Seagate Technology Holdings PLC

Good morning, and welcome to the Seagate Technology Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. My name is Tabitha, and I'll 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 only. At this time, I would like to turn the call over to Shanie Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanie.

Thank you. Good afternoon, everyone, and welcome to today's call. Joining me are Dave Mosley, C8's Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our June quarter and fiscal year 2021 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 included in our 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, a reconciliation to the corresponding GAAP measures is not available without unreasonable efforts. 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, 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 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 Investors section of our website. As always, following our prepared remarks, we'll open the call for questions. I'll now turn the call over to you, Dave.

Thank you. Thank you, Shani, and a warm welcome to everyone joining us today. Seagate ended fiscal 2021 on a strong note, delivering outstanding June quarter performance and fiscal year revenue that exceeded expectations. These results reflect broad-based demand across the mass capacity end markets and incredible execution by our global team, which together led to faster-than-anticipated progress toward our long-term financial targets. In the June quarter, revenue topped the $3 billion mark for the first time in six years, and we delivered non-GAAP EPS of $2 per share, which was at the topmost end of the upwardly revised guidance range that we provided in early June. Additionally, we expanded non-GAAP gross margin to 29.6% and expect to be inside our long-term target range of 30% to 33% ahead of schedule. The demand strength and favorable mix has accelerated the timeframe to achieve better supply-demand equilibrium, which is supporting firmer pricing conditions. We are reporting these exceptional results at a time of optimism in parts of the world as vaccinations progress and economies begin to reopen. In fact, we are hosting today's call from Dublin for the first time in six quarters. While the pandemic remains a difficult reality for many parts of the world, and we remain vigilant and continue to manage the business through this period, it is clear at a macro level that recovery is underway in the markets that we serve. T-Gate is entering this recovery period in a very strong position, helped by the fact that we executed incredibly well throughout the crisis. For fiscal year 21, we generated nearly 2% year-over-year revenue growth, exceeding our expectations. We grew operating profits faster than sales and achieved operating margin of 15.4% for the year, showing the leverage in the business. And we returned a substantial amount of capital to shareholders, including $2.7 billion in dividends and share repurchases, retiring more than 13% of our outstanding shares in fiscal 2021. In addition to recording strong financial results, our innovation engine has not slowed down, We extended our HCD technology leadership as evidenced by Seagate being the first company to commercialize hammer technology and the first to deliver dual actuator performance drives, which are now shipping in high volume to support multiple customers. We leveraged our aerial density gains to streamline our product roadmap, making us better able to meet changing customer demand requirements while maintaining an attractive cost profile. We also leveraged the strength of our common mass capacity platform to execute our 18-terabyte RAM plans to meet customer demand. We expect to begin shipping 20-terabyte PMR drives in the second half of this calendar year. Finally, we expanded our product and service offerings with the launch of live edge-to-cloud platforms and remain on track with the build-out of our four live cloud metro edge locations by calendar year end. A year ago, when the business challenges posed by the pandemic were very acute, I made the statement that Seagate would emerge from the crisis stronger than ever. With the financial performance and innovations that I've just highlighted, I believe that our team has delivered on that claim and that Seagate is stronger than ever. We are continuing to focus on unlocking more value for our customers and shareholders. For example, last month, we introduced Corvault to our family of cost-efficient, high-density storage systems. CoreVault combines Seagate's internally designed storage systems basics with our intelligent self-healing software and data security technologies, which results in a high reliability storage solution at petabyte scale, ideal for private cloud and macro edge data centers. We are also working directly with customers to unlock value. Many of our hyperscale customers repair their large fleets of storage drives. We recently teamed with Google Cloud to take data intelligence one step further. Together, we developed models that help predict drive failures before they occur. These models promise to lower operational costs and prevent potential problems to their end users, a clear win-win. Let's turn now to the current market environment, starting with an area that has garnered significant interest in recent weeks. Storage-centric blockchains, such as those used by Filecoin for decentralized storage applications or Chia cryptocurrency, which is considered an environmentally friendly alternative to other blockchains that utilize energy-intensive computational power to validate transactions, have significant interest. During the June quarter, we saw a meaningful increase in HDD demand due in part to the initial build-out of the Chia NetSpace, which is comprised of both new and repurposed HDDs. By our estimation, new Chia demand represented at most a mid-single-digit percentage of total industry exabyte shipments during the quarter, primarily into the distribution channel. This incremental demand served to tighten HDD supply dynamics in an increasingly robust demand environment. While the future growth outlook in this space remains unclear, we are excited by the potential applications associated with innovations in decentralized file storage. For Seagate, strong growth in the traditional mass capacity market remains the primary driver of HDD demand. In the June quarter, mass capacity represented close to 70% of Seagate's HDD revenue, supported by broad-based demand for our near-line drives and the third consecutive quarter of sales growth into both cloud and enterprise customers. Cloud data center demand has remained healthy and steady for the last 18 months, and current indicators suggest that that trend will continue. While it's clear that the pandemic played a big role in accelerating digital transformation, hyperscale industry leaders expect the digital adoption curve to continue accelerating even as COVID recedes. At the same time, businesses are preparing for employees to return to the workplace, which is reinvigorating on-prem IT infrastructure investments and supporting ongoing recovery in the enterprise markets. We also experienced stronger than anticipated recovery in the FIA markets during the quarter due in part to tighter supply conditions. We currently foresee relatively stable demand through the second half of the calendar year. Looking ahead, secular demand for mass capacity data combined with signs of macro recovery represent significant opportunities for Seagate and set the stage for continued strong financial performance and cash flow generation. These factors, combined with our broad product portfolio underpin our forecast to grow revenue in the high single-digit percentage range or more in fiscal 2022, which is well above our long-term financial model range. I'll now hand the call over to Gianluca to cover the financial results. Thank you, Dave.

Seagate executed extremely well in the June quarter, delivering very strong top- and bottom-line growth. but was fueled by accelerating demand in the mass capacity market and distribution channel. Revenue was $3.01 billion, up 10% sequentially and 20% year-over-year. Non-GAAP operating margin expanded toward 18.1% in the upper end of our long-term target range of 15% to 20% of revenue. And non-GAAP EPS was $2 per share, up 35% sequentially and 67% year-over-year. Ongoing demand momentum for our mass capacity product supported a third consecutive quarter of record hard disk drive capacity achievements, totaling 152 exabytes, up 9% sequentially and 30% year-on-year. More than 80% of total exabytes were shipped into the mass capacity market, which includes Nearline, VIA, and NAS products. Mass capacity shipments hit a record 123 exabytes in the June quarter, up 11% sequentially and 36% year-over-year. We are continuing to leverage our manufacturing agility and drive operational efficiencies to meet our customers' timing. Mass capacity now represents close to 70% of total HCT revenue. Further demand for our near-line price and strong recovery in the beer market of record mass capacity revenue of $1.9 billion, up 16% sequentially and up 29% compared with the prior year period. Sales of our near-line product grew strongly quarter over quarter, replicating the rapid uptake in demand from storage-centric blockchains that layered on top of healthy cloud data center demand and the improving enterprise OEM customer trends that we discussed last quarter. We attribute the incremental sales of our mid- to high-capacity near-line products in distribution channels to Chia Farmers, while our cloud and OEM customers consumed a majority of our high-capacity suppliers, including our 18-terabyte sites, which are shipping in high volume. Overall, nearline shipments increased to 101 exabytes, up 6% sequentially and 28% year-on-year, from record levels in each of the comparable quarters. Stronger than expected demand in the VIA market led to a sharp sequential increase in revenue as planned projects got underway and customers invested to support in future demand. Looking ahead, we expect relatively stable demand into the second half of the calendar year. The legacy market ends up well in the June quarter. with a revenue of $854 million, compared with $864 million in both the prior quarter and the prior year period. Exabyte shipments remain relatively flat quarter over quarter at roughly 29 exabytes. Ongoing demand for our nation-critical drives and better-than-expected sales of our consumer products partially offset the anticipated decline for PC drives. We expect relatively stable demand for both mission-critical and consumer drives over the next couple of quarters, which would result in more moderate year-over-year revenue decline for the overall legacy market. Finally, turning to our non-HDD business, revenue increased 16% sequentially and 42% year-over-year to a record $276 million. We continue to drive momentum in our system business, which offers simple and scalable petabyte solutions targeted for enterprise and private cloud customers. In the June quarter, non-GAAP gross profit increased to $892 million, compared with $749 million in the March quarter and $686 million in the prior year period. we incurred $32 million of COVID-related costs during the quarter. Calendar year to date, the vast majority of these costs are attributed to elevated freight charges, which we expect to persist through fiscal 2022. However, given the uncertainty around when or if these costs will evade, starting in fiscal Q1, we plan to stop calling them out. our resulting non-GAF gross margin expanded by 219 business points to 29.6%, including slightly more than 1% headwind from COVID-related costs. Total HPV margins are already inside our target range of 30% to 33%, and we now expect total company non-GAF gross margin to be at the low end of the range in the September quarter. demand and the transition to mass capacity product that has taken place. Non-GAAP operating expenses came in at $346 million, up 5% sequentially, reflecting higher variable compensation associated with the strong performance. We are tightly managing expenses and expect to maintain OPEX at approximately the same level for the next few quarters. The combination of higher sales and margin expansion resulted in non-GAAP operating income of $546 million, up 30% sequentially and over 46% year-over-year. Non-GAAP operating margin was 18.1%, up 274 basis points sequentially and 330 basis points year-over-year. and solidly inside our long-term target range of 15% to 20% of revenue. Based on the deleted share count of approximately 233 million shares, non-GAAP EPS for the June quarter was $2 per share, the highest level since fiscal 2012. Capital expenditures were $124 million in the June quarter and just under $500 million for the fiscal year. which represents 4.7% of annual revenue, in line with our long-term tariff range. Through strong expense discipline and efforts to improve manufacturing efficiencies, we reduced capex by about 15% in fiscal 2021, exiting the year with better supply-demand balance. Inventory was $1.2 billion, down 6% sequentially, with daily inventory outstanding, declining for the third consecutive quarter to 51 days. Our team has done an outstanding job of working with our suppliers and partners to manage strategic inventory levels and mitigate supply chain disruption, including the recent COVID-related recession in Asia, which we continue to closely monitor. In the June quarter, we increased free cash flow to $354 million, up 29% both quarter over quarter and year over year. Our focus on optimizing profitability and cash generation provides flexibility to reinvest in the business and return capital to our shareholders. We used $154 million to fund the quarterly dividend and $228 million to repurchase 2.6 million ordinary shares, exiting the quarter with 227 million shares outstanding and approximately $4.2 billion remaining in our authorization. We retired 34 million shares during fiscal year 2021 and returned a total of $2.7 billion through dividend and share repurchases. Based on our current outlook, we expect to maintain a robust capital return program in fiscal 2022, while maintaining a strong balance sheet and liquidity profile. Cash and cash equivalents remain relatively stable at $1.2 billion, and total liquidity was approximately $3 billion, including our revolving credit facility. These levels are more than adequate to support our operations and business needs. As we enter fiscal 2022, the demand environment remains strong and we continue to execute our product and technology roadmap to deliver on our customer requirements while driving value for Seagate. Looking ahead to our outlook for the September quarter, we expect revenue to be in the range of $3.1 billion plus or minus $150 million. We expect non-GAAP operating profit to grow faster than sales, resulting in non-GAAP operating margin at the upper end of our long-term range of 15% to 20% of revenue. And we expect non-GAAP EPS to be in the range of $2.20 per share, plus or minus 15 cents, representing a sequential growth of 10% at midpoint. In summary, we continue to achieve outstanding results supported by our unwavering focus on operational execution and the strength of our product and technology portfolio. We are already demonstrating performance consistent with our financial target and enter fiscal 22 well positioned for top and bottom line growth. I now turn the call back to Dave for final comments.

Thanks Gianluca. Seagate is executing well, delivering financial performance at or above our commitments, maintaining a relentless focus on total customer experience, and deploying capital to enhance value for all stakeholders. We capped fiscal 21 with our strongest performance of the year, and we expect that positive momentum to continue moving forward. We've demonstrated strong leverage in our business model to grow operating profits faster than revenue, and in turn drive free cash flow generation. Our ability to consistently generate free cash flow provides the flexibility to fund future growth and employ a robust shareholder return program as well. Based on the current outlook, we expect to grow free cash flow appreciably in fiscal 2022. Our employees have been crucial to CEA's current success and key to driving our future. Over our 40-year history, Seagate has transitioned many times to address the evolving storage industry landscape. For example, we've recently pivoted our factories and technology to deliver mass capacity solutions and emerged a leader. Now we are focused on addressing the next mass data challenge with our live product platform. To keep pace with these changes, we are investing to rescale and redeploy Seagate employees as needed to support our future growth and respond to the changing demands of the business. For example, we launched a tool called Career Discovery earlier this year, which has already helped CK to establish networking and mentor connections, as well as redeployment opportunities for hundreds of employees. CK has a broad bench of talent with decades of hardware and software experience, formidable supply chain management and manufacturing skills, and deep knowledge of chip design and data analytics. This expertise and strong customer relationships allow Seagate to understand the global mass capacity ecosystem and its architectures better than anyone. Tools such as Career Discovery are helping us deploy our diverse resources to support our future needs while enabling Seagate to maintain OpEx efficiency. We are confident that this focus on people will put us on a firm footing for continued growth and success. As we close, I want to thank both Seagate's employees and those in our supply chain whose efforts enable our ongoing leadership in mass data solutions. Our customers and our shareholders are equally deserving of thanks for their ongoing trust and support in CE. Gianluca and I are now happy to take your questions.

At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question comes from the line of Carl Ackerman with Cowan & Company. Carl, your line is open.

Hi, can you hear me OK? My first question, this is Lanny on for Carl Ackerman. I have two questions. My first question, what sort of feedback have you received from current hyperscalers as qualifying your 20 terabyte near-line drive? Asking because you have previously indicated it is not a cost-effective node, yet this is a critical step function until you reach the 24 20 terabyte hammer. When should we expect 20 terabyte hammer to reach fit crossover for nearline shipments? Is that something that could occur in fiscal 22?

Yeah, so thankfully, i don't think we ever said that 20 terabytes would be a crossover point for hammer to your point so we we have a number of different 20 terabyte platforms coming uh pmr smr hammer you know there's a lot of different flavors of them and they're targeted at different customers so different qualification schedules for each we're very aggressive uh with the 20 terabyte qualification because The heads of media for the PMR version that we referenced in the prepared remarks is already in the high-volume manufacturing for 18 terabytes and the capacity points below as well, 16 and so on. So we're very confident in that, and we're, you know, ramping aggressively with customers, giving them samples, getting through qualifications, and fairly optimistic about that for the back half of the year.

Yes. Thank you. And just one more follow-up, if I may. On-demand outlook in CapEx, how are you thinking about adding incremental heads in disk capacity relative to your fiscal 22 outlook? Chia currency has clearly led to a supply shortage of mid- and high-capacity drives for data center yet the fulfillment of the JEDI contract by the Department of Defense appears to be for the next few quarters. I'm hoping you may address your view of capacity of the outlook for data center demand over the next few quarters.

Yeah, I'd say within the head factory, for example, which is the longest lead time part, you know, well over 100 million heads per quarter going out. So we have the ability to change the mix as we see fit. So some of the demand changes that we saw are fairly easy inside of our portfolio, which has been really trimmed down, made very efficient, especially with the common platform. We have the ability to We are always bringing on more capacity by putting new tools online to hit the new technology nodes. That's within our CapEx envelope all the time. And we'll just continue to watch this. You know, I think we can continue to grow more exabyte supply with technology transitions, more exabytes with aerial density, so to speak. And we'll continue to watch and be nimble in the markets as well. John, do you want to add something? Yeah.

Yeah, we discussed in the last few quarters about the need to realign supply and demand, and we are getting closer and closer every quarter. For the overall cap at fiscal 22, we think we will have the same target of fiscal 21 between 4% and 6% of revenue. So we will add capacity, but we will also be looking at keeping this alignment between supply and demand.

Your next question comes from the line of Katie Huberty with Morgan Stanley.

Yes, thank you. As you walked through the various segments near line via Mission Critical Consumer, you talked about stable trends across the board, yet the full-year revenue growth guidance assumes that there will be a revenue run rate reduction from the $3.1 billion September guide. Can you just talk about what will drive lower revenue as you move through the year and maybe what sort of the first half versus second half looks like? And then I have a follow-up.

Thanks, Katie. Yeah, I think we are chasing the demand right now, obviously, and so we think the front half is a little stronger. In the back half, there will be a more muted seasonality than where we're normally accustomed. We do – you know, there's also – that's three-quarters away. You know, there may be some – variability there. So we do have good relationships with all of our customers across all these product sets now, and they give us a pretty strong sense of what their demand profile is going to be through the year. So I would characterize this as muted seasonality for now, but significantly up. We've had at least high single digits in revenue growth year over year, so it's still significantly up, and we're still chasing it.

Yeah, we think we will have a very strong second part of the calendar 21. Last quarter, I think we said at least 10% increase year over year. Right now, we think it will be at least 15%. So, for sure, another couple of quarters very strong. And then, as usual, we have in our plan some seasonality for the legacy market. and some of the mass capacity, like surveillance, but could be different as we have seen last year, for example.

I think the other thing is we're running, to the earlier question, we're running in high volume the heads of media that we already need to make more 18s or 20s or whatever. So if some of the cloud markets were to take off above our plan, we could stretch there, I think, in the back half of the year as well.

Okay. And then the pricing environment, as you said, has firmed up faster than you expected. What will determine whether those prices can hold and what are you assuming for price change in that full year guidance for high single digit growth?

Across the whole portfolio, it's really the balance of supply and demand. So it's not just about the exabytes at the highest capacity points. There's strong demand in the VM markets. There's strong demand for 8-terabyte families this quarter, strong demand for even some of the high-end desktop products. So I think... We're trying to balance all these things for the customers. They're giving us predictability, and they need predictability in a time of disrupted supply chain. Everybody's trying to get the complete kits to attack all these market opportunities that they have. So that's really what's firming it up, and I'll let John Luca kind of quantify it through the course of the fiscal year.

Yeah, for the time being, I'll stay in the plan. We have a fairly strong pricing environment, especially for the mass capacity. The legacy is still expected to decline a little bit. But in general, as we were discussing before, it all depends from this alignment between supply and demand. But right now, it's fairly good. We want to keep it at this level.

Thank you. Congrats on the quarter.

Thank you.

Your next question comes from the line of Sydney Ho with Deutsche Bank.

Great, thanks, and thanks for taking my question. My first question is on the near-line drives. Given how strong near-line exabytes should have been in the past two quarters, I think it's up 40% in the past two quarters. I know crypto is a factor, but you also mentioned cloud is strong as well. Are you concerned that we'll see an inventory digestion phase soon, or maybe slightly differently? Do you have a sense as to how much inventory is built in the channel or at your customers, especially cloud and enterprise guys at this time?

I don't think there's too much inventory out there by any stretch of the imagination. It's a little bit different if you look at the enterprise channels. They're relatively lower inventory, and we did see growth in the enterprise quite a bit, quarter over quarter. As far as the cloud goes worldwide, I think it's fairly healthy demand. It's fairly well distributed. This is what we've been talking about for the last couple of years. We've always wanted a lot of different customers pulling at these levels, and we've seen that. So we're fairly happy with the demand outlook and what we've got in the build plan right now for the next couple of quarters, because the lead time is so long, as we've said before. with customers worldwide.

Great. Maybe a follow-up question. On the gross margin side, you talk about gross margin to be within the long-term target range of 30% to 33% in the September quarter. Curious if you have to unpack the gross margin guidance, what are some of the key components for this margin uplift? What is like the live pricing, product makes, yield improvement, and whatnot? And how should we think about those factors playing out beyond the September quarter? Thanks.

Yeah, thanks, and I'll let John Luca chime in here, too. The first thing I would say is that there were a lot of swaps during the quarter from, you know, maybe some of the things we had planned into things that were actually moving faster. And like I said, when you have demand everywhere, you know, those swaps – actually reflect a better supply and demand balance than what we'd forecast. And that's probably the biggest thing. Inventories came down. Our factories were very full. The heads of media factories, of course, are being staged for the next couple of quarters as well. So all that benefits us financially. There's a mix-up as well, and we're going to more cost-optimized drives in the next few quarters as well. So we've started into the family of 18s that we've talked about we like to cost on. We have a lower-capacity near-line drive that's actually mixing in as well that we've launched. So those are all the positives. They're still our headwinds from freight. freight logistics around the world. It's still there. It's still an overhang. And there's obviously component prices in various sectors that are happening because of shortages worldwide that are affecting us a little bit. So those are the headwinds.

Yeah, we had a very good quarter in SQ4, and now we are already guiding SQ1 at a higher level. I would say one of the major reasons is this pricing environment that is improving. The second reason is the niche that is shifting more and more to the mass capacity. In fiscal Q4, 70% of the revenue was already on mass capacity, and we expect that to continue to increase. The other major reason that you will see throughout the fiscal year 22 is increase of our cost-optimized drives, so the drives that are built on two terabytes per disk. And that will stay with us through the four quarters and will continue to bring us improvement to our gross margin.

Thank you.

Your next question comes from the line FMC Mohan with Bank of America.

Yes, thank you. Dave, you said mid-single-digit percent of HDD exabyte demand from Chia in the June quarter for the industry. So if I map that to Seagate, it looks like Chia contributed maybe 60% of the incremental sequential exabytes. So if you see this demand flatten out, how comfortable are you that supply-demand will continue to be tight enough to keep pricing favorable? And I will follow up.

It's really hard to forecast exactly what's going on in Chia, not just because of Chia itself, because they're fairly transparent with their numbers, but because of the entire space that's developing. We did say that On the growth of the net space that we've seen to date, there's probably a fair amount of refurbished drives or drives that have been purchased one or two quarters ago. So, you know, it's a relatively small contribution as of yet to Seagate's overall revenue. And even in the Exabyte growth perspective, I don't think it's very big. So we said, you know, maybe mid-single digits like you referenced. I think it's a space to watch. We love it because it's very innovative, not just in Chia and those applications, but also in the IPFS applications that we talked about last quarter. The big takeaway is, you know, if it continues to grow and fast, it'll have to grow with more new builds. So, you know, that's something for us to watch. But we're not really forecasting very much of that into our guide right now because it's, you know, we're going to wait and see a little bit and we'll react to customers who, you know, are trying to drive more demand in the channel as it happens. Max capacity is still our business. I mean, that's what I would take away. And that's, you know, how we plan our exabytes, and that's how we have our customer relationships across the breadth of our portfolio. And, you know, so, you know, I don't think Chia was that impactful from that respect in the last quarter. And looking forward, we're not really forecasting it very much. We'll just react to it.

Okay, that's helpful. And then as a follow-up, you've added gross margins for next quarter within your long-term range. What would need to happen for you to fall out of that range as you go through the course of the year?

Yeah, I think that would be all about cost and maybe some kind of disruption to the overall supply-demand picture that we've been working on. If you go back you know, six quarters, eight quarters. When we decided to make some of the investments that we did for the mass capacity platform on 16th and then transitioning to 18th and everything else, we put on capacity for that. We pivoted our lines for that. And, you know, that's when the pandemic hit and the supply chain was so disrupted, that's the thing that really hurt us. It's allowed us to climb back into the model as the exabyte demand has grown. You know, I think we'd be a lot more resilient this time at this higher level, but, you know, that would still be the watch item. We don't forecast that, by the way. You know, we think that the exabyte curve is still going up, and, you know, over the next few years, you know our thesis. It's going to grow very big, and so we're still fairly bullish on exabyte growth without this thing taking a U-turn. But, you know, in these environments, everybody's careful. So that's the way I'd characterize it. Okay. Thank you so much. Thanks.

Your next question comes from the line of Thomas O'Malley with Barclays.

Hey, guys. Thanks for taking my question. I just wanted to follow up on Katie's earlier question talking about the seasonality for the year. Gianluca, I believe you said that the second half of the calendar year would be very strong, and I think you mentioned 15% year-over-year. That would imply a down December. Can you talk about what you're seeing in the December quarter that's weakening, or can you clarify that 15% year-over-year comment?

I said at least 15%, so I don't think it's implying really anything. a decrease in the December will be probably fairly close. I would say the seasonality that is expected is more into the March and June quarter as it was the case in the last few years with the exception in fiscal 21. We think in general because the mix of mass capacity is continuing to improve, this seasonality will be no more muted. in the future, maybe in this calendar year, but is a little bit less visibility for us when we go into the March and June quarter.

That's helpful. And then my follow-up is around Nearline. I know that you guys don't like to talk about share, but clearly you've been in a really nice leadership position here. Can you talk about that leadership position, how you feel like you're maintaining that lead? And for the remainder of the year, do you think that, you know, from a competitive perspective, you're going to see any change in that market? Thank you.

Yeah, thanks, Tom. You know, we actually, well, we don't manage for market share. You know, we've been talking about that for quite some time. We're very happy with this platform, 16s going to 18s, going to 20s, and going beyond as well. Obviously, that's allowed us to be very flexible. When people come in for a few more units, they want to swap something in their plan, they want to get an upside, we can actually get it done out of the factories. That's probably the biggest reason for why we've done really well. I think that back in the 16s, we had that leadership just in total capacity available. You know, as far as I'm concerned, we're executing the plan. So we're out talking to customers. We tell them, you know, what do you need? We plan that way in advance. We talked about this last quarter that, you know, If you want an 18 in December, you better tell me now because I'm starting the units for it now. That is, I think, really resonating with customers right now. We can be predictable like this. So that's the way we're planning the business, and we're fairly happy with the portfolio. Again, not driving really for market share or anything like that. And I think that's how our customers are managing us as well.

these are massive investments that they have to make as well so they they need to know that the product's coming thank you your next question comes from a line of stephen fox with fox advisor llc thanks uh good morning just to follow up on those last comments dave can you maybe talk about with now uh basically supply demand balance how you um engage differently with some of those customers what what would be the um sort of incrementals that get you to add capacity um going forward And then I had a follow-up.

Yeah, I'll tell you, it's kind of more of the same, really, because if you think about it, if you were buying 16s before and now you want to ramp to 18s or 20s, we're still having the same discussion. It's just a different drive. And, you know, we're confident in our yields and throughput and our ability to go hit those high volumes. There's not much legacy business to take heads of media out of anymore, to your point. But there's still, I said, well over 100 million heads per quarter to be able to do some swaps in. The issue is just lead time. So if the swaps are in the last quarter, two or three weeks of the quarter, there's no way, right? So that's what's changing, I think, in the market. I don't think we'll go back into a point where we put overcapacity in for that. I think we just, we get into a, you know, the stay inside of our financial model, we'll, you know, invest in the CapEx that we see up our investment. We can do that one tool at a time. We don't need to do it with the, you know, massive swings, I think.

That's helpful. And then just secondly, on the live platform, it sounds like you're getting some more technology validation or at least proceeding like you expected. Is it changing any of your thinking for 22 in terms of the non-HDD business? Thanks.

No, I don't think so. But the non-HDD business did grow, as we talked about in the prepared remarks. So we're fairly happy with the breadth of our portfolio and how it's growing. You know, relative to the live business, The market is clearly out there. There are people who are struggling with the data that they have on the edge, being able to move that into the cloud, find those temporary resting spots like we've talked about a lot with Live, such that they can move it to its final destination in some cloud service provider or multiple cloud service providers. So we are – I'm really encouraged by all the customer engagements that we have. We have to learn to serve this market really well, and then it will grow. So I'm really pleased with what I see, and I hope to share that at some point in the future with everyone. Great. Thanks so much.

Your next question comes from the line of Ananda Barua with Loop Capital.

Hey, good morning, guys, and good afternoon to you guys. Thanks for taking the questions. Hey – Dave, how would you sort of describe your thoughts around the length of this hyperscale cycle at this point? And I guess what sort of the personality of it as well? And I have a quick follow-up.

Thanks, Amanda. It's interesting because I think the front end of this cycle, if you will, was not really about adding too much mass capacity. It was more about just all the digital transformation that was going on during the pandemic. So, it was networking and it was compute and it was making sure the applications could run with much, much heavier workloads than they were necessarily designed for or, you know, they were contemplated, you know, six months earlier. I mean, it was a tremendous stress on people. It's been our thesis that the storage back end to that will come, and it will come bigger. And I would say that even the signal that we've seen that's fairly steady growth of the cloud, I still think it's going to grow even bigger. So it's a very different cycle, to your point. It's not a matter of, you know, putting on excess capacity and then learning some kind of way to use that capacity better out into the market. I think it's a matter of, you know, making sure you focus all those applications, satisfying everyone on the front end, usually from a performance perspective, and then the data will grow in the back of the cloud is clearly going to grow from here. And so we're very excited about that, making sure we have our portfolio as clean as we can by the time that the really big numbers come.

And how do you want us to think about it as we get into sort of the March, June quarter? Typically the breaks would come up a little bit. You know, is that the appropriate way to think about it this time?

Yeah, we said that there would be a more muted seasonality than normal, right? So because we're not in the PC business or the legacy business anymore, you know, now the cloud's a lot more steady. But we'll let you know. I mean, if we start to see, you know, more recovery around the world, then the next cycle will be pulled in exactly to your point, right?

Guys, that's helpful. And then just real quick on the capacity, you guys are saying supply-demand, and Gianluca, feel free to jump in here as well, supply-demand balance, but are you full capacity right now? I mean, what's the right way in sort of traditional capacity vernacular to think about where you guys are in terms of full and tight capacity?

Yeah, thanks. Much more full than we were. But, you know, last year was painful in July, of course. But I would say, no, we're not full. We can still do more. We can certainly still do more exabytes. I think the more we have to do, the more predictable we need it to be. In this last quarter, we were actually challenged operationally to make a lot of these swaps because we saw moving materials from one market to another. Over the long haul, we could do more exabytes right now, but it'd have to be even more long-term predictability, I think, in order to achieve the exabytes. And we're excited about it. We're telling everyone that's the way we're thinking about it.

Last quarter, we shipped a record of 152 exabytes. So we are still growing. So this means we have capacity. Some capacity is still available. Based on our guidance, you can expect another increase in exabytes in SQ1. And as we discussed before, we are still planning to add some CapEx or some capacity through the year.

And as we ramp to 18s and 20s and things like that, we'll get more exabytes out, obviously, than the existing head media footprint that we have.

That's helpful. That's great. Thanks a lot, guys.

Your next question comes from the line of Mehdi Hassani with SIG.

Mehdi, can you hear us?

Mehdi, your line is okay.

Hey, it's Tyler on for Mehdi. Our question was answered. Thank you. Thanks, Tyler.

Okay, your next question comes from the line of Kevin Cassidy with Rosenblatt Securities.

Thanks for taking my question. Just around your discussions with your customers, are long-term agreements being extended, or are you adding more long-term agreements? Maybe just can you give an idea of, you know, what visibility your customer is giving?

Yeah, I think the discussion around, you know, how things are going to go six months and nine months out just are continuing, and it's really good that I think everybody wants a certain amount of predictability right now. We certainly do because, you know, we've got factories to run, parts to bring online and things like that. A lot of supply chains are tight. And so people want to make sure that if they're going to invest in those supply chains, they're going to have the full kit together. So I think the entire industry is, you know, behaving quite well for this perspective right now. It's helping us quite a bit plan our business kit.

Okay, great. And maybe just as a comparison of hyperscale to enterprise, is enterprise coming back stronger or maybe just relative to hyperscale? How is it performing?

Yeah, we debate that a lot, and I would say it's 50-50. It's always been kind of a toss-up. Sometimes one race is ahead of the other. Right now, as we said in the prepared remarks, there's clearly still growth in the cloud, and then as people are coming back on performance, that they want to make that, you know, perhaps they hadn't made six or nine months ago, so they're continuing those investments. And so, you know, I would say there's growth in both, and, you know, it's not enough to knock it off the 50-50 split right now.

Thank you. Your next question comes from the line of Aaron Rikers of Wells Fargo.

Yeah, thanks for taking the questions. You know, and congratulations on the quarter as well. I'm just curious, kind of a – first of all, kind of a pointed question. Do you still think that your near-line capacity shift underpinning your fiscal 22 expectations is still going to grow in that 30% to 35% annual range?

Yeah, Aaron, we do. Like, you know, just to answer Kevin's question, it's – You know, two years ago it was at 80%, so, you know, 35% last year was a little less. But, you know, we think 35% is a good model right now. You know, the wild card on the upside, of course, is if we get a little bit more cloud six months, nine months from now, and, you know, we'll wait and see if we have capacity for it. And we actually are going to build the parts, I think, anyways for that. Yeah. You know, I think there's 35% is a good number to model this year. And then I'm going to ask this question. If the next cycle was actually pulled in a little bit, then it would grow pretty fast because, you know, we have 18s and 20s coming. Those are the ones that go up. We have good visibility on the next two quarters.

So to now give you exactly the growth for the entire year is a bit difficult. But as a model for the long term, we think that 35% CAGR is very valid.

And it's all the same, not the media part, I guess is the point, you know, so we can be flexible.

Right, right. And then the follow-up question is, you know, Gianluca, when you talk about the model and we now talk about, you know, 30% to 33% gross margin and confidence around that, I'm curious of how you're thinking about operating expense investments. You talked about OpEx remaining kind of, you know, at similar levels these next couple of quarters. But, you know, should we start thinking about that you'd let that drop through above that and drive it above 20% operating margin, or would you start to reinvest that in cap margin at that long-term high end of the target model?

Yeah, for the OPEX, we think the level of SQ4, we can maintain that level through the fiscal 22. You know, we are now start traveling more. There are a little bit more marketing expenses. The performance is very good. So, comparing to maybe prior year, we also have a little bit higher variable compensation. But, you know, this level we can keep it, you know, between $340, $345 million per quarter. I think we can do it.

But if we were to outstrip, I think, Aaron, the top end of the range, then, you know, we'd look at investments because we have a number of different markets that are growing well right now. So, you know, we'd look at what investments we have to make. I think we've said this. We said this in the script, actually. We have a lot of flexibility inside of $340, $350 million, right? So that's... You know, that's the first thing we would do is redeploy people inside of that, but then we could still tolerate a little bit more investment if we grew up out north of the top end of the range.

Operating margin is already 18% right now, so when you model the increasing revenue and this level of OPEX and the gross margin you were mentioning before, you know, you will see a very good result in terms of operating margin. Right. Thank you very much. Thank you.

Your next question comes from the line of Patrick Ho with Stiefel.

Thank you very much, Anne, and congrats on the nice quarter. Dave, maybe first off, in terms of the ramp of your 18-terabyte drives, can you just give a little color of when you expect to see the crossover from 16 to 18, where you're shipping more exabytes from the 18-terabyte ramp?

Yeah, I don't think we've formally looked at it that way, or at least I don't have an answer, but I think it's pretty soon. It's, you know, in the next few quarters. From my perspective, it's the same product family, you know, so the heads and media are already in the pipeline, and, you know, some customers are asking for 16s, some customers are asking for 18s, but, you know, I think it's very soon. And then, you know, the same heads and media will take us to 20 terabytes on that PMR platform that we talked about, so we may actually – spend some of those heads and discs on 20s as well, right? But I do think we're going significantly far north of 16 very, very soon.

Great, that's helpful. Maybe as a follow-up for either Jim and Luca or yourself, Dave, in terms of the live platform, obviously we see now the rollout of several product iterations from that family. As it relates to OpEx, is a lot of that R&D spending done, or are you continuing to invest in live where we'll see future product introductions? Is that part of the, I guess, help in terms of maintaining OpEx at current levels?

Yes, it's part of the OpEx guidance we discussed before, and we are investing more in live. We think this is a big part of our future business. We are very positive on the possible outcome from that business, so we will invest. But as I said, we will stay around that level of OpEx that we discussed before. Great, thank you.

And our last question will come from the line of Shannon Cross of Cross Research.

Thank you very much. I was just wondering, can you talk about the materiality of the dual actuator drives? It looks like you've expanded access to certain other customers recently, and I'm just wondering how we should think about it in terms of ASP and benefit as we look forward. And then as a follow-up, thank you.

Thanks, Shannon. It's growing quite nicely, actually, growing volume in the factories. And, you know, it's not a small volume product anymore. It's, you know, becoming a large volume product. We'll be talking about it more and more over the quarters. It is a 14 terabyte drive right now. So, you know, people are making trades for 18 terabytes. They may want to go with a single actuator. But It's very specific to a few applications out in the cloud world that people need the dual actuator already. Remember, fundamentally, we believe that by the time you get to 30 or 40 terabytes, you can't have all that behind one actuator. You need to have dual actuator at least. And we have to solve all the power problems and all the interface problems with our customers and things like that to make that happen. So we're quite excited about getting learning on the technology, the fact that we have the platform, you know, continuing in development process. you know, parallel drives that, you know, as we launch a new high-capacity drive, we have the same capacity points on dual access.

Okay, thanks. And then just a clarification. I think during the script you mentioned strength in high-end desktops, and I'm not sure if you're mentioning if that includes gaming, but I'm wondering, are you seeing benefit from customers coming back to the office and needing to refresh desktops that, you know, perhaps are 18 months old now at this point in time? Thank you.

Yeah, I wouldn't say it's desktop PC anymore. There is gaming that's happening. But I would say more is distribution channel around things like crypto applications and things like that. There are people who are looking just for the absolutely lowest cost per terabyte that they can find. And so that's one of the reasons why the average drive capacity is mixing up. You know, it's going to – from two terabytes to four terabytes. Last quarter, we were over five terabytes, and I expect that trend will continue. So it's, you know, happening certainly in consumer channels and things like that.

Okay, great. Thanks for the clarification.

Thanks, Shannon.

And at this time, I'll turn the call back over to management for closing remarks.

Okay, thanks, Tabitha. Seagate is delivering strong performance, demonstrating financial results consistent with our long-term targets and executing our product and technology roadmap to capture long-term secular growth opportunities for mass data infrastructure. I'll close by expressing my appreciation for our customers, suppliers, our employees, and our shareholders for your ongoing support of Seagate. Thanks again for joining us today.

Thank you, ladies and gentlemen. That concludes this conference call. You may now disconnect.