Earnings Call Transcript
Seagate Technology Holdings plc (STX)
Earnings Call Transcript - STX Q3 2023
Operator, Operator
Welcome to the Seagate Technologies Fiscal Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Shanye Hudson of Investor Relations. Please go ahead.
Shanye Hudson, Investor Relations
Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our fiscal third quarter 2023 results on the investors section of our website. During today's call, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K that was filed with the SEC. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable efforts. 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 vary materially from today's statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K and 10-Q filed with the SEC, our Form 8-K filed with the SEC today and the supplemental information posted on the Investors section of our website. As always, following our prepared remarks, we'll open the call up for questions. With that, I'll now turn it over to you, Dave.
Dave Mosley, CEO
Thanks, Shanye, and hello, everyone. Seagate's March quarter revenue came in at $1.86 billion, just above the low end of our guidance range, while we reported a non-GAAP loss of $0.28 per share. These results reflect rising economic uncertainties and an elongated inventory correction that impacted demand among a few large customers late in the quarter. As a result, we've altered our outlook regarding the timing and trajectory of recovery to now begin later in the calendar year. In response to the current market environment, we are taking aggressive actions to further reduce costs and rightsize the business to navigate this downturn and position Seagate to thrive when recovery ultimately comes. Beyond this cycle, we remain excited about the long-term opportunities presented by the secular growth of data and the relevance of mass capacity storage as new data-centric applications emerge and more workloads migrate to the cloud. We continue to make strong progress on our industry-leading technology roadmap, including launching HAMR-based products this quarter, which we believe puts us in an outstanding long-term position. In my remarks today, I will share some perspectives on the current market dynamics, provide greater context on our restructuring initiatives, and update you on our product plans. First, let me address the settlement we announced with the U.S. Department of Commerce, Bureau of Industry and Security, or BIS. The agreement resolves BIS' allegations regarding Seagate's sales of hard disk drives to a certain customer between August 2020 and September 2021. Under the terms of the settlement agreement, Seagate has agreed to pay a total of $300 million in $15 million quarterly installments over the course of five years. I want to emphasize that Seagate maintains its strong commitment to export compliance, and we believe that we complied with all export regulations at the time we made the shipments. However, in working toward a mutually acceptable solution with BIS, we balanced factors such as the risks and costs of protracted litigation involving the U.S. government, the size of a potential penalty, which could have been a significant multiple of the settlement amount, and our desire to focus on current business challenges and our long-term business goals. We believe the outcome we have reached and putting this matter behind us is in the best interest of our customers, shareholders and other stakeholders. Turning now to the near-term business environment. For the past year, Seagate has been navigating a complex market shaped by a few primary factors: inventory digestion among our large cloud customers impacting our nearline business, lower economic activity in China owing to the country's COVID lockdown policy, and weakening macro conditions that initially impacted consumer demand and are now affecting all end-markets. These pressures have recently compounded and weighed on our end-of-quarter dynamics. In the nearline markets, CIOs are now facing constrained IT hardware budgets, which has raised the bar for projects to get funded and resulted in efforts to optimize existing workloads, both on-prem and in the cloud. In turn, cloud service providers have focused on maximizing utilization of their existing infrastructure rather than deploying new capacity. The combination of these factors dramatically slowed the pace of cloud customer inventory consumption, and led to the pronounced slowdown in cloud and enterprise storage demand that we experienced exiting the March quarter. However, we don't foresee a strategic shift in customer spending patterns or a change to what remains a robust long-term outlook for cloud storage. Digital transformation trends will continue as enterprises realize significant cost benefits and operational efficiencies by transitioning workloads to the cloud. Industry analysts have observed that once applications and workloads are moved to the cloud, they generally stay there and grow. Digital workloads rely on data, which bodes well for mass capacity storage as the number of new cloud workloads multiplies every year. Within the China markets, customers remain constructive on their end-market demand outlook as the economy continues to reopen. However, rising macro uncertainties are pushing the timing for recovery to begin later in the calendar year. Despite the pushout, we are seeing some positive demand movement in the consumer and service sectors after COVID lockdown restrictions were lifted. These trends support a digital economy growth that bodes well for China cloud demand as growth in consumer demand has historically led to revenue growth for regional cloud customers. Within the VIA markets, future demand pickup is based on two factors. First, you will recall that several existing VIA projects were delayed during COVID lockdowns. Customers expect these projects to gradually resume as the economy reopens in the coming months, which will consume the existing HDD inventory that was earmarked for these projects. Second, we expect new smart city and smart manufacturing initiatives to build momentum as government funding and enterprise budgets free up and the global economy improves. In this dynamic environment, we are continuing to manage what is within our control. In late March, we extended the first phase of our restructuring efforts to adjust our factory headcount to align with lower production volumes, realized efficiencies across various operational support functions, and reset our live edge to cloud business plans. We are scaling back new investments in Lyve Cloud as we focus on filling our existing infrastructure. We expect to drive operational and cost synergies across all platforms to accelerate time to profitability while growing the business over the long term. Since fiscal Q1, we've taken more than $150 million out of our cost structure, lowered debt by 5%, and significantly reduced manufacturing capacity. Given the prevailing market conditions and our reduced near-term demand outlook, we are undertaking the next phase of restructuring actions targeted to yield at least an additional $200 million in annualized savings from both COGS and OpEx as well as implementing temporary cost savings measures, including salary reductions. We are taking a programmatic approach focused on three key areas: first, we are reassessing the levels of production output and functional support required to meet both near- and long-term business needs. These actions are intended to ensure that supply and demand are appropriately balanced. Second, we are simplifying our product roadmap to create operational efficiencies. We plan to reduce the number of drive configurations and major capacity node transitions to lower supply chain and manufacturing costs and complexity. We're taking these actions in concert with our customers, who can also capture cost benefits from fewer product qualifications. Finally, we will continue prioritizing resources towards higher-return products and end markets, while rationalizing support levels and investments aimed at non-core businesses. Our goal is to emerge a stronger, more agile company able to navigate well in all demand environments and return to profitable growth while preserving our technology leadership momentum. To that end, we have not let up on executing our HAMR-based product roadmap to preserve our significant time-to-market advantage. We are tracking well to our stated plans and achieved the key milestone last week of shipping initial qualification units to a cloud launch partner, and we expect to recognize initial revenue from 30-plus terabyte platforms this quarter as part of our Corvault system solutions. The decades of development that have led us to HAMR productization are even more important today as highly cost-efficient, mass capacity storage will be a competitive enabler in a world where data is rapidly growing and increasing in value. We believe HAMR will further extend the large and sustainable cost advantage compared to other storage media, even with current market prices. Additionally, Seagate's ability to service this growing demand through areal density gains by increasing capacities from three to four to five terabytes per disc or more provides far greater capital efficiencies compared with current PMR technology over time. We are confident in Seagate's ability to translate areal density leadership into the most advantaged TCO across a broad range of customers from the highest capacity drives used in cloud data centers to lower and mid-capacity drives more typically used by enterprise and VIA customers. We currently expect the high-volume ramp to begin in early calendar 2024, depending on customer qualification timelines and prevailing macro conditions at that time. Tactically, we are very focused on realizing our targeted savings which, along with an improved demand environment, should create the foundation to move towards our targeted financial model. And as we transition to our strategically vital HAMR platform, we believe that we are positioning the Company to drive differentiated financial performance for Seagate over the long term. Thanks. And now I'll turn the call over to Gianluca.
Gianluca Romano, CFO
Thank you, Dave. Amid intensifying economic uncertainties, we saw a rapid decline in demand in certain parts of the business over the last couple of weeks of the quarter, pressuring the supply-demand balance. These factors, along with underutilization charges and tax expenses weighed unfavorably on profitability. For the March quarter, we reported revenue of $1.86 billion and non-GAAP losses of $0.28 per share. Despite these conditions, we generated free cash flow of $174 million, demonstrating our ability to maintain discipline and strong cost control measures. In response to the near-term business environment, we have and will continue to evaluate and take steps to improve our cost structure and strengthen our balance sheet as evidenced by the expansion of our restructuring efforts, which we announced in late March. Exiting the June quarter, the actions that we committed to and taking charges for are expected to deliver cost savings of $40 million to $45 million annually, with roughly 60% realized in cost of goods sold. As Dave described in his comments, we are taking additional actions to further improve our cost structure, targeting at least $200 million of annualized savings exiting fiscal Q1 2024. Now turning to the end markets. Total hard disk drive revenue declined 4% sequentially to $1.6 billion. Mass capacity revenue remained essentially flat quarter-over-quarter at $1.2 billion, but lower than our expectations due to more prolonged cloud customer inventory adjustment and slower demand recovery in China. Shipments into the mass capacity market totaled 104 exabytes compared with 97 exabytes in the December quarter. Consistent with the prior quarter, roughly 83% were derived from nearline products shipped into cloud and enterprise OEM customers. Nearline shipments of 87 exabytes were up 9% sequentially, driven by growth in 20-plus terabyte drives. As a percentage of our nearline exabytes shipments, 20-plus terabyte capacity drives has grown from high single digits to approximately two-thirds of our nearline exabytes year-over-year, reflecting our customer of higher density storage for their data center needs. Looking ahead, we expect nearline exabyte shipments to decline over the next couple of quarters as cloud customers intensify their efforts to reduce inventory and improve the productivity of their existing infrastructure. Specific to the VIA market, revenue declined sequentially, largely as expected. As we outlined earlier, based on interactions with customers, we expect gradual recovery in the second half of the calendar year. Within the Legacy market, revenue was $371 million, down 12% sequentially, reflecting a steeper-than-anticipated decline in mission-critical sales amid a more cautious spending environment and weakening server demand, while the client and consumer markets reflect the typical seasonal demand patterns. Finally, revenue for our non-HDD business increased 14% sequentially to $256 million, a bright spot for the quarter. As anticipated, we grew sales for our enterprise system as component supply constraints continue to improve and we expand our market coverage. Moving to our operational performance. Non-GAAP gross profit in the March quarter was $347 million reflecting lower revenue and a less favorable mix than what we anticipated. Underutilization cost of approximately $75 million, similar to the prior quarter but higher than we were originally forecasting as we delayed the start in production to later in the quarter. Accounting for risk and underutilization cost, which translates into more than 400 basis points of margin headwind, we recorded non-GAAP gross margin of 18.7% compared with 21.4% in the prior quarter. Based on our current outlook, we expect underutilization costs to improve in the June quarter, even if production output remains well below the year-ago level. We expect both gross profit and gross margin to move higher as demand recovers towards the end of calendar year 2023 and our cost structure improvements are fully realized. We reduced non-GAAP operating expenses to $282 million, down $63 million year-over-year and $12 million sequentially. The year-on-year decline reflects our cost structure improvement actions to date, lower variable compensation as well as disciplined cost management. We expect non-GAAP OpEx in the June quarter to be similar to the March quarter. I would point out that our GAAP operating expenses for the March quarter included the $300 million reserve associated with the BIS settlement agreement and will be paid in quarterly installments of $15 million over the course of five years, starting in fiscal Q2 of 2024. We incurred non-GAAP tax expenses of $36 million in the March quarter. Our tax expense is largely based on a full year GAAP forecast by geography and allocated between the quarters based on expected profitability. We expect total non-GAAP tax expenses for fiscal year '23 to be approximately $45 million to $50 million. Based on diluted share count of approximately 207 million shares, GAAP loss per share for the March quarter was $2.09, which reflects the reserve that I mentioned earlier. Non-GAAP loss per share was $0.28. Moving to balance sheet and cash flow. We ended the March quarter with liquidity level of approximately $2.5 billion, including our revolving credit facilities. Inventory was relatively flat sequentially at $1.2 billion, consistent with our plans. We reduced capital expenditure to $54 million in the March quarter, down 22% sequentially. We expect CapEx to remain relatively flat in the June quarter. Free cash flow generation was $174 million, up slightly quarter-over-quarter and reflecting our ongoing focus to optimize free cash flow. We currently expect to generate positive free cash flow through calendar year 2023, dependent on the timing of restructuring costs. We used $145 million for the quarterly dividend and exited the quarter with 207 million shares outstanding. We are not currently planning to repurchase any shares in the next several quarters, consistent with our near-term focus on optimizing cash balances. Our debt balance exiting the quarter was just below $6 billion, down $71 million quarter-over-quarter. Adjusted EBITDA for the last 12 months totaled $1.3 billion, resulting in a gross debt leverage ratio of 4.5x. Since fiscal Q1 of '23, we have reduced debt by approximately $290 million. In fiscal Q4, we plan to further reduce debt by approximately $550 million. Interest expense in the March quarter was $81 million, and is expected to be similar in the June quarter. Turning to our outlook. In the context of the market challenges that we have outlined today, we expect the June quarter revenue to be in the range of $1.7 billion, plus or minus $150 million. We project incremental decline in the mass capacity business mainly driven by customer focus on inventory drawdown in our nearline cloud market. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the low to mid-single-digit range, which includes between $50 million and $60 million in underutilization cost, and we expect a non-GAAP loss in the range of $0.20 plus or minus $0.20. I will now turn the call back to Dave for final comments.
Dave Mosley, CEO
Thanks, Gianluca. The past year has presented a set of challenges that have impacted Seagate and our industry to a degree not seen for more than a decade. As our outlook and commentary today demonstrate, we believe that we are still a couple of quarters away from seeing a positive turn in demand for data storage. However, there are a few key takeaways that underpin our confidence in the business and our long-term potential. We are aggressively managing through this environment and taking appropriate actions to generate positive free cash flow, strengthen our balance sheet and enhance future profitability, all while executing our technology roadmap. To that end, we have continued to prioritize investments in our HAMR product roadmap. These drives offer the highest density, most cost-efficient mass capacity drive storage, which we believe translates into a competitive advantage for our customers, and we are focused on driving appropriate returns for the value we are delivering. And we continue to receive indications from our customers that demand will pick up as the global economy improves. The secular drivers powering long-term demand for storage are intact, and this fact is at the root of the conversations we're having with customers across our key markets and geographies. I'd like to thank and recognize our global team for your resilience and perseverance through this challenging period. We are keeping our heads down and aim to make continued progress towards our goal as we move closer to market recovery. Thanks again for joining, and let's open up the call for questions.
Operator, Operator
Our first question will come from Erik Woodring of Morgan Stanley.
Erik Woodring, Analyst
Dave, can you maybe help us understand kind of as we sit here today, what gives you the confidence to kind of talk about a recovery towards the end of the calendar year? I guess what I'm hearing from you is a worsening of demand in the last few weeks of the quarter, greater macro concerns among customers, obviously, challenges in the nearline market. And so like what data points are you seeing today? Or what are customers saying to you that gives you the confidence that the recovery will happen towards the end of the year as we sit here today? And then I have a follow-up.
Dave Mosley, CEO
Yes. Good. Thanks, Erik. As you alluded to, we've been anticipating a return to exabyte demand growth in the nearline for a few quarters, but what we saw coming out of the last quarter still reflects that there's too much inventory against just a very slow near-term mass capacity demand. I would say that the customers are spending money. They're not necessarily spending money on mass capacity storage right now; they may be spending on compute or other investments that they're choosing to make. And then as we look through into their data center behaviors, if you will, we're somewhat encouraged that the data continues to grow. So in the data centers, the drives that are in there are being strongly utilized. There are some drives that are living a little bit longer in data center applications, but there's also really compelling value propositions we're putting in front of them with higher capacity drives like 30-plus terabytes and new features that are coming that should drive adoption, and we should get a refresh. So as all of these things need to be factored into our planning, they're all important. But the most important thing right now is this reflects kind of our sentiment coming out of last quarter is we don't want to push too much in, especially the older technology products. We want to really stage ourselves for the new technology products and make sure that, that inventory flows through. Timing is everything, exactly to your point. But I do think with the way data is growing, the evidence that we have, the data is growing. Even anecdotally, I can talk about Seagate's IT; we can see the data growing in the cloud much further than our projections were a long time ago, and this is fairly consistent with discussions that I have with CIOs and other fellow travelers. I do think that we're not at peak cloud or anything like that. I think the cloud applications are growing tremendously in data size, and it's just a prioritization issue that we're in the middle of right now. So we're just really focused on taking actions to further manage the downturn like cost and footprint and still to keep driving the technology leadership so we're there when markets recover. That's how we think we can create the best foundation to quickly move back into the targeted financial range when the demand resumes.
Erik Woodring, Analyst
Okay. And then I guess, Luca, I know you mentioned talking about paying down the $540 million maturity in June. But can you maybe just help us understand some of your sources and uses in cash over the next, let's call it, 6 to 12 months, how you're thinking about your liquidity situation, just given your leverage is kind of quickly creeping up towards that 5x number. And then, for example, how are you thinking about the stability of your dividend, any potential drawdown of your revolver, adjustments to covenants? Maybe if you could just unpackage that a bit, that would be helpful for us.
Gianluca Romano, CFO
Yes. Thank you, Erik. Well, we renegotiated our covenants in the December quarter. We have paid down already a big part of our debt between December and even the March quarter. As you said, we already discussed the repayment coming in June about $550 million. So we are very focused on reducing the debt and the leverage. We are generating positive free cash flow every quarter until now. So part of that free cash flow is also going to help with the repayment of the debt. We have other sources that we are looking at. One of those that we discussed in the past is some sales and leaseback of non-manufacturing buildings that we are working on right now. So all this will help with our debt covenants. And if we need to do more, we can do more.
Operator, Operator
The next question comes from Tom O'Malley of Barclays.
Tom O'Malley, Analyst
I just wanted to dive a little bit into the dynamics of the full year. I think you just said that you expect some declines in nearline for the next several quarters. Just given the size of how big that end market is for you guys, do you expect any sequential growth for the remainder of this calendar year? And if so, are you getting that with about a VIA market or a recovery in Legacy? Can you just walk through the puts and takes of total revenue and when you may see that inflection given the new outlook?
Dave Mosley, CEO
A few points to consider. I believe the next quarter will be relatively quiet as we've described. However, I do anticipate some growth towards the end of this calendar year, particularly with exabyte growth. This is expected as many cloud service providers are moving past their digestion phase. We receive a lot of data from these providers indicating high utilization rates within their data centers, and data continues to increase. I am optimistic that this situation will improve at some point. Regarding the VIA markets and the broader macroeconomic environment, we are not declaring an end to macro uncertainty, but we believe that some investments that have been deferred for a while may re-emerge in the latter half of the year. There is positive sentiment, though it hasn't yet translated into purchase orders. Additionally, within the cloud workloads we observe, the data growth is significant. While businesses can make trade-offs by utilizing older drives or discarding data, there will come a time when we face limits. We create more data continually through videos, communications, AI, and other mediums, all of which require storage. Our focus is on accommodating this growth. The current imbalance between supply and demand cannot persist for too long, and we must take proactive steps on the supply side to avoid delays.
Tom O'Malley, Analyst
Got it. The second question is for Gianluca. Regarding gross margin, underutilization charges increased slightly from the previous quarter, and you mentioned the projected charges for the upcoming quarter. However, the gross margins have decreased significantly more than what I calculated based on underutilization. There seems to be some revenue impact as well. Can you explain if the margin pressure is primarily due to the higher mix from VIA in mass capacity, or is there pricing pressure from nearline customers? Could you clarify why we're experiencing more pressure on gross margins than just what the underutilization charges suggest?
Gianluca Romano, CFO
Yes. Thanks, Tom. So I would say the March quarter of course has some mix impact also. For example, mission-critical was sequentially down. And as you know, it has a good gross margin generation. VIA was also sequentially down. So we had a couple of segments that are, let's say, above-average gross margin in March because of seasonality we're down. So we see that recovering actually in the June quarter. As you said, there is also some pricing pressure, especially through the end of the quarter with certain customers. We decided to take some of those deals, and we decided to not take other deals. And so this is what we are focusing on, trying to keep a supply-demand balance where we can. This is why we are doing another restructuring action. We want to keep the capacity that we have internally aligned to the short-term demand and then, of course, in the longer term, keep that balance in a way that there is not too much pricing pressure to Seagate and to the industry in general.
Dave Mosley, CEO
Tom, I would add on to that. Just you can see the pricing stress fairly readily in the dollar per terabyte trends. And so that's why we have to be very discerning about what deals we're taking. But I think it's reflective of a world where manufacturers are just trying to convert inventory back to cash as quickly as they can. And our answer long term has got to be don't build too much so that we don't get ourselves into that position, and then focus on a transition to a more substantial value proposition like higher capacity or lower cost like VIA, the areal density gains that we might have and we apply that to lower capacity drives, just in order to rebuild the margin for ourselves and for the industry.
Operator, Operator
The next question comes from Wamsi Mohan of Bank of America.
Wamsi Mohan, Analyst
Could you provide insights into the outlook and pricing? It appears that your expected timeline for nearline demand recovery is later this year, with HAMR shipments starting in volume perhaps early next year. In the meantime, both memory pricing and NAND demand have been under significant pressure. As you consider your comments regarding gross margin improvement throughout the year, is that dependent on stable pricing, or are you anticipating improvements or declines in pricing? Any additional information would be helpful. Do you think the pricing environment could worsen as the year progresses? I will have a follow-up question.
Dave Mosley, CEO
I'll let Gianluca discuss the restructuring as it's an important aspect of your question. In terms of the pricing environment, we believe we have strong products with 20 terabytes to mid-20 capacity points. Currently, there's not significant demand, but we have good products that we can utilize effectively. The way to improve the situation is to continue enhancing areal density into the mid-30s, which will allow us to reset things a bit. From my viewpoint, the demand is so low that pricing pressures will increase if we overproduce. Therefore, we need to ensure we avoid overbuilding, as it could strain our resources and cash flow. We just have to be patient for now. Gianluca, please address the first part.
Gianluca Romano, CFO
Yes. A good part of the improvement in our gross margin starting fiscal Q1 is related to the restructuring actions that we are taking right now. We said it's about $200 million annualized savings. And it will be fully realized probably through the end of fiscal Q1. The plan is based on the current visibility of pricing. As you know, that can change. And we are trying to reduce our capacity so that we build the right level of products for the current demand, and we take out some pressure from pricing.
Wamsi Mohan, Analyst
Okay. Thanks for that color. And if I could follow up, Gianluca, on the comments around positive free cash flow for the remainder of the year. Your free cash flow and EBITDA levels have the potential to deteriorate from current levels. And when we look at that on an LTM basis, it does get you pretty close to your existing covenants. I know you mentioned certain actions that you can take on sale leaseback and other elements. But how should investors think about the dividend in this context, given that you have some cash restructuring charges coming up, you do have other uses of cash as well? I know you are paying down debt. But in the context of dividend, should investors think that's pretty secure as we go through the course of this year? Or is that going to be another lever to use to balance the cash sources and uses for you?
Gianluca Romano, CFO
Seagate has always been very focused on shareholder return. As you know, we have suspended share buybacks based on the current economic situation, but we have protected our dividend. We think we can reduce our leverage in the next few quarters and already discussed that leverage level with our banks. But I'll say until now, we have always protected our dividend.
Dave Mosley, CEO
Yes. I'd say, Wamsi, that I'm proud of who we've been. If you look just over the last 15 years when we came up with some of the policies that we're talking about, I'm really proud of what we've been able to return value to shareholders. Times are tough right now. We have a lot of levers that we can look at, I think, over time. But we want to continue to be that company that we have been. So we're factoring this into all of our discussions right now what our priorities are, trying to keep the exact same priorities we've always had for shareholders. And one of the reasons why we're being really aggressive on the cuts that we are, we're also as aggressively trying to turn some of the assets that we have into cash. We'll continue to look at all those options.
Operator, Operator
The next question comes from Timothy Arcuri of UBS.
Timothy Arcuri, Analyst
I had two. So Gianluca, just on free cash flow. So are you implying that it's going to be positive for the June quarter? Because you did extend payables a lot in March, and you'd probably have to bring that down maybe 25 days or so. So it seems like maybe June free cash flow could be quite a bit negative. So what's the message on June and particularly around cash flow?
Gianluca Romano, CFO
We see June still as positive free cash flow. Of course, we need also to look at the exact timing of the payments for the restructuring actions. But in our plan, we have positive free cash flow for June.
Timothy Arcuri, Analyst
You do. Okay. Okay. Then I guess I had a bigger-picture question. So Dave, in your prepared remarks, you talked about some evaluation of the longer-term capacity needs for the business, and that's kind of a new angle. And we've gone from a year ago thinking that the industry didn't have enough capacity, and now we're thinking about having too much on a structural basis. So I guess, can you talk about that and maybe in the context of that, just given how low NAND pricing has gone, we're now basically at cash cost. Is there a risk that there's some cannibalization happening now in nearline? And sort of what's the TCO difference in SSD and nearline now and data center? Is that part of what's driving you to talk about maybe rethinking what the longer-term capacity needs are for the business?
Dave Mosley, CEO
Let me address the second question first. The answer is no. We believe some of the SSD pricing we're seeing is fundamentally unsustainable, and while it may persist for a while, it is not something we are factoring into our calculations for exabyte demand over time. Your question is quite relevant. Over the last year, the industry has not been increasing capacity. Certain suppliers are facing significant challenges and are reassessing their investments or consolidating their operations. Consequently, from an equipment perspective, there is less capacity now than there was a year ago. From a workforce perspective, there is also reduced capacity due to substantial layoffs, which are tough and undesirable, and while that capacity can recover, the process is not quick. Looking ahead a year, the industry will not have the same capacity it did a year ago. While it could theoretically grow back, achieving that will take time and investment. Our primary focus is on the long lead times for certain starts, like wafer starts for our new products, and we are ensuring that customers understand this situation. It won’t recover quickly, so we need to discuss what the actual demand will be in a year. Many enterprises seem to be assuming they can easily meet future needs, but that assumption could lead to challenges as factory workers feel the strain. We will have to work through this, communicating as much as possible. The industry’s current capacity is not what it was a year ago, and if we don’t address these issues now, it might become even more stressful a year from now.
Operator, Operator
The next question comes from Aaron Rakers of Wells Fargo.
Aaron Rakers, Analyst
Yes. Sorry about that, guys. Can you hear me?
Dave Mosley, CEO
Yes, yes.
Aaron Rakers, Analyst
I'm just curious about the long-term growth trends in nearline capacity shifts. Where do you think we stand today? As we move forward, what does the long-term capacity growth trend look like now?
Dave Mosley, CEO
It's an interesting question. A couple of years ago, we experienced a stall followed by a significant growth surge. I don't believe we'll see that pattern repeat. In terms of exabyte capacity, if we reach mid-3 terabytes or even 4 terabytes per disc by that time, our exabyte output will be much higher with improved economics. However, I don't think we'll have enough capacity for everyone simultaneously. Therefore, I don't expect to see the same magnitude of change as before. Theoretical demand might suggest otherwise, but due to current industry stresses, there may not be sufficient supply. Companies are unable to start materials, maintain significant inventory, or invest aggressively in promising value propositions due to concerns about long lead times. This creates a different set of challenges compared to a few years ago.
Aaron Rakers, Analyst
Yes. And then the follow-up question, just trying to think about gross margin kind of normalizing itself or, I guess, taken another way, if we kind of think about the progression of lifting out the underutilization charge, appreciate you're not guiding beyond this next quarter. But as I look back in time, when I look back and say, hey, if this model gets back to total capacity shipment levels of 150 exabytes a quarter, 130 exabytes a quarter. How do we think about that relative to lifting out the underutilization charges in the P&L?
Gianluca Romano, CFO
Well, of course, it depends on what will be the capacity installed at that point. As you know, we are reducing capacity right now. So gross margin, what we see today for the next several quarters is despite the short-term decline in revenue, we guided in a way that is implying an improvement in gross margin already in the June quarter. So I think that will continue for the next several quarters. And of course, as Dave was saying before, demand weakened it and capacity will be at a certain level, and hopefully, supply and demand will be well balanced. And we have to manage this short-term demand decline. But again, we are ready to do it. We have done that in the past, and we think we know how to do it.
Aaron Rakers, Analyst
So underutilization charges continue beyond the June quarter through the back half of the calendar year?
Gianluca Romano, CFO
We will have some, I think, also in September. But it is declining sequentially.
Dave Mosley, CEO
And some of that is a reset to fixed and variable cost as well, Aaron. So I think as we look forward, we have to project what we think the supply that we'll need to meet that demand is, of course, and we'll be adjusting and trimming as need be.
Operator, Operator
The next question comes from C.J. Muse of Evercore ISI.
C.J. Muse, Analyst
Yes. I was hoping to maybe drill down a little bit deeper on the nearline outlook. If you think about your vision three months ago versus today, obviously a change. And I guess I was hoping you could kind of isolate between cloud, enterprise and China and maybe rank order the change statements there in terms of the slowdown as well as from an end demand overall perspective versus just realizing that there's just too much inventory downstream, and that's what kind of caught you by surprise. So I would love to hear kind of maybe the moving parts there. And if you could prioritize what has really driven the change, that would be helpful.
Dave Mosley, CEO
Thanks, C.J. It’s helpful to break this down into a few components. The most significant factor is the major cloud service providers globally, which exhibit different behaviors based on geography. The large applications in the cloud are experiencing substantial growth, but right now, there are shifts in priorities regarding computing and other investments. There are also concerns about business models, which takes time to resolve, yet data continues to expand. We initially forecasted that we would be past this phase by now based on trends and run rates, but companies can only wait for another three to six months before their patience wears thin. When considering the major cloud service providers, there’s a slight difference in China, where cloud providers have been on pause for some time but are beginning to show increased optimism about their investments, although not yet in terms of purchase orders. This is something to monitor for future developments. On the enterprise side, there has been considerable discussion about servers and other components. From our viewpoint, data is still growing on-premises, despite tight budgets for CIOs. However, some of the offerings are currently quite efficient. For different reasons—though macro factors may be the underlying issue—it seems that the on-premise enterprise sector might take about six months to recover. Additionally, inventory levels appear to be well managed, with anecdotal evidence supporting this. Therefore, if the opportunity arises to enhance those investments, we could possibly see a quicker turnaround.
C.J. Muse, Analyst
Very helpful. And I guess as my follow-up to Gianluca, thinking about liquidity. You talked about the intention to pay down the debt that's coming due in June. Curious how you're thinking about gross cash? And is there a plan today to draw on the revolver? Or that's TBD depending on kind of the free cash flow generation into June and September?
Gianluca Romano, CFO
No, I think our cash balance will remain relatively stable at the end of the quarter compared to the end of March. Therefore, I don't believe we will need to use the revolver. Occasionally, we may utilize a revolver during the quarter for a few weeks, but overall, I expect the cash balance to be quite similar to what we had at the end of March.
Operator, Operator
The next question comes from Krish Sankar of TD Cowen.
Krish Sankar, Analyst
My first one is for Gianluca. Just wanted to follow up on HAMR. How much of a drag is it on margins today? And when do you think it will improve towards the corporate average? Is it just purely a function of volume in that helps you improve HAMR margins? And then is the long-term gross margin target still 30% to 33% baking in HAMR? Then I have a follow-up for Dave.
Gianluca Romano, CFO
Yes. Well, I would say right now, we are very happy with how we are progressing with HAMR. As we said in the prepared remarks, we are shipping products for qualification, so right now, we don't have revenue coming from HAMR. So it's not really impacting our gross margin. But we think, of course, in the future, 3 terabytes per disk or 3.5 terabytes per disk and 4 terabytes per disk, those are very interesting propositions for our customers, and we think will be actually a very profitable gross margin improvement for Seagate, which is why this product is so important to us and in general, in the longer term for the entire industry.
Krish Sankar, Analyst
Got it. Got it. Very helpful. And then a follow-up for Dave. Sorry, just to come back to this SSD versus HDD dynamic. I agree with you that the NAND prices are unsustainably low. But if you look at like the last down cycle, the SSD prices are almost 8x higher than HDD on a per gigabyte basis. Now it's more like 2x to 4x. So that gap is definitely closing. So I'm kind of curious, when you talk to your cloud customers, how does that discussion progress? And is that a certain part of your weak pricing per terabyte, or is it part of your weak demand from cloud customers? Or I'm just kind of curious about it.
Dave Mosley, CEO
When we scale up to mass capacity, I don't believe the capacity points are simply 2x to 4x; I think they're much higher. We will continue to provide better value propositions as we increase capacity. Currently, demand is low across the board. Manufacturers are trying to quickly convert their inventory into cash. If they are selling below cost, I hope they reconsider their approaches and explore other strategies. We are also focused on avoiding overproduction. Given this situation, it’s difficult to predict trends accurately, as many comparisons may be unsustainable and will eventually need to adjust. As we delve deeper into the value chains and push more inventory, companies will start to create buffers. This is one reason we've chosen to reduce our production and scale back our presence in defense.
Operator, Operator
The next question comes from Toshiya Hari of Goldman Sachs.
Toshiya Hari, Analyst
I have a question for Dave and a quick one for Gianluca. Dave, although it may not be completely clear, could you share your thoughts on nearline inventory or customer inventory in the nearline market compared to six months and twelve months ago? How do you see the difference between what you're selling in the nearline space and what is actually being consumed, and what is the current percentage difference?
Dave Mosley, CEO
Yes. It's interesting because when I discuss inventory, particularly in distribution channels, I typically analyze weeks of supply. However, I wonder whether that is based on the last four weeks or 13 weeks? If we consider data from a couple of years ago, demand was low, and there wasn't much inventory available based on the drive usage rates from that time. Even looking at exabytes, the inventory remains fairly low. However, I want to point out that most cloud service providers require some level of inventory due to the size of their data centers, the new data center constructions, and the necessary spare parts. Typically, they aim to maintain a few months of inventory. Currently, it is slightly more than a few months, but not significantly so, and I believe the overall number of drives is not high. That's how I perceive it. Exabyte growth is expected to be substantial in the future, and we just need to ensure that we are not oversupplying those channels. I wouldn’t classify it neatly as three or six months since looking back two years at the number of drives being utilized suggests it’s more like three months.
Toshiya Hari, Analyst
Got it. And then any view on sell-in versus end consumption? Or is that too hard to really see?
Dave Mosley, CEO
Yes, here's what I'd say is that we see a lot of the new drives, the higher capacity drives going into replacing lower capacity drives, obviously, but the lower capacity drives get put into other purpose applications as well. So I think drives are living longer, but there's still going to be demand for higher capacity drives, especially just the efficiency that you get out of that in the data centers. And then there's new data center buildout as well. So I actually think that this is not a problem of not needing any product. This is a problem of reshuffling priorities inside of the data centers and getting ready for the next level of data center expansion.
Toshiya Hari, Analyst
That makes sense. And then Gianluca, on gross margins, longer term, obviously, you've had this target of 30% to 33%, if I'm not mistaken. You're obviously significantly below that today, but as you think about the path towards your long-term model over the next four-eight quarters, given the reduction to manufacturing footprint that you're executing to, what sort of quarterly revenue run rate would you need to be at to be at that, call it, 30% range? I assume it's lower than where you were about a year ago, which was about $3 billion, a little bit below $3 billion.
Gianluca Romano, CFO
Yes, of course, it depends also from the mix and other factors. But as you said, we are taking a lot of cost actions. So what we also said last quarter is when we go back to the prior level of revenue that we picked at about $3 billion, we expect gross margin to be actually better than what it was at that time. So we are still confident in the medium and long term. We are taking actions to be even stronger when we come out from this down cycle. And we are executing our roadmap. We are executing all our cost reviews, and we think we are ready for the recovery of this up cycle when it comes.
Shayne Hudson, Investor Relations
And operator, I think we have time for two more questions.
Operator, Operator
The next question comes from Sidney Ho of Deutsche Bank.
Sidney Ho, Analyst
Great. So I have two quick ones, one on the HAMR side. It sounds like high volume is starting in early '24 to your plan. Can you give us any goalposts in terms of when you expect to hit a certain unit volume on a quarterly basis and maybe when you expect HAMR to be gross margin accretive, and maybe at what kind of volume level? And I have a follow-up.
Dave Mosley, CEO
Yes. I think Sidney, our gross margins are going to come back based on demand. I don't know that we can really break it out based on HAMR transition right now because there's so many other dynamics. But we are aggressively filling the pipeline full of the product, working on the yields and scrap that we need to get down. Very, very confident in the technology. So thanks for the question. I would say we'll hit what I'll consider a significant volume ramp in early 2024. And then we're going to continue to ramp from there because we have that much confidence.
Sidney Ho, Analyst
That's helpful. As a follow-up question regarding demand, it appears that you are more optimistic about the enterprise market compared to the cloud market. Do you anticipate further corrections in the enterprise market, or do you foresee a U-shaped recovery, given that some comments from storage OEMs seem to suggest a subdued outlook and indicate they are still in the early stages of digestion?
Dave Mosley, CEO
Yes, I think the only nuance to your comment is that my previous remarks were focused on inventory. There isn't a lot of inventory available in those channels. So as we begin to see some recovery, I believe there is potential for inventory to be replenished. I understand that people are discussing a relatively quiet summer, possibly with no recovery until the later part of the year, and we are monitoring that situation. Unlike other markets where there may be an excess of inventory to be absorbed, I don’t think that's the case here. It has been managed more effectively.
Operator, Operator
The next question comes from Ananda Baruah of Loop Capital.
Ananda Baruah, Analyst
I have two quick questions to ask at once. One is more of a clarification. Dave, when you mentioned that you believe demand will pick up towards the end of the year, does that imply that you think the December quarter could see an increase in exabytes sequentially? Also, does that suggest that the September quarter might show a decrease sequentially? I will ask a follow-up after this.
Dave Mosley, CEO
Yes. Ananda, thank you for the question. I believe it's a bit early to provide guidance. We are still processing the situation and sharing information about our developments. However, at some point, we can expect an increase in exabytes. If we consider the December quarter, it seems reasonable to expect some growth, assuming there are no major macroeconomic issues. But right now, it's premature to provide specific guidance. Our focus at this moment is on managing the build.
Ananda Baruah, Analyst
And the quick follow-up is on the BIS dynamics, is there a revenue impact we should take into account now as well with that invested?
Dave Mosley, CEO
No, no revenue impact.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Dave Mosley, CEO
Thanks, Andrea. As you heard today, Seagate's acting with speed and agility to manage through a tough near-term market environment. At the same time, we're executing our strong mass capacity product roadmap that positions us to serve our customers and improve Seagate's financial performance. I just want to close by thanking all of our stakeholders for their ongoing support, and thanks for joining us today.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.