Seagate Technology Fiscal Fourth Quarter and Fiscal Year 2026 Conference Call

Welcome to the Seagate Technology Fiscal Fourth Quarter and Fiscal Year 2026 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 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 Shanie Hudson, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer, and John Luca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our Q4 and fiscal 2026 year-end results on the investor 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 also included on our Form 8K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and or cannot be reasonably predicted. Therefore, reconciliation to the corresponding gap measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they're subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. To provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then re-entering the queue. With that, I'll hand the call over to you, Dave.

Thanks, Shani, and hello, everyone. Seagate delivered a very strong finish to an outstanding fiscal 2026. Our June quarter results outperformed our expectations for both revenue and non-GAAP EPS, and we expanded our non-GAAP gross margin for a 13th consecutive quarter. Our performance led to free cash flow margins of 31%, which totaled more than $1.1 billion, our strongest quarter in over a decade. Our impressive fiscal 2026 financial performance was underpinned by the three structural growth pillars that I outlined last quarter. Sustainable market demand, our differentiated technology roadmap, and disciplined operational execution. First, sustainable market demand. As our results show, demand for mass capacity storage is strong and growing. We delivered fiscal year revenue growth of 34%, led by cloud customers' demand for data storage solutions, amplified by the adoption of AI-enhanced applications. Given our momentum and the improved visibility we have into demand, we expect fiscal 2027 revenue growth to outpace our performance in fiscal 2026. Second, we are executing our differentiated technology roadmap, anchored by our Hammer-based mosaic platform hammer enables us to increase aerial density and store more data on each disc as a result we can scale exabyte shipments to meet rising demand in a highly capital efficient manner to capture more value for drive exiting in the year hammer based products represented approximately 40 of our near-line exabyte shipment run rate and we continue to invest and hammer capabilities to support our mid-20% exabyte growth target while further enhancing profitability and capital efficiency. Our third pillar centers on translating demand strength and technology advancements into profitable growth. In fiscal 26, we increased non-GAAP gross margin 10 percentage points, grew non-GAAP EPS more than 90%, and generated record-free cash flow of $3.1 billion. Looking ahead to fiscal 27, we expect to deliver sequential margin and cash generation growth throughout the year. Our confidence is supported by the scale, quality, and duration of our data center customer commitments in a strengthening demand environment. Data center demand now represents approximately 90 percent of our exabyte shipments. Based on the long-term supply agreements in place today, the vast majority of our near-line exabytes are now allocated into calendar 2028. Importantly, we are not seeing customers pull back on planning horizons. As our strategic relationships deepen, many are actively seeking to extend planning horizons through 2029 and beyond, which we believe reflects growing confidence in their own long-term infrastructure needs. These engagements reinforce our view of demand durability while providing customers greater supply assurance and support for the key technology transitions. We remain disciplined in securing orders from these customers prior to initiating drive production, with contracts that define both product configuration and pricing terms covering the entirety of calendar 2027. We continue to execute our value-based pricing strategy, balancing a stronger demand environment, with our objective of supporting sustainable, profitable growth over the long term. Cloud customers remain the largest driver for near-line demand today, with three years of sequential quarterly exabyte growth and no evidence of a slowdown as AI adoption now builds on demand for traditional data-intensive applications, including video. We continue to benefit from cloud infrastructure deployments, which fuel the need for scalable, cost-efficient, and reliable storage. At the same time, we believe storage demand will prove durable through investment cycles. First, new data is constantly being created across existing cloud and enterprise infrastructure. And second, customers are retaining and reusing more of that data over time as its value extends beyond its initial use. AI is reinforcing these trends and illustrating how data is not only growing, it is compounding. With the transition from AI model training to inference to agentic applications, more data is generated and retained for historical context, compliance, and future reuse. As these data center environments become larger and more complex, customers must balance performance, energy consumption, and cost across distributed infrastructures. cloud providers have long addressed these challenges through tiered storage architectures that combine high performance memory and ssds with mass capacity hard drives to optimize performance and economics at scale our recent white paper with sk hynix illustrates the importance of tiered storage for inference and agentic ai workloads which show a direct benefit to hard drive storage These workloads rely on persistent context across user interactions, and key value, or KVCache, is used to retain and reuse that context efficiently. KVCache can expand significantly as the number of users increase and interactions become longer and more sophisticated. Our research found that by extending KVCache data across memory, SSD, and hard drive tiers, organizations can retain more context and avoid recomputing previously generated data. This drives the need for increased hard drive storage and reduces GPU usage during the most compute-intensive phases of an agentic application. As a result, GPU resources are available for additional revenue-generating workloads. Additionally, we are now seeing the relevance of tiered storage extend beyond large cloud data centers into enterprise deployments. As enterprises increasingly operate across public cloud, private cloud, and on-prem environments, they must manage growing volumes of structured and unstructured data while facing similar performance, cost, and energy consumption tradeoffs that hyperscalers have addressed for years. We see this broadening of demand in our business. Enterprise near-line revenue increased for a fifth consecutive quarter in June, and we are engaging more frequently with NeoCloud operators and leading model developers. As their data management needs scale, these providers are starting to adopt modern peer storage architectures where hard drives provide the trusted mass capacity foundation. Looking ahead, we believe physical AI applications such as robotics and autonomous vehicles will drive the next step function expansion in data creation and retention at the edge. These applications rely on world models trained on millions of hours of historical and synthetic video content in order to understand and reliably interact with the physical world. Taken together, these trends reinforce a structural change in storage demand. Applications are creating, retaining, and reusing more data across cloud and enterprise environments than ever before, extending the role of mass capacity storage across modern tiered architectures and creating additional opportunities for Seagate over time. Our technology roadmap plays an integral role in Seagate's ability to capitalize on growing storage demand. Advancing aerial density is our North Star. We believe that increasing the amount of data stored on every disk we produce is the fastest, most capital-efficient path to supporting long-term exabyte growth while maintaining relatively stable hard drive unit output. Our expertise across material science, precision manufacturing, advanced photonics, and nanoscale wafer production has enabled us to pioneer hammer technology and the mosaic platform, which have increased storage density per disc and per drive. We continue to push the boundaries of innovation, as demonstrated by our vertically integrated laser manufacturing capabilities, which yielded tens of millions of edge-emitting lasers last quarter. Our team's achievements underscore the scale, maturity, and supply chain resilience behind our Mosaic platform. These innovations are improving the total cost of ownership for our customers while expanding our exabyte output and enhancing efficiency across our operations and supply chain. We ended fiscal 2026 on schedule with our hammer-based product ramp. our mosaic 3 products are now qualified and operating in production environments across all major cloud customers our second generation mosaic 4 platform capable of supporting up to 44 terabytes per drive continues to ramp with the two largest global csps and additional customer qualifications are underway we expect to achieve our next ramp milestone by exiting calendar 26 with 50% of our hammer exabytes on our Mosaic 4 platform. Looking further ahead, Mosaic 5, our 5-plus terabyte for disk platform, remains on track for qualification shipments in late calendar 2027. Wrapping up, we delivered across the board in fiscal 2026, with each quarter building on the momentum of the last, and we expect that momentum to continue through fiscal 2027. The growth in data creation, retention, and utilization continues to elevate the importance of hard drive storage and modern data architectures. Together, our demand outlet differentiated technology strategy and disciplined execution position Seagate to capture the significant opportunities ahead and create long-term value for our stakeholders. I'll close by thanking our global team for another year of outstanding execution. I'd also like to thank our customers, suppliers, partners, and shareholders for their continued support and trust in the company. With that, I'll turn it over to Gianluca.

Thank you, Dave. We capped fiscal 2026, delivering strong, sequential, double-digit, top and bottom line growth in the June quarter, supported by disciplined operational execution and both revenue and gross margin expansion across every end market we serve. June quarter revenue was $3.6 billion, up 17% sequentially and up 48% year-over-year, exceeding the high end of our guidance range. We achieved record profitability levels across gross margin, operating margin, and earning per share. Non-GAAP gross margin came in at 52.7%, up 570 basis points sequentially. Non-GAAP operating margin increased 710 basis points sequentially to 44.6%. And non-GAAP EPS was $5.71, up 39% quarter-over-quarter and 121% year-over-year, exceeding the high end of our guidance range by a wide margin. As Dave noted earlier, we generated free cash flow of more than $1.1 billion, rounding out our best quarterly performance in over a decade. Sustained data center demand continues to outpace broader company growth. In the June quarter, we shipped a total of 218 exabytes, up 34% year-over-year, with data center representing 89% of that total. We shipped 195 exabytes into the data center market, up 11% sequentially and 43% year-over-year. with data center revenue coming in at $2.9 billion, up 17% sequentially and 57% year-over-year. Global cloud customers are driving the vast majority of data center revenue and exabyte demand. At the same time, demand trends in the enterprise OEM data center markets have strengthened, reflecting growing storage requirements across a broader set of customers and workloads, many of which Dave highlighted earlier. In the June quarter, we delivered strong double-digit year-over-year growth across both revenue and extra-by-shipments into the enterprise OEM markets. To support long-term demand growth, we continue to expand the deployment of HEMR technology across our product portfolio. Our goal is to transition an increasing portion of production to hammer-based products, forced to address cloud customers, and over time, to broaden adoption across enterprise deployments. As we make this transition, we are strategically investing in additional tools and technology to support the manufacturing of our hammer products. These investments enable us to maintain relatively stable drive unit output as customers mix up to higher capacity drives and manufacturing cycle time increase. We believe this action will enable us to deliver near-line exabyte growth in the mid-20% range over the next few years. Beyond the data center, our edge IoT market made up 19% of revenue at $697 million, up 14% sequentially, and 20% year-over-year, due in part to ongoing tight supply conditions and increasing net pricing. Moving on to the rest of the income statement, non-GAAP gross profit increased significantly to $1.9 billion, up 31% quarter-over-quarter, and more than doubling year-over-year. Non-GAAP gross margin expanded to 52.7%, up from 47% in the prior period. These improvements reflect continued execution of our long-term pricing strategy and a stronger product mix. We expect these trends to remain favorable, underpinned by strong demand. Non-GAAP operating expenses were $293 million, or 8% of revenue, reflecting our discipline in cost management. Non-GAAP operating profit increased 39% sequentially to $1.6 billion, representing 44.6% of revenue and underscoring the scalability of our financial model, continuous aerial density innovation, supply discipline, and pricing strategy execution. In the June quarter, other income and expenses were $58 million, and we project OI&E to decrease further in the September quarter to approximately $45 million, reflecting the benefit from lower interest expense as we continue to reduce our outstanding debt balance. Non-GAAP net income grew to $1.3 billion with corresponding non-GAAP EPS of $5.71 per share, based on tax expense of $242 million and a diluted share count of approximately 231 million shares, including the net impact of our 2028 convertible notes. Turning now to the cash flow and the balance sheet, In the June quarter, we invested $187 million of capital expenditures, with total fiscal 2026 capex representing 4.7% of revenue. Looking ahead, we expect capital expenditures for fiscal 2027 will remain well within our target range of 4 to 6% of revenue. Pre-cash flow generation expanded to $1.1 billion, up 17% from the prior quarter. We expect cash generation to further improve throughout fiscal 2027, supported by sustained demand, operational efficiencies, and capex investment discipline. During the June quarter, we returned approximately $283 million to shareholders through dividends and share purchases. Strengthening the balance sheet was a key objective for fiscal 2026, and we delivered on our plans. We ended the year with cash and cash equivalent of $1.7 billion and strong liquidity of $3 billion, including our undrawn revolving credit facilities. Our gross debt balance was approximately $3.6 billion exiting fiscal 26. down $1.4 billion year-over-year, including $300 million that we retired in the June quarter. Our resulting net leverage ratio improved to 0.4 times, based on adjusted EBITDA of $1.7 billion for the June quarter, up to 7% quarter-over-quarter, and 142% year-over-year. During the September quarter, we are retiring an additional $1.2 billion in debt. We have already extinguished $1 billion in high-heeled senior nodes in July and plan to retire the remaining balance on our convertible nodes in September. Turning now to the September quarter outlook. Visibility from our BTO model reinforces our confidence in sustained demand for high-capacity near-line drives as AI adoption accelerates. rates. We see continued revenue and profitability expansion in the September quarter supported by our mosaic ramp and pricing strategy. We expect September quarter revenue to be in a range of 4.1 billion dollars plus or minus 100 million dollars which represents a 56 percent year-over-year improvement at the midpoint. Non-GAAP operating expenses are expected to be approximately 300 Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to be around 50%. Non-GAAP EPS is expected to be $7.30 plus or minus 20 cents based on a tax rate of about 16% and non-GAAP deleted share count of 231 million shares, including estimated dilution from our 2028 convertible nodes of approximately 2 million shares. Seagate Financial Results and Outlook demonstrate our ability to deliver profitable growth, expand margins, and drive significant cash generation. We remain confident in delivering sequential revenue growth and margin expansion through fiscal 2027, while creating long-term value for customers and shareholders. Operator, let's open the call up for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. 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, we will pause momentarily to assemble our roster. Our first question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question and congrats on the results. I want to dig a little bit deeper into the gross margin. And I guess, given the guidance that you've outlined, it looks like your guide is implying like a mid 57% or so gross margin into this next quarter. So I guess my question is one, is that kind of the guidance that you're providing?

And two, how do you think about the cost down, execution as we move through Mosaic three to Mosaic four, you've been operating at like a mid teens kind of cost down per year on a per terabyte basis. do you think that's sustainable or how should we think about modeling that over the longer term thank you aaron i'll let uh john luca asked this answer this uh quantitatively but uh the way we're thinking about these product transitions is uh and i think you know this well we have to actually put our factories on pause to go through the product and transition a little bit you know so as we're moving product from three terabytes to four terabytes to five terabytes And then there's yield issues, and as we out-execute our plan, what happens is we have opportunity for costs to drive better costs than we thought. So that answers the second part of your question. Gianluca?

Yeah, hi, Aaron. So, yeah, very good result, I'll say, on gross margin already in fiscal Q4, so strong improvement sequentially. and we are guiding up again so our pricing strategy is continuing as we have discussed now for several quarters i would say we have adopted this strategy more than 12 13 quarters ago so we are continuing that direction every quarter is a bit different but the strategy is the same the mix is helping we are moving more and more into you know the high capacity nearline product. We have seen another strong increase in near-line exabytes in the quarter. So everything is continuing in the same direction that we have driven the company for many quarters. Dave discussed about the cost. Of course, moving the mix from three terabytes to four terabytes per disc is, of course, giving us another boost in terms of profitability.

The next question is from Ben Reitzes with Milius. Please go ahead.

Thanks for taking the question. It's great to be covering you again. I wanted to talk about two longer-term, ask you about two longer-term demand drivers, potentially. I mean, this key value cash use of the HDD tier at hyperscalers, how much is that helping right now? Is it on the come, and do you expect it to kind of ease in to your exabytes, and how do we look at that? And when do you think physical AI really starts helping your exabytes as well? Thanks a lot.

Right, Ben. I think that's good. Both very, very early days. I would say that the agentic flows that we're seeing are actually what – that's the reason we pointed to the KVCash discussion. I think the key word here is context. When you set up these agents, you really need to give them context, and sometimes that's a very broad set of rules across your business or your problem set or whatever. And as you do that, then you don't want to have to redo that context every time. You don't want to have to recompute all that context every time. So that's what's driving storage, but still very early days. Physical AI, we are quite excited about. I think I hear a lot about robotics. We've all seen autonomous vehicles. People focus very much on the end product, the robot, if you will. But I actually think it's a lot more of a data play. these robots have sensors on them they're sensor networks in order for them to learn the data actually comes back up into a local cloud or a bigger cloud and so when people say physical AI to me I think it's a lot more about the data, the data processing what kind of learning you're getting from that and to the exactly to your question how much you have to store to make sure you have that context long term so we think these are both great opportunities In particular, the physical AI stuff is largely more about video. So it's a very unstructured type of data coming. It's not like, you know, the days of old where you had, you know, spreadsheets or checklists to fill out that were complete, you know, structured data. This is very unstructured data that the machines are learning from, and they might want to learn again and again and again, but you don't want to have to re-promote that into the memory tier. So we think that's a great opportunity for us.

The next question is from Eric Woodring with Morgan Stanley. Please go ahead.

Great, guys. Thank you for taking my question, and congrats on the really nice results and guide. You know, John Luca, for a number of quarters, you've been quite steadfast that price per exabyte growth would be kind of this mid to high single digits year over year. You just reported 10% year over year price per exabyte growth in June. I think the September quarter guide implies pricing growth closer to maybe 20% year over year or even above that. Can you maybe just provide an update for us on how we should be thinking about pricing looking forward? You know, why this trend we're seeing in the September quarter shouldn't sustain or maybe even accelerate just given, you know, supply demand imbalance, customer demand strength, delivering more value to customers, et cetera. Thanks so much.

Hi, Eric. Oh, yeah, good. As I said before, it's not that we are changing our strategy, but for sure the gap between supply and demand is now a little bit bigger than a few quarters ago, and our volume was a little bit higher in fiscal Q4. Now we think it can be maybe a little bit of output available in fiscal Q1, and of course we are pricing that increased output at a very good price right now. So I'll say not really a change in our strategy, but a very good execution. And with demand being particularly strong right now, we take a little bit more pricing benefit. Now, of course, every quarter is different. We will see in the following few quarters how the pricing will evolve. But I think we were very clear, both Dave and I, in our prepared remarks, we see every quarter revenue to improve and every quarter gross margin and profitability in general to increase. So, of course, pricing is a part of the sequential improvement through the fiscal year.

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

Great. Thank you. Great results here. And if I may, just, you know, on the XFI CAGR growth, I think, you know, you guys reiterated sort of this mid-20%. You guys obviously have been executing too much greater than that. I think I heard about some investments that you're doing. Just help us understand, like, this, you know, above 30% exabyte growth rate, could that sustain as you enter fiscal 27, especially as you're migrating more towards your second-generation hammer, and then you're ramping into, you know, further out into your Mosaic 5.0? so if you could just help us understand why exabyte kegger could could or could not sustain at this 30 as we look into fiscal 27 thank you thanks asia we uh as we said before we're not really increasing the box count we are working really hard to get the heads and media inside the boxes to be able to go up in the the technology capability to get exabytes out and exactly to

your point what's the ultimate kegger it's how fast we can do that how successfully we can do that we are going through product transitions i mentioned this earlier so as you do that there's a little bit of inefficiency in your factories but you know long term you actually get many many more exabytes out as we go from three to four to five and that's the way we're focused uh you know what you've seen so far is the transition largely to three we are ramping the four right now and the five is coming and so how we play that is depending upon how we see end customer demand um what what the qualification schedule is like uh for those customers and we need visibility because that's three to four quarters out from when we do wafer start but also we get a little bit better yields we can we can out a few more exabytes here and there and and uh you know the team has been doing fantastic on that front so all these dynamics are how we actually have to predict the next few years. And that's one of the reasons we say mid-20s. Could we execute a little bit better? Not conceivably, but there's a lot of invention required still.

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

Yeah, good afternoon. Thank you for taking the question. I'll follow up on pricing. I'm curious if you could kind of speak to like for like versus the benefit of newer products. And then moreover, if you could speak to how we should be thinking about contracts rolling off, renegotiating of existing contracts, and how that is impacting the relative kind of year-over-year pricing, particularly as it relates to that strong 20-plus percent number embedded in the September guide and how to think about the moving parts into December and beyond. Thank you.

Thanks, CJ. We are, as we said in the prepared remarks we're trying to be predictable uh for at least the next year because that's what we have visibility to in our factories and that's when we know the exact configuration and we determine pricing with our customers but you know as various customers are rolling through those periods interesting things happen first there's product qualification like for like is kind of tough because we are moving products so quickly through transitionary periods that benefits us it also benefits them. If they're building a data center, they get a better TCO out of those products. And then there's other architectural reasons that may slow down or speed up their ability to ingest these things. So it is fairly complicated. What we're seeing over time is not only what we lock in for that period of the year, we also see our ability to execute a little bit better. And that's usually two or three quarters out. That's not in quarter, but we execute a little bit better. We have more exabytes to give and we determine how hungry the market really is for those exabytes and usually they'll pay more than that contract price if you will for those exabytes and so that's why you see these step functions um and and therefore i think we're all confident about the demand that we're seeing both ourselves and our customers but also they're voting every day with that by you know signing up to uh to pricing that is even higher than some of the you know contractual stuff that we had done together?

Yeah, CJ, you were asking about the new orders that we are negotiating and the new LTAs that we are negotiating. The trend is the same as the past. So we see strong demand and, of course, opportunity for us to continue to push on our pricing and pricing strategy and continue in the same direction. Every quarter is a bit different, depends how many contracts we negotiate, what is the volume for different customers, what is the upside volume, if any, that is available and what is the price. So it's not a straight line. But I'll say the trend is clear. I'll say we have really performed in the same way for more than three years at this point. Right now, it's particularly strong in terms of supply, demand and pricing.

But it's going to continue are we already we're already discussing about the next two or three quarters going in in the same direction the next question is from tom o'malley with barclays please go ahead hey guys thanks for taking my question i just had a two-parter here so you guys have previously said 70 percent of near-light exabytes will be hammered by june of 2027 how are you tracking to that and then i i saw in the preamble um that you specifically called out as you're transitioning there you're strategically investing in additional tools technology and manufacturing is that just something that um you know you would normally put the preamble it stood out a little bit to me could you maybe be more specific on uh what you're investing in there to help you get to that uh

percentage of the total mix thank you yeah we're tom we're still pushing hammer well and it's reacting exactly what we thought it would a couple years ago there we have as as uh time has Marched on, we have pushed maybe PMR a little bit harder than we thought. So, you know, transitionarily, I think, you know, we're still on the generally the same trends and everything's going well. Relative to the investment, most of the tools that we're investing in are directly contributing to those heads of media that are driving those technology transitions. I'm very happy with how the team's executed on that front, three to four to five, like we've talked about before um very optimistic about it and you know i think ultimately you know hammer's going to completely take over the portfolio because of it we're learning more and more about the tools all the time and uh and uh that's part of how we do aerial density development is is to get the latest tools on learn how to run them and uh and see what we can do with them and and i would say you know long long term i think there's probably more favorability for aerial density than i thought a couple years ago yeah in term of uh emmer percentage of exabytes no we have actually just achieved our first milestone that was to achieve 40 percent of nearline exabyte

sold on emmer drive by june so we just did that and so i'll say we are we are on track to achieve the future goals. Actually, on the new investment, there is, of course, a big difference between components and hard disk drive units. Now, for example, if you look at our last year, and if you look at the number of disks and the number of heads inside the box, they probably grew between 15 and 20 percent and the units were absolutely flat so there is always a mix-up of drives going more and more into the near line and going more and more close to the 10 disc and 20 ads but of course there is a strong shift year over year over year this happened for the last 10 20 years. So it's normal that even with flat out of these drive units, we need to increase heads and media through time. That's the best normal part of the business.

The next question.

Sorry, one more thing on that point, because I think a lot of people still don't understand this. So the thing that's actually driving factory complexity is not just drive numbers or heads numbers or media numbers. It's actually the product transitions. These new products, say four terabytes going to five terabytes, there will be more time in the tools, more time through the tools. Sometimes it has to touch the tool multiple times. The factory complexity is what's driving a lot of the investment that you made reference of, Tom.

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

Great. Thanks for taking my question. and congrats on another great quarter um lots of questions on the pricing so i wanted to uh talk more about the technology and the cost um could you update us on the um the hammer portion of your um shipments i think you've guided before 40 exiting the fiscal year on hammer and 50 percent exiting calendar year 26 is are we on target for that or tracking ahead of that guidance you can say on that and then also mosaics or you said ramping to global csps is so is that gonna i think i think you said it's a small very small portion of revenue in the previous quarter but it's going to become more significant in the first uh in the september quarter just want to clarify that and then given all that um should we expect that um cost declines should be potentially accelerating given um this upcoming ramp of mosaic four and now you have almost you know you're now the sharpest part of the s curve for the hammer adoption so just just don't want to see if anything you comment on that would be really appreciated thanks very much thanks mark yeah uh we're on target for all the metrics that you talked about i would say relative to mosaic 4 it was pretty

consequential last quarter even and it's ramping quite nicely we intentionally have you know maybe throttled the mosaic 4 ramp because of qualification cycles and everything else and other customers as they qualify you know we're they're full of the last generation product as well so things are fairly complicated in the supply chain. But Mosaic 4 is quite successful out in the market. It will continue to ramp over the course of this next fiscal year.

Yeah, no, just to clarify, no, we start shipping Mosaic 4 in March. So, March quarter volume was pretty low, but June quarter was a good ramp up. It's also a strong contributor to our financial performance and will be even better in the September quarter, and then, of course, we are already all focusing on the next step, that will be the 5 terabyte per disk and the 50 terabyte drive in next calendar year.

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

Yes, thank you. I was wondering if you could maybe just clarify on how much of your fiscal 27, fiscal 28, exabyte view is locked in via bill to order versus maybe not under LTAs and as you think about the pricing uplift in September part of that is coming from one of your initial hammer customers that had more favorable pricing rolling off so should we still expect the price momentum to continue at those levels for the rest of for the rest of the fiscal year I know you said that you would see revenue and margin increase every quarter, but any thoughts on sort of the magnitude of either sequential or year-on-year, given those comments around the initial customer?

Yeah, Wamsi, you're right. On the second point, I think it's important to realize that as we do roll through, there's different phases that different customers are under, and that renegotiation occurs. we are pretty uh predictable i think through fy27 so we have good line of sight but we are also getting a little bit more product out as we continue these product ramps because we're working the yields and scrap really aggressively on new products so to the extent that we can since there's such strong uh exabyte demand out there we'll offer that to people out in the market that are showing us that that uh that opportunity yeah relatively to that particular customer

the volume that was sold at the preferential price in june was minimal so september we will not have any so there is a little bit of a positive impact from that but it is not the major reason why you know pricing is a little bit better in september than june of course, is more overall demand and those are customers that are chasing it a bit more volume right now.

The next question is from Joseph Cardoso with JP Morgan. Please go ahead.

Hey, good afternoon. Thanks for the question. Maybe just a clarification from my end. I'm not really seeing or trying to increase the box count here.

Does that encompass your visibility into near line allocations into 2028 and the planning that you're seeing extending into 29 and then how should we think about visibility into pricing in those outer years as well thanks for the question thanks joseph yeah i mean you're right thanks for the question because many investors are new to stocks so we'll try to explain this again so our strategy coming out of the last down cycle has been to keep the number of drives flat and we're still on that path inside the drives however There's all these critical components, heads and media, and that is rising slightly. I think John Luca made reference to this before. So that puts strain on our internal heads and media fabs, which are under our control. And we're going through these aggressive transitions. That's the big story. The big story is the process content, the manufacturing complexity. As we move from three terabytes to four terabytes to five terabytes, the routes get more complicated. and that the technology transitions are putting a large strain on our internal components. But with the curves that we're on, we believe that this is the best way to bring more exabytes out into the world, is to stay focused this way. And so that's our strategy.

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

Thank you. Dave, you spoke about qualifications on mosaic among hyperscalers, but how should we think about Seagate's growing exposure to neoclouds and foundational model companies? I was hoping you could parse between demand from traditional hyperscale, neocloud, and maybe on-prem, implicit in your September outlook. Thank you.

Thanks, Carl. Yeah, two years ago, I would have said neocloud is probably largely compute-based. But we're starting to see that even some of the largest neoclouds, they need a lot of data coming at them. And, you know, where did they get that data in the past? They might have got that from traditional hyperscalers. but there are some places where, you know, clouds are saying, I need instances close to me. By the way, I do not think that's necessarily competitive with the hyperscalers. I mean, there are so many different application-specific reasons for people to have an exabyte or two sitting around, especially training various types of training for applications. So we are starting to have exactly the dialogues that you talked about. Everyone knows the hyperscaler architecture. and the efficiency of the hyperscalar architecture is because they know that they want that same efficiency. And, you know, in some cases, we're talking about systems level discussions with these customers. In other cases, we're just talking about drives. They also, since they're going to be running this gear for a long time, they want to be on the cutting edge of technology transitions. Sometimes that's hard because of feature sets, and they may not be as robust as some of the other people, so they need help with that, and it is a very complicated qualification space.

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

Thanks for my question. You know, I guess, Dave, as you look at the LTAs and the visibility and exit by demand that you have for 28 and even count to 29, can you meet all the exit by demand that's out there in 28, 29 entirely through aerial density gains? and maybe just touch on how secure do you think your own upstream supply chain is for specialized components, especially as Hammer starts to scale up. I'd love to just kind of understand the component side from your perspective. And John, look, I'd love to understand where you're going to get to 80% gross margins if you want to oblige and answer that. Thank you.

Thanks, Amit. So on the supply chain piece, you know, working with our supply partners that have been through a lot, like we were a few years ago, as you know, you know, we're making sure that everybody's kind of lined up and it's well orchestrated. That's an important part of our supply chain. We cannot have people, you know, kind of individually doing investments and then someone else not doing the investment and not be well orchestrated because that drives costs the wrong way. How confident are we in demand long term? Very confident. I do think that there's a lot of people out trying to understand all these new applications that are coming at us and saying, what does that mean for the storage tier? I also think that there's well-tractioned applications already in the market, whether they're pre-AI, which was huge, right? Some of the video applications we've talked about before, or whether they're, you know, now AI-enabled that are driving the storage tier even higher. And so the forecasting, especially for some of those new applications is relatively harder. I think there's a lot of optimism around it, but I also think that the existing data sphere, if you will, inside of these cloud service providers is growing at a certain large clip anyway.

I do not think that probably our aerial density transitions are going to be sufficient, but I do think that they're strong and I think it allows people to plan their business as well and that's one of the reasons we're having good conversations out in that time frame on the gross margin element i would say our incremental gross margin has been very strong for the last several quarters overall gross margin is improving sequentially very well so we don't have a specific target we will continue to improve based on the business situation and and we know already that for the rest of the fiscal year we will have sequential improvement every quarter. And then we will see at a certain point where we are, but we don't have a specific number that we are trying to achieve.

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

Hi, good afternoon. I just wanted to ask a free cash flow question if I could. So off of a 10-year high, can you talk about, I guess, the dynamics that drive from just a manufacturing standpoint a higher free cash flow margin in the in the future because um as the aerial density increases the increases as a percentage are smaller so i don't know if that helps or dave to your other point about passing through the same equipment makes it um more capital intensive etc and just as a follow-up to that just um uh can you maybe talk about where remind us where you want to get debt levels to and when buybacks could start thanks Yeah, thanks, Steve.

So we'll stay within our capital model. I mean, we talked about 5%, 4% to 6% of revenue is our range for CapEx. The tools we're buying are modern tools, and we're refreshing part of the fleet, even with that 5% of CapEx, 5% of revenue as CapEx, we're refreshing the fleet and doing quite well at that. So we'll turn all that into aerial density, and that's what we're really excited about. I think relative to free cash flow, you know, from an OpEx perspective, we don't see the need to add a bunch of OpEx. We feel our team is doing really well on all the innovation vectors, whether it's a sort of mechanical vector or it's a, you know, quantum device vector in the recording fabs or lasers now or whatever. I mean, we think that the team is funded well and doing well. And so we think we have visibility to continue aerial density without raising CapEx too much. So I think all of that translates into free cash flow that's, you know, growing like we talked about.

Now, on the debt part, we ended our fiscal 26 with $3.6 billion in debt. That is already a huge reduction from about $5 billion that we had at the beginning of the fiscal year. We will reduce that even more during the quarter. Actually, we have already done a good step in the month of July, but we will probably end fiscal Q1 at $2.4 billion in debt. And we still have one note that has a fairly high interest rate that I would like to address in the near future, maybe next quarter, maybe the following quarter. But we are doing already more share-by-back than what we have done in the prior quarter. So this quarter, we are executing a higher level of share-by-back, and we will continue in the next several quarters.

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

Hi. Congratulations, Dave and Gianluca. Just two quick questions. One, you look at the hard disk drive, the near-line attached rate. Is there a way to look at how the attached rate has changed on the GPU ASIC side per rack with agent TKI or KVCache picking up? How is that trend looking this year versus last year, let's say, when there's no agent And, Jan, look on the margin side. Should we expect margins to kind of get to the 60% plus? If you can give us what the incremental margins are on HAMR-4 versus prior, or if there's a way to look at mix of HAMR-4, I guess.

I'll take the attach rate discussion. I know there are people out there in the world trying to model this, and it's a noble effort, but I think it all comes down to application space. So there are certain applications where you may need a lot more context, and there are certain applications where maybe you don't need as much. And so, depending on the application pickup on this agentic AI, and we talked about KP Cash in the prepared remarks, it could be a lot, it could be a little. I think we're still trying to factor that in. And, you know, that's some of the stuff that as we get into modeling 29 and 30 and beyond, you know, I think we're going to have to, you know, work steady with our customers to watch those applications carefully.

Pretty excited about it. and that's not the discussion about physical ai either that's just on what i would call more enterprise type applications yeah on the margin we know last quarter we were at almost 53 percent we are guiding higher in september um our incremental gross margin is well above the 60 percent that you were indicating so i i'm not guiding for the future but no the trend is uh is, of course, to have a stronger and stronger gross margin, and we will see what we will achieve in the next few quarters. But as you know, we are guiding something that is not too far from that number already in September.

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

Yeah, thanks, guys, for taking the question. Dave, maybe just sort of dovetailing off your comments about application type, Is there an easy way or simple way to think about currently what you guys see as the more prominent applications driving demand right now? And before you get to physical, you know, maybe how you see those meaningful application types, you know, manifesting over the next couple of years.

Thanks, Ananda. Yeah, the way I think about it, and, you know, I've been around for a long time, we know, so you have to be careful with me, but if you're taking small blocks of text, whether it's forms that somebody filled out or ERP or something like that, and I say small blocks of text, you know, kind of jokingly because that could still be terabytes worth of text, I think that's probably not what we're talking about. but when you start to have a lot of unstructured data like video data or multiple sources of unstructured data sometimes it may be sensor data it may actually still be text but it's just uh necessarily coming in from all kinds of different sources that those are the applications that i think are going to require a lot more processing power and you don't want to renew that processing power over and over again. So this is happening in enterprises. It's not just happening in hyperscalers. It's happening, you know, at the extreme edge as well. And I think these trends are very favorable for us before we ever get into something like physical AI.

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

Thanks, Gary. And thanks to everyone for joining us today. Fiscal 2026 was an outstanding year for Seagate, reflecting strong execution by our global team and deep engagement with our customers. As we move into fiscal 2027, we are well positioned to address the opportunities in front of us. We remain focused on executing our technology roadmap, capturing profitable revenue growth, and delivering long-term value creation for all of our stakeholders. We look forward to updating our progress with you in the quarters ahead.

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