Seagate Technology Holdings PLC

Good morning and welcome to the Seagate Technology Fiscal First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Shani Hudson, Senior Vice President, Investor Relations and Treasury. Please go ahead.

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 fiscal first quarter 2023 results 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 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. I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today, should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they're subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect our future business results, including expectations regarding any regulatory, legal, logistical, or other factors, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Seagate also filed an 8K today disclosing that on August 29th, we received a proposed charging letter from the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, alleging violations of the U.S. Export Administration regulations. We have responded to the letter and believe that we've complied with all relevant export control laws and regulations. We've been cooperating with BIS, and we intend to continue engaging with them to seek a resolution. During the Q&A portion of this call, we won't be commenting further on this matter, and we'll provide additional updates as appropriate moving forward. With that, I'll now turn the call over to you, Dave.

Thanks, Shani, and hello, everyone. In our remarks today, we will discuss the September quarter performance in the context of an intensely challenging macro environment. and outline the aggressive actions we are taking to manage the company during this tough period. Despite these near-term challenges, the underlying data demand drivers remain strong, as does the opportunity for mass capacity storage solutions. And I will outline why we're confident that as current conditions improve, Seagate is in an outstanding longer-term position. For the September quarter, revenue came in at $2.04 billion. which was inside the revised guidance range that we provided at the end of August. Non-GAAP EPS of 48 cents was well below our expectations, impacted by multiple gross margin headwinds that I'll touch upon shortly. As we shared in late August, three main factors were influencing our outlook. The impact of COVID lockdowns and the related economic slowdown in China, broad-based customer inventory adjustments, and weakening global consumer spending. Since the August timeframe, macro sentiment has further deteriorated, which has led to a more cautious spending environment and more significant inventory adjustments as we move through the final weeks of the September quarter. These factors incrementally impacted sales volumes in the economically sensitive consumer markets, as well as certain U.S. cloud customers. We currently expect customer inventory drawdowns will remain a factor through at least the December quarter. We reacted quickly to adjust our production levels to the current demand environment, and our gross margin performance reflects the resulting factory underutilization costs that increased markedly through the month of September. It's important to note that consistent with some of the US CSP comments, end user demand for core data and analytics applications remains solid, which supports our view that the business will improve as elevated inventory levels are consumed. In the meantime, we continued to respond to the changing market conditions and further reduced production output across all product lines, with the exception of our 20-plus chair-by products, where demand has held firm and pricing relatively stable. Our actions underscore our focus on maintaining strong supply discipline, and we believe this will enable us to quickly return to a more favorable pricing environment across mid- to lower-capacity products as conditions normalize. Stepping back, today's highly uncertain macro environment stems from multiple factors outside of our control, such as rising interest rates, inflationary pressures, and geopolitical dynamics. With that in mind, we are focused on managing what we can control and taking aggressive actions to appropriately respond to the near-term market environment and enhance profitability over the long term. In addition to adjusting our production output to drive supply discipline and pricing stability, We are implementing a restructuring plan to sustainably lower costs, including a reduction in our global workforce. These are very difficult decisions to make and ones that we do not take lightly. However, we believe they are necessary to align our cost structures with the realities of the near-term market, while still enabling us to support future mass capacity storage opportunities as demand recovers over the longer term. We are improving working capital by reducing our inventory levels over the next couple of quarters, and we are significantly lowering our fiscal 23 capital expenditures while maintaining investments that support the launch and ramp of the 30-plus terabyte product family based on Hammer technology. These cost-saving actions, together with our supply discipline, enable us to drive increased leverage to earnings as conditions improve over the near term. Longer term, we remain confident in the secular growth of mass capacity storage and believe our technology leadership positions us to capture the significant future growth opportunities. Consistent with our focus on enhancing longer term shareholder value, we are maintaining our quarterly dividend. However, we are temporarily pausing our share repurchase program to ensure we can continue to make necessary investments to support our current business and underpin our longer term strategic plans. Let me now share some perspectives on the end markets, starting with VIA. The global economic slowdown has continued to impact VIA-related project budgets and installation timelines, which has led to a buildup of customer inventory. These trends have dampened the typically strong seasonality in the back half of the calendar year, particularly in the China market. Simulus programs to help boost the local economy have been announced. However, timing for economic recovery is not yet apparent, while COVID lockdown restrictions remain in place. Our long-term expectations for VIA demand have not changed. While we have significant direct customer exposure in China, end-market demand is global and continues to expand as smart video applications are adopted to address real-world challenges. For example, reducing traffic congestion is one area of focus for smart cities, which cost U.S. drivers alone an estimated $53 billion in 2021. These savings can only be realized after capturing and storing large volumes of data, and application best served by HDDs. In the near-line markets, we saw double-digit percentage sequential revenue declines across both cloud and enterprise OEM customers, reflecting the broad-based inventory adjustments that I described earlier. Recall we had been anticipating the customer inventory correction to be largely complete in the December quarter. However, amid intensifying macro uncertainties, customers have grown more cautious with their spending plans, which we believe will extend the recovery into calendar year 23. U.S. cloud customers are still reporting healthy demand tied to digital transformation, artificial intelligence, and other applications that unlock data value and continue to rank among CIOs' highest investment priorities. While enterprise CIOs continue to move workloads to the public cloud, according to a recent study, 80% of cloud users also have a hybrid cloud strategy, illustrating the desire to operate seamlessly across a network of public and private clouds. We believe these trends support our view for mass capacity Exabyte growth to return to the upper 20% range as the broader markets recover. These same trends underscore the positive market momentum we are seeing in our enterprise systems business. which recorded revenue growth of over 45% sequentially. While we expect sequential sales levels to reflect some lingering supply challenges in the December quarter, our systems results illustrate how customers are still allocating budget dollars towards areas that drive business value. The data trends that rely on cost efficient, higher capacity storage solutions remain intact. As a leader in HDD technology, Seagate is well equipped to address demand by continuing to execute our strong product roadmap. We are leveraging the current production slowdown to double down on our development actions and accelerate cycles of learning to continue delivering TCO value to customers. Sales of our 20 plus terabyte product family grew meaningfully quarter over quarter, supported by strong demand from cloud customers. 20 plus terabyte drives now rank as our highest volume and revenue platform, surpassing 18 terabytes as expected. We are extending this product family using conventional CMR technology into the mid 20 terabyte range, which also offers SMR capabilities into the upper 20 terabyte range. Development of our 30 plus terabyte platform based on HAMR technology remains firmly on track. In addition to HAMR, these drives incorporate many new technology innovations to reflect years of development, design, and integration know-how to form the backbone of our future product portfolio. We continue to execute our development plans meeting key milestones, including reliability metrics and aerial density gains that also position us to extend drive capacities well beyond 30 terabytes. As I shared in our July earnings call, customer revenue shipments are expected to begin around mid-calendar 2023, and I could not be more pleased with our great progress this quarter. In closing, we are navigating through the macro challenges that are impacting our business over the near term. However, the long-term growth trajectory for mass capacity storage remains solid, driven by the fundamental demand for data and the need for businesses to harness its value. We believe that the actions we have undertaken will ultimately strengthen our position over the long term. Looking ahead, as we incessantly push the technology innovation roadmap, We believe our customers will continue to value Seagate as their primary storage solutions provider. Gianluca will now cover the financial results in more detail.