Seagate Technology Holdings PLC

Good afternoon, and welcome to the Seagate Technology Fiscal Third Quarter 2020 Financial Results Conference Call. My name is Jason, and I will be 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 Shaney Hudson, Vice President, Investor Relations. Please proceed, Shaney.

Thank you. Good afternoon, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our March 2020 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 8K that was filed with the SEC. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and or cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort. As a reminder, this call contains forward-looking statements, including our June quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic, and general market conditions. These statements are based on management's current views and assumptions, should not be relied upon as of any subsequent date. Actual results may vary materially from today's statement. Information concerning our 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 our Form 8-K filed with the SEC today, and the supplemental information posted on the investor section of our website. Following our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to you, Dave.

Thanks, Shani. Good afternoon, everyone, and thanks for joining us. I would typically start the call by sharing highlights from the quarter. However, we are living in extraordinary times shaped by the coronavirus outbreak. Therefore, I'd like to take a moment to send our thoughts to those affected by the virus and recognize the healthcare professionals and other workers who are selflessly supporting our communities through this crisis. For Seagate, the health and wellbeing of our employees, customers, and suppliers have always been the top priority. Throughout this crisis, we have taken decisive actions to safeguard our global workforce and maintain continuity of the business to support our customers. In this period of unprecedented uncertainty, the Seagate teams performed very well. We delivered March quarter revenue and non-GAAP EPS above the midpoint of our guided ranges, supported by record sales of our nearline products and strong cost discipline. And we also continued to generate healthy free cash flow. In January, before our last earnings call, we mobilized our global enterprise crisis team and immediately put strong protective measures in place. This cross-organizational team has been very effective in identifying issues developing protocols, and mitigating risks, which has enabled Seagate to rapidly deploy site-specific learnings and best practices across our entire global footprint and share them with our partners and suppliers. In addition to health and safety concerns, this very dynamic situation has caused disruptions in our supply chain and those of our manufacturing partners and our customers as they also adapt to rapid shifts in demand. Our teams acted with speed and agility to tackle a wide range of operational challenges. from securing parts to produce our drives, obtaining materials to package them, and addressing logistics challenges to ship finished goods in order to support customer demand in the March quarter. As the situation evolved, more governments began instituting measures to prevent the virus's spread, including limiting the movement of people and restricting business operations. We continue to comply with government rules and guidelines across all of our sites. All of our manufacturing facilities are operating in compliance with local government regulations. Our R&D organizations are able to continue their efforts through a combination of telework and skeleton support staff in our labs. Today, our supply chain in certain parts of the world are almost fully recovered, including China, Taiwan, and South Korea, and we see indications for conditions to begin improving in other regions of the world. We are engaging with our suppliers and manufacturing partners on a daily basis. and will continue to take action to mitigate supply risks, including building inventory levels on critical components, supplementing our own supply with external sources where possible, and utilizing external labor resources to support our workforce needs. Based on our current assumptions, we do expect some supply-related impact in the June quarter. The demand environment was equally dynamic. At the surface, the quarter played out largely as expected with a seasonal slowdown in the consumer facing legacy markets, offset by growing demand for mass capacity storage, supporting cloud and data center growth. However, the underlying drivers and customer buying patterns were shaped more by the onset of the coronavirus outbreak rather than any historical trend. Looking at the markets, Seagate's third quarter revenue from mass capacity storage increased 18% quarter over quarter and 68% year-over-year, supported by record sales of our Nearline products. Demand from cloud and hyperscale customers was strong and accelerated towards the end of the quarter, due in part to the overnight rise in data consumption driven by the remote economy brought on by the pandemic. In this remote model, work moves from the office to our homes, education shifts from onsite to online, and entertainment is delivered at high bandwidth digitally to our living rooms. With millions of people simultaneously adopting these changes, endpoint devices such as mobile phones and laptops are overwhelming the edge of the network. This is a real-time example of what we have referred to as IT 4.0, the move of data to the edge. To address latency and bandwidth issues, compute and storage infrastructure is required at the edge. A recent post by a leading US hyperscale company further supports this view, speaking of plans to rapidly deploy new capacity in order to address the increase in global demand, while also encouraging customers to seek solutions at the regional level to address their specific requirements closer to their needs at the edge. We believe these trends drove a broadening of cloud customer demand for our Nearline products towards the end of the quarter, which has continued into the June quarter. The strength in Nearline demand more than offset below seasonal sales for video and image applications, such as smart cities, safety, and surveillance, as COVID-19 related disruptions impacted sales early in the quarter. More positively, within these applications, average capacity per drive increased to over four terabytes in the March quarter, consistent with our expectations for both average capacity and total exabytes to increase with the advent of high definition video and the desire to maintain more data for longer periods of time at the edge. We've also spoken of the long-term demand drivers associated with the advent of IT 4.0 and adoption of video and image sensors to support new applications. One such example surfaced over the last couple of months as healthcare workers and municipalities employed biometric sensors as a protective screening measure against the virus. As a matter of fact, Seagate used the same technology to help protect our own employees. These applications combined with the transition to higher capacity drives create meaningful growth opportunities for our mass capacity storage solutions in this market over the long term. Finally, let me touch on legacy markets, which encompass the consumer electronic space, desktop and notebook PCs, and performance mission critical applications. March is typically a slower demand quarter for these markets following the holiday rush and Chinese New Year. With the consumer markets among the first to get impacted by the onset of the coronavirus, We saw greater than expected revenue declines for our consumer and desktop PC drives. While we see pockets of healthy demand in certain markets and are starting to see improvements across our supply chain, the full extent of the COVID-19 related impacts to the broader economy and associated impact to our market and business operations are yet unknown. Recovery will likely be dictated by the duration of the outbreak, timing of containment, and duration of restrictive measures. Given the fluidity of the situation, we are not going to provide a detailed view for the second half of the calendar year at this time. For Seagate, we stand on solid financial footing with a strong balance sheet, ample liquidity, and exposure to secular growth trends that are tied to the world's insatiable demand for data and the need for mass capacity storage and data management solutions. We continue to advance our technology and execute our product roadmap to address that need. Our 16 terabyte high capacity drives continued to successfully ramp to meet customer demand, with exabyte and unit volume shipments more than doubling quarter over quarter. We remain on track with our 18 terabyte plans and began shipping in limited quantities to select customers as part of our system solution. Because the 18 terabyte drives employ the same architecture as the 16s, they can be deployed quickly and seamlessly in our systems, providing customers with a storage building block of up to 1.9 petabytes at a very attractive price per petabyte in the industry. Last quarter, I spoke of Seagate Live Drive, a series of seamlessly integrated storage solutions to cost-effectively move data between endpoints, edge, and core cloud environments. Our systems will play an integral part of Seagate's data management solution platform, particularly for enterprise customers as they move to a hybrid cloud approach for their workloads. This quarter, we introduced Seagate Live Labs. which is a collaborative platform intended to help our enterprise customers and partners develop data management solutions tailored to their future work requirements. While still in its infancy, this program has garnered tremendous feedback from customers, and I'm incredibly excited by our early engagements. With that, I'll turn the call over to Gianluca to go into more depth on our March quarter results and share our outlook for the June quarter.