All right. Good morning everyone. I'm Krish Sankar from TD Common. I'm the analyst covering Seagate where we are fortunate enough to have John Luca, the CFO, also Shaney from the IR team here. Seagate, obviously, as you know, one of the leaders in hard drives. um John Luca thank you very much for your time and while I'm on it I also tell every investor on this like you know please do vote for TD common in extel and semis uh so anyways with that let's start I think John Luca I think what is kind of interesting is that I think there seems to have been some confusion last week um where some folks assume that there's capacity addition but I think you know can you just clarify what's going on because I think what has been pretty like you know consistent with what you've spoken in the past is mid 20 percent exabyte growth probably not real unit capacity additions has anything changes is still that the narrative
today yeah thank you Grish always nice to meet with you before we start let me say that I will be making forward look at statement today and you can learn more about the risk associated with those statements on our website so short answer to your question is no we are not adding any unit capacity we think our technology roadmap is really strong so we can generate the exabyte that we need through technology transition now going from fourth generation emmer to second generation emmer we already discussed at our learning release about third generation emmer that is five terabytes per disk so a 50 terabyte drive that we will start qualifying at the end of next calendar year so our our roadmap is really good we think we generate about 25% increase in exabyte year-over-year through technology roadmap so we don't
need more units good and then what about head capacity addition is that a slightly different story compared to units or not really I'll say no we
produce as a media so the ads to read and write the data and the media is a disk we also buy a lot of other components externally but the technology is in those two components as a media. So depending how you assemble the drive, if you have a 5-disc drive or 8-disc drive or a 10-disc drive, for the same number of units, you can need a little bit different number of heads of media. So it depends where the mix is going. But generally, I would say our focus is keeping the units very stable and, of course, increase the exabyte that we generate through this change in mix, change in technology and transition every 18 months, 24 months to a new generation of MR that give us, in this case, from fourth generation MR to second generation MR give us more than 30% increase in exabyte. And then from the second to the third another 25%. So we can grow through technology. We don't need more units.
And also along the same path, you know, when you look at it, clearly demand is strong. I think last time we spoke about kind of, if I remember, but I kind of sold out for all of 2027. Is that still the case? What is the visibility into 2028? And how to think about some of the LTAs that you signed?
Yeah, so we have two different kind of agreements. Now, for the next four to five quarters, we have orders. So an order has a specific product, specific volume, specific price, and time to deliver the product. so we always want to cover the next four to five quarters because this is a time we need to produce an artist drive or to produce an MRRD drive you need about three quarters so we want you know three four five quarters that are fully defined when we start the product in our manufacturing we know exactly who will buy it and what price after that we have LTAs that are agreement based on exabyte so to know for our customers is very important to know what kind of storage they can get two years out in time three years out of time even longer because they need to plan their new data centers so then the price is less important the mix is less important they don't even know what product they will be qualified not three years out in time but they want to know how many exabyte we are allocated to them so they know how many data centers they can build so we have agreement on exabyte but then when we arrive into that no four to five quarters range we translate the exabyte LTA into an order at that point they know what is the product that they are qualified we know how much we can ramp over product and so we have usually we have a list of products where they buy not only one we define the price and we define exactly when we ship but historically if
you remember right the pricing was negotiated on a quarterly basis but now has it changed to an
annual basis yeah is depending from the customer and the duration of the orders is three four five
quarters gotcha you know the other interesting thing I remember is that you know in the past you mentioned that 70% of hard drive demand comes from new data center openings. How do you track that? Because obviously there are a lot of things that goes into a new data center opening. Obviously, I deal with like, you know, permitting process, power supply, things like that. So how much visibility do you get? And in that build-out process, where do you come in? Are you like a late stage purchase from a data center build-out standpoint, early?
Yeah, we have two major segments, you know, data center and edge. data center today is probably 80 percent of our revenue so it's growing has grown a lot in the last two or three years in particular public cloud is the sub sub segment inside data center that is growing the fastest so we're already 80 percent of revenue more than that in term of exabyte so we see this trend continuing now data center is growing faster than any other segment But we also see a good demand on the edge. So today, and the edge is where we compete with NAND. So low-capacity drive, 2 terabyte, 4 terabyte, 8 terabyte drive, small. Because NAND price is so high, but it's a good opportunity for artists to increase price. And we don't have purchase order in that segment. We can be more, we can increase price faster. And now demand is also higher. But again, it's not the majority of our business, only 20% of our revenue. Data center, much more structure. We have those purchase order in place. We have a price defined. Price is increasing, but it's a different kind of trajectory. And in the data center, as you know, we don't really compete with NAND. So the NAND price has no influence on our demand. NAND is used to run the application on the compute side RDS is used for storage so very
different application. I mean it kind of makes sense because I think hard drives is probably up to two percent of a data center capex while NAND plus DRAM is probably up to 40 percent now with the price increase so you're not the problem child but you know they think that memory could Is the memory price increase, i.e. DRAM, RAN price increase, slowing down data center build-out?
So far, probably not much. I'll say what we try to do is not to be the main problem. So we don't want to be the component that is limiting the development of the data center. So now in the past, you have seen the power being the bottleneck, probably still the bottleneck, the GPUs, they wear a bottleneck. Possibly DRAM is becoming the bottleneck. So we are always number two, three, or four in the list. Now it's a good place to be. Now we still have our power in the negotiation, but we are not limiting their development. So we are not a problem for our customers.
And, you know, the other thing that Karen noticed is compared to last year, I think last quarter, it is obvious from your numbers and your competitors' numbers, the pricing is getting better or, you know, a little more better than historically. So historically it was more like mid to high single digits. Now it looks like it would be low double digit. Obviously it's still not a problem. So you could probably even increase pricing further and not be an issue. But what is the thought process behind price increase and how sustainable is this run rate over the next couple of years well we know it's sustainable
because we already have po in places so we as we said that our earnings release we see not only this quarter but now we got it more precisely but we also discussed about the next four quarters and we said every quarter you will see revenue increase and you will see profitability increase of course a good part of that improvement is coming from pricing we are executing a very good strategy that is not being super aggressive with price but be very very consistent so every quarter you see the price up every quarter you see that exabyte up no units but exabyte up so revenue is growing very well and
profitability is growing extremely well and then the other thing that is kind of interesting when you look at last year I would say the inflection for hard drives really started when started seeing videos AI videos and things like that today how do you see that is that still a big trend or is it like more data retention what is the driver today and into next year for the next leg of
like hard drive demand yeah I'll say there are different drivers no I would the positive part for our disk is that on storage on our disk you don't need a different mix different kind of artists depending from what kind of data you want to store so if it is a video ai or a traditional video or a daytime form of text they all get stored in the same art disk so it's a good simplification for us in terms of what we have to produce and what we have to generate I would say video AI is huge. Retention started probably two years ago. So when companies and people were starting to use AI, the first things we all did is stop deleting data because if you want to have a good result from running AI, you need to have a lot of data. So data retention already started two years ago and then you started to have AI generating data itself as an application. and the beauty for us in terms of data generation and data storage is AI is very quick so generate a lot of more data than humans it works 24 7 every day no problem and generate data that you need even if even as a step through the final result so everything that AI generate gets stored and then get used again to generate something else until you arrive to the final result so a lot of benefit from from ai but it's not the only application now of course robotic is becoming more and more a data generation application now ai robotic will be another one but it's just starting today autonomous driving now you go to san francisco you go to phoenix arizona you see a lot of cars that are autonomous driving, they generate a lot of data every day. And all that data is stored every day for compliance and to learn how to better drive the car in the city. So when you see that expanding through all the city in the U.S. and outside the U.S., that is an incredible volume of data that will get stored.
So, you know, today, like you said, the majority of your demand is going to be hyperscalers. is there an argument to be made that hard drive really benefits only from hyperscaler or cloud demand because let's just assume in the future we go to an enterprise AI world with like inference if there's going to be more on-prem deployment would hard drives benefit or more a cloud play rather than
an on-prem play oh as I said before we see demand in both segments so in the data center and at the edge. I would say it depends how AI will continue to evolve. Now AI today use a lot of the public cloud, so it's concentrated in the public cloud. The NeoCloud are compute. They don't have storage. Now they take the storage from a big public cloud, so from an R disk, they move into an end, into the NeoCloud data center, runs the application, and store back in the R disk in the public cloud. So they basically outsource or complement the compute part of a public cloud. If they want to become more independent from the public cloud and run their compute for other customers, they will have to build storage. At that point, we'll sell R-Disk even to the new cloud. At the edge, the same or on-prem. If you have a company that doesn't want to use a public cloud for many reasons no efficiency cost or or security of the information the structure is the same it's just smaller but storage is our disk and then when they run the compute they move the data into an end run it and send it back just smaller but same concept now when we go to the edge that will be interesting no it's probably not happening you know tomorrow or the day after but when you go longer you will have for example autonomous driving we require a lot of edge storage and and fast compute so for sure you will have you know a a good application for the DRAM and the name part of the business but then they will also start parking data for a while until they send to the public cloud that can be our disk so we will see but I think there are a lot
of opportunities for our disk even at the edge. Would you consider your VIA China business it
kind of like similar to edge or is it the VIA is a is a bit different I would say there are two parts of VIA so the video and image application first of all there are not the cameras that are connected to a storage where storage is usually in our disk can be depending how big is the the security that you're having can be four terabyte eight terabyte ten terabyte so usually is a mid-cap artist not a huge then the company that are providing the surveillance they also offer storage so if you are a building like this one now you have all the camera you record everything and then you say okay or you delete or you store somewhere and you can store with the same company that is providing you the service of surveillance so in this in that case they buy big drives they buy 20 terabyte 30 terabyte 40 terabyte because they are actually offering a simplified cloud there are not a lot of applications there are some applications related to the surveillance but not a lot of application but a lot of storage because the data is kept until they run the application and then
they decide what to what to do with the data gotcha interesting let's pause to see if anyone in the audience had a question um if not I'll chug along um so you know the other thing like when you look at your business I think historically your cost downs are probably like high single digits 10 percent now it's more like low double digit mid-teens um so the cost downs are actually better than historical is that really a function of moving to hammer or do you think there is a lot more uh room for this cost decline to improve or do you think we there's like a once-in-a-time step down because of hammer now we should think
about more like 10% longer term well I'll say if you look at the product so the product cost going from first generation MR 30 terabyte drive to second generation MR 40 terabyte drive the unique cost is fairly similar but you have 10 terabyte more so we have actually fairly huge decline in term of cost per terabyte when you look at the entire company the entire P&L doesn't depend only from the last product now we sell from two terabyte drive to 40 terabyte drive so the cost in the period depend how this mix move up and so it's not only the last product but now with the time moving more and more into emmer especially as a beginning of the technology where you increase 33% going from fourth generation to second is a good no is a good improvement of our cost decline when you go from 40 terabyte to 50 terabyte in percentage that is 25 percent so it's still the same similar unique cost you you add the same 10 terabyte but in percentage is a bit lower so depending how you calculate but i'll say of course m is is advantageous for uh for the cost but every period is different every quarter is different depending how many pmr we're still selling and what is now the segment in that specific quarter that is getting more volume so it is not so it's not so linear but i'll say elmer longer term will be of course the way to reduce cost in in the industry otherwise with the old technology with pmr technology you continue to add one disc and two add one disc and two add until your space in the box but so the cost per unit goes up because you need to increase the bill of material with emmer you keep the 10 disk 20 heads from 30 terabyte drive 40 terabyte drive 50 terabyte drive so the bill of material remain consistent of course the components are not the same so there is an increase on some of those components so but the unit cost is
fairly similar are there any pressures on that because you know one of the things is like for example you get glass from Hoyer or someone but they also have increasing demand from the optics and photonics folks so is there anything any disproportionate pricing where other sectors are actually willing to pay a premium causing you know your cost to go up because they had to probably match
that to secure those components well no supply chain of course is very important and as I said before we buy a lot of components we buy electronics we buy memories that as you know are fairly expensive today and we buy a lot of other mechanical components so now of course every year is different you know there are years with higher inflation here with lower inflation here where there is a shortage of one component so you need to spend more so no my my discussion is keeping those at the same level you have this clearly no strong reduction in cost per terabyte but as i said before every period is different now right now we have memories no costing more for sure so but you cannot compare it's not because of the technology because of the component so that you need to adjust your your estimate based on how you see those components cost evolving yes got
you because I think you know clearly the demand is very strong doing these cost downs already like for 50% plus gross margin I think people always speculated that it's a rational duopoly so you should be at 65% gross margin and it seems like there's a path to get there easily maybe exceed but I think realistically get to mid 60% gross margin from your view I mean I'm not looking for guidance but is that a fair assumption given the trajectory of
demand and trajectory of your cost downs I would say is the assumption of continuing to improve is very fair. No, we actually said that just a few weeks ago. We said, no, there are this quarter plus other four of improvement. And no, this quarter we are guiding at a gross margin that is about 50%. So if we continue to improve, we continue to improve. So we will go, but we don't have a gross margin target. So, but it's not a number that when we achieve, we just say, okay, that's this enough we stop there we like we like how we run this strategy and we have done it for 12 consecutive quarters this is a 13 we have other four that we know are coming and we will continue to do that and then one day we will say okay this is this is the result that we have achieved but we don't see an end at this point yet gotcha because you know the other interesting thing is
you know you said early on you're not adding unit capacity. You're still growing exabytes 25 to 30 percent. At that keg, your hyperscale of customers are not pressuring you to add more capacity. They are happy with the 25 to 30. I don't
know if they're happy. I think there is pressure to do more because their unconstrained demand is for sure higher. But every year there is some components that get short. Right now it's DRAM probably short and power is still short. So from that unconstrained demand you need to go from what they can really build. And it's our assumption, it's not their assumption. Our assumption is if we increase exabyte by about 25 percent we will not be the component that is getting the development of the data center well we could be wrong but we think 25% is good enough not to become the top of the
list problem gotcha because I mean the reason I'm asking is it seems like you know you're doing 25% 30% exabyte growth slowly increasing pricing more than before but the customers are not pushing back so they seem to be okay in other words if you go to like say 35 percent exabyte growth you're not the bottleneck so you know your hyperscale customer will still be constrained so the marginal benefit is not much for you or them for you to go to like higher exabyte growth
right yeah I'll say so far with this strategy has worked very well we more than double our revenue we more than double our profitability so what is no reason to change I think as we started just giving us a great result and our focus is continue to execute the same strategy for the long time and we have already done 12 13 quarters it's already fairly long we don't see this ending we have another four quarters coming and we will have more later because now we see the extra but that our customers are demanding for a year two and year three and year four is actually way higher than than what we know what we have in
our plan and then also I think your your own forecast is that I think I think probably next month or so I think 40% of exabytes would be from hammer and then maybe a year from now 70% of exabytes would be on hammer is that still the plan or is you think that hammer percentage it's gonna be higher than
expected well we are ramping hammer well especially because the second generation MR was qualified a little bit earlier than what we were thinking with the two major cloud customers. Of course the percentage depends also from how much we produce on the old technology because to achieve those percentages would be very easy just not producing a lot of PMR and you have a lot of MR. So it depends. Now we are trying to optimize exabyte and to optimize exabyte we produce a lot of both, you know, EMR and PMR. So let's see, you know, it's I think first priority is to achieve this 25 percent exabyte increase. Now you, as you said, in the past we were able to do more and that's more is probably coming more from PMR than EMR. Now we are ramping more EMR. So no, EMR is ramping very well. I think we will be, you know, around those percentages but depends every quarter how we manage it to the
two technology gotcha you know I think I think if you do the math you're probably going to generate close to like 3 billion of free cash flow this year I mean after the dividend payment about 4 billion in debt how do you prior to the free cash is it like to mainly paid on debt would you consider repurchases of the stock price or do you think you probably need more supply chain preparedness for the RAM that it probably makes sense to invest more in
own business i'll say longer term we have as we have done in the past our free cash flow is always focused on shareholder return between dividend and share by back in the short term we have we have reduced our debt now going from about six billion dollar to now a little bit less than four now we can go lower now we still have a little bit of the convertible to buy back we did something recently you know we will do the remaining possibly next quarter and maybe reduce that even lower but no longer after we have reduced the debt now the free cash
flow mainly we go to two shareholders gotcha and is there any like do you see like you know in the past like you mentioned that I think heads of media takes like a year to bring it online so even if you decide to add capacity today you're probably looking at least a year before that becomes useful extra bytes into the marketplace is that still the same or do you think there is like a more tightening potential in the supply chain where lead times can come shorter than today well I'll say the
cycle time of a wafer where we produce ads is about nine months they say six to must depend from which technology which product if you need to build capacity like a greenfield well that takes more than a year i would say probably possibly at least two years because now you need to build the factory and then you know get the tools and qualify the tools so it's
long long term yeah i mean if you decide that capacity would greenfield make the most sense or it'll be more existing brownfield well right now we have not looking to
that because no we don't think we need to add the units I'll say if we arrive at that point in time or a certain decision we will see what is the best solution but again in our plan we don't have an increase of the number of
factories that we are then one thing you know you spoke about cost reduction you know when I look at your your footprint you know manufacturing between the heads away for the media everything you're in like Singapore Ireland us is there a consolidation angle in this to help get the you know cost reduction or do you think the footprint stays the way it is I think it will stay because we do
different type of manufacturing different location so Singapore we produce the disk. We don't have any other site producing the disk. Malaysia, we produce the substrate. We don't have any other place where we produce a substrate. China, Thailand, we do assembly and final test. Again, now China is used for our Chinese customers. Thailand is used for everyone else in the world. And then probably the only two factories that are similar are the one US and Northern Ireland we're in both places we produce ads but because we need that level of volume I know I don't see any reason to change that gotcha
close to running out in time just want to see if anyone had any quick question but I'll try to squeeze one more in you know double-digit exabyte like you know mid 20 percent exabyte growth and you know clearly like pricing is pretty robust um i'm just wondering like you know there's an expectation that you know you should see double digit growth in revenue wise even in 27 and beyond if the current demand scenario continues let's just linearly extrapolate is it a fair assumption that it should the revenue growth should be double because yeah no at
Earning release, Dave, the CEO, said we expect revenue to grow for the last several years at at least 20%. So he said at least, so probably will be more than that.
All right. I think, Janneke, thank you very much for your insights. Always fun having you. Thank you. Thank you very much.