Seagate Technology Holdings plc Q3 FY2026 Earnings Call

Good afternoon, and welcome to the Seagate Technology Fiscal Third 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 and 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 of Investor Relations. Please go ahead.

Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer, and John Luther Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our March quarter results on the investor's 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. 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 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 re-entering the queue. With that, I'll hand the call over to you, Dave. Thanks,

Amy, and hello everyone. CEA delivered a very strong March quarter, underscoring both the durability of demand and the leverage in our model. We grew revenue 44 percent year-over-year, achieved record gross margins, more than doubled non-GAAP operating income, and generated one of our highest ever levels of free cash flow at close to $1 billion. Momentum continues to build for our mosaic hammer-based platforms, with two of the world's largest CSPs now qualified on our 4-plus terabyte-per-disk product. For both of these customers qualification timelines were in line with PMR products underscoring the maturity of the platform and our team's outstanding execution as we work to meet customers accelerated demand requirements our strong FQ4 guidance issued today demonstrates our growing conviction in the business and future opportunities as we look ahead we see Seagate now entering a period of structural growth our belief is rooted in three pillars first is the sustainability of rising AI enhanced applications are accelerating data creation expanding retention and increasing reliance on historical data sets for advanced reasoning extending beyond cloud data centers to the enterprise edge these trends require storage solutions that deliver cost and energy efficiency at scale making high capacity hard drives essential to modern data center architectures second is our strategic technology roadmap anchored by the mosaic platform and hammer innovation we are delivering critical technology breakthroughs at the right time to support our customers rising demand now and into the future proven strategy focused on converting demand into profitable growth and value creation our build-to-order model enhances demand visibility, and supports pricing and supply discipline. Our hammer-based product roadmap enables margin expansion as we scale. And our capital allocation framework enables us to leverage our earnings growth and cash flow generation into strengthening our balance sheet and enhancing shareholder returns over the long term. The combination of these pillars, robust market demand, a proven technology roadmap, and disciplined operational execution is already driving performance ahead of the financial targets outlined at our analyst event a year ago the progress we have made gives us confidence to significantly increase our annual revenue growth target from the low to mid teens to a minimum of 20% over the next few years this confidence is reinforced by the strength of the current demand environment shaped by ongoing momentum from cloud investments The March quarter marked our 10th consecutive period of revenue growth from cloud customers who have committed hundreds of billions of dollars in infrastructure CapEx investment to support their own long-term growth and AI transformations. Using remaining performance obligations, or RPO, as a proxy for future revenue potential, the top three global CSPs alone have nearly doubled their RPO to a staggering $1.1 trillion. a clear indicator of sustained growth ahead. The importance of reliable supply is our customer's highest priority, particularly for near-line products, which accounted for close to 90% of total exabyte shipments in the March quarter. We have exabyte-scale supply agreements in place with nearly all major cloud and hyperscale customers, with near-line capacity almost fully allocated through calendar 2027. At the same time, we are finalizing build-to-order contracts with these customers through the end of fiscal 2027, which defines specific configuration and pricing. Our value-based pricing approach enables customers to plan with confidence while contributing to sustained profit growth for Seagate. And we are actively engaged in strategic planning discussions now reaching into calendar 2028 and beyond. Today, AI sits at the center of nearly all customer demand conversations. We are in the midst of an inference inflection where compute infrastructure is shifting from periodic training to becoming engines that continually generate mass capacity data. Leading AI chatbots now handle billions of user prompts daily, each consuming and producing multimodal outputs that fuel an unprecedented surge in data creation agentic AI pushes this even further transforming sporadic engagements into autonomous workflows that continuously ingest inputs generate reasoning and store durable outputs that are dramatically increasing data intensity and long-term storage requirements AI is amplifying demand across existing applications such as video where large cloud providers are integrating ai into platforms to boost user engagement and revenue opportunities driving new video creation and the need to store it we believe demand will further accelerate as ai applications move beyond the data center into the physical world powering manufacturing systems autonomous vehicles and robotics these physical ai deployments generate massive data streams from sensors cameras and telemetry with a single autonomous vehicle producing up to four terabytes per hour a portion of this data is reused for simulation validation and retraining with retention requirements stretching five to ten years to meet compliance standards these inference based applications are creating a growing need for both cloud and local storage we've started to see interest from sovereign and neo cloud data centers for our enterprise near drives and system solutions to manage these intensifying workloads cloud and edge data centers deploy storage tiers that work in concert to optimize performance cost energy efficiency and data durability our drives are critical to these modern data center architectures delivering scalable capacity along with energy and cost efficiencies that form the foundation of the mass data storage tier. D-Gate's proven product portfolio makes us well positioned to address this broadening opportunity set. Our technology strategy prioritizes aerial density innovation over increasing unit volumes to address rising demand. Leveraging our technology strengths, we provide the most capital and manufacturing efficient path to scale, while delivering improved cost and power efficiency per terabyte for our customers this approach supports our goal to supply data center exabyte growth in the mid 20 range our mosaic 4 plus platform is a prime example as our second generation hammer based product mosaic 4 can deliver up to 44 terabytes per drive over 30 percent more capacity compared to the first generation mosaic drives which we achieve with the same number of discs and heads with minimal change to the bill of materials. Mosaic 4 also incorporates our internally designed laser and integrated photonic circuitry into the recording head. This innovation enables high volume extreme precision manufacturing that enhances our ability to increase drive capacity and cost efficiency. We began revenue shipments from Mosaic 4 in late March and based on current ramp plans we expect mosaic 4 to represent a majority of our hammer exabyte shipments exiting calendar 2026 we have shipped millions of hammer based drives highlighting our ability to engineer with atomic level precision and then integrate that innovation into high volume exabyte scale we work closely with customers to ensure our technology roadmap aligns with their future storage capacity and performance needs customer feedback consistently indicates that tiered storage architectures and software solutions meet their performance needs over the next few years. Capacity scaling remains their top priority, and we are executing the plan. Our Mosaic 5 product development is progressing well to plan to deliver capacities at 50 terabytes with qualification shipments targeted for late calendar 2027. These drives leverage our advanced photonics expertise, internally designed laser, and mature 10-disc platform to extend aerial density capabilities. This approach offers customers a predictable path for addressing their future exabyte growth needs, as well as upgrade the storage capacity of their installed base while using the same power budget and smaller space. And the momentum we've seen in qualifying Mosaic products continues to validate this approach. Today, the vast majority of Hammer supply is allocated to cloud and hyperscale customers. However, as production scales, we expect to leverage 4 and 5 terabyte per disk capabilities to produce cost-efficient, lower-capacity products for enterprise data centers and edge IoT applications. This unified platform approach will simplify our product portfolio and enable manufacturing, supply chain, and cost efficiencies to deliver strong economics for Seagate over the long term. In summary, Seagate is entering a period of structural growth powered by durable demand, increasing adoption of our mosaic-based products, and continued execution against a strategy designed to drive margin expansion, cash flow, and long-term value creation. I want to thank our global team for delivering another strong quarter and recognize our suppliers, customers, and shareholders for their ongoing support. With that, I'll turn it over to Gianluca.

Thank you, Dave. Seagate posted very strong results for the March quarter, exceeding our expectation for revenue, operating margin, and earning per share, while setting new profitability records that reflect sustained data center demand. Additionally, we further strengthened our balance sheet by retiring $641 million in gross debt and achieved free cash flow margin of 31%. Revenue for the March quarter was $3.1 billion, up 10% sequentially and up 44% year over year. We achieved non-GAAP gross margin of 47%, up 480 basis points sequentially, and we expanded non-GAAP operating margin by 560 basis points sequentially to 37.5%. Our resulting non-GAP EPS was $4.10, up 32% quarter-over-quarter and 115% year-over-year. We shipped 199 exabytes in the quarter, up 39% year-over-year. The data center market accounted for 88% of exabyte shipments and 80% of revenue, with strong demand contribution from both global cloud and enterprise customers. We shipped 175 exabytes into the data center market, up 6% sequentially and 47% year-on-year. Data center revenue increased even faster over the same period, up 12% sequentially and 55% year-on-year, totaling $2.5 billion. Cloud makes up the vast majority of data center revenue and capacity shipments. We are focused on renting Mosaic to address growing cloud customer demand. In the March quarter, we ship Mosaic drives for revenue to 75% of the leading global cloud customers, and we remain on track to complete qualification with the remaining two customers in the current quarter. In the enterprise OEM data center market, we saw a notable sequential revenue increase, reflecting growing deployment of AI application, along with renewed demand for hybrid and tiered storage architectures. This proven strategy, widely adopted by cloud and hyperscale customers, provides scalable and efficient infrastructure solution across all market conditions. Our edge IoT market made up the remaining 20% of revenue at $612 million, up 2% sequentially. In the client and consumer market, tax supply and higher NAND costs offset the typical seasonal demand slowdown in the March quarter. Moving on to the rest of the income statement, non-GAF gross profit increased to $1.5 billion, up 23% quarter over quarter and 87% compared with the prior year period, growing roughly twice the rate of revenue. Non-GAF gross margin expanded to 47% in the March quarter, from 42.2% in the prior period. This improvement reflects continued execution of our long-term pricing strategy along with improving product mix. Together, we drove a mid-single-digit increase in year-over-year data center revenue per terabyte. We expect this trend to continue, support by a strong demand environment. Non-GAAP operating expenses were in line with our expectation at $196 million, or 9.5% of revenue. The combination of higher revenue and expense discipline enable us to achieve our long-term target earlier than originally planned. As we effectively execute our strategy around advancing area density, supply discipline, and pricing, we delivered a 30% sequential improvement in non-GAAP operating profit to $1.2 billion, or 37.5% of revenue. Other income expense were $62 million, reflecting lower interest expense on the reduced outstanding debt balance. We expect other income expense to remain relatively flat in the June quarter. Non-GAAP net income grew to $934 million, with corresponding non-GAAP UPS of $4.10 per share, based on tax expenses of $171 million and a diluted share count of approximately 228 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet, we invested $161 million in capital expenditures for the March quarter, or roughly 4% of revenue year-to-date. We expect capital expenditure for fiscal year 2026 to be inside our target range of 4-6% of revenue, with investment aimed at the ongoing transition and ramp of hammer-based products. Free cash flow generation expanded significantly to $953 million, up 57% from the prior quarter, representing our highest level in over a decade. We expect free cash flow generation to improve further through the remaining quarter in calendar 26, supported by sustained demand trends, operational efficiencies, and capital discipline. Cash and cash equivalents increased to $1.1 billion at the end of March quarter, with ample liquidity of $2.4 billion, including our undrawn revolving credit facility. During the March quarter, we returned approximately $191 million to shareholders through dividend and share purchases. We also retired $641 million in debt, including over $600 million of exchangeable senior note due 2028 using cash on end. Our resulting gross debt balance was approximately $3.9 billion exiting the March border. Year-to-date fiscal 2026, we have reduced gross debt by approximately $1.1 billion. dollars. Net leverage ratio improved to 0.7 times, based on our adjusted EBITDA of 1.2 billion dollars for the March quarter, up 28 percent quarter over quarter, and more than doubled year-on-year. We expect the net leverage ratio to continue declining as profitability and cash generation increase, while we plan to further reduce debt. I'm pleased to share that speech recently upgraded Seagate credit to investment grade, recognizing our strengthening balance sheet and profitability expansion. Turning now to the June quarter outlook, despite rising geopolitical tensions, including the ongoing conflict in the Middle East, we do not currently expect material impacts to the business. Our teams acted quickly to mitigate supply and logistic disruption, and we will continue to monitor this dynamic situation. Underlying demand fundamentals have not changed. AI is reshaping data into a strategic asset, accelerating our customer need for storage capacity at scale. We see strengthening extra by demand and continue to execute our Mosaic product qualification alongside our pricing strategy. With that as a context, we expect June quarter revenue to be in a range of $3.45 billion plus or minus $100 million, which represents a 41% year-over-year improvement at the midpoint. Non-GAAP operating expenses are expected to be approximately $295 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to be in the lower 40 percent range. Non-GAAP EPS is expected to be $5 plus or minus 20 cents based on a tax rate of about 16 percent and non-GAAP diluted share count of 231 million shares, including estimated dilution from our 2028 convertible notes of approximately 3 million shares. Our financial performance and guidance demonstrate our focus on profitable revenue growth, alongside a product strategy designed to capture the significant opportunities ahead. Combining with the visibility gained through our customer agreements, we are confident in delivering quarterly revenue growth and margin expansion through fiscal 2027, positioning Seagate to enhance value for both customers and shareholders over the long term.

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 one 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 please limit yourselves to one question if you have additional questions you may rejoin the queue our first question today is from eric

woodring with morgan stanley please go ahead awesome um good evening guys thank you uh thank you very much for the question and congrats on the results and guide um dave i was wondering if you could go a bit more into the detail on specific tailwinds to HDDs from agentic AI. And I guess meaning like the broad tailwinds that HDD storage demand for multimodal models and physical AI is pretty clear, but it's less clear exactly what parts of the agentic workflow are ripe for HDDs. So I guess my question is specifically how does agentic AI benefit HDD demand? And does that have any impact on how you think about that mid-20% near-line exabyte CAGR you provided at Investor

a year ago? Thank you. Thanks, Eric. Yeah, we are picking up confidence because of some of these new applications. I think it's important to realize that some of the applications, while important, are fairly small data applications. Some drive enormous data sets. And so when I think about agentic I think about frequently asked questions you're rather than just periodically querying something you're doing as part of workflow and when you do that you may actually reference enormous data sets to draw your conclusion then you may actually create new data that needs to be propagated out in the world to the extent that that's unstructured data video data you know that's where it's actually hitting the storage tiers fairly hard so not entirely, you know, related to mass capacity storage, but we're starting to see a lot of this

pick up. The next question is from Asya Merchant with Citigroup. Please go ahead.

Great. Thank you for taking my questions and great set of numbers here. Congratulations. If you could just talk a little bit about cost reductions, pretty impressive here. You know, you guys are on the second generation mosaic now. How should we think about these cost reductions? And if you could just update where you think you would be for, you know, Hammer, I think you said majority of them exiting, I think, fiscal 26, if I heard that correct. But if you could just update us on where you are with the Hammer targets and the blended cost reductions, we should expect as you ramp into the second generation. Thank you.

Yeah, thanks. So that's one of the reasons we try to change as little as we can, platform to platform. It just de-risks the product transition, but it also allows ourselves and our suppliers to leverage all the install base as well. So we're trying not to change as many parts as we possibly can. Obviously, there are technology changes. Most of those are under our control in the heads of media. But right now, because of the momentum that we're seeing with the HAMR roadmap, we're seeing that we can get more aerial density for fairly small changes inside of our portfolio. Most of it affects the laser and the photonic circuitry and the material set on the media, like we talked about. So all of this is not netting out to much of a bill of materials change, and therefore we're getting a lot of the cost leverage. John, do you want to expand on that?

If you look at our last several quarters, the cost reduction was coming from mainly two items. One is for sure the mix going to higher capacity drive. And second was the full utilization of our manufacturing. When I look into the future, of course, now we are full. So that part maybe will not be so important in terms of cost reduction. But our mix change continues to be very fast. We're going faster than what we were thinking on the transition to AMER. And now that we have second generation AMER, now we have a very good increase in terabytes per unit. And, of course, this is the driver not adding more bill of material to the R-disc. This is the main driver for the future cost reduction.

And I think, Asiya, your second question was around where we stand in terms of AMER. Dave had mentioned on the call that we would expect towards the end of this calendar year for Mosaic 4 to cross over with Mosaic 3, and then we remain on track for overall HAMMER exabyte crossover at that time as well.

Great.

The next question is from Sonic Chatterjee with J.P. Please go ahead.

Hi, guys. Thanks for taking my question. And maybe on the pricing side, pretty strong price increase, both on a year-over-year and quarter-over-quarter basis here. I know you sort of expect these pricing trends to continue, but just trying to think through why shouldn't we see pricing maybe accelerate a bit as more new contracts come into play as you go through sort of end of 2026 into 2027? and why shouldn't sort of, how should we think about pricing and why should it sort of accelerate more as more new contracts come into the P&L from here on?

Yeah, thanks. The first way I think about it is what is the true demand? And I think the demand is rising, to your point, further out in time as we roll out of one LTA and into the next. Then the market demand dictates, you know, what the economics. We talked about this a little bit in the prepared remarks. about when we set exact capacity configurations, what products are qualified with what customers and therefore what price. As we've been rolling forward, though, we have the ability to out just a few more drives out of manufacturing or whatever, so we can always test what that demand is and the demand keeps going up. And so we're seeing what the market price, if you will, is. our goal still is to try to lock in with our customers and give them predictability so that they have a great economics plan to build their data centers out and we know what we're going to

get paid for for what we start in our factories. Yeah, we have now finalized our bill to order for our fiscal 27th. So we see how the pricing is trending, how safe there are no changes to our pricing strategy, we are continuing to execute this strategy that allowed us to increase profitability for the last 12 consecutive quarters. And based on those orders that we have now finalized in terms of mix, in terms of pricing, in terms of volume, we said that for the next four quarters, so for the entire fiscal 27, we are confident in saying that we have a good opportunity to increase our profit and our revenue sequentially through the fiscal

27. Thank you. The next question is from CJ Muth with Cancer Fitzgerald. Please go ahead.

Yeah, good afternoon. Thank you for taking the question. I guess another question on agentic AI, and particularly as you think about the need for large-scale data lakes and overall demand for persistent memory um is this changing uh perhaps you know your your product structure um roadmap i know you announced a partnership with nvidia curious you know how this is augmenting um you know kind of your product roadmap and and also you know does this change kind of your thinking around uh supporting demand via only aerial density uh improvements Thanks so much.

Yeah, it's an interesting question, CJ. I think architectures still are largely driven the same way they were a couple of years ago, which is, and we said this before, our customers want more capacity per spindle, and that's their highest priority. And so we're still racing on aerial density exactly to your point. There are a lot of conversations about performance tiers. Can we get a little bit more performance out of the drive? And so, for example, we've talked about this in the past. We had stacked actuator designs in the past. We've shipped millions of those drives in the tens of exabytes range for performance tiers. And we can certainly pull those designs back down off the shelf. But I would still say while those discussions are happening, the biggest driver for us is get more capacity for drive.

Yeah, on Argentic AI, you need historical data for agents to reason. and you need to store that data for compliance. So, we see those as a huge benefit to our business.

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

Yes, thank you so much. So, you generated almost a billion in free cash flows, over 30% plus free cash flow margins in the quarter. And given your view that you're entering a new era of structural growth, how should we think about how you're going to deploy this cash beyond sort of the next 12 months where, you know, I think you've said you're going to retire debt? And a quick clarification around pricing. When you say you have pricing locked in for fiscal 27, how much of the capacity for fiscal 27 has pricing been locked in and how much is sort of floating at the moment?

Yeah, we said the vast majority of our near line capacity is allocated during the next four quarters. So, of course, it's not 100 percent, but it's a very high percentage. On capital allocation, in the last few quarters, we have focused a lot on reducing our debt, especially our convertible, because somehow that would have created even more dilution. We still have about $400 million of the convertible that is open, but we will probably address this quarter or next. So a little bit of reduction in debt, and then I would say the majority will probably go to share by that. Now we are active already today in the market, and we will probably do more in the next few quarters.

Yeah, Wamsi, I would say that last year we were focused very much on working capital and just getting the supply chain back healthy again from what we went through now to john lucas point we have to take care of some of the debt uh that that we have and and i think the next place that we go to exactly to your point is back to where we were before which is

returning value to shareholders thanks the next question is from krish sankar with pd cowan please

go ahead yeah hi thanks for doing my question uh david john look on the mid 20 percent exabyte

growth are you just increasing capacity per unit or are you actually increasing the units of head

capacity thank you yeah i would say capacity per unit is where our focus is if if you think about it um and a lot of people get this wrong in the when when thinking about hard drives it's a very complex supply chain with many different suppliers coming in and and then there's our critical components that we control but they have very long lead times not just for the capital to build more but also for the the product themselves itself when it's inside the machines and so therefore it's really needs to be well orchestrated in our supply chain it's not like just plugging in a few more machines to get more capacity out our people are very much focused on increasing the aerial density, the amount that comes out of the entire fleet, that's the way we believe gets the most exabytes into the world. And if we took those people off and had them make more parts, to your point, we would probably net-net fewer exabytes over the next few years. So we're very focused on with the technology innovation that we see coming in front of us, continuing to drive those efficiencies. The customers benefit from those with energy efficiency and space efficiency and scale as well so this is in concert with our customers this is the way we're driving and trying to be as aggressive as we can I'll say they move to the

second generation Emma now is giving us opportunity to continue to grow and to achieve a target CAGR that we discussed about a year ago and and then after the second generation we will have the third generation but they was mentioning in a prepare remark that is not too far in time from now now is uh basically at the end of next calendar year we will be already in call with a with a 50 terabyte drive so that is our strategy and uh all based on technology transition and not donating units thank you the next question

is from mark newman with bernstein please go ahead hi thanks for taking my question and

Congrats on a great quarter. Just wanted to double click on pricing. It seems like on my math, your pricing per exabyte seemed to accelerate a bit, something like mid-single digits Q on Q. And I wanted to understand, is that more because you had a higher portion of new contracts signed this quarter versus previous quarters, or was it just that the magnitude of the price increase on new contracts has gone up? I guess the reason for this question is we're just trying to get a sense of if this magnitude of price increase is going to continue every quarter going forward, or was this because you had a number of new contracts signed, and so perhaps it was a bit higher than normal. I really appreciate any kind of clarity you can give on on the pricing dynamic thanks very much

yeah we are not changing our pricing strategy so as i said before we have executed this strategy for a long time and we are continuing to do the same every quarter is different depend from how many new contracts you have in the quarter depend a lot from the mix also know how we move customers from one product to the next. But in general, I would say there are no changes in how we address our pricing strategy. So we have done that for many quarters. And as I said before, we have the same trend for the next four quarters for the entire fiscal 27 and possibly even for

longer. Thanks, Raymond. The next question, excuse me, 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 just maybe frame for us a little bit with a little more precision as we look out say towards the end of fiscal 27 given your pricing visibility would you characterize your price per exabyte growth year over year in those for those longer dated orders as sort of up low mid or high

single single digits year over year yeah we probably don't don't guide so far so far in time So, as I said before, every quarter will be a little bit better, and we expect revenue improvement. We expect profitability improvement. A big part of the profitability improvement is coming from pricing, but it's also coming from the change in mix and the reduction cost that the 40-terabyte hammer drive will give us.

Yeah, Jim, that's the way I look at it, is there's new products coming, higher capacity products, and then we said this in the prepared remarks as well, the ability to address some of the lower price bands, if you will, with better products, fewer components in them, that's what aerial density provides us, and that's the way we think about it. So fundamentally, it'll still come down to demand, you know, as we play out through 27. to the extent that we can get up the ramp faster than we think on yields and, you know, get the scrap down and be able to address other people through completing the customer qualification, that product's very – that allows us to get into those other markets very aggressively, and I think that's where we're focused. And then what really ultimate demand is, you know, we don't know, but we think it's pretty high relative to our supply as well. So we'll continue to negotiate with customers to give them predictability, and they'll determine what the price is.

The next question is from Amit Dharianani with Evercore. Please go ahead.

Thanks for taking my question. I have a question just on gross margins. And if I think about the analyst day, you folks talked about 50% incremental gross margin. It seems like a while back that happened. You folks are doing 70% plus pretty consistently. I'd love to understand, is this outperformance, you know, kind of driven by pricing or mix or shift to hammer, and then importantly, is 70% incremental sort of the right framework to have as you go through the fiscal 27 model?

Yeah, I think I'll let John Luca talk quantitatively here, but I think the strong demand is something that even we weren't focusing on a year ago, to your point, and we've executed really well against that, you know, maybe even better than I thought we would. But we're pushing aerial density really aggressively, and the team's done a great job.

Yes. No, we have executed better than what we were planning a year ago from different drivers. Now, I say pricing was actually better. This was a mixed transition a little bit faster. Now we can leverage more on the 40-terabyte drive. So, I would say, yeah, I'm looking at what we have done in the last few quarters, and I don't see a reason why we should not do the same in the future, but, of course, every quarter is different. So, let's see what we can achieve.

Thank you, and congrats on a nice sprint.

Thank you.

The next question is from Aaron Rakers with Wells Fargo. Please go ahead. Yeah, thanks for taking the question.

and maybe I'll stick with the P&L, you know, kind of similar to Amit. You know, when we think about the model you framed out at the analyst day, I'm curious as we look into fiscal 27 and given variable comp dynamics, how do we think about operating expenses? I think your prior target was to kind of maintain roughly 10% OPEX to revenue. Clearly we're now breaking through that. So I'm curious of how should we think about the OPEX trajectory going forward?

I would say think about it as relatively flat. You know, obviously, if we see the need to go invest more for the technology to drive the technology even further, we can. But right now, I think our team is doing very well. And, you know, we have a fairly big OPEX portfolio that we can readjust priorities inside of. So I think the way I think about it is relatively flat.

But, yeah, just to be sure, flat on a dollar base is not as a percentage of revenue, no, as we discussed also in prior quarters. And as Dave said, no, this is a good level for us. And if we need to do something, we will do it. But right now, we don't see the need. Thank you.

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

Thanks a lot. I just wanted to clarify exactly what the message is on units. I know you and your peers stopped giving us units a few quarters back, but there was a big head supplier that did report last night. They got a heads up 40% year over year, and they specifically indicated that it's demand from the US HDD guys. So I know maybe some element of it is that you want to prioritize internal head capacity for Hammer, but how does that fit with the idea that you're not growing units? Or are you, in fact, beginning to grow units because of some of these new demand drivers?

to first order tim no we're still not growing units i mean inside of the mix there may be more heads inside of the drive right so the average number of heads per drive which we don't talk about very much may be increasing it's not 20 heads which is in the highest capacity drive that we have yet and there's still quite a bit of the low capacity drives that are serving and customers that are very important to us. So as we look across that blend, probably more heads of media going into the average drive is the way to think about it. The total number of units is not really increasing. And I don't think it will unless we see a resurgence at the edge. And that may be over a long period of time.

Yeah, as you know, Tim, HEMR cycle time is a bit longer than PMR. So we use a little bit of PMR heads just to keep the units as they are today. Otherwise, the units will actually go down.

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

Yes, thank you. You spoke about how the Mosaic 4 platform will command 70% of your HAMR shipments by the end of fiscal 27. But how quickly might HAMR exceed half of your total exabyte shipments? I ask because it seems to support favorable capital intensity, and as yields improve on HAMR, it seems easier and more economical for you to replace lower capacity data center and edge hard drives with HAMR heads and media.

Maybe let me clarify those percentages. Now, what we said is we will achieve 70 percent of exabyte, near-line exabyte, built on MR drive by the end of calendar 27, actually by fiscal 27, sorry. And by the end of this calendar 26, we said the majority of MR exabyte, so inside the MR exabyte, will be 40 terabyte drives product versus the 30 terabyte drives product that we were building before so those are the percentages but still a quite aggressive

ramp on mosaic 4 plus to your point but i think the other way to think about it is you know our wafer fab is relatively full and and so therefore everything's spoken for we're making sure we do that blend just right we're not leaning too hard into the mosaic 4 because the you know some of the other product families are still doing quite well and needed for for various customers thank

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

Yeah. Thanks, Dave. Just a quick question on the margins, obviously very solid margin pickup in the quarter of the guide. There's something there's a way to look at it on what's the impact from hammer mix versus utilization or price, and how does this change with Mosaic 5, I guess?

yeah i think as we continue to go up the curve and we can hold the line on new piece parts in the build materials like we talked about before leverage as much technology that already exists i think that's where we get the the best cost leverage um and again the the technology and the heads of media are what fundamentally enables all of this so we're that's why we're investing very heavily we get more exabyte output as well and that'll help drive margins i think when you think about a three terabyte per platter, a four terabyte per platter, a five terabyte per platter drive, that value into the data center is enormous. I mean, it's space efficiency, efficiency on all the parts around it on a per terabyte basis, and then obviously power and things like that. So the customers lean very hard into those things. And that's why, you know, that's giving us great visibility. And as we drive that without adding too much incremental costs, I think that's why our margins are defending.

All right.

The next question is from Steven Fox with Fox Advisors. Please go ahead. Hi. Congrats on the great quarter. I was just curious if this latest inflection point has anything to do with what seems like a rising cost differential between HDDs per gigabyte and NAND. And if it doesn't right now, could it in the future sort of help for, you know, a future inflection? Thanks.

Thanks for the question, Steve. You know, I say this all the time. NAND is a great technology. It has many niches that hard drives are not in. So, you know, it's, and we need those niches to continue to grow because they serve data markets either on the ingest side or on the consumption side as well. But in the storage tiers that we largely talk about inside the data center, I don't see the architectures changing very much. If anything, because of the economics of what's going on right now, people are coming back to hard drives and saying, what more can you do? And I think that was referenced to some of the earlier questions on the performance side. You know, is there something else that hard drives can do inside of their tier to make sure they're improving the performance? Again, we get driven very hard to just get more exabytes out. And, you know, I think the architects understand this really well. and I see these architectures pretty sticky for a long, long time into the future.

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

Yeah. Thanks, guys. Good afternoon. Appreciate you taking the question. Dave, I wanted to ask you, just going back to your remark a little while ago about using hammer to go down to lower capacity points is is mosaic four is is that sort of the the model that gets you to go down to 20 terabyte hammer and and if so like at what point of the mosaic four ramp do you think that you guys might have an opportunity to do that thanks yeah we had originally talked

about it and on to um in that context you know mosaic four 20 terabyte if you will would be five discs. I think the demand for Mosaic 4 at the high end is so high right now that as we look forward, I don't think you'll see very many of those. But we'll see how the market plays out over the next three, four quarters. Mosaic 5 obviously changes the economics again. And at some point, we're going to be able to readdress those markets in a very cost-efficient way.

Yeah, I would say it's a great strategy as the problem we have is demand is so strong in the public cloud that we don't have enough volume to also implement this lower capacity based strategy based on the four terabytes of this. So again, possibly we will address it a bit later out in time.

Yeah. So the economics is so attractive at the higher end that it's not worth doing it yet. Thank you, guys.

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

Thanks for taking my question. Reach in deep here. There's been a lot before here on the pricing and the contract side. But just if you look at the demand industry and potentially DRM as well, you're hearing more about potential prepayments over the course of a contract life. Are you guys seeing that in the market? And would you ever consider this as new contracts come up over the coming years and demand continues to grow just given your production footprint? would that be something you would consider in the future? Thank you.

Thank you, Tom. I would say right now our free cash flow is very strong, so we are not looking at prepayment in particular. I think we are mainly focused on predictability of the shipments and on optimizing our pricing strategy. Now, I don't exclude that in the future we will maybe implement prepayments, but so far we have not focused on that part.

Yeah, Tom, we've really been going for demand predictability. The customers have to drive through important architectural transitions themselves. We have to drive through the product transitions. We have to make sure all that's synced up. And so that predictability is top of mind for us, not necessarily any other economics.

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

Thank you, Gary. And thanks to everyone who joined us on the webcast today. we're excited about the strong march quarter and the accelerating momentum building for our mosaic technology platforms as we enter this period of structural growth we'll keep executing with discipline to expand margins drive cash flow and build long-term value creation thank you for your continued support the conference is now concluded thank you for attending today's

presentation. You may now disconnect.