So joining us today at day one of Bank of America's tech conference for 2024. I'm Wamsi Mohan. I cover IT hardware and supply chain here at the bank. We're delighted to have from Seagate, we have Gianluca Romano, who is Seagate CFO. He has been CFO since 2019, and has had a long, distinguished career in finance, spanning over 20 years. So here with us today, we also have from IR, Shanye Hudson, sitting here, if you've got questions for follow-up later, and Rod Cooper as well. So feel free to grab their cards on the way out. But welcome, Gianluca. Thank you so much.
Thank you.
-for, for doing this. Really appreciate it.
Thank you very much.
Well, so to dive right in, maybe let's start at the high level, from a demand perspective on sort of cloud, enterprise, and China, which seem to be major drivers for your business.
Very good. Before we start, let me remind everyone that I will be making forward-looking statements and the risks associated with those statements on our website. So demand is getting stronger, especially in the Cloud segment. So if you look at our revenue for the bottom of the cycle, the improvement in December, in March, in what we have guided for the June quarter, is coming mainly from the Cloud. Some improvements also in enterprise OEM, some small improvement in China in general, but really the majority of the recovery is coming from Cloud. I think first we will see the second step of the recovery, that is actually probably driven by China and the, you know, the big enterprise customers.
Okay, great. About a couple of quarters more for China recovery. Are you seeing any green shoots over there that's giving you the confidence?
Yeah, we have seen some improvement, especially in video and image application. It's still not... So we think it's just the first part of the recovery, which is why now I'm thinking we will see a much better situation in China, worldwide Enterprise OEM, in a couple of quarters. So through, you know, the end of this calendar year. And that will drive, in my opinion, the second step of the upcycle. You know, the first step is Cloud. The happening, it will get stronger in the next few quarters, but it's already happening. The second step in the recovery is actually from those other two segments, which are to Seagate in particular.
When you talk about, you know, the strength that you've seen in Cloud already manifesting, can you talk about what the underlying drivers of that are? Is it basically the higher capacities? Is it more about, you know, an attach with AI? What are some of the reasons why you're seeing the strength in Cloud come back?
Well, I think, there are different drivers. You know, the first one is more the macroeconomic situation. You know, one year ago, two years ago, the Cloud cut their business a little bit differently, and they were trying to raise utilization more than no increase, the number of exabyte that they wanted to install, you know, they had. So we are now in a different, in a different trend. I would say AI is another big driver. As you know, focus mainly on creating the infrastructure for AI, and so being able to generate data. Until you don't generate data, you don't really need a device to do the storage. Focus on other components for, you know, three, four quarters at least. Right now, the businesses are starting to use AI, and with this infrastructure, then, of course, they need more storage.
It's just the beginning, in my opinion, but, we have, we have visibility that some of our drives are actually going into data center.
Okay, excellent. I wanted to talk to you a little bit about exabyte growth, going into sort of the next few quarters. How, and maybe if you could break that out into cloud and non-cloud.
Yes, we know, we made a few comments on the rest of the calendar year. Now we said we see, right, you know, the June quarter, which we guided, and then September and December. We also said we expect calendar 2025 to be a good year for storage. I would say, this is driven by more volume. Of course, there is also the pricing impact that is positive to us, but the majority of the increase is, of course, coming from volume. So you will see a sequential increase in exabytes that we sell every quarter.
The magnitude of that, any way to quantify sort of what that sequential exabyte increase might look like?
Well, we don't give precise numbers, also because those numbers can change a little bit during the quarter, but now what we said is, capacity installed. Right now, we have opportunity to grow revenue using that capacity. We also said when you look at the end of this calendar year, we think, supply will be. You could have, you know, a little bit of imbalance between supply and demand. You know, if demand continue to grow and if, you know, the China business and enterprise OEM business start to go into the real apps, I think, you know, probably capacity will be not enough for the demand.
What would you say then, from a pricing trajectory perspective? It seems that already pricing is quite favorable, but maybe it's going to start to pick up even more so for enterprise customers, based on your comments. How should we think about the pricing trajectory here in the next couple of quarters?
Yeah, we see, you know, few good news in general. Now to increase pricing more than a year ago, even during, you know, the worst part of the down cycle. And we have been very consistent. You know, quarter after quarter, we increase pricing. Of course, every quarter is a bit different, where we target the increase, but, you know, we have been very consistent. We have not increased pricing in a way that is really strong. We have always done a little bit of increase, not very high increases, but very consistent quarter over quarter. And actually, we have told our customer what was our strategy, so they can match lower impact. So this is continuing. So I always receive the question: When are you stopping? I say, there is no reason to stop, right?
Because into, you know, this next several quarters until we see this strong demand, and actually demand eventually being higher than supply. So we will continue that same direction, where a certain level of profitability is needed to manage correctly this business and to also support the big supply chain that very. So this is one positive compared to, you know, a few quarters ago. Second is the mix. Of course, the mix is moving more and more into the mass capacity, right now, mainly in the Cloud. But as I said before, volume increase and revenue increase also from the enterprise OEM and from the video and image application. And the cost. Now, when you start increasing volume, the underutilization costs start to abate relative to our gross margin.
Now, we actually said, in the last couple of quarters that we were expecting to achieve that, gross margin target, 33%, at a level that was way lower than the prior peak. And we indicated about a level of revenue of $2.2 billion. I would say looking at, well, I think we could be in the range already this quarter. So it's a major improvement compared to even our internal expectation in terms of the speed of this recovery. And of course, now we will also see an EPS that is higher than what we guided. As I think we'll be fairly close to the top of the range. Now, we guided $0.70 ± $0.20, so the top of the guidance range.
So this is good, of course, for the short term, but I think even better for the long term because revenue will continue to grow. And of course, we think that will help in continuing to bottom line. That is always the focus.
No, thank you for that update. Appreciate it. So if we, if we just step back for a second and think about that trajectory, based on your comments around pricing and already in that range, and heading into a more even supply-constrained environment in the back half of the year, how high can this gross margin really go? Because you've got, you know, just, you're almost $1 billion lower than your peak revenue that you saw a few years ago. So as China recovers and maybe gets closer to $1 billion a quarter, and you get enterprise, can we imagine a world where we're sitting at 36%, 37%, 38% gross margins?
Well, we don't, we don't guide gross margin, you know, so far in time. I would say, oh, we had a target, including the positive impact of HAMR. So we are, now we think we are back into that range, as you said, at a much, much lower level of revenue. Revenue is increasing, so this will... As I said before, our strategy on the pricing is not changing, so we will continue to be very consistent with, you know, some increases every, every quarter. And the mix, you know, of course, is clearly moving more on into mass capacity and less on the legacy. So all those things together, you know, could, will actually improve our profitability. We can see that fairly clear.
Okay, that's great. Maybe just to follow up on your comment about HAMR, right? So I think you made some comments recently talking about some of the qualifications that your lead customer getting pushed. Can you just provide some more color around that? What are some of the issues that is creating the shift in qualification? And when we think about that in the context of what you just said about the current quarter, is the lack of HAMR maybe in the quarter versus other drivers of upside in the quarter?
I would say the change in the HAMR for the quarter is very because we were not supposed to ship, you know, a high volume of HAMR units. So when you ship in a quarter, I don't know, 12 million units, the 200,000 or 300,000 or losing your P&L. So I would say HAMR is not really impacting the short term. I would say, from a revenue perspective, we can replace HAMR with PMR drives. So, losing any revenue there, we just replace HAMR with a different product, of course. Now, HAMR has higher capacity for a gross margin is, of course, positive for Seagate, so we will have that in here compared to what we were expecting, because qualification has shifted from, you know, the June quarter into the September quarter.
I would say the good news is we've learned enough from this, qualification process that we can start the majority of our cloud customers' qualification in the September quarter. So we will not wait any longer. Starting next quarter, we will have the Cloud starting the quarter. We think maybe the quarter could be a little bit longer than a normal PMR drive, looking at what has been, you know, the recent, qualification process. So now we estimate about three quarters to go through that quarter, and you will see the major ramp in volume of HAMR probably around the mid of calendar 2025. And at that point, we will have several, some also non-cloud customer qualified, and therefore the pricing dynamics will be different.
Demand will be very strong for a product that has the highest capacity in the industry, taking a little bit the benefit of HAMR out in time.
Can you talk about what are some of the underlying things, the learnings that you're finding, and what were some of the constraints or the changes that you've had to make?
So we had that issue in the March quarter due to a component. We now have several vendors for that component, so we restarted the process, unfortunately, but took out another, you know, two or three months. But I am glad to say that all the results are positive, so that issue has been solved. We have test internally, and the customer has test externally, so now the results are very consistent, that that component issue has been solved. Now, during we also look at our internal manufacturing processes. This is actually to improve our internal yield. That is back to your gross margin comment. Now, how can you make this? Well, one point is to make it more efficient into manufacturing. So we went through some change in manufacturing.
The customers also require the change into the firmware. So we are doing those two changes, and will be pushed from the June quarter to the September quarter. But for us, considering where we are, from a competitive landscape, now pushing out two or three months is a no-brainer. So I don't know, we just push that out, and we will get the full benefit later.
Well, would you say that I mean, I know you just spoke about sort of the issues that were in the March quarter, those were mechanical qual. Can you just clarify if there are any other sort of more recording-related pieces of the drive that are centered around the qualification?
No, I would say no, that component defect created a contamination to the drive. Of course, that was then impacting other components, but when we defective components, no, the problems did not show up again. So we are very confident that that problem is not going to show in the next batch of-
You originally thought about HAMR, maybe last year. You thought this first half you would be shipping about 1 million units or so. Now we're maybe shipping a couple hundred thousand. If we think about the full year, this year, is it reasonable to think that we're, we're for two quarters of shipments?
Well, I would say basically everything has been shifted out in time. So what we were expecting to ship in March and then in June is basically going into the o f course, now we will be more precise later, but yeah, there is a little bit of shift in the time of the quarter and then in the time of the revenue related to HAMR. But as I said before, it's not really from a revenue perspective point of view because we can replace with PMR drives. And again, the volume was not huge enough to really change the P&L structure and-
Can you just talk about sort of gross margins in the context of HAMR, too? Because you said it's accretive. When you say it's accretive, is it accretive to mass capacity? Is it accretive to overall company? I mean, when you said, you know, next year we'll be shipping substantial volumes of HAMR by mid-next year, well, how should we think about that in terms of, you know, mass capacity drives, and you guys are shipping close to 20 million drives or so? What percent of that would you consider as substantial when you think about the ramp of HAMR and the margin overall with that? Sorry, too many questions in one.
Well, in terms of the gross margin, mainly as a cost per terabyte. Then, of course, the gross margin will depend from, you know, how we price the drive and how strong is the demand in that specific quarter. In the first part of the ramp, now we have one main customer that is qualified. So the dynamic is very different when you have one and when you have four or five more customers. As I said before, we need to wait to go through the other quarter, and this is why we will ramp high volume in the mid of 2025, when we have a lot of customer qualified. Ramping a lot right now with just one customer is not the best things to do.
So I think the benefit of HAMR, you will see the benefit of HAMR sequentially higher and higher, no? And second, because you have more customers, and with more customers, more demand for the same product, of course, will have a positive impact to the pricing. So, no, we don't specify what is for HAMR gross margin, but we always said gross margin will be accretive to the company. And of course, now, because it's the highest drive, we'll have the lowest cost per terabyte, and then we will see exactly how much more we can price very well, but let's see when we are there.
Okay, great. And I wanted to just go back to exabyte growth for a second, because in the March quarter, we saw some of the largest differential between you and your primary competitor on exabyte growth. And I'm just kind of curious what that, that kind of created that, and how do you see that maybe divergence, you know, close or sustain, or how do you think about it?
Yeah, I would say, of course, with customers, so depend which customer is ramping in a specific quarter, you can see a little bit of change in overall market share. I would also say that, no, we were very focused on HAMR, and possibly resulted in a little bit of Seagate being late to market with a 28 TB SMR. Today we are qualified with, you know, multiple customers, so you will see the, you know, realignment starting probably next quarter. But no, we could be a little bit late by maybe a quarter on that product. And of course, there was a few issues we had on HAMR on the short term, because short term is not our priority, but we are ready, you know, with the same product, with you know, with a lot of customers.
So I think, starting this September quarter realignment, and of course, now depends then from, from customers. So who is ramping, who is, who is, you know, refurbishing data center could drive some, some changes between the, the two main competitor.
We're working on, you know, one primary customer right now for qualifications, but as you qualify more cloud customers, how do you think the appetite for getting the highest capacity drive is within your cloud customer, underlying behavior? Because you just said, you know, not having the highest capacity drive created a fairly different, like, exabyte growth rate. So if you have the highest capacity drive, should we expect the inverse higher exabyte growth?
Absolutely. No, even if Seagate focus is not market share, is more, you know, profitability, but when you have, you know, the product that has the best performance, in this case, the best capacity, you see this is normal. Now, for customers, capacity is extremely important. Think about if you already have a data center, and in this data center, you arrive with 20 TB. So you have a cost for that location, and the cost is not only the hard disk, but is the building, is the power, is the, you know, entire infrastructure, cost, people that are there. So that location has a cost, and of course, based on how many exabyte you have in that location, you have a certain revenue. Now, if you can change that, you go from 20 TB to 40 TB.
You have the same cost for the location, the same labor cost, the same rent cost, the same power cost, the same cost of the infrastructure, but you can double. So your revenue can be doubled. So it's not only when we, we say TCO, it's not really a cost per terabyte that our customers are judged, but they can also, with the same cost, they can generate much more revenue. That is a huge benefit for them, for the location where they already are. And of course, when you build a new location, you want to get, to get as many of the new location. So, so capacity is extremely important.
Of course, in a data center, there are many components that are important, and, you know, in certain cases, like we have, there was a big focus on certain components that need to be used for AI application. So that was a priority for a while, but selling storage. So they need to optimize the storage, the cost of the storage, and the revenue which they can get from storage. So I think capacity is very, very important. I think not only with AI, but there are many applications that will continue to generate an increase in data creation, like autonomous driving, that is still very limited, and the Internet of smart cities, machine learning. All those application will continue to generate more data, and that data has to be stored in a hard disk, and that will generate-
Okay, that's great. Well, if I could just ask you around that TCO comment that you made, right? Like there are certain all-flash companies that kind of talk about, "Oh, the TCO on all-flash is so much more superior, and it's going to go away." Well, you know, I clearly, we don't subscribe to that view, but the question I have is: What have your customers told you about the relative TCO, when it comes to using flash-based array versus HDD-based array?
Well, I would say if you look at the last couple of years during the down cycle, you know, the NAND cost and the all-flash array cost more than 50% lower. And if you go into a data center, you will see no change on how they are managing the storage. 90% of the storage is on hard disk, 10% is on NAND. It's because the storage is on hard disk, but when they need to use the data for certain applications, they move the data from hard disk to NAND. They do the compute, the compute part and the analytic part. So despite the huge declining cost of NAND, we didn't see any change. And now the NAND price is going up, I know, 10%, 15%, 20% quarter-over-quarter. So positive or negative, we don't see the change.
The reality is the architecture of the data center is already optimized between hard disk and NAND. They use as two different component, not as a one storage component, that is hard disk, and another component that is used for the utilization of the application, that is SSD. So we have not seen any change from the delta. I think in future with HAMR, you know, the cost per terabyte will continue to decline. The NAND cost will also continue to decline, but of course, the vertical is now much, much lower. Now, before you could double the gigabytes per wafer, so reduce a lot the cost per gigabyte. Right now, when you go from 128 layers, you don't double anymore.
More and more you go up in layers, the impact to your GB per wafer and then the cost per GB is lower. 40 TB to 40 TB to 50 TB will strongly decline the cost per terabyte. But independently from the cost, we have not seen no. If, if there is some positive from this down cycle, is that we had this theory that now the data center are using the CMR, the components, the two components differently, and I think this has been proved.
Yeah. No, that's a great point. We don't have a lot more time, unfortunately, but I did want to ask you to twist, your primary competitor is talking about separating out its HDD and NAND businesses. Do you think that has an impact to profitability of the industry, a change that might be material to the industry because of this split?
In general, I don't expect any change. I think today, the NAND business, as there are two business units, two separate business units, so I think they're fairly independent, one to the other. So the fact that they are in two different companies should not create any difference. Of course, final business because they decide the strategy, but again, I don't see, I don't see any reason why the strategy tomorrow should be different than today.
Okay, great. And again, like, I think a free cash flow question. So, maybe, you know, if you could comment on sort of what is the annual free cash flow generation that you see for Seagate, if you think about quarterly revenue, you know, $2 billion-$3 billion over time, like, what does that do to your free cash flow generation?
Yeah, we don't really guide free cash flow, but, you know, even during, like, well, we were always able to generate positive free cash flow. So I would say that is our bottom free cash flow. I think, when revenue start to go up, profitability is better. Of course, bottom improvement in free cash flow, now sequentially, will follow basically the business. Of course, there is always a working capital from one quarter to the other or the CapEx, but in general, now you will see a similar increase in free cash flow. The CapEx, now, for the time being, we've been, I would say, fairly good in managing the last couple of years. Our target has not changed, so we are still targeting between 4% and 6% of revenue, and that will not be, a negative impact to our free cash flow.
Great. Well, we're just about out of time, so appreciate everyone coming here. Thank you, Gianluca, so much for all the time you spent and for the great update you've given.