Seagate Technology Holdings plc (STX) Q2 2026 Earnings Call Transcript

Welcome to the Seagate Technology Fiscal Second Quarter 2026 Conference Call. All participants will be in a 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 a touch-tone phone. 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 Shani Hudson, Senior Vice President, Investor Relations. Please go ahead.

Thank you, and hello, everyone. Welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our 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 on our Form 8 . 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 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. They 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 these 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 turn the call over to you, Dave.

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

Thank you, Dave. Seagate delivered another quarter of strong year-over-year revenue growth and set new record profitability matrix in the December quarter, underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in eight years. December quarter revenue came in at $2.83 billion, up 7% sequentially, and up 22% year-over-year. We achieved non-GAAP gross margin of 42.2%, up 210 basis points sequentially, and we expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. percent. Our resulting non-GAAP EPS was $3.11, up 19 percent quarter over quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology roadmap to support demand growth. To the end, we shift 190 exabyte in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across the enterprise OEM markets. We shift 165 exabytes in the data center market, up 4% sequentially and 31% year-on-year. Data center revenue grew at roughly the same pace, totaling $2.2 billion for the quarter, up 5% sequentially and 28% year-on-year. Against this strong demand backdrop, both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud nearline capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with the ramp of Hammer-based Mosaic products. As Dave highlighted, Mosaic drives are running very well in production environment and meeting all performance, reliability, and integration expectations. In the enterprise OEM market, we are benefiting from slight improvement in traditional server units along with increasing demand for storage servers, driven in large part by the adoption of AI applications and need to store data at the enterprise edge. The edge IoT market made up the remaining 21 percent of revenue at $601 million, supported by anticipated seasonal improvement for consumer products and the via client market. We project the broader via market to grow over time, with the largest growth contribution coming from beyond airline products that are captured as part of our data center and market moving on to the rest of the income statement non-gap gross profit increased to 1.2 billion dollars up to 13 percent quarter over quarter and 44 percent compared with the prior year period significantly outpacing revenue growth non-gap gross margin expanded to 42.2 percent in the December quarter, up from 40.1% in the prior period. This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high-capacity products, which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non-GAAP operating expenses were $290 million, dollars relatively flat quarter over quarter and in line with our expectations operating expense as a percent of our revenue declined to 10.3 percent rapidly trending towards our long-term target of 10 percent the combination of strong top-line growth and significant financial leverage drove an 18 percent sequential improvement in non-GAAP operating profit to 901 million dollars almost 32% of revenue. Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income and expenses to remain relatively flat in the March quarter. We grew a non-GAAP net income to $702 million with corresponding non-GAAP EPS of $3.11 per share based on tax expenses of $129 million and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet, we invested $116 million in capital expenditures for the December quarter for roughly 4% of revenue. We are maintaining capital discipline while we continue to transition and ramp HEMER technology. To support these objectives, we anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4 to 6% of revenue. Pre-cash flow generation was strong at $607 million dollars. up 42% from the prior quarter. Looking ahead, we expect pre-cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiencies, and capital discipline. These factors position us well for durable, long-term cash flow generation. Cash and cash equivalent total just over $1 billion at the end of December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility. During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from these notes and optimize cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1 times, based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter over quarter, and up 63% year on year. We expect the net leverage ratio will trend lower as profitability and cash generation increase, while we continue to evaluate opportunities to further reduce debt. Turning now to the March quarter outlook, the demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March 4th revenue to be in a range of $2.9 billion plus or minus $100 million, which represents a 34% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to be approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to approach the mid-30% range. Non-GAAP EPS is expected to be $3.40, plus or minus 20 cents, based on a tax rate of about 16% and non-GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible modes of approximately 7.6 million shares. We get strong December quarter performance and March quarter guidance underscore our continued focus on driving growth, enhancing profitability, and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders over the long term. Operator, let's open the call up for questions.

Thank you. 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 question queue. Once again, that was star, then one, to ask a question. At this time, you'll pause momentarily to assemble our roster. And the first question today will come from CJ Mews with Cantor Fitzgerald. Please go ahead.

Yeah, good afternoon. Thank you for taking the question. You know, given the supply-demand dynamics, you're obviously in the catbird seat and wanted to really try to get some more detail on gross margins going forward. Your philosophy historically has been to share the gains, you know, both your customers and yourselves. But at the same time, you know, given this tight environment, you are raising like-for-like pricing. So curious, you know, is there a framework to think about in terms of the incremental gross margins that we should model from here? And then I guess maybe bigger picture, as you think about overall average pricing per exabyte, you know, We've gone from kind of down double digits to high single digits, and I think we just exited the quarter down 4% year on year. Do you see a world where pricing could flat or even move positive year over year? Thanks so much.

Yeah, thanks, E.J. I'll let John Luka chime in here as well, but the pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into 27 and 28, we look at how much capacity we're having, we're bringing online by virtue of the fact that we're making all these aggressive product transitions, we'll bring more exabytes to bear, and then, you know, people go out there and renegotiate for those. I think flat to slightly up is certainly possible, and that's the way we're really managing it. As we talk to our customers, the value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong.

Hey, PJ. So on the gross margin, we are executing very well. We're executing a little bit better than what we discussed at our investor day where we presented a model. with a 50% incremental margin above a $2.6 billion of revenue. We have done better every quarter. Of course, it is our objective to continue to optimize what we produce, what we sell, and finance the profitability that we can get from the product. So the model covers a longer period of time, about two, three years.

Not two or three quarters, but I'm positive we are continuing to progress in the right direction thank you thanks the next question will come from wamsi mohan with bank of america please go ahead uh yes thank you i have a similar uh type of question i guess the gross margins in the guide and the incremental quarter-on-quarter gross margins in the guide are very strong can you maybe help bridge the drivers between mix and prize obviously you've got you you know, better mix of data center revenue next, next quarter. But just wondering if you can dimensionalize that and the opportunity for pricing, Dave, you just said sort of, you know, flat to up as possible. But as we think about the pricing that might be getting embedded within these LTAs and sort of beyond 26, why, why can't that be a lot higher just given, you know, the tightness in the supply demand environment?

Thank you. yeah i think this gets into how persistent is is the demand going to be wamsi you know we've talked about two or three years from now the one behavior change that i really like in the last year is that people are starting to say if i can't get it now i'll plan next year better and the following year better so we're having great dialogues on that front um you know of course uh And supply has risen quite a bit in the last year's supply of exabytes from the industry. The industry has reacted pretty well, but I think demand is still pretty strong. And my perspective on this is I think demand will stay strong for quite some time. So in that kind of world, we're having great discussions with customers further out in time. And the biggest part that helps us in our planning is through these product transitions. They know that's how they get more exabytes.

Yeah, in 1C, we are saying in the script, David, for the rest of the calendar year, we expect revenue and profitability to continue to improve sequentially every quarter. So we are not implying in any way that this trend is changing. It's actually now getting better somehow.

Thank you. The next question will come from Eric Woodring with Morgan Stanley.

Please go ahead. great good afternoon guys thank you for taking my question and uh and congrats on these results um incredible um you know david your analyst day last year you kind of pointed to a mid 20 um percent exabyte growth kager and i'm just wondering where you think that that supply growth can land you know this calendar year and as you get closer to that hammer crossover point later this year like does that pace of exabyte growth accelerate and i'm just asking this because demand is clearly outpacing supply so can you maybe just help us try to better understand the shape of your exabyte supply growth um because obviously it'll dictate kind of exabyte um

shipments for the year um thank you very much yeah thanks eric so uh we are planning to transition to four terabytes of platter and you know fairly aggressively but i think what people have to keep in mind is that we we're fairly tight all throughout manufacturing uh so we have products that are in the pipeline already that are committed to customers and so on. We don't just move very quickly to three or four terabytes of platter as things come. And it's a good problem to have, actually. You know, we're running manufacturing quite, quite tight right now. So I think it'll be a fairly prescriptive ramp, to your point. It won't be as fast as maybe we've done some ramps in the past, but it'll be very profitable, and that's the way we look at it. But as we go further out in time, you know, I'm very optimistic that the four-carabyte per platter is a very strong product. It'll start to replace some of the other, you know, legacy products, I'll say, that way, because it has so much better value proposition in a lot of those markets. And then when that happens, then we see more opportunity.

Thank you guys, Edna. Best of luck.

The next question will come from Ashia Merchant with Citi. Please go ahead.

Great, thank you for taking my questions and great results here. Just a couple that are related to the prior question. You know, you guys get some projections on hammer, not just for fiscal year 26, but even into fiscal 27. So if you could talk about, you know, upside to achieving those targets for the hammer rollout. And related to that, how we should think about the blended cost reductions, you know, pretty impressive, again, margins here and guiding for improved profitability. So if you could talk to us a little bit about the cost reductions going forward, especially as you ramp Hammer here with the Mosaic 4, that would be great.

Yes, Asiya. So I would say, first of all, we are very happy with the transition to Hammer. We qualified the last big cloud service provider in the U.S., and we have qualified six out of eight of the top cloud service providers. So the transition from PMR technology to ML technology is progressing very well. And we are qualifying the new product, the 4 terabytes per disk, so 40 terabytes per drive. Of course, this will help with the increase in exabyte in terms of mix. We gave a good indication, I think, at our investor day, and we want to be aligned to that. And the cost will be favorably impacted, especially when we start ramping high volume of the 40 terabyte drive. Of course, that will drive a fairly important reduction in cost per terabyte compared to the current hammer. And, of course, it will be a good contributor to further increase our gross margin.

The next question will come from Carl Ackerman with BNP Paribas. Please go ahead.

Thank you, John, Witt, and Dave. I was hoping you could clarify what portion of your LTAs for overall near-line HDD capacity has fixed or multi-quarter pricing agreements. I ask because as these LTAs roll off throughout 2026, any new agreements will be locked in at higher values, reflective of not only the million use cases, but also widening price per terabyte gap between enterprise hard drives and HEDs.

And, Carl, the second part of your question was a little fuzzy, so we captured the first part, but might ask you for clarity on that second.

Sure. Yes, I'll just repeat. if I could. As the LTAs roll off throughout 2026, I would imagine those new LTAs will be priced at perhaps a higher value or higher order value, particularly given the widening gap between hard draws and SSDs. So, we'd comment on the mix of LTAs and how you think that progresses throughout 2026 would be great. Thank you.

Yeah, thanks, Carl. So, as we roll off, say, for example somebody might have been qualified on a 2.4 terabyte per platter product or something and then they might be qualifying a 3.2 or even a 4 terabyte per platter as we roll forward so you know we change uh based on the demand that we see we change uh and our available supply we change the the pricing dynamic there i think that's one of the biggest things you're you're pointing out. I'll say that 26 is fairly booked. We talked about that in the call. To the extent that we can out-execute our plan, it'll be marginal like you saw last quarter. We get the qualifications done a little faster. We ship a few more drives. That's how we can do better than plan. But other than that, it's fairly predictable in 26, and we're looking to start 27 the same way.

Thank you. The next question will come from Jim Schneider with Goldman Sachs. Please go ahead.

Good afternoon. Thank you for taking my question. I was wondering if you could maybe address, given everything you just said about demand and about the mix effect from Hammer this year, maybe can you give us any kind of directional guidance about where you might expect exabyte shipments to end up on a calendar 26 versus calendar 25 basis relative to the sort long-term targets you've laid out previously. It seems like you could do materially better than that, but I'm just wanting to confirm what your expectations were if you could give us a numerical range.

No, we are not guiding calendar 26. But we said in our financial model, we said that we expect exabyte, nearline exabytes to grow in the mid 20%. We have done a little bit better. If you look the last few quarters, And we always, as Dave said before, we always try to extract as many extra as we can from our manufacturing. So, no, we are continuing this trend, but we don't guide calendar 26.

But moving from 2.4 per platter to 3 per platter to 4 per platter, you can see that, you know, we're on a trajectory like you described. When it gets down to the individual customer level, obviously, we have to be very predictable because they need what they need and what we've committed to in order to build out that data center. So we'll continue to actually get that plan, and maybe we can do a little bit better as we transition to four-terabyte per platter.

The next question will come from Amit Dharianani with Evercore. Please go over.

Good afternoon, everyone. Thanks for being my question. I guess, Jean-Luc, I'm hoping you can talk a little bit about the March quarter guide, because it seems to be a really sizable uptick in gross margins. I think it's up like 250 basis points or 100% plus incrementals. Is there anything you would call out in March quarter that's unique, that's helping drive that kind of margin expansion? And is this really all coming from the core HCD business, or is there a potential benefit from the old systems business that's helping you as well?

Well, I would say we expect to be a very good quarter. I don't think it's different than what we had done before. It's always based on the pricing strategy and the mix. Now, as you know, we qualified another customer on EMER, so we will rent a little bit more volume on EMER. This is helping us to get better margin. But fundamentally, it's not really a difference in how we think we are going to execute the border. And it's good. I think the incremental margin was very good.

Yeah, and it's not the systems business. The systems business is doing well, but it's fairly small scale.

The next question will come from Mark Newman with Bernstein. Please go ahead.

Great. Hi. Thanks for taking my question, and congrats on the numbers today. I just want to touch again on the LTAs and pricing arrangements you have. Just curious, do you think there's an opportunity here for more significant price increases? In NAND flash, we're hearing things like 40% to 100% up Q1Q for some contracts. I appreciate hard disk drives, you have very long-term agreements, but I think there's a lot of questions. I'd like to just touch on this as well. A lot of, as the LTAs roll off, is there an opportunity for some of those to be repriced at a more significant more significantly higher price to change the trajectory certainly numbers are great your printing um we're just trying to figure out uh could you start to see more significant price increases rather than at the moment you're seeing kind of flattish a down a little bit up a little bit but overall your your average prices are flat which i understand is a mixture of uh like for like slightly up offset by new products coming

in at lower price um just wondered if that may change and then if it's just a quick update on hammer mix if there's any update on the trajectory of the hammer mix that you've outlined before thanks very much thanks mark uh a couple of points on the hammer mix we uh necessarily constrained ourselves on the three terabyte per platter because the factories were fairly full and we knew we would be going to the four terabyte per platter product so we've been leaning harder on that and making sure it gets through the development and qualification phases as time goes on then we'll move off and on to the four terabyte per platter very aggressively so that helps you on the mix side and the other thing about hammer mix is it'll be necessarily mixed up. I think the demand for those products will be at the high capacity points, not necessarily the lower capacity points just yet. And then relative to pricing, I think I said before, as one long-term agreement rolls into the next year or the next year, we've satisfied our existing supply commitments. People are looking at the new products. We have constrained supply of those new products then we look at what the demand is and we dictate where our pricing is and you know i one of the very first questions i said is it could be flat to up a little bit i you know that's the way i think about it right now but it all depends on what the demand is the band continues very strong that's great and and again what we're seeing is people who can't get what they need today they're saying okay i need to be able to plan my data center procurement out in the future let's get more predictable in the future has given us better visibility helps our run us run our factories for better costs and so on so that's great thanks so much the next question will come from krish

sankar with td cowan please go ahead all right thank you for my question um i had a question uh i just want to put in two parts one is uh how much will feel hammer as a person of your exabyte shipment lab here how much do you expect it to be this year uh the genesis of the question is i'm just trying to figure out you know obviously a lot of questions on the very strong gross margin if there's a way to put it in three buckets like how much of the gross margin upside is driven by pricing how much is driven by product mix how much is driven by cost reduction by offshoring manufacturing thank you yeah there's really no offshoring manufacturing or anything

like that involved um you know our manufacturing operations around the world are doing quite well and quite full, so that's helping from a cost perspective, but really no change in any manufacturing strategy to speak of. I would say a lot of what the benefits we're seeing is mix, and mix not just because we're actually transitioning into better products over time, but also because the demand for those products is quite high. You think about it, if you're building a data center with a three-terabyte per platter versus a four-terabyte per platter, you're going to be running that data center for a long time. You want the higher capacity point. And to the extent that we can do that as predictably as possible, that mix is what's driving the stability out in the market for us and, you know, helping us plan.

Yeah, Trish, we don't give specific details on the impact of pricing, mix, and cost, but they are somehow interrelated. Now, the change in mix is helping with the cost reduction, and the supply-demand situation is, of course, supporting our pricing strategy. So, now, they are all very good contributors to the increasing gross margin. And as we said before, now, this is going to continue through the calendar year.

How much of Hamer is the purpose of the mix?

Well, Dave gave an indication of the unit that we shipped in last quarter, so I think you can fairly easily calculate that.

Thank you very much.

Thank you.

The next question will come from Stephen Fox with the Fox Advisors, LLC. Please go ahead. Thanks. Good afternoon.

I guess I was just wondering on your next question, looking at your average capacity per drive being up 22 percent um like how much of that like obviously the supply demand environment has tightened over the last year um and in reaction to that are you taking steps to accelerate you know that mix up as the customers pushed you that way like i'm just curious how much you can control going forward now that we're here on even tighter supply to sort of help your customers in terms of absolute pet advice you're delivering thanks steve so yeah we are the lead time out of the wafer fab is quite long so you know we have to

be predictable for our customers say six months nine months later so on and so forth that's one of the reasons why we talk kind of a year at a time inside of these ltas um so we start wafers based on what we know we're going to be able to deliver so that we're as predictable as we can be for our customers as we're if we're deploying manufacturing you know engineering resources we're trying to get through these product transitions that's what gets us the most exabytes after that and so you know going mixing up is is kind of our goal so that you know if that helps clarify what our strategy is like it it does Dave I just wondering like when you had your

analyst meeting, you said that's sort of a pretty well-defined timeline for node transitions. Maybe just can you give yourself a report card on how you're doing on some of those timelines if we look out now versus the next year or longer term?

Yeah, I think that's good. We're on the plan or slightly ahead. And again, most of that's under our control. We execute well. We've been executing well. Some of it's under our customer's control as well um and the behavioral changes we've seen the customer i i made reference to earlier they're really pulling hard because they need more exabytes and so that helps get the quals done quickly uh you know it helps a roadmap alignment and then supply specific supply alignment which helps our factory so great that's helpful thank you the next question will come from aaron rakers with Wells Fargo.

Please go ahead.

Yeah, thanks for taking the question and also congrats on the results. I want to go back to gross margin. I know you talked a lot about the pricing dynamics and the visibility you have, but the thing that stands out to me is you've been executing on like a cost per terabyte of like a mid-teens year-on-year decline these last several quarters. As we roll out the four terabyte per platter mosaic drive, how do I think about that cost down curve is it mid single digit is it can you sustain a double digit and would not wouldn't wouldn't we expect the four terabyte per platter hammer drives to actually maybe accelerate the cost down given the ability to bring that into you know lower end other outside of the airline platforms i'm just curious how you think about that cost down curve yeah we are very positive on the four terabytes per disc in terms of impact on the cost as we discussed before The unit costs tend to be fairly similar, but of course, we are adding a lot of content per unit.

So that will be a good help to reducing the cost and improving profitability. As you know, we are qualifying two major customers on this new product. So the time to finalize the call and then rent, probably through the end of the calendar year. And for sure, the impact will be strong, I think, in the next calendar year, too.

And, you know, we plan on making a big transition to four terabytes per platter over the coming few years and then getting to five terabytes per platter as well. We do add complexity as we make those transitions. But, you know, I'd say the first order, the things that dictate the speed of the ramp are our ability to go work scrap and yields all through our supply chain and so on. And we're working very hard on that. I like the product, so I think it provides for a bright.

Thank you. The next question will come from Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. I want to ask about LTSAs. I think you said nearline capacity is allocated through 2026. So it sounds like both pricing and exabytes are locked in this year. But for 27, I think you said something that I took that exabyte and pricing is not locked in, but you have some sort of agreement. So I guess I had two questions. First of all, is it right to assume that pricing is also locked in for all 26? And what sort of agreement are you referring to for 2027 if, you know, volume and pricing is not locked in next year? things.

Yes, for this calendar year, we said basically we have PO in place for all the quarter, so volume and pricing is well defined. As Dave said before, if in a quarter we can produce a little bit more, of course, we will sell those exabytes in the open market at a good profitability, but I would say we have the vast majority of the volume is already allocated. um calendar 27 we will uh we will start working on that fairly soon of course we have very good indication and uh and agreement on volume but we have not uh we have not fixed the price yet yeah and tim if this helps so we haven't really started uh the longest lead time parts but we will very soon for the start of 27 and we need to start having those uh discussions with our

customers, which quals are we going to get through together? What exactly is the plan? Because a lot of them need predictability as well. So we'll have to build in our factories based upon how hard they want to pull on those new products.

Okay. Thanks. The next question will come from Mehdi Hosseini with the Susquehanna Financial Group. Please go ahead.

Yes. Just a quick house fitting item. Gianluca, your capex has been increasing on a QOQ basis. How should I think about depreciation, especially since it did dip in the December quarter? Any color here would be great looking forward.

Yeah, no, our capex is aligned to our target of four to six percent of revenue. We are actually at the bottom of that range, so it's not increasing in terms of what we want to achieve or what we said. Of course, compared to a field where we were more into the down cycle in terms of dollars, of course, is higher. We are supporting our hammer transition and hammer ramp. So I would say there is nothing different than what we said.

Yeah, I think that's what I think about it as well, Mitty, is that if you go back two years ago and you used that as a baseline, we were still significantly lower revenue, but also we were challenged on the supply and demand balance. Right now, we're in a totally different environment, of course, so we'll probably stay well within the 4% to 6% range, but as the revenue goes up, we'll spend a little bit more, and probably the first priority is maintenance tools and the things that we weren't doing a couple of years ago.

I apologize. I may have confused. I was focusing more on depreciation. Given these several quarters of increasing CAPEX, should I expect a step up in depreciation looking forward?

Depreciation will follow the CAPEX. So you have your, I guess you have your model on the revenue, So you can calculate the 4% to 6% of CAPEX, and then depreciation for us is only 10 years user for life. So you can probably model in that way.

It's not like some other fabs. It's not necessarily the huge part of the cost drivers. There's a lot of other pieces of cost that we can go manage.

Thank you. The next question will come from Ananda Baruja with Loop Capital. Please go ahead.

Yeah, guys. Good afternoon. Thanks for taking the question. Dave, while we have you, a little bit of a technical one. Are you, what kind of activity are you seeing, you know, at sort of the so-called warm tier of storage? It's a question that comes up a bunch in our conversation. We've heard that it's obviously growing. It's growing both hard drive and flash storage. It's participating nicely. but would love to get your input on it, because I think there's still, first of all, we'd love to know if what we're hearing is accurate, but secondarily, I think there's a lot of people that are assuming that that's really, like, it's becoming a NAND tier, and largely a NAND tier in a Gen AI world. And anyway, just would love to get any context there that you have.

Yeah, I think you have to be a little bit careful, Ananda. So there are applications that are very memory-dependent that are attached to compute, and some of these applications are neat. I like them. When you start talking about big data storage, if you will, in data centers, the tiering architecture is fairly well set and probably won't change based on economics and also architectures that are well-known. People know how to play. So if the concept is that drives aren't working hard, they're, you know, in the background just storing data, that's not a good way to think about it. That's not the way hard drives are being used right now. They're working 24-7. A lot of times they're optimized for performance themselves, largely streaming performance, not random small block workloads. That's more of a memory thing. And so, you know, if you had an application that's random small block, it's probably memory. If you have big data, it's probably a little bit of memory on the front end and a lot of hard drive on the back end. And we think that there are applications across the entire spectrum, of course. But we think that in the future, when we start to talk about the concepts in their enormity about checkpoints and physical AI and video and things like that, it's large, large data. So the architectural tier that stores the data will probably remain constant for the next decade.

That's super helpful. I'll keep it there. Thanks a lot. That's great.

The next question will come from Vijay Rakesh with Mizuho. So please go ahead.

Yeah, thanks, dear. Just a quick question on Hammer. I know you're ramping it faster in the March quarter. Should that drive a much better gross margin profile, I guess? And any thoughts on how we should see the margins improve, I guess, as Hammer starts to ramp? And I follow up.

If you are referring to the March quarter, of course, the ramp of HEMER is included in our guidance, and our guidance is indicating a fairly good improvement in gross margin again. And then I said for the rest of the calendar year, we expect both revenue and profitability to improve sequentially, and of course, part of that is coming from additional HEMER products.

We think demand will be strong for the four terabyte per platter, of course, and so that's one of the reasons why we're, you know, making that a priority in the transition that we go through this calendar year and into next.

Got it. Very helpful. And just a quick question also on the OPEX side. You know, very nice, obviously, OPEX, same time last year, somewhere in the 14 percent range, now it's down to 10 percent. I know, Jennifer, you said probably that's a long-term target, But it looks like, as Dave mentioned, with the top line ramping up with all the design, it looks like OPEX could go down again. Is that fair as a person of mix?

I would say, you know, we are getting closer and closer to our fourth target of 10% of revenue for OPEX. We are almost there. We should be there actually in the March quarter. And then, of course, if not that we relax our cost control, we will continue to keep our cost control. and revenues are supposed to increase, so we can probably do it a bit better.

Yeah, I'm glad you asked that, Vijay, because, you know, obviously a few years ago, the tough times that we went through, we weren't investing in ourselves to the rate that I'd like. And, of course, it's with the hammer transition in front of us, that was a lot of work. Now that we've kind of cleared that hammer transition, we can see the future fairly well. It's, you know, the clouds are parting, if you will, and we can see aerial density opportunities in front of us, and we will take the money such as it is, even staying within our same model, and we'll take that money and reinvest in ourselves so that we can continue to drive the aerial density.

Got it.

Great. Thanks a lot. I appreciate it. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Nick, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets and advancing aerial density roadmaps, and successfully qualifying customers on our hammer-based mosaic products to address the sustained and growing demand for data storage. As data creation accelerates, driven by both traditional workloads and these emerging AI applications, Seagate's transformational technology positions as well to capture the significant demand opportunities ahead. I'd like to thank our employees for their dedication and innovation, and our customers and suppliers for their trust and collaboration, and our shareholders as well for their continued support together we're driving Seagate's ongoing success thank you the conference is now concluded thank you for attending today's presentation you may now disconnect