Seagate Technology Holdings plc (STX) Q1 2027 earnings call transcript

Seagate Technology Holdings plc (STX) held its earnings call for the first quarter of fiscal 2027 on 27 October 2026. What follows is my machine transcription of the company's public webcast, made on 28 October 2026, and not the company's official text.

A machine mis-hears names and numbers, so where one reads oddly, the webcast is the record. This recording is not split by speaker.

Transcript

Welcome to the Seagate Technology Fiscal First Quarter 2027 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Shaney Hudson, Senior Vice President and Vesta Relations.

Please go ahead. Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer, and John Luca Romano, our Chief Financial Officer. We've posted our earnings press release in detailed supplemental information for our September quarter results on the investor's section of our website. During today's call, we'll refer to GAP and non-GAP measures. Non-GAP figures are reconciled to GAP figures in the earnings press release posted on our website and included on our Form 8K.

We've not reconciled certain non-GAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date.

Actual results may differ materially from those contained in or implied by these forward-looking statements as they're subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect future business results, please refer to the press release issue today and our SEC filings, including our most recent annual report on Form 10K and quarterly report on Form 10Q, as well as the supplemental information, all of which may be found on the investor's section of our website.

Following our prepared remarks, we'll open the call up for questions. To provide as many analysts as possible the opportunity to participate, please limit yourself to one main question and a brief follow-up. With that, I'll hand the call over to you, Dave. Thank you, Shaney, and hello, everyone. Fiscal 27 is off to an outstanding start. September quarter revenue grew by more than 60% year over year and non-GAP EPS expanded by nearly three times to a record $7.68.

We also achieved record gross and operating margins, demonstrating the earnings power of our business, and ongoing demand strength for data storage. Both the data center and edge IoT markets delivered double-digit sequential revenue growth, up 18% and 13% respectively, reflecting ongoing demand and pricing strength. These trends support our expectation to deliver strong sequential revenue growth and gross margin expansion throughout fiscal 2027. Our confidence is supported by an extremely strong demand environment with visibility extending beyond 2030, and an aerial density driven technology road map poised to capture this growth.

In the September quarter, we shipped a record 198 exabytes near line capacity into data center customers, and we expect a meaningful step up in the December quarter, supported by the continued ramp of the Mosaic 4. As we staged new generations of Mosaic products and shipped to a broader customer base, quarterly exabyte growth may vary. At the same time, we expect our technology road map to support near line exabyte supply growth in the mid 20% range on a compound basis.

Overall, we delivered another very strong quarter, including record free cash flow generation of nearly $1.5 billion, driven by durable demand, our continued technology innovation, and disciplined operational execution. Additionally, we significantly strengthened the balance sheet, achieved our primary debt reduction objectives, and regained investment grade status. With those goals largely achieved, we are shifting our focus towards capital returns with share repurchases serving as our primary vehicle complemented by dividends. This month, our board approved an increase in the quarterly dividend to 76 cents per share.

Importantly, this capital allocation strategy reflects our confidence in the cash flow potential of the business, as well as the multi-year demand visibility afforded by our customer agreements. Demand strength continues to be driven by data center customers, which accounted for 90% of our shipped capacity. Within data center, cloud near line products achieved a 12th consecutive quarter of revenue growth, while enterprise OEM revenue reached its second highest quarterly level in over a decade. Climate growth is profound across a wide variety of applications.

Behind these trends is a growing recognition that the value of data extends well beyond its original use. In a recent discussion with Seagate, a leading hyperscale customer observed that their customers are increasingly discovering new ways to extract value from data long after it's initially stored, strengthening the incentive to retain it. And AI innovations are amplifying this dynamic. As AI adoption expands beyond model training and toward inference and agentic applications, persistent data becomes increasingly important. These systems rely on vast amounts of historical data to make informed decisions and take effective actions, while constantly generating new output that must be governed, retained, and reused.

Estimates suggest that billions of AI agents will be deployed worldwide over the next decade, executing hundreds of billions of actions daily. At that scale, agents will continuously consume, generate, and reuse data. We believe future storage demand will increasingly be tied to this new data life cycle and compound again as physical AI applications proliferate. As the volume of persistent data grows, storage demand can extend well beyond the initial infrastructure build-out. These positive demand dynamics play directly into the strength of hard drives, which deliver the scalable, reliable, and cost-efficient foundation for data retention.

Hyperscale customers have long recognized these benefits and continue to pursue higher-capacity storage architectures. Our engineering teams work closely with leading cloud providers to align our product roadmap with future data storage requirements and simplify the adoption of higher-capacity drives. A recent example is Microsoft's qualification of a joint Seagate and Broadcom solution that combines our hammer-based mosaic drives configured with SMR technology and Broadcom's connectivity infrastructure. Microsoft already deploys hammer drives, and this recent qualification validates the SMR-enabled solution at hyperscale.

Customers can benefit from additional capacity gains that SMR provides, however, broad adoption at higher-drive capacities have been limited given the meaningful architectural and software changes required. This joint solution provides a blueprint for implementing SMR storage to unlock additional capacity gains on top of our hammer-based mosaic platform. Beyond hyperscalers and CSPs, demand is expanding among the broader set of enterprise OEM customers that are managing increasingly large data sets. We are engaging more directly with many of these customers and developing reference architectures that pair proven compute and storage hardware with flexible customer selected software.

These solutions offer a path to scale persistent data capacity, improve storage economics, and drive platform efficiencies. The strengthening-demand environment is extending our customers' planning horizons, which is reflected in the supply agreements we now have in place. The vast majority of our near-line exabyte supply is now allocated under long-term supply agreements through calendar 2028, with some cloud customer agreements extending through calendar 2030. Our strategic planning discussions extend even further. We are working closely with customers to address their growing storage needs across this time horizon by executing our mosaic product roadmap.

As we transition to hammer-based mosaic products, we are investing in additional tools and technologies necessary to offset longer manufacturing cycle times and maintain stable unit production. For Seagate, increasing capacity per disk is driving exabyte growth. Our build-to-order contracts establish specific configuration and pricing terms for near-line shipments through calendar 2027. As we move through the next few quarters, we expect to begin finalizing configuration and pricing terms with customers for the exabyte supply that we've allocated to them for calendar 2028.

Pricing continues to improve, reflecting both the execution of our value-based pricing framework and higher external component costs. We expect a stronger-demand environment evident in customers' multi-year commitments to continue to support these healthy pricing dynamics. Taken together, these agreements provide customers with greater supply assurance, while increasing visibility for both parties. They also reflect customer confidence in long-term demand growth and the increasingly strategic role that hard drive storage plays in the modern data ecosystem. Supporting this demand growth requires storage solutions to deliver scale, efficiency, and economics.

These very attributes serve as the foundation for our technology strategy. Increasing storage density within the same data center footprint is the most cost-efficient way to maximize bytes per square foot as one large hyperscale customer put it. And our hammer-enabled roadmap is designed to deliver on that objective. Advancing aerial density is our North Star. We are scaling drive capacity through aerial density rather than relying on higher drive unit production. We believe that this is the most efficient way to help customers manage their extreme data growth and retention needs.

The same approach supports profitable ex-bike growth for Seagate. We are executing well on the product roadmap milestones that we've outlined. We continue to expect hammer to represent roughly 50% of our near-line ex-abyte shipment run rate exiting calendar 2026 with Mosaic 4 representing roughly half of those hammer shipments. Mosaic 4, which offers up to 44 terabytes of capacity, is continuing to ramp with two leading CSPs. We are on track for additional qualifications to complete over the next couple of months across multiple global CSPs and OEM enterprise customers.

Product development for our third generation Mosaic 5 product remains on track. These drives can deliver upwards of 50 terabytes of capacity and leverage our highly efficient tendest platform. We continue to expect customer qualifications shipments to begin towards the end of calendar 2027. Reflecting on our ongoing advancements in photonics, we recently demonstrated eight terabytes per disk in the lab, providing further evidence that hammer and the Mosaic platform can deliver on customers growing capacity needs and reinforces our conviction that increasing ex-abyte supply through aerial density growth is the right long-term strategy for both our customers and for Seagate.

Wrapping up, our results demonstrate both the durability of demand and the effectiveness of our strategy. Data creation, retention, and reuse are compounding demand for mass capacity storage. And based on the long-term visibility we have with customers, we believe we're still in the early days of a multi-year growth phase. Our technology roadmap combined with disciplined supply management and a value-based pricing strategy and the operational leverage in the business gives us confidence in our ability to deliver strong profitability, cash generation, and shareholder returns.

I'd like to recognize our global team for their execution in delivering a record quarter and a strong start to fiscal 27. I'd also like to thank our customers, suppliers, and shareholders for their continued trust and support. Now I'll turn the call over to John Luca. Thank you, this. Seagate posted very strong results for the September quarter, exceeding the high end of our guidance range for both revenue and earning pressure while continuing to establish new profitability records that translated into our highest-ever free cash flow generation.

September quarter revenue was $4.2 billion, up 17% sequentially, and up 61% year over year. No gap gross margin came in at 67.8% up 510 basis points sequentially. No gap operating margin increased 610 basis points sequentially to 50.7%. And no gap VBS was $7.60 a cents, up 35% quarter over quarter and 194% year over year. To stay in data center demands, continue to drive strong company performance. In the September quarter, we ship a total of 120 extra byte, up 21% year over year, with data center representing 90% of that total.

Data center revenue was $3.4 billion, up 18% sequentially and 63% year over year, representing 81% of total revenue. Data center shipments total 198 extra byte, up 24% year over year, and represented 90% of the company overall extra byte volume. As they've noted, we are staging MOSX4 products higher than anticipated customer qualification, and we expect capacity shipments to meaningfully step up in the December quarter. Over-cloud customers accounted for the vast majority of data center revenue and extra byte demand, a trend that we expect to continue as we ramped MOSX4 volume.

At the same time, demand across the enterprise OEM data center markets has continued to strengthen, as the application transition more toward inference and agent-based workloads, customers are seeking scalable, high-capacity storage solutions across hybrid cloud data center environments. In the September quarter, revenue from base markets increased for the sixth consecutive quarter, with double-digit growth both sequentially and year over year. Complementing the strength in our data center business, our Edge IoT market also delivered solid revenue growth. Revenue total $784 million, representing 19% of total revenue.

This was an increase of 13% sequentially and 52% year over year. Moving on to the rest of the income statement, no gap gross profit increased significantly to $2.4 billion, up to 28% quarter over quarter, and more than doubling from $1.1 billion in a year ago period. No gap gross margin expanded to 57.8%, up from 52.7% in the prior period, reflecting variable pricing execution and then improving product mix as we ramped MOSX4 products. With factors, more than offset cost headwinds associated with certain external resource components.

Looking ahead, respect continued benefit from our value-based pricing strategy and product mix to support quarterly margin expansion for the rest of fiscal 2027. No gap operating spaces were $300 million or about 7% of revenue. The strong demand environment, combined with discipline expense management, drove substantial operating leverage, with no gap operating profit after 33% sequentially to $2.1 billion, representing 50.7% of revenue. Other income expenses total $38 million in the September quarter. Following the debt reduction we completed earlier in October, we anticipate other income expenses to decrease further in the December quarter to approximately $25 million, benefiting from the lower interest expense.

No gap net income grew to $1.8 billion, with corresponding No gap UPS of $7.68 per share, based on tax expense of $328 million, and a diluted share count of approximately 232 million shares. Turning now to cash flow and the balance sheet, operating cash flow was $1.7 billion, and capital expenditures were $111 million for the September quarter, or 5% of revenue. For fiscal 2027, we continue to expect capital investment will remain within our target range of 4 to 6% of revenue, as we support the ongoing transition to EMR technology.

Higher profitability and in-line coverage resulted in pre-cash flow generation of $1.5 billion, up 32% from the prior quarter, and more than 3 billion year over year. We expect cash generation to further improve throughout fiscal 2027, supported by sustained demand, operational efficiencies, and complex discipline. During the September quarter, we retired $1.2 billion in debt, including the remaining convertible notes, and approximately $1 billion in higher debt. We exited the quarter with gross debt of approximately $2.4 billion, and the net leverage ratio of 0.2 times.

Following the close of the September quarter, we retired an additional $750 million of higher senior notes, reducing principal debt to approximately $1.6 billion. As a result of our actions, we expect to be net cash positive, exiting with calendar year. We have now delivered on our goal of strengthening the balance sheet, and are now focused on returning more of our free cash flow generation to our shareholders. During the September quarter, we returned $568 million to shareholders through dividend-insured purchases, roughly two times the amount returned in the June quarter.

We are also increasing our quarterly dividend by approximately 3% to 76 cents per share, reflecting our confidence that strong cash generation is sustainable. We exited the September quarter with $4.4 billion, remaining on our existing share of purchase authorization, and expect too significant to increase share of purchases, starting calendar 2023. We ended September quarter with cash and cash equivalents of $1.3 billion, in total liquidity of $2.6 billion, including our under-owned revolving credit facility. Turning now to the December quarter output, we expect another quarter of strong sequential growth, underpinned by continuing demand momentum, a significant increase in next-up estimates, and ongoing execution of our value-based pricing strategy.

We expect December quarter revenue to be in a range of $4.8 billion, plus or minus $100 million, which we presented 70% year-over-year improvement at the midpoint. Non-GAP operating expenses are expected to remain flat, at approximately $300 million. Based on the midpoint of our revenue guidance, Non-GAP operating margin is expected to spend over the mid-50% range. Non-GAP EPS is expected to be $9.20, plus or minus 20 cents, based on a tax rate of about 16%, and Non-GAP utility share count of 133 million shares.

Our September quarter results and December quarter outlook reinforce our expectation for un-revenue growth to meaningfully outpace fiscal 2026. Renewable demand, increasing mosaic adoption, and healthy operating leverage are supporting ongoing revenue growth, managing expansion, and strong cash generation. Together, with our increasing focus on capital return, we are well positioned to increase long-term shareholder revenue. Operator, let's open the call up for questions. We will now begin the question-and-answer session. To ask a question, you may press star than one on your telephone keypad.

If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star than two. In the interest of time, we ask that you limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. Once again, that was star than one to ask a question. The first question today is from CJ Muse with Cantor Fitzgerald. Please go ahead. Yeah, good afternoon. Thank you for taking the question.

I guess first question regarding exabyte deceleration in the September quarter. Curious, given your inventory days moved up to 97 from 83, was there a kind of staging involved pre-building that's supporting your outlook for the accelerated exabytes into December? And then maybe, as you think about calendar 27, you were kind of in the mid-30s range. You're reiterating kind of the mid-20s long-term. Curious, given the ramp of mosaic weather, we should be kind of in that 30-plus range, or do you think we will revert to that compounded number at some point in calendar 27?

Hi, CJ. Thanks for the question yet. If you think back to the June quarter, we had a pretty appreciable step up in the September quarter. We were relatively flat to your point. And the quarter we're in now, the December quarter, we'll step up again. So we are on a trajectory. And I think 25% is a really good number for that. We're driving product transitions, and we have to stage them quite a ways out in time. We make sure that we lock in with our customers on what they need to -- when those things have to hit their dock and sync up with all the other parts that they need to build the data center.

So, pretty happy with the progress and still, you know, staging very aggressive aerial density and product transition technologies so that we can get to those higher x-by levels. Yeah, CJ, we have few customers, but we qualify more like four in the next quarter. And therefore, we are preparing manufacturing for those schools and the volume that we can shift to them in the December quarter and later. Perfect. And there's a quick follow-up. Chalmuka, on the operating margin guidance in the slide deck approaching or towards the mid-50s, you know, should we be modeling 50% or are we suggesting something else?

No, I think -- 55%, sorry. 55, sorry. Well, we are suggesting something that is between 50 and 55. So, of course, it's another improvement compared to what we have done this quarter that was already above the 50%. So, we are very happy on how we are managing the operating margin in particular. You have seen continuous improvement in revenue in gross margin, very stable objects. So, this is resulting in sequential strong improvement in operating margin and we are approaching, you know, even higher results that we have a guidance for this December quarter.

And as we said, in prior course, we expect to improve even more in the rest of the fiscal year. For example, thank you. Thank you. The next question is from Eric Woodring with Morgan Stanley. Please go ahead. Thank you guys. Thank you so much for taking my questions. Really strong placing, obviously, in the quarter. I'd love any commentary that you could provide there just on how to look forward on that price per terabyte metric, but separately also just to address the cost per terabyte decline, you know, over the last four quarters, you've done something like 15% annual cost declines or year over year cost declines.

You just did kind of mid single digits. So, can you maybe help us understand any temporary factors that are impacting that related to the mosaic transition or when we should expect that metric to accelerate? And then quick follow up, please. Thank you. Yeah, thanks, Eric. It's a complicated question. So on the pricing side, you know, I continue to believe that that's very dependent upon demand and demand continues to be very strong, not just in quarter, but you know, you look two, three, four quarters out.

People are demanding that we go higher in exabytes as well. So it's a great long term relationship with it that we have with the customers. And we're able to predictably go through these product transitions and accelerate our technology the way we talked about. So, and I don't see that changing. You know, in the past years ago, we would see product swaps and things like that. People saying, I don't need product in quarter. We're seeing none of that right now, absolutely.

Everything we can make above and beyond our plans is being spoken for. And on the cost side, you know, that we control our manufacturing efficiency of our critical technologies. And that's the largest driver of our costs. We get a lot of efficiency, especially in cost per terabyte, if that's a metric, as we transition platforms. But during some of the transitions, we get early cost things like scrap that go up. It doesn't dissuade us from driving the transitions.

We continue to drive them very hard. And then we go work those things down. Right now, I see more opportunity because the future transitions look even brighter than it would have said 90 days ago. So, I'm pretty excited about that. Yeah, Erica, I would say our costs decline for what we produce. So, as the media is continuing to be very, very strong. So, we are happy with that. The cost of the external component, as you know, compared to a year ago, is now much higher.

And therefore, over is at least a partial offset of our internal cost reduction from an higher external component cost. So, we have to see where the external component costs will go in the future. But what we can control is actually performing very well. Now, when we have enough visibility and we have the time to include that cost increase for the external component into our processing, of course, we do it. And this is also why you have seen a little bit higher cost increase, sorry, a price increase to our customers in the current quarter.

But sometimes it's not so relatable. So, we need a little bit of time to adjust. Okay, super. Thank you very much for the feedback. And then, Dave, maybe just going back to CJ's question at the top of Q and A, just want to make sure I understand the kind of product staging dynamics in the September quarter. I just want to make sure, you know, there's no kind of right tail risk here in terms of any, you know, yield issues that we need to be thinking about anything in terms of data center readiness.

I just want to make sure there's none of those that are impacting. And this was, this was generally just product transition, leading to this lower sequential exit by growth as opposed to anything. Maybe that would be a little more concerning. Thank you so much. Yeah, there's none. Big step up in the June quarter. Take it off a little bit in the September quarter, just timing, and then it'll be another big step of the December quarter. And then, you know, as we get through these product transitions, we'll see you next in my growth.

Awesome, guys. Thanks so much. Good luck. The next question is from Amit Darianani with Evercore. Please go ahead. Good afternoon. Thanks for taking my question. I guess the first one was really you folks reiterated the four to six percent of revenue for CAPEX in fiscal '27. Is that a sustainable framework to support mid-20% exit by growth longer term beyond fiscal '27 as well, especially given the fact you need, you know, you talked about longer tuning needed to offer the longer hammer manufacturing cycles?

Could you talk about like what the right framework would be longer term? And to the extent you need additional heads or media capacity, how do you find a way between building it organically versus acquiring it? To first order, there's no way we can acquire the hammer technology, the leading edge technology. So we have to do that ourselves exactly to your point. Yes, we see that four to six percent model being plenty for us to continue to grow according to our plans.

Actually, the latest acquisition of new tools is really helping us drive very old MZ because we get to buy remarkable new tools that are maybe more capable than what we're replacing in the factory. So that's a cost for optimism. We are using some legacy technology from outside as on a case-by-case basis that will help us through some of our manufacturing technology to hammer. But I definitely think that 25% is the target for our exabyte growth. We can do that predominantly through the aerial density transitions that we're driving.

Some of those components get, we've talked about this in the last couple of quarters, some of those components get a little bit longer time in the factory. And so therefore we have to adjust our output accordingly, but we can do that all within the four to six percent window. That's helpful. And then as hammer ramps, especially with Mosaic 4 becoming a bigger percent of exabytes for you folks, what's the right thing to think about cost-for-bid declines as you get through that transition?

I get that the four to six percent range right now isn't the optimal one, but I'm just curious, as hammer ramps up for you, what's the right cost-for-bid decline long ago? Yes, as I said before, the cost for the component that we produce, of course, is continuous with decline. And when you go from three terabytes per disk to four terabytes per disk, you have a major impact in terms of cost per terabyte decline. As I said before, right now, there is also an impact from external components.

So you need to save a little bit of the tool between internal efficiency and technology improvement that is driving cost reduction. And the overall cost per terabyte, that is, of course, also impacted by the external supply chain and external component cost. So you have seen a very good decline in the prior quarters, a little bit less in the September quarter. I would say we need to understand the various drivers for the different components, because we buy a lot of different components externally.

But overall, when you go even longer term, the technology is what is driving cost per terabyte. And having a technology that continues to generate more terabyte per disk is exactly the way that we want to follow in order to reduce the cost per terabyte and improve our profitability. Thank you very much. Next one. The next question is from Chris Sankar with TD Cowan. Please go ahead. Yeah, thanks for having me question. I understand the dynamics of the cost with the product transition.

But if you just look at from a high level, you know, 50% of the extra bytes exiting the series going to be hammered, which is gross margin equity. Unlike your peer, you're not, you're sticking to 10 platters, not going to 12 or 14, which in theory, I think your set increases cost. Some is running while the cost down the even better going forward. Or would you consider moving beyond the 10 platters with any technical reason for not doing it and then add a follow-up?

I'll start at the end. There's no technical reason for not moving beyond 10 platters. I mean, I think we like the platform and we get leverage cost leverage to your point going from product generation to product generation. We don't have to transition the mechanical piece parts and pay for new tooling and things like that. So we know the platform, we like it. We're going to stay on it, but there's no technical reason why we can't start adding platters.

Actually, from a qualification perspective, it's much simpler, especially with our customers to disqualify one thing that they don't have to, you know, to go through any new risks on except for just the technology transition. They don't have to change the dynamics of how many heads or disks are in the drive. From my perspective, probably should have said this on one of the earlier comments as well, there's not a significant cost increase in the hammer technology from one generation to the other.

So the cost per terabyte takedown, you can pretty much calculate it. If you go from four to five, for example, and we are driving five very, very hard right now. There's a quick follow-up. I understand you're maintaining your capital intensity four to six percent. So obviously the different third player talking about adding capacity in Japan. So I'm just wondering, is the four to six persons still a good bogey to use for the next few years, or should we worry about any potential share loss or is the demand so much greater in supply that it should not matter?

Well, I don't really speculate on what our competitors plans are. I just say relative to ours, I think four to six percent is just fine. You know, I have a lot of respect for everybody in the industry, but their technology solutions may differ from ours. And you may see that over the next few years. From our perspective, demand remains really strong. And from a supply side, we continue to believe that bringing meaningful HDD capacity to market is a really complex process that requires substantial investment in R&D and technology.

It's an intricate supply chain balance and, you know, the idea of just plugging in a few machines, I mean, it's orders of magnitude more difficult than that. It really requires tight coordination throughout our supply chain. So, most of our, as I said in the prepared remarks, our near line exercise supplies are already allocated through calendar year 2028 and we're having conversations much further out in that. We have very, a lot of confidence that our customers are going to be there and we believe supply will remain fairly tight for our products over the over that period.

So we're just going to keep focusing on our technology roadmap and and try to get the products out and meet exactly what the customers need when they do. And I'm not really worried about anything else. Thank you. The next question is from us the merchant was city, please go ahead. Great. Thank you for taking my call. You mentioned there were a lot about Katie cash adoption contributing to demand. So, you know, given that, how should we think about, you know, unconstrained demand and the impact to exit by demand given just this trend that you're seeing on TV caching.

Thank you. Yeah, thanks. I do think we are watching a lot of new technologies come out that are increasing the value of data very quickly. And so, and, you know, I know a lot of people toss around the letters AI. It gets really confusing. What I would say is the data sphere is growing weeks and bounds anyway. Just look at video on the internet or, you know, video analytics, for example, in places like our factory, it's growing very quickly and then AI is an accelerator of that dynamic.

The ability to take data from the application layer and move it down to the storage layer and then promote data from the storage layer back up. We've, we've never seen the systems be as efficient as they are right now with software not in the way with, you know, compute technologies are much faster than they were in the past and, and architecturally things like the KV cache plug between those two layers only accelerated to even faster so very excited about that.

I don't think any of us has ever lived in the world where things are this efficient above the storage layers and I do think that'll drive a lot of future demand for us. Yeah, we are seeing a demand for storage in not a different part of the cloud growing very rapidly even a bit faster than what we were expecting. So, as we were discussing before, our demand is stronger and stronger. How safe the supply demand gap is probably growing at this point.

But as we said, we are really focused on our technology transition and we built around more of our 40 terabyte drive in the next few quarters and we see how we want to address demand. Okay, and just as a follow up, could I just even ask about physical AI I know that's probably a little bit longer term but are you seeing any of that demand currently translate into, you know, meaningful inflections for your advice. Thank you.

I would say not yet directly but we're hopeful. I mean, we've had conversations for a long time with autonomous vehicles companies and people that are moving data around in the world. The interesting thing to us about physical AI is not only the, the need to store the data for training but it's also the need to store the data to make sure you made the right decision. And that storage will probably be closer to where the data is actually created, which is the edge.

So there's maybe new products that are coming on the horizon. It's still very early days in this, but I think there's a lot of innovative companies out there driving for value add solutions out of the edge and we're watching them carefully. You know, I think this could be a further driver storage that we haven't really contemplated yet. Thank you. The next question is from Mark Newman with Bernstein, please go ahead. Yeah, thanks for taking my question.

Congrats on the numbers. I shouldn't look at this, so pricing costs to gross margin. I mean, you've had another very strong quarter of gross margin appreciation, and it's obviously based into the guidance as well. But when I look at the price, it seems to be accelerating significantly from what was something like a single digit Q and Q to have like a mid teams Q and Q at the September quarter. I mean, while your cost still slightly confused about that appears to be actually up to Q and Q. You did point out about some of the component costs coming up.

I understand that could be part of it. Anything else that we should be aware of, perhaps on the mix or something else that may have changed things to may have boosted the price or the cost temporarily that we should be aware of. Thanks, Mark. So the first thing I would always say is that I'm really happy with the bottom line, we continue to drive the operating income really well, the free cash flow really well. As you get up into things like gross margin and then above its prices, you know, there could be some in quarter dynamics going on about our product transitions.

I mentioned scrap already. As we drive these hard product transitions, we have to incur some of that scrap and we actually incur a little bit of manufacturing. I'll call it lossiness when that happens as well. You know, the yields on the product transition may not be where we want. We go take a quarter or two and we go beat those back into what the old yields were from. There's so there's a little loss capacity in that.

You know, from my perspective, the pricing dynamic is really still about long term demand. It's not about in quarter demands long term demand and we're having great conversations with our customers about staging these technologies, making sure that we get through the product transition and that their systems are ready for that product transition as well because they have to make sure their architecture is ready for the higher capacity drives and we do that very carefully and make sure making sure we don't build too early for those transitions make sure we just time it right.

It's very important because the size of the supply chains that we have out in the world are enormous and in order to make sure you're doing what the customers want today tomorrow and next year in the following year, you have to make sure you think of the number of square sets that you will if you, you know, with those customers. We're working all of that very hard and I think that all plays into the pricing and the cost dynamics that you talked about.

Yeah, no, I was correct. I think pricing and cost dynamics are always somehow correlated and when we're visibility on some external cost increase. We try to pass that to customers, including that in our pricing. No, sometimes the timing is not immediate because we have contact in place and we have commitments. But over time, that additional cost from the supply chain, if any is going to be passed to customers. This is why pricing now is increasing a little bit faster than what you have seen in the past is also to cover that additional cost.

As I said before, there is nothing unusual internally. Now our cost for producing as a media is declining as we were expecting, but there are additional costs from external components. And as you said before, gross margin is actually the improvement of gross margin is actually accelerating because of pricing more than offset that increasing costs. So, I think we are, we are managing this external component in cost increase in the right way in a way that is actually accelerating the profitability of the company.

I really appreciate that and follow up on the price, given all that, and that the huge price increase you've been getting recently image degree expect this type of quarterly. As the growth to continue in the mid teams range or is that more of a one off and I mean, I appreciate from pricing will continue, but that was extremely strong pricing you just printed. So I'm just curious if that's realistic to consider that to continue at that rate.

As we talked about on supply, there will be step ups as new contracts come up all the time. I said in the prepared remarks that we don't see any demand destruction at all. If anything, we see a lot more demand creation kind of quarter over quarter, and we're projecting where this is going to be three or four quarters from now. Then we get into negotiations with the customers on the exabytes that we've kind of allocated for them we lock down the configuration and then lock down the pricing and I don't see the trend changing too much right now.

Yeah, every quarter is a bit different. I report is a bit different. Of course, everything is included in our guidance. So you see a strong revenue upside part of that is coming from exabytes, as they've said before. Past is coming from pricing and I think you can model another step up in gross margin and of course that is coming at this point, mainly from pricing because now we discussed about the cost and the offset from the external component cost increase.

Really great. Thanks very much. The next question is from Wamsi Mohan with Bank of America, please go ahead. Let's talk a little bit on the pricing. How much of this would you say was achieved with already contracted pricing versus versus what's floating any any relative percentages on there or hyperscaler versus OEM versus edge or by capacity tranches like any any color incrementally just share magnitude of what we just saw and have a quick follow up. Yeah, I think most of it's on the, I'll call it the role, rolling, re upping of the contracts woncy.

It's, it's not because we're getting more exabytes out or we're pushing more exabytes out. We're running the business very predictably on that front. So, usually when we see a pricing to upside, it'll be two or three quarters away. Because we'll be able to find a way to get a few more exabytes out and we'll say who wants them. That comes because we are working in operations really hard and just trying to get a little bit more efficiency out of our factories.

Yeah, we have no change our pricing strategy. The strategy is the same. But as we said before, when we have visibility for some of external cost increase, we have to pass that through and include in our new pricing. So when we negotiate a new concept, of course, we also consider the current situation for external supply chain costs and adjust the pricing according to that. Apart from the, from the change the strategy is exactly the same that we have followed for the last three years at this point.

Right. Okay. And then just as a follow up on the exabyte growth. I understand that you're calling for an acceleration meaningful step up again next quarter. As we think through the fiscal year, is it right to think that we should be seeing sort of improving exabyte growth trajectory as we go through the course of the year, given that some of this product transition. Issue would be behind you and you're still saying that you're meaningfully under shipping demand.

Thank you. Yeah, I don't think we had any issues with product transitions. I think it's all been planned. I mean, to your point, it's the way for cycle time is quite long. So we've, we've known exactly what our exabyte output is going to be. Yes, you will see continued acceleration in Mosaic four and then we're going to start leaning in the mosaic five as well. So I, I'm very happy with the 25% number. We're going to keep driving it as hard as we can.

Next question is from Ben rights is with Milius, please go ahead. Yeah, hey, thanks a lot. Dave and John Luca, you know, I'm look, I want to talk about the buyback and the cash return pace, because, you know, you say you're going to start in the March quarter. You actually don't have any debt that comes due, I believe until June of 2029. So you probably start with like free cash flow of around a couple billion, maybe 2 billion at the start of this period.

What does it imply for buybacks? Are you going to do 100% of the free cash flow that we start with in that March quarter of 27. And can that continue, you know, up until you have to pay down that debt. What kind of percentages of the free cash flow are we looking at here? Thanks a lot. Yeah, we're, we're, we're, we're, we're very happy to be through the period where we dealt with the debt, like you said, and, and we're back to, you know, being ourselves, our model is 75%.

And, you know, we should be able to get back to that model over some period time. So that's great. Beyond that, it's opportunistic. You know, when we can, when, when we don't think we have any other needs for the free cash flow that we're generating above and beyond that 70% will look at it. Yeah, I think that's correct. No, we had, we had the last debt report just earlier this month, but we are also active in the market in terms of share the next quarter.

But we said starting next quarter because we don't have any other debt activity plan. We will step up the share the debt program. So you will see much more happening on the on that side, starting the March quarter. Okay, and thanks a lot for that. You know, your customers, especially for most of your business for the big hyperscalers. Are you hearing anything about, you know, in terms of their ability to purchase on time, are you hearing anything about land power shell delays, or is it more are you, are you hostage to their timing of when they get chips or land power shell.

And how are you managing that, and how would you characterize that? Thanks a lot. Yeah, that's an interesting question. The answer to your question is no, but there, we are very mindful of the fact that we don't want any of our products sitting anywhere. And so it's very important that we don't over build that we build exactly what we think the demand is. And for exabytes will strengthen the, you know, more exabytes in the box makes the data center much more efficient.

The customers know that they want that. In general, the storage layer doesn't use a whole lot of power compared to the compute layer. It doesn't use a whole lot of space and it doesn't use a whole lot of money either. So, you know, we can calculate all those things, but we just do not want to, we don't want to over shift into a channel that necessarily doesn't have the components elsewhere, right. We want to make sure we spread spread out as much as we possibly can.

And I think we're doing a good job of that, giving our customers that predictability, not just for next quarter, but for the next few years now, so that they know exactly what they're going to have to go acquire and they know what their footprint is. They know what your data requirements are, but also their data center capabilities are and we try to time all that together. Thank you. The next question is from Carl Ackerman with BMP Parabas, please go ahead.

Yes, thank you. Obviously, hyperscale demand is robust, but you spoke about near record sales from on-prem enterprise. I'm cognizant that CPU providers have said traditional server demand supports 25% of the agentic CPU opportunity. So my question is, frankly, have you seen it yet? And as more of the CT racks become deployed over the next 12 months across both hyperscale and on-prem, how is your penetration rate of high capacity hard drives changing due to this agentic CPU demand bill?

Thank you. Yeah, it's an interesting question. I would say typically those enterprise and OEM customers lagged quite a bit the highest capacity points and they're starting to not lag as much. I mean, so the storage layers are much more data rich and the products are higher capacity drives than they ever have been before. I think maybe inside of your question, there's some of this. Is it truly just a non-prem instance where you might only have one petabyte or is it?

Are we talking about people that maybe service through these channels that may grow to a larger scale? I think we're seeing both. And there's demand for both types of products. So there may be just on-prem meaning a small office or a small enterprise. And then there may be some of these channels that are actually servicing people who are doing software cloud instances and things like that. Thank you. The next question is from Joe Quattrochi with Wells Fargo.

Please go ahead. Yeah, thanks for taking the question. I was wondering if you could just qualify. What was the external component impact on gross margin and then is that expected to be completely offset and embedded in the December quarter guide? Yeah, I feel included in the December guidance. As I said before, there is a cost related to what we produce and that is declining as rapidly as we had in the past. And then there is a cost of what we buy externally.

And if you compare to the cost of the same component a year ago, today that cost is higher. And so he is partially offsetting the cost decline, but we generate internal, but everything is included in the guidance and the guidance is showing an improvement, not only strong improvement, not only revenue, but also in gross margin in operating margin. And of course, if yes, so I think the trend of improvement is the same that you have seen in the past.

And of course, we are managing this additional external cost as well as we can and still generating strong improvements. And then maybe as a follow up, you know, I apologize for another question kind of inviting us to just thinking about the increase in dollar per chair by how can you help us understand like how much of the was maybe makes driven by, you know, higher hammer contributions relative to like like for like price uplift. Yeah, let's see.

The product is going to say hyperscalers, they're pulling really hard on new capacity points that are much more efficient, better TCO proposition for their data centers. So we get the benefit from that relative to price per chair by, you know, that's fairly well blended across the entire portfolio. So, some of those contracts with the hyperscalers are more forequarters. Think of the sport quarters rolling, if you will. But and some of the other stuff is a little less than that.

So I, you know, I don't know that you can really look at it, different, different markets. But I think that relative to our ability to actually predict we're going after the highest capacity points to make sure that we keep those big chunks of demand kind of predictable for us so we can run our factories. The next question is from Joseph Cardoso with JP Morgan, please go ahead. All right, good afternoon, and thanks for the question here.

Maybe just wanted to follow up. I think in the past you kind of hinted at maybe an outlook around hammer exiting your fiscal 27. So just curious if there's any update there on how we should be thinking about hammer share of near line as we track through the fiscal year, just given, you know, any shifts and thoughts around constraints on getting there faster like customer calls, the future cycle times, or any other variables. And then I do have a quick follow up.

Thank you. Thanks, Joseph. Everything on the poor terabyte for, for platter is, is on track. So we're happy with the qualification progress. We're happy with the initial units we shipped to the field and how they're doing in the field. Everything's on track there. Five terabyte is that we're actually more optimistic than we were last quarter. I'd say we see the ability to make this transition a little bit faster than we originally planned and we'll get to talking to that when we get into fiscal 28.

We're going to stage that and go as hard as we possibly can because that's yet another improvement for us. And I also see the five terabyte per platter extending fairly rapidly into six terabyte per platter. So love this platform. The technology development is going quite well and we're pretty optimistic that we'll keep driving. Yeah, so I would say that there are no changes on on our targets, but we discussed in the prior quarter in terms of the percentage of total near land exabytes for a end of calendar 26 and then for a fiscal 27.

No, got it. Makes sense. And then, you know, just wanted to touch on some of the comments and the prepared remarks that you guys had around agreement, extending through calendar 30 if I heard correctly. It may just touch on like, is there a change of differences between, you know, the agreements going out all the way through calendar 30 versus maybe the ones that are more near term in terms of calendar 28 just just curious in terms of how you guys are thinking about or like what's how we should be thinking about maybe more importantly around those agreements relative to walking in exabytes pricing, etc. And maybe how these agreements are influencing your capacity plans.

Thank you. Our process hasn't changed. So we're giving visibility to people about how what our extra bike growth will be. And then we're saying, basically, when you get within say 12 months, we lock in the configuration that we're going to be building in our factories. And, and then we lock in pricing. That's what I would call the build the order process that we have. As things roll forward, you have demand stays strong as strong as it is.

We may see that some of those contracts start, we lock in at higher prices. That's fine. We also would understand very quickly, if somebody wasn't pulling according to the plan, we could pull back. We don't see any evidence of that right now. I think we're in the in a multi year growth base for data. And the reason I say that is just go back five years ago, the data storage products were roughly shipping half the exabytes on a quarterly basis of where we are today.

And then we had this big downturn. So the world's making up for a lot of lost time. And there's growth, extreme growth and data everywhere. So I think the next five years will be very strong from that perspective. And the value of that data with some of these accelerated applications is, you know, because it's becoming much more valuable. So I'm very excited about this. I think the customers are as well. So they know what they're planning for, what they're going to install capacity for.

And we'll work together with them on that. Appreciate the color. This concludes our question and answer session. I would like to turn the conference back over to Dave Mosley for any closing remarks. Thanks, Gary. And thanks again to everyone for joining us. But we're entering fiscal 2027 with really strong momentum ahead of what we believe is a multi year growth base for mass capacity storage for executing our strategy that position segated to capture that opportunity through continued technology innovation and discipline to execution with a real endless focus on driving profitable growth and creating value for our customers and shareholders.

Thank you and we'll talk to you next quarter. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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