Seagate Technology Holdings plc (STX) September 9, 2026 Conference Transcript

Good morning. I've been told it's still the morning. I've been stepped out, so I'm assuming it's still morning of day two. We've had a lot of meetings and so it just, you know, can't believe, like I said, it's still the morning. So welcome to day two, Asia Merchant. I lead Citi's tech hardware and tech research here at Citi. I am delighted to have Seagate CFO, John Luca Romano here with me. I also have Shani here in the audience. She's part of, she heads Seagate's IR team. So this obviously is fireside interactive. I do have some prepared questions. I do leave time at the end for investors. So if you have burning questions, please make sure. We're short on time here always, but do raise your hand, please. We will bring the mic to you so that folks on the web can also hear. I'll first turn it over to Gianluca for some prepared comments.

Thank you, Asiya, and thank you, everyone, for being here today. As always, I will be making a follow-up statement today, and you can learn more about the risk associated with those statements on our website.

All right, great. Great. Gianluca, you know, I've been asking a lot of these companies, obviously, you guys are seeing great growth here. Investors sit back. There's always going to be skeptics worried about, you know, is this cycle really different? You know, why is it different? So maybe you can opine on that. Why do you think the cycle is different for the HDD space and for Seagate in particular?

Well, I would say every cycle has different drivers. And I would say we are very happy on the situation today. It's not for sure the beginning of the cycle because it's already more than three years that we are improving our revenue and our profitability. And we discussed at our last earnings release, based on the PO that we have in place, we see improvement also for the entire fiscal 27, fiscal year 27. So every quarter we see improvement in both revenue and profitability. So it's for sure a strong cycle. We see demand growing even faster than what we were thinking. So the gap between supply and demand is not decreasing. It's actually a little bit increasing. We are trying to grow our exabyte. as fast as we can through technology transition and moving from our 30 terabyte drive hammer to our 40 terabyte drive hammer we also discuss about the next drive that will be a 50 terabyte drive that we will start to qualify about in a year from now so just now four quarters from now we will be already in call with a new drive so this is where we really focus is technology transition, drive more Exabyte as a company, moving the mix up through the technology. Of course, we are not increasing our units, but we are increasing our Exabyte, and we are targeting at least 25% CAGR in the next two or three years.

And, you know, like I said, there's always folks who are going to say, like, when do they think they can digest this capacity as if, you know, the build is complete, but obviously we're seeing capex numbers go up uh city themselves race their ai capex numbers as well but just as you think about the build that's happening and the exabytes that are getting deployed for storage in particular hdd storage do you foresee at least you know over the next i don't know two to three years that there's going to be some digestion of this storage medias that's been deployed well based on our ltas i would not say so no we see volume growing every year now we have ltas in place for the next two three years and we see those volumes going up

now we have purchase orders in place for the next four or five quarters and that are very specific CEOs with the right mix, with the right price, with the right time to deliver. But then we have also a longer term LTA where we commit on a certain exabyte volume that our customers need to plan their data center growth. And we see those volumes actually increasing year over year. So we don't see today any change in the trend that we have seen in the last two or three years.

Okay. And then, you know, obviously as the industry is transitioning from training, now we're seeing a lot more inferencing. Inferencing tends to be just that much more data being generated. Just how do you think about that 25% exabyte CAGR sort of that you've laid out? And I know that's supply versus demand. So demand's probably greater than that. But when you think about the incremental HDD capacity that your customers are deploying, like, is there any way for the investors to think about, okay, this is going towards training, this was, or towards inferencing, or this is just more traditional HDD demand that was getting replaced?

Well, there are a lot of drivers for demand. Of course, AI today is a huge part of that demand. There are a lot of traditional applications that require a lot of data, and on top of that, you have AI, and more recently, you have video AI that is consuming even more exabyte. But there are also other applications that you will see in the next two or three years. No, now we are looking at robotic AI, how to use more robotic automation in manufacturing and also outside manufacturing for more normal life that require a lot of video cameras, a lot of monitoring, a lot of data storage. You will see also, I think, a strong improvement in autonomous driving. And all those cars, now if you are in San Francisco or if you are in Phoenix, now you see a lot of cars going around. All those cars have a lot of cameras and they collect data all day long, all night long. And all the data gets stored to improve their performance and also for compliance. So when those new applications will start to evolve in different places and in different parts of the world, that is a lot, a lot of data storage that will be required. So we see a lot of reason why data storage will continue to grow. And so when we put all the data together, the new applications, what our customers are telling us, and the other components inside the data center, when you put it all together, we don't see today a reason why this trend should not continue.

Okay. And then KV caching. I know Dave Mosley on the call talked about KV caching. And then typically when you're KV caching, you think of a very high-performance storage, which tends to be more flash. How does KV caching, sorry, affect HDD demand? Like, how are you thinking about demand coming through for you guys?

I would say there is, for sure, already a lot of demand for our normal storage. So, actually, demand is already above supply. So, it's not that we are really looking for more demand. But I would say if you look at data center, now you have storage and you have where you run the application. And so you move the data from storage that is hard disk into an end when you run the application. Now, in reality, there is another tier that is, let's say, in the middle, that is the warm storage that you call KiwiCache. Inside KiwiCache, you have also different tiers. I'll say for sure there are some tiers inside KiwiCache that can use hard disk drive. So I would say that is the only part where you can see a little bit of overlap between NAND and R-Disc. Otherwise, no, the normal storage is R-Disc. The running of the application is on NAND. But there is something in the middle that could go in the same both directions. And I think R-Disc can for sure be part of that warm storage. In the future, I would say today, again, demand is well above supply. So it's not that we have a lot of opportunity. but could be.

Okay, and if that were to materialize or as you see that opportunity materialize, in order to participate in that space, do you guys need to do some development here? Is there some partnership with Flash or is it really just the technology innovation within HDDs?

Yeah, I don't think we need to partner with Flash. I would say depending from the tier inside the KV cache, there are probably some requirements for performance of the hard disk. So we will have to meet those requirements. Now, I think we have for sure the technology to do it. And then we need to see what is the capacity per drive that it will be required. But we have a lot of opportunities, I think, to develop the right performance for whatever storage level is required.

Right.

Okay.

And then one of the things, you know, we had some of our enterprise OEMs just report earnings just before Labor Day. you know, NetApp, Dell, very, very strong growth there as well. And I know you've talked a little bit. It's a smaller part of your portfolio. But just, you know, what are you seeing there? And as you talk to your customers, your enterprise OEM customers, what are they seeing on storage from the enterprise side? And, you know, how much do you think is durability here?

It's very interesting. I would say in the fourth part of the last three years, The majority of the increase in demand was coming from public cloud. And that has continued. But at a certain point, we started to see enterprise OEMs, so more on-prem data center demand to start to grow again. They buy a little bit different kind of drives. If you look at the capacity of the drives, every segment has a different capacity. The capacity actually goes up every year. but they don't all buy the highest capacity drive. Now, public cloud, they buy the highest capacity drive. On-prem data center, they buy a little bit lower capacity. So today, if we sell a 40-terabyte drive to a public cloud, we probably sell a 28, 30-terabyte drive to on-prem data center. Probably in two years from now, on-prem data center will consume a 40-terabyte drive, But they don't have the same structure. So they need to evolve their architecture to use a bigger drive. Now, public clouds, they already have a very sophisticated architecture, so they can get all the capacity and the highest capacity drive. When you start to go in different segments, you see a different kind of capacity. So this is why we produce actually between 2 terabytes to 40 terabytes, because every segment has a different demand. But it's very good. They are growing, and I think they will be very important to this business. It also depends where this new application will become important in terms of storage. Some of the applications could be more on-prem. So maybe a certain point on-prem will grow faster than today. I'm sure public cloud will continue to grow very rapidly. But there are some applications that maybe companies prefer to keep on-prem or hybrid. Some they go on-prem, some they go on public cloud. So we serve all our customers in the same way. And it's a very good business already today.

All right. And then demand, obviously consistently outpacing supply here. It's obviously reflected in your own pricing. It's gone from declines to stable to much better even in the June quarter. And I think you just talked about further pricing improvements. So just help, you know, investors always push back. Well, a lot of their capacity is already allocated and built to order. You know, those agreements like you talked about. Where is this incremental pricing? Like I'm always surprised, well, okay, pricing was much better. Like, you know, where is that coming from? Is it this enterprise that we just talked about?

No, I would say it's in every segment. As we were discussing before, demand is above supply and is actually growing a little bit faster than what we were expecting. So the gap is eventually a little bit bigger. And when demand is above supply, now you have opportunity to increase your price. And as you know, we do this in a way that is not super aggressive. I think it's very reasonable. We don't want to create a problem to our customers, and we want to keep this sequential improvement going for a long period of time. We have already done this for three years, and based on our orders that we have in place, we said that earnings release every quarter of this fiscal year will actually be an improvement in both revenue and profitability. and based on the LTA I can say I think this will go on even after so we want to keep this for a very very long time and to do that you need to do it in a way that is sustainable and so we are doing that but of course we are increasing price as we have done in the past and when you talk about units I know you're trying to maintain your units do the aerial density to get your

exabyte going um as you think about unit growth like you know are you seeing any change whether it's from your peers out there who are also stressing unit demand you know units being kind of flattish but any changes you're thinking about the fact that okay there is a lot of upside here in terms of meeting demand because clearly supply is undershooting demand well we think the best way to address the growth is through technology so growing the content of the drive not the units not the number of the units that we sell now we have a very strong technology and with this technology you know with hammer we can grow without the need to increase the units that

could change it to be the dynamic between supply and demand of course we want to keep a good balance between supply and demand. And so we like the situation today. It helps us to continue to improve every quarter. Technology is where we focus. Now we have developed Hammer for many years. We are starting to sell Hammer product almost two years ago. And we are already on second generation Hammer. We discussed our earning release. we will start third-generation MRQOL in just a few quarters from now. So we are progressing very well. When you go from 30 terabyte to 40 terabyte, you increase 33% your capacity. So it's a very good increase in exabyte, even if the units remain the same. And going from 40 to 50 is another 25%. So this is where we focus, of course, on the PMR part of the business, so the lower capacity drive to increase capacity per unit you need to increase the bill of material so you need to have one more disk and two more heads now if you want to go from an 18 terabyte drive to a 20 terabyte drive you need to add one disk and twice and as i said before we sell from two terabyte to 40. emery is only on the top of the capacity so 30 terabyte and up but between two terabyte and 28 is basically pmr so on that part to increase the capacity you need to have a little bit more heads and more media because you need to increase the component inside the box with hammer you really focus on just on the technology so we have two dynamics going on now maybe in future now when we go high enough in capacity even hammer can have no 11 years for 12 disks, but it's still space inside the box that we could use at a certain point. Today is less important because when you go from 30 terabyte to 40 terabyte, you have a 33% increase. If you go from 10 disks to 11 disks, you only gain 10%. So today is not so interesting for us. Maybe in the future, it will be interesting to add another disk and maybe two disks.

Okay. And then, you know, you talk about HDDs. I think there's still a very small percentage of data centers, but a critical component, you look at alternatives that are out there to storage, and obviously the pricing there is significantly higher on a per-terabyte basis. When you think about the infrastructure spending that is continuing, storage being a very critical component, I think the question we always get is, how much more pricing flexibility is there for HDDs? I mean, just given the alternative, NAND is just significantly much higher priced.

But you're talking about the neocloud space or generally?

No, AI, just infrastructure spending on the clouds, like, you know, when you think about how much more pricing flexibility is there as you continue to, as spending continues.

Well, I think there is no reason why we should not get a similar result in the future than what we got in the past, because demand is actually higher than the gap between demand and supply is actually a bit higher. So, and again, we are not a big part of our customer capex. So, it's not that we are impacting so much their spending overall, even with our increase. And again, we don't want to be super aggressive. We want to be reasonable, but we want to keep this very, very long. And every quarter is different for many reasons. Now, some quarters you have more volume because you have prepared your manufacturing for a new product. So we have a lot of new product coming out. Other quarters, you have a lot of new contracts that are renegotiated. So you have good pricing, sequential improvement. Depends also what you did a year before because that can impact your comparable. So every quarter is different. There are a lot of variables. But the result is the same. Revenue will go up and profitability will go up.

And as we think about these transitions, you know, I mean, you talked a little bit about density goes up as you go from 30 to 40, and then eventually you have the 50 terabyte there as well. Just on the cost per bit reductions, like, you know, now that you're in your second generation hammer, obviously yields should be better. How should we think about that cost per terabyte decline that you're on?

It's very good. I would say, no, we produce internally where the technology is, so on the heads and on the media. Of course, the cost to produce a head or a media, the unit cost actually is not changing. If it is a 3 terabyte or a 4 terabyte or a 5 terabyte. So we have a very good cost per terabyte decline on what we produce. What we buy externally depends. There are some years where the component cost is going down, so that add to the cost decline. There are some years where there is a mixed bag. Some components are increasing. Some components are declining. In some years, if you think about the COVID period of time, all the components were actually going up, and there was a little bit of inflation. So that part of the year is different and is less under our control. But on what we control, of course, we have a very good cost decline.

And then when we're thinking about this, you know, qualifications for the 50 terabyte, you said about a year from now, are they just, are your customers just getting, you know, maybe faster at qualifying this? Now they've played around with Hammer, now second generation. So, or is it the same length of qualification cycles?

Well, I would say the first generation Hammer was a little bit more difficult.

Right, of course.

Well, for sure, it was a false customer because it took longer to find the right configuration of the drive to work as it is used in a big data set. But I would say for every customer, they had a little bit more, they took a little bit more time to test. It's not that it was different. They were just testing for longer. Just to be sure that the change into the technology was not resulting in some unexpected result. But second generation is going very, very fast. I would say right now they don't even think about technology as just a new product, but on something that they already know very well. So I don't think it will be different, AMR, compared to what was PMR.

Right, okay. And then each time you do a ramp, like as you're transitioning from 40 to 50, for example, there are some some inefficiencies that do creep in whether it's shipping product just for qualifications and so you can't recognize that as revenue just you know as you think about and you're getting faster and learning from your prior transitions like how should we think about those manufacturing inefficiencies as you transition i would say well there is always a little bit of transition cost when you go from one product to the other but i would say it's normal for the business has always been similar so we always have some transition even even with PMR products

I'll say because now we grow more now you go from 40 to 50 so now you will see eventually more variability in the exabyte when you grow from 18 to 20 if the units are similar you grow by 10% or less, 5%. Now, with Hammer, you could have a quarter where the exabyte growth is very variable. Now, when you prepare the line for the transition, you don't grow so much. But when you start to get the output, you have a quarter where maybe you jump a little bit. So you will have a little bit more variability on exabyte volume, but the kegger will be about 25%. Yeah, all right.

Just going to turn around, see if there's any questions from the audience. Please do raise your hand. Okay. I'll continue. Nearline capacity, you know, obviously, again, you said you have LTAs here extending quite, you know, and yet your capex is just 4% to 6% of your revenue. You want to stick to that range. At what point, I know investors constantly ask, like, at what point, What do you have to see to maybe just step up that CapEx? Or do you see, again, whether it's transitions to higher terabytes, I don't know if that causes a step up in that sort of CapEx as a percentage of revenue?

No, I would say, you know, we see a strong demand already today. Already demand is above supply. I would say what this industry needs is two things. One is, when you are on hammer, especially the heads, they require a little bit longer cycle time. Basically, a head is produced on a wafer. This wafer has to go through all the PMR equipment, like before, and then has to go through some specific hammer equipment. So cycle time is longer. So if you want to extract the same volume, you need a little bit more space. But you need to start more wafer and get the same output. So, of course, a little bit more space is part of what we need. And especially on the PMR, you need a little bit more heads and more media because you grow through more components, not through technology. So this is what we do. Now, we increase the number of heads, we increase the number of media, we increase a little bit the space that we need. Everything in our capex range, so between 4% and 6%, So it's very, very reasonable. And all these, when you put all these together, you will see the same number of units, but about 25% more exabyte.

And then just on gross margins, I mean, again, very strong incremental margins. On top of that, you have OPEX leverage, of course, in the model as well. When you think about the margin expansion, I know there's various variables, But there's pricing, cost per terabyte declines. There is some other on the OPEX side as well, and you have flexibility in terms of OPEX leverage. So help investors understand which are the biggest drivers on that margin expansion story.

I'll say pricing and cost are both very important. I would say if you look our last quarter, I think we had a very good performance on both. maybe even more on pricing than cost. I'll say, we were discussing before, every quarter is a bit different. We had a huge increase in revenue in the June quarter. That was coming also from a very good volume. That was coming from our 40 terabytes of the new product. You go into September, we got another very significant increase in revenue and in profitability. Of course, this also means that in this quarter we have a good level of new contracts with high volume, so there is a good pricing support in the specific quarter. We are preparing more 40 terabyte volume coming out because we will have other customers that will be qualified fairly soon. So again, some variability between volume and pricing in terms of revenue and of course pricing and cost in terms of what we produce that will generate, finally, the improvement in gross margin.

And without talking about necessarily units or CapEx growing, I mean, there's just so many opportunities. We've already talked about physical AI, robotic AI, KV caching, of course, AI inferencing demand continues to grow. Just on the OPEX side, I mean, you've kept an OPEX to revenue target there. If these things speed up at the pace that we think it could speed up to, how are you thinking about R&D spending and sales SGA spending?

Yeah, I think in term of headcount, we don't see a reason why we should really increase our headcount. I think we have all the talents that we need to work on Hammer, and the business is not changing from a sales perspective. The number of customers are so far the same, so we need more or less the same people to support. so i think we will be fairly stable in term of headcount and opex the majority of the cost is headcount uh with some variability in rnd material because now there are some periods where you run a little bit more material rnd something a little bit less but i'll say for for this fiscal year we guided our opex fairly stable around the 300 million per quarter so i would say for the next three four quarters we don't see any any reason for change then And if we see future opportunity maybe in technology to do something different, maybe we will take the opportunity. But so far, we don't see it.

All right. And then these LTAs that you're signing with your customers, they're now extending beyond – I know, you know, some of them are just volume beyond a certain – this thing. Maybe – how have the volume assumptions changed? Like, can you help investors understand within these agreements – they're growing bigger, obviously. But, you know, when you talk about how much capacity they need, you know, just within what's written in the agreement, are you guys building a lot more flexibility in these agreements beyond the next four-quarter period?

No, not a lot of flexibility. No, we try to allocate all what we think we can produce. Of course, we don't allocate more than what we are sure we can produce. So we don't want to run into that situation where we promise something and we cannot deliver. So we promise what we think we can deliver, now assuming everything goes well, and we transition in a certain way, product after product. So as we said before, we see more volume, so higher volume for all the customers that are into those LTAs. This is why we feel comfortable that, no, it's not a short-term cycle. It's actually a very different trend. And I would say every time we rediscuss the agreement, our customers are asking for more volume, not less volume. So this gives us even more confidence. And, of course, we try to go as fast as we can to the next product and next product and next product. Now, when we talk about three, four years out in time, it will be a capacity that is way higher than 50 terabytes. So we need to keep all that into consideration and try to commit to a number that we can achieve and can at least satisfy a good part of the demand that our customers have today.

And then capital structure, Jean-Luc, I mean, that's been important for you. You've been working on bringing that net leverage down. I think now you are, like, well below your target levels, right? So there is a lot of that convert debt that you've been retiring as well. How do you think about that optimal capital structure for Seagate? How much cash do you want to keep? How much do you want to return?

Yeah, I think in terms of debt, we are almost done. So all the activities we wanted to do this quarter are at this point already done. But it's still one note with high interest rate that we want to address possibly next quarter. After that, I think we are good. We will have a very low level of debt. We will generate a very strong free cash flow. We are already generating a very strong free cash flow. And therefore, we will move to what we have done very consistently in the past. So higher share by bank. And I'm still focusing on a good return in terms of the deal.

Okay. Okay. And just remind us, like free cash flow margin, have you shared a target?

We didn't share a target. Our cash flow has improved a lot, especially in the last couple of quarters. I think last quarter was already above the $1 billion, was $1.1 billion. We said, of course, increasing revenue, increasing profitability, we result also in higher free cash flow. So we will generate a strong free cash flow this quarter and next. after that all the debt that we wanted to repay will be repaid so we are already doing a good level of shareback this quarter and we will do also next quarter but after that we will probably do even more fair enough let me ask the audience questions here I'll continue then you have all these other various opportunities you talked about hyperscalers enterprise, robotics, physics, AI which is the one that you are sort of most excited about or maybe investors don't appreciate it?

I mean, hyperscaler story has been growing. They have been growing. Enterprise seems to be now something that's coming up as well. But when you think about what investors are underappreciating about the growth opportunity for HDDs and for storage, what are investors missing?

Well, I think everything that is based on video. So robotics, for example, there is a lot of video attached to the robot. So all that part is what will consume more exabyte. So you say, well, what are you more interested in is whatever is a video attached because we consume more exabyte in terms of storage. So autonomous driving, I think, will be huge. No robotics, especially when it's applied into manufacturing, will be huge. or quality control so that is based on a video so all those parts i think will be extremely important to to our disk of course everything is then linked to ai because then ai improve the result and give back a tangible improvement to people and companies that are using ai and and this is why it's so important to us now it's a benefit for everyone but it's a cost of course but it's very important to everyone and sovereign ai you know i mean we talk a lot more about hyperscalers where does sovereign ai come into is this just another end market that you're addressing through your hyperscaler customer today yes i would say no there is a lot of sovereign ai i mean there are some data center that needs to be in a certain country and somehow segregated from external access but they're still built today by the same big cloud guys so they control manufacturers a big data center and then very often you see employees are only from a certain country and there are some way to separate that data center from maybe having visibility externally, but they're still built by the same big public cloud companies, so we sell artists to them, and then they install into those specific data centers. But in future, it could be different. It could be other companies that specialize only on sovereign data centers, but today I would say it's mainly through the big public cloud.

Right, and the same for the neoclouds. It seems like that's the end market, but they're fulfilled through the...

Yeah. NeoCloud today, they basically run the compute application. And they do it for the big public cloud. So, we basically have the same customers. We sell storage, they sell compute. And we sell storage directly to the public cloud. So, the NeoCloud access the data that is on an hard disk into the public cloud. They import into their data, AI, data center they run the application and the result gets stored again into the public cloud storage so the storage is centralized into the public cloud is huge and is centralized in future if data center want to have different customers they cannot access the public cloud storage anymore because they don't work for them so they work for someone else so they need to have they will need to have their storage. So at that point, you could see some of what today we sell to the public cloud will be sold to the new cloud. And they will start to have their own complete data center, including storage. I think it's good from a customer diversification. In terms of volume, probably not very different, because, you know, today is probably a bigger volume centralized with a certain number of customers. Tomorrow, you know, some of that volume will go to the NeoCloud. But we'll be positive from a customer diversification.

We're up on time, Don Luca, but just maybe why should investors still be holding or buying more, rather, of Seagate stock?

Absolutely. Now, I would say basically what we said at the beginning, demand is very strong. There are a lot of new applications that will drive the need for more storage. There is no replacement in data center for R-Disk storage. So the only way to store data and use data into a big public cloud or on-prem data center is R-Disk. So demand will continue to grow. And we will continue to increase our exabyte as a level that we discussed. and we are continuing our strategy in term of pricing and customer support that has resulted in better revenue and better profitability for already three years, and we see this continuing. All right.

Well, thank you very much.