early days.
Speaker Change: And I guess just to follow on there.
Speaker Change: Is there and then just.
Speaker Change: Maybe get any sort of like too in the weeds, but you guys have any sense on if youre starting to see more storage arrays.
Speaker Change: Yes sort of more near line five that they use for their own storage arrays be placed into what's been existing data centers.
Speaker Change: And any context there.
Yes, what I would say is that I referenced.
Speaker Change: Francis already.
Speaker Change: Concept of disaggregated storage is much more interesting so so the compute and storage.
Is decoupled to some extent and then if you need to scale storage you can without the overhead and costs associated with adding more compute to that so the compute can scale, one way and that storage could scale the other.
Speaker Change: That to me is a more interesting trend as applications developed that need to adjust and spin off more and more storage than.
That storage investment will be relatively more efficient so I'm really interested in those architectural changes.
Speaker Change: That's great I appreciate it thanks guys.
Thomas O'malley: The next question is from Thomas O'malley with Barclays. Please go ahead.
Speaker Change: Hey, guys. Thanks for taking my question Joon.
Speaker Change: At June 14th quarter, you're saying Opex is impacted but no real.
Speaker Change: Change on the revenue side, you guys are kind of talking about our continued growth profile into the back half of the year talking about good visibility should we be thinking about September with any kind of headwind from that 14 weeks. It is the same we will apply to the back half of the year, which is revenue unaffected do we need to be kind of discounting that September quarter. After the stronger June.
Speaker Change: Hi, Jana I don't know when you have this extra week in the quarter. It was only impacting you on Opex is not really impacting your revenues.
Speaker Change: We knew January negotiated based on only a quarter is not based on the week.
Speaker Change: Tom I think I heard you say June quarter that'll be the September quarter September He has 14 weeks.
Speaker Change: Excuse me when you are from a ceiling and I was just kind of December yes. Thank you.
Speaker Change: And then the second the second is just if you look at.
Speaker Change: If you look at the exabyte shipments.
Speaker Change: Rewind the clock you are kind of getting back to where you were kind of pre pandemic from a total exabyte shipments I think you guys have talked about like 160, <unk> just kind of the range, where you need technology transition to move ahead of that.
Speaker Change: <unk>.
Speaker Change: Part one is.
Speaker Change: When do you guys think do you think that this is in the next fiscal year that youre going to kind of hit that wall because it sounds like you're accelerating very quickly and then secondarily on the pricing side I know you talked about direct impact to tariffs, but indirect impacts oftentimes.
Speaker Change: Precision comes up.
Speaker Change: Large customers do more aggressive with pricing do you feel like Youre going to just have you seen any behavior change with your customers or your safe guarding against that with this view that you have did you are kind of fully fully baked already. Thank you I know that was a bunch there.
Speaker Change: Oh no worries.
Speaker Change: Recall, our strategy, we're adding exabyte capacity through areal density technology, which makes our ability to serve the market more and more efficient as we do that we can grow revenue and profit and deliver better value to customers as well. So I wouldn't think about 160 or 165 as being the peak ever.
Speaker Change: The drives are much more extra by efficient than there used to be.
Speaker Change: And so we're we're really excited about our ability to deliver more and more expedites and therefore see that kind of growth.
Speaker Change: From the broader perspective.
Speaker Change: Tactically, we have not really seen very much impact from customers changing anything one way or the other nobody is losing their place in line people are still making the datacenter infrastructure investments they are because.
Speaker Change: Data infrastructure is key to some of this.
Speaker Change: Cloud applications are the AI applications that are to come and so we expect predictability from that and that's what we need as manufacturers as well as predictability. So that's one of the reasons, we've driven these new strategies.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: The next question is from Tristan <unk> with Baird. Please go ahead.
Speaker Change: Hi, Good afternoon, a quick follow up on the question you just addressed about adding exercise capacity. So you know that.
Speaker Change: And where you were for the.
Speaker Change: A quarter ago, do you have to and assuming your utilization rates.
Speaker Change: At the peak so are you dedicating.
Speaker Change: Capex to ramp capacity.
Speaker Change: And here is this the.
Speaker Change: Function.
Speaker Change: Are you going to.
Speaker Change: Pose any capacity you want because of the uncertainty of indirect impact of tariffs.
Speaker Change: Thanks for the question Tristan.
Speaker Change: So the issue that we had in supply.
Speaker Change: Manifests itself last quarter, but.
Speaker Change: But started in wafer.
Speaker Change: Last summer actually during August.
Speaker Change: That issue was only on TMR products and so we have the hammer technology products. We've already planned the capex. So we don't need to add any additional capex to continue to ramp the hammer products.
Speaker Change: <unk>.
Speaker Change: I say this all the time, we already have the advanced manufacturing bits.
Speaker Change: Some of the most sophisticated manufacturer in the world don't Miss devices atom by atom by atom. It takes a long long time, and we're going to continue to invest in that some of that investment is in the U S. As well. So we're going to continue to invest in that but we need demand predictability, we need to be able to predict the rate of return.
Speaker Change: Right now, we're fairly happy with where our capital is versus the demand that we see in maintaining an eye with healthy supply demand balance.
Speaker Change: Should there be more demand than we can address that when we need to but we havent done that.
Speaker Change: Just yet.
Speaker Change: So yes, we are not the land.
Speaker Change: Landing for motor has the auto media production, but of course, those heads and media will generate and higher volume of <unk> because of that technology transformation and this is how we want to address the increasing demand.
Speaker Change: Great. Thank you very much.
Speaker Change: The next question is from Mark Miller with Benchmark Company. Please go ahead.
Speaker Change: Congrats on your quarter and thanks for the question I'm. Just wondering if you have seen any recent or do you expect any significant changes in data center capex by your major Hyperscale customers and the second question is any significant components.
Speaker Change: Sourcing out of China.
Speaker Change: So mark I would say that we have decoupled supply chains long ago. So I think we we.
Speaker Change: And control sourcing or whatever we need to make sure that we don't run out of parts or there aren't any significant cost impacts. So that's one of the reasons why we said whatever happens so far has been minimal.
Speaker Change: But we always watch.
Speaker Change: Specific sourcing issues to make sure that we.
Speaker Change: You have what we need I think there.
Speaker Change: Geocentric options for anything that we need from a sourcing perspective.
Speaker Change: And relative to <unk>.
Speaker Change: Predictability of the cloud customers their demand.
Speaker Change: We've said before this has been fairly predictable some of it's because the market has been underserved, but we're running the play and there is visibility into lower demand in the back half of the year and even people are starting to book into.
Speaker Change: Calendar year 2006, because data center infrastructure very important in their business models.
Speaker Change: A relatively small percentage of their capex to is what they spend on.
Speaker Change: Storage so.
Speaker Change: Given how important it is and how that it continues to grow theyre, making that a priority.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks, so much Gary.
Speaker Change: I'd also like to take the opportunity to once again, thank our employees our customers and our suppliers further contributing to our results and our shareholders for your support we look forward to speaking you within with it with you in a few weeks at our analyst event May 'twenty.
Speaker Change: <unk>.