Seagate(STX) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Seagate reported December quarter revenue of $2.83 billion, up 7% sequentially and 22% year-over-year, setting new records for profitability metrics [15][24] - Non-GAAP gross margin increased to 42.2%, up 210 basis points sequentially, while non-GAAP operating margin expanded by 290 basis points to 31.9% [15][19] - Non-GAAP EPS was $3.11, reflecting a 19% increase quarter-over-quarter [15][20] Business Line Data and Key Metrics Changes - The data center market accounted for 87% of shipment volume, with 165 exabytes shipped, up 4% sequentially and 31% year-over-year [16] - Average cloud nearline drive capacities rose to nearly 26 TB in the December quarter, indicating a shift towards higher capacity drives [17] - The edge IoT market contributed $601 million, supported by seasonal improvements in consumer products [17] Market Data and Key Metrics Changes - Demand for high-capacity nearline drives in global cloud data centers continued to grow, with nearline capacity fully allocated through calendar year 2026 [7][16] - Video applications are driving significant demand, with platforms like YouTube seeing 20 million video uploads daily, up from 2 million three years ago [8] - The strategic value of data is increasing, particularly with the rise of AI applications that require large volumes of historic data [9] Company Strategy and Development Direction - Seagate's HAMR technology roadmap is positioned to meet growing demand and improve total cost of ownership (TCO) for customers [12][14] - The company aims to maintain supply discipline while satisfying exabyte growth through advancements in areal density without increasing unit production volume [7][12] - Seagate is focused on expanding profitability through a higher capacity product mix, supported by strong demand from AI applications [13][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong demand environment, particularly from global cloud customers, and expects data center demand to offset typical seasonality [22][23] - The company anticipates continued sequential improvement in revenue and profitability throughout calendar 2026 [24] - Management highlighted the importance of maintaining predictable supply and pricing strategies as they transition to higher capacity products [28][70] Other Important Information - Seagate generated over $600 million in free cash flow, the highest level in eight years, and retired $500 million in gross debt [15][21] - The company expects capital expenditures for fiscal year 2026 to remain within the target range of 4%-6% of revenue [21][102] - Cash and cash equivalents totaled just over $1 billion, with ample liquidity of $2.3 billion [21] Q&A Session Summary Question: Can you provide more detail on gross margins going forward? - Management indicated that pricing will be dictated by demand, with potential for flat to slightly up pricing as capacity increases [28][29] Question: How do you see the pricing dynamics evolving? - Management noted that strong demand is leading to better discussions with customers about future pricing, with expectations for flat to slightly up pricing [34][70] Question: What is the expected growth rate for exabyte shipments in 2026? - Management did not provide specific guidance for 2026 but indicated a mid-20% growth rate for nearline exabytes based on historical performance [58] Question: How is the transition to HAMR technology progressing? - Management reported successful qualification of major cloud service providers and expects to ramp up production of 4 TB per disk drives [47][91] Question: What portion of your LTAs has fixed pricing agreements? - Management confirmed that pricing and volume for 2026 are well defined, with ongoing discussions for 2027 [96][97]