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Seagate Technology plc (STX) Q4 2021 Earnings Call Transcript

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Seagate Technology plc (NASDAQ:STX)
Q4 2021 Earnings Call
Jul 21, 2021, 9:00 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Call Individuals

Ready Remarks:

Operator

Good morning and welcome to the Seagate Technology Fourth Quarter and Fiscal Yr 2021 Monetary Outcomes Convention Call. My identify is Tabitha and I will be your coordinator for in the present day. [Operator Instructions]

At the moment, I want to flip the decision over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye.

Shanye HudsonSenior Vice President of Investor Relations and Treasury

Thanks. Good afternoon, everybody and welcome to in the present day’s name. Becoming a member of me are Dave Mosley, Seagate’s Chief Government Officer and Gianluca Romano, our Chief Monetary Officer. We posted our earnings press launch and detailed supplemental data for our June quarter and monetary 12 months 2021 on the Buyers part of our web site.

Throughout in the present day’s name, we’ll consult with GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures within the earnings press launch posted on our web site and included in our Type 8-Okay that was filed with the SEC. We have not reconciled sure non-GAAP outlook measures, as a result of materials gadgets that will influence these measures are out of our management and/or can’t be moderately predicted. Subsequently a reconciliation to the corresponding GAAP measures is just not out there with out unreasonable efforts.

As a reminder, this name comprises forward-looking statements together with our September quarter monetary outlook and expectations about our monetary efficiency. Market demand business development traits deliberate product introductions, potential to ramp manufacturing, future development alternatives, potential results of the financial circumstances worldwide ensuing from the COVID-19 pandemic and normal market circumstances. These statements are based mostly on administration’s present views and assumptions and data out there to us as of in the present day shouldn’t be relied upon as of any subsequent date. Precise outcomes could fluctuate materially from in the present day’s statements. Data regarding our dangers, uncertainties and different components that would trigger outcomes to vary from these forward-looking statements are contained in our most up-to-date Type 10-Okay and 10-Q filed with the SEC, our Type 8-Okay filed with the SEC in the present day and the supplemental data posted on the Buyers part of our web site. As all the time, following our ready remarks, we’ll open the decision for questions.

I am going to now flip the decision over to you, Dave.

Dave MosleyChief Government Officer

Thanks, Shanye and a heat welcome to everybody becoming a member of us in the present day. Seagate ended fiscal 2021 on a powerful be aware, delivering excellent June quarter efficiency and monetary 12 months income that exceeded expectations. These outcomes replicate broad-based demand throughout the mass capability finish markets and unbelievable execution by our world workforce, which collectively, however the quicker than anticipated progress towards our long-term monetary targets. Within the June quarter, income topped the $3 billion mark for the primary time in six years. And we delivered non-GAAP EPS of $2 per share, which was on the high most finish of the upwardly revised steerage vary that we offered in early June. Moreover, we expanded non-GAAP gross margin to 29.6% and anticipate to be inside our long-term goal vary of 30% to 33% forward of schedule. The demand energy and favorable combine has accelerated the timeframe to realize higher provide demand equilibrium which is supporting firmer pricing circumstances.

We’re reporting these distinctive outcomes of time of optimism in elements of the world as vaccinations for grants and economies start to reopen. In truth, we’re internet hosting in the present day’s name from Dublin for the primary time in six quarters. Whereas the pandemic stays a tough actuality for a lot of elements of the world and we stay vigilant and proceed to handle the enterprise by way of this era, it’s clear the macro stage that restoration is underway within the markets that we serve. Seagate is coming into this restoration interval in a really robust place helped by the truth that we executed extremely nicely all through the disaster. For fiscal 12 months ’21, we generated almost 2% year-over-year income development exceeding our expectations. We grew working revenue quicker than gross sales and achieved working margin of 15.4% for the 12 months displaying the leverage within the enterprise. And we returned substantial quantity of capital to shareholders, together with $2.7 billion in dividends and share repurchase, retiring greater than 13% of our excellent shares in fiscal 2021.

Along with recording robust monetary outcomes, our innovation engine has not slowed down. We prolonged our HDD know-how management as evidenced by Seagate being the primary firm to commercialize HAMR know-how and the primary to ship twin actuator efficiency drives, which we’re now delivery in excessive quantity to help a number of prospects. We leveraged our areal density features to streamline our product highway map making us higher in a position to meet altering buyer demand necessities, whereas sustaining a sexy price profile. We additionally leveraged the energy of our frequent mass capability platform to execute our 18 terabyte RAM plans to satisfy buyer demand. We anticipate to start delivery 20 terabyte PMR drives within the second half of this calendar 12 months.

Lastly, we expanded our product and repair choices with the launch of Lyve edge to cloud platforms and stay on observe with the buildout of our 4 Lyve cloud metro edge places by calendar 12 months finish. A 12 months in the past when the enterprise challenges posed by the pandemic had been very acute, I made the assertion that Seagate would emerge from the disaster stronger than ever. With the monetary efficiency and improvements that I’ve simply highlighted, I consider that our workforce has delivered on that declare. And I believe it’s stronger than ever. We’re persevering with to concentrate on unlocking extra worth for our prospects and shareholders. For instance, final month, we introduce CORVAULT to our household of price environment friendly excessive density sources. CORVAULT combines Seagate’s internally designed storage techniques ASICs with our clever self-healing software program and information safety applied sciences, which ends up in a excessive reliability storage answer at petabyte scale, supreme for personal cloud and macro edge datacenters.

We’re additionally working instantly with prospects to unlock worth. Lots of our hyperscale prospects already using AI and machine studying to scale back the quantity of human intervention mandatory to keep up and restore which can be logically the storage worth. We just lately teamed with Google Cloud to take information intelligence one step additional. Collectively, we developed fashions that assist predict drive failures earlier than they happen. These mannequin involves decrease operational prices and stop potential issues to their finish customers, a transparent win-win.

Let’s flip now to the present market surroundings, beginning with an space that has garnered vital curiosity in latest weeks. Storage-centric blockchain similar to these utilized by Filecoin for decentralized storage purposes with Chia cryptocurrency which is taken into account an environmentally pleasant various to different blockchains that make the most of power intensive computational energy to validate transactions have vital curiosity. In the course of the June quarter, we noticed significant enhance in HDD demand due partially to the preliminary buildout of the Chia internet area which is comprised of each new and repurposed HDDs. By our estimation, new Chia demand represented at most a mid-single digit proportion of complete business exabyte shipments throughout the quarter, primarily into the distribution channel. This incremental demand served to tighten HDD provide dynamics and a rise within the strong demand surroundings.

Whereas the long run development outlook on this area stays unclear, we’re excited by the potential purposes related to improvements and decentralized file storage. For Seagate, robust development within the conventional mass capability market stays the first driver of HDD demand. Within the June quarter, mass capability represented near 70% of Seagate’s HDD income supported by broad-based demand for our nearline drives and the third consecutive quarter of gross sales development within the each cloud and enterprise prospects. Cloud datacenter demand has remained wholesome and regular for the final 18 months and present indicators counsel that that pattern will proceed.

Whereas it is clear that the pandemic performed a giant position in accelerating digital transformation, hyperscale business leaders anticipated digital adoption curve to proceed accelerating at the same time as COVID recedes. On the similar time companies are getting ready for workers to return to the office which is reinvigorating On-Prem IT infrastructure investments and supporting ongoing restoration within the enterprise markets.

We additionally skilled stronger than anticipated restoration within the VIA markets throughout the quarter due partially to tighter provide circumstances. We presently foresee comparatively secure demand by way of the second half of the calendar 12 months. Wanting forward, secular demand for mass capability information mixed with indicators of macro restoration signify vital alternatives for Seagate and set the stage for continued robust monetary efficiency and money circulation era. These components mixed with our broad product portfolio underpin our forecast to develop income within the excessive single-digit proportion vary or extra in fiscal 2022 which is nicely above our long-term monetary mannequin vary.

I am going to now hand the decision over to Gianluca to cowl the monetary outcomes.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Thanks, Dave. Seagate executed extraordinarily nicely within the June quarter, delivering very robust high and backside line development that was fueled by accelerating demand within the mass capability market and distribution channel. Income was $3.01 billion, up 10% sequentially and 20% year-over-year. Non-GAAP working margin expanded to an 18.1% within the higher finish of our long-term goal vary of 15% to twenty% of income. And non-GAAP EPS was $2 per share, up 35% sequentially and 67% year-over-year.

Ongoing demand momentum for our mass capability product supported a 3rd consecutive quarter of document exhausting disk drive capability shipments for totaling 152 exabytes, up 9% sequentially and 20% year-on-year. Greater than 80% of complete exabyte had been shipped into the mass capability market, which embrace Nearline, VIA and NAS merchandise. Mass capability cargo hit the document 123 exabyte within the June quarter, up 11% sequentially and 36% year-over-year. We’re persevering with to leverage our manufacturing agility and drive operational efficiencies to satisfy our prospects’ timing. Mass capability now represents near 70% of complete HDD income, additional demand for our nearline drive, a powerful restoration within the VIA market of document mass capability income of $1.9 billion, up 16% sequentially and up 29% in contrast with the prior 12 months interval. Gross sales of our Nearline product grew strongly quarter-over-quarter reflecting the speedy uptick in demand from store-centric blockchain layered on high of wholesome cloud datacenter demand and bettering enterprise OEM buyer TAM [Phonetic] as we mentioned final quarter.

We attribute incremental gross sales of our mid to excessive capability Nearline merchandise in distribution channels to Chia companions, whereas our cloud and OEM prospects consumed a majority of our high-capacity provide together with our 18 terabyte drives that are delivery in excessive quantity. General nearline cargo elevated to 101 exabyte, up 6% sequentially and 28% year-on-year from document ranges in every of the comparable quarters. Stronger-than-expected demand within the VIA market result in a pointy sequential enhance in income. Prolonged venture bought underway and prospects invested to supporting future demand.

Wanting forward, we anticipate comparatively secure demand into the second half of the calendar 12 months. The legacy market find yourself nicely within the June quarter with income of $854 million in contrast with $864 million in each the prior quarter and the prior 12 months interval. Exabyte shipments remained flat quarter-over-quarter as roughly 29 exabyte. Ongoing demand for our mission-critical drive and higher than anticipated gross sales of our shopper merchandise partially offset the anticipated decline for PC drives. We anticipate comparatively secure demand for each mission important and buyer drives over the following couple of quarters which might end in extra average year-over-year income decline for the general business market.

Lastly, turning to our non-HDD enterprise, income elevated 16% sequentially and 42% year-over-year to a document $276 million. We proceed to drive momentum in our system enterprise which assist a easy and scalable petabyte options focused for enterprise and personal cloud prospects. Within the June quarter non-GAAP gross revenue elevated to $892 million in contrast with $749 million within the March quarter and $686 million within the prior 12 months interval. We incurred $32 million of COVID associated price throughout the quarter. Calendar year-to-date, the overwhelming majority of those prices are attributed to validated state fees which we anticipate to persist by way of fiscal 2022. Nonetheless given the uncertainty round when or if these prices will abate, beginning in fiscal Q1, we plan to cease calling them out.

Our ensuing non-GAAP gross margin expanded by 219 foundation factors to 29.6% together with barely greater than 1% headwind from COVID associated prices. Complete HDD margin actually inside our focused vary of 30% to 33% and we now anticipate complete firm non-GAAP gross margin to be on the low finish of the vary within the September quarter reflecting higher alignment in provide and demand and the transitions to mass capability venture that has taken place. Non-GAAP working bills got here in at $346 million, up 5% sequentially reflecting increased variable compensation related to a powerful efficiency. We’re tightly managing bills and anticipate to keep up opex at roughly the identical stage for the following few quarters.

The mix of upper gross sales and margin growth resulted in non-GAAP working revenue of $546 million, up 30% sequentially and over 46% year-over-year. Non-GAAP working margin was 18.1%, up 274 foundation factors sequentially and 330 foundation factors year-over-year. And solidly inside our long-term goal vary of 15% to twenty% of income. Primarily based on the little share rely of roughly 233 million share, non-GAAP EPS for the June quarter was $2 per share, the very best stage since fiscal ’12. Capital expenditures had been $124 million within the June quarter and just below $500 million for the fiscal 12 months which signify 4.7% of our income [Phonetic] according to our long-term goal vary.

Via robust expense self-discipline and efforts to enhance manufacturing efficiencies we diminished capex by about 15% in fiscal 2021 exiting the 12 months with higher provide demand steadiness. Stock was $1.2 billion, down 6% sequentially with days stock excellent declining for the third consecutive quarter to 51 days. Our groups have achieved an impressive job of working with our suppliers and companions to handle strategic stock ranges and mitigate provide chain disruption together with the latest COVID-related restrictions in Asia, which we examine to intently monitoring.

Within the June quarter, we elevated free money circulation to $354 million up 29% each quarter-over-quarter and year-over-year. Our concentrate on optimizing profitability and money era offers flexibility to reinvest within the enterprise and complete capital to our shareholders. We use $154 million to fund the quarterly dividend and $228 million to repurchase 2.6 million peculiar shares, exiting the quarter was 227 million shares excellent and roughly $4.2 billion remaining in our authorization. We retired 34 million shares throughout fiscal 12 months 2021 and returned, a complete of $2.7 billion for dividend and share repurchases. Primarily based on our present outlook, we anticipate to keep up a sturdy capital return program in fiscal 2022 whereas sustaining a powerful steadiness sheet and liquidity profile.

Money and money equivalents stay comparatively secure at $1.2 billion and complete liquidity was roughly $3 billion, together with our revolving credit score facility. These ranges are greater than enough to help our operations and enterprise wants. As we entered the fiscal 2022, the demand surroundings remained robust and we proceed to execute our product and know-how roadmap to ship on our buyer necessities whereas driving worth for Seagate.

Looking forward to our outlook for the September quarter, we anticipate income to be within the vary of $3.1 billion plus or minus $150 million. We anticipate non-GAAP working revenue to develop quicker than gross sales leading to non-GAAP working margin because the higher finish of our long-term vary of 15% to twenty% of income, and we anticipate non-GAAP EPS to be within the vary of $2.20 per share, plus or minus $0.15 representing a sequential development of 10% on the midpoint.

In abstract, we proceed to realize excellent outcomes supported by our unwavering concentrate on operational and energy of our product and know-how portfolio. We’re already demonstrating efficiency per our monetary goal after which for fiscal ’22 nicely positioned for high and backside line development.

I am going to now flip the decision to Dave for ultimate feedback.

Dave MosleyChief Government Officer

Thanks, Gianluca. Seagate is executing nicely delivering monetary efficiency at or above our commitments, sustaining relentless concentrate on complete buyer expertise and deploying capital to boost worth for all stakeholders. We saved fiscal ’21 with our strongest efficiency of the 12 months and we anticipate that optimistic momentum to proceed shifting ahead. We have demonstrated robust leverage in our enterprise mannequin to develop working income quicker than income and in flip drive free money circulation era.

Our potential to constantly generate free money circulation offers the pliability to fund future development and worker strong shareholder return program as nicely. Primarily based on the present outlook, we anticipate to develop free money circulation appreciably in fiscal 2022. Our staff have been essential to Seagate’s present success and key to driving our future. Over our 40-year historical past, Seagate has transitioned many occasions to deal with the evolving storage business panorama. For instance, we have just lately pivoted in our factories and know-how to ship mass capability options and have emerged a pacesetter.

Now, we’re centered on addressing the following mass information problem with our stay product platform. To maintain tempo with these adjustments, we’re investing to reskill and redeploy Seagate staff as wanted to help our future development and reply to the altering calls for of the enterprise. For instance, we launched a instrument known as profession discovery earlier this 12 months, which has already helped Seagate to determine networking and mentor connections in addition to redeployment alternatives for a whole lot of staff. Seagate has a broad bench of expertise with many years of {hardware} and software program expertise, formidable provide chain administration manufacturing expertise, deep information of chip design and information analytics. This experience and robust buyer relationships permit Seagate to know the worldwide mass capability ecosystem and its structure is best than anybody.

Instruments similar to Profession Discovery are serving to us deploy our various sources to help our future wants whereas enabling Seagate to keep up opex efficiencies. We’re assured that this concentrate on folks will put us in a agency footing for continued development and success. As we shut, I wish to thank each Seagate’s staff and people in our provide chain whose efforts allow our ongoing management in mass information options. Our prospects and our shareholders are equally deserving a thanks for his or her ongoing belief and help at Seagate.

Gianluca and I at the moment are completely happy to take your questions.

Questions and Solutions:

Operator

[Operator Instructions] Our first query comes from the road of Karl Ackerman with Cowen and Firm. Karl, your line is open.

LennyCowen and Firm — Analyst

Hello, are you able to hear me OK? My first query — that is Lenny [Phonetic] on for Karl Ackerman. I’ve two questions. My first query, what kind of suggestions have you ever obtained from present hyperscale that may qualify your 20 terabyte nearline drive asking as a result of you’ve gotten beforehand indicated, it’s not a price efficient be aware, but, it is a important step operate till you attain the 24 [Phonetic] terabyte HAMR. When ought to we anticipate 20 terabyte HAMR to achieve the shopper for nearline cargo? Is that one thing that would happen in fiscal ’22?

Dave MosleyChief Government Officer

Yeah, so, thanks, Lenny. I do not assume we ever stated that 20 terabytes could be a crossover level for HAMR to your level. So, we’ve numerous completely different 20 terabyte platforms coming, PMR, SMR, HAMR, there may be lots of completely different flavors of them they usually’re focused completely different prospects, so completely different qualification schedules for every. We’re very aggressive with the 20 terabyte qualification, as a result of the heads of media for the PMR model that we referenced within the ready remarks is already within the excessive quantity manufacturing for 18 terabytes and finish the capability factors under as nicely, 16 and so forth. So we’re very assured in that. And we’re ramping aggressively with prospects, giving them samples getting by way of {qualifications} and pretty optimistic about that for the again half of the 12 months.

LennyCowen and Firm — Analyst

Thanks. And — sure, thanks, and only one extra follow-up if I’ll. On demand outlook in capex, how are you fascinated with including incremental heads in disk capability relative to your fiscal ’22 outlook? Chia [Phonetic] forex has clearly led to a provide scarcity of mid and excessive capability drives, datacenters, but, the postponement of the Jedi contract by the Division of Protection seems to satisfy capex the calls for for the following few quarters. I am hoping, will they deal with your yield capability of the outlook for datacenter to broaden over the following few quarters.

Dave MosleyChief Government Officer

Yeah. I might say throughout the — throughout the head manufacturing facility, for instance, which is the longest lead time half, we’ve nicely over 100 million heads per quarter going out. So we’ve the power to combine — to vary the combination as we see failures. So a number of the demand adjustments that we noticed are pretty straightforward use within our portfolio which has been actually trimmed down, made very environment friendly, particularly with the frequent platform, we’ve the power to vary from one to the opposite. We’re all the time bringing on extra capability by placing new instruments on-line to hit the brand new know-how nodes, that is inside our capex envelope on a regular basis and we’ll simply proceed to look at this. I believe we will proceed to develop extra exabyte provide with know-how transitions, extra exabytes with areal density, so to talk. And we’ll proceed to look at and be nimble within the markets as nicely. Gianluca, you wish to add one thing.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah, we mentioned in the previous couple of quarters about the necessity to understand provide and demand, and we will get nearer and nearer each quarter. For the general capex fiscal ’22, we predict we can have the identical goal of fiscal ’21 between 4% and 6% of income. So we’ll add capability, however we will even be — protecting this alignment between provide and demand.

Operator

Your subsequent query comes from the road of Katy Huberty with Morgan Stanley.

Katy HubertyMorgan Stanley — Analyst

Sure, thanks. As you stroll by way of the varied segments, nearline through mission important, shopper, you talked about secure traits throughout the board. But the total 12 months income development steerage assumes that there will probably be a income run fee discount from the $3.1 billion September information. Are you able to simply discuss what is going to drive decrease income as you progress by way of the 12 months and possibly what kind of the primary half versus second half seems like? After which I’ve a follow-up.

Dave MosleyChief Government Officer

Thanks, Katy. Yeah, I believe we’re — we’re chasing the demand proper now, clearly. And so we predict the entrance half is slightly stronger. Within the again half there will probably be a extra muted seasonality, usually accustomed, we do — there may be additionally, that is three quarters away, there could also be some variability there. So we do have good relationships with all of our prospects throughout all these product units now they usually give us fairly robust sense of what their demand profile goes to be by way of the 12 months. So I might characterize as muted seasonality for now, however considerably, like we stated a minimum of excessive single digits in income development year-over-year. So it is nonetheless considerably up and we’re nonetheless chasing it.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

We expect we can have now a really robust second a part of calendar ’21. Final quarter, I believe we stated a minimum of 10% enhance year-over-year. Proper now, we predict, we’ll be a minimum of 15%. So for positive one other couple of quarter, very robust. After which as normal we’ve in our plan some seasonality for the legacy market and a number of the mass capability like NAS [Phonetic], however might be completely different as we’ve seen final 12 months for instance.

Dave MosleyChief Government Officer

I believe the opposite factor is we — we’re operating to the sooner query, we’re operating within the excessive quantity. The heads in media that we already have to make extra ’18s or ’20s or no matter form of cloud markets had been to take up above our plan, we will stretch there, I believe within the again half of the 12 months as nicely.

Katy HubertyMorgan Stanley — Analyst

Okay. After which the pricing surroundings as you stated has firmed up quicker than you anticipated. What is going to decide whether or not these costs can maintain and what are you assuming for worth change in that full 12 months steerage for high-single-digit development?

Dave MosleyChief Government Officer

Throughout the entire portfolio, it is actually the steadiness of provide and demand. So it is not simply in regards to the exabytes on the highest capability factors, it is — there’s robust demand within the gear markets, there may be robust demand for whole, like households. This quarter, robust demand for even a number of the heightened desktop merchandise. So I believe we’re making an attempt to steadiness all this stuff for the shoppers. They’re are giving us predictability they usually want predictability within the time of disruptive provide chain, everyone is making an attempt to get the entire kits to assault all these market alternatives that they’ve. In order that’s actually what’s affirming it up. And I am going to let Gianluca sort of quantify it by way of the course of the fiscal 12 months.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah. Now, in the intervening time, I am going to keep within the plan, we’ve a reasonably robust pricing surroundings, particularly for the mass capability, the legacy remains to be anticipated to say no little bit. However basically as we had been discussing earlier than, it should rely from this alignment between provide and demand, however proper now it is pretty good. We wish to give it at this stage.

Katy HubertyMorgan Stanley — Analyst

Thanks. And congrats on the quarter.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Thanks.

Operator

Your subsequent query comes from the road of Sidney Ho with Deutsche Financial institution.

Sidney HoDeutsche Financial institution — Analyst

Nice. Thanks — and thanks for taking my query. My first query is on the nearline drives. Given, how robust Nearline’s exabyte cargo had been previously two quarters, I believe, is up 40% previously two quarters. I do know crypto is an element, however you additionally talked about cloud is powerful as nicely. Are you involved that we’ll see a listing digestion section quickly or possibly ask barely in another way. Do you’ve gotten a way as to how a lot inventories construct within the channel or have your prospects particularly crowded within the worth information right now.

Dave MosleyChief Government Officer

Yeah, thanks, Sidney. I do not assume there’s an excessive amount of stock on the market by any stretch and creativeness, it is slightly bit completely different should you take a look at the enterprise channels. They’re comparatively decrease stock and we did see development within the enterprise, fairly a bit quarter-over-quarter so far as the cloud is — goes worldwide, I believe it is pretty wholesome demand, it is pretty nicely distributed. That is what we have been speaking about for the final couple of years. We have all the time needed to lots of completely different prospects pulling at these ranges, and we have seen that. So we’re pretty proud of the demand outlook and what we have got into construct plan proper now for the following couple of quarters, as a result of the lead time is as long as we — as we have stated earlier than. That is actually what builds our confidence is these nice conversations, we’re having with prospects worldwide.

Sidney HoDeutsche Financial institution — Analyst

Nice. Possibly a follow-up query, on the gross margin facet, you talked about gross margin to be inside the long run goal vary of 30% to 33% in September quarter. Curious if in case you have — if it’s important to unpack the gross margin steerage, what are the a number of the key parts for this margin uplift? What’s like — like pricing product combine, yield enhancements and whatnot and the way ought to we take into consideration these components which can be enjoying out past in September quarter? Thanks.

Dave MosleyChief Government Officer

Yeah, thanks. And I am going to let Gianluca chime in right here too. The very first thing I might say is that, there have been lots of swaps throughout the quarter from possibly a number of the issues we’ve deliberate into issues that we’re truly shifting quicker. And like I stated when you’ve gotten demand in every single place, these swaps, truly replicate a greater provide and demand steadiness than what we forecast. And that is in all probability the largest — the largest factor, inventories got here down, factories are very full, the heads and media factories in fact are being staged for the following couple of quarters as nicely. So all that advantages us financially. There’s — there’s a combine up as nicely and we will extra price off — most drives within the subsequent few quarters as nicely. So we have began into the household of 18s that we have talked about, we like the fee on. We’ve got a decrease capability Nearline drive, that is truly mixing in as nicely that we have launched.

So these are all of the positives. There are nonetheless lot of headwinds from freight — freight logistics all over the world. It is nonetheless — it is nonetheless there. It is nonetheless an overhang and there is clearly complement costs in varied sectors which can be — which can be taking place due to shortages worldwide which can be affecting us slightly bit to the headwinds.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah, we had an excellent quarter, subsequent, Q4 and now we’re already guiding Q1 is increased stage. I might say one of many main purpose is that this pricing surroundings that’s bettering. The second purpose is the combination that’s shifting increasingly more to the mass capability. In fiscal Q4, 70% of the income was already on mass capability and we anticipate that to proceed to extend. The opposite main purpose that you will notice all through fiscal 12 months ’22 is enhance of our price optimized drive. So the drives which can be based mostly on 2 terabytes on disk, and that may stick with us by way of the fourth quarter and can proceed to deliver enchancment to our gross margin.

Sidney HoDeutsche Financial institution — Analyst

Thanks.

Operator

Your subsequent query comes from the road of Wamsi Mohan with Financial institution of America.

Wamsi MohanFinancial institution of America — Analyst

Sure, thanks. Dave, you stated mid-single-digit p.c of HDD exabyte demand from Chia within the June quarter for the business, so if I map as much as Seagate, it seems like Chia contributed possibly 60% of the incremental sequential exabytes. So should you see this demand flatten out, how snug are you that provide demand will proceed to be tight sufficient to maintain pricing favorable? Then I’ve a follow-up.

Dave MosleyChief Government Officer

Yeah, thanks, Wamsi. It is actually exhausting to forecast precisely what is going on on in Chia, and never simply due to Chia itself, as a result of they’re pretty clear with their numbers, however due to the whole area that is creating. We did say that, on the expansion of the NAS area that we have seen so far, there’s in all probability a good quantity of refurbished drives or drives which were bought one or two quarters in the past, so it is a comparatively small contribution as of but to Seagate’s total income. And even within the exabyte development perspective, I do not assume it’s totally large. So we stated possibly mid-single digits such as you referenced.

I believe it is a area to look at. We like it as a result of it’s totally progressive, not simply in Chia and people purposes, but additionally within the IDFS purposes that we talked about final quarter. The massive takeaway is, if it continues to develop and quick, it should develop with extra new construct, in order that’s one thing for us to look at. However we’re probably not forecasting very a lot of that into our information proper now, as a result of its — we will wait and see slightly bit, and we’ll react to prospects who’re making an attempt to drive extra demand within the channel because it occurs. Mass capability remains to be our enterprise — that is what I might take away, and that is how we plan our exabytes and that is how we’ve our buyer relationships throughout the breadth of our portfolio. So I do not assume Chia was that impactful from that respect within the final quarter, and searching ahead we’re probably not forecasting it very a lot, we’ll simply react to it.

Wamsi MohanFinancial institution of America — Analyst

Okay, that is useful. After which as a follow-up, you have added gross margins for subsequent quarter inside your long run vary. What would want to occur so that you can fall out of that vary as you undergo the course of the 12 months?

Dave MosleyChief Government Officer

Yeah. I believe that might be all about price and possibly some sort of disruption to the general provide demand image that we have been engaged on. In the event you return six quarters, eight quarters, once we determined to make a number of the investments that we did for the mass capability platform on 16s after which transitioning to 18s and every little thing else, we placed on capability for that, we pivoted our traces for that. And that is when the pandemic hit and the provision chain was so disrupted, that is the factor that basically harm us.

What’s allowed us to climb again into the mannequin is the exabyte demand is inclined. I believe we might be much more resilient this time at this increased stage, however that might nonetheless be the watch merchandise. We do not forecast that by the way in which, we predict that the exabyte curve remains to be going up and over the following few years, you recognize our thesis, it should develop very large, and so we’re nonetheless pretty bullish on exabyte development with out this factor taking a backseat or a u-turn. However in these environments we’re — everyone is cautious, in order that’s the way in which I might characterize it.

Wamsi MohanFinancial institution of America — Analyst

Okay, thanks a lot.

Operator

Your subsequent query comes from the road of Thomas O’Malley with Barclays.

Thomas O’MalleyBarclays — Analyst

Hey guys, thanks for taking my query. I simply needed to observe up on Katy’s earlier query speaking in regards to the seasonality for the 12 months. Gianluca, I consider you stated that the second half of the calendar 12 months could be very robust. And I believe you talked about like 15% year-over-year. That may suggest a down December. Are you able to discuss what you are seeing into the December quarter that is weakening or are you able to make clear that 15% year-over-year remark?

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah, I stated a minimum of 15%, so I do not assume it is implying actually a lower within the December right now [Phonetic] could be in all probability pretty shut. I might say the seasonality that’s anticipated is extra into the March and June quarter because it was the case in the previous couple of years with the exception in fiscal ’21. We expect basically, as a result of the combination of mass capability is continuous to enhance, the seasonality will probably be extra muted sooner or later possibly on this calendar 12 months, however there’s slightly bit much less visibility for us once we go into the March and June quarter.

Thomas O’MalleyBarclays — Analyst

That is useful. My follow-up is round Nearline. I do know that you simply guys do not like to speak about share, however clearly you are in a very nice management place right here. Are you able to discuss that management place, how you’re feeling such as you’re sustaining that lead, and for the rest of the 12 months, do you assume that from a aggressive perspective, you are going to see any change in that market? Thanks.

Dave MosleyChief Government Officer

Thanks, Tom. We truly — nicely, we do not handle for market share, we have been speaking about that for fairly a while. We’re very proud of this platform, 16s going to 18s going to 20s, and going past as nicely, and clearly that is allowed us to be very versatile, so when folks are available for just a few extra models — they wish to swap one thing of their plan, they wish to get on upside, we will truly get it achieved out of the factories and that is in all probability the largest purpose for why we have achieved very well. I believe again on the 16s, we had that management simply in complete capability out there.

So far as I am involved, we’re executing the plan, so we’re out speaking to prospects. We inform them what do you want, we plan that manner upfront. We talked about this final quarter, that if you would like an 18 in December, you higher inform me now as a result of I am beginning the models for it now. That’s, I believe, actually resonating with prospects proper now — we may be predictable like this, in order that’s the way in which we’re planning the enterprise and we’re pretty proud of the portfolio. Once more, not driving actually for market share or something like that. I believe that is how our prospects are managing us as nicely, which is be predictable for me and — as a result of these are huge investments that they should make as nicely, so they should know that the product’s coming.

Thomas O’MalleyBarclays — Analyst

Thanks.

Operator

Your subsequent query comes from the road of Steven Fox with Fox Advisors LLC.

Steven FoxFox Advisors LLC — Analyst

Thanks, good morning. Simply to observe up on these final feedback, Dave, are you able to possibly discuss with now principally provide demand steadiness, the way you interact in another way with a few of these prospects? What could be the incrementals that get you so as to add capability going ahead? Then I’ve a follow-up.

Dave MosleyChief Government Officer

Yeah, I am going to inform you it is sort of extra of the identical, actually, as a result of if you concentrate on it, should you had been shopping for 16s earlier than and now you wish to ramp to 18s or 20s, we’re nonetheless having the identical dialogue, it is only a completely different drive. We’re assured in our yields and throughput and our potential to go hit these excessive volumes. There’s not a lot legacy enterprise to take heads of media out of anymore, to your level, however there’s nonetheless, I stated nicely over 100 million heads per quarter to have the ability to do some swaps. The difficulty is simply lead time, so if the swaps are within the final two or three weeks of the quarter, there is no manner, proper, so that is what’s altering, I believe, out there.

I do not assume we’ll return into some extent the place we put over-capacity in for that. I believe we simply — we get into the — keep within our monetary mannequin, we’ll put money into the capex that we see for the demand, after which possibly if the demand goes even larger than we will up our funding, we will do this one instrument at a time. We need not do it with a large swings, I believe.

Steven FoxFox Advisors LLC — Analyst

That is useful. After which simply secondly on the Lyve platform, it sounds such as you’re getting some extra know-how validation or a minimum of continuing such as you anticipate it. Is it altering any of your pondering for ’22 by way of the non-HDD enterprise? Thanks.

Dave MosleyChief Government Officer

No, I do not assume so, however the non-HDD enterprise did develop, as we talked about within the ready remarks, so we’re pretty proud of the breadth of our portfolio and the way it’s rising. Relative to the Lyve enterprise, the market is clearly on the market. There are people who find themselves fighting the information that they’ve on the sting, having the ability to transfer that into the cloud, discover these non permanent resting spots like we have talked about quite a bit with Lyve such that they’ll transfer it to its ultimate vacation spot in some cloud service supplier or a number of cloud service supplier cases. So we — I am actually inspired by all the shopper engagements that we’ve. We’ve got to study this market very well after which it should develop, so I am actually happy with what I see and I hope to share that in some unspecified time in the future sooner or later with everybody.

Steven FoxFox Advisors LLC — Analyst

Nice, thanks a lot.

Operator

Your subsequent query comes from the road of Ananda Baruah with Loop Capital.

Ananda BaruahLoop Capital — Analyst

Hey, good morning, guys or good afternoon to you guys. Thanks for taking the questions. Hey, Dave, how would you form of describe your ideas across the size of this hyper scale cycle at this level? And I assume what’s form of the persona of it as nicely? Then I’ve a fast follow-up.

Dave MosleyChief Government Officer

Thanks, Ananda. It is fascinating, as a result of I believe the entrance finish of this cycle, if you’ll, is just not actually about including an excessive amount of mass capability. It was extra about simply all of the digital transformation that was occurring throughout the pandemic, so it was networking and it was compute and it was ensuring the purposes can run with a lot, a lot heavier workloads than they had been definitely designed for or had been contemplated six months earlier. It was an incredible stress on folks.

It has been our thesis that the storage again finish to that may come and it’ll come larger, and I might say that even the sign we have seen that is pretty regular development of the cloud, I nonetheless assume it should develop even larger, so it is a very completely different cycle, to your level. It is not a matter of placing on extra capability after which studying some sort of manner to make use of that capability higher out into the market. I believe it is a matter of constructing positive you focus all of your funding {dollars} on these purposes, satisfying everybody on the entrance finish often from a efficiency perspective, after which the information will develop. The again finish of the cloud is clearly going to develop from right here, and so we’re very enthusiastic about that and ensuring we’ve our portfolio as clear as we will by the point that the actually large numbers come.

Ananda BaruahLoop Capital — Analyst

How would you like us to consider it as we get into the March-June quarters? Usually the brakes would come off slightly bit. Is that the suitable manner to consider it this time?

Dave MosleyChief Government Officer

Yeah, we have stated that there could be a extra muted seasonality than regular, proper, as a result of we’re not within the PC enterprise or the legacy enterprise anymore now that the cloud is much more regular. However we’ll let you recognize — I imply, if we begin to see extra restoration all over the world, then the following cycle will probably be pulled in, precisely to your level, proper?

Ananda BaruahLoop Capital — Analyst

Bought it, that is useful. Then simply actual fast on the capability, you guys are saying provide demand, and Gianluca, be at liberty to leap in right here as nicely, provide demand steadiness, however are you full capability proper now? What’s the best manner in form of conventional capability vernacular to consider the place you guys are, like by way of full sort [Phonetic]?

Dave MosleyChief Government Officer

Yeah, thanks — rather more full than we had been, however final 12 months was painful in July, in fact. However I might say no, we’re not full, and we will nonetheless do extra. We will definitely nonetheless do extra exabytes. I believe the extra we’ve to do, the extra predictable we’d like it to be, and this final quarter we had been truly challenged operationally to make lots of these swaps, as a result of we noticed upsides in lots of markets and we had been shifting supplies from one market to a different. Over the lengthy haul, we may do extra exabytes proper now, but it surely’d should be much more long run predictability, I believe, to be able to obtain the exabytes. We’re enthusiastic about it and we’re telling everybody that is the way in which we’re fascinated with it.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah, final quarter we shipped a document of 152 exabytes, so we’re nonetheless rising, so this implies we’ve capability, some capability nonetheless out there. Primarily based on our steerage, you’ll be able to anticipate one other enhance in exabytes in FQ1, and as we mentioned earlier than, we’re nonetheless planning so as to add some capex, so some capability by way of the 12 months.

Dave MosleyChief Government Officer

And as we ramp to 18s and 20s and issues like that, we’ll get extra exabytes out clearly than the prevailing head media footprint that we’ve, so.

Ananda BaruahLoop Capital — Analyst

That is useful, that is nice. Thanks quite a bit, guys.

Operator

Your subsequent query comes from the road of Mehdi Hosseini with SIG.

Dave MosleyChief Government Officer

Mehdi, are you able to hear us?

Operator

Mehdi, your line is open.

TylerSIG — Analyst

Hey, it is Tyler on for Mehdi. Our query was answered, thanks.

Dave MosleyChief Government Officer

Thanks, Tyler.

Operator

The subsequent query comes from the road of Kevin Cassidy with Rosenblatt Securities.

Kevin CassidyRosenblatt Securities — Analyst

Thanks for taking my query. Simply round your discussions along with your prospects, are your long run agreements being expanded or are you including extra long run agreements? Possibly are you able to give us an concept of what visibility your prospects are giving?

Dave MosleyChief Government Officer

Yeah, I believe the dialogue round how issues are going to go six months and 9 months out are persevering with, and it is actually good — I believe everyone desires a specific amount of predictability proper now. We definitely do, as a result of we have got factories to run, elements to deliver on-line, and issues like that, however lots of provide chains are tight and so folks wish to ensure that if they will put money into these provide chains, they will have the total package collectively, so I believe the whole business is behaving fairly nicely for this attitude proper now. It is serving to us fairly a bit to plan our enterprise, Kevin.

Kevin CassidyRosenblatt Securities — Analyst

Okay, nice. Possibly simply as a comparability of hyper scale to enterprise, is enterprise coming again stronger, or possibly simply relative to hyper scale, how is it performing?

Dave MosleyChief Government Officer

You already know, we debate that quite a bit, and I might say it is 50-50 — it is all the time been sort of a toss-up. Typically one races forward of the opposite. Proper now, as we stated within the ready remarks, there’s clearly nonetheless development within the cloud after which as persons are coming again on prem, they’re realizing the investments that they wish to make that maybe they hadn’t made six or 9 months in the past, in order that they’re persevering with these investments. I might say there’s development in each and it is not sufficient to knock it off the 50-50 break up proper now.

Kevin CassidyRosenblatt Securities — Analyst

Thanks.

Operator

Your subsequent query comes from the road of Aaron Rakers with Wells Fargo.

Aaron RakersWells Fargo — Analyst

Yeah, thanks for taking the questions. Congratulations on the quarter as nicely. I am simply curious, to start with, sort of a pointed query — do you continue to assume that your Nearline capability shift underpinning your fiscal ’22 expectations remains to be going to develop in that to 30% to 35% annual vary?

Dave MosleyChief Government Officer

Sure, Aaron, we do. Simply as I answered Kevin’s query, two years in the past it was 80%, so 35% final 12 months was rather less, however we predict 35% is an efficient mannequin proper now. The wildcard on the upside, in fact, is that if we get slightly bit extra cloud six months, 9 months from now, and we’ll wait and see. We have got capability for it, however — and we truly are going to construct the elements, I believe, anyhow for that. I believe 35% is an efficient quantity to mannequin this 12 months. Ananda requested this query — if the following cycle was truly pulled in slightly bit, then it could develop fairly quick as a result of we’ve 18s and 20s coming. These are — that want to go.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

We’ve got lead — we’ve debate on the following two quarters, so to now provide you with precisely the expansion for the whole 12 months could be tough. However as a mannequin for the long run, we predict that 35% CAGR remains to be very legitimate.

Dave MosleyChief Government Officer

And it is all the identical heads and media elements, I assume is the purpose, so we may be versatile.

Aaron RakersWells Fargo — Analyst

Proper, proper. Then the follow-up query is, Gianluca, if you speak in regards to the mannequin and we now discuss 30% to 33% gross margin and confidence round that, I am curious as to the way you’re fascinated with working expense investments. You talked about opex remaining at related ranges these subsequent couple of quarters, however ought to we begin fascinated with that you simply’d let that drop by way of above that and drive an above-20% working margin, or would you begin to reinvest that and cap off margin at that long run excessive finish of the goal mannequin?

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

For the opex, we predict the extent of FQ4, we will preserve that stage by way of the fiscal ’22. We at the moment are — begin focusing on extra, we’re slightly bit extra advertising bills. The efficiency is excellent, so evaluating to possibly prior 12 months, we even have slightly bit increased variable compensation. However this stage, if we will hold it between $340 million, $345 million per quarter, I believe we will do it.

Dave MosleyChief Government Officer

But when we had been to outstrip, I believe Aaron, the highest finish of the vary, then we might take a look at investments as a result of we’ve numerous completely different markets which can be rising nicely proper now, so we might take a look at what investments we’ve to make. I believe we stated this within the script, truly — we’ve lots of flexibility within $340 million, $350 million, proper, in order that’s — you recognize, the very first thing we’d do is redeploy folks within that, and we may nonetheless tolerate slightly bit extra funding if we grew north of the highest finish of the vary.

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Working margin is already 18% proper now, so if you mannequin growing income and this stage of opex and the gross margin, you had been mentioning earlier than, you will notice an excellent consequence by way of working margin.

Aaron RakersWells Fargo — Analyst

Proper, thanks very a lot.

Dave MosleyChief Government Officer

Thanks.

Operator

Your subsequent query comes from the road of Patrick Ho with Stifel.

Patrick HoStifel — Analyst

Thanks very a lot, and congrats on the great quarter. Dave, possibly first off, by way of the ramp of your 18 terabyte drive, are you able to simply give slightly colour of if you anticipate to see the crossover from 16 to 18, the place you are delivery extra exabytes from the 18 terabyte ramp?

Dave MosleyChief Government Officer

I do not assume we have formally checked out it that manner, so I haven’t got a solution. However I believe it is fairly quickly, it is within the subsequent few quarters. From my perspective, it is the identical product household, so the heads and media are already within the pipeline and a few prospects are asking for 16s, some prospects are asking for 18s, however I believe it’s totally quickly. After which the identical heads and media will take us to twenty terabytes on that PMR platform that we talked about, so we may very well spend a few of these heads and disks on 20s as nicely. However I do assume we’re going considerably far north of 16 very, very quickly.

Patrick HoStifel — Analyst

Nice, that is useful. Possibly as a follow-up for you, Gianluca or your self, Dave, by way of the Lyve platform, clearly we have seen now the rollout of a number of product iterations from that household. Because it pertains to opex, is lots of that R&D spending achieved or are you persevering with to put money into Lyve the place we’ll see future product introductions? Is that a part of the, I assume, assist by way of sustaining opex at present ranges?

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

Yeah, it is a part of the opex steerage we mentioned earlier than and we’re investing extra in Lyve. We expect it is a larger a part of our future enterprise. We’re very optimistic on the potential outcomes from that enterprise, so we’ll make investments, however as I stated, we’ll keep round that stage of opex that we mentioned earlier than.

Patrick HoStifel — Analyst

Nice. Thanks.

Operator

And our final query will come from the road of Shannon Cross of Cross Analysis.

Shannon CrossCross Analysis — Analyst

Thanks very a lot. I used to be simply questioning, are you able to speak in regards to the materiality of the twin actuator drives? It seems such as you’ve expanded entry to sure different prospects just lately and I am simply questioning how we should always give it some thought by way of ASP and profit as we glance ahead. After which I’ve a follow-up. Thanks.

Dave MosleyChief Government Officer

Thanks, Shannon. It is rising fairly properly, truly, rising quantity within the factories. It is not a small quantity product anymore, it is turning into a big quantity product. We’ll be speaking about it increasingly more over the quarters. It’s a 14 terabyte drive proper now, so if persons are making trades for 18 terabytes, they could wish to go to the only actuator, but it surely’s very particular to a couple purposes out within the cloud world that individuals want the twin actuator already. Bear in mind, essentially we consider that by the point you get to 30 or 40 terabytes, you’ll be able to’t have all that behind one actuator, you have to have twin actuator a minimum of, and we’ve to unravel all the facility issues and all of the interface issues with our prospects and issues like that, to make that occur. We’re fairly enthusiastic about getting the training on the know-how. The truth that we’ve the platform persevering with in growth — you recognize, parallel drives that as we launch the brand new excessive capability drive, we’ve the identical capability factors on twin actuator.

Shannon CrossCross Analysis — Analyst

Okay, thanks. Then only a clarification — I believe throughout the script, you talked about energy in excessive finish desktops, and I am undecided should you’re mentioning — if that features gaming however I am questioning, are you seeing profit from prospects coming again to the workplace and needing to refresh desktops that maybe are 18 months outdated now at this time limit? Thanks.

Dave MosleyChief Government Officer

Yeah, I would not say it is desktop PC anymore. There’s gaming that is taking place, however I might say extra it is distribution channel round issues like crypto purposes and issues like that. There are people who find themselves trying only for the completely lowest price per terabyte that they’ll discover, and in order that’s one of many explanation why the common drive capability is mixing up. It may — from 2 terabytes to 4 terabytes, final quarter we had been over 5 terabytes, and I anticipate that pattern will proceed. So it is taking place definitely in shopper channels and issues like that.

Shannon CrossCross Analysis — Analyst

Okay, nice. Thanks for the clarification.

Dave MosleyChief Government Officer

Thanks, Shannon.

Operator

And right now, I am going to flip the decision again over to administration for closing remarks.

Dave MosleyChief Government Officer

Okay. Thanks, Tabitha. Seagate is delivering robust efficiency, demonstrating monetary outcomes per our long run targets and executing our product and know-how highway map to seize long run secular development alternatives for mass information infrastructure. I am going to shut by expressing my appreciation for our prospects, suppliers, our staff and our shareholders in your ongoing help of Seagate. Thanks once more for becoming a member of us in the present day.

Operator

[Operator Closing Remarks]

Length: 59 minutes

Call members:

Shanye HudsonSenior Vice President of Investor Relations and Treasury

Dave MosleyChief Government Officer

Gianluca RomanoGovernment Vice President and Chief Monetary Officer

LennyCowen and Firm — Analyst

Katy HubertyMorgan Stanley — Analyst

Sidney HoDeutsche Financial institution — Analyst

Wamsi MohanFinancial institution of America — Analyst

Thomas O’MalleyBarclays — Analyst

Steven FoxFox Advisors LLC — Analyst

Ananda BaruahLoop Capital — Analyst

TylerSIG — Analyst

Kevin CassidyRosenblatt Securities — Analyst

Aaron RakersWells Fargo — Analyst

Patrick HoStifel — Analyst

Shannon CrossCross Analysis — Analyst

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