Seagate(STX) - 2026 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Seagate reported revenue of $2.63 billion for the September quarter, representing an 8% sequential increase and a 21% year-over-year growth [13] - Non-GAAP gross margins reached a record 40.1%, up 220 basis points sequentially [13] - Non-GAAP operating margin expanded by 280 basis points to 29% sequentially, with non-GAAP EPS at $2.61, exceeding the high end of guidance [5][13] - Free cash flow generation was flat quarter-over-quarter at $427 million, with a projected increase in the December quarter [19] Business Line Data and Key Metrics Changes - Data center revenue accounted for 80% of total revenue at $2.1 billion, up 13% sequentially and 34% year-over-year [15] - The company shipped 182 exabytes in the September quarter, a 32% increase year-over-year, with the majority delivered to global data center customers [14] - Edge IoT revenue made up the remaining 20% of revenue at $515 million, with expectations for seasonal improvement in the December quarter [17] Market Data and Key Metrics Changes - Demand from global cloud service providers (CSPs) continued to grow, with cloud exabyte demand increasing for the ninth consecutive quarter [16] - The average nearline drive capacity increased by 26% over the past year, contributing to exabyte volume growth [16] - The company noted a significant increase in unstructured data generation, particularly from video content, driving demand for hard drives [7][8] Company Strategy and Development Direction - Seagate is focused on executing its HAMR-based product roadmap to support growing exabyte needs and transitioning customers to higher-capacity drives [6][11] - The company aims to leverage its manufacturing expertise and advancements in technology to achieve a competitive advantage in aerial density [10] - Seagate is committed to returning at least 75% of free cash flow to shareholders over time, with a recent increase in quarterly dividends by approximately 3% [19] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the sustainability of cash flow generation and the ongoing demand environment for high-capacity hard drives [5][11] - The company anticipates continued strong demand from global cloud data centers, projecting December quarter revenue in the range of $2.7 billion, representing a 16% year-over-year improvement [22] - Management highlighted the transformative impact of AI on hard drive demand, particularly in relation to data storage needs [6][7] Other Important Information - Seagate's cash and cash equivalents increased by 25% sequentially to $2.4 billion, with a net leverage ratio of 1.5 times based on adjusted EBITDA [20] - The company shipped over 1 million Mosaic drives in the September quarter, with plans to qualify additional global CSPs for higher-capacity products [9][10] Q&A Session Summary Question: Plans to add capacity and supply chain bottlenecks - Management indicated that capacity addition is through product transitions rather than unit capacity increases, focusing on exabyte capacity [27][28] Question: Adoption of HAMR technology - Management noted that customer engagement on long-term agreements is driven by visibility into higher capacity points, with ongoing qualification of customers on HAMR drives [30] Question: Sustainability of incremental margins - Management acknowledged that while current margins are higher due to product mix, variability exists from quarter to quarter based on customer negotiations and product transitions [34] Question: Cost reduction expectations - Management stated that improvements in cost per terabyte are expected from the transition to higher capacity drives, with ongoing qualification of 40-terabyte drives [40] Question: Visibility of inference demand - Management expressed confidence in the growth of inference demand driven by video content generation, with expectations for lower seasonality impact on data center revenue [45][47] Question: Pricing strategy in a constrained environment - Management confirmed that pricing strategy remains consistent, with slight increases for higher capacity products while maintaining profitability [52] Question: Managing supply for cloud versus consumer markets - Management indicated that while there is some seasonality in edge IoT markets, demand for cloud remains strong, and supply is being prioritized accordingly [58][60] Question: Future exabyte demand and supply - Management expects significant increases in exabyte supply as the company transitions to higher capacity products, with ongoing collaboration with major hyperscalers [82]