The Seagate Technology Q2 2024 earnings call

The Seagate Technology Q2 2024 earnings call highlighted several key points:

1. Financial Performance:

   • Revenue for the fiscal second quarter was $1.56 billion, with cloud nearline demand and consumer drives contributing to the results.

   • Non-GAAP earnings were $0.12 per share, surpassing the upper end of the guided range.

   • Strong cost discipline and pricing adjustments led to a significant increase in non-GAAP operating income quarter over quarter, despite lower revenue levels.

2. Product Launch - Mosaic Platform:

   • Seagate introduced the Mosaic platform, a groundbreaking mass capacity storage solution, marking a major inflection point in the industry.

   • Mosaic integrates innovative technologies, including Seagate's unique implementation of HAMR (Heat-Assisted Magnetic Recording), allowing for an extension of aerial density leadership.

3. Performance and Demand Trends:

   • Seagate sees the fiscal Q2 as the bottom of a prolonged down cycle, with expectations for a gradual recovery.

   • Enhanced discipline, cost controls, and supply management provide a solid foundation for future growth.

   • Positive trends in U.S. cloud market recovery and stabilized demand from Enterprise OEMs were noted.

4. Outlook and Strategy:

   • The company expects a structural improvement in profitability and a return to its targeted financial model.

   • Seagate's product roadmap aims to enhance profitability and address industry challenges, supporting healthier economics.

   • The company is confident in achieving a minimum 30% benchmark level for non-GAAP gross margin, even with quarterly revenues 20% below the prior cyclical peak.

5. Mass Capacity Solutions:

   • Seagate is executing its product roadmap, with the launch of 24-terabyte PMR and 28-terabyte SMR drives in the December quarter.

   • The Mosaic platform, starting with three terabytes per disk, offers a significant leap in aerial density innovation, with plans to extend to five terabytes per disc and beyond.

   • Seagate emphasizes the efficiency of aerial density gains in scaling storage capacity and outlines various cost-effective product offerings.

6. Technology Advancements:

   • Seagate's technological innovations include superlattice platinum alloy media, plasmonic writer with integrated laser, and advanced reader technology, contributing to the Mosaic platform's capabilities.

   • Plans to vertically integrate the laser manufacturing process aim to enhance supply flexibility and reduce production costs.

7. Sustainability and TCO Focus:

   • Seagate's products aim to provide not only total cost of ownership (TCO) benefits but also address data center operators' concerns about power and space consumption.

   • The Mosaic platform's capabilities are highlighted by its potential to replace hundreds of terabyte drives with a single 32-terabyte drive, offering significant TCO and sustainability gains.

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Gianluca Romano, the CFO of Seagate, provided insights into the company's December quarter financial results:

1. Revenue and Operational Performance:

   • Seagate's revenue for the December quarter was $1.56 billion, marking a 7% increase quarter over quarter.

   • Non-GAAP operating income more than tripled sequentially to $127 million, leading to a non-GAAP operating margin of 8.2%.

   • Non-GAAP EPS was $0.12, surpassing the high end of the original guidance range.

2. Hard Disk Drive Business:

   • Exabyte shipments within the hard disk drive (HDD) business grew 6% sequentially to 95, with revenue reaching $1.4 billion.

   • Mass capacity market revenue increased 4% sequentially to $1.1 billion, driven by strong nearline cloud demand.

   • Mass capacity shipments represented 87% of total HDD exabytes, comparable to the prior quarter.

3. Product Segments Performance:

   • VIA market revenue declined sequentially, aligning with expectations.

   • Legacy product revenue increased to $324 million, primarily due to higher seasonal demand in the consumer market.

   • Non-HDD business revenue increased to $171 million, driven by improved SSD demand.

4. Non-GAAP Financials and Margins:

   • Non-GAAP gross profit increased by approximately $80 million, exceeding original expectations.

   • Non-GAAP gross margin expanded to 23.6%, up nearly 400 basis points compared to the previous quarter.

   • Non-GAAP operating expenses totaled $240 million, reflecting ongoing spending optimization.

5. Cash Flow and Balance Sheet:

   • Inventory remained flat at just below $1.1 billion, and capital expenditures were flat sequentially at $70 million.

   • The company generated about $100 million in free cash flow and returned $146 million to shareholders through dividends.

   • Seagate closed the quarter with $2.3 billion in available liquidity and a debt balance of $5.7 billion.

6. Outlook for March Quarter:

   • Seagate anticipates incremental improvements in mass capacity demand to offset seasonal declines in VIA and legacy markets.

   • March quarter revenue is expected to be in the range of $1.65 billion, reflecting a 6% sequential increase at the midpoint.

   • Non-GAAP operating margin is projected to expand to the low double-digit percentage range, with non-GAAP EPS expected to be $0.25, plus or minus $0.20.

7. Final Comments:

   • Seagate expresses increased confidence in a gradual nearline demand recovery coinciding with the Mozaic platform launch.

   • Mozaic is seen as delivering sustainable aerial density leadership with compelling total cost of ownership (TCO) advantages.

   • The company credits its disciplined approach and focus over the past seven quarters for being well-positioned to optimize financial performance and return to targeted profitability levels.

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During the Q&A session, several key points were discussed:

1. Mozaic Progress and HAMR Outlook:

   • Dave Mosley mentioned that the ramp for Mozaic is continuing at a healthy pace, focusing on balancing supply and demand.

   • Regarding the HAMR (Heat-Assisted Magnetic Recording) transition, the goal is to drive HAMR aggressively in the current year, with a particular emphasis on the second half of 2024 and into 2025.

   • The first customer is looking to transition to three-terabyte HAMR, and Seagate aims to drive as many HAMR exabytes into 2025 as possible.

2. Margins and Underutilization Costs:

   • Gianluca Romano addressed the margin trajectory, noting that December quarter profitability showed improvement, with gross margin up about 4% and operating margin up more than 5%.

   • Underutilization costs are expected to be slightly higher due to the transition to HAMR, but the impact is anticipated to be manageable.

   • March quarter is not expected to be particularly high-volume for HAMR, but higher volumes are anticipated in June and beyond.

   • Mix improvement towards higher-capacity drives and the impact of HAMR volume are expected to contribute to margin expansion throughout calendar year 2024.

3. Hyperscaler Dynamics and Inventory Situation:

   • Dave Mosley discussed improvements in hyperscaler inventory, stating that the inventory situation is much better than it was six months ago, and inventory is being consumed by data centers.

   • He mentioned that while the rate of consumption isn't what it was two years ago, it is expected to accelerate as data centers prioritize replacing drives for power, space, and cost benefits.

   • Seagate is having conversations with customers about TCO benefits and is factoring these discussions into volume plans for the next three years.

4. Operating Expenses (Opex) and Free Cash Flow:

   • Gianluca Romano addressed the trajectory of operating expenses, stating that Seagate will focus on opex control, and the current level of opex is expected to remain around $240 million for the next few quarters.

   • Opex for the next fiscal year is expected to be slightly higher but still well below the $300 million mark.

   • Regarding free cash flow, positive trends are expected to continue with increasing revenue and profitability.

5. Capital Structure and Share Repurchases:

   • The company remains focused on generating positive free cash flow.

   • Seagate closed the quarter with $2.3 billion in available liquidity and has a debt balance of $5.7 billion.

   • No specific details were provided about the possibility of coming back into the market for share repurchases.

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Several key points were discussed during the Q&A session:

1. HAMR Launch and Customer Value:

   • The CEO, Dave Mosley, expressed appreciation for the launch of HAMR (Heat-Assisted Magnetic Recording) and its exciting opportunities.

   • When asked about customer value with two-terabyte HAMR drives, Dave mentioned that Seagate will balance incentives based on yields and costs. Customers will enjoy a TCO (Total Cost of Ownership) benefit, primarily related to power and space reductions.

2. HAMR Transition Speed:

   • Comparing the HAMR transition to the transition from LMR to PMR (Perpendicular Magnetic Recording) in 2006-2008, Dave acknowledged that cycle times are longer now. The transition may not be as fast, but Seagate aims to drive it as quickly as possible. The PMR product kit is similar to HAMR, making transitions smoother.

3. Timing of Qualification to Revenue Recognition:

   • Regarding the move from qualification to revenue recognition, Dave explained that qualification times vary, with some customers having relatively shorter qualifications. The TCO benefits are encouraging customers to expedite qualifications. However, Seagate's ramp will be limited, and the company will balance all factors.

4. Gross Margin and HAMR Lever:

   • When discussing the trajectory of gross margin, Gianluca Romano, CFO, highlighted that HAMR is a significant lever for improving margins. The more HAMR is ramped up, the better the margin will be. He expressed optimism about achieving margin improvements earlier and at a lower level of revenue.

5. Price Trends and Channel Actions:

   • A question was raised about the improving gross margin trajectory and whether it was driven by price changes. Gianluca noted that a good part of the improvement comes from both pricing and cost management. Dave added that raw demand is not yet at pre-pandemic levels, and the industry's supply chain still faces challenges. Price raises may occur over time, especially incentivizing transitions to newer mass capacity drives.

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In this segment of the earnings call:

1. Build-to-Order Program:

   • Kevin Cassidy from Rosenblatt Securities congratulated Seagate on the great results and inquired about the build-to-order program. Dave Mosley, the CEO, confirmed that the program is still active and emphasized its importance in the current industry landscape. He highlighted the need for improved visibility and predictability in demand to sustain investment in aerial density and exabyte growth.

2. Vertical Integration of Laser Technology:

   • A question was raised regarding the vertical integration of laser technology. Dave Mosley mentioned that Seagate now has its own capability for laser technology due to the intricate nature of silicon photonic circuitry. Currently, it is more about second-sourcing technology, but over time, there may be opportunities to drive costs down and balance investments with multiple sources.

3. Gross Margin Trajectory:

   • A question from Steven Bryant Fox of Fox Advisors inquired about achieving the 30% gross margin target. Dave Mosley acknowledged the complexity and mentioned that the ramping of HAMR, demand recovery, and the industry's response to these factors would shape the trajectory. Gianluca Romano, the CFO, added that a combination of stronger demand and Seagate's advanced HAMR technology would drive sequential improvements in gross margin through 2024.

4. Back-End Testing Capacity:

   • The question was asked about back-end testing capacity and its impact on margins. Dave Mosley assured that Seagate has plenty of back-end test capacity, even with longer test cycles for larger drives.

5. Book-to-Bill and Orders Visibility:

   • A question from Maia (representing Tim Arcuri from UBS) sought insights into book-to-bill and orders' visibility. Dave Mosley mentioned the importance of the build-to-order plans for predicting economics, incentivizing predictability with customers, and stabilizing the supply base. He noted progress in this direction and improving visibility in the next quarter and beyond.

6. Enterprise HDD Revenue Run Rate:

   • Vijay Rakesh from Mizuho inquired about the expectations for enterprise hard disk drive (HDD) revenues reaching a $2 billion run rate by the end of 2024. Gianluca Romano declined to provide specific guidance beyond the current quarter but mentioned a positive trend in nearline demand, CSP demand, and on-prem enterprise demand.

7. Gross Margin Target and HAMR Margins:

   • Vijay Rakesh also questioned whether Seagate could reach the 33% gross margin target by the end of the year and inquired about HAMR margins compared to corporate margins. Gianluca Romano expressed optimism about achieving sequential improvement in gross margin through 2024, and he stated that HAMR's amortized gross margin is accretive to the corporation, always above the average.

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In this segment of the earnings call:

1. Hyperscalers and Data Center Redesign:

   • Ananda Baruah from Loop Capital Markets asked about the potential impact on Seagate from the hyperscalers' discussions about data center redesign, particularly around GPU compute and AI-related opportunities. Dave Mosley, the CEO, acknowledged the complex nature of the topic, mentioning that compute infrastructure is undergoing dramatic changes. He highlighted different types of AI applications, the need for data storage in AI data centers, and the importance of addressing issues like power consumption and space constraints. Mosley suggested that the architectural redesign might not directly impact Seagate's tiers but could create opportunities, especially if higher capacity drives contribute to cost savings, space efficiency, and reduced power consumption.

2. AI-Related Opportunities and Mozaic Launch:

   • Mark Miller from The Benchmark Company inquired about the traction Seagate is seeing from AI-related opportunities and the expected ramp throughout the year. Dave Mosley shared that while AI-related applications are developing, the actual impact on data infrastructure is still evolving. He expressed some skepticism and mentioned that specific purchase orders explicitly mentioning AI are still relatively small. He emphasized that Seagate is still in the early innings of AI-related developments.

3. Closing Remarks:

   • In closing, Dave Mosley thanked stakeholders for their ongoing support of Seagate. He reiterated the company's focus on executing its product roadmap, leveraging advanced technologies in the Mozaic platform, and positioning itself for profitability in the near term while capturing long-term opportunities in mass capacity storage.

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