Seagate Technology Holdings PLC

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 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 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 turn the call over to you, Dave.

Thanks, Shanie, and hello, everyone. Seagate closed out calendar 2025 with a record-breaking quarter driven by sequential revenue growth across nearly all end markets. December quarter financial results exceeded both top and bottom line expectations and set new company records for exabyte shipments, gross margin, operating margin, and non-GAAP earnings per share. We expanded non-GAAP gross margin above 42%, supported by the execution of our pricing strategy, along with an improving mix of our high-capacity drives as Hammer Shipments ran. Looking at the entire calendar year, 2025 marked a transformational period for Seagate, both financially and operationally. Over the calendar year, we increased revenue by over 25%, improved gross margins by nearly 740 basis points, and expanded operating margins by an even greater amount, demonstrating the profitability leverage in our financial model. 2025 also solidified Hammer technology as a long-term enabler of mass capacity storage. We ended the year shipping three terabyte per disc mosaic-based Hammer products to our first CSP customer, and by year's end, quarterly Hammer shipments exceeded 1.5 million units and have continued to ramp. MOSAIC-3 hammer drives are now qualified with all of the major US CSP customers, and qualifications for our second generation MOSAIC-4 terabyte per disc products are tracking well to plan. These developments align with our long-term aerial density roadmap that extends to 10 terabytes per disc, which we expect to deliver early in the next decade. I want to thank our Seagate teams around the world for exceeding our performance expectations and delivering outstanding value to our global customers. We continue to operate in an exceptionally strong demand environment, particularly within the data center end markets. In the December quarter, we saw sustained demand growth for our high-capacity near-line drives across global cloud data centers, as well as continued improvement from the enterprise edge. Based on our build-to-order pipeline, we anticipate these positive demand trends will continue for some time. Our near-line capacity is fully allocated through calendar year 2026, and we expect to begin accepting orders for the first half of calendar year 2027 in the coming months. Further out, demand visibility is strengthening based on the long-term agreements in place with major cloud customers through calendar 27. Additionally, multiple cloud customers are discussing their demand growth projections for calendar 28, underscoring that supply assurance remains their highest priority. We will continue to meet strengthening demand through our strategy to maintain supply discipline and satisfy exabyte growth through aerial density advancements and without increasing unit production volume. In the December quarter, our average near line drive capacities rose by 22% year over year, approaching 23 terabytes per drive, with those sold to cloud customers averaging significantly higher. This trend underscores the strong adoption of our higher capacity drives to support demand growth. At the same time, revenue per terabyte sold has remained relatively stable, reflecting the effectiveness of our pricing strategy. Ticket is well positioned to continue benefiting from the combination of powerful secular tailwinds and supply discipline. Video applications continue to drive significant demand for hard drives, with platforms like YouTube witnessing 20 million video uploads daily, up from just 2 million three years ago. This staggering pace of growth extends to other cloud video platforms and doesn't yet include the full surge in content generation expected from emerging AI-driven video applications. These applications are not only fueling social media uploads, they're also transforming how organizations turn their data into tangible value. enabling personalized marketing, interactive education, and advanced simulations capable of training manufacturing, engineering, healthcare, and other professionals. The strategic value of data is further underscored as new applications and use cases emerge across cloud and edge workloads. Among the most promising of these is agentic AI, which relies on persistent access to large volumes of historic data to enable effective planning, reasoning, and independent decision-making. Adoption is already gaining momentum, with one recent survey conducted by a leading cloud service provider reporting more than half of participating customers were actively using AI agents. Early adopters are already realizing measurable returns with benefits ranging from lower costs to increased revenue opportunities. With the deployment of AI agents at the edge, where untapped data often resides, We believe the stage is set for a sustained and meaningful increase in data generated and stored that will support inferencing, continuous training, and also maintain model integrity. Modern data centers have evolved to address the complexity and scale that massive workloads bring through sophisticated data tiering architectures, ensuring that the right data is available at the right time and place. Hard drives are essential to these architectures. anchoring the mass capacity data tier that stores the vast majority of exabytes. From storing the checkpoint data sets used to train and maintain model integrity, to supporting vector databases that provide the context necessary for accurate inference results and agentic AI performance. By leveraging hard drives, data center operators, whether in the cloud or on-prem, can achieve the optimal balance of performance, capacity, and cost efficiency at scale. Against this transformational backdrop, Seagate's Hammer technology roadmap positions us to meet growing demand and deliver ongoing TCO improvement for our customers. Hammer is a proven technology with large volumes of drives running in cloud production environments for more than three quarters now and performing well across a broad spectrum of use cases. We are systematically ramping our Mosaic 3 Hammer products to qualified customers while maintaining focus on optimizing the profitability of our available supply. As noted earlier, Mosaic 3 is now qualified with all major US CSP customers and remains on track to have all global CSPs qualified within the first half of calendar 2026. Additionally, qualifications of our second generation Mosaic 4 products are progressing well. We expect to begin the ramp of Mosaic 4 later this quarter and have multiple CSPs qualified in the coming months in line with our plans. We continue to set the pace for the industry, recently demonstrating 7 terabytes per disk capability in our labs. As one of our largest CSP customers recently aptly described, hard drives are engineering marvels, a sentiment that we obviously share. Our deep expertise across mechanical engineering, material science, nanoscale fabrication, and now advanced photonics not only enables Seagate to deliver on the hammer roadmap, but also creates a durable, competitive moat for hard drive technology well into the future. Wrapping up, 2025 was a milestone year for Seagate in every respect, financial performance, operational execution, and technology leadership. We are carrying this momentum into calendar 2026, supported by a powerful demand backdrop as new AI applications start to complement traditional workloads. We will remain highly disciplined and focused on expanding profitability through our higher capacity product mix, underpinned by the strong economics of Hammer. Our Aerial Density Roadmap positions Seagate to sustain the core TCO and efficiency advantages of hard drives as data creation and storage requirements accelerate in the AI era. We believe this foundation creates a compelling long-term value proposition for the company, our customers, and our shareholders. I'll now turn the call over to Gianluca to cover our results in greater detail.

Thank you, Dave. Seagate delivered another quarter of strong year-over-year revenue growth and set new record profitability matrix in the December quarter. underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in eight years. December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year over year. We achieved non-GAAP gross margin of 42.2% up to 110 basis points sequentially, and we expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. Our result in non-GAAP EPS was $3.11, up 19% quarter over quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology roadmap to support demand growth. To that end, we shipped 190 exabytes in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across enterprise OEM markets. We shipped 165 exabytes in the data center markets, up 4% sequentially and 31% year-on-year. Data center revenue grew at roughly the same pace, totaling $2.2 billion for the quarter, up 5% sequentially and 28% year-on-year. Against this strong demand backdrop, Both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud near-line capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with a ramp of Hammer-based Mosaic products. As Dave highlighted, Mosaic drives are running very well in production environment and meeting all performance, reliability, and integration expectations. In the enterprise OEM markets, we are benefiting from slight improvement in traditional server units, along with increasing demand for storage servers, driven in large part by the adoption of AI applications and need to store data as enterprise edge. The edge IoT market made up the remaining 21% of revenue at $601 million, supported by anticipated seasonal improvement for consumer products and the VR client market. We project the broader VIA market to grow over time with the largest growth contribution coming from VIA Nearline products that are captured as part of our data center and market. Moving on to the rest of the income statement, non-GAAP gross profit increased to $1.2 billion, up 13% quarter over quarter and 44% compared with the prior year period, significantly outpacing revenue growth. Non-GAAP gross margin expanded to 42.2% in the December quarter, up from 40.1% in the prior period. This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high-capacity products, which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non-GAAP operating expenses were $290 million, relatively flat quarter over quarter and in line with our expectations. Operating expense as a percent of our revenue declined to 10.3%, rapidly trending towards our long-term target of 10%. The combination of strong top-line growth and significant financial leverage drove an 18% sequential improvement in non-GAAP operating profit to $901 million, almost 32% of revenue. Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income and expenses to remain relatively flat in the March quarter. We grew non-GAAP net income to $702 million, with corresponding non-GAAP EPS of $3.11 per share, based on tax expenses of $129 million, and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet, we invested $116 million in capital expenditures for the December quarter, or roughly 4% of revenue. We are maintaining capital discipline while we continue to transition and ramp EMER technology. To support these objectives, we anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4% to 6% of revenue. Pre-cash flow generation was strong at $607 million, up 42% from the prior quarter. Looking ahead, we expect free cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiency, and capital discipline. These factors position us well for durable, long-term cash flow generation. Cash and cash equivalents total just over $1 billion at the end of December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility. During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from these notes and optimize cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1 times based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter over quarter, and up 63% year on year. We expect the net leverage ratio will trend lower as profitability and cash generation increase. while we continue to evaluate opportunities to further reduce debt. Turning now to the March quarter outlook, the demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March quarter revenue to be in a range of $2.9 billion plus or minus $100 million, which represents a 34% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to be approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to approach the mid-30% range. Non-GAAP EPS is expected to be $3.40 plus or minus 20 cents, based on a tax rate of about 16% and non-GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible months of approximately 7.6 million shares. Biggest strong December quarter performance and March quarter guidance underscore our continued focus on driving growth, enhancing profitability, and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders over the long term. Operator, let's open the call up for questions.