Perfect. All right, let's start that over, why don't we? Erik Woodring. I lead the hardware coverage here at Morgan Stanley. Quick research disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm delighted to be joined this morning by Seagate CFO, Gianluca Romano. He's been at Seagate since 2019. He brings decades of financial experience, multiple senior roles at other companies. But Gianluca, thank you for joining us this morning.
Thank you very much. Thank you for inviting us here.
It's been about five weeks since you reported December quarter results. You know, at the time, you were alluding to still some continued end market challenges across enterprise, cloud, China, consumer, each one at kind of various stages of slowdown or recovery. Kinda what are you seeing from a demand standpoint today if we, if we touch on each one of those markets?
Okay. Before I answer your question, let me just say that I will be making forward-looking statements today, and you can learn more about the risks associated with those statements on our website. I would say in general, now the quarter is coming out as we were expecting.
Mm-hmm.
With a fairly, slow January, a little bit better February. We have a lot to do in March.
Okay.
Overall, no, our estimate today is well-aligned in terms of revenue to what we discussed at the earnings release. In terms of the segment, the improvement quarter-over-quarter is coming from nearline. Now going into the March quarter, March is also a seasonally down quarter, probably the lowest quarter of the calendar year for our legacy business and also for our video and image application that is part of the mass capacity. Despite, you know, this seasonality in the March quarter, now we have guided the revenue a little bit higher-
Mm-hmm.
Compared to December. The improvement is all coming from nearline.
Okay.
There are different trends in different parts of the business. I would say for China, we start to get some good discussions with our customers. At the same time, I would say this is still no preliminary discussion on no midterm, long term. No, I still wait to see real orders coming in.
Mm-hmm.
I would say we were not counting on a lot of China business in the March quarter, and it's probably what is going to happen, as we were expecting. We are also now more confident of what we can see in the next few quarters with we think a sequential recovery coming from that part of the world. That is the good news. Not too much for the current quarter, that maybe is not so important, but I would say for the rest of the calendar year.
Mm-hmm.
In the nearline space, I would say, you know, the major problem was inventory.
Mm-hmm.
In general, now every customer is different, but in general, I would say, enterprise OEM are going maybe a little bit faster in depleting the extra inventory that they had compared to cloud. But more or less, now everyone is going in the same direction. Probably the cloud part will take a little bit longer, you know, few more months from now to fully deplete the, you know, inventory that they had. But as I said before, now sequentially, they are actually buying more. There are little bit two different trends. They are buying more, they are depleting maybe a little bit less. It's the two trends. You know, we need to find, as an industry, the right balance between short-term and inventory depletion. It's a little bit of both.
Finally, for consumer, legacy in general, of course, as I said before, March is the lowest quarter of the calendar. Still inflation, as you know, is still very high, so there is not a lot of recovery from that part of the business. Again, we think in the next few quarters also that part will start to improve.
Okay. That's a great way to start. You answered question two and three all in one question, That's perfect. I just wanna make sure one bit of clarification on the inventory build-up and work down is when we talk about the end markets that are furthest through that inventory correction, I just wanna make sure it's enterprise OEM before cloud. Is there anyone else that you'd point to in terms of is that an issue in China, is that an issue in consumer, or those are more just end market demand related trends more so?
Yeah, I would say maybe now cloud is more general. It's mainly U.S., but no, it's a little bit more general. For the rest of the business in China, we don't see a lot of inventory build-up. We think, it's only a slowdown of the economy that happened in the last, actually, you know, three quarters.
Mm-hmm.
Now it's starting to reopen. As you know, there was a budget meeting last week, the budget has been approved for certain segments. Now that budget has to translate into business and orders to Seagate.
Got it. Okay. Okay. I guess another way I kinda wanna delve into the kind of the near-term dynamics is really what you're hearing from customers. I think throughout this week we're hearing a bit of a mixed message across a number of different customers, whether that's delays, cancellations, push-outs. Just broadly speaking from your customers, is there fear? Is it just kind of short-term concern? Is there still confidence in spend longer term? Help us frame the customer conversations you're having today.
I would say for the medium term, long term, we don't see any difference. I think they are very confident their business is going to grow as they were expecting. They need to manage the short-term down cycle.
Mm-hmm.
It's, you know, in some case, this inventory buildup.
Mm-hmm.
We don't see any change in the long-term view. You know, they will grow, especially, you know, the mass capacity part of the business will continue to grow, and, you know, it's just a matter of time. I would say the only difference is more on China, where, you know, starting to have this discussion with the customers is giving us little bit more confidence for, you know, for the recovery in the next, you know, two or three quarters.
Okay. All right. As it relates to production, when you had talked about.
Yeah
... the production ramp, back at earnings, is everything kind of trending in line with your expectations, not only in terms of the ramp, but in terms of the costs or charges associated with that ramp?
Maybe this is a bit different from what we discussed at the earning release. We kept January and February production fairly low.
Mm-hmm.
Probably to be lower than what we were planning before, so we will have a little bit higher underutilization charges. Again, it's just a short-term impact. We are still, you know, we still keep the same estimate in term of revenue, so it's just how we manage production, the timing of the production.
Mm-hmm
... the timing of the ramp, and how we manage our cash. You know, because of course there is a trade-off between underutilization and cash, and of course, right now we focus more on cash. I would say probably the underutilization charge will be at the same level of December. I think, as the earning release and subsequent meeting, I said was fairly close. You know, I was expecting a little bit lower.
Mm-hmm.
I think our plan was more in the, you know, $60 million-$70 million. In the December quarter, we had $80 million. I think we will be, you know, probably around $80 million at this point. Little bit higher, not enormously higher, but a little bit higher. Again, it's not impacting our view of the revenue or our expectation of the revenue of the quarter.
Right. Okay. Then just as we, I don't wanna get ahead of ourselves, but just as we think about the ramp from March into June, how do we think about production ramp, underutilization, costs associated again with that? You know, should we think about that as being a relatively cleaner quarter, for example, from the cost perspective?
It will be, probably not completely clean.
Mm-hmm.
You know, my prior estimate was to have, you know, a June with a very minimal underutilization charges. I think we will have some, but way lower what we have seen in December and March. You know, maybe half of that, of that cost. Of course, we will know better in few more weeks and when we discuss at the earning release, in April. I'll say we will have some cost. Again, a big improvement sequentially, but not zero.
Okay. Again, as we think about going from March into the rest of the year, whether it's fiscal or calendar doesn't necessarily matter, but where does the relative improvement come? Is it broader based? Where, you know, where should we think about the relative, again, kind of like sequential strength coming from?
Yeah
...across it?
I think all the segments will improve for different reasons. Nearline will improve because inventory will be depleted. China will improve because, you know, they are now in a different phase of their economy. The legacy part, particularly the consumer part, hopefully will improve because inflation will start to decline and also because of seasonality. You know, that part of the business, if you look at the calendar year, actually, you know, sequentially improve normally. We think 2023 should be a more normalized year compared to the 2022 that was not, you know, was not usual.
Fair enough. Fair enough. you know, last quarter, just kinda wanna touch on pricing too. you know, last quarter you talked about some pricing pressure and lower capacity drives, otherwise relatively stable pricing. How would you frame the pricing environment today? Is that still the case, or what has changed, if at all?
I would say it's still the case. The lower capacity drive, pricing is impacting more from the NAND situation than the hard disk competition.
Mm-hmm.
As you know, you know, right now, NAND is selling probably at, you know, negative gross margin. It's not going to remain like that for very long term, I hope. Right now, that situation is, of course, creating more competition with our, you know, 1 TB, 2 TB, 4 TB drives. On that part, there is pricing pressure. Again, possibly this will improve actually, you know, in the rest of the calendar year when the NAND cycle will start to swing on the upside. The high-capacity, I would say no change. Where there is no overlap between NAND and hard disk, I would say the industry is actually behaving in a way to support as much as possible profitability even during a down cycle, instead of, you know, fighting for a few point of market shares.
Right. Okay. Okay, very helpful. Let's touch on some of the announcements or kind of the key announcement that I thought you made at December quarter earnings in terms of starting to qualify, 30 TB+ HAMR drives in the June quarter. You know, just as an update, Are you still on track to start commercializing in June? Maybe just if there's anything, if there's anything you'd add relative to what you spoke about in December, just in terms of an update on HAMR, and we'll kind of dig into a few questions?
Yeah. We are going a little bit faster. That is the good news. We are shipping samples. Actually, we start shipping samples already, you know, end of January, February.
Mm-hmm.
A little bit earlier than what we were planning. We will start our qualification process in the next quarter, possibly, you know, fairly early in the quarter. That is a little bit earlier than what we were expecting also. I don't see any change for the commercialization part starting in, you know, in the July quarter.
Okay. Okay. you know, when you guys are having these conversations with customers and you're. You know, they're on, what, 22 TB-24 TB PMR drives. You know, how do you communicate the decision to purchase something like 30 TB and higher? What are the key factors that get them to move from one capacity up to the next?
I'll say-
Especially with a new technology.
I would say probably technology is not impacting the decision. You know, it's always the TCO that is impacting the decision and, of course, how much they want to invest in qualification. Of course, you know, in the upcycle of the demand, they want to go very, very fast because, you know, they are buying millions of units, in the down cycles. It can take a little bit more time.
Mm-hmm.
The driver is always the same, is a better TCO per physical slot that they have. They want to optimize the cost and the revenue for that physical slot.
Mm-hmm.
Moving from 20 TB to 22 or 24, and by the way, we will have a 24 PMR drive coming out fairly soon also. Gives them a good improvement in TCO and a good improvement in revenue for that single slot. You know, 20-22, they basically get 10% more revenue.
Right. Okay.
They get a better cost. There is a double advantage. The advantage is much bigger when you can jump from 22 to 30.
Mm-hmm.
That is a much bigger advantage for them and benefit for them. It will be also a benefit for us, of course, because we want to keep some of that improvement to increase our gross margin and our profitability in general.
Mm-hmm.
our EPS and our free cash flow. You know, we think it will be a win-win.
Mm-hmm.
for both, for us and the customers. So far, you know, we are progressing, as we said, and we were expecting, No change to our plan.
Good. Just, you know, thinking about how that can have an impact on the model and the P&L, you know, how do you initially frame the revenue contribution from this launch? How long does it generally take after launching a new capacity point for, you know, a customer to cross over? Are we multiple years away from this moving the needle? Just again, help frame the relative impact on the revenue side first, at least.
Okay. If you look at the past, crossover is usually three to four quarters. I'll say for the long term, this is what I expect also for HAMR.
Mm-hmm.
There is no reason why it should be different. For the first HAMR product is more difficult to say because it's a new technology. We need to ramp. We need to see what is the yield when we start ramping hundreds of thousands of drive. If the yield is good, we will do exactly what we have done with PMR. If the yield is not as good, we will go through our learning curve and then improve the yield, and then we ramp. We don't want to ramp a product that, you know, it's not yielding financially, you know, a good result.
Right.
I would say I would not. I cannot be 100% sure on the first product, but we are very confident that, you know, after the normal learning curve that, by the way, everyone will have to go through.
Mm-hmm.
When they have HAMR, after that, you know, it will be a normal transition.
Right. Maybe just as a slight deviation on that, you know, how do you think about specifically when it comes to HAMR, the competitive landscape and the competitive advantage that you have on that end?
Yeah. I'll say, you know, it's important that the industry is going in the same direction. I think at least one of our competitors is, you know, developing HAMR. They are a little bit late, mainly because they were looking at a different technology before, and then, you know, they decided to come back to HAMR. That is our advantage, is mainly, I'll say two things. One is we have a product today, so we don't need to develop HAMR anymore. We have the technology, we have the product. We just need to develop, you know, the next product.
Mm-hmm.
They still need to go through the development of the technology. The benefit for us is the time and the fact that, you know, it's not sure that other companies will be able to develop HAMR, even if now we think in the longer term, probably they can.
Mm-hmm.
No, we think we have a fairly big time advantage. Again, HAMR is growing faster than PMR in term of capacity. The first product is a 30 TB. The following product will be a 36 TB. Having time advantage is extremely important because now that one or two products advantage is a lot of capacity, a lot of benefit for customers. In theory, they should be more interested in, you know, in product having higher capacity.
Mm-hmm.
I think we will have that higher capacity for a fairly long time.
Okay. Okay. maybe switching again, saying last question on HAMR, but switching kind of to the cost side of things. longer term, you know, we'd expect it to, or at least you guys have communicated it should drive an improvement in gross margins. You know, how do we think about that ramp? you know, is that a point of tailwind? again, in the near term, are there any other costs that we need to be mindful of just as you think about the ramp of HAMR and the impact that it would have on the cost side of the equation?
I would say that is the second major benefit. It's only, not only the capacity increase, but also the cost decrease coming from HAMR. In a very simplified way, I would say if you take 30 TB, 36 TB, 40 TB, I think as earnings release, we discuss about 5 TB per disk, so a 50 TB drive. All those drives will have the same bill of material.
Mm-hmm.
They will have 10 disk and 20 heads. An enormous increase in capacity, but with the same unit cost. The cost per terabyte will decline a lot, much more than what you have seen now recently with PMR.
Mm-hmm.
Where the increase was just now couple of terabyte and often was coming from an additional disk and two more heads. It's a great opportunity to reduce the cost and to keep a big part of the benefit into Seagate to improve our own EPS, to improve our own cash flow.
I imagine the next question I ask, part of the contribution you'll say is from HAMR, but, you know, you're targeting 30%-33% gross margins, 18%-22% operating margins. You know, we've really only seen you generate that type of gross margin when revenue is, call it, above $3 billion on a quarterly run rate. Is that what we need to see for you to get back to 30%? Can you do 30% with a smaller revenue base? If so, how do you get there?
I would say when we go back to that level of revenue and now adding HAMR part of that revenue, we expect to have an higher profitability.
Mm-hmm.
We gave the range of 30%-33% for gross margin and now 18%-22% for operating margin based on a PMR-.
Mm-hmm
... roadmap. We actually achieved that December last year.
Mm-hmm.
2021, not 2022. We were already at that point. Before the down cycle, we were already at 32%.
Mm-hmm.
When we go back to that level of revenue and with some contribution from HAMR, I expect to be higher than where we were before. Some is product, some is mix, some is our changing cost structure. As you know, we went through a fairly big restructuring effort.
Mm-hmm
... in November. This is also taking out cost that now is not needed anymore for the company. Now every day, every week, we look to more opportunity to improve our cost structure and reduce our cost. Even the time that we will have will help us in also reducing our now fixed cost and cost structure overall.
I wanna touch on kind of two debates or very common questions that I get from investors. One is just, again, HAMR plays a part of this, but, thinking about the competitive landscape when it comes to flash and the threat of disruption longer term, you know, how should we think about that? How is HAMR and anything beyond that kind of insulating you? You know, does it keep you up at night? You know, how do you think about that?
No, not really. It's an interesting question, but-
There's other things I do.
I would say, NAND is overlapping with hard disk only on low capacity.
Mm-hmm.
That part of the business is declining. Of course, until, let's say mid of fiscal year 2020, our legacy business or low capacity compared to high capacity was still in the 50%. That decline was a major impact to the company. Despite that, company overall revenue was actually growing in fiscal 2020, in fiscal 2021, in fiscal 2022. I think last year, legacy was maybe 25%.
Mm-hmm.
Half of what it was just couple of years before. The impact is becoming smaller and smaller.
Mm-hmm.
In the future will be even smaller. At a certain point, that part of the business will be completely immaterial to Seagate.
Right.
Now you also need to consider the impact of HAMR at lower capacity. Because today everyone is focused on the high capacity revenue and profitability coming from HAMR. But if you think, you know, in few years we will have a 40 TB HAMR drive with 10 disk and 20 heads. At that point, probably segments like video and image application that today use, you know, eight, 10, 12 terabytes, probably they will be using 20 TB. We can have a HAMR 20 TB with five disks and 10 heads. That is a major improvement also for lower capacity applications where we can develop our HAMR and get an improvement in our profitability. At the same time, you know, having a bigger gap with NAND.
There are a lot of benefits coming from HAMR that are little bit underestimated right now.
Mm-hmm.
Of course, we're in a down cycle, so it's kind of normal to be less optimistic. You know, when we will meet again in few quarters, I think we will have a different view.
Okay. Okay. The other debate is kind of around the cyclicality of the business again. You touched on it, but you're seeing this mix shift to mass capacity, more specifically nearline. If we think of those end markets as being more secular type growers, that becomes a more defensible model for Seagate relative to history. You know, someone made the comment to me, you know, "Well, sure, that could be true, but look what happened in fiscal 2022." I guess my question for you is, you know, should this mix shift actually make your business less cyclical? How do you think about that? Well, I imagine there will still be a degree of cyclicality, of course, but.
I would say it's not only our risk. I would say, you know, in almost all the technology industries, you have some kind of cyclicality.
Mm-hmm.
The important is, you know, to look at the business over a certain number of years.
Mm-hmm.
See what is the trend and what are the drivers for demand. I would say even today, there is no change in the drivers for data storage demand growth. You know, all the important new applications that now are maybe progressing a little bit lower than what it was before.
Mm-hmm.
They're still progressing, and they will, you know, restart generating a lot of data. You know, artificial intelligence and machine learning and smart cities, smart factories, autonomous driving, Internet of Things, all those are not disappearing.
Mm-hmm.
Have just slowed down a little bit.
Mm-hmm.
They will come back, and they will generate a lot of data. 90% of that data is going to be stored on our disk.
Right. Okay.
So-
Right.
The cycle, you know, can happen of course.
Right.
Even on the upside, you know, if you look at the growth that we had in fiscal year 2020 for mass capacity in term of exabyte was almost 60%, and then the following year was 30%, and fiscal 2022 was another 30%. It's not always the same.
Mm-hmm.
It's different. Now, the other important point is the base is now much bigger.
Mm-hmm.
You know, the cloud business was almost zero, you know, 10 years ago. Now has millions and millions of units installed-
Mm-hmm.
exabyte. You also need to consider that the percentage maybe can change a little bit.
Mm-hmm.
The exabyte, that is what we produce, is actually probably increasing more, even if the percentage of growth is little bit lower.
You know, in and around this conference, the topic of AI has been pervasive. You mentioned it, you mentioned it there. You know, when we think about the big picture drivers of data, is AI and machine learning kind of like a number one in your mind? Are we at an inflection point, at least from your perspective? Is it IoT? Help us think about.
Yeah.
the relative importance of AI for you.
It's a bit difficult for us to know which one will go faster.
Right.
I would say they all generate data and, you know, even AI, there are, I would say, two parts of AI. One is a lot of computing where we play less.
Mm-hmm.
The second is a lot of data storage.
Mm-hmm.
where we are the predominant industry. Difficult to know which of those application will be generating more data in, you know, the next year or two. I would say they will all generate more data, and probably, you know, some will grow a little bit faster and some a little bit slower. For us, you know, data is data, so we just store data and exabyte and-
We just want more data.
It's just not different.
All right. Well, that is, that brings us up to time. Gianluca, thank you very much for-
Thank you very much.
spending time with us today.
Thank you.
Cool. Thank you.