Welcome to the Seagate Technology Fiscal Third Quarter 2024 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and the detailed supplemental information for our March 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, a 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 are 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. I'll now hand the call over to you, Dave.

Thank you, Shayne, and hello, everyone. Seagate is delivering solid financial results in an improving demand environment. In the March quarter, we grew revenue 6%, expanded non-GAAP gross profit 18%, and more than doubled non-GAAP earnings per share compared with the prior quarter. Our performance is a function of both improving end-market demand and the decisive actions we implemented throughout the downturn to strengthen our financial profile heading into the recovery. Nearline cloud demand trends are increasingly positive across both US and China customers, and we also saw a sequential improvement in the enterprise OEM markets in the March quarter. On the execution side, the quarter-on-quarter margin expansion reflects our pricing initiatives taking hold as well as favorable mix, resulting in revenue growth in the quarter outpacing exabyte growth. Pricing strategy is just one key piece of our broader focus on profitability, which also includes maintaining a healthy supply-demand balance, introducing new technologies to enhance value for our customers, and maintaining tight expense controls with an emphasis on generating cash. Looking at the near-term end-market dynamics, cloud continues to lead the demand recovery. For a second consecutive quarter, we realized strong double-digit revenue growth from sales to cloud customers, with improvement across both US and global cloud names. We believe the long-running cloud customer inventory correction is mostly complete and their end demand is also improving. Based on our customer interactions, we currently expect healthy nearline demand growth to continue through the rest of calendar 2024. Within the enterprise OEM markets, demand stabilized in the second half of calendar 2023 and we observed incremental improvement in the March quarter. Historically, enterprise nearline demand has correlated well with traditional server growth, which is projected to modestly increase in calendar 2024. As a result, we expect enterprise OEM revenue to improve as server growth resumes. In the VIA markets, revenue was seasonally lower in the March quarter and we expect demand to trend higher through the calendar year. Smart cities remain the largest end-market opportunity for VIA products. However, new applications continue to emerge that use AI analytics to form actionable insights from data at the edge, where an estimated 80% of data resides. One such use case centers on smart energy and utility management that aims to use imaging data to drive energy efficiency and conservation. Analysts place this among the fastest-growing sectors for VIA applications worldwide. Within China, the pace and magnitude of demand improvement in VIA and other HDD markets will be shaped by economic recovery in the region. We continue to monitor the government's efforts to spur economic growth, including stimulus plans aimed at digital transformation and infrastructure spending. Recent economic indicators show signs of progress. However, it will take time for the benefits of these programs to take hold. Overall, we believe these constructive market trends support steady revenue growth throughout the calendar year. Our ability to deliver that growth is enhanced by our build-to-order initiative that is now in place with the majority of large mass capacity customers. These plans support Seagate better demand visibility and greater predictability for capacity planning, while our customers find value in the assurance of supply that meets their volume and timing needs. Importantly, the improving overall outlook for HDD demand is unfolding as we execute on our product and technology roadmap. Today, we are simultaneously driving qualification and ramp plans for two high-capacity product families. Our last PMR product delivering up to 28 terabytes per drive, as well as our first HAMR-based Mozaic product on 3-plus terabytes per disk. This is rare for our industry, and I want to acknowledge our product teams at Seagate, who are doing a phenomenal job supporting customers as we work together to advance our industry-leading products and technologies through the various customer qualifications. These two product families share about 95% commonality in components and leverage the same assembly processes and test processes. This enables efficiencies across areas such as procurement, manufacturing, capital investments, and customer qualifications. The 24-terabyte, 28-terabyte PMR drives are in qualification at most of our global cloud and enterprise customers. We have already completed qualification with one major enterprise customer, some global Tier 2 customers, and with our enterprise systems business. We currently expect to begin shipping significant volumes in the first half of fiscal 2025. Relative to HAMR technology, we continue to progress towards completing our first large CSP customer qualification, though we experienced a temporary slowdown in recent weeks. We determined a mechanical component unrelated to the HAMR recording subsystem in some of our drives was not performing as expected. We identified and rapidly implemented the solution with full support from our customer. Verification tests are underway and these tests should be completed in the June quarter. Every other aspect of the qualification process has gone as expected. With this shift in timing, we now expect to ship a few hundred thousand HAMR-based Mozaic drives in the June quarter and meet the remainder of our customer's exabyte demand through other already qualified products. As we gradually ramp HAMR products with our lead hyperscale customer in the second half of the calendar year, we remain focused on broadening the number of customers qualified on Mozaic products. Customer feedback reaffirms strong interest in HAMR technology and that is further reflected in the successful completion of our first qualification with a top non-cloud customer a few weeks ago. We've laid out a Mozaic roadmap with a clear path to at least 50 terabyte drives that offers customers TCO and sustainability benefits, including lower power consumption and less required floor space on a per terabyte basis. We are scaling drive capacity through aerial density gains rather than adding heads and disks. As we execute on our product roadmap to 50 terabytes and beyond, we expect to incur minimal changes to our bill of materials costs and maintain low capital intensity of between 4% and 6% of revenue. As a result, we believe HAMR provides the path for achieving margin performance beyond our current target range as production scales and also positions Seagate well to continue capitalizing on megatrends like AI and machine learning, which drive long-term demand for cost-efficient mass storage. As we've discussed in the past, the initial phase of GenAI has focused on building out the compute-intensive infrastructure required to develop and train large language models. As development shifts to the deployment phase, enterprises will begin to leverage these trained AI models to transform data with value-enhancing applications and generate data-rich content. Customers expect HDD demand to increase as this phase takes hold. Over the next several years, the volume of AI-generated content is expected to increase and also shift towards more imagery and videos, which can be up to 1,000 times larger than text. These trends bode well for HDD demand over the long term, as HDDs remain the most cost-effective means to house and subsequently use mass capacity data. To summarize, the combination of more favorable demand trends, strong operating discipline, and product and technology leadership provide the foundation for driving further financial performance gains. This combination reinforces our confidence in returning to our long-term target margin ranges and potentially exceeding those ranges over time as HAMR-based products proliferate in the marketplace. With that, Gianluca will now cover our financial performance and outlook.

Thank you, Dave. Seagate delivered solid financial performance in the March quarter with sequential improvement across every key financial metric. Revenue was $1.66 billion, up 6% quarter-over-quarter. Non-GAAP operating income was up 44% sequentially to $183 million, leading to a non-GAAP operating margin of 11% of revenue, expanding nearly 300 basis points quarter-over-quarter, and our non-GAAP EPS was $0.33, increasing $0.21 sequentially and above the midpoint of our guidance range, reflecting the improving demand trends and continued cost discipline. Within our Hard Disk Drive business, exabyte shipments grew 4% sequentially to 99 exabytes, while revenue increased 7% to $1.5 billion. Revenue performance was mainly driven by the expected improvement in the nearline cloud market as well as favorable pricing actions. Within the mass capacity market, revenue outpaced exabyte growth, increasing 11% sequentially to $1.2 billion with nearline cloud demand more than offsetting the slight decline in the VIA market. Mass capacity shipments totaled 89 exabytes compared with 83 exabytes in the December quarter. Mass capacity shipments as a percentage of total HDD exabytes were 89%, reflecting the continued long-term secular growth for mass capacity demand. For nearline products, shipments of 72 exabytes were up quarter-over-quarter from 65 exabytes. We believe that inventory among most CSP customers has decreased and anticipate continued nearline demand improvement in the June quarter and beyond. In the VIA market, we believe the March quarter will prove to be a low point of the calendar year with demand returning to more typical seasonal patterns moving forward. Legacy product revenue was $297 million, down from $324 million in the prior quarter, primarily driven by lower seasonal demand in the consumer market. Finally, revenue for our non-HDD business was $178 million, essentially flat quarter-over-quarter. We expect both the legacy and non-HDD market to remain at similar levels in the June quarter. Moving on to the rest of the income statement. Non-GAAP gross profit increased sequentially by $65 million in the March quarter to $432 million. Non-GAAP gross margin improved for a fourth consecutive quarter to 26.1% and expanded approximately 250 basis points compared to the previous quarter. Continued pricing adjustment and favorable mix shift toward mass capacity products offset margin headwinds from underutilization costs, which were about $43 million. Non-GAAP gross margin for the HDD business expanded much faster than overall company gross margin. Looking ahead, we expect underutilization costs to decrease in the June quarter and abate in the second half of the calendar year as our overall build volume improves to support incremental demand in the nearline market. We believe these factors along with ongoing expense discipline and product execution support the return to the 30% minimum margin benchmark in the current calendar year. Non-GAAP operating expenses totaled $249 million, up 4% quarter-over-quarter, but slightly better than our guidance, reflecting the timing of certain R&D spending and continued cost control efforts. Adjusted EBITDA continues to improve and was up 29% sequentially in the March quarter to $278 million. Non-GAAP net income was $71 million, nearly tripling quarter-over-quarter, resulting in non-GAAP EPS of $0.33 per share based on a diluted share count of approximately 212 million shares and a tax expense of $27 million. Moving on to cash flow and the balance sheet. In the March quarter, we increased free cash flow generation to $128 million. Capital expenditures were down sequentially to $60 million as the majority of planned capital expenditures were completed in the first half of fiscal '24. We expect fiscal '24 CapEx to be at or below the low end of our long-term target range of 4% to 6% of revenue. We returned $147 million to shareholders through the quarterly dividend, exiting the quarter with 210 million shares outstanding. We closed the March quarter with $2.3 billion in available liquidity, including our undrawn revolver credit facilities. Today, we announced that Broadcom has acquired our ASIC assets, including development engineering and related IP for $600 million in cash. The cash inflow will be reflected on our balance sheet in the June quarter and Seagate expects to use a portion of the net proceeds to support our supply chain as we begin to ramp new product builds, as well as pay down debt over time. Additionally, we expect to realize annualized OpEx savings of approximately $40 million starting in fiscal 2025, but there is no expected impact to revenue. Inventory increased to $1.2 billion as we staged material to support the continuous mass capacity demand recovery, along with our concurrent ramp of our last PMR-based product and the initial Mozaic-based product ramp. Our debt balance was $5.7 billion at the end of the March quarter, with more than 90% of our long-term debt obligations maturing beyond three years. Interest expenses were $82 million and we project interest expenses to be between $83 million and $85 million in the June quarter. Turning to our outlook, we expect continued improvement in our mass capacity markets, led by ongoing demand for our nearline cloud products as well as modest improvement in both the nearline enterprise and VIA markets. Legacy and non-HDD revenue are expected to remain relatively flat sequentially. With better context, June quarter revenue is expected to be in the range of $1.85 billion, plus or minus $150 million, an increase of 12% sequentially and 16% year-on-year at the midpoint. We are planning non-GAAP operating expenses of approximately $260 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to improve into the low-teens percentage range, including underutilization costs of approximately $20 million. We expect our non-GAAP EPS to be $0.70 plus or minus $0.20, based on a diluted share count of approximately 212 million shares and a non-GAAP tax expense of $25 million. Our strong expense management and supply discipline are contributing to the year-over-year profitability expansion that you are seeing in our results and outlook. Our balance sheet and healthy free cash flow generation position us well to continue supporting our capital return commitments. I will now turn the call back to Dave for final comments.

Thanks, Gianluca. Seagate is demonstrating strong operational execution and supply discipline amid an improving demand environment, which sets us up well to grow revenue and further expand margins throughout calendar year 2024. Our product portfolio, anchored by industry-leading HAMR technology, offers compelling economics for our customers and for Seagate. As we proliferate these new products, we expect to drive further financial leverage over time. I'm confident that our product strategy offers customers the most compelling TCO proposition and positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. We believe that the Mozaic platform delivers TCO advantages for datacenter operators and supports their increasing focus on conserving power and space. This week, Seagate published our 18th Annual ESG Report outlining the progress we've made towards our own sustainability goals, including our product circularity program. We are collaborating with customers and recovering drives from our own operations to extend these products' life cycles and conserve the planet's limited resources. Since launching this program in 2020, we've recovered and shipped nearly 4 million drives back into the market. Finally, I want to thank our global team members for their hard work and dedication and recognize our suppliers, customers, and shareholders for your ongoing support of Seagate. Gary, we're ready to open up the call for questions.

Our first question today is from Erik Woodring with Morgan Stanley. Please go ahead.

Great. Thank you so much for taking my question. I'll combine this into a two-part question. So, Dave, I appreciate your comments on HAMR in the prepared remarks, really just wanted to get clarification on two points, if I may. First is, have you replaced the mechanical component that was giving you an issue and then proceeded to do testing such that you won't have any further delays on HAMR and now you're just going through kind of the final testing phase with your lead CSP customer? And then second, I believe you've talked in the past about a goal of onboarding the remaining large CSPs by the end of calendar year '24. Does this hiccup impact that timing at all, or have you started the qualification process with these customers? Just any clarification on those two points would be super helpful. And that's it from me. Thank you.

Thank you for the question, Erik. Regarding the mechanical component, we have alternative sources that were running concurrently, allowing us to separate the material and get the test beds operational with the correct material. As a result, we were able to quickly recover our schedule. While we are not pleased about this issue, we believe we can move forward, which is why we are confident about completing the qualification this quarter and shipping the units. In the larger context of the program, such issues can arise when integrating high volumes from all suppliers, and sometimes unforeseen interactions occur. However, this won’t hinder our long-term plans or affect other qualifications. To address your second point, we continually reassess our progress, but our goal remains to ramp up HAMR as quickly as possible to achieve not only 3 terabytes per platter but also 4 terabytes per platter. We remain very optimistic about this.

Great. Thank you so much.

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

Good afternoon. Thank you for taking my question. I want to focus on the cloud recovery aspect. In the past, you've mentioned that this might be somewhat gradual, but looking at your March numbers and the guidance for June, it seems the recovery may be steeper. I would like to hear your thoughts on the pace and durability of demand recovery from cloud customers. Additionally, I understand you shipped nearly 100 exabytes of capacity this quarter; what is your total available capacity right now? What prompted the decision to possibly add more capacity in the future? Thank you.

Thanks, Amit. It's been an incredible journey over the past year and a half to two years because demand was significantly lower compared to the supply available in the industry. We all reduced some supply, and made a serious shift to build-to-order about nine months ago, informing everyone that we need some predictability in the business to trigger builds. We're pleased with how that has progressed. What's changed in the last 90 days is the return of demand. Observing that last quarter's exabyte growth outpaced revenue growth, along with the current increase in exabyte growth, gives us reason for optimism. However, we still have underutilization charges and factory capacity that isn't fully in use. We plan to stick to our strategy, as it's important for us not to overbuild or produce based on speculation. We aim for predictability and long-term financial health. While we're pleased with the improvements made, we still have some way to go, and we will continue to push forward.

Yeah, let me add on the underutilization charges, we said in the prepared remarks we do not expect underutilization charges in the fiscal year '25, so fairly soon we will not have that additional cost.

Thanks, Amit.

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

Yeah, thanks for taking the question. I know, Gianluca, you just kind of highlighted the underutilization costs, but I guess as we think about the model and you think about the recovery that you're seeing, I'm curious if we adjust for underutilization, it looks to me like you're guiding maybe a 70 basis point, again ex-underutilization gross margin expansion this quarter at the midpoint of the guidance. How would you characterize the company's ability to price up in this environment, especially looking at the results, it looks like your mass capacity dollar per terabyte was up about 5% sequentially. Where are you at in that journey and how much more do you think pricing could turn favorably for the company? And really what I'm getting at is the continued driver from pricing to gross margin.

In the last several quarters, we have successfully improved our pricing, and we are continuing to do so. This increase in gross margin that you are estimating for the June quarter is, of course, influenced by pricing. In the March quarter, we had a very strong mix for mass capacity, but as we move through the rest of the calendar year, other parts of the business will grow. Therefore, the mix may not be as favorable as it was in March, but pricing is rising, and our costs are consistently trending in the right direction. We are also ramping up new products, and overall, we are very pleased with our pricing actions and the current mix. We expect further improvements throughout the calendar year.

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

Yes, thank you so much. Dave, if I could just go back to the qualification, any color you can share on the differences between these two qualifications at your CSP and non-CSP customers? And is there a meaningful difference in the product itself between the CSP and non-CSP customer? And if I could for Gianluca, with this Broadcom deal that you also announced, how should we think about both the OpEx trajectory and would this impact your gross margins, so should we expect your gross margins to go down because of this slightly and then OpEx also to go down, or what dynamics should we expect? Thank you.

Thanks, Wamsi. To your first question, there's no significant difference in the hardware. The qualifications for cloud versus non-cloud, it's not usually that much different. There can be some software features depending on which cloud service provider you're talking about, that complicates the qualification and especially different customers, whether it's cloud or non-cloud, might be going through other types of architectural transitions at the time, so we have to make sure we get that right. But by and large, it's the same drive. I think that was your question.

Right, yes.

So on the financial impact for the transaction with Broadcom, the major difference will be in OpEx where we expect a decline of about $40 million for fiscal '25. Now, we have a very good collaboration with our partner, so we don't expect basically any other change from operations. So it's mainly a reduction in OpEx due to the transfer of asset and people to our partner.

Okay, got it. Thank you so much.

Thanks, Wamsi.

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

Yeah, hi, thanks for taking my question. I had a question for Dave or Gianluca. A two-part HAMR question. Dave, you mentioned you might ship a few hundred thousand units of HAMR this quarter, kind of curious how to think about the HAMR unit shipment in the second half of this year or exiting 2024, how many units do you think you can ship? And just as a follow-up to that is, you mentioned about the gross margin exceeding the range longer-term, I'm kind of curious, as HAMR drives become more mainstream, say, a couple of years from now, do you think your gross margin can be over 40%? Thank you.

We will continue to ship aggressively and go through the HAMR transition because we believe it offers better value to our customers. As we increase capacity over time, it will also allow us to reduce components in the supply chain, which will lower costs for these platforms. Currently, the market is interesting; six months ago, supply was ahead of demand, and now supply is lagging behind demand, partly due to lead times for the product. Balancing these factors is crucial in today's market, but we will push through the transition aggressively, as we believe it will improve our margins. While I won't provide specific numbers, customers are currently looking for any type of product we can manufacture, and we may shift our focus to products that are already qualified rather than our previous plans. I see this as a positive development because we now have demand that is benefiting our factories, and I am very optimistic about that. Just to emphasize, we will continue to drive these transitions aggressively.

On the gross margin trajectory, we said before, we expect to be at 30% or higher during this calendar year. And as you know, there is only a part of the ramp of HAMR. So for sure, when we move higher-volume of HAMR, we expect to be now in the high part of the range or even higher, we will see as a point in that point of the ramp. But, yes, even without HAMR we can be into the 30% to 33% range that we discussed as our target in the past.

Thank you.

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

Hi, good afternoon. Dave, I was wondering if there's any more color you can provide on your experience with talking to customers about build-to-order plans for, say, the next 12, 24 months. I mean, it sounds to me like you have accelerating demand on the cloud side, Legacy, and VIA sort of recovering on a seasonal type of basis, and then you have channel partners that are going to need inventory in order to help even things out. So how are you balancing all that? What is going to be different you think that we should consider if we're looking out over the next few quarters with how you're going to be doing business? Thanks.

That's a great question, Steven. It brings to mind the lessons we've learned from the recent downturn. We realized that the significant supply chain inertia we experienced can lead to challenges when demand unexpectedly drops. It's crucial for us to be more cautious moving forward; we can't allow our volume shipments to exceed our revenues. We need to manage our production effectively to avoid overbuilding and ensure we aren't flooding the market, especially when conditions are softer. Now that demand has slightly improved, as you've noted, we're optimistic about the trends we've seen in the past 90 days. We are currently discussing with customers which products to increase production for. Our main goal is to achieve predictability, and we plan to incentivize customers who provide us with reliable forecasts with better financial outcomes for themselves. These discussions are giving us good insight into what to expect in the upcoming three to four quarters, and I feel positive about that.

That's helpful. Thank you.

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

Thank you. I wanted to ask about the million HAMR units you guided for the first half of the year, which primarily involves 30 key drives. It seems like you will produce around 700,000 to 800,000 drives with other products beyond HAMR. I have two questions: first, you likely need to rework some of the HAMR work in progress, which might have a negative impact, but it appeared that HAMR would initially be dilutive. Does this balance out to a net positive effect on gross margin for the June quarter? Also, I apologize for interrupting.

There are two aspects to consider. One is the timing of the qualification completion, and the other is the total amount of material. We do have other sources for the specific component, so we don't need to separate the entire work in progress. Some parts of it are still active. The timing of qualification is the main issue here. We're not ready to provide a forecast for the latter half of the year, as much of that will depend on specific customer demand and when the remaining qualifications are completed. Once we get the material sorted out, there will be some rework or scrap, but we can manage that. All these products are compatible, so we have options for utilizing other materials as needed. We can also shift resources between different product families, which gives us a lot of flexibility.

And just a clarification, Tim, on the HAMR gross margin, we never said that HAMR was dilutive to gross margin. We said that HAMR gross margin will for sure improve in the second part of the ramp or the first part of the ramp as, of course, a little bit more cost, but we never said it was dilutive to our overall gross lines.

Right. Okay. Thank you, Gianluca.

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

Yeah, thank you. I wanted to get a better understanding of the demand impact of both the ramp of 28-terabyte SMR and the simultaneous ramp of 32-terabyte HAMR, which might be 34, 35-terabyte SMR. I'm curious whether you see that as perhaps somewhat catalystic to your early deployments of HAMR. If you could just discuss that, that would be great. Thank you.

Thank you, Karl. Different customers have varying requirements and feature sets, which affects how they utilize the drive, so I don't believe there's a simple one-to-one replacement. The positive aspect for us is that we share a lot of commonality, allowing us to respond fairly rapidly based on whether there's more demand for one product family or the other. We're collaborating with multiple clients on two different qualifications simultaneously, and from my perspective, those qualifications are progressing well. We're maintaining clear communication with our customers and, considering the improving demand environment, I believe this enhances their appreciation for our predictability as we showcase our offerings and our willingness to develop new solutions.

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

Good afternoon, everyone. I appreciate you taking my question. I have one regarding gross margin. Previously, when there have been similar demand increases and price hikes, along with supply and demand tightness, we usually see a noticeable increase in gross margin in a quarter or so. I'm curious if there's anything that might prevent this cycle from experiencing similar dynamics. Also, Gianluca, have there been any updates on the revenue to gross margin ratios you've shared before? Do those still apply, or do the current pricing dynamics alter that in any way? Thank you.

Thanks, Ananda. I'll let Gianluca address his segment, but at a high level, I want to emphasize that we will continue to push forward aggressively through product transitions because we believe that's the best way to add value for our customers and improve our margins. Some of the margin improvement we are experiencing right now is primarily due to our factories ramping up production. They are not completely full yet, but the trend is positive and encouraging.

Yeah, on the trajectory, especially of the gross margin, but with the business in general, every cycle is a bit different. We are saying today we see a good recovery from the cloud part of the business. Of course, it's not all the business increasing at the same way. So we still need to wait for other segments to start having the same kind of recovery before we can see a strong upcycle. But, no, we are very positive. We said earlier, we see that gross margin improving quarter-over-quarter and to be in the target range during this calendar year. I would say, every quarter, we have a little bit better pricing, little bit better cost. So the opportunity for us to achieve that target range at even lower level of revenue is for sure a reality.

Cool. That's super helpful. Thanks, guys.

The next question is from Mehdi Hosseini with SIG. Please go ahead.

I have a couple of follow-up questions. I thought you had sourced most of your components internally, so why are you relying on external vendors for HAMR, and how are you planning to transition between these vendors? Additionally, for Dave, what is your latest projection for exabyte growth as the cycle picks up? Thank you.

Thank you, Mehdi. For our critical components, we primarily handle them in-house; however, this particular mechanical piece is something we do not manufacture ourselves and instead source externally. It's quite common across all of our product lines. Gianluca, would you like to address the second part?

No, I was just thinking about the components, but there are many components that we source externally, actually now the Ads and media, of course, we produce internally. Those are the most critical components, but there are many other components that we get from external suppliers. And on that particular component, we have multiple sources, so we can switch from one to the other.

Yeah, on exabyte growth, it's a good question because we're coming out of negative territory, which is unprecedented in the industry. I expect to see expansion soon. While we might discuss preferences between 35% or 25%, we can settle at 25% for now, and in the near term, we may see more growth. It's still early in this demand cycle, but we're optimistic about what we're observing. Additionally, our ability to address this with new products that offer more exabytes may further drive expansion. The main priority is to reestablish financial predictability in our industry, which has faced significant challenges recently. As we recover, we need to ensure we're not underselling our products and proceed in a measured way. To achieve this, it’s crucial that we maintain tight control over supply.

Thank you.

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

Yeah, good afternoon. Thank you for taking the question. I know you talked about the qualification just being a three-month delay in qualifications elsewhere on track, but if things do push out a bit, how do you, I guess, expect to maybe impact your planned utilization elsewhere, your thoughts around pricing and mix, and what kind of impact could that have? I would think positively on gross margin in the back half, would love your thoughts there.

Thank you, C.J. The interesting thing is that as demand returns, we have much more flexibility than we did six months or a year ago. In this build-to-order process, we've essentially informed our customers about what we plan to build, and they have acknowledged the economics. As demand increases, we can engage in new discussions with them about which products qualify and which ones they want to expedite through qualification. This gives us numerous options. We have been concentrating on operating profit and free cash flow, and we're finally seeing double-digit growth in operating profit, with returns on capital also improving. All of this reinforces our strategy of managing the business for long-term predictability. The build-to-order approach is effective, and we plan to continue with it.

Thank you.

The next question is from Toshiya Hari with Goldman Sachs. Please go ahead.

Hi, thank you for the question. Dave, in your opening comments, you mentioned AI. I understand that you may not have complete insight into the factors driving customer demand, but based on your discussions with customers, how significant is the impact of AI on your business? I know it’s still in the early stages, but any thoughts you have would be appreciated. Additionally, I would like your perspective on your ability, as well as the broader ACD industry's ability, to compete with Flash in the realm of AI. From recent discussions, it seems investors are concerned that while hard disk drives are price competitive, factors such as read-write capability, space, and power consumption may make your current offerings less competitive. I would appreciate your insights on this. Thank you.

Thank you, Toshiya. AI is indeed a significant topic, and I understand it can be confusing for many due to the extensive marketing surrounding it. I believe that both cloud service providers and our enterprise OEM customers are utilizing a variety of applications, some of which are continuing to expand. Certain areas are currently experiencing transformative changes due to new computing capabilities. Generally speaking, there are applications related to cold storage, big data, and video that give us a lot of encouragement. We're already receiving purchase orders from cloud service providers that explicitly mention AI, which was not the case six months ago. This creativity within the application space excites me, and I see substantial opportunities ahead. Regarding our ability to adapt, we will certainly continue to focus on mass capacity. We're also making some progress on performance across our tiers. As for Flash, I usually don't share my views on it, but I don't have many negative comments to make. I believe it's an excellent technology and essential for executing applications. Some applications may not require mass capacity, but the notion that mass capacity conflicts with Flash is not accurate. That's not how data center architects view it, and it doesn't make economic sense. Furthermore, when considering factors like power and space, hard drives will remain highly competitive with the workloads they support. From my viewpoint, the expanding new application space is a positive development and should ultimately benefit many hardware providers over time. We have faced a challenging period recently, and we need to be vigilant with our supply to avoid another significant downturn like we just experienced. Thus, we must proceed cautiously.

Thank you.

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

Thank you for taking my question. I want to clarify the progress with your largest customer in HAMR. You mentioned replacing a subcomponent, and that multiple vendors are being qualified simultaneously. Typically, how long does it take for a customer to qualify a new product? Is that several weeks or several months? What gives you the confidence that you'll be able to qualify and ship these drives within the quarter? Thank you.

Yeah, so Tom, we already said that there's multiple sources for this, and so we segregate the parts that were affected and then we push the other ones on their merry way. We've already repopulated those test beds that are running well, so that's why we have confidence.

Okay. So in the future, you will just not use that supplier anymore or you would just rely more heavily on the others?

No, no, no, I wouldn't say it like that. I mean, we'll go work with everybody. Everybody has got a tough challenge. They have issues and we'll go work with them, yeah.

Helpful. Thank you.

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. As you heard today, Seagate is well-positioned to drive improved financial performance in a recovering demand environment through ongoing operating discipline, keen focus on supply-demand balance, which is a big deal, and ramping our latest CMR, SMR, and HAMR-based products. I'm confident in our product strategy. I think it's serving us well, and in our HAMR technology, which positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. I'd just close by thanking our stakeholders for their ongoing support. Thanks for joining us today, and we look forward to speaking with you during the quarter.

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