Seagate Technology Holdings plc (NASDAQ:STX) Q1 2024 Earnings Call Transcript October 26, 2023

Seagate Technology Holdings plc misses on earnings expectations. Reported EPS is $-0.22 EPS, expectations had been $-0.2.

Operator: Welcome to the Seagate Technology Fiscal First Quarter 2024 Conference Call. All members will probably be in a listen-only mode. [Operator Instructions] After at the moment’s presentation there will probably be a possibility to ask questions. [Operator Instructions] Please be aware this occasion is being recorded. I might now like to show the convention over to Shanye Hudson, Senior Vice President of Investor Relations. Please go forward.

Shanye Hudson: Thank you. Good morning, everybody, and welcome to at the moment’s name. Joining me are Dave Mosley, Seagate’s Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press launch and detailed supplemental info for our September quarter outcomes on the Investors part of our web site. During at the moment’s name, we’ll seek advice from 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 Form 8-Ok. We’ve not reconciled sure non-GAAP outlook measures as a result of materials objects which will impression these measures are out of our management and/or can’t be moderately predicted. Therefore, a reconciliation to the corresponding GAAP measures shouldn’t be accessible with out unreasonable efforts.

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Before we start, I’d wish to remind you that at the moment’s name accommodates forward-looking statements that replicate administration’s present views and assumptions primarily based on info accessible to us as of at the moment and shouldn’t be relied upon as of any subsequent date. Actual outcomes might differ materially from these contained in or implied by these forward-looking statements as they’re topic to dangers and uncertainties related to our enterprise. To study extra concerning the dangers, uncertainties and different components which will have an effect on our future enterprise outcomes, please seek advice from the press launch issued at the moment and our SEC filings, together with our most up-to-date annual report on Form 10-Ok and quarterly report on Form 10-Q in addition to the supplemental info, all of which can be discovered on the Investors part of our web site.

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As at all times, following our ready remarks, we’ll open the decision up for questions. I’ll now hand the decision over to Dave, for opening remarks.

Dave Mosley: Thank you, Shanye, and welcome, everybody. Before I talk about our monetary outcomes, I need to acknowledge the scenario happening within the Middle East. Our ideas are with the entire individuals within the area together with our Seagate staff members, their households, and family members. Moving on to our September quarter outcomes, income got here in at $1.45 billion, with non-GAAP loss per share of $0.22. Consistent with our current public commentary, we skilled softer than anticipated demand within the legacy markets, whereas the continued cloud stock correction and weak financial tendencies in China continued to restrain near-term demand for onerous drives. Looking forward, we count on the tempo of financial restoration in China to be uneven. However, we’re inspired by the optimistic progress of U.S. cloud stock consumption.

Importantly, we proceed to reveal monetary self-discipline and powerful execution on the priorities we outlined on the onset of this down cycle, specifically to drive money technology, strengthen our stability sheet and place the Company for enhanced profitability because the markets get better. We additionally continued to hit all key HAMR product improvement milestones, demonstrating our skill to drive vital areal density positive aspects with this expertise. These positive aspects translate into decrease storage prices on a per bit foundation, enabling Seagate to supply a compelling TCO proposition for our clients whereas enhancing our future profitability. Qualification and income ramp plans for our 30 plus terabyte merchandise stay absolutely on-track with excessive quantity ramps beginning early is a aggressive differentiator and more and more necessary in mild of the inexperienced shoots that we’re beginning to see with respect to cloud demand tendencies.

Within the mass capability markets, we noticed a modest uptick in demand for our excessive capability Nearline merchandise amongst U.S. cloud clients. We venture incremental income development from U.S. cloud clients once more within the December quarter, and are inspired by constructive buyer dialogue relating to our transition to a build-to-order mannequin, making us extra assured on demand fundamentals coming into calendar 2024. Additionally, trade evaluation of cloud buyer conduct means that their price optimization efforts are nearing a conclusion, whereas enterprises proceed migrating new workloads to the cloud. These embody each core IT workloads in addition to AI particular workloads. In addition to price optimization efforts, spending priorities for CSPs have briefly shifted in direction of AI-related infrastructure, which have additional slowed the tempo of demand restoration for mass capability storage.

While AI-related spending stays a near-term precedence, a number of cloud clients have indicated that investments in conventional servers and different IT {hardware} will resume within the coming quarters. All of those tendencies bode properly for HDD demand restoration in each the cloud and enterprise OEM markets. The similar markets in China are lagging these early optimistic indicators as a result of regional financial situations that I discussed earlier. However, video and picture functions had been a notable exception reflecting demand each inside China and globally. Public and personal investments in sensible metropolis and sensible safety initiatives have been key demand drivers for the VIA market. While we imagine these underlying demand tendencies stay intact over the long-term, the extreme slowdown in China’s property sector and broader world macro uncertainties are more likely to mood demand over the following couple of quarters.

Near-term situations apart, we’re optimistic concerning the VIA market given the growing use of AI and deep knowledge analytics that improve the effectiveness of VIA programs. These programs are evolving from primary monitoring instruments to extra fulsome options incorporating advances like excessive definition AI cameras that provide extra beneficial insights and result in longer knowledge retention charges. These knowledge intensive options are properly suited to onerous disk storage by way of price, capability and efficiency. Looking again throughout our 45-year historical past, price efficient excessive capability storage has been very important to the enterprise’s skill to harness the advantages of each generational expertise megatrend that we’ve skilled. From private computing to the web, cell to massive knowledge, to the continued migration to the cloud, we anticipate the identical will probably be true with the rise of AI and generative AI functions, which contributes to our long-term view for return to wholesome exabyte development.

Seagate’s mass capability storage portfolio units us up strongly with this development backdrop. Last week, we introduced our newest excessive capability Nearline merchandise boasting 2.4 terabytes per disk and leveraging our confirmed 10-disk platform to ship capability beginning at 24 terabytes. We proceed to supply clients the pliability to deploy these drives as a traditional CMR drive or as a shingled SMR configuration primarily based on their particular capability and architectural wants. We are participating with quite a lot of cloud and enterprise clients on qualification, and count on quantity shipments to start within the first half of calendar ‘24. We also expect to begin aggressively ramping 3 terabyte per disk products based on HAMR technology in early calendar 2024. These drives deliver capacity starting at 30 terabytes and offer customers the same flexibility to adopt either CMR or SMR configurations, to further boost areal density into the mid-30 terabyte range.

Initial customer qualifications are progressing very well, and we continue to hit our reliability and yield metrics. We are getting extremely positive customer feedback and we are broadening the number of customer qualifications as planned. We’ve been very thoughtful in building our product roadmap to stage HAMR technology, leveraging existing product design and process commonality where possible. For example, virtually all of the capital invested for the 20 plus terabyte PMR drives is compatible HAMR products. The 30 plus terabyte HAMR drives utilize many of the same components in electronics as our 20 plus terabyte products. They represent the fourth generation product using our 10-disk platform and the seventh generation that leverages glass substrates.

These actions improve capital efficiency, reduce manufacturing complexity, ensure reliability, and hasten time to market. While many aspects of our product design are evolutionary in nature, HAMR revolutionizes areal density advancements. Through years of persistent research and development investment, innumerable design iterations and optimization cycles across all elements of the drive from mechanical and electrical designs to wafer processing and firmware, we have now reached the appropriate balance between areal density gains, cost optimization, and reliability to launch HAMR and volume. Our execution and cycles of learning have enabled us to continue strengthening our portfolio and we expect to launch products yielding 4 terabytes per disk in less than two years’ time.

Significantly differentiating Seagate and addressing the full spectrum of mass capacity demand. Architecturally speaking, in today’s data driven business economy, mass capacity storage is a crucial tier. The HDD areal density advancements that we are delivering affirm and sustain the existing TCO advantages relative to NAND for mass capacity storage. Simply put, we offer customers mass data storage at less than one-fifth the cost of comparable NAND solutions on a per bit basis. We don’t foresee that value gap closing over the next decade relative to data center architectures. In addition to optimizing costs, customers are intensely focused on conserving data center power and floor space. Customers can realize benefits across each of these objectives by upgrading their existing installed base of HDDs to higher capacity drives.

The 30 plus terabyte HAMR drives currently in qualification are more than two times the capacity compared to the average installed base across large data centers. This HAMR based upgrade would more than double their existing storage costs in the same footprint or offer a 50% reduction in operating cost for the same storage capacity using about half the power and floor space. These are compelling savings for customers and offer valuable optionality to best monetize their storage assets, or reallocate floor space and power budgets for other uses, or even defer new data center build-outs to maximize their capital dollars. As we deliver these benefits to our customers, we are also focused on capturing the value of our product portfolio. As noted on our last call, we are continuing efforts to adjust price commensurate with that value, which ensures both a healthy industry supply chain and offers customers the opportunity for improved TCO over the long-term.

We have already seen some benefit from this strategy which we anticipate will take a few quarters to implement more broadly across the end markets we serve. I’ll now hand the decision over to Gianluca, for additional particulars on the September quarter outcomes and share our outlook.

Gianluca Romano: Thank you, Dave. Seagate September quarter monetary outcomes had been in keeping with our revised expectations. We generated income of $1.45 billion and a non-GAAP lack of $0.22 per share. Despite a sequential decline in income, we expanded complete firm non-GAAP gross margin by about 30 foundation factors and HDD non-GAAP gross margin by greater than 130 foundation factors, reflecting our deal with enhancing profitability. Within our onerous disk drive enterprise, income declined 6% sequentially to $1.3 billion, reflecting a modest enchancment in mass capability gross sales offset by steeper decline within the legacy market than we had initially anticipated. The combine shift towards greater capability drives resulted in complete HDD shipments of 90 exabytes, basically flat with the prior quarter.

Average capability per drive elevated 17% sequentially to roughly 7.5 terabytes per drive. Mass capability income elevated 3% sequentially to simply over $1 billion, pushed primarily by the anticipated enchancment within the VIA market. Mass capability shipments totaled 79 exabyte in contrast with 75 exabyte within the June quarter. The Mass capability cargo as a proportion of complete HDD exabyte had been roughly 88%, up from 82% within the June quarter. For Nearline merchandise, shipments of 56 exabyte had been barely up quarter-over-quarter. Average capability per Nearline drive elevated 12% sequentially as demand tendencies amongst U.S. cloud clients started to modestly enhance. We imagine that the trade continues to shift under finish consumption and is making progress in decreasing current stock at our cloud clients.

As we talked about final quarter, we anticipate that it’s going to take no less than via the tip of the calendar yr for stock ranges amongst CSP clients to rebalance and for demand to enhance extra broadly. Specific to the VIA market, income was up sequentially as anticipated within the September quarter. However, as Dave famous earlier, the unsure financial setting in China appears unlikely to alter within the near-term. As a end result, we anticipate the VIA market will replicate an uneven sample of restoration going ahead. Legacy product income was $278 million, down 31% sequentially with decrease demand in every of the three markets served mission essential, purchasers and client. Finally, income for our non-HDD enterprise decreased barely greater than anticipated to $159 million in contrast with $218 million final quarter.

We reserved IT spending patterns in mild of financial uncertainties stay a headwind to our enterprise system enterprise, and we count on related income ranges within the December quarter. Moving to our operational efficiency, in keeping with decrease income ranges within the September quarter non-GAAP gross revenue decreased by $25 million to $288 million. Non-GAAP gross margin of 19.8% expanded barely in comparison with the prior quarter. Pricing adjustment enacted in the course of the quarter and price saving from earlier restructuring actions greater than mitigated the 9% lower in income and enhance in underutilization prices, which had been roughly $59 million. We count on to see additional margin profit in future quarters, as we proceed to execute worth adjustment throughout your entire portfolio, and obtain [full utilization] (ph) of projected price financial savings.

I be aware that starting with the September quarter, our outcomes replicate a change within the estimated helpful lives of sure capital tools utilized in manufacturing. Our skill to extend the effectivity of our current fastened tailored base has enabled us to increase the helpful lives from a spread of three to seven years to a spread of three to 10 years. This change decreased depreciation expense within the September quarter by roughly $9 million inside price of products bought and is anticipated to extend by about $20 million within the December quarter. We decreased non-GAAP working bills to $248 million, down from $258 million within the June quarter. While we proceed to actively handle all areas of spending, we do count on non-GAAP OpEx within the December quarter to be up barely, as sure minor spending discount measure start to conclude.

Moving into money movement and the stability sheet, we’re persevering with to take actions to enhance our debt profile and handle working capital to assist optimistic free money movement technology. September quarter, we decreased stock by 8% sequentially to simply below $1.1 billion. Capital expenditures had been $70 million in contrast with $50 million within the prior quarter. For the fiscal yr, we’re nonetheless planning a big discount in CapEx spend, in contrast with fiscal ’23 and count on spending will probably be extra closely weighted to the fourth half of the fiscal yr. Free money movement technology was $57 million, after giving impact to roughly $90 million of restructuring associated funds that we had highlighted on our final incomes calls. We used $145 million for the quarterly dividend and exited the quarter with 208 million shares excellent.

We closed the September quarter with $2.3 billion in accessible liquidity, together with our undrawn revolving credit score facility. During the quarter, we raised $1.5 billion in new capital via the issuance of convertible notes bearing a low rate of interest of three.5%. A portion of the proceeds had been used to fund [capital co-transaction] (ph) that elevated the efficient convert worth to almost $108 per share, decreasing potential future share dilution. The majority of the remaining proceeds had been used to retire as excellent stability on our time period loans, which totaled roughly $1.3 billion. As a results of its debt restructuring actions, we count on to comprehend money curiosity financial savings of about $15 million on an annual foundation. Additionally, we renegotiated the phrases of our credit score settlement, and we assist from our lender group with considerably relaxed the debt covenants via fiscal 2025.

Accounting for all actions that I simply described our debt stability was $5.7 billion on the finish of the September quarter, up $215 million quarter-over-quarter. Non-GAAP curiosity expense was sequentially flat at $84 million and we count on related expense ranges within the December quarter. Turning to our outlook, we count on mass capability gross sales to maneuver barely greater within the December quarter. Supported by incremental demand for our Nearline merchandise from each cloud and enterprise clients, offsetting softer sequential VIA demand. Within the legacy enterprise, we’re projecting greater seasonal demand, primarily from the buyer market, whereas non-HDD income is anticipated to be basically flat. With higher contact, we count on December quarter income to be in a spread of $1.55 billion plus or minus 150 million.

At the midpoint of our income steering, we count on non-GAAP working margin to be within the mid-single-digit proportion vary, with underutilization price anticipated to be comparatively flat with the September quarter. We count on to slim our non-GAAP loss per share to $0.10 plus or minus $0.20, primarily based on a share depend of roughly 210 million shares and a non-GAAP tax expense within the $15 million vary. I’ll now flip the decision again to Dave for last feedback.

Dave Mosley: Thanks, Gianluca. We are working in an extended than typical cycle, and I’m very pleased with our staff’s shared dedication and resilience. We’ve continued to drive our monetary, operational and innovation priorities, which is clear by the actions we have mentioned at the moment. We are focusing our tactical enterprise selections on free money movement technology. We are strengthening our stability sheet via debt restructuring actions. And we’re executing on our mass capability product roadmap to handle future knowledge development. Signs of restoration has began to emerge as we glance previous the tip of calendar 2023 and as trade situations enhance Seagate is able to capitalize. We are a stronger, extra environment friendly firm with a expertise roadmap that extends our areal density management, positioning Seagate to ship enhanced worth, to our clients and shareholders.

Thanks to all of our stakeholders on your ongoing assist of Seagate. Operator, lets open up the decision for questions.

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