Good afternoon and welcome to the Seagate Technology Fiscal Second Quarter 2025 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 2. Please note this event is being recorded. I would now like to turn the conference over to Shaney 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 detailed supplemental information for our December 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 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, a 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 impact our future business results, please refer to the press release issued today and RSEC 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. site. 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 now hand the call over to you, Dave.

Thank you, Shaney, and hello everyone. Seagate closed out calendar 2024 on a strong note, driving 7% sequential revenue growth in the December quarter. Our non-GAAP gross margin expanded by more than 200 basis points, and non-GAAP earnings per share exceeded $2 for the first time in 12 quarters, underscoring our continued focus on profitability. Our performance was supported by increased demand across nearly all markets we serve, with the most significant growth in the cloud sector. This broad-based demand from global cloud customers led to an almost doubling of near-line product revenue in the December quarter on a year-on-year basis and close to 60% near-line revenue growth for the entire calendar year. We are experiencing strong momentum with our aerial density-driven roadmap, which positions us well to offer compelling storage solutions to our customers and also supports our expectation for significant profitable revenue growth for fiscal 2025 and beyond. We continue to advance our product roadmap and have achieved several key milestones related to our hammer-based mosaic platform in the December quarter. We completed qualification and started to ramp hammer-based products to our initial CSP customer. Earlier today, we also announced sampling of mosaic drives with capacities of up to 36 terabytes. Overall, Seagate is in an outstanding competitive and technology position in a strengthening demand environment. Prior to discussing the end market environment, I'll briefly address the production issue that we disclosed last month, which has led to supply constraints for the March quarter. Gianluca will provide details on our fiscal Q3 outlook. However, I can confirm that this issue has been resolved. We are able to meet our bill-to-order commitments to major customers, and we expect the revenue impact to be limited to the March quarter. Now turning to the mass capacity markets, cloud remains the primary demand driver. The surge in near-line product demand that I referenced earlier aligns with a nearly 50% increase in cloud capital investments made by our customers in 2024, with their CapEx expected to continue growing in calendar 2025. We believe hyperscale customers are continuing to manage their inventory levels well, while making infrastructure investments to support growing demand for traditional services, advertising, and e-commerce, as well as emerging Gen.AI applications. These applications will be prolific creators of data. And given that a substantial volume of the data will be stored on HDDs, we expect Gen AI to drive future mass capacity storage growth. This is particularly true of data-rich imagery and video content created by Gen AI models, which is projected to expand nearly 170 times from 2024 through 2028. Today, HDDs play a crucial role in housing the massive data sets required for training AI models, serving as central repositories when these data sets are not actively being processed by GPUs. These mass storage data links form the backbone of trustworthy AI by storing checkpoints or snapshots of AI model data sets, ensuring that data is both retained and available in the future for continuous model refinement. A recent survey of over 1,000 business leaders and AI decision makers underscores the critical importance of data retention and checkpoints in enhancing the quality of AI outcomes. These insights are not only applicable for the cloud, but also the edge, where the vast majority of data is generated. The enterprise markets fall under this edge umbrella. We expect enterprises to replicate and store more data locally at the edge as AI computing and inferencing moves closer to the source of data generation. VIA is another opportunity-rich market at the edge. For some time now, we've spoken about the increased adoption of AI analytics within the VIA markets, which helped form actionable insights from data for applications such as smart cities and smart factories. In the December quarter, average drive capacities for VIA products set a record reflective of increasing use of video analytics as well as longer data retention periods overall we believe mass capacity storage remains both an enabler and a beneficiary of these emerging data trends seagate is in a great position to address the resulting demand growth through our aerial density driven product roadmap as we've shared in the past we are maintaining a disciplined approach in planning our production capacity we will leverage technology transitions to support exabyte growth rather than adding new head and media unit capacity. Looking at our long-term roadmap, our mosaic-based technology provides Seagate with a highly capital-efficient means to satisfy growing exabyte demand, to deliver a strong TCO value proposition for our customers, and expand profitability over the long term for the company. Today, we have continued to ramp our 2428 terabyte PMR platform, which has rapidly become our top product platform in terms of both revenue and exabyte shipments. Three terabytes or higher, our Mosaic Hammer technology delivers leading capacities and is gaining momentum across our customer base. There are no multiple customers qualified on this platform across each of the mass capacity end markets. currently we are ramping volume to our lead csp customer while progressing on qualifications at additional cloud and hyperscale customers these qualifications will set the foundation for the next phase of our mosaic volume ramp starting in the second half of calendar 2025. we are confident that our mosaic hammer technology provides a strong and sustainable competitive advantage at scale for mass capacity storage and underpins a cost-efficient roadmap to build on those advantages. Consistent with feedback we've received from many cloud customers, AWS highlighted at their recent reInvent conference that adopting the highest capacity hard disk drives allows their storage system architecture to lower costs, conserve floor space, and reduce power consumption. Data center architects will continue to adopt both hard disk drive storage and compute-oriented memory technologies, such as NAND Flash, to support the breadth of their workloads. NAND is best suited for high-throughput, low-latency tasks, while hard disk drives remain the preferred storage solution for the bulk of data storage needed in the cloud. We do not see these dynamics changing over the foreseeable future due to several advantages that HTVs hold over NAND. HDDs offer customers at least six times lower cost per terabyte of storage capacity. They possess a significantly smaller embodied carbon footprint and provide manufacturing scale that is highly capital efficient. Wrapping up, Seagate is in position to deliver further improvements in revenue and profitability in fiscal 2025. Looking out further, we have a practice setup for Seagate. with our steadfast focus on supply discipline in a favorable demand environment, a leading technology roadmap, and the tailwind of AI's massive data storage requirements. I'll turn it over to John Luca now.

Thank you, Dave. Seagate's strong December quarter results were highlighted by 50% growth in revenue and a four-fold increase in non-gap operating income on a year-over-year basis. We delivered December quarter revenue of $2.33 billion, up 7% sequentially. We increased non-GAAP operating income 22% sequentially to $538 million, translating to non-GAAP operating margin of 23.1% of revenue. And our non-GAAP EPS was $2.03 at the high end of our guidance range, reflecting strong adoption of our high-capacity near-line rise, along with ongoing price adjustment and cost discipline. Within our hard disk drive business, revenue increased 8% to $2.2 billion, with volume shipment of 151 exabytes, up from 138 exabytes in the September quarter. Mass capacity revenue grew for the sixth consecutive quarter, reflecting continuous strength in airline cloud demand, along with anticipated improvement in the enterprise and OEM markets, and seasonal uplift from via customers. Mass capacity revenue and exabyte shipments both increased 9% sequentially, and total $1.9 billion and 140 exabytes, respectively. Starting this quarter, we are including Nearline Exabyte shift to VIA customers within our overall Nearline Exabyte reporting. Many VIA customers are adopting Nearline drives consistent with the shift toward more cloud-like solution that we had highlighted last quarter. Consequently, we believe this reporting change more accurately reflects how customers are utilizing these drives and aligns with industry reporting standards. With this change to all periods presented, Seagate total near-line shipments were 126 exabytes in the December quarter, up from 114 exabytes in the prior period. Our performance reflects strong demand for our 24 and 28 terabyte PMR products, particularly among cloud customers, as well as continued improvement in enterprise, marked by record high average drive capacity for a second consecutive quarter, extending the trend for a higher storage content per server unit. Sales of our legacy product totaled $175 million, up 2% sequentially, supported by higher seasonal demand in the consumer market. Finally, for our other business, which includes systems, SSD, and refurbished drives, revenue was $156 million, down slightly from last quarter, as lower SSD revenue was partially offset by improved system demand. Moving on to the rest of the income statement, non-GAV gross profit increased 14% sequentially in the December quarter to 825 million dollars. This increase reflects continued revenue growth of mass-capacity products, increasing mix of new high-capacity drives, ongoing price adjustment, and cost efficiencies. Our resulting non-GAAP gross margin expanded by 220 basis points to 35.5% at the company level, marking our seventh consecutive quarter or sequential gross margin improvement. Non-GAAP gross margin for the HDD business remains significantly higher than the corporate average. Non-GAAP operating expenses totaled $287 million consistent with our plans and up 2% quarter over quarter. Other income and expense were stable at $86 million and are expected to be relatively flat in the March quarter. Adjusted EBITDA increased 19% sequentially in the December quarter to $591 million. Non-GAAP net income increased to $433 million, resulting in non-GAAP EPS of $2.03 per share, based on a diluted share count of approximately 213 million shares. Moving on to cash flow and the balance sheet, we continue to focus on driving free cash flow generation, which increased to $150 million in the December quarter, compared with $27 million in the prior period. We continue to expect free cash flow generation to improve sequentially through the rest of the fiscal year. Capital expenditures for the quarter were at $71 million. For fiscal 25, we will maintain capital discipline and continue to expect capex to be at the low end of the long-term target range of 4 to 6 percent of revenue. We return $148 million to shareholders to the quarterly dividend and close the December quarter with $2.7 billion in available liquidity, including our undrawn revolving credit facility. Inventory increased likely to $1.5 billion, primarily to support the ramp of new high-capacity products. Our debt balance was $5.7 billion at the end of December quarter. Consistent with our intent to reduce debt, we retired approximately $479 million of nodes as they matured in early January. As a result, we have no debt obligation until late fiscal 2027. We exited the December quarter with a net leverage ratio of 2.5 times and expect to see further reduction in the coming quarters. Turning now to our March quarter outlook, we expect ongoing demand strength from cloud customers to partially offset seasonal decline in the VIA and legacy markets, along with the supply constraints that we have already discussed. We still expect to meet our build-to-order commitments, but our ability to respond to in-quarter volume upside opportunities will be limited. Consequently, embedded in our guidance is approximately $200 million of revenue impact from these supply constraints. With value of the context, March quarter revenue is expected to be in a range of $2.1 billion plus or minus $150 million. At the midpoint, this reflects more than 25% year-over-year improvement. Despite supply limitation in the March quarter, ongoing demand for our latest generation near-line products including mosaic offers the potential for sequential improvement in gross margin performance we expect non-GAAP operating expenses to be in the range of 290 million dollars and at the midpoint of our revenue guidance we expect non-GAAP operating margin to remain in low 20 percentage range. We expect non-GAAP EPS to be $1.70 plus or minus 20 cents based on a diluted share count of approximately 214 million shares and non-GAAP tax expense of roughly $20 million. In summary, Seagate's strong December quarter financial performance underscores our continued focus on enhancing profitability, optimizing cash generation, and driving growth. As we focus on capturing the significant opportunities ahead, we will remain diligent in supporting a healthy supply and demand environment, which we believe positions Seagate to deliver further improvements in revenue and enhance profitability this fiscal year and beyond.

I will now turn the call back to Dave for final comments. thanks charluka as data value continues to increase so too does the strategic relevance of mass capacity storage particularly in the era of ai against this backdrop seagate is executing a strong product and technology roadmap to deliver a compelling value proposition for our customers in short we are responding with technology to store the world's data we've crossed an exciting inflection point with our mosaic hammer platform now ramping volume to address customer demand at exabyte scale the mosaic platform provides a capital efficient solution for seagate to sustain aerial density leadership and effectively address the growing demand for mass storage this takes the way for seagate to offer significant economic advantages both to our customers and the company these achievements are only possible through the hard work of seagate's global team i extend my thanks to them as well as recognize our suppliers customers, and shareholders for their ongoing support. Operator, let's now open up the call 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. In the interest of time, we ask that you limit yourself to one question. If you have further questions, you may re-enter the queue. Once again, that was star then one to ask a question. Our first question is from Eric Woodring with Morgan Stanley. Please go ahead.

Hey guys, thanks so much for taking my question. You know, Dave, maybe just to start, if I look to past June quarters, I know we're getting ahead of ourselves here, but we've seen sequential growth historically. And in light of your positive demand comments and the fact that March quarter supply issues would be transitory, you know, how do you think about that incremental 200 million of shortfall in the March quarter? What exactly happens there? Does it get pushed to June? Does it get pushed to multiple quarters in the future? can you just help us understand kind of the magnitude and timing of when you expect to claw that back? Thanks so much.

Yeah, thanks, Eric. As you know, we've tried really hard to get predictable in the last couple of years, especially with the downturn. And so as we come out of it, we've really valued that predictability. This temporary issue that we're dealing with, limited to this quarter only, I think as we look out further and further, especially through some of the product transitions that are coming, we have confidence in the predictability. And so, I think Exobites are going to continue to grow. The demand is going to continue to grow. We're confident in that. And we'll get through those product transitions as well, which allows us to grow our margin profile as well. So, I do think this is a very temporary issue.

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

Yes, thank you. I just wanted to clarify the comment about the transitory nature of this $200 million. So if it is transitory, should we think that the true baseline for March was $2.3 billion and then June should be sequentially up from that? That's just a clarification, if you could clarify that. And my main question is really around the fact that you've seen six quarters of really strong near-line and mass capacity exabyte shipment increases. Historically, these have been one-and-a-half to two-year cycles, and then there's a period of a pause. Can you perhaps maybe, Dave, share your view on where we are in the cycle and anything that you see that could cause the cycle to turn in 2025? Thank you so much.

Yeah, Wamsi, I think we're still pretty early in calling this a cycle because the overbuild at the start of the pandemic was probably substantial, and then the last two years, the exabyte shipments has been really low, so it's a very profound cycle compared to those previous ones that we had seen before. That said, the build order discipline that we have is giving us good predictability, and people continue to ask for, with that predictability, more certainty of the build outs that they're doing, the data centers that they've built need population, the refreshes refreshes that they're doing of old gear, they'll wholesale replace entire data centers to uplift their capacity. I think the whole industry and supply chain is getting more predictable and I'm quite happy about that. So that gives us confidence through this calendar year. Relative to, kind of like Eric's question, same one you asked, relative to this issue that we have this quarter, it's really hard to tell in that predictable behavior that we're doing for, say, a year in a build-to-order or visibility that's even going beyond a year, whether or not this quarter effect is a pull-in or is a push-out, that's really hard. But I'm confident in the financial expectations that we have, and I'm also confident in these product transitions that we have, that that's building value for our customers and we're going to be able to execute them. So that's how I think about it, John.

Lucas, do you want to add something? Yeah, no, related to the part of the question on the impact to the March quarter, no, the short answer is yes. We could have been higher. No demand is there. Unfortunately, for the short term, we don't have the volume to satisfy the demand, so we could have, of course, achieve a higher level of revenue. But as Dave said, we see further improvement to the calendar year, so this is not going to impact our overall results.

The next question, excuse me, the next question is from Krish Sankar with TD Catwin. Please go ahead.

Yeah, thanks for doing my question. John, look, when I look at your guidance, it seems like your March quarter gross margin is about 36 percent, give or take. And you said AMR is obviously going to be, you know, accretive in numbers.

And both you and Dave seem pretty optimistic on near-line for the rest of the year. so is it great as you as the near line grows the gross margin should improve quarter over quarter to the rest of calendar 25 off of this 36 percent baseline in march thank you yeah we see good opportunity to continue the trend that started like six quarters ago um to improve our gross margin sequentially parties mix of course now moving more and more into the high capacity drive give us opportunity to improve gross margin and of course there is always our strategy in terms of stable consistent price increase uh quarter after quarter cost efficiency hammer will help us especially in the second part of the calendar year when we can rent much higher volume so no right now we have uh we are very confident that our profitability will continue to improve. Thank you.

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

Thanks for taking my question. You know, I guess, Dave, I was hoping you just talk a little bit about, you know, there's always this fear when you hear about HCD companies adding capacity. What does that really mean for the industry? So, can you just talk about, you know, are you really adding net new capacity? You're trying to get back to some baseline level. And what do you think sort of Seagate's total exabyte capacity could be once these additions Let me just touch on that part. And then maybe along that theme, I'm somewhat surprised that your gross margins are expected to go up in March despite revenues coming down and despite the capacity addition. So just talk about what's going well or what's offsetting what I think our headwinds sequentially in March quarter that's enabling gross margins to expand. Thank you.

Thanks, Amit. yeah yeah if it if it helps if you think back three quarters or four quarters ago when things were uh when demand was a lot lower we were on older product generations and we had buffers of those product generations because demand's picked up those have blown through largely and then we had this issue this production issue on some of the new product generations but it's really the answer your question is all all about mix so as we mix to higher and higher capacity points, we believe that that's a compelling value proposition for our customers. We also believe that we're giving predictable economics for them and for ourselves as well, and that's what's building the margin structure in.

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

Hi, thanks. I just wanted to ask about this $200 million and the effect into June again because I'm not sure I understand what the message is. I think, Dave, in the remarks, you said that the impact will be completely limited to the march quarter so it sounds like you think that june you get the entire 200 back but you seem like you're not really uh willing to clarify that so can you clarify exactly what you meant by the uh the entirety of the impact is being felt in march yeah i remember this is the thanks tim this is a uh supply issue not a demand issue so So from our perspective, we're, you know, communicating this, and we started, you know, after the conference in December there, we started communicating to the customers exactly what was going on.

We can maintain all the build-to-order commitments that we have this quarter. Next quarter is next quarter. We're recovering from the issue as quickly as we can. But, again, it's not a demand compression. It's only our ability to hit the supply. John, look, did you want to add something?

So, Tim, basically, as we explained in December, we did not start enough material in a certain period of time because we didn't put back the equipment that were necessary to produce that material. So we don't have that level of supply that could have been necessary to match demand in the March quarter. So that $100 million is not coming back. It's just material we were not able to start. And so we missed that opportunity in the March quarter. And then we go back to June with the right level of supply that will match the June demand. But, of course, the one that is in March is probably going away.

And as we discussed in December, this is yet another reason you see the long lead times that we have in some of these wafer equipment, which is why we need the build-to-order predictability for our customers and for ourselves. you know this problem started manifesting itself late summer and then we realized that we had it in late November and you know but and it's still flowing through the system we're going to try our best to recover as much as we can but we know that and it's up against the backdrop of a very steep ramp so it's not like a hole that goes away it's a ramp that we're on that's very steep it's just you know there there is an impact this quarter as these parts don't flow through that we wanted to at the level of it, and then we've fixed the problem now, so we're convinced that we can get back and satisfy demand next quarter and beyond.

The next question is from Asia Merchant with Citi. Please go ahead.

Great. Thank you for taking my question. You sound very confident about a lot more upside to gross margins, especially as hammer ramps here and you're shifting your mix to even these higher capacity drives. Maybe if you can shed some light on what do you think about the appropriate margin for C-Date as you go forward, given you're executing well above your target range at this point? Thank you.

Yeah, I think that depends largely on the demand picture. We think the demand picture is strengthening, and we think we have a good portfolio against it. People will buy the new drives, higher and higher capacities, because they're going to run these in data centers for a long time and they see a great uh value proposition for those and to the extent that we can be more predictable with these built order uh negotiations then we know what we're building anyway so we can go out and uh you know have those negotiations and say we'll build it for you if you know we all agree to this and so i think that's served the industry really well Yeah, and that target range that you are referring to, we gave that target and we clearly said this is not including HEMR.

So, of course, in future, we've got already expecting a higher profitability and we will ramp HEMR in not just two or three quarters from now. So we will discuss maybe more at our analyst day in the future what will be our next model. But I will say I will not focus on that old gross margin range that we were discussing in the past.

Yeah, one of the things I'd say about margins, gross margins and operating margins, is that even at the revenue levels that we're at right now, we have to continue to fund the R&D in order to keep driving the roadmap forward, four terabytes, five terabytes. We have to fund CapEx, so on and so forth. And from my perspective, those things provide such a compelling value proposition to our end customers. They want us to as well. So we're going to need the right combination of margin and revenue to be able to continue to drive the roadmap for the end user value propositions. I think everyone's kind of understood that as even though these undulations in supply and demand that we went through in the pandemic were so painful, but I think we're starting to come out of it and people understand the financial impacts of those a lot more and allows us to be a lot more predictable.

Next question is from Stephen Fox with Fox Advisors. Please go ahead.

Hey, good afternoon, everyone. Dave, I was just wondering, as we think about the longer-term impact of transitioning to Hammer, you move through the initial ramps of new technology. Does the customer mix or how you ramp become faster, slower, more broad? like I'm just you mentioned like going from one cloud guy to having a second and third but as you go towards 36 terabytes what changes in how how this technology hits the market I'd say our first ramp was tougher than we expected even right up against it we had great results out of the labs and the first experiments and then we ran into some problems in productization we don't exactly see any of those problems in future productizations.

So it's just the strain on all the other subsystems, not just the recording subsystem, but all the other subsystems as we go from 30 terabytes to 40 terabytes to 50 terabytes is still great. But, you know, we have confidence and, you know, we've told people that based on what we see right now, that's why the announcement of industry gets paid for as aerial density. That's helpful. Thank you.

The next question is from thomas o'malley with barclays please go ahead hey guys thanks for taking my question i just want to get a better picture for your mix of business i think you like to talk in exabytes that are moving towards hammer um you guys had originally talked about a unit forecast you adjusted that over time but maybe as we look out into the calendar year 25 you could talk about how much of your business in terms of mixes hammer today and maybe how much you think exiting the year obviously you had enough to impact gross margins in the near term so maybe if you could size that for us, that'd be really helpful.

Hey, thanks, Tom. We did talk about the success of the 2428 platform, so that's growing in very, very fast ramp, very high volume. There's a lot of common parts with that in Hammer, so we can ramp Hammer quickly as well, and we're focused on doing that, getting through the qualifications and ramping. Last year, we were pushing through these transitions as hard as we could just to inject some margin back in the in the business this year the demand picture is quite different and the response of people and where they're called where they are in qualifications is very different so we're going to be a little bit more careful remember hammer still accreted to margins and we still want to drive it and we still have parts that are coming um but we'll just be a little bit more cautious and make sure we work with the customers on exactly what they need you know i i think as we get to higher and higher capacity points is such a good compelling value proposition for our end customers that they're pulling very hard. So maybe even to some of the earlier questions, I do think that there's going to be an acceleration based on the fact that we are already up the curve productization wise. We have all those learnings so the other person doesn't have to learn those same lessons and there's this compelling value proposition.

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

Yeah, thanks for taking the question. I'm going to stick with the gross margin narrative here a little bit. Gianluca, if I try and make some adjustments for your non-HDD gross margin, I guess what I'd be left to think about is that your hard disk drive gross margins probably in the 37% plus or minus range. I guess the question is, is that would you say even today as you're you're initially ramping hammer that your hammer gross margin is accretive to the hard disk drive uh only gross margin and is there anything structurally that keeps you from thinking hey gross margin could have a four in front of it just structurally and you know as we look forward and pricing continues to progress etc etc just curious on what your thoughts are yeah erin thanks i i i would say that and you know our history really well i'm pretty happy where we are right now.

So as we're looking out into the future, we're signing up for business that's, you know, good business and higher capacity points through these transitions. So that's what allows me to build confidence. Is there a theoretical maximum? You know, I think a lot of that depends on the demand picture that ultimately comes. And, you know, we'll keep you informed of that as time goes on. But I think we've done a really good job getting the margin structure back into the industry, or even in some cases to all-time highs. The revenue is still not back, and the output is still not back, frankly. I mean, we could do some more output. But we want to do it in a very predictable way and defend what we've had to rebuild. We still have some supply chain issues that we have to take care of as well, and that's going to be going on for the next few quarters. So we're kind of in that transitionary period to, you know, future model versus continue to just execute as hard as we can to rebuild. And we're quite happy with the progress.

And Eric, you know, part of the confidence we have in improving gross margin, even in the mass quarter where, as you know, the revenue is lower, is coming from the increased volume of HEMR. So, in general, the mix moving to higher capacity drive has always helped us to improve margins, and EMER will increase a lot the capacity per unit, so it is a good contributor to the improved gross margin. Thank you.

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

Yes, thank you. Thank you. As we think about the sustainability of the cycle, are your nearline and hyperscale customers giving you more visibility today, which I think was six months or longer last quarter, since you've experienced these production capacity constraints? And for my clarification question, does the production capacity address only hammer drives, or were these tools used for conventional nearline drives as well? Thank you.

Thanks, Carl. Yeah, the second question first, the production capacity issue affected non-hammer drives, not the hammer drives. So it was the ramp of the 2428. Think of it this way. We've actually qualified that back in even in some old programs, but it's the non-hammer product being affected. So stepping out a little bit more in the future, I think that the hammer transition, just because we get the – John Luka was talking about – higher capacity points, and then we can also refresh lower capacity points as well. So that's what helps build margin into this entire portfolio, not just the highest capacity.

Yes, thank you.

I was hoping you could talk about the visibility you're receiving from hyperscale customers today since those capacity constraints. Thanks.

Oh, yeah. So, the built-to-order models that we're coming up with have given us good visibility. Maybe as we get through the supply constraint issue that we have this quarter, we said we're protecting all the built-to-order commitments that we have. But so on an account-by-account-by-account basis, then, you know, I think it's almost that particular issue is almost irrelevant for them, right? So we're talking about Q4 is Q4, Q3 is Q3, Q1 next year is Q1 next year. So, you know, they're helping us with that visibility, and this temporary issue is irrelevant in that BTO.

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

Yeah, hi, Bear and Jen. Just looking at the Hammer, you look at your 150 x-byte quarter ship and saw the 126 x-byte near line. Do you expect Hammer to get to like 10 to 20% of that mix by like first half calendar, let's say 26?

Well, we certainly expect to make it, to ramp it really hard, yes. We're not going to say a specific number. We're in a very different space than we were. We expect it to ramp very hard. that the customers are pulling out of heart because of you know the value proposition that they see so um it has to be a creative as well we've said that uh for for some borders now uh but we're confident that it is so um yeah yeah we're gonna we're gonna drive it hard and drive the the volumes very soon we will have a we will have improvement every quarter of course that we'll have to follow the qualifications with the different customers.

And as we said, we expect multiple qualifications between December last year and mid of calendar 25. So I know we still expect the majority of the ramp to happen in the second part of calendar 25. And that will be another improvement for our business and our performance in just a few quarters from now.

Got it. Thanks. And then in terms of capacity, as you ramp hammer, do you expect you need to add more capacity in the back half, or how do you see the available capacity and the ramp of hammer with that? Thanks.

No, most of the tools, almost all the tools that we're using for our non-hammer products are convertible to the hammer products. So there's really no added tools that we need to bring on. we planned this transition for quite some time um and we we've said in the prepared remarks we would not add head and media unit capacity the capacity ads that we get are by virtue of driving the aerial density so we can go to customers and say hey instead of shipping a 24 terabyte drive i'll ship you a 32 terabyte drive hope and those that gives us more exit by capacity and and you know, more TCO proposition for them, benefits to their, for their value and more.

Thank you.

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

Good afternoon. Thank you for taking the question. I guess first question clarification on the 200 million for March, is that completely traded away? Or are you expecting partial part of that business in the June quarter? And then for my main question, in your prepared remarks, you talked about increasing focus on imagery and video as part of generative AI. And I'm curious if you've done any work in terms of sizing, you know, what that might mean.

It looks like Meta is really the big driver today, but curious if you've sized at all and how you think about the incremental demand to your overall business thank you yeah so um so the 200 billion i think we answered this a little bit earlier cj so um the way i think about it is the build the orders are all all those commitments are being made so if there was this stuff on top of it does it transact this quarter next quarter i mean we'll get we'll get into that but as far as the major accounts that are participating in build order it's really not not an impact um the you know so it's a supply hole remember it's not a demand hole so that's the demand is um when we talk about video and imaging we're usually talking about what's going on at the edge smart cities smart factories um the the data that's actually being created at the edge and finally making it to the cloud but there are video applications as well that are raging in the cloud. I mean, some of the use of video on some of the major media properties and things, the videos themselves are growing in length, in number, in the long tail is long documentaries and things. The creation tools with AI are coming that allows people to create video, be more inventive on that. but so I think the creative professionals that are out there creating content. So, Russ, and yes, you know, some of the first movers that we saw in this resurgence is from Ananda Barua with Loop Capital.

Please go ahead.

Yeah, thanks, guys, for taking the question. So maybe I'd love to hear maybe from both of you guys. This is just sort of hammered transition question. So I might have missed this, but John Luca, are you communicating that the hammer margin, I guess at what point are the hammer margins accretive? And then, Dave, I guess for you and that question, I was going to ask how to think about the pacing of volume of Hammer given the richness of the legacy tech margins right now. And I guess I was thinking you might be more selective with rolling them out, given the margins. But you also just made a comment about driving Hammer into the market with some energy. So I guess just sort of, those are really the questions. I appreciate it. Thanks.

And yes, no, AMR is high capacity drives and that is generating a higher level of gross margin than of course other drives. As I said before, it will be more visible later during the calendar year when we can ramp more volume and we would like to have more volume today, but we need to go through certain number of calls before we can really ramp up in a much higher quantity. But as all the high-capacity drives, we expect a very good profitability from this product and this technology.

Right, and if this helps, you go back a year ago when our gross margins were considerably lower. Of course, we were saying hammer is accretive to the gross margin. Now the gross margins are considerably higher on some of the legacy products like you talked about some of the 2428 pmr platform pmr smr platforms um hammer is still accretive and the more we can drive through these transitions that we're talking about not only do we increase the the top line capacity if you will which you know provides such a compelling value proposition that we can actually get paid for it But also, we can start to refresh some of the lower platform drives, lower components inside, and therefore you get margin uplift that way. So we're still driving the hammer transition, if that helps.

I got it. No, that's great. So you're going to ship as much hammer as you can, and as quickly as you can, it's going to be accretive, all of them.

Yeah, and we just have to get the qualifications done, and then we'll make the right decision based on the specifics of what the customers want. with it.

Thank you. Appreciate it.

The next question is a follow-up from Wamsi Mohan with Bank of America. Please go ahead.

Yes, thanks for taking the follow-up. I guess a quick question on Hammer. The sampling of the 36 terabyte drives that you announced, is that with the same leading CSP that you qualified, the earlier Hammer drives? And any color that you could share on Hammer units originally your expectation was shipping a million in the first half of of last year uh clearly now with this ramp being much more significantly underway would you say that um you know it should be orders of magnitude higher than that uh in the second half of this year thank you so much yeah thanks so uh it's much more broad based we're shipping sample units to not to more than one person let me say it that way you know not not to just one uh most comments specifically on any one customer of course but um and then relative to the the size of the ramp yeah

we've got customers that are latched pretty well right now on the 24 28 product and you know we talked about factories being full with the ramp being really high we will supplant some of that product with hammer product. We'll do it in a measured way, you know, based on when the qualifications complete, what those customers exactly want. Some of them, yeah, you always have to keep in mind, they have to get their systems ready, you know, some of these, some of the transitions that their management features, they'll say, I'll do that on the next generation product. So, you know, there's a lot of, it's not as easy as us just...

The next question is a follow-up from Krish Sankar with TD Cowan. Please go ahead.

Hi, thanks for doing my follow-up. John, look, a quick question of the 126 exabyte near line we shipped in December. How much went to surveillance? You started to do a comparison because you did 109 in September, but that is all your traditional near line definition. So I'm just trying to figure it out to 126. How much is surveillance versus traditional near line?

In general, in different port is about four or five exabytes. Thank you.

And our supplemental will show, uh, the history for the last five quarters so that you have, um, like for like over the prior year period.

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

Thanks everyone. I wish everyone a happy Happy Lunar New Year. Really appreciate all the efforts of our employees and our suppliers in helping the recovery which is still ongoing and looking forward to talking to everyone this quarter or next quarter's call. Take care.

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