Q4 2019 Earnings Call
Mcdaid EM.
D.A.D.
Your company name.
Era A.I.E.R. J.
Andrew phone number.
Two on two lines, you know three six side of it.
Thank you one moment please.
Good morning, and welcome to the <unk> technologies fourth quarter and fiscal year 2019 financial results Conference call.
My name is Kelly I know that your coordinator for today.
At this time all participants are in a listen only mode.
Following the prepared remarks, there will be a question and answer session.
As a reminder, this conference is being recorded for replay purposes.
At this time I would like to turn the call over to see any Hudson Vice President Investor Relations.
Please proceed chaney.
Thank you good morning, everyone and welcome to today's call. Joining me today are Dave Mosley, seeking Chief Executive Officer, and John Romano, Our Chief Financial Officer.
We posted earnings press release and detailed supplemental information for June 2019 quarter on the investors section of our website.
During today's call, we will refer to GAAP and non-GAAP measures.
non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and form 8-K that was filed with the SEC.
We've not reconcile certain non-GAAP outlook measures because material items that may impact. These measures are out of our control and or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
As a reminder, this call contains forward looking statements, including our September quarter financial outlook and expectations about our financial performance.
Market demand industry growth trends planned product introductions ability to ramp production future growth opportunities and general market conditions. These statements are based on management's current views and assumptions and should not be relied upon as of any subsequent date actual results may vary materially from today's statements information concerning risks uncertainties and other factors that could cause results to differ from these forward looking statements are contained in our most recent Form 10-K filed with the SEC and the supplemental information posted on the investors section of our website.
Following today's prepared remarks, we'll do our best to accommodate your questions and with that I will turn the call over to you Dave.
Thanks, Jamie Good morning, everyone and welcome to our quarterly earnings call.
I will start off by summarizing key highlights from the June quarter, and sharing some perspectives on the market before outlining our progress on our key priorities.
Afterwards, Gianluca will discuss details on our June quarter financial results and provide our outlook for the September quarter.
Following the prepared remarks, we will open the call for questions.
Yeah continues to deliver on its financial commitments achieving June quarter results that were solidly in line with our expectations.
We recorded revenue of $2.37 billion and non-GAAP EPS of 86 cents.
Both towards the upper end of our guidance range against a backdrop of increasing geopolitical uncertainty and regulatory hurdles.
These broader macro conditions disrupted our customers buying patterns, causing trepidation amongst some of our enterprise and OEM partners, while prompting others to accelerate demand, including a few surveillance customers.
Our ability to adapt to market volatility and intelligently manage our business enabled us to increase revenue and exabyte shipments quarter over quarter.
Supported by improving demand for our Nearline drives from cloud and Hyperscale customers.
Additionally, our fiscal year performance demonstrates solid execution on our priorities to optimize profitability and free cash flow.
We have been successfully pivoting the business towards growing markets.
Which include enterprise Nearline drives as stores for surveillance announce and our cloud systems solutions.
In fiscal 2019, we delivered annual revenue of $10.4 billion of which approximately half was derived from these markets.
These applications require reliable cost effective mass storage, making them well suited to our portfolio of products.
Importantly, they contribute an even higher percentage of our gross profit providing a solid platform for margins to expand as they become a greater part of our overall revenue.
At the same time, we are continuing to supply hdds into mature markets, which include mission critical as compute DVR gaming and consumer applications to support our customers' needs.
These products require minimal further investment while contributing nicely to our overall operating income.
We are continuing to tightly manage expenses, while prioritizing investments towards areas that deliver the greatest value to our customers and strong returns for seagate.
In fiscal year 2019, we reduced our full year non-GAAP operating expenses by 9%, while increasing our investments in next generation technologies to improve aerial density and lower cost per terabyte.
We are leveraging our significant free cash flow generation to enhance shareholder value.
In fiscal 2019, we delivered $1.2 billion and free cash flow and returned $1.7 billion to shareholders through dividends and buybacks demonstrating our longstanding commitment to capital returns as well as our confidence and sustainable cash flow generation.
We continue to advance our technology roadmap.
And focus on being first to market with new product solutions.
This strategy enables us to provide our customers with cost and performance benefits at an attractive margin for Seagate.
As we shared last quarter, we began shipping our 16 terabyte drives in late March to deliver the world's highest capacity storage solutions and we have already introduced products for both enterprise and Ed storage applications.
Customer qualifications are progressing well and we remain on track to ramp high volume shipments later in calendar year 2019.
In addition to driving the next generation of high capacity storage. We are the first to introduce dual actuator technology.
This technology effectively doubles the performance at the same capacity points, making it ideal for cloud workloads and Ed sequential operations servicing large data flows such as video streaming smart factories, AI and machine learning.
Our Mach two dual actuator technology is garnering strong interest.
Customers have started to qualify these drives which we expect to begin shipping later this calendar year and becoming increasingly critical across the industry starting around the 20 terabyte capacity points.
Looking ahead, we expect to capture another industry first with the introduction of 20 terabyte capacity drives which will be based on our highly scalable camera technology.
Six years ago, I stated that hdds would be 20 terabytes by the end of calendar 2020, and we remain on track to hit that target.
We are focused on making the transition to hammer technology seamless for our customers.
Our hammer drives are built on a common platform to current 16, terabyte drives which is helping to accelerate maturity and adoption in the market.
As we enter fiscal year 2020, we expect the macro related uncertainties that I described earlier, we will continue to have some influence on near term industry dynamics.
However, we expect demand from global cloud and Hyperscale customers will continue to improve particularly for high capacity dress.
The game is well positioned to address this growing demand with a strong technology portfolio.
Deep customer relationships manufacturing expertise in precision robotics assembly and analytics and the supply chain flexibility, which together all enable manufacturing cost advantages.
We expect our exabyte shipments into the enterprise Nearline market will be well above the long term CAGR of 35% to 40% in fiscal year 2020.
Additionally, we expect to deliver healthy revenue growth year over year.
With that I'll turn the call over to John Luca to go into more depth on our June quarter results and share our outlook for the September quarter.
Thank you Dave.
We are focused on driving strong abrasion IP to innovate and effectively managing that business so dynamic market conditions.
On a sequential basis, we could to June quarter revenue by 3%.
With $2.87 billion, and a vote and media buying to allow a guide Anthony.
We could have done an exabyte shipments by 10% to wake you followed by five Exabytes.
And we expanded non-GAAP operating income by 8%.
To to find that they make is $8 million.
Why did that deal, but any benefit ratio will remain on that than we are seeing improving demand from India, but particularly among the ipic estimates, but higher cup by the day the idling device.
Revenue for the enterprise market, which include Nearline immediately because as these guys have been granted 41% of total June quarter David.
Up from 39% in the last quarter.
Mainly due to stronger demand in yesterdays.
Thank them by CMS into the enterprise market were at 15% quarter over quarter at 38, Exabytes airline died accounted for more than 90% of that Delta is evidenced capacity by the airlines.
And nearly eight data Mike.
Revenue from 12, Terabyte and had a cup I see that I have.
Now to event more than 50% of thought that in the Atlantic revenue compared with 36%.
We have successfully qualified our 16 data by Dr. with a nominal cost on that and we expect shipment volume to increase so as if he has got it.
Revenue for the edge and non compete with market, we can grow the surveillance Nat and TV AD and go somewhat obligation increased to 34 best and of that both our June quarter, saving compared with 32% in the prior quarter.
While the footpath how is that kind of in that he added typically a weaker period for the edge and oncomed good market.
We saw some acceleration in demand from a few sort of Adas and gaming customers, which led to us that they face an increasing revenue and exabyte shipments.
We shipped a total of 33 exabytes into the Ace Nokone good market during the June quarter compared to 29 Exabytes.
Got it.
You mean, Estonia application and Majesco as Nokone good platforms at acquired in Iowa, and secured a nice thats audit.
Which is well aligned to high capacity is today.
Revenue from the ads come good markets, including desktop and notebook out of these guys.
On pivoted, 18% or thought that revenue.
I'd like David to a 20% of revenue in the March quarter.
We think that by CMS down approximately 6% to 14, exabyte, reflecting because seasonality.
Our non of these that I'd be at net including Lcs them and Ssds Autozone.
Made that setting, meaning 7% of joint book that revenue.
Down from 8% and that value.
The quarter over quarter revenue decline was mainly driven by lower demand.
From our enterprise and as the gas than us.
Revenue for our cloud the assembly of net was laughing down quarter over quarter. However, we improved operating profit we had a finance our ability to transition our portfolio to higher value products.
During the quarter, we jointly announced a new partnership with cloud yen. So at that asset private cloud market opportunity across Africa, and Dave you can assess and media and entertainment.
Thanks, I guess solution with the power to buy cigarettes aimed at night high capacity bags.
And our new high density started seven platform.
With that event and cost effective solution for large scale deployment.
non-GAAP gross margin for the June quarter was 28.8%.
After 20 basis points sequentially on a more favorable product mix.
Consistent with our expectations.
During the June quarter, we incurred on day to day on costs.
Which we had only a slightly improved from last quarter and that negatively impacted cost last year.
We continue to proactively manage our manufacturing output by line grows at eight with a demand environment, which is that income go what I get capacity today.
Therefore, we are expanding our production capability set that as future growth.
And that is out of these dynamic and a realization costs will remain a headwind on gross margin and good demand 40 megawatts out of production capacity today that I that kind of here.
Efficiently manage our non-GAAP operating expenses holding them flat quarter over quarter that at $350 million.
Now nearly $50 million from the year ago period.
The combination of slightly higher gross margin and flat operating expenses.
That was in a non-GAAP EPS of 80 cents for the June quarter at the high end of our guidance range and the reflecting our ongoing operational efficiency and expenses.
Cash flow from a bit Asia was $148 million that individual book.
Got that expanded to $151 million in the June quarter, and about $600 million for the fiscal year.
Which was just below 6% for the Navy.
Looking ahead to fiscal 2020, we expect capex to be near the midpoint of our targeted range of between six and 8% of aiming to support our plans to increase.
Our manufacturing exabyte capacity today, but on demand.
Free cash flow was a healthy $297 million.
For the June quarter, and $1.2 billion for the full year.
During the quarter, we received a cash payment of $1.35 billion from talking about mainly holding company.
What is the early redemption outstanding prophetic share we added things that come by.
And that in mind that just over a year ago Seagate made a $1.27 billion investment in PMC pathetic shift.
The proceeds repairs and hello to unite investment as well as I could but I think.
During the June quarter were tied to $172 million in debt, including the repayment of our revolving credit facility.
At the end of the quarter.
The company that violence was $4.25 billion.
We think it allows them to last 12 month non-GAAP EBITDA ratio I would just below two times.
But at four to 7.8 million ordinary shares.
For for the $150 million.
Illustrating our view, let's take shares represent an attractive investment.
We exited the June quarter, with 269 million ordinary shares outstanding.
Down 6% comes at diarrhea.
At the end of the quarter, we add $2.2 billion Thats remaining on our organization.
Our board as they gain approved a quarterly dividend payment of 63 cents per share, which will be payable on October nine 2019.
So it's a combination of dividends and share buyback seagate that totaled approximately $1.7 billion negotiate all of that in fiscal year 2019.
Only about 145% of free cash flow, we should reflect our focus on enhancing shareholder value.
As of the end of June cash and cash equivalents were $2.2 billion.
832 million from the prior quarter.
With an additional $1.5 billion available through our order.
As we enter fiscal year 2020.
The industry landscape is improving.
And we remain focused on executing plans to expand our manufacturing capacity, so that adds growing demand for mass capacity storage.
While these actions have any at tanami, but on gross margin, we believe they position on c. gateway to capitalize on future growth opportunities.
I have two shedding our quarterly outlook.
I'd like to outline a change to our financial reporting.
That thing is in the September quarter.
We will begin his closing share based compensation expanse.
From our non-GAAP as as because companies utilize different factors and methodologies to calculate that span.
As well as to be more consistent with the majority of our industry peers.
If this band because that does come at a $30 million per quarter.
While recent majority is included in operating expenses.
I would also point out.
Better than by quarter.
18 week period, and we expect to incur additional operating expenses.
Due to higher variable compensation and the extra week in the quarter.
We expect the net impact to operating expense to be an additional $20 million in the September quarter.
Taking these factors into account our outlook for the September quarter is as follows.
We expect total revenue to be in that range of $2.55 billion, plus or minus 5%.
non-GAAP gross margin to be relatively flat sequentially.
non-GAAP EPS of 90 cents plus or minus 5%.
While the macro environment continues to develop near term demand, we expect exabyte volumes to meaningfully grow.
Over the long term our focus on cash generation.
And a solid balance sheet, we'll provide that.
The financial strength to capitalize on future starts growth opportunities and enhance shareholder value.
I will now turn the call back to Dave for final comments.
Thanks, John Luca.
To summarize Seagate is executing well on its strategic priorities to optimize profit and free cash flow.
We are continuing to manage the business and diligently through industry related cycles and the current market dynamics.
Over the longer term, we believe the fundamental demand for data is driving the need for mass storage capacity.
Seagate is creating solutions to help customers manage the exponential volumes of data securely efficiently and cost effectively.
As we enter fiscal 2020, I am confident that we have the financial foundation manufacturing expertise and technology portfolio to capitalize on future growth opportunities.
We will be hosting an analyst event.
On September 19th in New York City, where we plan to outline our strategy in more detail.
Before opening the call for questions.
I would like to take a moment to thank our customers suppliers business partners and employees for all their contributions to the success of our business.
So look and I will now take your questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press the pound key your first question comes from the line of Katy Huberty from Morgan Stanley . Please go ahead. Your line is open.
Thank you good morning, Im surprised gross margin then recover more in the June quarter, given the 10% increase in Exabytes shipped and the improvement in near line in surveillance. It sounds like under utilization is it still an issue does that tie entirely to the 16 terabyte investments are there other areas of the business, where you are seeing under utilization and then just how should we think about the progression of gross margins over the next couple of quarters is 16 terabyte ramps. Thank you.
Good Thanks Katy.
At a very high level no it doesn't tied to the to the ramp of the 16 terabyte.
Ill describe the market dynamics, and then what sort of Luka do.
Walk on specific impacts us more helpful.
I don't think we should underestimate the disruptions in the market from a demand perspective that we saw in Q4 and continue to see ramifications of the Q1 there's.
There's a lot of supply that was pushed into the market I think into channels that are not necessarily tied to revenue quickly and that's partly because.
People are buying things in anticipation of some maybe supply disruptions that didnt happen.
And I think those those factors have actually played into the quarter to quarter compare.
And may even be a meaningful part of of Underutilization as well just as we try to.
Title six back together because as you know we like to build only with the customers absolutely need and as those disruptions have impacted us I think if I step to the very high level in the industry and look at revenue per terabyte, you can see the revenant procurements going down quite a bit now some of that is the transition to higher capacity address some of the fact that the cloud is still not fully turned on but you can see that competitive progress there how do we get out of it and and win.
As to your question, that's when we could go drug cost per terabyte and the biggest product that we have coming there that's going to be impactful sixteens as well, but I'll, let Jim Lucas good luck as well.
Yes, okay. So in Panama, the under utilization on cost.
In F Q4 .
We see land about 100 basis points of gross margin that we lost you.
Two under utilization.
But on a gross managing it was fairly well aligned to our guidance.
And as you know, even as we actually higher than the midpoint of our guidance.
So I dunno noise expectation was to add at much higher gross margin for Q4.
In F Q1 .
You will see that some under utilization cost impacting the gross margin.
Less than in FQ, four west either probably 50 60 basis points.
So as Dave said is not relegated to the 16 satellite specifically, but we add.
Adding capacity to our money pacing.
Capabilities because of our expectation of much higher volume coming in the next few quarters. So on Peyton we.
And I am all our production and fulfill is a factories, we will ask them lately additional cost.
And as Dave said it but he is also some though.
Pricing pressure in that market escaping and gross margin.
Maybe to be lower than that.
What you would expect.
And maybe let me take the opportunity to talk about those so as far as.
Q1.
So we guided at 90 cents plus or minus 5%.
When asked David as items that will impact EPS in Q1 in different directions. So first of all we will have a positive impact of higher.
Venue.
At this event had a gross margin as we guided.
We also have a positive impact from excluding share based compensation staffing as Q1.
Are there to be bad that align to.
Our home base oil sands at normal practice in the industry.
And then we have a capital of.
Negative impact linings opex.
Because as Q1 is a 14 week quarter, we will add about.
Between $25 million in Opex in the quarter.
And we also have I at all thanks to say variable compensation. So back is probably another $20 million.
Finally, we also have lower interest income because we increased our investment in Toshiba.
No as you know back investment was in any way.
About $80 million of.
Interest income that we will not have the last Q1. So I guess how are you getting on Saturday.
It's a sense in F Q4 to the 90 cents in F Q1 .
That's really helpful. Thank you.
Thanks.
Your next question comes from Steven Fox from Cross Research. Please go ahead. Your line is open.
Hi, good morning, sorry for the background noise I have just one question.
So as you ramped 16 terabyte in the indirect is there meaningful share loss.
That we should consider and if so can you sort of getting a sense for how that sort of plays out over the next few quarters. Thank you.
Yeah. Thanks Steven.
We.
The way I think about it is we're ramping sixteens and communicating to our customers, where we want to do on sixteens, that's the platform and we didn't just stages platform.
Last month, we've been working on for years, So thats a platform, we've been out selling to our customers getting them to align to getting them aligned on the ramps and so on.
So to your point, you know, especially when the market is relatively softer near line. We've we've been down its actually starting to pick back up as we talked about but it's not still not up to full speed as you can see that versus where we were say a year ago.
When things were really hot.
We don't we want to make sure we don't push the wrong dries out there so from our perspective, let's not overbuild say for example on tools are tens and push those into slots and ultimately the customers maybe they don't want for their long term.
Tcl proposition there going to be putting these data centers up and running tries for five seven years.
So the Tcl proposition for the 16 is huge we don't want to be temporarily going after that so if you call that share loss or something like that thats fine thats not a metric we're really managing on to your point.
Thank you.
Yes.
Your next question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead. Your line is open.
Yeah. Thanks, two real quick questions. If I can so first of all just kind of trying to understand the gross margin trajectory from here.
Can you help us appreciate you know at what level of capacity shipments on a quarterly basis, you think that you kind of fully absorb the under utilization.
Of your Fabs I mean is that north of a 100, exabytes or I'm, just trying to understand or frame that as we kind of build the model and I again do go up.
Yes, good Aaron so and I think it's a good way to think about it so.
This time last year, we were north of 100, Exabytes and then you know we dip down in the eighties.
You know in the last couple of quarters when things have been soft I think we need to go up over 100, now and we're installing capacity for that and largely a portion. It's not just 60 terabytes right. It's just some of the low cap stuff moving to eight terabyte since some of the surveillance markets.
The edge towards markets moving to.
For an eight terabyte and so on is exactly to your point, but that's those are the utilization targets that Weve got set and we think it's going to come so we're staging for it.
Okay, and then just not to read too much between the lines, but last quarter. I think you said that the near line capacity shipments for fiscal 2020 may exceed 35 to 40, now you're saying quote unquote, well above that range that long term margins. So can you help us understand or maybe define what well above means.
Yeah, I think that goes back to.
Deep collaborative work with our customers and talking about what exactly they need when they need it and making sure that our ramps are.
Our.
Big enough and flexible enough to be able to accommodate their needs I you know.
It goes without saying that 16 terabyte sound above 18 terabytes, when we get there 20 terabytes when we get there are very meaningful TCOS.
Improvements for the customers.
The depending on which ones they may be cycling out old equipment. They may be building, new data centers as part of their plans.
But all of that.
Improves their capability and they are going to be running the gear for a long time. So we think we're up against a fairly fairly big.
Mobile this time in Exabytes.
Okay. Thank you.
Your next question comes from the line of Chris for Muse from Evercore. Please go ahead. Your line is open.
[noise].
He gave you there.
CJ.
Yeah can you hear me.
Oh I know again.
Yeah, sorry about that I I guess to the September model I'm, having difficulty hearing the numbers. So I guess could you provide guide for Opex and gross margins, including stock based comp.
No I don't think we will do that but we might impact headwinds impacted about.
So a million dollar so you can kind of as a fairly quickly.
So I should be thinking 30.
Plus 20% 25, so 75 million higher Opex Q on Q, including stock based comp.
Now are they opex spot all this all these conversations about Twain.
So you have $20 million or that is not included in our guidance because of of installed base compensation.
Therefore in week those extra weekend they bought there.
Neither in amount so clean comedian though.
And then because we entered into a new fiscal year in the guidance that is an assumption for body wasn't visitation of it is higher than what we had in the prior quarter. So you need to add all those items.
And that will come out.
Why why not okay. Thank you.
And then as a a as a follow up can you speak to as you think about gross margins and I know, you're you're focusing an under utilization, but it is the 16 terabyte transition having any impact there and then at what point should that be mitigated.
So we are ramping their 16 terabyte had as you know that expectation for demand is really strong thinking there.
A time lag between when we start to say goodbye to Dan when we handily.
Add ons international so which is why we still have some under utilization cost, but that when depending from how much additional capacity, we will add in the next few quarters, but instead to be.
Poorly.
Close to be at full capacity fairly quick probably a couple of quarters.
Yeah, I know that you could start to see the CJ in our in our.
Capex numbers a little bit.
If you look year over year as we're staging the right technology to be able to get them out and that's one of the reasons why we.
We reinforce the expectation for revenue growth and 20 as well is because we're getting to the point, where we believe that those tcl propositions or.
So advantageous to people stretch for them.
Thank you.
Your next question comes the line of Amanda Barra from Loop capital. Please go ahead. Your line is open.
Hi, Good morning, guys. Thanks for taking the question.
Yeah, Dave Angeliki, just just I have two if I could the first is just sticking with gross margin Dave yes, the the metrics around utilization how they get the the margins go and what you're seeing for the whole you terabyte. That's really helpful. Mike My question in that regard AIDS.
Last cycle when you hit that 100, the gross margins I believe we are close to 32.5%.
And so can you just give us a little more context on.
You know.
Is that the ultimate ceiling again, I guess just around the sliding scale and the 100, Sarah bites and how we should think about what ceiling could be this time, then I have a quick.
I'm glad you asked that.
If I think about gross margin percent, we don't manage the business on a day to day perspective for gross margin percent.
But it's a long term planning item. So so when we say last cycle gosh. It was only a year ago. It just feels like these cycles are going very very quickly.
We're investing to be able to hit the peak so those cycles better to your point.
And then I think theres competition, as well, which is to my my comments commentary about.
Revenue per terabyte, we need to get cost per terabyte down, but we also have to realize that the revenue per terabyte is coming down fairly aggressively as we moved so all these things factor in.
Over a longer period of time.
The margin range serves as a guide for how we how much we want to invest where we think we're we're going to go and I think if you look over the entire fiscal year to your point you saw a peak in the valley if you will.
We think theres, another becoming as well exactly to your point so.
If we I think if we get to the top end of that range again, we earned it and.
We would also I would also always asked the team, though kind of in quarter. If we have the opportunity to go grab dollars even if there.
Dilutive to gross margin percentage will take it tactically to some extent.
Yes. It does say that that's really helpful. I appreciate it and then the second and then the follow up is yes with regards to that 16 terabyte.
Yeah kind of quality progression I believe.
Yes, sort of 90 days ago or at least as we 60 days ago, let's say.
You guys were expecting to get the volume in September quarter, and some context and 16 terabyte than that really.
So to see things kick up in the December quarter, It sounds like you're still expecting that in the December quarter.
How does the progression relative to prior expectations for the September quarter. Appreciate it yeah. We're on the run a fairly aggressive ramp and remember the lead times for things like heads and disks and drives or are getting longer, especially on these big capacity drive and we're still driving it in the qualifications of really don't have any significant technical hitches at this point some of timed out theres a few that are for various reasons customers have pushed a few weeks because there are tools weren't ready or because they are not ready to intercept.
With.
Where they want to.
To be able to take a 16 terabyte and a lot of that is about where they want to go.
As far as I'm concerned.
We're pretty happy and were definitely staging materials.
Appreciate that and I guess.
You are going to add that you will see a big event in Maine that December quarter. So we are very active on MBS quarter like it was a much more volume starting next quarter.
Thank you.
Your next question comes from the line of Mark Delaney from Goldman Sachs. Please go ahead. Your line is open.
Yes, good morning, thanks for taking the questions.
First I was hoping to follow up more on the commentary around revenue per per bed and David you spoke about dual actuators and improve performance. How do you think that translates into your ability to improve pricing.
What sort of price premium do you can you can get for that type of technology and yes. There is some sort of additional costs. So so related to that what what would the gross margin implications be as well.
It's an interesting space Mark and I don't think its near term. So just to be quite Frank I think there are some smaller customers who have very high performance workloads, who are really pushing for this technology.
There are some smaller divisions of cloud service providers, because everything alcohol answers providers are not created equal in month many have.
Different workloads, so where this technology is immediately applicable is a subset.
I think the technology over time becomes much more important and.
I would think about it is above 20 terabyte their multiple do you just can't continue to have bigger drives all behind when actuator and a relative I apps per terabyte.
Streaming speed, that's less if that makes sense. So we need to go to this technology I think it will be competitive and I think.
We're being driven very hard for it.
But I also think it provides since we're providing so much more value. If we happen to that competes should be good for us I think the other interesting thing about the technology does everything I just said about the cloud it's very applicable back into the edge data centers, which are right now starved for that value I think.
From a lower cost per terabyte perspective, and also from a performance perspective, and then the rest of the ads is also.
If we.
We talk about surveillance drives or something that were getting driven for multiple streams of surveillance trends. So the technology is probably relevant there too, but I just want to be very upfront in say the first instantiation now that we're shipping. These products is going to be the early adopters. If you will are going to be more nichey for a while.
Okay. That's helpful. My follow up question during the past quarter or the company announced the.
The SVP of sales will be leading later this year can you talk about how seagate plans to fill that that sales position and are you contemplating making changes and how you're going to market going forward. Thank you.
Yes, it's thanks for the question, it's interesting, though I want to talk about any individual staffing that we'll do it but I will say that.
Are we planning on changing how we go to market. Its its really interesting the markets are changing very quickly the customer types are changing.
Due to the customers, we just even talked about on this call versus two or three years ago. So exactly to your point there is a lot of changes going on.
The sea team is pretty deep I think as everybody knows them together for a long time and I have a ton of faith in the rest of the team I really think we've made great transitions in the last three years and some with Jim's help.
I think going forward, we're going to have to rely on the growth of the seagate team and.
So from my perspective.
I am very focused on who are the new customers how are they willing to buy how do we get adapt to them and some investments, we're probably going to have to make.
Your next question comes from the line of Karl Ackerman from Cowen. Please go ahead. Your line is open.
Hey, good morning.
Dave or one Luca I mean, clearly your PC exposed drives have decelerated last few quarters.
Presumably following the normalization of NAND ASP is that I think make it a little bit more economical for us the season those environments.
Now in the past Youve counteracted that headwind by raising the density per drive while using only one platter.
But I guess from here, how should we think about the levers you can pull on the cost side to stabilize that business. Thank you.
Yes Carlo thanks its.
It's interesting that we said in the script the.
Cost as we talked about how we're doing minimal investments in some of these spaces.
But I think whats important is we're managing the business for.
Free cash flow over the long term not over the short term rates and some of these markets are still without with minimal investment the free cash flow is still quite good operating margins still quite good.
As a matter of fact I would argue that today there the competitor if you will.
Just talked about being being flash drives or something like that or not as good. So but there is a reality of the market space. So were not really investing a lot in those spaces will continue to run them.
Over the long haul and think about them is how do we how do we generate free cash flow.
There will be disruptions in some of those spaces and we forecast that overtime, but I think we have to be careful because the tail is actually quite long as well just pick on Pcs for a second because a lot of people like to talk about it.
From my perspective from a hard drive perspective.
Pcs.
The interesting win for our dries already have told drives in them. So.
It's actually a longer tail and Theres a reason why the hdds in there and DSSD is in there and so I don't really think of it as per se it either or and then the other thing to keep in mind as we're out to service our customers and our customers kind of dictate the demand we don't make demand by.
Our strategy, we don't think of it that way so that helps it and deck and add something on free cash flow I think is very important to keep in mind that even during a quarter that is a down cycle quote that seagate was able to generate began to meet and operating free cash flow.
And was there anything that last quarter. So I think there is a change compared to what it was in the past so even.
In a down cycle time.
Focus on free cash flow is getting very limited that.
Appreciate the color. Thank you.
Your next question comes from the line of Mehdi Hosseini from <unk>. Please go ahead. Your line is open.
Yes, Thanks for taking my question, David So big picture and it's.
It's very.
Interesting and supported you having confidence in your enterprise exabyte shipment for its like Tony can you put that in context and give us some framework as to how the overall exabyte would grow.
Hi, Tony versus if please go ahead.
Okay, sorry, I didn't catch the very last part of that maybe could you just repeat just like the lessons yes.
Sure sure.
I would just go back to your enterprise exabyte growth of.
Willow with 35% to 40% for Tony.
How does that impact your overall it simply shipment.
Can you put the overall exabyte shipment in the context, given how and how comfortable you are with the enterprise segment.
Oh, I see I see okay.
Yes, its becoming a bigger and bigger portion I think in the script, we talked about it already being 50% so.
From from my perspective, it's going to be a bigger and bigger portion and the leverage that we get because we're doing fewer drive types than before I think we'll get relatively better pay off.
If I think about the large part of the driver for exabyte growth. It's the fact that we're getting higher capacity points sixteens versus 10 in the last peak of the last cycle.
And I'm, not saying that the hard drive size. The primary driver of that I think there are many drivers, but but I think thats the biggest thing driving us near term longer term to your point.
If I think about enterprise the cloud will continue to grow.
The cloud will continue to cycle through some of their existing footprint and upgrade as well.
But I think David it's still going to grow in the cloud I think the other interesting topic that we have going on right. Now is is that in the on Prem data centers.
Data is being repatriated, but there is a market difference in the cost between the cloud and the on Prem.
And what we're seeing is a lot of people in the on Prem Arena have focused on high performance storage and that's fine, but because it's going to be a lot of.
Needs for compute there.
And the and the high performance.
US storage or high performance memory, if you will need to be a very close that compute but in order to.
The extreme data growth that's going on in order to have enterprise growth in those places you're going to need cost effective solutions vis-a-vis. The cloud. So so we'd see a great opportunity there we talked about it a little bit in the script.
And I think.
That's also an opportunity for us to get to market a little bit faster with the same technology and that will drive exabyte growth.
If I may.
The following my question if your enterprise Exabyte is growing over 30, 540% Youre surveillance consumer electronics, but growing at a faster rate.
Would those to help you with double digit.
Total exabyte growth.
Yes, eventually they'll take over maybe back back to Carl's question of it eventually they will take over from some of the more legacy systems from an exabyte perspective exactly to your point.
The.
What weve seen about some of the.
Ed storage like surveillance is it's been a little choppy like the cloud hasn't Unfortunately, sometimes they phase up and and you don't see it so I don't know it's easy on.
Rolling 123 quarter basis.
To draw any trends, but certainly over the last three or four years, if you start drawing the cloud trend and the.
As storage trends that are around surveillance and presents a pretty good story.
Got it thank you.
Your next question comes from the line of Jim Suva from Citi. Please go ahead. Your line is open.
Thank you very much and thus far your answers have been very useful I just wanted to make sure I heard it incorrectly.
On the gross margin and Youtube under utilization.
The June quarter. It was about 100 basis points in the September outlook about 50 to 60 basis points, but then you're going to be adding and filling them more capacity, but more volume. So it should be normalizing pretty quickly. After the September quarter is that is that the way to think about the impact passed in forward.
Yes, I think that that's likely of course, so the bank I'm asking about a week, adding that December quarter into following.
Well I guess, but that I think from a modeling standpoint, you are right.
And then my last question is just knowing the cycle time or the throughput of your production I would assume.
The materiality of the revenues kind of come in probably after.
The December quarter, because you simply don't turn on the Fabs and they come out perfect right away, probably more like the March quarter as opposed to.
December quarter, or do you think December quarter won't be to the full run rate of the revenues coming out of your increased capacity.
I need it need to go through an old guy that aiming at right now.
Well it'd be saying that on it.
Or later caught this but that.
Of course, the ban from that how much we have and the NCCN guidelines and as we said before.
We will continue to ramp into the December quarter going to end up that way. So you would have probably more in the next few quarters. It's a good way to think about with lead times.
Because we don't know exactly what's going to happen right now on when people pull but relative to what we're staging from a materials perspective, we're staging those parts that will go against that ramp.
And it's been we're being very aggressive with that does that make sense.
It does thank you so much for your detailed questions as greatly appreciate it.
Your next question comes from the line of Sidney Ho from Deutsche Bank. Please go ahead. Your line is open.
Great. Thanks for taking my question.
He talked about the improving demand conditions, especially for hyperscale customers.
Can you give us some color as to how broad based that strength is and giving you are more than say if my numbers are right. Given your numbers your exabyte for Neil Lane, that's still about 20% below year ago. When do you think that on that on the excite basis that nearline drives could get back to year, but year over year growth. Thanks.
Year over year growth I think is coming certainly an endpoint 20 and some of it depends if we were talking about just on exabyte growth some of it depends on the.
Specific to the ramp of the 16 and I don't want to get any.
Further ahead than the next quarter, but what I would say is you are on the right point, which is.
Last year the drives the factories were for Q4 to Q1 this year as we go through.
The as we're ramping right now were definitely staging to be able to capture the peak of that cycle again, and I think we make that available.
For the guide the eye, if you will on our Investor Relations website, just to show those cloud cycles.
And what we've seen over time is that.
That that.
The.
The peaks and valleys, if you will of the decline in the cloud.
Have really been fairly predictable.
Things can always get thrown off just a little bit but.
But we believe there is another one coming in it's certainly consistent with the discussions we're having with our customers.
Yeah. So yes that that we expect a very clean Canadian exabyte, Tony didn't ask you one flows anyway.
Okay, great. Thanks.
Your next question comes from the line of Mitchell Schafer Media. Please go ahead. Your line is open.
Yes, hi, thanks.
Taking my question last quarter, you mentioned that.
Line.
Ram B.
Wider and higher do you still expect that or do you think it's going to be.
Coming back much stronger.
Yes, I think.
Let me say it this way the data center Buildouts that we've typically heard of and even all the way extending back to last August and September some of the data centers, we hear about being built geographically.
Are some of the plans and a lot of places they've just been postponed for various reasons.
There are other people, who you can tell the data is growing against their application and they want to continue to invest but they wait for the right architectural decisions, sometimes its the hard drive capacity point, sometimes it has has to do with other architectures that are going on so I.
Hard to point to paint the cloud with a.
Uniform brush because there's so many different applications and strategies that are going on but I do think.
The overall data group is very consistent and that's what drives that period is the that we're referring to.
A little wider and deeper this time, maybe you know I think certainly felt like that in the last six months.
And I think what I said, a year and a half ago was a geographically we're starting to see enough diversity that maybe it wouldn't be as deep.
Clearly you know the markets have been fairly disturbed in the last six months, but I think that that.
Overall data growth the demand for places to put the data is still there and and driving that that trend.
Just a follow up so when we see the next ramp are we seeing from existing applications or do you think those build outs that were pushed out a static happens like the new data.
Yes, you have visibility.
Yes, Thats certainly true yes, there are new applications coming on line I wouldn't be talking about any specific customers of course, there are new applications.
All right great. Thanks, a lot.
Your next question comes from the line of mid Steven from RBC Capital markets. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions. One just to talk a little bit at slide 20, I know you guys are getting giving exact guidance, but given that this year has been a little bit in this strange year in terms of the first half being a little weaker during the calendar year. When we look at 20 should we assume that's going to be more of a typical seasonal year for you guys or is there anything else, we should be aware of it sounds like maybe two for the more seasonally strong just looking for any sort of high level comments in terms of that seasonality next year.
Interesting I think Mitch.
There's still seasonality in some parts of it like for example, consumer silver seasonal.
As we.
Or have less and less exposure to things like PC you know some of the traditional seasonal spikes that we would see that are very predictable or are not there as much and as we talked about earlier some of the PC.
Design points are changing a little bit they may be changed they maybe seasonality maybe changing.
The cloud and surveillance smarts surveillance used to have a little bit of seasonality I think it it's been a little disrupted so I I would say, it's a seasonal and the cloud certainly is a seasoned all go through.
Through different patterns that caused that.
The spikes that we talk about with all these things considered though you know just looking at the data growth.
The total data growth over the last few years, we think appointed exactly to your point people have been very conservative and you know an endpoint 20, theyre going to have to go invest in data and that's why we have confidence in revenue growth.
Perfect and then just one last follow up just on the enterprise side and we saw what I can see a I'm sorry, when that person and terminated Preannounce I guess is there anything there that it was surprising to you guys in terms of their comments or do you guys think that.
That would be more company specific anything you gave in terms of why they are necessarily towards significantly versus what you're what you're kind of talking to in terms of demand.
I wouldn't talk about specific person I would say, it's super interesting to me.
What's going on and on Prem Enterprise I think if I look over the last five to 10 years. There have been people very focused on high performance rigs and that's important.
We see it in the.
Our own data centers that we have to build but we also see a lot of people want to want to.
Grow the data on Prem for themselves, whether it's our own control their own application control. Some people talk about repatriation I don't think it's a good way to think about it I think because I think the cloud will grow substantially in that and the applications in the cloud or.
Have a great value proposition as well, but I do think that on prem low cost.
Efficient.
Storage to to cover the entire lifecycle of data not just the compute but the lifecycle of the Dana is super important I think some companies have been very focused and that's their business model to be very focused on high performance.
I think there is an opportunity for all of us for everybody in this more economical on Prem stuff and I and we pointed to that a little bit in our script.
And I think it's a space to watch in the next five years.
Very helpful. Thank you.
Thanks.
Your next question comes online of the day Rakesh from Mizuho. Please go ahead. Your line is open.
Hi, guys just meeting on the Hyperscale side, there's been some confusion in terms of as you look at the back half you know if demand.
If there's a difference in demand pick up between enterprise and Hyperscale odd what do you seeing geographically in terms of.
Near line demand picking up between U.S., a Chinese customers appreciate any color there.
Yeah. It has been a little choppy this year that's for sure.
I think there's various reasons for that but but overall most of the discussions we're having with our customers are.
There is a lot more planning involved so.
Is there a data center is going to be built or are you going to be transitioning some of your old gear into new gear, new applications coming online to that point.
We do feel that the last six months or nine months geographically there have been a lot of people to say I am on hold we will come back to this.
But some of that business models are still.
Desired in place and then there may be new ones coming up which I think causes some of the choppiness that we see in the Nearline exabyte demand.
Got it and then I know this is any reason but.
In terms of Sonys stat is to again going back in place.
In a month's time any thoughts I know this is Eddie.
Preliminary but.
Thanks.
Sorry, I didn't catch that.
Just investors on the status of the announced yesterday Oh, yes, yes. Okay. Thanks, we don't have any we don't expect any impact from the new from and you add on the new ones.
I think.
From from our perspective, there is a lot of things that we are obviously working with our customers through we.
We tend to focus on.
No.
Or when do we have the right stuff in the right place at the right time.
We react to these things just like everyone else does I think we have a pretty robust supply chain that we can.
Can react quickly.
So.
From from the new tariffs I think theres minimal impact.
And everybody's analyzing the same things in the world.
And going through the same things were seeing is markedly similar to everyone else and I've heard their earnings calls.
So you can tell other people are struggling with it a little bit more but I think we're dealing with it.
And there are no further questions at this time I will now turn the call back to date, mostly for closing remarks.
Okay. Thanks, everyone for joining us today in Dublin, and thanks for your interest and Seagate.
Once again like to thank our customers and our suppliers and business partners and all of our employees for their contributions to our fourth quarter performance.
I'd also like to thank our shareholders for your ongoing support we look forward to seeing you all at an analyst event in New York in Sept on September 19th and Thank you Kelly also for hosting the call.
This concludes today's conference call you may now disconnect.