Seagate Technology Holdings PLC

Good day and welcome to the Seagate Technology Fiscal Second Quarter 2023 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, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Shanie 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 second quarter fiscal 2023 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 easily be predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, 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 and 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 are subject to risks and uncertainties associated with our business. Regarding the matter raised by the proposed charging letter from the U.S. Commerce Department's Bureau of Industry and Security, or BIS, Seagate maintains that it has complied with all relevant export control laws and regulations. We've been cooperating with BIS and engaging in discussions with BIS to seek a resolution. Please note that we won't be addressing questions regarding this matter on today's call, but will provide additional updates as appropriate moving forward. To learn more about the risks, uncertainties, and other factors that may affect our future business results, 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. As always, following our prepared remarks, we'll open the call up for questions. Let me now turn the call over to you, Dave, for opening remarks.

Thanks, Shanie. Good afternoon, everyone, and thanks for joining us today. Seagate delivered on what we set out to do in the December quarter, and I'm proud of our team's accomplishments amid this tough business environment. Revenue and non-GAAP EPS came in slightly above the midpoint of our guidance range, and free cash flow generation increased by more than 50% quarter over quarter. We are managing well what is in our control and executed on the actions we outlined on our October call. We retired more than $200 million in debt, strengthening our balance sheet. We lowered operational costs by realizing a meaningful portion of the expected savings from our restructuring efforts. We reduced capital expenditures by more than 40% sequentially, while still accelerating the launch and development schedules for new mass capacity products. And we adjusted our factory production output to support strong supply discipline as demand recovers. These actions, we believe, put Seagate on solid footing to weather the near-term industry dynamics while continuing to make the technology investments to meet our customers' evolving needs and thrive over the long term. Relative to market conditions, three primary external factors have been impacting our business over the past several months. The COVID-related economic slowdown in China, the work down of near-line HDD inventories among U.S. cloud and global enterprise customers under a more cautious demand environment, and macro-related disruptions primarily impacting our consumer-facing markets. These factors remained at play during the December quarter and weighed heavily on the mass capacity markets, resulting in a 10% sequential decline in mass capacity revenue. Having said that, we are already seeing some encouraging indicators. Within China, we believe first steps toward recovery are being implemented through government policies aimed at improving economic conditions, including the faster than expected reversal of zero COVID restrictions. In a show of confidence following the policy shift, several major banks raised their 2023 outlook for China's GDP. We expect it will take time for consumers and businesses to work through disruptions related to the COVID policy pivot and for the economy to fully reopen. Based on our customer conversations, we anticipate regional sales into the Via and Nearline markets to remain subdued in the March quarter and gradually improve as the calendar year unfolds. We will continue to monitor demand signals and expect to gain a better picture following the Lunar New Year celebrations. Turning to the US cloud and enterprise markets, customers have focused on working down the HDD inventory levels that were built up during the pandemic as non-HDD component shortages created inventory imbalances. We believe some progress has been made in recent months supported by an improvement in non-HDD component availability. While inventory adjustments are a customer-by-customer event, and ongoing macro uncertainties have led to more cautious near-term buying decisions, we expect near-line sales will improve slightly in the current quarter, particularly for our high-capacity drives. Our view is supported by the ongoing adoption of our 20 plus terabyte family of Nearline products, which represented close to 60% of Nearline Exabyte shipments in the December quarter and is expected to trend even higher in the current quarter. Relative to our products, we are seeing a wider variety of Nearline capacity points and configurations being adopted across our customer base, depending on their specific data center architectures, workloads, and application needs. Seagate is well-equipped to address these individual unique requirements with our deep customer relationships and broad technology portfolio, spanning traditional perpendicular recording technology or PMR drives to performance-oriented dual actuator products to TCO-enhancing SMR technology. In addition to our device portfolio, Seagate's systems business offers cost-efficient, scalable, petabyte solutions for both enterprise and cloud customers. While system sales were down sequentially off of a very strong September quarter, we captured a record number of new customer wins with our Corvault products. Corvault offers features such as self-healing, autonomous drive regeneration, which increases productivity while reducing electronic waste. The momentum that we're seeing across the systems business supports revenue to move higher in fiscal 2023. Our strong product pipeline is underpinned by the technology advancements we're bringing to market. We're leveraging our technology leadership to scale drive capacities through aerial density gains rather than additional heads and disks. As a result, we can deliver our trademark TCO advantages to customers with attractive margin opportunities for Seagate. Our 20 terabyte product features two terabyte per disk capacities, and we've started to ramp the volume of 22 terabyte products deployed on 2.2 terabyte per disk capacities. The 20 plus terabyte platform is based on traditional PMR technology. And some customers are choosing to enable SMR technology as an additional feature that slightly increases the drive's capacity for certain applications. In the December quarter, about 35% of our near-line exabyte shipments were deployed as SMR drives. We are executing plans to deliver another 10% gain in per-disk capacity for this PMR platform to offer drives in the mid to upper 20 terabyte range. However, I'm most excited by the advances we've made on our HAMR technology. It was nearly four years ago to the day that I first shared our lab results demonstrating three terabyte per disc capacities. And today, we have demonstrated capacities of five terabytes per disc in our recording physics labs. In the current market environment, we've been taking advantage of our reduced factory utilization to accelerate cycles of learning around hammer productization. We are meeting or exceeding all product development milestones and reliability metrics. And we will be shipping pre-qualification units to key cloud customers in the coming weeks. As a result of this progress, we now expect to launch our 30 plus terabyte platform in the June quarter, slightly ahead of schedule. The speed of the initial hammer volume ramp will depend on a number of factors, including product yields and customer qualification timelines. However, we plan to use our systems business to quicken the pace of learning and time to yield. Our tremendous progress reinforces my confidence in Hammer products and our ability to execute. These innovations were only possible through the hard work and dedication of our global team, and I would like to thank them for their many efforts. Our multi-decade focus on Hammer R&D and our innovation across all facets of drive production have resulted in a development advantage that we believe is measured in years. And we're excited by our collaborations with cloud customers on Hammer capabilities. The technology innovations driving aerial density higher will deliver strong and consistent cost reductions at the highest drive capacities and enable future cost-efficient refreshes of our mid-range capacity drives. We believe these products serve as the foundation to expand our margin profile back into and possibly beyond the long-term target range. Wrapping up, Seagate is executing with speed and agility through the near-term macro challenges. We've made meaningful improvements to our cost structure and balance sheet while steadily advancing our product and technology roadmaps. With signs starting to emerge that market conditions could improve as we progress through the calendar year, Seagate is well-positioned with an industry-leading mass capacity portfolio that we believe supports the return to our long-term financial model over time. Thanks, and I'll now turn the call over to Gianluca.