Seagate Technology Holdings plc (STX) September 10, 2026 Conference Transcript

Okay. Good morning, everybody. Welcome to the Goldman Sachs Community Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Seagate Technology and CFO John Luca Romano to be here with us today. Thanks, John Luca, for being here. Thank you very much. Maybe start off at the highest level. Help us understand where you think we are in the build-out of mass storage for AI infrastructure, and where do you see the biggest opportunities specifically for Seagate over the next, say, 12 to 18 months?

Yeah, before we start, let me inform everyone that I will be making a follow-up statement today, and you can learn more about the risk associated with those statements on our website. Well, it's a very good question. I would say if you look at the capex of our customers, the growth in their capex is signaling still being in a fourth part of the phase of AI investment, and, therefore, for what we are concerned on investment in storage, in data storage, especially in the big public cloud. And more recently, I'll say even more on on-prem data center with a fairly good growth on enterprise OEM.

With your competitors, you've been able to significantly increase the amount of exabytes being brought to the market without really significantly increasing unit production and by just doing the capacity additions rather than unit volume. So the industry has been prudent on supply additions, seems the strategy has really paid off for most of the players, yourself included. How do you think about striking that balance into next year and beyond?

In general, I would say it's important for this industry to be disciplined with CapEx and with capacity addition. I think we have been very well aligned to this discipline for two or three years at this point in time. The business is growing because of technology, not because of more units. We move up in technology with products that have more content inside the box, and that is generating at the end of the quarter more exabytes, And finally, this industry is selling exabytes, not units. So what we need to focus is, of course, always looking at supply and demand, you know, and keeping a good balance between the two. And also, you know, strongly, strongly pushing on our technology to continue to grow in exabytes year after year.

What is your view on sort of the long-term exabytes growth for the industry? You've talked about, you know, 20% long-term growth as a target. Clearly, you've been outstripping that for a little while now. Is that still the right, correct long-term target? Or do you think we can kind of sustainably ship above that given the sort of current supply balance we have?

Well, every quarter is different. Every year is different. You know, we gave this mid-20% CAGR for a fairly long period of time. You know, we said about three or four years. Of course, now, you need to look at, you know, the real exabyte growth, you know, not only in percentage but also the real number, you know, in absolute number. And of course, when the base starts to grow, you add a lot of exabytes, maybe in percentage is not exactly the same of what you were doing two or three years before. But actually an exabyte is more. So, that increased number on Exabyte is actually what is imparting positively your revenue growth. So, when the base change percentage, it could be a little bit misleading. So, I always look more at the absolute numbers and percentages. But this industry, and Seagate in particular, I think is growing very strongly in Exabyte. And as we said, this will continue because of the applications that are today and in the future imparting the need for more storage. If I look today where storage is, but it's a lot of traditional application, and then there is the new impact from video AI, from starting robotic AI. If you are here in San Francisco, you see a lot of autonomous driving. All those cars have a lot of cameras, and all the data that they collect all day long gets stored. If you multiply San Francisco for the rest of the world, you can just imagine how much data autonomous driving will generate and the need for storage. And this is just one application. Even robotic AI is just the beginning. There is a lot of quality control that is done connected to AI so that you get an input from AI on how identifying an eventual problem and eventually how to fix the eventual problem. Some of that is in the form of video, and video consumes a lot of exabyte. So there are a lot of new applications, but the common theme of those applications is everything is based on data. And that data is very, very valuable. When you have the valuable data, the cost of storage is minimal compared to recompute that data. And that's why storage is growing at the pace that you have seen in the last two or three years.

I mean, you mentioned this idea of absolute exabyte growth for the industry. That's a very interesting notion. I think I remember you raising that before. I'm curious, is there a way to frame the industry growth in terms of absolute exabytes?

No, I think you can look at the trend, but because we are growing fairly rapidly in term of exabyte, now the base is really growing. If you look at growing, I don't know, 25% or 30% this year, comparing to three years ago, that is maybe 50 plus percent, if you look at the number of exabytes. So when you look at the revenue growth, you need to look at the exabyte that we sell and what will be the price for those exabytes. more than a percentage, because the data is very different, could be a little bit misleading.

Yeah, okay. And then, so if you think about kind of all the things you said that are driving demand for data, you've also been driving a lot of your exabyte growth through technology transitions as well, especially with Hammer, which we'll get to. So do you think you continue to support all the exabyte growth you expect through tech transitions alone?

Well, today this is our view, you know, this is our objective to go as fast as we can on technology. Now, technology can give us a fairly good growth in exabytes. When we go from a 30 terabyte drive to a 40 terabyte drive, we can have 33 percent more content. So that, of course, is implying a huge increase in exabytes, even if, of course, we don't You can just produce one drive, now there is a big mix, but when you can have that kind of growth in your, through your technology, you can generate a good growth in exabyte overall, that is what finally we sell, now we sell exabyte. And of course, growing exabyte and keeping, you know, a good balance between supply demand is what is making this industry very successful. And so we don't see any reason today to change this strategy. It has given us huge improvements together with our pricing strategy. The Exabyte growth through technology and the pricing strategy that we have applied for the last three years, triple our gross margin without really impacting our customers too much. We are low to middle single digit. We are reasonable with the pricing strategy that will allow us to apply this strategy for a very, very long period of time and continue to improve our performance from a financial standpoint. We have done that for 12, 13 quarters. Based on our PO that we already have in place for the entire of our fiscal year, we are now at the beginning of the fiscal year, We said we see every quarter of this fiscal year having higher revenue and higher margin. So this strategy is really working well, and we don't see any reason today to change it.

And so to that point, you raised the topic of pricing. So maybe you wanted to think about that for a second and zoom out for a second. Several years ago, we were talking about mid-single-digit declines in price per X byte. Then we went to flats. Then we went to mid-single-digit growth. Last quarter, you talked about 11% year-over-year price per exabyte increase, so we're going to comfortably in the double digits now. How should investors think about sort of the cadence of pricing growth over the next few quarters, and should last quarter be kind of like a good ballpark to use modeling forward for this fiscal year?

We changed the pricing strategy about three years ago. I would say there are two reasons why this strategy is working well. The first one is, of course, the supply-demand balance is different than what was, you know, four or five years ago. The second is the value of storage is much higher. As I said before, when you have a data and that data is a value for you, you want to keep it. You don't want to recompute later because recomputing later will cost you more. So there is always that double check between keeping the data or the cost of recreating the data later. And of course, at least today, there is a huge difference between the cost of storage and storing the data or recomputing. Got it.

Okay. You often reference toe cost of ownership as a way to sort of approach the economics of higher capacity drives, at least from the customer perspective. Now, how receptive have customers been to serve these higher per drive and per exabyte prices? And is it really any different from prior cycles in terms of the way they perceive TCO?

I would say the value of data is for sure growing. And our customers, of course, now are pushing more and more on optimizing their structure. that means optimizing the storage and the compute and how much storage to support that compute. And, of course, they realize that, you know, the value of data is not the same today that was, you know, 10 years ago or five years ago. And that, of course, is giving us the opportunity to also optimize our own business and driving through technology to generate a little bit more now exabyte every quarter and, of course, try to get the target that we discussed before for the CAGR, but also extract some more value for us. And, of course, increasing pricing is part of the strategy. And as I said before, this is a huge contribution to our gross margin and operating margin at the end.

Okay, I mean, you know, it may seem really hard to imagine in the current environment, but let's say we find ourselves in a situation someplace down the line where the industry is over-shipped end-demand, customers cut orders, you know, what kind of risk in a downside scenario does Seagate see in that kind of eventuality, and what measures has a company put in place from a manufacturing perspective to sort of de-risk that?

Yes, today we don't see that situation happening. As I said before, we already have purchase orders in place for the next four or five quarters. And as I said before, based on those purchase orders, we actually see revenue increase and profitability improve. So we don't see that possible change in trend happening for the next many quarters. I would say, you know, being disciplined with CAPEX is, of course, something that will help you at a certain point if the trends change or if for some reason, you know, our customer, despite having a very high demand, maybe they cannot build all the data centers that they would like to, you know, because of some constraint. It can be a power constraint, it can be a delay in building permit, it can be some components that are not fully available. So there are many reasons why eventually, even if demand is very high, our customer could have the need to slow down a little bit the building of the new data center. And pushing that demand out in time is not going away, it's just pushing that out in time. But if that happens, I think the fact that we are very disciplined with the CapEx and how we increase capacity through technology instead of through units will allow us to eventually manage much better a possible change in cycle.

So I want to actually, to the point, shift to the technology and product side for a moment. You know, following the qualification of Mosaic 4 with two hyperscalers you talked about last quarter, what further progress have made with additional customers beyond those two, and what feedback have they given you on Mosaic 4?

It's very good. Now, I would say Hammer is a fantastic technology. It is allowing us to really have very good results, not only in terms of more exabyte volume, but also in terms of financial performance. And you will see more. Now, the more we scale up in capacity per unit, so going from 30 terabytes that we are already selling to all the hyperscalers in the world, the big guys, to the 40 terabyte that we're already selling to the two biggest hyperscalers in the world and that we are qualifying with a few more. So we will be able to qualify fairly soon. And then we discuss that our earning release already the next product, that would be a 50 terabyte. So you can see how quickly and how much we can grow in terms of content per unit. And now the 50 terabytes will be more, you know, calendar 27 or through the end of calendar year 27. So very good progress. We are very happy with Hammer. I would say it took a long time to develop the technology, many years. And it took a little bit of time to qualify the first product because it was new. New technology, new product. It has to work. We had to find the right configuration to work in the cloud. after that everything went really well and we qualified the top 8-10 customers in basically a year on the 30 terabyte drive and we are already qualifying on the 40 terabyte a good number of customers both in US and in Asia and we will do the same with the 50 fairly soon yeah you've also talked about getting volume crossover of Hammer by the end of this calendar year Is there anything changed that will allow you to even pull that in, or is there anything that would delay it at all? No, I think our plan is really solid. I think by December, so just a few months from now, we will be at that level for the 40-terabyte drive and for AMR in general. I think in a couple of years from now, probably in the data center environment for Seagate, 80-90% of the volume will be sold through Hammer. Now it's just a matter of time. There is no way that the PMR technology can keep up with Hammer. Just no way. Now you can put how many discs you want inside the box, you will not have a 50 terabyte drive, you will not have a 60 terabyte drive, you will not have a 70 terabyte drive, so that's the reality. Because in that environment customers have a huge benefit from higher capacity per unit customers will want to buy those big drives and those big drives can only come from hammer yeah now how are you thinking about the cadence of hammer adoption by your customers give any visibility into sort of any kind of lumpiness that might you know get created in customer demand and or should we just expect the sort of hammer grant to be very gradual in terms of mix throughout 2027 well as I said before For all our customers, all the big customers are already buying AMER, everyone. So everyone has qualified at least a fourth generation AMER. Some have qualified a second generation AMER. So they are all buying hundreds of thousands of units every quarter. So I would say technology is not even a discussion with them anymore. The discussion is the capacity per unit, how you go from 30 to 40 to 50, how fast you can go, and then what happens after that, and et cetera, et cetera. So I would say technology has been proven with a forced drive, with a forced generation drive. Right now it's just a product development. It's not anymore a real technology development. For us, it's a product development.

Got it. And you've also pointed to some of the advantages you see in terms of your vertically integrated supply chain, specifically lasers, as a key kind of innovation that you have. So as you ramp up hammer production, do you see margin tailwinds from that internal production of lasers on the higher capacity drives?

Well, partially, yes. Of course, no. The cost for us to produce the laser together with the head is much lower than buying the laser outside and then attached to the head later. So there are a lot of benefits from a cost perspective, from a process perspective, and, of course, also the risk, a little bit the supply chain. So, yeah, it's one of the improvements that we have done in the last few quarters.

Can you help us understand the dual source or second source strategy for the ledgers specifically? I mean, is there any kind of, like, you know, supply chain impact or margin impact from any of that?

Well, the first generation of Hammer was only using external laser. Now, when we transitioned to the second generation, we started to have a mix. Some of the products are built with our internal laser. Some are still using external laser. I think more and more we will go out in the future. More the mix will go into the internal laser. And as I said before, there is a cost differential, of course, is one component out of a certain number of components inside the box, but it's, of course, one component where we can generate a bit more profit. Yeah.

And then you talked about, you know, Hammer obviously getting bigger and bigger in terms of the mix. Longer term, how quickly, if at all, do you expect PMR to sort of rotate out of your product offering? Is there still place for PMR in your product portfolio for, you know, outside of legacy and sort of client-type applications?

As I said before, I think in a couple of years from now, at least for us, the vast, vast majority of products will be based on Hammer. But our different capacity for different segments, now inside the Ardis business, we always talk about the big drive, but don't forget that we sell Ardis drive from 2 terabytes to 40 terabytes a day. And in the future, it will be maybe not 2, maybe 4 terabytes to 50, 60, 70. So PMR is a very good technology for the lower capacity. But when you go into the public cloud, and at a certain point in time, also for on-prem data center, when you go above the 30 terabyte drive, I think Hammer is a clear, better solution that is available.

Yeah. And, you know, you talked about, we've talked a lot about the data center market and AI, and we think we all know that's growing very strongly for you. Maybe talk about sort of what's happening in some of your other segments, whether that be, you know, the client business or even, you know, other kind of like legacy video applications and things like that. What's happening in those segments, and do you expect those to kind of remain stable over time, or, like, do you expect those to sort of, like, you know, fade a little bit?

Yeah, it's very interesting. Now, our business has two major segments, now, data center and what we call edge, edge IoT. Data center is what we have discussed until now, big drive. Now, bigger and bigger and bigger drives give you a better revenue, a better financial result. This is today 80% of our revenue. 20% is lower capacity drive, so what we call edge. This is serving consumer, client, some part of the video surveillance. So those are drives that are between, let's say, 2 terabytes and 10, 12, maybe 14. In data center, the architecture of the data center separate storage from compute. Storage is hard disk, compute starts with an SSD. So in a sophisticated data center, all the storage is hard disk, and then the data is physically moved from an hard disk into an SSD when you need to do the compute or the analytics of the data, and then the new data goes back into the hard disk. When you go to different segments, like consumer or some of the video surveillance, capacity is much lower. So there is an overlap between hard disk and SSD. And therefore, the volume and the price also depend from the situation to the net. Today, the NAND price is fairly high, and this is giving the opportunity to R-Disc also in those low-capacity R-Disc drive segments to actually have the opportunity to increase our price and actually to keep the volume fairly consistent. I would say even in those segments, demand is above supply, But we need to allocate, you know, because demand is about supply in every segment today. So we give priority to our big customers, I would say, and the data center because it's 80% of our business. We also allocate a certain volume to, you know, consumer, clients, video surveillance. But we have, you know, recently in the last couple of quarters, we have changed a little bit our pricing strategy there because we don't have purchase orders in place. No, we don't have LTAs. We don't have specific big customers. It's a different kind of business. Only 20% of our revenue, so not huge. But today is giving us actually a very good result also from a financial standpoint. So what will happen in the future, I would say, if you look at the past, that business has declined a little bit in terms of volume and was also kind of declining in terms of pricing. Today, I would say the volume is fairly stable because we cannot allocate more. Otherwise, it could be even higher. But pricing is much better. So let's see what's happening in the future. Again, it's not so material to our business in total because it's not the majority, but it is important.

Yeah. On the financial picture, I think it's fair to say that as we stand here, you've already prematurely outstripped the financial targets you provided just last year at your investor day, but maybe want to sort of understand, like, where things could be going on that front. You know, you recently kind of, like, upgraded your long-term revenue outlook for the company. Maybe talk about, like, that target, how sustainable and over what duration you can maintain that.

Yes, I would say the situation from our investor day has continued to improve. demand is much much stronger than what we were seeing at that time so we are doing all what we can through technology to increase the exabyte and to support a good part of that demand but of course this is also giving us opportunity to know raise pricing it could be more than what we were discussing as an investor today and this is resulting in no better gross margin better operating margin um of course much stronger eps this is continuing no i no i don't see a reason why it should should really change at this point uh situation is the trend is really going in one direction today and uh and the strategy strong is giving us very good results so we are applying the strategy, you know, with a little bit more maybe emphasis on pricing. And we are performing well, and I think you will see our results continue to improve in the next several quarters.

Yeah. And then in terms of margins, I mean, I think you previously laid out the idea of incremental margins of 50%. You've obviously been dramatically outstripping that in recent quarters, as you just said. You know, I think the 50% kind of bakes in a number of things that were true at the time. For example, the startup cost of your hammer ramp, which was very early days before, that's probably no longer a big headwind for you. And as you mentioned, pricing has been a big tailwind. So is there a new construct you can kind of share in terms of how we should think about incremental margins in the business?

Well, I say if you look the last several quarters, now our incremental gross margin, as you said, has been way higher than 50%. I was saying the 70 plus percent. The trend is, as I said before, the trend is continuing. So today I don't see a reason why that should change. So for the next few quarters, I think that is a good way to look at the business.

Then on balance sheet and capital, you've basically been carrying a few notes with relatively high coupons, and you've talked about sort of retiring already a billion or more of those recently, and then sort of getting back to a more normal cadence of capital return. You know, after you kind of get done with that debt retirement, how are you thinking about this sort of how this plays out, and how do you sort of weigh the differences between or the tradeoffs between increasing the dividend versus share repurchase?

Yes, very good question. I think we have reduced our debt already by a lot in the last one or two years, including this quarter. We are also doing a decent level of share-by-back this quarter. After this quarter, we probably still have one note that I would like to repurchase, that has a very high interest rate, and probably we will do next quarter. So starting calendar year 27, I would say you will see a higher level of share-by-back. Not that we are not doing today. We are doing today and we will do next quarter. But I think when we are done, completely done with the debt, we will have even more free cash flow available for share-by-back. Dividend, usually we review internally with our CEO around October, November time frame on what to do in terms of possible dividend increase. Generally, in a strong period of time like this one, we will probably increase the dividend. But I don't think dividend is actually the focus of our investors at this point. So we want, of course, to provide the good shareholder return, and part of that is dividend. A much bigger part will be share by back. And, of course, the focus is on growing the company, growing the top line, and continuing to improve the profitability.

Excellent. Maybe just to close on one last question before we go, if we're sitting here on stage five years from now and we look back, what do you think is going to be the one thing that really surprises investors about what Seagate has done over, say, the past five years, which are the next five?

Well, I hope they will be surprised by our financial results. I think we have all the opportunity to do it. As we discussed before, demand will be there. You can have temporary changes, but the underlying demand because of the new applications that are coming out in the world are all based on data. And storage has a lot of value, has a lot of value in the data center business. demand will be there I think we will be able to grow through technology at a very good exabyte Kager and you know what is our view on pricing at this point so I think there are a lot of opportunities for this company to grow to become no even more important into the data center ecosystem in general and therefore not justify better results excellent I think we'll leave it there Thanks so much, John, for being here.

We appreciate it. Thank you very much.