Seagate Technology Holdings PLC

Welcome to the Seagate Technology fiscal third quarter 2023 conference call. All participants will be in 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 this event is being recorded. I would now like to turn the conference over to Shani Hudson, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Hello, 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 third 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, 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 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 8K filed with the SEC today and the supplemental information posted on the investor section of our website. As always, following our prepared remarks, we'll open the call up for questions. With that, I'll now turn it over to you, Dave.

Thanks, Janie, and hello, everyone. Seagate's March quarter revenue came in at $1.86 billion, just above the low end of our guidance range, while we reported a non-GAAP loss of $0.28 per share. These results reflect rising economic uncertainties and an elongated inventory correction that impacted demand among a few large customers late in the quarter. As a result, we've altered our outlook regarding the timing and trajectory of recovery to now begin later in the calendar year. In response to the current market environment, we are taking aggressive actions to further reduce costs and right-size the business to navigate this downturn. and position Seagate to thrive when recovery ultimately comes. Beyond this cycle, we remain excited about the long-term opportunities presented by the secular growth of data and the relevance of mass capacity storage as new data-centric applications emerge and more workloads migrate to the cloud. We continue to make strong progress on our industry-leading technology roadmap, including launching hammer-based products this quarter, which we believe put us in outstanding longer-term positions In my remarks today, I will share some perspectives on the current market dynamics, provide greater context on our restructuring initiatives, and update you on our product plans. First, let me address the settlement we announced with the U.S. Department of Commerce Bureau of Industry and Security, or BIS. The agreement resolves BIS's allegations regarding Seagate's sales of hard disk drives to a certain customer between August 2020 and September 2021. Under the terms of the settlement agreement, Seagate has agreed to pay a total of $300 million in $15 million quarterly installments that will take place over the course of five years. I want to emphasize that Seagate maintains its strong commitment to export compliance, and we believe that we complied with all export regulations at the time we made the shipment. However, in working toward a mutually acceptable solution with BIS, we balanced factors such as the risks and cost of protracted litigation involving the U.S. government, the size of a potential penalty, which could have been a significant multiple of the settlement amount, and our desire to focus on current business challenges and our long-term business goals. We believe the outcome we have reached and putting this matter behind us is in the best interest of our customers, shareholders, and other stakeholders. Turning now to the near-term business environment, for the past year, Seagate has been navigating a complex market shaped by a few primary factors. Inventory digestion among our large cloud customers that is impacting our near-line business, lower economic activity in China owing to the country's COVID lockdown policy, and weakening macro conditions that initially impacted consumer demand and is now affecting all end markets. These pressures have been compounded recently and weighed on our end-of-quarter dynamics. In the near-line markets, CIOs are now facing constrained IT hardware budgets, which has raised the bar for projects to get funded and resulted in efforts to optimize existing workloads both on-prem and in the cloud. In turn, cloud service providers have focused on maximizing utilization of their existing infrastructure rather than deploying new capacity. The combination of these factors dramatically slowed the pace of cloud customer inventory consumption and led to the pronounced slowdown in cloud and enterprise storage demand that we experienced exiting the March quarter. However, we don't foresee a strategic shift in customer spending patterns or a change to what remains a robust long-term outlook for cloud storage. Digital transformation trends will continue as enterprises realize significant cost benefits and operational efficiencies by transitioning workloads to the cloud. Industry analysts have observed that once applications and workloads are moved to the cloud, they generally stay there and grow. Digital workloads rely on data, which bodes well for mass capacity storage as the number of new cloud workloads multiply every year. Within the China markets, customers remain constructive on their end market demand outlook as the economy continues to reopen. However, rising macro uncertainties are pushing timing for recovery to begin later in the calendar year. Despite the push out, we are seeing some positive demand movement in the consumer and service sectors after COVID lockdown restrictions were lifted. These trends support a digital economy growth that bodes well for China cloud demand, as growth in consumer demand has historically led to revenue growth for regional cloud customers. Within the VIA markets, future demand pickup is based on two factors. First, you will recall that several existing VIA projects were delayed during COVID lockdowns. Customers expect these projects to gradually resume as the economy reopens in the coming months, which will consume the existing HDD inventory that was earmarked for these projects. Second, we expect new smart city and smart manufacturing initiatives to build momentum as government funding and enterprise budgets free up when the global economy improves. In this dynamic environment, we are continuing to manage what is within our control. In late March, we extended the first phase of our restructuring efforts to adjust our factory headcount to align with lower production volumes, realize efficiencies across various operational support functions, and reset our live edge to cloud business plans. We are scaling back new investments in live cloud as we focus on filling our existing infrastructure. We expect to drive operational and cost synergies across all platforms to accelerate time to profitability while growing the business over the long term. Since fiscal Q1, we've taken more than $150 million out of our cost structure, lowered debt by 5%, and significantly reduced manufacturing capacity. Given the prevailing market conditions and our reduced near-term demand outlook, we are undertaking the next phase of restructuring actions targeted to yield at least an additional $200 million in annualized savings from both COGS and OPEX, as well as implementing temporary cost savings measures, including salary reductions. We are taking a programmatic approach focused on three key areas. First, We are reassessing the levels of production output and functional support required to meet both near and long-term business needs. These actions are intended to ensure that supply and demand are appropriately balanced. Second, we are simplifying our product roadmap to create operational efficiencies. We plan to reduce the number of drive configurations and major capacity node transitions to lower supply chain and manufacturing costs and complexity. We're taking these actions in concert with our customers who can also capture cost benefits from fewer product qualifications. Finally, we will continue prioritizing resources towards higher return products and end markets while rationalizing support levels and investments aimed at non-core businesses. Our goal is to emerge a stronger, more agile company able to navigate well in all demand environments, return to profitable growth, and preserve our technology leadership momentum. To that end, we have not let up on executing our hammer-based product roadmap to preserve our significant time-to-market advantage. We are tracking well to our stated plans and achieved the key milestone last week of shipping initial qualification units to a cloud launch partner. And we expect to recognize initial revenue from 30-plus terabyte platforms this quarter as part of our core vault system solutions. The decades of development that have led us to Hammer productization are even more important today, as highly cost-efficient mass capacity storage will be a competitive enabler in a world where data is rapidly growing and increasing in value. We believe Hammer will further extend the large and sustainable cost-advantage multiple compared to other storage media, even with current market prices. Additionally, Seagate's ability to service this growing demand through aerial density gains by increasing capacities from three to four to five terabytes per disc or more provides far greater capital efficiencies compared with current PMR technology over time. We're confident in Seagate's ability to translate aerial density leadership into the most advantaged TCO across a broad range of customers, from the highest capacity drives used in cloud data centers to lower and mid-cap drives more typically used by enterprise and VIA customers. We currently expect the high-volume ramp to begin in early calendar 2024, depending on customer qualification timelines and prevailing macro conditions at that time. Tactically, we're very focused on realizing our targeted savings, which along with an improved demand environment should create the foundation to move towards our targeted financial model. And as we transition to our strategically vital hammer platform, we believe that we are positioning the company to drive differentiated financial performance for Seagate over the long term. Thanks, and now I'll turn the call over to Gianluca.