Earnings Call Transcript
Seagate Technology Holdings plc (STX)
Earnings Call Transcript - STX Q2 2022
Operator, Operator
Good afternoon, and welcome to the Seagate Technology Fiscal Second Quarter 2022 Financial Results Conference Call. My name is Brent, and I will be your coordinator for today. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye.
Shayne Hudson, Senior Vice President, Investor Relations and Treasury
Thank you. Good afternoon, 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 December quarter fiscal 2022 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 including our March quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions. These statements are based on management's current views and assumptions and 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. Now I'll hand the call over to you, Dave.
Dave Mosley, CEO
Thank you, Shanye, and hello to everyone joining us on today's call. Seagate ended calendar year 2021 on a high note, delivering another solid performance in the December quarter, highlighted by revenue of $3.12 billion, our best in over 6 years. And non-GAAP EPS of $2.41, representing the highest level in nearly a decade. This performance is all the more impressive in light of the supply chain disruptions and inflationary pressures we are experiencing today and further demonstrates the consistent execution, operational agility and sharp focus on expense discipline that we have displayed throughout the year. To that point, in calendar year 2021, we achieved revenue of nearly $12 billion, up 18% compared with the prior calendar year. We expanded non-GAAP EPS by more than 75%, and we grew free cash flow by nearly 40%, truly an outstanding year of growth that shows we are capitalizing on the secular tailwinds driving long-term mass capacity storage demand. As we shared many times before, driving profitability and free cash flow generation remain 2 of Seagate's top priorities and underpin our focus on enhancing value for our customers and shareholders. Since the onset of the pandemic, we have consistently executed our product roadmap and made investments to deliver cost-efficient, higher capacity drives that offer business value for our customers while also enhancing Seagate's financial profile. We extended our proven common platform drive family from 16 to 18 and now to 20 terabytes and beyond. We also address cloud customers' performance needs through our industry-leading dual actuator technology. We've made these advancements while notably returning more than $4 billion to our shareholders through our quarterly dividend and share repurchase programs. Our execution and product momentum position Seagate to deliver a third consecutive calendar year of top line growth. We currently expect calendar year '22 revenue to increase 3% to 6% with further growth beyond, consistent with our long-term model range. Let me spend a few minutes discussing the current business environment. In the December quarter, we again generated record mass capacity revenue with growth led by demand from cloud customers. We achieved our highest ever cloud customer revenue, supported by sales of our 18 terabyte nearline products, which significantly increased quarter-over-quarter consistent with our plans. HDDs are a critical enabling technology for the growing data sphere. As we shared a year ago at our analyst event and our results demonstrate, HDDs have a well-established place in the data center ecosystem, and we do not expect that to change over the next decade or longer. For the past couple of years, Seagate has been a beneficiary of increasing cloud data center investments to support remote work, remote education and the digital transformation trends that continue to take place. Analysts forecast another year of strong double-digit cloud CapEx growth in calendar 2022. Several powerful themes emerged from this year's CES conference that support our longer-term demand outlook and underscore a clear business need to capture, access and analyze massive and growing volumes of data. New use cases highlight how data-intensive applications such as AI, autonomous vehicles or smart cities can improve business or social value and drive demand for mass capacity storage, both in the cloud and at the edge. We have previously shared how emerging use cases at the edge are driving meaningful opportunities within the VIA market. These applications utilize high-definition video and AI analytics to capture and extract data value. In the December quarter, sales of our VIA products remain healthy, and we expect the March quarter to be seasonally slower, consistent with historical trends. Longer term, we continue to forecast exabyte growth in the mid-teens, supported by expanding opportunities at the edge. Moving to our other markets, sequential growth from the cloud in the December quarter was somewhat counterbalanced by lower revenue in the enterprise, OEM and legacy PC markets that we attribute primarily to the COVID-related supply challenges that dominated broader industry headlines. As we indicated last quarter, non-HDD component shortages are disrupting some of our enterprise and OEM customer shipment plans, which impact both mass capacity nearline and legacy mission-critical drives. We are mindful that these supply pressures and other COVID-related measures could further weigh on the typical March quarter seasonality that we anticipate in the VIA and legacy markets. However, customers are managing through the tight supply environment and expect conditions to ease over the next couple of quarters. Seasonality and temporary constraints aside, the long-term mass capacity demand trends remain strong. In this environment, we remain focused on exercising capital discipline to align supply with demand and continue to engage with customers on their longer-term demand requirements to ensure that our production capacity plans align with their future ramp timelines. With lead times for high-capacity HDDs of 6 months or longer, an increasing portion of our nearline drive revenue is under long-term agreements with momentum to expand even further. We are executing our innovative mass capacity roadmap and cost reduction plans to offer a compelling value proposition for our customers that is also financially attractive for Seagate. We are ramping 20-terabyte drives, extending our common platform to a third generation. For a couple of quarters now, cloud data center customers have shown very strong pull for these drives. The TCO value proposition for transitioning to higher capacity drives is compelling. Consider first that a move from 18 to 20 terabytes represents an 11% boost in storage capacity, and then layer on the savings realized across the data center buildout. At the system level, customers require less networking gear and other ancillary parts to support the same storage capacity. On both fronts, these gains translate to meaningful cost efficiencies, which may be further enhanced given the part shortages and inflationary pressures in today's market. All indications point to a very steep production ramp for our 20-terabyte products with the potential of surpassing the record-setting ramp we saw for our 16-terabyte drives. As a result, we are using the seasonal slowdown in the March quarter to stage our factory operations to support strong 20-terabyte demand as the year unfolds. Our common platform approach helps to facilitate this process by enabling us to quickly transition and ramp new products into the market. Our 20-terabyte drives highly leverage the head and media technology that power our 18-terabyte product family, making the production process well understood and hastened in time to yield. This strategy also provides manufacturing flexibility and improves our overall cost efficiencies across the breadth of our common platform family, which currently spans 16 through 20 terabyte capacities for CMR products with some customers stretching to 22 terabytes using SMR feature sets. We are driving additional manufacturing and cost benefits by incorporating the same media and head technology to produce cost-optimized drives, spanning capacities down to 2-terabyte drives. In addition to improving manufacturing flexibility, these cost-optimized drives can require fewer heads and disks, which offset some of the near-term inflationary component pressures. In the December quarter, the revenue contribution from products using higher aerial density drives increased to nearly 40% of total HDD revenue. Wrapping up, we entered the March quarter amid a challenging supply environment. However, I remain optimistic for conditions to gradually improve. Importantly, our strong product portfolio and operational execution put Seagate in an excellent position to deliver on our long-term revenue growth model and generate strong free cash flow in 2022 and beyond, underpinned by growing demand for mass capacity storage beyond 20 terabytes. I'll now hand the call over to Gianluca to cover the financial results.
Gianluca Romano, CFO
Thank you, Dave. Seagate continued to execute well and navigate a complex business environment to deliver a solid financial performance aligned with our expectations. In the December quarter, we grew revenue to $3.12 billion, up 19% year-over-year. Delivered non-GAAP operating margin of nearly 20%, up 520 basis points year-over-year, and increased non-GAAP EPS to $2.41, up 87% year-over-year. In our HDD drive business, we achieved the fifth consecutive quarter of record capacity shipments, totaling 163 exabytes, up 3% sequentially and up 26% year-on-year. Ongoing cloud demand for our nearline products supported mass capacity revenue of $2 billion, up 1% sequentially and up 25% compared with the prior year period. Shipments into the mass capacity market totaled 137 exabytes, up 4% sequentially and 41% year-over-year. Nearline remains our fastest-growing product segment with revenue outpacing the broader mass capacity business. In the December quarter, we increased shipment to 111 exabytes, up 4% sequentially and 56% year-on-year, supported by the ongoing cloud adoption of 18-terabyte drives as well as healthy demand for mid-capacity products from enterprise and OEM customers. Our 20-terabyte product family is growing strong customer interest, and we are continuing to scale 18 terabyte shipments while also preparing for an anticipated steep 20-terabyte ramp in the coming quarters to support demand. Sales into the VIA markets remained healthy in the December quarter, following 2 quarters of rapid growth and near-record revenue in September. We project a seasonal slowdown in the VIA market during the March quarter, but expect revenue to remain up on a year-over-year basis. Within the legacy market, revenue came in at $775 million, down 7% sequentially and 15% year-over-year. Seasonal demand for consumer drives partially offset weaker-than-anticipated PC sales due in part to ongoing PC component shortages and lower mission-critical sales. As we discussed last quarter, component shortages are also impacting sales in our system business as customers delay some ordered product deals due to constrained supply of nondrive components. Despite these headwinds, non-HDD revenue increased 17% sequentially and 48% year-over-year to a record $294 million, boosted by strong SSD demand. While we continue to face near-term supply challenges for both the system and SSD businesses, we remain confident in growing the non-HDD business in fiscal 2022, particularly for our system solution, where we see ongoing demand and continue to capture new customer logos. Looking at our operational performance, non-GAAP gross profit in the December quarter was $958 million. Our corresponding non-GAAP gross margin was 30.7%, down 30 basis points sequentially, but up nearly 400 basis points year-over-year. The ongoing transition to both higher capacity drives and cost-optimized products mostly offset higher freight and logistic costs and the less favorable product mix with a record non-HDD sales. Notably, HDD gross margin remains in the upper half of our long-term target range of 30% to 33%, flat with the prior quarter. We maintained relatively flat non-GAAP operating expenses at $337 million, lower than expected, reflecting our disciplined expense management and the timing of certain spending. We expect OpEx to be somewhat higher in the March quarter due to increased R&D expenses and business travel. Our resulting non-GAAP operating income was $621 million, down 1% sequentially and up 61% year-on-year. Non-GAAP operating margin remained relatively flat with the prior quarter at 19.9% and at the top end of our long-term target range of 15% to 20% of revenue. Based on diluted share count of approximately 225 million shares, non-GAAP EPS for the December quarter was $2.41, which is $0.06 above our guidance midpoint. We increased inventory by approximately $100 million with days inventory outstanding of 54 days to support the upcoming 20-terabyte product trend. Capital expenditures were $95 million for the quarter, down 19% sequentially. For fiscal '22, we continue to forecast CapEx at the low end of our target range of 4% to 6% of revenue, which is sufficient to support our future product roadmap while maintaining alignment between near-term supply and demand. Free cash flow generation increased to $426 million, up 12% quarter-over-quarter and 36% year-over-year. We delivered strong performance in the December quarter and expect to improve free cash flow generation through the fiscal year, enabling us to continue to fund our strong capital return program. In the December quarter, we used $151 million for the quarterly dividend and $471 million to repurchase 5.1 million ordinary shares, exiting the quarter with 219 million shares outstanding and approximately $3.3 billion remaining in our authorization. We ended the December quarter with cash and cash equivalents of $1.5 billion. And total liquidity was approximately $3.3 billion, including our revolving credit facility. Adjusted EBITDA increased to $723 million in the quarter, our highest level in 7 years, and was $2.6 billion for the 12-month period ending in December. Total debt balance at the end of the quarter was $5.9 billion, and as we previously reported, we plan to repay $120 million in debt coming due in March. In summary, we delivered solid financial performance, maintaining our focus on driving profitability and free cash flow generation while navigating a dynamic business environment. Looking ahead to the March quarter, we expect a continuation of the healthy demand environment in the nearline market with anticipated seasonal decline in VIA and the legacy markets. As Dave noted, we are mindful of the ongoing impact related to corporate dynamics and will continue to manage through supply chain constraints and other inflationary pressures that we expect to persist through at least the fiscal year. We expect March quarter revenue to be in the range of $2.9 billion, plus or minus $150 million. We expect our operating margin to be impacted by COVID-related pressure, what I just discussed over the near term. However, we believe the structural changes in the industry combined with Seagate's disciplined execution will support a higher operating margin over time. As a result, we are raising our long-term target non-GAAP operating margin range to 18% to 22% of revenue compared with our prior range of 15% to 20% of revenue. With that in mind, we expect our March quarter non-GAAP operating margin to be at the lower end of our revised long-term range of 18% to 22% of revenue. And finally, we expect non-GAAP EPS to be in the range of $2, plus or minus $0.20. Looking further ahead, ongoing demand for mass capacity storage, combined with our strong product pipeline, give us confidence to further raise our fiscal year 2022 revenue growth to be between 12% and 14%, up from our prior outlook in the low double-digit range.
Dave Mosley, CEO
Thanks, Gianluca. I'm very proud of the results Seagate posted in the December quarter and also our ability to deliver consistent performance during this unique period of transitory issues. Through it all, the trends driving explosive growth in data remain powerful. Longer-term demand tailwinds that will push growth in mass capacity stores in 2022 and for years to come. Seagate has the right product portfolio, operational know-how, and partnership focus to capture these opportunities and lend confidence in our ability to deliver on the annual growth targets we've outlined today as well as achieve strong profitability and cash generation to fund our robust capital returns program. Seagate has been a technology company, innovation leader for over 4 decades. We are now leading the industry into a new era of technology with HAMR and multiactuator drives. The industry has undergone a positive structural change with the transition of mass capacity markets. These innovations are the result of years of intense focus and significant investments that bring value to our customers and to their customers by unlocking the power of their data. We are focused on capturing an appropriate return to continue fueling our mass capacity innovation engine, which we believe is healthy for Seagate and for the industry at large. In closing, I would like to thank our employees who deserve the credit for Seagate's outstanding performance this past year. We are a values-driven company, and last week, we published our third annual diversity, equity, and inclusion report that captures the many ways we put our value of inclusion into action. Among the many positive measures in the report, I want to highlight an increase in the overall percentage of women in director and executive roles as well as an increase in minorities in our U.S. workforce. These are important areas of focus for the company and reflect positive progress in our efforts to build a more global, diverse, and inclusive workforce, which we believe leads to better business sustainability. I would also like to thank our customers and suppliers for their continued support, and our shareholders for their trust in Seagate. Gianluca and I are now happy to take your questions.
Operator, Operator
Your first question comes from Wamsi Mohan with Bank of America.
Wamsi Mohan, Analyst
Dave, Gianluca, when you look at the gross margins that came in slightly down quarter-on-quarter, 30 basis points, can you talk about the moving pieces there, not just for this quarter, but as you think through gross margin trajectory in terms of both price and the very strong inflationary cost pressures that everyone seems to be absorbing? You guys have done a great job on a year-on-year basis, but how should we think about the next few quarters?
Operator, Operator
Your first question comes from Wamsi Mohan with Bank of America.
Wamsi Mohan, Analyst
Dave, can you hear me?
Dave Mosley, CEO
Yes, I can hear you, Wamsi.
Wamsi Mohan, Analyst
Okay. Great. Dave, when you look at the gross margins coming in slightly down quarter-on-quarter, can you talk about the moving pieces there just in terms of price versus the inflationary pressures that we have seen over the last few quarters? You guys have done a great job on a year-on-year basis. But how should investors think through these moving pieces over the next few quarters?
Dave Mosley, CEO
Appreciate the question. We've tried hard, as you know, to be as predictable as we can. There are a lot of near-term margin headwinds that we described in the prepared remarks. We still remain focused on and as prescriptive as we can over time. We don't view that our current range is some kind of ceiling or anything like that, but there are near-term headwinds. And I'll ask Gianluca to illustrate with a few numbers here in just a second. Big picture, what's going on in our industry is our drives are becoming more and more mass capacity, of course. And which means inside the drive, there's more heads, more disks, all the time. So I think for the last quarter, it grew yet again, and it probably will for the course of the next few years also.
Gianluca Romano, CFO
Yes. I would say, first of all, the change quarter-over-quarter is mainly coming from mix. If you look at the hard disk drive gross margin, it is completely flat to the prior quarter. So we don't have any change in profitability for the hard disk. We have increased a lot our non-hard disk revenue, mainly in the SSD part of the business, and that is driving some reduction in the overall gross margin. But of course, it was also very helpful at the revenue level and the free cash flow level. Now when you look inside the hard disk, mass capacity was at a record high, fairly close to September as we were expecting about 1% higher, but still a good record high. Legacy was sequentially down in mission-critical, but as you know, it is a high gross margin segment. And was actually higher in consumer that is actually a lower gross margin segment. So there is a lot of mix going on into December. But finally, the reality is hard disk in total, was flat gross margin compared to September and the increase in the non-hard disk part was driving the slight decline at the company level. Now when you go into the March quarter, where it's still a mix impact, it's a different kind of mix. This is more a seasonality impact. Some of the segments that will be seasonally low are fairly high gross margins like surveillance, like mission-critical. Other segments are actually fairly, let's say, not low but low at gross margin like consumer. And we also expect at this point some decline in the SSD part of the revenue. So when you put all together, again, the mix is probably driving the gross margin in the March quarter, slightly down from the December quarter, but it's not coming from the business. It's coming mainly from the mix. As Dave was saying before, of course, we have also some cost increases, mainly in the freight and logistic cost. We thought 2 quarters ago to be at already the high level of the freight cost, but it continued to increase in September and again in December. This we expect to start declining in the next few months. But with our spending control, with the strong mass capacity business that we have, we have mainly offset those bad news coming from the cost leaving the mix impact, of course, impacting the total result.
Operator, Operator
Your next question comes from the line of Karl Ackerman with Cowen and Company.
Karl Ackerman, Analyst
Two questions, if I may. One is a follow-up to Wamsi's most recent question. But Gianluca, you spoke about non-HDD component shortages disrupting some of your enterprise customer shipment plans. If I may, are you referring to mission-critical here? Or is this weighted toward mass capacity? And I have a follow-up.
Gianluca Romano, CFO
No, I would say the shortages we have experienced in 2 parts of the business. One is the PC and one is a system solution.
Karl Ackerman, Analyst
Understood. That's clear.
Dave Mosley, CEO
So I think to break it down a little bit, Karl. There is some mission-critical and there is some nearline components to that, if that makes sense.
Karl Ackerman, Analyst
Great. From an end demand perspective, it seems that most end markets may slow down in March, except for nearline hard drives. Could you talk about the visibility you have with your data center customers for high-capacity drives, particularly those signing long-term agreements? Additionally, what is your outlook for the other areas of your business as you anticipate 3% to 6% growth for the calendar year 2022?
Dave Mosley, CEO
So, as mentioned in the prepared remarks, the demand for 20-terabyte drives is quite strong. We are using this quarter to transition from the smaller 18-terabyte components to focus on the 20-terabyte drives to prepare for significant growth in that area. The outlook for these products is positive, and customer demand has been strong, with customers recognizing the cost benefits. We continue to monitor all other markets, and in some cases, our deep relationships with customers provide additional assurance. Overall, I believe it will be a strong year for exabytes, which should translate into increased revenue. However, we are currently facing some temporary challenges due to supply chain issues impacting demand more than supply, and we are attentive to this situation. The demand for mass capacity data, especially, remains robust.
Operator, Operator
Your next question comes from the line of Tim Arcuri with UBS.
Jungsuk Park, Analyst
This is Jason Park on for Tim Arcuri. Our first question is how can we think about the June quarter if June is close to normal seasonal, which is usually flat or up a little than the implied second half of the calendar year has been pretty strong, like 53% of the year, which is about the strongest second half of the calendar year loading we have seen? So just wanted to ask what are the drivers there? And what gives you the confidence? Then I've got a quick follow-up.
Dave Mosley, CEO
I believe you are highlighting an important point. When we began this calendar year, we projected revenue growth in the high single digits, subsequently adjusting to low double digits. Now, we've indicated an expectation of 12% to 14% growth, and we are already past the midpoint of the fiscal year. As we look ahead to Q4, we are forecasting positive momentum. This is partly due to the 20 terabytes I previously mentioned and the shift to cost-optimized drives that we referenced during this transition. We can accurately anticipate the market for our 2 terabyte, 8 terabyte, and 10 terabyte products and have beneficial discussions with our customers in that space. Therefore, we are fairly confident in that aspect of our guidance. Additionally, we discussed expectations for the entire calendar year, which includes growth from last year, all of which is integrated into our projections.
Jungsuk Park, Analyst
Got it. And my follow-up question is on the demand in China. So we just wanted to gauge your level of concerns in China as we think most of the nearline business is direct rather than to a channel. But there are a lot of concerns about demand weakness there due to some of the problem restrictions. So my question is, what are you seeing from the hyperscalers in particular in China?
Dave Mosley, CEO
There have been some delays in construction primarily due to supply chain challenges rather than issues with overall capacity. We still plan to move forward with those investments. Some of these delays might be linked to component shortages or the redirection of budgets towards COVID-related measures or other priorities set by the end customers. However, we are not overly concerned about this in the long term. We maintain strong relationships with the original equipment manufacturers and cloud service providers, and I believe these ongoing projects will proceed. This trend is not limited to China; throughout Asia, there are numerous new applications emerging, including many related to smart cities, which we find very promising. All of this is incorporated into the revenue forecast we recently provided.
Gianluca Romano, CFO
Yes, we need to be cautious not to mix up seasonality with lower demand. As we enter the March quarter, our overall capacity will be affected by seasonal trends, particularly in the surveillance segment. This is not due to high inventory levels or unusually low demand; it's simply the normal seasonality we anticipate for that segment in March. Typically, we see improvements in the June quarter, with a significant uptick expected in September and December.
Operator, Operator
Your next question comes from the line of Tom O'Malley with Barclays.
Thomas O'Malley, Analyst
My question was related to the VIA business. You're describing some seasonality into March. But you made the comment on the call that from a revenue basis, it would be up year-over-year. Obviously, when you look at exabytes, March was extremely low for the business in terms of exabyte shipments in VIA. Can you just try to dial us in a little bit between those two field go posts there? When you look at what is traditional seasonality into that March quarter, what should that look like just because it's hard to get a gauge, given how weak March of '21 was?
Dave Mosley, CEO
That's a great point. Comparing it to a year ago, anyone trying to predict based on pandemic-related investment behaviors will face challenges. There is strength in smart city applications that are emerging. In the second quarter, performance could have been even better. It showed clear improvement year-over-year, but it had the potential to be stronger. Regarding the earlier question, it's reasonable to think that some of those developments are being delayed. Unfortunately, the COVID pandemic is still present, and some priorities are still being adjusted this quarter. We expect that over time, the market will strengthen. As we mentioned, we anticipate mid-double-digit growth in the VIA markets. This will largely depend on the applications and the economics of the required investments across the entire compound supply chain. From our standpoint, demand for data products in these markets is robust. Thus, we should continue to see growth, and possibly even more as time progresses.
Thomas O'Malley, Analyst
Okay. And then my follow-up was just on the inventory side. There's obviously an uptick. You mentioned in your prepared remarks that that was mostly related to a buildup in 20T. Are there other parts of that inventory that are climbing just because of the supply dynamics of the market where your not shipping product? I think you mentioned also that some of that was actually demand related, and that could be because of componentry, et cetera. But can you just dive into that inventory number? Is it all the increase due to 20T? Or are there some other pieces in there as well? That would be helpful to understand.
Dave Mosley, CEO
Largely, it's the 20T. We're able to use those parts against a broader portfolio than just 20s. Of course, we can go to 18s, 16s or all the way, like we talked about, some of the complements are very, very similar, down even further. So at the end of the cost-optimized drive. So that's the way we think about it, is that yes, there's some inventory buildup going on right now. Some of that's just staging for bigger growth in subsequent quarters after this quarter. And the components are very usable across multiple families. So we're really not worried about the growth.
Gianluca Romano, CFO
In the last few quarters, we have built some strategic inventory, of course, to be a little protected by this supply chain situation, but not much in the December quarter. So I will say we have done it before. The increase that you have seen in the last 3 months is mainly related to the 20-terabyte trends.
Operator, Operator
Your next question comes from the line of Katy Huberty with Morgan Stanley.
Kathryn Huberty, Analyst
The March quarter revenue is typically down mid- to high single digits, which aligns perfectly with your guidance. In your prepared remarks, you did mention that supply pressures could put some additional pressure. And I wasn't sure whether that could be incremental to downside to the revenue guidance? Or if that's something that you had baked in for the March quarter? And then just connected to that, the implied June revenue looks to be better than seasonal, up sort of 2% to 3%. Is that because you would expect some of these supply headwinds to resolve themselves as you go into June? And then I have a follow-up.
Dave Mosley, CEO
Yes, thank you, Katy. There are various factors at play. To address the latter part of your question first, yes, there are certain components that we anticipate will become available in the next few weeks. We have incorporated that expectation into our guidance for this quarter as best as we can. However, some components will take longer to become available, so we need to ensure that we align these with our production plans. This also applies to our builds, but we are also considering the wider technology ecosystem, as we understand that many smaller customers are struggling to obtain complete kits. This situation has been challenging for customers at the moment, and our primary focus is to assist them in navigating through these difficulties. While some issues are expected to improve in the near term, others may persist for a longer duration.
Kathryn Huberty, Analyst
Okay. That's helpful. And then maybe, Gianluca, if you can extend the discussion you had with Wamsi on gross margin into how we should think about the March quarter. Your revenue and EPS guide is really in line with the consensus. But on the gross margin line, consensus was I think you could hit north of 31%, which would be an improvement. Do you see the mix shift back towards HDDs helping you expand gross margin sequentially in March?
Gianluca Romano, CFO
Well, in March, the main impact will be coming from the mix and surveillance. VIA market, in general, is a very high gross margin segment. So we will have some impact from that business declining and also mission-critical. So when we look at seasonality and look at the segments that are really impacted are segments that are fairly high gross margin. Of course, the continued increase in our mass capacity. So in the cloud, in the nearline and the OEM part of the nearline, that is all positive. And I think we will continue to see improvement in our gross margin after the March quarter when we go into less seasonal part of the business and, of course, even stronger when you go into September and December. So there is an impact that is due to seasonality and is normal for this industry. I will not look that as unexpected.
Kathryn Huberty, Analyst
So gross margin sort of flat to down in March seasonally and then improvement off of that base?
Gianluca Romano, CFO
Yes, let me see how we guided, yes.
Dave Mosley, CEO
Yes. The best that we can drive gross margins is to continue to transition to more mass capacity products to get more of the constituents of the BOM into the drives that are heads and media.
Operator, Operator
Your next question comes from the line of Mark Miller with The Benchmark Company.
Mark Miller, Analyst
Just was wondering, you mentioned that some of your nearline people were facing some supply constraints. What about your own supply of chips, is that holding up?
Dave Mosley, CEO
Yes. I think we have deep partnerships with our suppliers. We've been with them for a long time. I think there are a lot of dynamics that smaller customers have that we try to help them with. And then from my perspective, there's a certain amount of volatility with that. But like I said before, stuff is becoming more predictable over time even if it might not be the level of what some of those customers want. So we're getting better visibility as time progresses.
Mark Miller, Analyst
Is there anything else driving your enterprise sales in addition to SSD sales, considering the strong growth over the last year?
Dave Mosley, CEO
I do think there is demand for data out there on-prem, and some of that's probably not being serviced, I mean, as well as it could be if there weren't some of the supply constraints, Mark. So yes, I think there's probably some underserved demand. But it may be part of other build-outs as well. It may have problem getting compute or they may have problem getting networks, so they don't do the entire build-out. I think this is going to shake out over the next few months.
Operator, Operator
Next question comes from Mehdi Hosseini with SIG.
Mehdi Hosseini, Analyst
I want to get your thoughts on nearline mix expectation for '22. And how we should think about the migration from 16 to 18 and then to 20, especially given your commentary that was focused on 20 terabyte. And I have a follow-up.
Dave Mosley, CEO
Yes, Mehdi, we have largely transitioned to a platform that can support either 18 or 20 terabytes if we choose, or revert back to 16 if necessary. We adjust our offerings based on customer demand rather than following a theoretical model. We are in discussions with customers where some are not ready to shift to 20 terabytes, while others prefer to remain at 18 or 16 terabytes, and our goal is to accommodate their preferences. The introduction of these new platforms and the modifications we've made will enhance our cost effectiveness. Regarding the aggressive ramp we mentioned earlier, the 20-terabyte expansion is going to be exceptionally rapid. We are preparing for this both now and in the past quarter, and throughout this calendar year, we expect to transition to higher capacity options.
Mehdi Hosseini, Analyst
Got it. And then just going back to the gross margin topic. I understand the mix impact. You also highlighted material cost that has gone up. And I want to better understand how you're able to pass on that incremental cost to your customer. Would it be fair to say that there is a really unusual pricing dynamic for different products? And in that context, would you be able to pass on that incremental cost increase to customers?
Dave Mosley, CEO
Yes, most of the cost increases are related to freight and logistics, particularly when demand predictions are not accurate. It's challenging to ensure the right kits are in the right place at the right time, and the associated freight and logistics fees can be problematic. We do not immediately pass these costs onto our customers. Instead, we collaborate with them, as they are often supply chain experts, to find ways to mitigate those costs. Both parties are keen on maintaining a partnership spirit in the supply chain. There may be instances where we ultimately have to pass those costs along, though there is a time lag involved as we implement our strategies. We engage in extensive discussions with our customers, many of whom manage significant supply chains themselves, and they are aware of the situation. Therefore, we work together to address these challenges.
Gianluca Romano, CFO
Yes. I would say that the favorable price environment is mainly related to the good alignment between supply and demand, not too much on transferring of cost from a supplier to the customer.
Dave Mosley, CEO
But most of our investments are going to head some media for mass capacity now. They're really long lead investment cycles and things like that. So that's what we're focused on.
Operator, Operator
Your next question comes from the line of Sidney Ho with Deutsche Bank.
Jeffrey Rand, Analyst
This is Jeff Rand on for Sid. How should we think about the trajectory of operating expenses as we go through calendar year 2022? I would assume you'll see an uptick in travel and labor costs, but perhaps a decline in some COVID safety costs.
Gianluca Romano, CFO
It's a good question. I would say in the December quarter, operating expenses were a bit lower than we anticipated. This was partly due to the resurgence of the COVID situation, which limited our travel again in that quarter. We believe this situation will start to improve possibly in the March quarter and in subsequent quarters. Therefore, we expect our operating expenses to increase slightly throughout the calendar year, remaining within the range we discussed last quarter of $340 million to $350 million per quarter, which is our current expectation.
Jeffrey Rand, Analyst
Great. And then on the nearline side, how do you think about your gross margins of your higher capacity drives as you continue to increase capacity? Should the 20 terabytes have a similar gross margin profile to the 18 terabyte when fully ramped?
Dave Mosley, CEO
Yes. I think there's opportunities, of course, to increase as we introduce any new technology node, whether it's 20 terabytes or the generations that come after it. A lot of that comes down to how fast can we get up the media and head yield curves and where our scrap bills are and things like that, but they're firmly under our control. So we transition according to what customers need. We transition according to how fast we can based on all of our internal metrics as well. And so I think there is opportunity to build that over time.
Operator, Operator
Your next question comes from Ananda Baruah with Loop Capital.
Ananda Baruah, Analyst
I have a couple of quick questions. First, Dave, has your view on nearline demand changed in the past 90 days, specifically regarding the length or intensity of the market cycle? I'd appreciate any insights you can share on that. And I have a brief follow-up afterwards.
Dave Mosley, CEO
Ananda, in light of everything happening, I don’t think so. At the beginning of the pandemic, we were aware that working from home and the difficulties in getting IT professionals to implement on-prem solutions led to a greater push towards the cloud. As a result, the cloud is expanding more rapidly than we anticipated due to this shift. This isn’t limited to storage; it also includes compute, networking, and other areas that are putting pressure on those businesses. However, we believe storage will follow suit. Our discussions with customers regarding their build-out plans have been fairly predictable, and we see more opportunities arising as the value of data continues to improve. Although there are some temporary supply chain issues affecting many, I don’t believe there has been any significant change in the overall demand for mass capacity.
Ananda Baruah, Analyst
Okay. That's super helpful. And then just a follow-up for Gianluca. Gianluca, you sort of made mention briefly of ASPs a few moments ago. Like can you just describe to us how you view ASPs? And you had mentioned sort of pretty aligned supply demand. Could you also just sneak in some context about your capacity situation? And do you need to put on more capacity to meet the demand as you go through the year?
Gianluca Romano, CFO
Yes, Ananda. As you know, we are spending a relevant amount of CapEx every quarter. So the fact that the supply and demand are now very well aligned. It's not because we are not investing is because demand is strong. And we put in place the capacity that is needed and try not to put more than what is requested. Of course, because there is some seasonality through the year, there are quarters where that capacity is not exactly matching demand. But in general, part of our job is to estimate demand and define what is the CapEx that is needed to match the demand and satisfy our customer demand without putting capacity that is not needed. That is the main driver for the pricing. And in the last several quarters, as we have seen, the pricing environment has been much better than a year ago or 2 years ago. And we think this industry deserves an appropriate return follows a significant investment that we are making and the industry in general is making. And all the value that we deliver to support the mass capacity growth. And this is what we are driving for.
Operator, Operator
Your next question comes from the line of Patrick Ho with Stifel.
Patrick Ho, Analyst
Dave, maybe first off, it seems like you're getting really good traction and adoption for the 20-terabyte drives over the next few quarters. Can you give us your thoughts on the HAMR drive, whether the common platform could potentially delay adoption of HAMR or is that still on track? And how is customer acceptance of the next-generation HAMR drives?
Dave Mosley, CEO
Yes. Thanks. So the HAMR has always been planned to go into the common platform. There will have to be some changes specifically for that. Exactly to your point, we plan to continue to do customer evals. So the customers know exactly what kind of behaviors they'll get. There will be higher capacity drives when they ultimately come with HAMR too. Very happy with the progress actually on HAMR. So I think we said a couple of quarters ago, this is happening right now. We're in an intense product development, engaging with customers. They're partnering with us on it.
Patrick Ho, Analyst
Great. And as my follow-up question, maybe for Gianluca, in terms of the investments into the company. You've obviously invested a lot into HAMR and the common platform. Can you discuss some of the investments maybe on a big-picture basis for stuff like your Lyve platform? How much investments are needed to kind of build up that business, additional solutions offerings that will come out of that platform over time? How much more do you need to invest as it relates to Lyve?
Gianluca Romano, CFO
It's a very good question. The Lyve business is mainly based on hard disk, is a cloud storage that is based on hard disk. So it's not really requiring a lot of additional CapEx. It's part of what we use for our normal production that, depending from demand, we move between customer allocation and the internal need.
Dave Mosley, CEO
Yes. These aren't large investments, Patrick. However, we are always looking for ways to develop go-to-market strategies that can utilize our products in different ways. For example, we consider circularity and recycling the product and creating outlets for it. There are many opportunities within our systems business and the Lyve platform, and we see this as a way to establish channels that provide significant economic advantages to customers. Additionally, it will help us manage the various challenges we will face globally due to our scale.
Operator, Operator
Your final question comes from the line of Jim Suva with Citigroup.
Jim Suva, Analyst
My question is regarding the pricing of your products. It seems that over the past two years, pricing has been significantly stronger than historical norms. Do you expect this trend to continue? For how much longer? You mentioned that some of your components will be available soon, while others will experience delays. I'm curious about how long you think we will remain in this environment with pricing that is much stronger than usual.
Dave Mosley, CEO
I agree, Jim. It's important to note that if we look back 5 or 10 years, our factories were filled with many client-server drives, which were in much different environments compared to today's mass capacity systems with long lead times. As we've transitioned over the past few years to mass capacity, we can now clearly articulate our investments and the projects we're pursuing. This allows us to establish long-term agreements and gain predictability in the market. Of course, there can still be disruptions due to the increasing number of heads and media that we manage. If there are external components involved, like the impact COVID has had on several of our suppliers, as well as on customers and end markets, it introduces more volatility. However, from my viewpoint, as we continue to shift towards mass capacity drives with more heads and media, the situation becomes somewhat more predictable because it's essential for us to realize a good return on investment.
Operator, Operator
There are no further questions at this time. I will now turn the call back over to management for closing remarks.
Dave Mosley, CEO
Thanks, Brent. As you can all see, calendar '22 is an outstanding year for Seagate, and we believe that our strong product and technology roadmap, combined with our ongoing solid execution position us well to capture secular growth opportunities for mass data infrastructure for years to come. I'd just like to once again thank our employees for their outstanding efforts and our customers and suppliers and investors for their continued support of Seagate. Thanks for joining us today.
Operator, Operator
Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.