Good afternoon, and welcome to the Seagate Technology Fiscal Second Quarter 2021 Financial Results Conference Call. My name is David, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye..

Thank you. Good afternoon, everyone, and welcome to today’s call. Joining me are Dave Mosley, Seagate’s Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our December quarter on the Investors section of our website.

During today’s call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and Form 8-K that was filed with the SEC.

We have not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control or cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort.

As a reminder, this call contains forward-looking statements, including our March quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions.

These statements are based on management’s current views and assumptions and information available to us as of today, should not be relied upon as of any subsequent date. Actual results may vary materially from today’s statements.

Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K and 10-Q filed with the SEC, our Form 8-K filed with the SEC today and the supplemental information posted on the Investors section of our website.

As always, following our prepared remarks, we will open the call for questions. And with that, I will now turn the call over to you, Dave..

Thanks, Shanye. Welcome, everyone, and thanks for joining us today. Seagate exited calendar year 2020 on a very strong note, delivering December quarter performance that exceeded our objectives. Compared to the prior quarter, we grew revenue 13%, expanded non-GAAP operating profits 31% and significantly increased the free cash flow to $314 million.

We began executing our recently increased share repurchase authorization and retired over 18 million shares of Seagate stock, or approximately 7% of the shares outstanding beginning of the quarter. Through the combination of share repurchases and our quarterly dividend, we returned a total of $1.2 billion in the quarter.

Despite the challenges of a global pandemic, Seagate grew annual revenue 2% in calendar year 2020, achieving revenue growth inside of our long-term financial target range. At the halfway point of fiscal 2021, our performance puts us well on our way to achieving our objective to deliver relatively flat revenue for the year.

In the remainder of my comments today, I will provide an update on end market trends, share the progress we’ve made on our technology and product roadmaps, and offer some insight into how these advancements position Seagate with a strong secular mass data growth transit.

Against the backdrop of the pandemic, 2020 was headlined by diverging end market trends. Strong cloud investments to support our remote economy and digital transformation were countered by significant disruptions to enterprise IT spending.

However, during the December quarter, the enterprise markets began to recover for the first time since the onset of the pandemic. The improvement was most pronounced amongst large enterprise OEM customers, which led to strong sequential revenue growth for both nearline and mission-critical drives.

We anticipate this positive trajectory to continue, which is consistent with analysts’ expectations for on-prem IT hardware investments to pick up in calendar year 2021. Cloud data center demand remains healthy, with the overall data demand drivers and tech.

Analysts projected strong double-digit growth in cloud CapEx in 2021, which bodes well for Seagate and aligns with our expectation for cloud HDD storage demand to increase through the balance of the fiscal year and drive significant growth long-term.

For a second consecutive quarter, we experienced stronger than expected growth in video and image applications or VIA markets, due in part to pent-up demand following the significant impacts incurred in these markets during the economic shutdowns early in the pandemic. Video and image applications are a key growth market within mass capacity storage.

As the number of devices generating data explodes at the edge, mass capacity HDDs are vital to preserving and putting that data to work. For example, the rollout of 5G and rise of edge computing supports further growth in smart and safe city initiatives, as well as smart factory opportunities.

Gartner projects, the number of 5G enabled outdoor video cameras to exceed 15 million by 2023, a six-fold increase from current levels. That will translate to as much as 1 exabyte of data generated each day and that’s to fill about 2 million security surveillance drives every week.

Proliferation of video and image sensors and other IoT devices is expected to be a major driver of data creation at the edge in the coming years and will play a key role in the growth and evolution of the mass data storage industry.

Finally, strong seasonal demand for our desktop PC and consumer drives contributed to double-digit sequential revenue growth in our legacy business during the December quarter.

Overall, we expect demand for mass capacity storage to improve across the cloud and enterprise markets in the March quarter, more than offsetting an expected decline in the VIA markets and the typical seasonal slowdown in the consumer space.

With the broader market environment continuing to firm, Seagate is executing well on its technology roadmap and hitting our committed milestones, highlighted by the shipments of our first 20 terabyte HAMR drive in late November.

With HAMR, we could drive areal density compound growth rates of 20% or higher to support the scale of our customers’ infrastructure investments and enabling Seagate to maintain a significant economic advantage for mass capacity applications relative to enterprise SSDs, that is expected to persist over the foreseeable future.

Seagate’s first to market dual actuator technology is gaining interest among a broader customer base, who require mass capacity storage with higher performance for certain applications, such as content delivery. We are increasing shipments of dual actuator drives today and expect to see higher volumes as drive capacities increase.

We are also continuing to strengthen our PMR product roadmap anchored by our industry leading 16-terabyte drives based on our common scalable platform. We broadened the adoption of 16-terabyte drives in the December quarter, gaining new cloud customers globally.

We have started to increase the pace of the 18-terabyte product ramp, which will continue through the calendar year consistent with the strong progress of our qualifications and customer readiness timing. As product capacities increase, the qualification process often takes longer and adds complexity.

Our common platform approach is helping customers simplify the qual process. In fact, a number of leading cloud customers commented that the qualification of 80 terabytes has been the smoothest ever. Additionally, we expect to continue to leverage the quality and scalability of this platform, which is extendable through 20-terabyte on PMR technology.

The strength of this platform offers Seagate the flexibility to meet customers’ timing and mass storage needs. For Seagate, the common platform strategy drives manufacturing efficiencies that allow us to ramp new technologies and production more quickly, and then use our systems business to accelerate the pace of learning and market adoption.

We are maintaining solid momentum in our systems, securing multiple customer wins in the December quarter, including our biggest systems deal ever, a multi-quarter deal representing close to 8-exabytes of scalable storage.

Overall, with our leadership in HDD technology and execution on our product roadmap, Seagate is in excellent position to capture the $24 billion mass capacity storage opportunity we forecast for 2025, which is driven by the burgeoning demand for data.

However to capture value from the avalanche of data being created, CIOs must overcome cost, scale and complexity challenges associated with moving, analyzing and storing more data across the distributed enterprise.

As a result, economics are forcing enterprises to keep proportionately less of the data that’s being created, which threatens business performance and competitive advantage. This dynamic is at the foundation of Seagate’s innovation agenda.

We are enabling CIOs to address the key challenges of cost, scale and complexity to preserve and put the word more of the valuable data they are already creating. Our Lyve Storage Platform offers a simple, cost-efficient and secure way to manage massive volumes of data across the distributed enterprise.

Lyve Mobile enables mass data transfer between endpoints, edge and core, and Lyve Rack powered by CORTX open-source objective software provides enterprises with the lowest cost per petabyte.

CORTX software is the foundation the Lyve Storage Platform has maintained by a growing community of data scientists and enterprise storage experts, many of whom participated in our first ever and highly successful Hackathon event held last month at Lyve Labs Israel.

We have a growing customer interest for the Lyve portfolio and continue to receive positive feedback on our existing engagements that span multiple verticals, including media and entertainment, and autonomous vehicle technologies.

Driving platform level innovation and addressing the growing challenges faced by the distributed enterprise is a mandate that will help define our long-term growth strategy. We plan to share more details on the Lyve Storage Platform and the rest of our unfolding strategy on February 24th, when we will be hosting a Virtual Analyst and Investor event.

I look forward to having you join us. With that, I will now turn it over to Gianluca to walk through the December quarter..

Thank you, David. Seagate continue to execute well and adapt to the rapidly changing business environment as shown by our strong December quarter performance, which was supported by the anticipated recovery in the enterprise market, record revenue for video and image application and seasonal demand for our consumer in desktop PC product.

We achieved revenue of $2.62 billion, up 13% sequentially and above our guidance midpoint, non- GAAP EPS of $1.29, up 39% sequentially, exceeding the high end of our guidance range, and free cash flow of $314 million, up nearly 70% sequentially, reflecting our ongoing focus on operational efficiency.

Additionally, we repurchased 18.2 million shares of Seagate stock. Our decision to invest in our shares in the current environment underscores our confidence in the long-term business outlook and future cash generation abilities.

In the December quarter, we shipped a record of 129 exabytes of hard disk drives capacity, up 13% sequentially and 21% year-on-year. Roughly three quarters of our total exabytes were shipped into the mass capacity market, which include nearline, VIA and mass products. Mass capacity shipments increase to a record 97 exabytes in the December quarter.

We shipped a total of 365 exabytes in the calendar year 2020, up 59% year-over-year, which is well ahead of the long-term CAGR forecast of about 35% for this market segment. Our current outlook for the March quarter support continuing exabyte shipment growth setting in terms at for calendar year 2021.

On a revenue basis, HDD accounted for 92% of total December quarter revenue and mass capacity storage representing 62% of HDD revenue. Revenue from mass capacity storage was $1.5 billion, up 12% sequentially and 15% year-over-year. Nearline revenue increased sequentially, driven by stronger than expected demand from enterprise and OEM customers.

Nearline shipments were 71 exabytes, up 11% sequentially and 45% year-on-year, reflecting ongoing demand for our 16 terabytes high capacity drives, as well as increased demand for mid-capacity nearline product as the enterprise market recovers. This dynamic resulted in every capacity per nearline drives staying relatively flat at 11.4 terabyte.

We are continuing to expand the adoption for 16 terabyte size and expect 16 terabytes to remain the company’s highest revenue product over the next couple of quarters.

We also continue to increase shipments of our 18-terabyte drives and make positive progress on qualification plans at multiple cloud customers with volume ramp aligned with their timing.

In the VIA market, revenue was above our expectation for the second consecutive quarter as pent up demand from the COVID related cost in the first half of the calendar year led to strong recovery in September quarter and record revenue in the December quarter.

Following this period of strong demand, we anticipate the March quarter sales to be sequentially lower and below typical seasonal trend. The legacy market represented 38% of December quarter HDD revenue, compared to 37% in the prior quarter and down from 47% in the year ago period.

Revenue and exabyte shipment both increased 15%, sequentially, resulting in a total of 32 exabyte shipped into the legacy market.

The growth was driven by a seasonal uptick for consumer drives and desktop PCs and improving demand for mission critical drives consistent with the recovery in the enterprise market, which also impacts demand for our mission critical drives.

We currently expect ongoing enterprise market recovery to moderate the seasonal decline we typically see in the March quarter. Our non-HDD business made up 8% of December quarter revenue, relatively flat on a percentage basis with a prior quarter.

As chosen partner for Microsoft Xbox expansion plan, Seagate benefits from strong holiday demand, which supported both double-digit growth for our SSD product and a sequential improvement in non-HDD revenue.

Within our system business, we saw early signs of recovery at large OEM customers, which along with customer wins, Dave mentioned earlier, should benefit our system business in calendar 2021. In the December quarter, non-GAAP gross profit increased to $704 million, compared with $614 million in the September quarter.

COVID-related cost increased slightly to $28 million, primarily due to elevated shipping costs. We are currently planning to incur similar levels in the March quarter, as we balanced customer demand timing with increasing higher freight cost and opportunities to derive lower cost, which sounds great.

Our resulting non-GAAP gross margin was 26.8%, including about 110-basis-point impact from this COVID-related cost, as the margin expanded slightly quarter-over-quarter, offset by a less favorable non-SDD product mix.

Non-GAAP operating expenses came in at $319 million, down $31 million from the same period of last year, reflecting ongoing benefit from working from home and overall operational efficiency. Looking ahead, we expect operating expenses to be a bit higher in the March quarter.

Our resulting non-GAAP operating income was $385 million and non-GAAP operating margin was 14.7% of revenue, up 200 basis points sequentially and in the upper half of our long-term target range of 13% to 16%, despite the COVID headwind, I mentioned earlier.

Based on diluted share account of approximately 251 million shares, non-GAAP EPS for the December quarter was $1.29, the $0.19 outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage, while our share repurchase activity enhanced EPS by $0.05.

Capital expenditures were at $159 million in the December quarter, which represented approximately 6% of revenue. We expect CapEx to represent between 4% and 5% of revenue for the fiscal year, which is below our prior target of 6% to 8% of revenue.

We believe this CapEx level will align supply with demand when considering the existing installed base capacity and continued demand growth for mass capacity storage. Days inventory outstanding reduced by eight days sequentially.

Inventory value was relatively flat at $1.3 billion in anticipation of continuous strong mass capacity storage demand in the near-term, as well as the need to carry higher level of strategic inventory to better manage freight logistics and protect against potential future supply chain risk.

We expect inventory level to gradually decline as freight cost return to more normalized level and we consume this critical component.

We generated $314 million of free cash flow in the December quarter, up from $186 million in the September quarter and up 10% year-on-year, supported by our focus on operational efficiency and improvement in demand trend and a strong linearity.

In the December quarter, we use $167 million to fund our dividend and utilized $1 billion to retire approximately 18 million ordinary shares, exiting the quarter with 240 million shares outstanding. We will continue to opportunistically retire Seagate stock and return capital to our shareholders.

Additionally, we raised a total of $1 billion in capital, issuing two tranches of debt at a lowest average interest rate of any of our bond. Including the new notes, gross debt was $5.1 billion and the net debt was $3.3 billion.

We expect the interest expense for March quarter to be approximately $59 million, including $9.5 million on the two new tranches. Cash and cash equivalents remained relatively stable at $1.8 billion.

As the new calendar year begins, we expect strong cloud data center demand and continue enterprise recovery in the March quarter to more than offset the seasonal decline in some of our other end markets. While we are still facing headwinds from COVID-related cost, we expect this will gradually decrease over the next few quarters.

Taking all these factors into account, our outlook for the March quarter is as follows, revenue is expected to be $2.65 billion plus or minus $200 million, non-GAAP operating margin is expected to be in the mid of our target range of 13% to 16% of revenue and non-GAAP EPS is expected to be $1.30 plus or minus $0.15.

In closing, Seagate is executing well across multiple levels, delivering on our financial commitments, demonstrating the agility of our business model to address customer demand and maintaining our commitment to return cash to our shareholders. I will now turn the call back to Dave for final comments..

Thanks, Gianluca. 2020 was a very challenging year and we have and continued to face hardships. We are encouraged by progress with vaccines and signs of recovery. Through the efforts of our extended team, Seagate exited the year firing on all cylinders and we are well-positioned to capture mass data growth opportunities in calendar 2021 and beyond.

We are executing our technology innovation roadmap to continue delivering the lowest cost mass data storage.

We are strengthening our mass data infrastructure portfolio by building on the positive momentum of our scalable common platform family of 16-terabyte and 18-terabyte drives and we are gaining interest for our Lyve Storage Platform, which expands Seagate market opportunities paving the way for future growth.

Our success is founded on the dedication of our employees and the ongoing support from our suppliers, customers and shareholders. Employees remain the lifeblood of our company and we are focused on maintaining and strengthening our culture to provide an open, safe and respectful workplace, and ensure all employees are able to thrive.

Earlier this month, Seagate released its latest diversity, equity and inclusion report. I am proud to see a strong track record and reputation for promoting inclusion both within and outside the walls of the company and recognizing diversity is a key to our ongoing success.

We are equally focused on contributing to our customer success, which we believe will lead to higher revenue for Seagate and greater value for our shareholders. We collect data quarterly to measure overall satisfaction across the breadth of our customer base.

The December quarter indicators were among our highest ever, which reflects the care we take in providing high quality reliable products for all of our customers. In summary, I am excited about Seagate’s growth opportunities, ability to generate cash and enhance shareholder value over the long-term.

With that, Gianluca and I are happy to take your questions..

[Operator Instructions] Your first question comes from the line of Karl Ackerman with Cowen. Your line is open..

Hi. Good afternoon, everyone. Thanks for taking my question. Dave, I have got a question for you to start.

With on-prem still recovering, are you able to achieve 35% exabyte growth for your nearline business in fiscal 2021? I ask because I think you indicated in your prepared remarks that while customers are still suggesting 18 terabyte offers a very attractive upgrade past, maybe adoption timing is a bit elongated? And then second, I think, you noted that your 20 terabyte drive could facilitate exabyte growth of, I think, 20% or more a year.

So if you could you just touch on your longer-term exabyte growth expectations as well, that would be very helpful? Thank you..

Thanks, Karl. Thanks for the question. Yes. 35% is still in the cards to answer your question directly. There is -- what’s astute about your question is, there is a mix between the highest capacities and then the on-prem tends to be a little lower capacity nearline. So it could be 8 terabytes or 12 terabytes.

But we think still the 35% is a good number through the fiscal year exactly to your point. Longer-term, I think, we’ve said 35% is fairly consistent. The cloud may actually grow bigger than that, but we have a wait and see kind of some of the reverberations after COVID.

But I still think that’s a good number for bit growth in the mass capacity markets even further than just the end of the fiscal year..

Got it. If I may just hoping if you could touch upon shortages.

I think, with shortages of semiconductor components and even diodes, does that preclude you from ramping your hard capacity drives even particularly your 20 terabyte drive? And then, second, are you able to extend your volume commitments within -- with data center providers given the shortages across the supply chain? Thank you..

Yes. Two interesting questions. The first thing is one of the reasons we really like the common scalable platform is flexible and questions exactly like you just asked. So relative to componentry, we have long visibility. But if we were changing platforms over and over and over again then some of those things might be hard to chase.

And the fact that we have more capacity inertia on those platforms, I think, gives us a lot of flexibility. But to your point, I think, across all the supply chains, people are witnessing some of these kind of constraints and people are managing way out in front of them.

And I do think it’s forcing discussions to be a little bit more mature relative to what the mass capacity needs are, what the needs are of silicon.

For example, I think, you made reference to and some of the other components and making sure everybody has enough for the growth of our customers, especially during recovery times than what they might need later on in the calendar year..

Thanks, Karl..

Your next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open..

Good afternoon. Thanks for the question. Just with the improvement in demand that you have seen in a number of the end markets.

Can you talk just qualitatively about where you are in terms of manufacturing utilization versus either a quarter ago or a year ago? And I ask, because we have started to hear that some hyperscalers can get all the product they want, we have seen some price increases in the channel.

I’m just wondering how tight things got in the seasonally strong December quarter, and what that might mean for the next couple of quarters?.

Yes. Katy, thanks. So in some of the markets that we are tremendously disrupted, some of the legacy markets. For example, we had ample capacity throughout the period of Q1 and Q2, the COVID impact, pandemic impact and a lot of supply chains were disruptives as well. The cloud demand has been fairly strong and predictable for us.

We are building what we had predicted. I think the way I think about our capacity constraints, our manufacturing constraints, if you will, is more of a long lead time stuff like wafer capital and some of those things, wafer process time of things, things like that staging for the future, that’s the stuff that’s full.

At drive level, we still have some flexibility and we did last quarter. And so we were able to chase really aggressively the VIA markets, in particular that we are kind of racing ahead and there were some seasonality there, but some of it was just pent-up demand based on how the impacted -- the pandemic had impacted bullet all the supply chain.

So if that’s helpful, the longer lead time upfront manufacturing capacity we have is building up to your point, which saw some flexibility to drive them..

Okay. And then just to follow-up Gianluca. Can you just bridge how you are thinking about the March quarter gross margin relative to December.

Just some of the plus and minuses sequentially on gross margin, which seems like it’s up slightly based on your guidance?.

Yes. First of all, the December quarter margin has already improved sequentially. Especially in the RDs part of the business, we had maybe some negative impact on the SSD and system solution segment, but the hard disk starting to improve already in the December quarter. The mix is going in the right direction.

As we said in the script, enterprise OEM was strong in December, cloud was still very healthy. And now when we go into the March quarter, we expect both segments to actually continue to improve sequentially. We will lose a little bit of the legacy segment, little bit of surveillance.

We think mission-critical will be maybe less seasonal than what we have seen in the past and then I think the quarter and the gross margin in the quarter. So I think we will continue to go in the same direction. Of course, we will have some of the cost from COVID that will continue to be there.

It was fairly high in the December quarter, a little bit higher than what we were expecting and we think March will probably be fairly similar..

Great. Thank you for that and congrats on the quarter..

Thank you..

Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open..

Thanks for taking my question. I had a kind of couple of them. Maybe first one on the nearline side, maybe two parts here. On the enterprise side, you talked about some recovery you’ve seen last quarter.

How far do you think we are still below the trend line? The question is more on the on-prem nearline drive side, Q3 you talked about mission-critical? But on the cloud side, have you seen any kind of delays or pull-forwards and capacity transitions in some of your large cloud data center customers compared to what you think a few months ago?.

Yes. Okay. Sidney, I think, the kind of two parts. So first just the enterprise, if you will be on-prem that we said during the early days of the pandemic is probably the most impacted. That is recovering somewhat. I think it’s recovering slowly, because some of the on-prem dynamics are not -- have not fully resolved themselves and probably still long.

But it is recovering slowly and it’s more predictable now, so that’s why we feel like we understand the market. This is kind of in line with the IDC numbers we quoted in the prepared remarks as well about traditional IT is going to be up 3% and I think that goes exactly to that point.

On the bigger cloud service providers around the world, there is a lot of dynamics going on because there is no one size fits all cloud obviously.

But I would say in general, they -- a lot of applications pushed into the cloud and people have to react there with the budgets that they have, with the technology they have, with the platforms that they and so on.

And in some cases they prioritize away from whatever storage infrastructure they were building on and in other cases they prioritize too and so it’s fairly complicated right now.

My opinion is that because of the dynamics we have just seen the cloud is going to grow even bigger than what we forecast, and so over the long-term we are projecting mass capacity to be $24 billion market in 2025.

So we think there is strong secular growth coming in the cloud, but it is still choppy based on some of the dynamics that we just talked about..

Okay. Maybe a quick follow up, I know I asked this question last quarter on Huawei, but given the current restrictions on the shipment to Huawei.

Does that change the way you think about the total addressable market for this calendar year for nearline drives?.

Yes. So like I said last time, we don’t comment on these specific customers. I think that the market demand globally will not change on how it’s ultimately serviced. So if that answers your question.

So the net demand for data storage products is out there and it will get serviced by one customer or another, by one supply chain or another and these are very, very complex supply chains..

Okay. Thank you..

Your next question comes from the line of Thomas O’Malley with Barclays. Your line is open..

Good afternoon, guys. Thanks for taking my questions. My first one is really around capital returns. You obviously thought it was strategic to spend a decent amount in the quarter and take that from shares.

Can you talk about what your view is on buying back more shares over the next couple of quarters and then obviously with the new debt rolled into the model as well? How have you viewed the pros and cons which we can take some of that down and also buying back the shares?.

Yes. Tom, obviously, there’s kind of two parts of the question is, what we just went through in the pandemic and the way we were looking at the market. But the bigger part is that looking forward I really believe in the long-term cash generation capabilities of the company.

So our decision to invest in our shares is weighing current environment and long-term business outlook and cash generation capabilities. I do think that if this is helpful that we are kind of an inflection point in data growth.

I mean we, from Seagate’s perspective, we had to do a lot of transition from client server businesses, the factory transitions and so on into mass capacity, we have kind of finished that and now we are seeing mass capacity growing just simply because the demand for data is growing with the edge opportunities and things like that, so.

So I think that this is an interesting time relative to all that we -- we look at the opportunistic, the ability to retire stock, return capital. We look at the investments we have to make in ourselves, we had a fairly strong thesis on all this and it’s good to have cash generation capabilities to underpin it all, so we can make the trade-offs..

Really helpful. The next one is just a high-level question and totally fair if you answer it from a very high level as well, but clearly, there is a lot of concerns about flooding the market with big capacity NAND this year.

How do you think in a market in which the cost environment on the flash side is decreasing, particularly your legacy markets will react. Obviously, you mentioned some seasonality in the first quarter. But do you think that you will see greater than expected declines there.

Or can you just talk through the pros and cons of what you may see happening throughout this year if that flash environment weakens?.

Yes. Sure. A few years ago, the narrative was very different when notebooks hadn’t transitioned over and now they largely have transitioned over to NAND. So I look at things like that as places where the two technologies are competing head to head and that doesn’t really exist anymore.

People talk about for example mission critical drives and this is a little bit of inside baseball here. But mission critical drives for us, we haven’t really done a new platform in quite a few years, where continuous service market that’s out there.

There’s a large number, tens of millions maybe even more than that of slots that are out there with SaaS interface on and have good value proposition. So we will continue to service those market, but I don’t think that is small change or even a fairly large change and the NAND price changes that dynamic.

Because the new architectures are not SaaS architectures generally speaking, some of them are NVMe architectures and that’s where you need to be designing products or so. So the overlap, if you will, between the two markets is not super relevant.

And in the mass capacity markets, its 9 day difference and mass data infrastructure, a small change in cost, thinking of large change in cost is not going to make a difference in the architecture decisions that people are making..

I think that, which is the important point in this segment that are really growing like cloud and enterprise OEM and even surveillance, but really overlap between hard disk and NAND at this point and we don’t expect that to happen in the next few years structure..

Yes. The way I look at the data for social dynamics, there is a big growth in edge and cloud and there’s lots of different architectural components.

NAND is definitely come of age and so it’s got a lot of opportunities that has to be -- design the right solutions for the customers and for mass capacity perspective, we have the exact same problem, we keep driving our roadmap and we are going to be just fine..

Your next question comes from the line of Steven Fox with Fox Advisors. Your line is open..

I am just having trouble footing everything you said with the new CapEx advice of 4% to 5% of sales. I know you were thinking it might not be as high as 6% to 8% previously. But can you just sort of talk about what’s going into that decision and then I had a follow-up..

Yes. I will let Gianluca take this one..

Yes. Basically what happened in the last couple of years, Seagate, and I think in general the industry installed more capacity than what was needed.

So the fact that the growing demand is now absorbing that capacity is obviously good news for the industry and for Seagate in particular, but we can still see some of additional capacity not being fully utilized. So we don’t need to invest more in the short-term at least in order to absorb their demand and serve their demand.

So we think that still investing a fairly high amount that is now 4% or 5% of our revenue is not small number is a big number, but that is the right level for us to align supply and demand in the next, I would say, two or three quarters..

And then just maybe Dave, if you can give a little bit more color on the 18 tb rollout. I know you have said consistently it is dependent upon when your customers want kind of some uptick, but is there any other color you can provide in terms of what may drive it sooner rather than later or later that you expect based on, et cetera..

Yes. We did say in the script that the 18 terabyte qualifications have gone very well. To the earlier point, I don’t think from a mass capacity perspective, we are not in the era in the industry anymore of just roll the bunch, and then try to ship them in at the end of the quarter or something like that.

You have to have real good relationships with the customers, know exactly what they want. So we over the last few quarters, we have been on a theme in communicating this with you that we know where 18 terabytes was going to be with the customers, who are going to be asking us for and so we were fairly clear that the rent has begun though.

And so, and it starts by going back to wafer, which is many, many months ago and then making sure we are starting the right parts, we are making the transition to that product right now and we feel really good about it.

We feel good about the quality levels, the yield levels, the ability to ramp, all the components that we need, because it’s a common platform. I think we have been signaling this pretty well. I can’t really comment on what the rest of the industry is or isn’t doing because I just don’t know, but that’s relative. That’s the way I look at our plans..

Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open. Aaron Rakers with Wells Fargo. Your line is open..

Sorry about that, guys I was on mute. I wanted to build on the last question with regard to kind of a visibility discussion. When I look at kind of growing your mass capacity at 35% loss this year, it seems to really imply a very, very healthy uptick in capacity shipment growth into these next couple of quarters.

So as we think about the visibility in the business, the change in dialogue that you have had with kind of your key customers, how would you characterize visibility into that kind of demand profile, that pickup up of capacity ship into the back half of the year? And I do have a quick follow up..

Yes. I think in -- it’s not just about the highest capacity point exactly what you are pointing out. We have good visibility on 16’s and what our customers needed.

We have good visibility on 18’s because we talked to those customers about exactly what they need in multi-quarters out as well, but there’s also something going on at 8 terabytes and 12 terabytes and so on.

So if you see that kind of transition based on the products that serve the lower capacity points of the mass capacity market if you will that’s where we start to see some significant growth as well. And that tends to be more global than isolated at a few accounts. But that gives us confidence.

And by the way, the platform that we have or the platform transitions we are making, take cost and disks and heads and things like that out as we increased capacity, we can actually do that there. So, we are confident in our ability to go solution that better out the mix increases. So go ahead with your follow-up..

Okay. Yes. And this is a quick follow-up. Given the mix of business and kind of what’s transpired over the last year or plus, I am just curious.

How do you think about the variables, the drivers that gets you back to that kind of what I think you have characterized as a normalized gross margin into that 29%, the 30% plus range?.

Yes. As Gianluca mentioned before, HDDs almost there. I mean, there is some other dynamics of other businesses. But exactly to your point, we have these new platforms coming that will necessarily take costs out. We have to make sure that there is -- we are actually getting with the customers what they need.

But I do expect some demand growth recovery again in some markets, but also growth as well that will allow everything to equilibrate more and get us back into the ranges. It was a very competitive market in the times of COVID 2020 and people are trying to keep their factories full and things like that.

Now, we are into a period of -- with this growth and recovery. Like Karl asked earlier, there is a lot of questions about supply availability, making sure you have the right supply at the right time and we are into those kinds of discussions as well and we expect that to stabilize..

That’s in the quarter..

Thank you, Aaron. I think the combination of different items, of course, the focus for us is always on cost reduction and I think we are achieving that level of cost quarter after quarter. The second very important item is this alignment between supply and demand that should bring a healthier pricing environment for the industry.

And then, of course, there are those additional costs that we are incurring right now because of the COVID situation that we don’t expect to continue for forever, we think few more quarters and then hopefully, a little bit part of the cost will go away..

Your next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is open..

Thank you for taking my question and congratulations on the strong results.

Maybe first, with the enterprise customers coming back, have they been qualifying higher density drives? Or is that going to just start now? And was there a delay and what are the expectations going forward?.

Yes. Typically, Kevin, some of the enterprise customers do lag. They don’t qualify the highest capacity point through the branded product as fast as some other people do. There are exceptions to that rule, but they do lag. There has not really been any slowdown in qualifications for any reason.

I think, people even through the challenges, the logistical challenges of COVID, people have kept focused on what they need to do because they are seeing efficiency gains as well there. So -- but as we make some of those transitions, I think that helps us answer the enterprise demand the right way as the enterprise demand is starting to grow again..

Okay. Thanks. And just as a follow-up.

With the 16-terabyte and moving over to the 18-terabyte and the visibility you talked about, do you see a crossover of shipments anytime in 2021? Or is that more of a 2022 calendar year event?.

Yes. It’s not going to happen this quarter or next quarter just because of the sheer volume of the 16’s. But I do see it at some point, yes. And we are going to ramp really hard and it’s the same platform. So it’s not hard for us to ramp per se. There is also other efficiencies that we get by driving to the 18 platforms.

So that’s why we are pretty excited about it..

Your next question comes from the line of Patrick Ho with Stifel. Your line is open..

Thank you very much and congrats on a nice quarter. Dave, maybe as a follow-up to Kevin’s last question about the 16-terabyte to 18-terabyte transition. Obviously, the 16-terabyte has been a big share gainer for Seagate and you mentioned the easy platform transition to 18 terabyte.

First, how do you look at, I guess, new customer wins with 18 terabyteS? And maybe, secondly, on top of that question, do you see more incremental share gains when you get -- I guess when you move to 20-terabyte and above on the HAMR platform where there are, I guess, significant differentiation versus your peers?.

Thanks, Patrick. Yes. I don’t really think about market share per se. I think about talking to the customers about what exactly they need. Now to your point, there are people who were on 14, for example, or 12 and said, I am going to 18. And so they have been waiting the transition a little bit.

And so we will work with them on those transitions and make sure that we have an ample supply for them. As we go even higher, I can’t really speak to -- I can only speak to the discussions that we are having. I have confidence in 20-terabyte ramps. We made comments in the script about peer market capabilities to get there.

We have the HAMR capabilities to get there. I think we control those levers very carefully. So whatever a specific customer, who they want, performance wise or whatever, we can get them for their new architecture, old architecture because there is still a lot of legacy architecture.

There is even replacement architectures we have to service and we will go out and do that. So, just not being flippant, but I just don’t think about share gains, rather I think about what do these customers we are talking to need exactly from us and making sure we are aligned..

Right. And as my follow-up question for Gianluca. In terms of OpEx, you guys have done a really good job flexing OpEx during, especially these challenging times in 2020.

How do you look at OpEx and especially R&D given now that they are starting to release HAMR-based products? Is there an ability to flatten out R&D in the near-term with maybe a lot of the heavy lifting related to HAMR? I don’t want them out of the way, but it leaves a lot of the initial ramp and start-up costs embedded?.

Yes. Actually, we have done that already. So, you see the result already, at least, partially in our results of the quarter. And for the long-term, I think last quarter we said, probably a good model is around $330 million per quarter. And now we are little bit below. And now we will try to stay below as much as possible.

Of course, we know we always look at opportunities for cost reduction, especially online now in the technology space where we have developed HAMR. So, we don’t have the need for maybe all the spending that we had in the past..

Yes. It’s a really good point. Yes. It’s a really good point. There is these HAMR technologies, smallest laser ever shipped and the smallest waveguide ever shipped. And dialling it down to something 30-nanometer spot size or whatever it is.

This is a really, really difficult technology, we have invested a lot to get to where we are really proud of where we are being able to ship some units and get the learning out there and start building the volume and everything else. We don’t have to go through that investment, again.

And so that we get a lot of scale from here, so I appreciate your question..

Your next question comes from the line of Ananda Baruah with Loop Capital Markets. Your line is open..

Happy New Year and congrats on solid results here. Still, if I could, first Dave, I guess sort of the 35% mass capacity exabyte growth for the year, actually implies that the June quarter and then the March to guide implies that June quarter is really the quarter where it kind of kicks up. And then you had made some remarks.

I think in the prepared remarks about calendar ‘21. I don’t want to -- I would really act looking for clarification, you said sort of continues through the year. And so, I love. I’d love to get. Well, first of all, could you just sort of comment on if the June quarter does kick up in a meaningful way from the March quarter.

And then what your thoughts are with September and December quarter as well. And then I have a follow up for Gianluca..

Yes. Thanks, Ananda and Happy New Year to you too. So, yes, looking forward, we do see recovery in mass capacity. There was obviously the VIA markets that grew last quarter and they had their normal seasonal downtick, but the cloud will continue to grow from here and exabytes and so that underpins the forecast that we have right now.

It’s still early -- haven’t seen through Chinese New Year. But things feel like very different than they did last year, where there was a lot of disruption during -- due to COVID. I think it’s time for some of the people who were say -- who put off investments, frankly to say, okay, now I need to make those investments.

And our pivot to mass capacity are getting over to the same platform and everything, allows us the flexibility to really go address the markets with high volumes. So that’s what underpins our confidence..

Okay. Great. And then Gianluca. You guys are doing, sort of on the op margins you are doing sort of the higher end of the range right now or like so in the upper 50%, upper half of the range.

And it sounds like you are also talking about a couple -- a handful of things as you go through the year that can cause the gross margins to go up couple of 100 basis points to 200 basis points. I am putting numbers on that.

But I think you have had 200 basis point to COVID cost, then you continue to get mix, you get pricing, those pricing feels a little bit more normalized right now on nearline drives et cetera, et cetera.

So what would you -- does it mean, how should we think about the -- I guess the normalized op margin range, if you get it, if you already sort of the upper 50% on the op margin range and you are going to capture 200, 300 debts on card -- on the gross margin.

Would you show that in a normalized fashion or are there areas to go invest? And I guess that’s really what I am asking..

Thank you, Ananda and Happy New Year to you. If you look at our performance before COVID, our operating margin was already at the top of the range, we were already at 16% even it’s a bit higher. And then COVID happened, and it’s still happening, it’s still impacting our result. But we are right now in the 15%.

So we are going back to that level even with the COVID situation. So, of course, we expect fairly quickly and based of course on the impact from the COVID additional cost to go at the level that we were before the pandemic situation and even better.

And we are always looking internally at opportunity, now we discussed it with the gross margin before, we are going in the right direction in term of mix. We are seeing now the industry pricing is also going in a better direction compared to for example a year ago.

So all those elements are of course pointing to better gross margin, better operating margin, and I am sure, we will discuss with more at our Analyst Day..

Gianluca, that sounds like 18% to 20% operating margins to make, by the way..

I didn’t say that..

Just saying. Thanks, guys, appreciate it. Good day..

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open..

Just as a follow-up to the prior question, it seems to me that you have made some changes to procuring subcomponents and I want to see. I will get an idea when those cost savings would actually materialize and help you with gross and operating margin and I have a follow-up..

Yes. Mehdi with me, thanks. We discussed the biggest impact on the gross margins, was the COVID drivers and that’s largely freight and logistics-related. And I think the world is still got a lot of challenges on those, on those fronts. And so I think a lot of people are feeling that.

Relative to components, I think we feel fairly solid about our company, supply chain. So it was tough in the early days of COVID.

We had to make sure that, you know, people had the right factories open and we had to, you know, get in there and work with all of our suppliers, especially the ones that are positioned for some of the products that are continuing to grow, that they are making the right investments in times that are pretty lean, but we are confident about how we did that.

So I don’t really, maybe be to the earlier question, I don’t really foresee any supply constraints, but it is forcing a different dialogue that we had, maybe to your implied in your comments..

And then looking at composition of a nearline, especially as you highlighted opportunities with video and surveillance, could there be increased diversification of nearline and into both cloud service providers as well as the like a surveillance and adverse surveillance moving into higher capacity, nearline and this way you give some diversification of end market demand drivers?.

It’s interesting because if you read the script to the point about all these cameras generating all this data at the edge. And, you know, we expect that to be kind of a bellwether for smart cities, smart factory. You know there’s a lot of data some of video data, but there’s other kinds of data being created at the edge.

A lot of that data today actually dies with the edge. It doesn’t make a back-up in the cloud.

You do start to see the nascent -- the beginnings of models where people say, how do I get that data from the micro edge, all the way back up to the core -- for the core cloud, because the cloud has some of the great applications to be able to process the data, you just have to physically get it there.

You know, I point to our live product strategy for -- that’s exactly what we are thinking there. And, you know, it’s not small.

The amount of data that’s being created at the micro edge today and, like I said, probably either being overwritten or you have to make a decision once you process the data and you never get to make that decision ever again or never get to question that decision again. Things like autonomous vehicles, you want learning to go on.

So, you need the data kind of resonant for quite some time, there’s a lot of different models that are very, very interesting to us right now. And it is forcing a symbiosis I guess that’s the right word for between micro edge and cloud and the same kind of drives to service level, yes..

Your next question comes from the line of Jim Suva with Citi Investment Research. Your line is open..

Thank you. And I just have one question. It seems like on both gross and operating margins, every indicator ahead whether it be pricing looks better, COVID costs are peaking, shipping costs are likely to get lower, new innovations rolling out are helping.

Am I right that just simply both operating and gross margins should just continue to trend higher through 2021 or there’s some actually negatives or headwinds that we should be mindful of as we go forward?.

No headwinds, Jim. The world is still fairly volatile place that everyone’s through COVID of course and still impacting communities quite a bit. So from our perspective, we have narrowed down our product portfolio to have the right products, made sure our factories, our supply chains already talk to the customers and things like that.

The story is coming out and we do believe there’s data growth ahead, but we want to make sure that we are mindful of the realities that are in the economics today. That’s why to our comments we think we are positioned really well, but we will guide you quarter-over-quarter like we normally do..

Your final question comes from the line of Nikolay Todorov with Longbow Research. Your line is open..

Thanks for squeezing me in. I just want to go back to the CapEx question and maybe try to get a little bit more color.

Can you tell us a little bit more where do you see that supply and demand now fully balanced from your perspective? I have a guess, but I wanted to hear from you and maybe can you try to quantify how much of a headwind is that under utilization to your profitability right now whether on the gross margin line?.

Yes. Nikolay, thanks. It’s a little bit of tough because if you think about what’s the demand environment that we were in calendar year 2020 and how disruptive it was? You have some of the legacy products that were impacted quite a bit.

Some of them are going back a little bit, but some of them that capacity can be repurposed back into mass capacity as well. And then mass capacity itself the growth of 18-terabyte drives that requires, what we call technology transition capacity, the dollars that we actually have to spend.

So blending all these things together, the world is through this demand disruption, supply disruption period that we got through early last year. And what we are saying is, we think that we can manage from here at the 4% to 5% range based on our modelling and that will be ample supply will be bringing online for what the demand is out there..

Okay.

And the way to quantify the headwind, do you see a meaningful headwind from that under utilization?.

Sorry, not really. Once the -- maybe way back to Kathy’s question, once the factories fill up, heads maybe drive, I think that headwind will be gone, and so that that will happen here in quarter two..

Just a quick follow up, on the legacy price per terabyte declining for a second quarter in a row double digit year-over-year I think over the last four or five quarters in the mid single digit, a lot more benign, I just want to -- can you give us any color what drove that?.

I think that’s all about a mix. And segments, like consumer grew quite a bit, actually last quarter. So some of that work from home and play from home, the gaming, things like that. Mission critical obviously is was still recovering, but still light compared to what it had been previously, so I think that’s the next part of that question..

That concludes the question and answer session. I will turn the call back over to management..

Thanks David. And thank you to all of you for joining us today and we look forward to speaking with you again as Gianluca said on our upcoming Analysts Day on February 24 please join us there. I’d like to once again thank all of our customers, supplier’s, business partners and our employees for their ongoing support in Seagate.

We will talk to you next quarter..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..