Seagate Technology Holdings PLC

Welcome to the Seagate Technology Fiscal First Quarter 2026 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 Shanie Hudson, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our September quarter results 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 8-K. 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 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, 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. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. With that, I'll hand the call over to Dave.

Thanks, Shani, and hello, everyone. Seagate delivered a very strong start to fiscal 2026. Revenue grew 21% year-over-year, non-GAAP gross margin set a new company record at 40.1%, and non-GAAP operating margin climbed to 29%, a level last seen in fiscal 2012. Non-GAAP EPS exceeded the high end of our guidance range, underscoring our focus on expanding profitability. Today, we announced an increase to our quarterly dividend of approximately 3%. reflecting confidence in our execution and ongoing sustainability of our cash flow generation capabilities as we leverage our leading hammer technology in a strengthening demand environment for high-capacity hard drives. Demand strength was led by global cloud service providers, and we also saw meaningful sequential revenue growth from enterprise customers in the September quarter. The data center end market, which is comprised of near-line sales into cloud, enterprise, and via customers, represented 80% of overall revenue. Amid this improving demand backdrop, our high capacity nearline production is largely committed under bill to order contracts through calendar 2026. Additionally, longer term agreements that we have with our global data center customers provide clear visibility through calendar 2027, reinforcing our view that these favorable demand conditions will persist. We remain focused on executing our Hammer-based product roadmap to support our customers' growing Exabyte needs and continue working with them to transition to higher-capacity drives. There is no question that AI is reshaping hard drive demand by elevating the economic value of data and data storage. This is evident by the growing demand for our high-capacity near-line drives as customers continue to ramp investments in AI applications. AI inferencing is set to inflect and scale rapidly, further increasing data's value. Inferencing consumes and generates large volumes of data, which is then stored, monitored, validated, and reintegrated into an infinite training loop. We are already seeing the positive impact of this trend as global CSPs deploy large-scale inferencing applications that rely on multimodal inputs such as text, audio, and video. Using monthly token consumption as a proxy for inferencing adoption, one major hyperscaler reported a 50-fold increase in the span of a year. This explosive growth is driving a sharp increase in unstructured data generation that creates demand for hard drive storage. Video content is a major contributor of unstructured data and is driving considerable demand for hard drives today, from social media platforms to content delivery networks and online marketing. AI-generated videos promise to further fuel demand growth. There are already numerous text-to-video tools that democratize creativity by letting anyone generate professional quality videos from text, images, or sketches. We see this trend already taking hold. For example, Google reports over 275 million videos were generated on its video platform within the first five months. With a one-minute AI video, Being up to 20,000 times larger than a 1,000-word text file, the data storage implications are clear. The rapid adoption and growing capability of these tools are already having a positive impact on the demand for storage. Beyond the application space, we've discussed new storage use cases from emerging trends around hybrid cloud environments that enhance data security and compliance with data sovereignty regulations. Recently, Seagate partnered with a global CSP to develop a sovereign cloud solution for managing massive volumes of sensitive telemetry and sensor data collected from a fleet of autonomous vehicles. These types of data sets are subject to strict requirements and stipulate such data must be processed, stored, and managed locally. As in any other data center, Hard drives provide the ideal solution by meeting customer requirements for throughput, durability, and cost-efficient long-term data retention. As data generation explodes and new use cases emerge, Seagate is answering the call with a clear long-term roadmap to capture demand. Momentum continues to build for our hammer-based Mosaic platforms, and we achieved several important milestones in the quarter, consistent with what we discussed during our analyst event. We now have five global CSPs qualified on MOSAIC 3 plus terabyte per disk products, which can deliver capacities up to 36 terabytes per drive. We remain on track to qualify the remaining three global CSPs within the first half of calendar 2026. Additionally, we shipped over 1 million MOSAIC drives in the September quarter. These products are performing well in live production environments. And we are on pace to achieve 50% exabyte crossover on near-line hammer drives in the second half of calendar 2026. And we started qualification with a second major CSP on the MOSAIC 4 plus terabyte per disk platform with initial volume ramp starting in the first half of next calendar year. This platform will offer capacities of up to 44 terabytes. Advancing aerial density is a key competitive advantage Not just for Seagate, but for the hard drive industry overall. We are leveraging our manufacturing expertise and advancements in technologies, including silicon photonics, to pave the path to 10 terabytes per disk. Our aerial density roadmap delivers a superior and sustainable TCO advantage for hard drives compared to alternative technologies well into the future. Customers clearly see the value of transitioning to higher capacity Hammer products as the most efficient way to support their rapidly expanding data storage needs in an AI-driven world. Wrapping up, the Seagate team continues to execute at an exceptional level. We are delivering on our target financial framework supported by a structurally improved business and a strong sustainable demand environment. We are advancing our Hammer-led technology roadmap which creates significant value for our customers and positions Seagate for long-term success. With the strength of our technology roadmap and the transformative impact of AI, we believe the best years are still ahead of us. I am proud of how our teams are rising to meet the opportunities ahead as we remain focused on delivering profitable revenue growth and expanding cash flow generation in fiscal 26 and beyond. I'd like to thank our employees, supply partners, and customers for their many contributions to our performance and to Seagate's ongoing success. Let me now turn the call over to Gianluca.

Thank you, Dave. Our September quarter performance demonstrates strong operational execution and underscores the enhanced structural economics of our business model. We delivered revenue of $2.63 billion, up 8% sequentially and up 21% year over year. we achieved record non-GAAP gross margin of 40.1% up to 120 basis points sequentially. And we expanded non-GAAP operating margin by 280 basis points to 29% sequentially. Our resulting non-GAAP EPS was $2.61, exceeding the high end of our credit range. We have continued to execute our technology roadmap to support ongoing demand momentum for our higher capacity products. In the September quarter, we shipped 182 exabytes, up 32% year over year, with a vast majority of that volume delivered to global data center customers. As we shared last quarter, we will be discussing the business across two key markets, data center, which is comprised of near-line products and systems that are sold into cloud, enterprise, and via customers, and Edge IoT, which includes consumer and client-centric markets, along with network-attached storage. In the September quarter, data center revenue represented 80% of our total revenue at $2.1 billion, up 13% sequentially and 34% year-on-year. Demand from global cloud customers continued to grow And we also saw a notable improvement in the enterprise OEM markets. We project these positive trends to continue, with cloud growth expected to outpace enterprise demand. Whether data is stored in public cloud, private cloud, or on-premises, the shift from AI model training to inferencing is driving the need for large capacity hard drive storage. This includes everything from saving checkpoints to maintaining model accuracy and integrity. to storing the vast data sets required for effective inference results. In the September quarter, we shipped 159 exabytes into data center customers, up from 137 exabytes in the prior period. Cloud exabytes demand increased for the ninth consecutive quarter, resulting in close to 80% of near-line volume on drive capacity at or above 24 terabytes. as customers continue to mix up to higher capacity drives. Over the past year, average near-line drive capacity have increased by 26%, which is a primary contributor to our exabyte volume growth. Amid tight supply condition, we are partnering closely with data center customers to support and, where possible, accelerate their qualification timeline on our high-capacity Mosaic products. As Dave highlighted earlier, a majority of the largest cloud customers in the world are now qualified on our hammer-based Mosaic drives, and we are continuing to ramp these products to support customer demand. The strong data center growth that I just described more than offset lower sequential sales in the edge IoT market, which made up the remaining 20% of revenue at $515 million. We are expecting some seasonal improvement in edge IoT revenue in the December quarter from both via edge and consumer products. Moving on to the rest of the income statement, non-GAAP gross profit increased to $1.1 billion, up 14% quarter over quarter and 46% compared with the prior year period. We are expanding non-GAAP gross margin to 40.1%. which represent an incremental margin of nearly 70%. This margin growth reflects the benefit of increased adoption of our latest generation products and ongoing execution of our pricing strategy. Non-GAAP operating expenses were $291 million, up 2% quarter over quarter and in line with our expectations. The combination of strong top line growth and significant financial leverage drove a 19% improvement in operating profit to $763 million. Other income and expense were $74 million, and we are currently projecting OINE to be essentially flat in the December quarter. We grew non-GAAP net income to $583 million, with corresponding non-GAAP EPS of $2.61 per share. based on tax expenses of $106 million and a diluted share count of approximately 223 million shares, including the net impact of our 2028 convertible notes of approximately 7 million shares. Turning now to cash flow and the balance sheet, we invested $105 million in capital expenditures for the September quarter, or roughly 4% of revenue. For fiscal 26, we anticipate capital expenditures to be inside our target range of 4% to 6% of revenue while we continue maintaining capital discipline. Free cash flow generation was flat quarter over quarter at $427 million, including the substantial variable compensation payout we discussed on our July earning call. Looking ahead, we expect free cash flow generation to expand in the December quarter. We returned $153 million to shareholders through dividend. And as Dave noted earlier, we are increasing our quarterly dividend by approximately 3% to 74 cents per share. We deployed $29 million to repurchase shares of our common stock at an average price of $187 per share. We will continue to opportunistically repurchase shares and anticipate share repurchase activities to vary from quarter to quarter. We remain committed to returning at least 75% of free cash flow to shareholders over time. Cash and cash equivalents increased 25% sequentially to close the September quarter with ample liquidity of $2.4 billion, including our undrawn revolving credit facility of $1.3 billion. We exited the quarter with gross debt of approximately $5 billion, a net leverage ratio of 1.5 times based on adjusted EBITDA of $831 million for the September quarter, up 19% quarter over quarter, and up 67% year on year. We are pleased that our strong execution is being recognized. with S&P upgrading our credit rating earlier this month. Looking ahead, we expect net leverage ratio will continue to trend lower as profitability increases in the coming quarters. Additionally, we are exploring opportunities to further reduce debt, supporting the positive leverage ratio trajectory. Turning now to the December quarter outlook. The demand environment remains strong. particularly among global cloud data centers. We expect to increase revenue and expand margins as these customers continue to shift to our next-generation storage solutions to support their increasing demand. We expect December quarter revenue to be in a range of $2.7 billion plus or minus $100 million, which represents a 16% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to remain relatively flat at approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to expand to around 30%. Non-GAAP EPS is expected to be $2.75, plus or minus $0.20, with a tax rate of about 16%, and non-GAAP diluted share count of 227 million shares, including estimated dilution from our 2028 convertible nodes of 10 million shares. As demonstrated by our September quarter result, Seagate is delivering on our financial commitments, reinforcing our track record of operational execution. Our performance is underpinned by a strong product roadmap that offer enterprise exabyte scale storage solutions, enabling them to maximize the potential of their data. With strength, position Seagate to drive meaningful value for both customers and shareholders. Operator, let's open the call up for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, we ask that you limit yourself to one question. If you have further questions, you may reenter the question queue. Once again, that was star then one to ask a question. At this time, we will pause momentarily to assemble our roster. Our first question today is from Mark Newman with Bernstein. Please go ahead.

Hi, thanks very much for taking the question, and congrats on a great quarter. The question was really, if you look at, you commented at the beginning at the strong orders, and it seems like you have order backlog through to, I think you mentioned through to 2027. and the supply seems to be quite tight in the market. I just wonder if there is any plans to add capacity, if there's any specific supply chain bottlenecks that may alleviate over time. You know, obviously, Um, you know, there's pros and cons to that. So just, just, just like to see how you're thinking about the whole supply demand balance. And if you're adding any capacity, that would be great. If you could comment on that and then, and then a follow up on hammer mix congrats on the fifth hyperscaler being qualified, um, solid execution on hammer. So far, I just wondered what you're hearing from customers so far in terms of adoption. for Hammer. Is there any upside or downside to the previous projections you provided for Hammer rollout going forward? Thanks very much.

Thanks, Mark. Your two questions kind of go hand in glove. What I would say is that our strategy for adding capacity, if you will, is to go through product transitions. We're not really adding unit capacity. Through some of these product transitions, we actually lose a little bit of capacity because the The process content is a little higher as we go through, but we add exabyte capacity. And to your question about Hammer, a lot of the reason that customers are engaging with us on these long-term agreements is because we have visibility into higher and higher capacity points. So the demand that most of the hyperscalers certainly are feeling is for more exabytes, more efficient exabytes in their data center. It allows their space and power and all their other metrics to get the best returns of TCO, if you will. And that's what we're really trying to answer the call for. We're very focused on going through the product transitions, getting our yields up on the product transitions, and then ultimately transitioning to the point where we get 40s and 50s and so on and add exabyte capacity that way.

Good, excellent. Any update on the Emma, roll out, sorry.

Nothing more than what we said in the script, I think, you know, the qualification you made reference to. You know, the ramp continues on, and part of this is that predictability of those transitions that we're going through. We have to make sure we're staged for that so that we give the customers what they need.

Yeah, we are ready to achieve another call during the quarter, so now we have five customers qualified on that. five big customers, cloud customers qualified on Hammer. Of course, this is contributing to our delivery in the quarter and how we got it December quarter. So we are achieving those level of revenue and profitability a little bit faster than what we were thinking. And of course, this is related to the transition of the mix to other capacity drives, mainly to Hammer.

Thanks very much. Appreciate it.

Thanks, Mark. The next question is from Eric Woodring with Morgan Stanley. Please go ahead.

Great. Thank you guys for taking my question, and congrats on your results tonight. Gianluca, since your May Analyst Day, you've reported two quarters where your incremental margins have been 60% to 70%. Is it fair to say that in the new demand environment that we're in and the need for higher capacity drives, We should be thinking about your incremental margins just being higher, you know, consistently higher than that 50% incremental margin you outlined at your analyst day, or why would we not see these level of incremental margins sustained? I realize not literally every quarter, but generally speaking, why would we not see 60 to 70% incremental margins sustained from here? Thank you.

Thank you, Eric. Well, you're right. No, we are a executing a little bit better than what we were expecting. And as I said before, this is mainly due to the move to better mix in terms of profitability. Not every quarter is the same. So of course, now that we are qualifying more customers and moving more customers to the MR drives, we have a little bit of a higher support in terms of profitability. I would say this will be different every quarter, even the pricing strategy that we have is very consistent, but not every quarter we have the same number of new negotiations going on. So it's not easy to estimate exactly what will be the profitability and the mix of a specific quarter. I think in the short term, we are delivering very good results. Longer term, I think the model that we presented as the analyst day is a strong model. But you're right, in the short term, we are doing it a bit better. And you'll see now we got in December, it basically implies a higher margin than the 50% incremental from September.

The next question is from Jim Schneider with Goldman Sachs. Please go ahead.

Good evening. Thanks for taking my question. I was wondering if you could maybe address the level of cost reduction you expect to achieve on a blended basis as we look out into calendar 2026. Is there anything that would kind of prevent you from achieving that kind of mid-teens cost down on a blended basis, even as you ramp hammer more aggressively? Could that actually be better than that, or is there a reason it would be worse than that. And then just to clarify the prior statement you made on not adding unit capacity, is there any kind of benefit you get in terms of sort of dual capacity tracking hammer versus conventional technologies that would add a little bit of unit capacity into the overall mix? Or is that just an overall dilutive event to overall units? Thank you.

I'll take the second part first, and then I'll let Gianluca answer the cost question. So the way I think about it is, and I think I understood your question this way, there's some of our PMR technologies, which are in high volume, and as we transition to Hammer and the newer products, 30, 40 terabytes and beyond, then we're going to have to pivot pretty substantially. You know, we don't really think about it as going back and building more of the PMR technology. We think about it as freeing up the PMR technology to ultimately go through the pivot. And that's how we're going to add Exabyte capacity. As far as unit capacity, a lot of that comes down to customers that are asking or qualified and what we've planned with them. So those plans are taking a long time to develop. And like John Lucas said earlier, If we get any upside, marginal upsides, it's because we're pulling in the future a little bit. So you want to answer the question on cost?

Yeah, on the cost, of course, we don't guide cost for calendar 26. I would say the good improvement in our cost per terabyte is coming from the transition to higher capacity drives. So the mix is very important and every quarter is different. I would say you will see more and more transition to Hammer. We have two customers that are qualifying 40 terabyte drive. That will for sure will be a good boost to our reduction of cost per terabyte during calendar 26. Thank you.

Thank you. The next question is from Asya Merchant with Citi. Please go ahead.

Great. Good evening. Thank you for taking my question. There was commentary early about inference demand. If you could talk a little bit about the visibility of that demand, what gives you confidence that, you know, this one continues to grow, maybe in terms of applications that you're seeing, and that's kind of giving you the confidence of demand through calendar year 27. And how should we think about seasonality here? Typically, March, you know, does have a seasonal drop. How should we think about that given seasonality? AI inferencing demand is pretty strong here. Thank you.

Yeah, it's actually very interesting for all of us to watch. Most of what I think has driven our demand over the last couple of years is this move to video, where short-form or long-form video, like over 80% of the internet traffic right now is video content. And there's just literally tens to hundreds of millions of videos being uploaded every day. I think exactly to your question, the more people can generate, access those videos via inferencing, the faster that happens, the better it probably is for our storage. And so, do we see, you know, how is that going to progress in the next nine months or 12 months? It's a little hard to tell, but, you know, we're pretty excited as we see new applications coming online that allow people to generate the videos. The videos are longer and format, they're richer in content, they've got more embedded video, so on and so forth. But it is really hard to predict. And I think our customers are struggling with this a little bit as well, which is one of the reasons the demand is strong.

Yeah, on the Season 19 March quarter, of course, it's a bit early to discuss about March. We just got it in December. I would say, considering that data center Revenue is 80% of our total revenue. The impact of seasonality is probably lower than what you're seeing in the past. I think every year will be a little bit lower. But of course, we are now guiding March. But we expect a good quarter.

Thank you.

The next question is from Wamsi Mohan with Bank of America. Please go ahead.

Yes, thank you so much. Can you talk a little bit about how you're managing pricing in this very constrained environment? How much is contractually locked in going into a quarter? How much flexibility do you have in intra-quarter basis? And when we look at just the reported quarter, right, like the dollars per terabyte decline was consistent with the prior quarter, but obviously the demand environment is very strong. So hoping you could unpack that a little bit. Is there a differential there between hammer and non-hammer that's contributing to that? Or what's causing that dollar per terabyte to be declined to be relatively consistent, given just like this very strong demand backdrop? Thank you so much.

Yeah, thanks, Wamsi. So there's a lot of what we're doing right now is very predictable. To our earlier comments, you know, if we can execute a little bit better than planned, we can take costs out or we can pull in products that get qualified faster. But, you know, we are supply limited from that perspective. And contractually, we are, you know, giving our customers that predictable economics as well. Over time, if we, you know, go through these transitions a little bit faster, then the next contract comes up, the next contract comes up, we can actually, you know, make sure we get the right economic returns for what the market needs. And I think that's the long-term strategy right now. But, you know, kind of near-term, everything's happening according to plan to being slightly shifted left.

Yeah, our pricing strategy is the same since about 10 consecutive quarters. So when we renegotiate a contract, we slightly increase pricing for the same product. And then when... customers move to higher capacity products, they can get a little bit of a lower price per terabyte. That's why with the major transition of customers to MR products with higher capacity, you can see a slight decrease in the average price per terabyte. But you see in the profitability, the impact of the like-for-like price increase and of the cost per terabyte decrease due to the mix.

The next question is from CJ Muse with Cantor Fitzgerald. Please go ahead.

Yeah, good afternoon. Thank you for taking the question. I wanted to clarify the March seasonality question earlier. Curious, you know, if you were to assume that consumer via we're seasonal, could you pivot supply more to the cloud? And then I guess as the main question, you know, your customers are turning to SSDs given the, you know, tremendous tightness on the HDD side. curious your thoughts around that cannibalization and I guess what would maybe change your mind in terms of the vision for this sustainably higher demand and then potentially add capacity to support that. Thanks so much.

Yeah, thanks, CJ. So I don't think that customers are really changing their architectures because of what they're seeing right now. What everybody's driving us to do is getting more predictable over time. And if anything, be more aggressive on the product transition. So I don't really think there's any quote unquote cannibalization. As a matter of fact, I don't think it's in anybody's economic benefit to do so. And the architectures are pretty well set, you know, going out for a couple of years.

Yes. No, we see actually demand, the gap between supply and demand getting a little bit bigger every quarter. That means demand is shifting more into the future. It's not taken by any other technology.

And then your comment on seasonality is kind of interesting to think about. In some of the edge IoT markets, there is seasonality indeed. We have been taking slowly, we've been taking some supply out of edge IoT products and putting it into cloud as we can pivot demand. Some of that's happening naturally as a part of these product transitions, which we've been talking about. It's not something we can do very quickly until we get to some of the products like the four terabyte per platter where we have commonality all the way through the platforms. But we will think that. So even though the edge IoT is, the revenue is going down a little bit, the profitability is actually greater because those products are being prioritized a totally different way than if there was a ton of supply on the market. I do think that'll mean a little bit muted seasonality because that market is still fairly strong. I think it was over a half a billion dollars last quarter, the edge IFT.

The next question is Krish Sankar with TD Cowan. Please go ahead.

Yeah, thanks for taking my question. I had a question and a clarification. Dave or John Luca, you know, in the past you spoke about sharing the cost-benefit of Hammer with your customers, but now with cloud becoming a bigger portion and the AI tailwind, I'm wondering if you're rethinking your pricing strategy for Hammer, i.e. can you increase it further? And then a clarification, John Luca, historically your revenue guide had a range of $150 million. Now it's more like a hundred million. So is that because better visibility built to order helping you tighten the range? Thank you.

Yeah. Thanks, Chris. So I think what you said is very true. We are, as we go through these product transitions, we're being as predictable as we can with the customers, but they, some of the contracts are quite long as well. And so the market, as the demand goes up, the market will adjust. Remember that most of the benefit that the customers are seeing is in that TCO proposition of the higher capacity drives. So the pricing is a factor in that, but also this benefit that they see in their TCO is a factor as well. And so it'll adjust very slowly over time as the market develops.

On the hammer pricing, in the past we discussed only with one customer to giving them a slightly lower price, but these customers, of course, help us with a force qualification of the product. And so for a certain volume, they have a lower price than other customers. But of course, this is transitioning away fairly quickly, just a matter of a few more quarters.

Thanks, folks.

Thanks, Chris. The next question is from Amit Daryanani with Evercore ISI. Please go ahead.

Yep. Thanks a lot. Good afternoon. Dave, as you see an uptick in video creation, you've been talking about this, but with offerings like OpenAI Sora, and given your near-line capacity is fairly committed to Canada 26, are you seeing customers looking to potentially fund or co-invest CapEx dollars for Seagate to get access to more units? And is that something you would be open to? I would love to just understand, if this really keeps playing out the way you outlined, Is aerial density going to be enough, or would you or your customers have to eventually add some capacity to get more units? I'd love to understand if you'd be open to that co-investing angle. And then if you just qualify this a little bit, when you talked about shipping a million-plus mosaic drives this quarter, does that imply that about 36 exabytes of the total units were hammer-driven this quarter? Is that fair? Thank you.

I'll let John-Luke answer the question on exercise because he'll go calculate it, but you're not far off. I mean, the way we think about it is going through those transitions opens up all these higher capacity points, yes. From customer perspective, I think I mentioned earlier there isn't great visibility in what some of these new tools are going to unlock, but I think there's a lot of optimism around demand, especially in the video properties. that exist in the world. And so, therefore, you know, nobody wants to be too late to these. I don't think there's any significant changes to architecture, but I do think what we see driving or what's driving us is really stability. So it's customers showing up and saying, let's be very predictable as far as what I'm going to get. Some of the numbers about how much demand there is above and beyond what our supply is, those numbers are by someone else. I don't think that's the way necessarily each customer looks at it. What customers are starting to see is a temporal shift. So saying, hey, can I pull this in a little bit? Because they know we're gaining exabyte capacity over time, especially through the product transitions. That's what you saw contribute a little bit more to last quarter. And as we go as hard as we possibly can through the product transitions, we'll be bringing on more and more exabytes. So getting these qualifications done, Getting us up the ramp, it's all priority for the customers as well. That's the way they're going to add capacity.

Yes, no. First of all, I think it's very important that we keep the current balance between supply and demand and not taking action to oversupply in the future the industry. In terms of exabyte, it's a nice question. I would say you know that our MR product is between 30 and 36 terabytes per unit. So with a million units sold in the quarter, we are into that range.

Perfect. Thank you.

The next question is from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question. Yeah, I guess first on housekeeping side, I know that, you know, new disclosures. I'm curious of how or if there's any way we should think about the systems business within, I guess it's in the data center piece of it, that we kind of just think about what it was over the past many quarters and kind of think about that kind of level going forward. And then, you know, on a near-line demand perspective, given the growth that we're seeing, looking back at the analyst day, I know you outlined kind of a mid-20% CAGR. Has your thoughts at all changed whether or not that that's structurally just, you know, looking forward just higher relative to what you initially thought back a few months ago?

Thanks, Aaron. From the systems business, you know, we obviously we package the drives into the racks to save some customers some work. It's a fairly limited number of customers. They're great customers and we don't really see the landscape changing too much on that. You know, there's The customers that are buying bare drives today and having someone else do the integration aren't necessarily pivoting to the systems. It could happen, but, you know, so I think it's steady as she goes on that front. Relative to Nearline, we're all watching demand, and the mid-20 number, you know, something we continue to grapple with, and thus, you know, most of the questions we've been asked today about how much supply is there. Again, you know, I'll just say it. the way we bring in more Exabyte supply is to get the bigger drives out, and so that's what we're all focused on.

Yes, Aaron, and we report system as part of data center, and this is very similar to what the rest of the industry is doing, so we try to align so it's easier to look at the different players in the same way.

Yep, thank you.

The next question is from Thomas O'Malley with Barclays. Please go ahead.

Hey guys, thanks for taking my question. I wanted to understand the timing of the crossover between the Mosaic 3 platform and the Mosaic 4 platform. I think you guys have historically talked about the first generation is what takes a long time. That's what was the struggle with your first big customer, but now you're really seeing that adoption accelerate across other global CSPs. At Mosaic 4, it sounds like it's starting to ramp in volume in the second half fiscal year 26. Could you get to a crossover point in the first half 27? Like, should we be thinking about 15% or 20% contribution? I'm just trying to understand how much supply you can actually add to the industry with that transition in the short period of time. Thank you.

Thanks, Tom. Yeah, it's a question we're asking as well, because as we go up the ramp, then yields and scrap and everything else on the new product is what dictates that. We understand the old product pretty well. There is a lot of commonality in piece parts between the two, technologies between the two, so this is not a complete unknown on the ramp, but from my perspective... it will be a little bit faster ramp. You know, we have to go execute, and that's what the team's going to be focused on. The qualifications are running well so far, so there's no reason to be disappointed at this point. And, you know, I'll be continuing to, you know, implore the teams to get the yields up as quickly as we possibly can to accelerate the transition.

The next question is from Carl Ackerman with BNP Paribas. Please go ahead.

Yes, thank you. Dave, you spoke about longer-term agreements offering visibility into 2027. Presumably, that visibility is on exabytes for hammer drives. But since you didn't specify what that visibility is, does exabyte slow down in the context of that 25% exabyte growth over time, or do you think exabyte demand actually accelerates into 2027 from what you see today? Thank you.

Well, I think that's a – so there's a supply question and a demand question. You know, I think, yes, the supply would go up quite a bit because as we go transitioning to the earlier question Tom asked, as we transition to the 4-plus product family, we get a lot more exabytes out of it. So we'll drive that as hard as we possibly can. We are working with customers, major hyperscalers and everything else, on the 5 that we've qualified on 3-plus. Now we get as many qualified on 4-plus over the course of the next year, and we get significantly more exabytes out. That's what we're driving.

Thank you.

The next question is from Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. I also had a question about the Hammer crossover. So five of the CSPs are qualified now, and the other three are going to get qualified in the first half of next year. It sounds like it's about high teams of exabytes now, you know, maybe pushing 20%. I would have thought you could get to exabyte crossover before a year from now if, you know, more than half the CSDs are called now and everyone's pushing to get these higher, you know, cap drives. So why would it take another year to go from 15% to 20% of exabytes to more than half of exabytes?

Yeah, thanks, Tim. So there's a lag in the supply chain, obviously. You know, we've started wafers for various products. We will sell those various products. Just pulling in the qualification does not necessarily mean we turn a light switch from the old product to the new product. We have to actually, you know, go through that transition ourselves in our own factories. We're going to do that as aggressively as we can. And I think I asked this back or answered this back in Tom's question. There is some commonality between, so we can pivot a little bit, but not as hard as we'd all like. and I think some of this will be dictated by our yield ramp and so on on the new products, but things are going well, so we're going to be as aggressive as we can.

It takes time to ramp. Now, as you know, the cycle time for Hammer is not short, so we need to qualify first and then to ramp the product, so it takes a certain number of quarters to really go up in capacity.

So I guess that's why you'd be buying heads from TDK basically from the outside, right?

No, we're not buying heads today from TDK. And I would say TDK is a great partner, has been for a long time. We talk to them about technology all the time, but they don't have hammer technology. So, you know, the way we're focused on is how do we get transition to the hammer exabytes as quickly as possible?

Yeah, I meant PMI heads, but thanks again.

The next question is from Stephen Fox with Fox Advisors. Please go ahead.

Hi. Just listening to all the questions and thinking back to the presentation in May where you lined up sort of the roadmap and the time it takes, it seems like hard disk drives is going to become more of a bottleneck to some of the expansion plans for the cloud guys as we get into next year. How legitimate is that of a concern and what else could be done at the cloud guys to just sort of leverage existing capacity to sort of get through that period and keep you guys on track?

Yeah, Steve, I don't look at it as something that's, you know, immediate or, you know, going to be solved in a period of three months, you know, Industry is not going to bring on more supply in three months. So really what's coming out of all of this is customers are getting very predictable on long-term plans, and that's what they need to do, and that's what we need them to do as well because we've got long cycle times, as we've been saying. So, you know, it's building industry health, and that's good. We can't react with supply, you know, to everyone's wish list, and there's probably – wish lists that aren't real at some point. But the customers that we're working with are being very predictable for us, telling us exactly what they're going to need, and we're answering the call to the extent that we can. And if they need more exabytes, usually we're off. It's a timing problem, a temporal problem. We're off by a few months or six months or something like that. And so ultimately, as we go through these transitions, we're going to bring on more exabyte capacity, and they're going to be happy with it. Again, we don't see any evidence of architectures changing or anything like that.

Understood. And the advanced algebra on how you're upsiding is just different every single quarter, depending on, you mentioned like half a dozen variables between how many exabytes you got out this quarter versus last quarter and next quarter.

Yeah, we're executing well, as we said in the script. We're pulling as hard as we possibly can, but we're executing the plan that we have and pulling in as much as we can as qualifications complete. And we'll continue to do so to the extent that our factories will let us. I mean, it's a fairly long supply chain.

Great. Thanks for that, Culler.

The next question is from Ananda Barua with Loop Capital. Please go ahead.

Hey, guys. Thanks for the question. Appreciate it. Dave, how should we think about, well, what's the most useful way to think about velocity? I guess the pace at which customers going forward will look to mix up to higher capacity points, given the shortages and given the aerial density is what's going to bring new exabytes to market. Do you think that we'll see folks look to mix up faster than historical? And part of this, I get, is obvious because when you make the switch to Hammer, there's like a stair step up in capacity. But even as Hammer normalizes, let's say once you get past crossover, say 12 months from now, Once hammer normalizes, do you think we could see an even faster than typical mix-up inside a hammer? And if not, like what would be the gating factors to that? Appreciate it. Thanks.

Thanks, Ananda. It doesn't seem like that long ago that we were talking about 16s going to 18s or 18s going to 20s. You know, diminishing returns, I would say, on PMR products. And then as we've gone 30 to 40, we see an immense pull for 40s. And then I think that will be true with 50s as well as we try to drive that part of the transition because the TCO proposition is so much better if you're building a data center and then you want those products. So I do think that that's reflective in the customer's behaviors exactly to your point. Back in the day when we were moving from 16 to 18 or 18 to 20, we just weren't seeing that much push. On the demand side, on the true end demand side, I think it's also because of what's going on in the world. We pointed out video in the script. Some of the video properties are just exploding right now, and the capability to create and diversify the video in the world is great, and people are monetizing it. That's great as well. So human creativity is what's fundamentally driving all of this stuff, and I don't see it slowing down. Appreciate it. Thanks.

The next question is from Tristan Guerra with Baird. Please go ahead.

Hi. Good afternoon. Could you elaborate on the duration of the long-term agreements for Hammer? Is there a pricing component to it? And what percentage of total revenue is currently based on those agreements? And how does that compare with what the mix of those agreements was last year?

Well, every customer has a different FTA or built order, so the duration is different, the volume is different, the mix is different. But what we said in the prepared remark, the vast, vast majority of our near-line exomites have already been committed for the entire calendar 26, so we have a fairly long built order in place.

Okay. And then as you look at the ramp of hammer and you're not ramping capacity, you're migrating to higher densities, is your expectation on the basis of that ramp and what you see in terms of demand that lead times are going to remain similar to what they are today? Or would you expect lead times to expand further despite the ramp and migration to higher density hammer?

Yeah, it's a good question, Tristan. I think they'll remain like they are today. Getting through the hammer transition, you have to add a significant amount of content to wafer in particular, which is one of the longest lead times. But the next generation and the next generation after that, you don't have to go through that amount of transition again. So, you know, I do think it's a step up in lead times. We'll work it. to get it back down as quickly as we can, but I think there's a substantial amount of process content. So we've gone through that step up, at least on those products. And then, you know, after that, we don't have to get to four terabyte splatter, five terabyte splatter, and so on.

Great. Thank you very much.

The next question is from Mark Miller with The Benchmark Company. Please go ahead.

Congratulations on another good quarter. I'm just wondering, are your margins and yields on your hammer drives at parity with the legacy PMR drives? If not, when do you expect that to occur?

Yeah, Mark, I would say we don't have ePMR. So, you know, we have our last generation PMR drive is a great drive. It's fantastic. It's got great yields. I'm very happy with it. We're always going to be working the next generation and the next generation as hard as we possibly can. The four terabyte per clutter, which is what we're all focused on right now, is where we need to get the yields up, and it's still early in its lifetime. So we'll continue to put as much muscle as we have in Seagate to get that done this year.

Thank you.

The next question is from Vijay Rakesh with Mizuho. Please go ahead.

Yeah, hey, Dave and Jen, Lucas. So just I saw good numbers on the gross margin side up very nicely sequentially. Just wondering with the drop through on Hammer, would you expect to hit the mid 45, 45% margins exiting fiscal 26, or how should we look at that margin progression and follow up?

Yeah, as I said before from Eric's question, no, we are very pleased with the progression in gross margin. and also with increasing revenue. So we have achieved the $2.6 billion in revenue and the 40% gross margin a little bit earlier than what we were thinking. And we have guided December with an incremental margin that is higher than the 50% that we discussed in our financial model. Every quarter is a little bit different. Right now we have a fairly quick transition from the PMR drive to hammer drive and with higher capacity drive, we get better profitability. So in the short term, we are progressing well. And as I said, every quarter will be a little bit different. I think the model that we presented in May is a strong model for the next three years, but doesn't mean we cannot execute even better.

Right, Vijay, and as I reflect on a lot of the questions today, it's about, you know, how well do we know the demand further out? Some of it's predictable, but the demand may keep on coming based on, you know, what we see in some of the end applications. And then our ability to continue to work the yield issues around the new four-carbiter platter and get through that transition as quickly as we can, and that'll help the cost side and supply side from an Exabyte perspective. So that's what we're all focused on. Appreciate the question.

Got it. And Dave, just on your follow-up on the video side with the increased traffic, the longer-term exabyte growth that you guys had laid out on the 20-25%, do you see upside to that now given this significant increase in video traffic and storage?

This is what we're all still studying, I think. We've seen, especially with some of the new AI generation, AI content generation, which we talked about in the prepared remarks. We're studying how fast the uptake there is for some of these new creative capabilities that people have. Got it. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, Gary, and thanks to everyone for joining us today. As you can see, fiscal 2026 is off to a great start. marked by strong operational execution and outstanding financial results, I want to once again express my gratitude to our employees, our suppliers, our customers, and our shareholders for their contributions to Seagate's ongoing success. Together, we are advancing innovation to serve growing data storage demand and position Seagate for long-term value creation. Thanks for your continued support, and we look forward to the significant opportunities ahead.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.