Seagate Technology Holdings PLC

Good afternoon and welcome to the Seagate Technology Fiscal Third Quarter 2021 Financial Results Conference Call. My name is Gabriel and I will be your coordinator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, the conference is being recorded for replay purposes. At this time, I would like to turn the call over to Cheney Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Cheney.

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 quarter on the Investors section of our website. During today's call, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website in 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 and information available to us as of today and should not be relied upon as of any subsequent date. Actual results may vary materially from today's statements. 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 and 10-Q filed with the SEC, our Form 8-K filed with the SEC today, and the supplemental information posted on the investor section of our website. As always, following our prepared remarks, we will open the call for questions. I'll now turn the call over to you, Dave.

Thank you, Shani. Welcome, everyone, and thanks for joining us today. Seagate delivered an outstanding March quarter, executing well across multiple dimensions. We grew revenue quarter over quarter and year over year. We expanded non-GAAP operating margin into the recently increased target range, and we achieved non-GAAP EPS above the high end of our guidance range. We also continued to drive forward on our commitment of enhancing value for our shareholders, returning a combined $912 million during the March quarter through dividends and share repurchases. Fiscal year to date, we have repurchased approximately 12% of our common shares outstanding, a statement that demonstrates our confidence in Seagate's long-term business prospects. Gianluca will share more details on the financials shortly. For the remainder of my remarks, I'll focus on the business trends that we see unfolding this year and how Seagate is well positioned from a product and technology perspective to unlock more value for our customers. Strong cloud data center demand and ongoing recovery in the enterprise markets drove our highest ever HDD shipments of 140 exabytes and record mass capacity revenue of more than $1.6 billion. These trends underscore the strong secular demand dynamics we are seeing in the mass capacity markets and support our outlook for the TAM to more than double by 2026 to roughly $26 billion. Cloud customers are helping drive this market expansion by investing in scale and infrastructure to support the acceleration and digital transformation in businesses worldwide, as well as growing demand for AI and data analytics. Seagate's high-capacity nearline drives are a vital component of these infrastructure investments, and we believe that our strong technology roadmap and focus around delivering the best total customer experience is helping drive broad adoption by the global cloud ecosystem. These factors were a driving force behind a number of new strategic partnerships and agreements formed last quarter with several of the world's leading cloud providers. These multi-year collaborations are focused on delivering innovative and reliable mass capacity storage at exabyte scale. In the enterprise markets, we are seeing a continuation of the recovery trends that we discussed last quarter, as businesses increase investments in traditional on-prem IT hardware. Recent CIO surveys highlight increased 2021 budget growth expectations to support their post-pandemic application and infrastructure needs. We realize strong double digit sequential revenue growth for both our enterprise near line and mission critical products in the March quarter and currently anticipate healthy demand through the calendar year. The record demand that I cited in the near line markets more than offset anticipated seasonal declines for video and image applications. We see via market demand improving in the June quarter and sustaining through the calendar year as planned smart city projects are slated to begin in the coming months. Video analytics extends well beyond public safety. As I discussed in our recent analyst event, there's a growing list of edge applications that leverage video image sensors in areas such as retail, manufacturing, and healthcare to derive valuable data insights. These applications support our longer term exabyte and revenue growth projections. Seagate is well positioned to benefit from these trends as we continue to lead the driven by product aerial density competitiveness and strong customer engagement. Finally, looking quickly at the legacy markets, higher enterprise mission critical sales and relatively stable desktop PC demand led to better than anticipated revenue in the March quarter, despite this period's typical seasonal slowdown. With a broader industry shift to mass capacity storage forming the foundation of our future revenue growth outlook, we have built a strong technology roadmap, streamlined product portfolio, and are growing a pipeline of solutions and services that make us ideally suited to address big data demand now and well into the future. Average capacity per drive increased 17% sequentially to top the five terabyte mark, a milestone that reflects the growth in mass capacity storage and demand for Seagate's high capacity nearline drives. Today, Seagate is servicing the vast majority of market demand for 16 terabyte and higher capacity drives. We've started to aggressively ramp 18 terabyte volume and current demand suggests strong sequential growth through at least the calendar year. We are also rapidly gaining traction with our industry-leading Mach 2 dual actuator technology. Mach 2 has been proven to address TCO and performance requirements for certain applications with heavy data traffic, such as content streaming. We've recently begun the high-volume ramp of Mach 2 drives with a leading hyperscale customer and plan to expand shipments to additional customers later in the calendar year. And that brings me to Hammer. We believe Hammer is the technology to achieve drive capacities of 30 terabytes and beyond. Today, customers are testing 20 terabyte hammer drives in their production environments, which offers valuable feedback that we are factoring into our product roadmaps. I would highlight that through our innovation capabilities and our common platform approach, we have the flexibility to offer multiple versions of 20 terabyte drives to meet customer needs, not only with hammer technology. We are focused on delivering solutions to customers that meet their roadmaps and lower their TCO and do so in a way that also drives value for Seagate. To that end, we plan to begin shipping a few versions of 20 terabyte drives in the second half of the calendar year. This quarter, we introduced new key components of our live edge to cloud platform. We launched live data transfer, enabling data movement on demand between the edge and the cloud. Live data transfer works seamlessly with live cloud, an object-based storage-as-a-service solution delivered in collaboration with Equinix and strategically located at the metro edge. In a recent survey conducted by IDC, a majority of respondents considered it increasingly important to co-locate data adjacent to applications or cloud services. We are progressing our build-out plans and are on track to have four live cloud sites up by the end of the calendar year. We are gaining ecosystem support and have now been certified with each of the leading backup software vendors. We are very excited about the future potential for live products and services, which open a large and growing market opportunity for Seagate estimated to reach about $50 billion by 2025. However, I do want to reiterate that we are still in the early innings. We're being deliberate in how we build out the platform and capabilities to position Seagate for long-term success. We are listening closely to customers to make sure we're designing and evolving our services to best serve their needs, particularly as the distributed enterprise itself evolves in the growing data sphere. In the March quarter, we hit a milestone that took four decades to achieve. Seagate has now shipped a cumulative three zettabytes of HDD capacity, shipping over 3.3 billion disk drives. For perspective, at the 140 exabyte rate we shipped in the March quarter, we would ship our next three zettabytes in about five years. That is an amazing commentary on the exploding global data sphere we live in today. And I think Seagate's in an outstanding position to drive great future value for our stakeholders. I'll now hand the call over to John Luca to cover details of our financial results.

Thank you, Dave. Seagate continued to execute exceptionally well, as demonstrated by our strong March quarter performance. We delivered revenue of $2.73 billion, up 4% sequentially and above our guidance midpoint. We achieved non-GAAP gross margin of 27.4%, up 60 basis points sequentially, and we expanded non-GAAP operating margin to 15.4%, inside the recently increased long-term target range of 15 to 20 percent operating strong demand for our mass capacity product supported record hardest drive capacity shipment of 140 exabytes of 8 percent sequentially and 16 percent year-on-year nearly 80 percent of our total extra bite were shipped into the mass capacity market which include nearline video and image application or via and NAS products. Mass capacity shipments increased to a record 111 exabytes in the March quarter, up 21% compared with March 2020, which was our prior shipment record. Based on our current outlook, exabyte shipment growth should continue through the calendar year, consistent with our long-term CAGR forecast of about 35%. Ongoing demand to record mass capacity revenue of $1.6 billion, up 8% sequentially and up 5% compared with the prior year period. Mass capacity represented about 65% of total HDD revenue. Yearline revenue increased sharply quarter over quarter, driven by strong recovery from enterprise and OEM customers, as well as healthy growth from cloud. Nearline shipments were 95 exabytes, up 34% sequentially and 25% year-on-year. Average capacity per nearby drive increased to 12 terabytes, driven by the strength of our high-capacity drives. 16 terabytes and higher capacity contributed approximately 50% of our total March quarter exabyte shipments. Even strength in the VIA market are playing out much as we expected based on seasonality. Revenue declined sequentially in the March quarter from the record demand we saw in the December quarter. We are already seeing demand improve as some of the smart city projects that Dave mentioned take shape. We support our outlook for stronger via sales in the June quarter and into the second half of the calendar year. The legacy market made up 35% of March quarter HPD revenue. These markets add up well in the seasonally slower period with revenue of $864 million, down 5% sequentially and 11% year-over-year. Improving demand for mission-critical drives and stronger than anticipated demand for desktop PC partially offset anticipated decline in consumer drives. We shipped a total of 29 exabytes into the legacy market, down 9% on a sequential basis, reflecting a lower mix of consumer drives. Looking ahead to the next few quarters, we expect the pace of year-on-year revenue decline to moderate, support a relatively stable demand for mission-critical and consumer drives. Revenue from our non-HDD business increased 20% sequentially to $238 million, or 9% of March quarter revenue. The strong growth was driven by our system business, as we began to rank revenue from our customer win in the December quarter. We expect growth momentum to continue in our non-HD business in the June quarter. In the March quarter, non-GAFA gross profit increased to $749 million, compared with $704 million in the December quarter, and included $24 million of COVID-related costs. We're currently planning to incur a similar level of COVID-related costs throughout this calendar year, mainly driven by higher freight charges. Our resulting non-GAFA gross margin was 27.4%, including about 1% impact from these COVID-related costs. HPD margins expanded quarter over quarter, driven by favorable mix, offsetting the sequential growth of our non-HPD business, which carries a lower gross margin profile. Today, our mass capacity gross margin is already at the low end of our target range of 30 to 33%, but we are flying at our recent analyst event. We are on track for total company gross margin to be in the low end of our new long-term range by the end of fiscal 22, supported by the ongoing shift to mass capacity product, higher revenue contribution from cost-optimized 2TB per disk drives, which make up less than 20% of revenue today, a gradual reduction in COVID-related costs, and our continued focus on aligning supply with demand. Non-GAAP operating expenses came in at $329 million, up $10 million sequentially. The increase reflects higher variable compensation associated with a strong performance and increased R&D material expenses to support new product development. Comparing with the same quarter last year, OPEX was down $11 million while supporting a slightly higher revenue level, demonstrating operational leverage and disciplined expense management. Looking ahead, we expect operating expenses to be a bit higher in the June quarter as we gradually resume normal on-site business activities and travel. Our resulting non-GAAP operating income was $420 million, and non-GAAP operating margin was 15.4% of revenue, up 70 basis points sequentially, and inside our recently increased long-term target range of 15 to 20% of revenue. Based on the deleted share count of approximately 237 million shares, non-GAAP EPS for the March quarter was $1.48, up 15% sequentially, and exceeded the high end of our guided range. The $0.18 outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage, while our share repurchase activities enhanced EPS by 4 cents. Capital expenditure were $104 million in the March quarter, which represented approximately 4% of revenue and in line with our expectation for CapEx to be inside our long-term range of between 4% and 6% of revenue for the fiscal year. We will continue to focus on CapEx discipline to better align supply with demand through platform simplification and manufacturing efficiency improvement. We had inventory relatively flat at $1.3 billion, consistent with our strong mass capacity storage demand outlook. Even the broader market dynamics and well-publicized component shortages were continuing to carry higher level of strategic inventory to protect against potential future supply chain risk, as well as to help manage freight logistics. We believe these actions enable us to support customer demand and will continue to monitor current market conditions. The inventory outstanding reduced by three days sequentially to 59 days. We generated $274 million of free cash flow in the March quarter, compared with $314 million in the December quarter and $260 million in the year-ago period. In the March quarter, we used $161 million to fund the dividend and $751 million to retire 11.3 million ordinary shares, exiting the quarter with $213 million share of spending. The investment in Seagate shares underscore our confidence in the long-term business strategy and future cash generation abilities. As a reminder, during the quarter, the Board authorized an increase of $2 billion to our existing share repurchase authorization. As of the end of the quarter, we had $4.4 billion remaining in our authorization, subject to availability of distributable reserves. As we communicated at our recent analyst event, we expect to return more than 100% of free cash flow to shareholders in fiscal 2022. We will do this while maintaining a strong balance sheet and liquidity profile. Cash and cash equivalents were $1.2 billion, and total liquidity was approximately $3 billion, including our revolving credit facility. These levels are more than adequate to support our operation and business needs. Looking ahead to our outlook for the June quarter, we expect revenue to be in a range of $2.85 billion, plus or minus $150 million. supported by continuous strength from cloud data center and enterprise customers, along with increasing demand from via market. We expect non-GAAP operating margin to be at the lower end of our new long-term target range of 15% to 20% of revenue. And we expect non-GAAP EPS to be in the range of $1.60, plus or minus $0.15, representing a sequential growth of 8% at midpoint. At the midpoint of our fourth quarter guidance range, fiscal 21 revenue would be $10.5 billion flat year on year and aligned to the goal we set at the start of the fiscal year. In closing, we continue to deliver on our financial commitment and remain on track to achieve the fiscal 2021 goals we have set while also demonstrating a clear path to meet the long-term objective outlined at our analyst event. I will now turn the call back to Dave for final comments.

Thanks Gianluca. In summary, we had a great quarter. Our growing mass capacity markets are showing strong demand and enterprise spending is in recovery. We are executing on our technology and product roadmaps and seeing positive customer engagement with our newest mass capacity offerings. We currently expect annual revenue growth of at least 10% in calendar year 2021, as the shift towards the less seasonal mass capacity market supports a more stable revenue outlook through the year. We are also making deliberate steps to build out our live platform, particularly live cloud, and are excited by the early reaction from customers. All of this lends confidence to our positive outlook for the company, And that confidence is illustrated by our active return of capital to our shareholders. In recognition of Earth Day, it is fitting to highlight that we published our 15th Global Citizenship Annual Report this week. We are proud of our longstanding commitment to build sustainable supply chains and products to conserve the world's precious resources. In the more recent reporting period, we increased water recycling by nearly 9% and recycled the equivalent of 1,100 Olympic-sized swimming pools. We reduced our production energy consumption by about 19% on a per-exabyte basis. And we are executing plans to reduce our carbon footprint by 20% by 2025 and 60% by 2040 in accordance with science-based targets. Consistent with our core value of integrity, we will continue striving to balance our business decisions around people, our planet, and profitability. Prior to closing, I would like to thank our employees for their extraordinary efforts, as well as our customers, suppliers, and shareholders for their ongoing trust and support in Seagate. With that, Gianluca and I are now happy to take your questions.

Thank you. And now this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. The first question will come from Juan Zimon of Bank of America. Please go ahead.

Yes, thank you, and congrats on these strong results. Could you maybe help us think about, you know, gross margins in terms of utilization rates across components and where you see the most room to improve? I appreciate the... color you shared both around where you are with mass capacity and when you're getting to the low end of that long-term range, maybe some color around the main factors that can cause you to achieve that level a little faster, or maybe what would cause it to get pushed out would be helpful.

Sure. Hi, Wamsi. I'll let Jean-Luc go through a couple of details, but I'll just break it down real quickly as we're going through the transition to the the on the same kind of platform we have the 16 to 18 terabyte and even beyond um we obviously control a lot of the internal competence and we've said that we like the transitions for our ability to go control cost a little bit better as well so that does help the margin probably the most important part of it relative to our manufacturing transactions is third transitions as you said obviously gross margins are still very impacted by freight and logistics worldwide and you know even if customers want product immediately you know we have to it's pretty expensive to go get it to them so that's that's the other uh headwind that we have right now we do see that some of that abating over the next six months

Well, I would say, first of all, we are fairly satisfied with the improvement in fiscal 2003. We improved by 60 basis points in a fairly big jump in just one quarter. We are expecting further improvement. As we discussed at the analyst day, we have a clear target of 30% to 33% in just a few quarters from now. uh we communicated and today that our mass capacity segment is already in that range and this is also of course very important for us because as you know we we have 65 percent of artist drive that is in that segment um we need to look at the mix um For example, this part of the business has grown fairly materially in the last quarter. As you know, that part of the business has a lower margin percentage, but it's a very good contributor to our free cash flow, so it's a very important part of our business. I would say for the future, as Dave said, one big element is COVID. The second big element is the continued transition to mass capacity. We expect a fairly strong quarter in June in the near-line part and a good recovery in surveillance. That is more seasonal than other parts of the mass capacity segment, so it was down in March and we expect to recover in June. And then the continuous alignment between supply and demand. And as you know, we are using our CAPEX in order to, of course, increase capacity by increasing the way that is quarter after quarter aligning better to demand that is coming fairly strong. We didn't get a gross margin, but you can extrapolate the gross margin for fiscal Q4. It has a slight improvement sequentially. I would say potentially we can do better than what we imply in the guidance, and we need to go through the quarter, but I'm optimistic and positive we will have a good result.

No, that's great. I appreciate the color. And if I could, you know, it's really interesting to see that the legacy exabytes have stabilized, and you called out the higher mission critical and desktop PC demand holding that up. When you think about the sustainability of that, frankly, I mean, if you're right on that, OEM and on-prem demand increasing through the course of the year, and also desktop PC potentially going through a replacement cycle with folks moving back into the offices, and even a stronger PC cycle in the second half of this year. Would you say that there is actually an opportunity for legacy exabytes to grow meaningfully in the second half of the year? Thank you.

Yeah, I would say it's possible. As you said, there's strong demand in a lot of these segments. Obviously, over the long haul, we expect continued erosion, but most of the big erosions already happened, to your point, and so a lot of the systems that are out there, certainly mission-critical replacement rates and PCs that still exist, I think they're much more stable and to the extent that some of the The recovery that happens after the pandemic in certain places in the world, you know, may actually drive needs for that kind of equipment. There may be a temporary run on that stuff. I think it's possible. Thank you so much.

Our next question will come from Katie Huberty of Morgan Stanley. Please go ahead.

And then a couple of questions. I think, Dave, you mentioned when you were talking about the mass capacity business in 18 terabytes that you expect sequential growth through at least this calendar year. Was that just for 18 terabyte, or that was for mass capacity near line, more broadly speaking?

Right, all of the above.

Okay, all of the above. And then what were the drivers of material upside in the non-HD business this quarter, and how should we think about the growth rate of that segment for calendar 21?

Yeah, I think that there's some that is mass capacity. Again, the systems business, for example, which is largely boxes full of mass capacity drives, but to the extent that there's incremental revenue from the boxes, from the chassis themselves and the controllers that we use and things like that. There's revenue in that. And there's high demand for that as well. It's akin to mass capacity, though. And then the consumer and the consumer SSD business doing quite well and strong demand. I think our brand is moving a lot of product there as well. So, you know, I think those are the big drivers there. And it's a little bit eight-day seasonal, to your point.

We discussed last time of a good win with an important customer. And also now we are executing on between. It will last also during the June quarter, so we expect a good result also in the June quarter.

Okay. And then just lastly, I think I asked you last quarter about supply-demand dynamics and the potential for an improved pricing environment. There has been some more evidence that in some channels, prices are increasing. Some of the hyperscalers are talking about having to pay a little bit more for drives. How would you characterize the pricing environment, both that you saw in the March quarter, but also what you expect over the next couple of quarters?

I think, as you know, we have long cycle times, and so therefore we have long planning cycles with most of the big scale customers. And so I think that things on that front are fairly predictable. Everyone's going through certain kinds of component shortages. I think that may actually, it doesn't really affect our supply, but it may actually affect the end demand based on what everybody can get and kit together and things like that. So I think it's a relatively benign environment from that perspective. There are interesting trends that are going on out in the world about what people are doing with mass capacity storage. I think there's a lot of innovation vectors that are taking off, and especially as recovery happens. And these are things that we're watching, and I think if you look through the distribution channels, you'll see fairly strong demand for that as well. Again, it's mass capacity demand, but some of the, you know, file sharing platforms that exist out there, IPFS is one that we're watching really carefully. It's an interesting dynamic with a lot of – kind of vibrancy that I just love to see a lot of creative professionals just coming up with new types of applications. And, you know, these are driving demand as well. So, you know, I think that's probably something you see if you look at those channels in particular.

Okay, great.

Thank you. Next question will come from Aaron Rakers of Wells Fargo. Please go ahead.

Yeah, thanks for taking the question. I believe and I want to make sure I didn't hear incorrectly that, you know, Dave, at the end of your prepared remarks, you had commented that you expect to see at least 10% year-over-year growth in calendar 2021. Can you just help us understand or appreciate how that has changed? First of all, is that correct? And secondly, how has your outlook kind of changed? What's been the drivers of that change over the course of the last three months or so?

Yeah, thanks, Aaron. So, you know, obviously looking back at 2020, there was supply and demand disruption. So at first, when the supply was disrupted, people were shutting down factories. There was a lot of pull-in of demand. And then the demand reality is in about... still some kind of supply concerns that people have about components everywhere, and so there are people pulling things in. From my perspective, mass capacity is relatively insulated from some of that, and we have pretty predictable relationships exactly to Katie's question. So, you know, we look at this year as not having as profound an impact as we did in 2020, and that's where we get the And it's largely on the strength of mass capacity. Some of the markets and things like that will be contributing as well, but it's largely the cloud and enterprise on-prem coming back. Yeah, we said two things.

We said at least 10%, and we also said that we expect revenue to be maybe more stable throughout the quarter. So we don't expect a lot of seasonality. And I think that is important when you

Yeah, that's helpful. And then just as a real quick follow-up or second question is, on the gross margin trajectory, you've now got, I think it's 65% of your revenue coming from mass capacity. You had talked about that business now running at the low end of that 30% to 33% guidance, you know, long-term target model. You know, how do you think about that longer term? Do you think actually that mass capacity gross margin can trend up, you know, at the high end or even above the high end of that long-term model range that you've outlined? Thank you. Simply put, yes.

I think we have to get all of our manufacturing capacity pointed in the right direction there. And as legacy comes down, that helps us. And then there's other opportunities as well, like platform commonality and things like that. And we kind of said that 16 terabytes was getting a little long in the tooth. That's why we want to accelerate into 18 terabytes and then 20 terabytes. And at each one of those points, you get a chance to refresh and maybe take some costs out as well, but based on what new designs are in the factory. But we get the leverage of the platform, too. So if that helps you. Yep. Thank you.

Your next question will come from Carl Ackerman of Cowan. Please go ahead.

Yes, good afternoon. Dave or Juan Luque, I guess Dave, you referenced this in another question. In recent days, there have been reports of some significant price hikes in the retail aftermarket as hard drives are being used for new applications like crypto mining. While you have less control over the retail market from a pricing perspective, I was hoping you could discuss how demand in the channel may be impacting your factory utilization and lead times across your customer base?

Yeah, I would say that we always budget enough capacity for the channel. I mean, the customers in the channel are varied and important to us, and so we always budget enough capacity to make sure that we're servicing the channels well. We do see the uptick in demand that you're referring to. Like we said, we're watching the different trends that are causing it. Some of them are really interesting, vibrant trends. And we love that. What I would say is that it's a little early in this to know how prolonged it is, how prolonged it will be. So, you know, I think we're even early in this quarter. So it's really hard to know exactly when. what the distribution channel reaction is going to be. I also think that getting people things immediately is a problem in the world today because, you know, so back to your question about the manufacturing capacity that we have, you know, even if it came out of the back of our factory, getting it around the world to that channel location might be a problem, right? So I think we'll have to look at all these dynamics, look at the lag or lead times, if you will, on, you services.

Understood. If I may, just while on the topic of cryptocurrency, I could be wrong, but I believe you still maintain your stake in Ripple. You have over the last few years, and that's appreciated 5x since you last reported. So I guess, A, do you still maintain the stake there? And then secondarily, are there ways to monetize that stake today? Thank you.

Yeah, we won't talk about the latter part, but, yes, we do maintain a stake. These are, you know, like I said, vibrant segments that we've been watching for quite some time. We have, you know, a fair amount of people that are – because it's all about data flow, and in the case of the recent trends, a lot of it's about data storage in particular. So these are things that we watch and, you know, determine how we make investments not only in – you know, external investments that we might make, but also internally what kind of technologies we're developing. So we are maintaining a stake. Thank you.

Your next question will come from Thomas O'Malley of Barclays. Please go ahead.

Hey, guys, nice results, and thanks for taking my question. Mine was really related to the VIA market. On the last earnings call, I think Davey described an environment that was, like, down mid-teens in terms of revenue. And at least with exabytes that you guys break out, you saw it down, like, in the 40% range. Should you see some of that snap back more violently in the June quarter, given how hard it fell off in March? And just could you walk through what are the reasons why you saw it down so hard in March and why it should come back in June? Thank you.

Yeah, this is typically – I'll let John Luke answer partly as well, but this is typically a seasonal market. It's tied to, I'll say, government spending and build-out. Now, obviously, a lot of that has been disrupted in various places in the world right now. And then I think if you go back four quarters ago, the edge – markets were generally really depressed because I think my comment at the time was nobody's on-prem anyway. So people just aren't making on-prem. So I think there's been a high degree of cyclicality this year to the point. I think what we're seeing right now is not only a replenishment of supply chains that were disturbed, but also an early in the year investment cycle in smart city applications. And some of that may be, you know, because of healthcare data or maybe because of, you know, buildings reopening and they hadn't been making investments for a while, but it seems to be relatively earlier and, you know, maybe a seasonal right now. John Luther.

Inside the mass capacity segment, beer is probably the only one that is seasonal. So it's not unexpected. We knew that into the March quarter we were going to have a decline. As I said before, June quarter will start to be a much stronger quarter for beer and will continue to increase in September and December. Usually December is a stronger quarter for beer.

And sorry, one other point, too. Our central thesis is that the data at the extreme edge is not being properly utilized. As a matter of fact, a lot of times this gets deleted. And, you know, we think there are people who are starting to answer questions about how do I – store that for a little bit longer and then process the data with AI or ML and make, you know, value-based decisions on the data, maybe not necessarily in the next minute, but maybe a day later or a week later. And so as that happens, you know, we expect some of this seasonality to be more muted over time.

Great. That's helpful. And then my follow-up is really around Nearline. Obviously, you guys don't need to talk about share, but let's just look at exabytes. If you look at kind of what the market was forecasting from March, I mean, you have, you know, 50-plus percent share of that market. A better way to ask it other than share is, can you talk about the dialogue that you're having with customers with Nearline drives? What kind of success are you seeing over the next couple of quarters, and what kind of led you to the position where you are right now, where you're maintaining this higher percentage of share? You can answer that however you want, but I just wanted to dive in there.

Yeah, it's great. I mean, I don't really think about it as share because, to your point, we go out to the customers. We have – since the lead times on the products are so long, we have good dialogues about not what do you need in six weeks, but what do you need in six months. And I think that's working quite well. Our customers appreciate that, you know, we still have flexibility for them, but, you know, we're kind of co-planning in that respect, and I think that's served us both very well on both ends. So, you know, the – the bouncing ball on chair, if you will. I, I don't, I don't have a great visibility into, you know, how that's going to change. I just know what our demand is. I, that's why I'd say it. I do think there's a little element in the last few quarters of, um, you know at the end of quarters sometimes seagate gets pulled a little harder than we thought and there that may be a competitive dynamic or it may just be you know the the customers were holding a little bit in their back pocket but in general it's become a way more stable environment than it used to be and we're not building things speculatively either witness our 18 terabyte ramp we've been we were ready for that drive mid last summer the customers weren't really ready so we've been going up a very predictable ramp for that and keeping our factories full of the 16s while that was happening and you know having good dialogues too so i think that's just serving as well we're not in the in the era of building you know having a hunch building a bunch and then speculatively trying to move them at the last minute anymore i think that

The next question will come from Ananda Barra of Loop. Please go ahead.

Hey, thanks, guys, for taking the question. Appreciate it. Yeah, congrats on solid results and good execution. Just two quick ones, if I could. Those are kind of clarifications. Dave, just sort of going back to pricing, you said that things are fairly benign. Does – I guess – Does that mean that they're – I'm really just trying to understand if they're – or think through if there's an opportunity for pricing to improve as we go through the year relative to maybe what you thought, you know, 90 days ago. And I just wanted to get your thoughts there and see if I lost anything in translation. And then I have a quick follow-up.

I think really on a –

Yeah, I'm really sorry. Yeah, sorry, Dave. Nearline pricing specifically.

Yeah, I would say relative to 90 days ago, I mean, again, we've been fairly predictable in giving our customers what they need. And, you know, to the extent that that's locked in with our manufacturing capacity, not much has changed on that front. I do think across the broader world, procurement people tend to be more concerned about supply. And so some of the discussions are being even more mature than we had thought 90 days ago. You know, that's the way I think about it. And we made reference to this in the prepared remarks earlier. you know, about some of the long-term agreements that we've been able to establish in the last quarter.

Got it. And to the LTAs, I mean, is it useful for us to think about their use in an increasingly structural sense, you know, kind of a la 2012, which was an extreme case, But it was sort of material to financial impact. Is it useful at all to think about it in a structural sense like that, or is this more on the margin?

I think that was much more profound back then. You know, from my perspective, supply and demand is a lot more imbalanced than back in those days. As a matter of fact, supply was so disrupted last year and demand was disrupted as well that we're still feeling the reverb, but it's very different than the 2012 environment. I would say that the biggest difference is the lead times on the products. I mean, the wafer starts that we're doing right now, realistically are hitting, you know, for the mass capacity drives, are hitting the back end of our testers probably around Christmas. And if you think about that, that's driving really good, healthy discussions with what people exactly need and what kind of flexibility they need.

I got it. That's helpful context. I appreciate it. That's it for me. Thanks a lot.

Our next question will come from Mehdi Husseini of SIG. Please go ahead.

Yes, thanks for taking my question. Two follow-ups. I believe you guided to near-line exabyte growth of 35%. Is that correct? Did I hear that right?

Yeah, that's right. That's right. That's what we've been seeing, 35%. You know, it's been a little bit stronger from that for the last couple of years for us, but, you know, that's what we think the long-term growth rate is, 35% to 40%. Sure.

It seems to me maybe... You're a little bit more on the conservative side. And I say that because if I just make certain assumptions for the June quarter, that would imply the acceleration into the back half of the year, like in the second half of the calendar year, to get to that 35%.

I think we do think that mass capacity is going to continue to grow. Yeah, I think... When we talk about this a little bit, cloud service providers around the world have to make tough decisions on exactly how they're making investments, and so not all of those investments are necessarily mass capacity related. We do expect a, you know, continued growth in mass capacity into the back half of the year, and that's when John Luca made the comment earlier about a seasonality, that's what he was talking about.

Yes, I think that is an important point. We see a strong cloud and enterprise OEM, but you also need to consider the sequential improvement in surveillance and in the DR market in general that is increasing in volume and in revenue through the calendar year.

Got it. And just to be clear, you're referencing year-over-year growth or sequential growth?

Well, In the remark, we said 10% is year-over-year. Of course, the surveillance comment is sequential, so depending if you're looking at the second half of the calendar year compared to the first half, or you're just comparing year-over-year. Sure.

Got it. And just very quickly, as a follow-up to your Tony Teraboy commentary, that you're going to have several different products. And especially in the context of lower CapEx, is this going to basically enable you to extend your market share from 18 to 20? Especially it seems to me that Hammer may have been pushed out, so now you have alternative technology. Is that how we should think about it?

Again, I don't really think about it as market share. I think more about what customers want, what technology portfolio that we have, and how we might service it. And I think it's important to remember that the cloud, if you will, and the mass capacity is not one size fits all. There are many different types of firmware loadouts, applications. that require different performance levels, that can tolerate different performance levels. Some are colder storage and some are, you know, very much near line, right? So they're very active 24-7. So there are going to be multiple flavors of the technology. It's all serviced off the same common platform. And, you know, from my perspective, I think we're locked in pretty tight with customers. That's why we've got confidence. And when I say multiple flavors, that doesn't mean one or two.

Thanks, Maddie.

Thank you.

And your next question will come from Patrick Ho of Stiefel. Please go ahead.

on the next quarter. Maybe, Dave, first off, it's good to hear some of the commentary about your 18 terabytes growing through the rest of this year. Can you just give a little qualitative color whether you're getting that 18 terabyte demand from, quote, existing customers at lower capacity points, or are they from, you know, potential new customers that hadn't used Seagate over the last few capacity points?

No, maybe the way I would characterize it is there are some customers that were using 16s and are transitioning, but there are also other customers that were not transitioning from previous 12s or 14s or wherever they were before. And I think we have a fairly broad representation. I do think the markets are generally moving up from... You know, like I said, if I think back to the six or eight terabyte days, people would be stuck on some of those lower capacity points much longer. In general, the people who are doing data center build-outs around the world are using that mass capacity leading edge drive much more aggressively. So, you know, from my perspective, the 18 terabyte is a very broad adoption, and I've already said we like the platform quite a bit because, you know, we're continuing to get cost leverage out of it, so.

Great, and maybe as my follow-up question for Gianluca, you've given really good color in terms of the gross margin level and what's driving that.

Can you give a little color of some of the OPEX levers? What's driving that? Are you adding more headcount given the increasing demand? What are some of the moving pieces there?

Yeah, so the OPEX year-on-year was about $10 million lower. Sequentially, it was a little bit higher. The increased sequential is basically due to variable compensation and a little bit higher R&D material spending. We said a couple of quarters ago that we expect our normal trend to be around $340 million per quarter, so we are very well aligned to that expectation, and we think that probably will be our level in the next couple of quarters. Great. Thank you.

Our next question will come from Shannon Cross of Cross Research. Please go ahead.

Thank you. Earlier you talked about challenges of shipping into the retail channel, but I'm wondering if you could speak to how the current supply channel issues are impacting other segments of your business and how you sort of incorporated them into the model. I have a follow-up. Thank you.

Yeah, again, sorry, Shannon. So not so much on the supply of parts for us, although, you know, I think everybody's watching the same kinds of long-term supply issues. But short-term, you know, we hear from customers that they're having problems getting the final kit. And so usually what that does to us is it may mean that in order to hit that revenue or, you know, secure that customer win for them, they may need it differently. And so we're having to be very flexible.

Do you see it basically just pushing out demand, though, right, as opposed to taking any away from a long-term perspective?

Yeah, I think exactly to your point. I mean, I think the demand is there. It's just how exactly quickly it can be served. And then, you know, obviously, you know, some customers, if they can't serve it, somebody else will. And so there's a lot of those dynamics out in the world right now.

Right. And then my second question, and I realize it's new, but you mentioned you had some positive feedback on live cloud. I was wondering, you know, which segments are seeing the most interest and maybe if you can give a little more color on what you're hearing from the customers. Thanks.

Sure. You know, I think if you think about live cloud as almost like an external storage or an external hard drive in a cloud, you know, to the comments you made about retail, it's very simple. There's no ingress or egress fees. It's a scratch pad. That's the way I think about it. And you can use it temporarily. You can use it permanently if you want. I think there are customers who are very – who are always aggregating data out of certain locations and want a temporary landing spot before they find out exactly where they're going to put their data long-term. And so these are the kinds of customers that are giving us a lot of, you know, interesting feedbacks for us to go continue development of the thing. And we're not talking five terabytes at a time. This is people that have tens of petabytes or even bigger.

Great. Thank you.

Our next question will come from Sydney Ho of Deutsche Bank. Please go ahead.

I have two. The first question is, Dave, you talk about the 10% or at least 10% revenue growth for calendar 21. If my math is right, That would imply the average revenue for calendar Q3 and calendar Q4 will be consistent or maybe slightly below calendar Q2. I would have thought the numbers could keep going up on a sequential basis based on all the recovery you're seeing. I know you said at least 10%, but are there some things that we should consider here?

I'm sorry, John, I'm going to go out to the answer. yeah of course we don't we don't guide the individual quarters i think you know it's very easy to for you to calculate but at least ten percent we didn't say how much more than ten percent we said at least ten percent for the calendar year and then we will uh we will discuss the following quarter on the next uh uh we expect driving to be very strong in the calendar year so just please wait for that few more months and get more details on individual courses.

But Cindy, I would say that what we are trying to say is that I think things are relatively full and we expect a muted seasonality, if you will, you know, as we look forward. That's definitely true.

Okay, that's helpful. Maybe my follow-up question is related to the 20 terabyte drives. I know you started shipping the Hammer drives back in November, and you seem to think that the PMR is extendable through at least a 20 terabyte. And you talked about having multiple products at that capacity come out of the second half. I would think qualify multiple products at the same capacity point would increase the cost of your customers. Does it not make sense to say at a certain capacity point you only offer one type of technology? Or are there other things that we should think about that may mitigate that?

Yeah, it's interesting. There are different types of customers who want different performance levels. I think I made reference to that earlier. But, you know, to the extent that we already know the heads of media and say this platform family really well and we don't have to turn the heads of media, that's one option. Another option is various flavors of SMR like we talked about. So there's lots of different ways to provide those customer solutions. Is it more complex for us? Yes, but we have this common platform. And so that common platform can go multiple different different directions and we feel very confident in that and we're not really worried about qualifications or anything like that.

Okay. Thank you.

Thanks.

We have time for one final question from Steven Fox of Fox Advisor. Please go ahead.

Hi. Good afternoon. Thanks for squeezing me in. Two kind of clarifications. First of all, on the video side, in terms of the recovery, I'm not sure if I understood that it's mainly surveillance still, or Dave, are you trying to imply that you're also seeing some of these other edge use cases really take off? Or if not now, can you maybe talk about when? And then secondly, as you buy ahead on components, you know, I understand building the safety stock, but given how the supply chain is changing, do you see that sort of delta increasing, decreasing, staying the same versus your actual needs? Thanks.

Yeah, I think the latter question. First, we have long lead times for our components internally. We have to run the factories every day, 91 days a quarter or so. To the extent that we know exactly what we want for this common platform and for all the other products that we're building, I think we do make sure that we have enough stock for whatever contingencies we have. From my perspective on the smart city applications that we're seeing, this is not just a surveillance market anymore, so to speak. There are many different kinds of edge use cases that are starting to develop. And even some of the building security type of applications, they have a lot more features that are being the same kind of security we're all used to. There's other kinds of features being put in. And so, therefore, if you're buying the solution for a facility or you're upgrading a facility, you want all those new features. I think that's actually driving demand for higher capacity storage as well. And then, sorry, Steve, what we said earlier was last year was so disruptive from a supply-demand perspective on this front. And when people were investing in the edge, I think that's why we're seeing this kind of pull-in of of the market this year relatively.

Got it. It's very helpful. Thank you.

That's all the time we have. I'll now turn the call back over to the presenters for closing remarks.

Well, thanks, Gabriel. And thanks to all of you for joining us today. Seagate continues to execute well and remains excited about the tremendous opportunities we foresee ahead, both in the near term and longer term, driven by a massive growth in data. I'd like to once again thank our customers, suppliers, business partners, and, importantly, our employees for their ongoing support at Seagate.

This concludes today's conference call. Thank you for joining. You may now disconnect.