Seagate Technology Holdings PLC

Welcome to the Seagate Technology Fiscal First Quarter 2027 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 Shanye 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'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 on 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 gap 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 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. To provide as many analysts as possible the opportunity to participate, please limit yourself to one main question and a brief follow up. With that, I'll hand the call over to you, Dave.

Thank you, Shanye, and hello, everyone. Fiscal 27 is off to an outstanding start. September quarter revenue grew by more than 60% year-over-year and non-GAAP EPS expanded by nearly three times to a record $7.68. We also achieved record gross and operating margins, demonstrating the earnings power of our business and ongoing demand strength for data storage. Both the data center and edge IoT markets delivered double-digit sequential revenue growth, up 18% and 13% respectively. reflecting ongoing demand and pricing strength. These trends support our expectation to deliver strong sequential revenue growth and gross margin expansion throughout fiscal 2027. Our confidence is supported by an extremely strong demand environment with visibility extending beyond 2030 and an aerial density driven technology roadmap poised to capture this growth. In the September quarter, we shipped a record 198 exabytes of nearline capacity into data center customers. And we expect a meaningful step up in the December quarter, supported by the continued ramp of Mosaic 4. As we stage new generations of Mosaic products and ship to a broader customer base, quarterly exabyte growth may vary. At the same time, we expect our technology roadmap to support nearline exabyte supply growth in the mid 20% range on a compound basis. Overall, we delivered another very strong quarter, including record free cash flow generation of nearly $1.5 billion driven by durable demand, our continued technology innovation, and disciplined operational execution. Additionally, we significantly strengthened the balance sheet, achieved our primary debt reduction objectives, and regained investment grade status. With those goals largely achieved, we are shifting our focus towards capital returns. With share repurchases serving as our primary vehicle, complemented by dividends. This month, our board approved an increase in the quarterly dividend to 76 cents per share. Importantly, this capital allocation strategy reflects our confidence in the cash flow potential of the business, as well as the multi-year demand visibility afforded by our customer agreements. Demand strength continues to be driven by data center customers, which accounted for 90% of our shipped capacity. Within data center, cloud nearline products achieved a 12th consecutive quarter of revenue growth, while enterprise OEM revenue reached its second highest quarterly level in over a decade. Data growth is profound across a wide variety of applications. Behind these trends is a growing recognition that the value of data extends well beyond its original use. In a recent discussion with Seagate, a leading hyperscale customer observed that their customers are increasingly discovering new ways to extract value from data long after it's initially stored, strengthening the incentive to retain it. And AI innovations are amplifying this dynamic. As AI adoption expands beyond model training and toward inference and agentic applications, persistent data becomes increasingly important. These systems rely on vast amounts of historical data to make informed decisions and take effective actions, while constantly generating new output that must be governed, retained, and reused. Estimates suggest that billions of AI agents will be deployed worldwide over the next decade, executing hundreds of billions of actions daily. At that scale, agents will continuously consume, generate, and reuse data. We believe future storage demand will increasingly be tied to this new data lifecycle and compound again as physical AI applications proliferate. As the volume of persistent data grows, storage demand can extend well beyond the initial infrastructure build-out. These positive demand dynamics play directly into the strength of hard drives. which deliver the scalable, reliable, and cost-efficient foundation for data retention. Hyperscale customers have long recognized these benefits and continue to pursue higher capacity storage architectures. Our engineering teams work closely with leading cloud providers to align our product roadmap with future data storage requirements and simplify the adoption of higher capacity drives. A recent example is Microsoft's qualification of a joint Seagate and Broadcom solution that combines our hammer-based mosaic drives configured with SMR technology and Broadcom's connectivity infrastructure. Microsoft already deploys hammer drives, and this recent qualification validates the SMR-enabled solution at hyperscale. Customers can benefit from additional capacity gains that SMR provides. However, broad adoption at higher drive capacities have been limited given the meaningful architectural and software changes required. This joint solution provides a blueprint for implementing SMR storage to unlock additional capacity gains on top of our HAMR-based Mosaic platform. Beyond hyperscalers and CSPs, demand is expanding among a broader set of enterprise OEM customers that are managing increasingly large data sets. We are engaging more directly with many of these customers and developing reference architectures that pair proven compute and storage hardware with flexible customer-selected software. These solutions offer a path to scale persistent data capacity, improve storage economics, and drive platform efficiencies. The strengthening demand environment is extending our customers' planning horizons, which is reflected in the supply agreements we now have in place. The vast majority of our Nearline Exabyte supply is now allocated under long-term supply agreements through calendar 2028. with some cloud customer agreements extending through calendar 2030. Our strategic planning discussions extend even further. We are working closely with customers to address their growing storage needs across this time horizon by executing our Mosaic product roadmap. As we transition to Hammer-based Mosaic products, we are investing in additional tools and technologies necessary to offset longer manufacturing cycle times and maintain stable unit production. For Seagate, Increasing capacity per disc is driving Exabyte growth. Our build-to-order contracts establish specific configuration and pricing terms for nearline shipments through calendar 2027. As we move through the next few quarters, we expect to begin finalizing configuration and pricing terms with customers for the Exabyte supply that we've allocated to them for calendar 2028. Pricing continues to improve, reflecting both the execution of our value-based pricing framework and higher external component costs. We expect a stronger demand environment, evident in customers' multi-year commitments, to continue to support these healthy pricing dynamics. Taken together, these agreements provide customers with greater supply assurance while increasing visibility for both parties. They also reflect customer confidence in long-term demand growth and the increasingly strategic role that hard drive storage plays in the modern data ecosystem. Supporting this demand growth requires storage solutions that deliver scale, efficiency and economics. These very attributes serve as the foundation for our technology strategy. Increasing storage density within the same data center footprint is the most cost efficient way to maximize bytes per square foot, as one large hyperscale customer put it. and our HAMR-enabled roadmap is designed to deliver on that objective. Advancing aerial density is our North Star. We are scaling drive capacity through aerial density rather than relying on higher drive unit production. We believe that this is the most efficient way to help customers manage their extreme data growth and retention needs. The same approach supports profitable X-Byte growth for Seagate. We are executing well on the product roadmap milestones that we've outlined. We continue to expect HAMR to represent roughly 50% of our near-line exabyte shipment run rate exiting calendar 2026, with Mosaic 4 representing roughly half of those HAMR shipments. Mosaic 4, which offers up to 44 terabytes of capacity, is continuing to ramp with two leading CSPs. We are on track for additional qualifications to complete over the next couple of months across multiple global CSPs and OEM enterprise customers. Product development for our third generation Mosaic 5 product remains on track. These drives can deliver upwards of 50 terabytes of capacity and leverage our highly efficient 10-disc platform. We continue to expect customer qualification shipments to begin towards the end of calendar 2027. Reflecting on our ongoing advancements in photonics, we recently demonstrated 8 terabytes per disc in the lab. Providing further evidence that HAMR and the MOSAIC platform can deliver on customers' growing capacity needs and reinforces our conviction that increasing exabyte supply through aerial density growth is the right long-term strategy for both our customers and for Seagate. Wrapping up, our results demonstrate both the durability of demand and the effectiveness of our strategy. Data creation, retention, and reuse are compounding demand for mass capacity storage. and based on the long-term visibility we have with customers, we believe we're still in the early days of a multi-year growth phase. Our technology roadmap combined with disciplined supply management and a value-based pricing strategy and the operational leverage in the business gives us confidence in our ability to deliver strong profitability, cash generation and shareholder returns. I'd like to recognize our global team for their execution in delivering a record quarter and a strong start to fiscal 27. I'd also like to thank our customers, suppliers, and shareholders for their continued trust and support. Now I'll turn the call over to Gianluca.