Good afternoon, and welcome to the Seagate Technology Fiscal Third Quarter 2021 Financial Results Conference Call. My name is Gabriel, 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, the 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 March 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 and/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 June 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, which 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. I will now turn the call over to you, Dave..

Thanks you, Shanye. Welcome, everyone, and thanks for joining us today. Seagate delivered an outstanding March quarter, executing well across multiple dimensions. We grew revenue quarter-over-quarter and year-over-year.

We expanded non-GAAP operating margin into the recently increased target range, and we achieved non-GAAP EPS above the high end of our guidance range. We also continue to drive forward on our commitments of enhancing value for our shareholders, returning the combined $912 million during the March quarter through dividends and share repurchases.

Fiscal year-to-date, we have repurchased approximately 12% of our common shares outstanding, the statement that demonstrates our confidence in Seagate’s long-term business prospects. Gianluca will share more details on the financials shortly.

For the remainder of my remarks, I’ll focus on the business trends that we see unfolding this year, and how Seagate is well-positioned from a product and technology perspective, to unlock more value for our customers.

Strong cloud data center demand and ongoing recovery in the enterprise markets drove our highest ever HDD sentiments of 140 exabytes, a record mass capacity revenue of more than $1.6 billion.

These trends underscore the strong secular demand dynamics we are seeing in the mass capacity markets, and support our outlook for the TAM to more than double by 2026 to roughly $26 billion.

While customers are helping drive this market expansion by investing in scale and infrastructure to support the acceleration in digital transformation in businesses worldwide, as well as growing demand for AI and data analytics.

Seagate’s high capacity nearline drives are a vital component of these infrastructure investments, and we believe that our strong technology roadmap and focus around delivering the best total customer experience is helping drive broad adoption by the global cloud ecosystem.

These factors were the driving force behind a number of new strategic partnerships and agreements formed last quarter with several of the world’s leading cloud providers. These multiyear collaborations are focused on delivering innovative and reliable mass capacity storage at exabyte scale.

In the enterprise markets, we are seeing a continuation of the recovery trends that we discussed last quarter, as businesses increased investments in traditional on-prem IT hardware. Recent CIO surveys highlight increased 2021 budget growth expectations to support their post-pandemic application and infrastructure needs.

We realize strong double-digit sequential revenue growth for both our enterprise nearlines and mission-critical products in the March quarter, and currently anticipate healthy demand through the calendar year. The record demand that I cited in the nearline markets more than offset anticipated seasonal declines for video and image applications.

We see VIA market demand improving in the June quarter and sustaining through the calendar year, as planned smart city projects are slated to begin in the coming months. Video analytics extends well beyond public safety.

As I discussed at our recent analyst event, there is a growing list of edge applications that leverage video image sensors in areas such as retail, manufacturing and healthcare to drive valuable data insights. These applications support our longer-term exabyte and revenue growth projections.

Seagate is well-positioned to benefit from these trends, as we continue to lead the VIA market at all nature capacity points driven by product aerial density competitiveness and strong customer engagement.

Finally, looking quickly at the legacy markets, higher enterprise mission-critical sales and relatively stable desktop PC demand led to better-than-anticipated revenue in the March quarter, despite this period’s typical seasonal slowdown.

With a broader industry shift to mass capacity storage forming the foundation of our future revenue growth outlook, we have built a strong technology roadmap, streamlined product portfolio, and are growing a pipeline of solutions and services that make us ideally suited to address big data demand now and well into the future.

Average capacity per drive increased 17% sequentially to pass the 5 terabyte mark, a milestone that reflects the growth in mass capacity storage and demand for Seagate’s high capacity nearline drives. Today, Seagate is servicing the vast majority of market demand for 16-terabyte and higher capacity drives.

We’ve started to aggressively ramp 18-terabyte volume, and current demand suggests strong sequential growth through at least the calendar year. We’re also rapidly gaining traction with our industry-leading MACH.2 dual actuator technology.

MACH.2 has been proven to address TCO and performance requirements for certain applications with heavy data traffic, such as content streaming. We’ve recently begun the high volume ramp of MACH.2 drives with a leading hyperscale customer and plan to expand shipments to additional customers later in the calendar year. And that brings me to HAMR.

We believe HAMR is the technology to achieve drive capacities of 30 terabytes and beyond. Today customers are testing 20-terabyte HAMR drives in their production environments, which offers valuable feedback that we are factoring into our product roadmaps.

I would highlight that through our innovation capabilities and our common platform approach, we have the flexibility to offer multiple versions of 20-terabyte drives to meet customer needs, not only with HAMR technology.

We are focused on delivering solutions to customers that meet their roadmaps and lower their TCO and do so in a way that also drives value for Seagate. To that end, we plan to begin shipping a few versions of 20-terabyte drives in the second half of the calendar year. This quarter, we introduced new key components of our Lyve edge to cloud platform.

We launched Lyve Data Transfer, enabling data movement on demand between the edge and the cloud. Lyve Data Transfer works seamlessly with Lyve Cloud, an object-based storage-as-a-service solution delivered in collaboration with Equinix and strategically located at the metro edge.

In a recent survey conducted by IDC, a majority of respondents considered it increasingly important to colocate data, adjacent to applications or cloud services. We are progressing our build-out plans and are on track to have four Lyve Cloud sites up by the end of the calendar year.

We are getting an ecosystem support and have now been certified with each of the leading backup software vendors. We’re very excited about the future potential for Lyve products and services, which open a large and growing market opportunity for Seagate estimated to reach about $50 billion by 2025.

However, I do want to reiterate that we are still in the early innings. We’re being deliberate in how we build out the platform and capabilities to position Seagate for long-term success.

We are listening closely to customers to make sure we’re designing and evolving our services to best serve their needs, particularly as the distributed enterprise itself evolves in the growing data sphere. In the March quarter, we hit a milestone that took four decades to achieve.

Seagate has now shipped a cumulative 3 zettabytes of HDD capacity, shipping over 3.3 billion disk drives. For perspective, at the 140-exabyte rate we shipped in the March quarter, we would ship our next 3 zettabytes in about five years. That is an amazing commentary on the exploding global data sphere we live in today.

And I think Seagate’s in an outstanding position to drive great future value for our stakeholders. I’ll now hand the call over to Gianluca to cover details of our financial results..

Thank you, Dave. Seagate continued to execute exceptionally well as demonstrated by our strong March quarter performance. We delivered revenue $2.73 billion, up 4% sequentially and above our guidance midpoint.

We achieved non-GAAP gross margin of 27.4%, up 60 basis points sequentially, and we expanded non-GAAP operating margin to 15.4%, in spite the recently increased long-term target range of 15% to 20% of revenue.

Strong demand for our mass capacity products supported record hard disk drive capacity shipment of 140 exabytes, up 8% sequentially and 16% year-on-year. Nearly 80% of our total exabytes were shipped into the mass capacity markets, which include nearline, data and image application or DIA and NAS products.

Mass capacity shipments increased to a record 111 exabytes in the March quarter, up 21% compared with March 2020, which was our prior shipment record. Based on our current outlook, exabyte shipment growth should continue through the calendar year, consistent with our long-term CAGR forecast of about 35%.

Ongoing demand for our high capacity nearline drives led to record mass capacity revenue of $1.6 billion, up 8% sequentially and up 5% compared with the prior year period. Mass capacity represented about 65% of total HDD revenue.

Nearline revenue increased sharply quarter-over-quarter, driven by strong recovery from enterprise and OEM customers, as well as healthy growth from cloud. Nearline shipments were 95 exabytes, up 34% sequentially and 25% year-on-year. Average capacity for nearline drives increased 12 terabytes, driven by the strength of our high capacity drives.

16 terabytes and higher capacity contributed approximately 50% of our total March quarter exabyte shipments. Demand trends in the VIA market are playing out much as we expected due to [ph] seasonality. Revenue declined sequentially in the March quarter from the record demand we saw in the December quarter.

We are already seeing demand improve as some of the smart city projects that Dave mentioned take shape. We support our outlook for stronger VIA sales in the June quarter and into the second half of the calendar year. The legacy market made up 35% of March quarter HDD revenue.

This market held up well in the seasonally slower period with revenue of $864 million, down 5% sequentially and 11% year-over-year. Improving demand for mission critical drives and stronger than anticipated demand for desktop PC partially offset anticipated decline in consumer drives.

We shipped a total of 29 exabytes into the legacy market, down 9% on our sequential basis, offsetting [ph] the lower mix of consumer drives. Looking ahead to the next few quarters, we expect the pace of year-on-year revenue decline to moderate, support relatively stable demand for mission critical and consumer drives.

Revenue from our non-HDD business increased 20% sequentially to $238 million or 9% of March quarter revenue. The strong growth was driven by our system business, as we began to ramp revenue from our customer wins in the December quarter. We expect growth momentum to continue in our non-HDD business in the June quarter.

In the March quarter, non-GAAP gross profits increased to $749 million compared with $704 million in the December quarter and included $24 million of COVID-related cost. We are currently planning to incur similar level of COVID-related cost throughout this calendar year, mainly driven by higher freight charges.

Our resulting non-GAAP gross margin was 27.4%, including about 1% impact from these COVID-related costs. HDD margin expanded quarter-over-quarter driven by favorable mix, offsetting the sequential growth of our non-HDD business which carries lower gross margin profile.

To-date, our mass capacity gross margin is already at the low-end of our target range of 30% to 33% that we outlined at our recent analyst event.

We are on track for total Company gross margin to be at the low-end of our new long-term range by the end of fiscal ‘22, supported by the ongoing shift to mass capacity products, higher revenue contribution from cost optimized 2 terabyte disk drives, which make up less than 20% of revenue today, a gradual reduction in COVID-related cost and our continued focus on aligning supply with demand.

Non-GAAP operating expenses came in at $329 million, up $10 million sequentially. The increase reflects higher variable compensation, associated with strong performance and increased R&D material expenses to support new product development.

Comparing with the same quarter last year, OpEx was down $11 million, by supporting a slightly higher revenue level, demonstrating operational leverage and disciplined expense management. Looking ahead, we expect operating expenses to be a bit higher in the June quarter as we gradually resume normal on-site business activities and travel.

Our resulting non-GAAP operating income was $420 million and non-GAAP operating margin was 15.4% of revenue, up 70 basis points sequentially and inside our recently increased long-term target range of 15% to 20% of revenue.

Based on the diluted share count of approximately 237 million shares, non-GAAP EPS for the March quarter was $1.48, up 15% sequentially and exceeded the high-end of our guided range.

The $0.18 outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage, while our share repurchase activities enhanced EPS by $0.04.

Capital expenditures were $104 million in the March quarter, which represented approximately 4% of revenue and in line with our expectation for CapEx to be inside our long-term range of between 4% and 6% of revenue for the fiscal year.

We will continue to focus on capital discipline to better align supply with demand through platform simplification and manufacturing efficiency improvements. We had inventory relatively flat at $1.3 billion, consistent with our strong mass capacity product demand outlook.

Given the broader market dynamics and well-publicized component shortages, we’re continuing to carry higher level of strategic inventory to protect against potential future supply chain risks as well as towards managed state logistics. We believe these actions enable us to support customer demand, and we continue to monitor current market conditions.

Days inventory outstanding reduced by 3 days sequentially to 59 days. We generated $274 million of free cash flow in the March quarter compared $314 million in the December quarter and $260 million in the year ago period.

In the March quarter, we used $161 million to fund the dividend and $751 million to retire 11.3 million ordinary share, exiting the quarter with 230 million shares outstanding. The investment in Seagate shares underscores our confidence in the long-term business strategy and future cash generation ability.

As a reminder, during the quarter, the Board authorized an increase of $2 billion to our existing share repurchase authorization. As of the end of the quarter, we had a $4.4 billion remaining in our authorization, subject to availability of distributable reserves.

As we communicated at our recent analyst event, we expect to return more than 100% of free cash flow to shareholders in fiscal 2022. We will do this while maintaining a strong balance sheet and liquidity profile. Cash and cash equivalents were $1.2 billion, and total liquidity was approximately $3 billion, including our revolving credit facility.

These levels are more than adequate to support our operation and business mix. Looking ahead to our outlook for the June quarter. We expect revenue to be in the range of $2.85 million, plus or minus $150 million, supported by continued strength from cloud data center and enterprise customers along with increasing demand from VIA market.

We expect non-GAAP operating margin to be at the lower end of our new long-term target range of 15% to 20% of revenue. And we expect non-GAAP EPS to be in the range of $1.60, plus or minus $0.15, representing a sequential growth of 8% at midpoint.

At the midpoint of our fourth quarter guidance range, fiscal ‘21 revenue would be $10.5 billion, flat year-on-year and aligns to the goal we set at the start of the fiscal year.

In closing, we continue to deliver on our financial commitment and remain on track to achieve the fiscal 2021 goals we have set, while also demonstrating a clear path to meet the long-term objectives outlined at our analyst event. I will now turn the call back to Dave for final comments..

Thanks, Gianluca. In summary, we had a great quarter. Our growing mass capacity markets are showing strong demand and enterprise spending is in recovery. We’re executing on our technology and product roadmaps, and seeing positive customer engagement with our newest mass capacity offerings.

We currently expect annual revenue growth of at least 10% in calendar year 2021, as the shift towards the less seasonal mass capacity markets supports a more stable revenue outlook through the year. We’re also making deliberate steps to build out our Lyve platform, particularly Lyve Cloud and are excited by the early reaction from customers.

All of this wins confidence to our positive outlook for the Company. And that confidence is illustrated by our active return of capital to our shareholders. In recognition of Earth Day, it is fitting the highlight that we published our 15th global citizenship annual report this week.

We are proud of our longstanding commitment to build sustainable supply chains and products to conserve the world’s precious resources. In the most recent reporting period, we increased water recycling by nearly 9% and recycled the equivalent of 1,100 Olympic sized swimming pools.

We reduced our production energy consumption by about 19% on a per exabyte basis. And we are executing plans to reduce our carbon footprint by 20% by 2025 and 60% by 2040, in accordance with science-based targets.

Consistent with our core value of integrity, we will continue striving to balance our business decisions around people, our planet, and profitability. Prior to closing, I’d like to thank our employees for their extraordinary efforts, as well as our customers, suppliers and shareholders for their ongoing trust and support in Seagate.

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

Thank you. [Operator Instructions] The first question will come from Wamsi Mohan of Bank of America. Please go ahead..

Yes. Thank you and congrats on the strong results. Could you maybe help us think about gross margins in terms of utilization rates across components, and where you see the most room to improve? I appreciate the color you shared both around where you are with mass capacity, and when you’re getting to the low end of that long-term range.

Maybe some -- some color around the main factors that can cause you to achieve that level a little faster, or maybe what would cause it to get first out would be helpful. And I have a follow-up..

Hi Wamsi. I’ll let Gianluca go through a couple of details. But, I’ll just break it down real quickly. As we’re going through the transition to the common platform, we have the 16 to 18 terabytes and even beyond. We obviously control a lot of the internal concepts.

We’ve said that we like the transitions for our ability to go control costs a little bit better, as well. So, that does help the margin. Probably the most important part relative to our manufacturing transactions is – transitions, is that obviously gross margins are still very impacted by logistics worldwide.

And even if customers want products, immediately, we have to -- it’s pretty expensive to go get it. So, that’s the other headwind that we have right now. We do see that some of that abating over the next six months..

Well, I would say, first of all, we are fairly satisfied with improvement in [indiscernible]. We improved by 60 basis points. It is a fairly big jump in just one quarter. We are expecting further improvement. As we discussed at the Analyst Day, we are near target of 30% to 33% in just few quarters from now.

We communicated today that our mass capacity segment is already in that range, and that it is also of course very important for us because as you know, we have 65% of hard disk drive that is in that segment. We need to look at the mix, for example, the normal hard disk part of the business has grown fairly materially in the last quarter.

As you know, that part of the business has a lower margin percentage. But, it is a very good contributor to our free cash flow. So, it’s very important part of our business. As for the future, as Dave said, one big element is COVID; the second big element is the continued transition to mass capacity.

We expect a fairly strong quarter in June in the nearline part and a good recovery in surveillance. That is more seasonal than other parts of the mass capacity segment. So, it was down in March, and we expect to recover in June. And then, continuous alignment between supply and demand.

And as you know, we are building our CapEx in order to of course increase capacity but increase in a way that is quarter-after-quarter aligned better to demand that is coming fairly strong. We guided gross -- gross margin but you can extrapolate the gross margin for fiscal Q4. It has a slight improvement sequentially.

I would say, potentially we can do better than what we provide the guidance. And now, we need to go through the quarter, but I’m optimistic on….

No. That’s great. I appreciate the color. And if I could, it’s really interesting to see that the legacy exabytes have stabilized and you called out the higher mission-critical and desktop PC demand, holding that up.

When you think about the sustainability of that, frankly, I mean, if you’re right on OEM, an on-prem demand increasing through the course of the year, and also desktop PC, potentially going through a replacement cycle with the folks moving back into the offices, and even a stronger PC cycle in the second half of this year.

Would you say there is actually an opportunity for legacy exabytes to grow meaningfully in the second half of the year? Thank you..

Yes. Wamsi, I would say it’s possible. But as you said, strong demand in a lot of these segments, obviously, over the long haul, we expect continued erosion, but mostly the big erosion’s already happened, to your point. And so, a lot of the systems that are out there, certainly mission critical replacement rates and PC business still exists.

I think, they’re much more stable. And to the extent that some of the recovery that happens after the pandemic, in certain places in the world, may actually drive needs for that kind of equipment. There may be a temporary run on that stuff is possible..

Thank you so much..

Your next question comes from Katy Huberty of Morgan Stanley. Please go ahead..

A couple of questions. I think, Dave, you’ve mentioned when you were talking about the mass capacity business and 18-terabyte that you expect sequential growth through at least this calendar year.

Was that just for 18-terabyte or that was for mass capacity nearline and more broadly speaking?.

Right. All of the above..

Okay. All of the above.

And then, what were the drivers of material upside in the non-HDD business this quarter, and how should we think about the great growth rate of that segment for calendar ‘21?.

Yes. I think that there is some -- there is mass capacity in the systems business for example, which is largely boxes full of mass capacity drives. But, to the extent that there is incremental revenue from the boxes from the chassis themselves and controllers that we use and things like that, there is revenue in that.

And there is high demand for that as well for mass capacity. And then, the consumer and the consumer SSD business doing quite well and strong demand. I think, our brand is moving a lot of product there as well. So, I think those are the big drivers there, and it’s a little bit seasonal to your point..

And we discussed last time of Goodwin [ph] is an important customer. And now relative to vaccine, it will add also during the June quarter. So, we expect a good result also in the June quarter..

Okay. And then, just lastly, I think I asked you last quarter about supply demand dynamics and the potential for an improved pricing environment. There has been some more evidence that in some channels prices are increasing. Some of the hyperscalers are talking about having to pay a little bit more for drive.

How would you characterize the pricing environment, both that you saw in the March quarter, but also what you expect over the next couple of quarters?.

I think, as you know, we have long cycle times. And so, therefore, we have long planning cycles with most of the big scale customers. And so, I think, the things on that front are fairly predictable. Everyone’s going through certain kinds of component shortages.

I think that may actually -- it doesn’t really affect our supply, but it may actually affect the end demand, based on what everybody can get and sit together and things like that. So, I think it’s a relatively benign environment from that perspective.

There are interesting trends that are going on out in the world about what people are doing with the mass capacity storage. I think there’s a lot of innovation vectors that are taking off, and especially as recovery happens. And these are things that we’re watching.

And I think if you look through the distribution channels, you’ll see fairly strong demand for that as well. Again, it’s mass capacity demand. But some of the file sharing platforms that exist out there, IPFS is one that we’re watching it really carefully. It’s an interesting dynamic with a lot of kind of vibrancy.

The guys just love to see a lot of creative professionals just coming up with new types of applications and these are driving demand as well. So, I think, that’s probably something you see if you look at those channels in particular..

Okay, great. Thank you..

And your next question will come from Aaron Rakers of Wells Fargo. Please go ahead..

Yes. Thanks for taking the question. I believe -- and I want to make sure I didn’t hear it incorrectly. But, Dave, at the end of your prepared remarks, you commented that you expect to see at least 10% year-over-year growth in calendar 2021.

Can you just help us understand or appreciate how that has changed? First of all, is that correct? And secondly, how has your outlook kind of changed? What’s been the drivers of that change over the course of the last three months or so?.

So, obviously, looking back at 2020, there was supply and demand disruption. So first, when the supply was disrupted, people were shutting down factories, there was a lot of pulling of demand. And then, the demand realities in about July timeframe came to restrain. So that -- so we lived through that in 2020.

I think 2021, there is still some kind of supply concerns that people have about components everywhere. And so, there are people pulling things in. From my perspective, mass capacity is relatively insulated from some of that, and we have pretty predictable relationships exactly to Katy’s question.

So, we look at this year is not having as profound an impact as we did in 2020. And that’s where we get the 10% capacity. And it’s more of mass capacity, some of the VIA markets and things like that will be contributing as well, as largely the cloud and enterprise on-prem coming back..

Yes. We said two things, at-least 10% and we also said that we expect revenue to be maybe more stable throughout the quarter. So, we don’t expect relative seasonality. And I think that is important when you model your quarters off..

Yes. That’s helpful. And then, just as a real quick follow-up for second question. On gross margin trajectory, you’ve now got, I think 65% of your revenue coming from mass capacity. You had talked about that business now running at the low end of that 30% to 33%, guidance, long-term target model.

How do you think about that longer term? Do you think actually that mass capacity gross margin can trend up at the high or even above the high end of that long-term model range that you’ve outlined?.

Simply put, yes. So, I think we have to get our -- all of our manufacturing capacity pointed in the right direction there. And as legacy comes down and helps us, and then there’s other opportunities as well, like platform commonality and things like that. We’ve kind of said that 16-terabyte was getting a little long in the tooth.

That’s why we want to accelerate the 18 terabytes and then 20 terabytes. And in each one of those points, you get a chance to refresh, and maybe take some cost out as well. But, based on what new designs are in the factory -- and we get the leverage of the platform too. So, I hope that helps you. .

Your next question will come from Karl Ackerman of Cowen. Please go ahead..

Yes. Good afternoon. I guess, Dave, you’ve referenced this in an earlier question. In recent days, there have been reports of some significant price hikes in the retail aftermarket as hard drives are being used for new applications, like crypto mining.

While you have less control over the retail market from a pricing perspective, I was hoping you could discuss how demand in the channel maybe impacting your factory utilization and lead times across your customer base?.

Yes. I would say that we always budget enough capacity for the channel. I mean, channels -- the customers in the channels are varied and important to us. And so, we always budget enough capacity to make sure that we’re sourcing the channels well. We do see the uptick in demand that you’re referring to.

Like we said, we’re watching the different trends that are causing it. Some are really interesting vibrant trends. And we love that. What I would say is that it’s a little early in this to know how prolonged it is, how prolonged that will be. So, I think we’re even early in this quarter.

So, it’s really hard to know exactly what the distribution channel reaction is going to be. I also think that getting people things immediately is a problem in the world today, because it’s affecting, to your question about the manufacturing capacity that we have.

Even if we even if it came out of the back of our factory, getting it around the world to that channel location might be a problem, right? So, I think, we’ll have to look at all these dynamics, look at the lag or lead times, if you will on how that demand’s developing and figure out how we service it..

If I may, along the topic of crypto currency, I could be wrong. But, I believe you still maintain your stake in Ripple, it has over the last few years. And that’s appreciated 5x since you last reported. So, I guess, A, do you still maintain a stake there? And then secondarily, are there ways to monetize that stake today? Thank you..

Yes. We won’t talk about the latter part. But yes, we do maintain a stake. These are, like I said, vibrant segments that we’ve been watching for quite some time. We have a fair amount of people that are -- because it’s all about data flow, and in the case of the recent trends, a lot of it’s about data storage in particular.

So, these are things that we watch and determine how we make investments, not only in external investments that we might make, but also internally and what kind of technologies we’re developing. So, we’re maintaining a stake..

Thank you..

Your next question comes from Thomas O’Malley of Barclays. Please go ahead..

Hey, guys. Nice results and thanks for taking my question. Mine is really related to the VIA market. On the last earnings call, I think, Dave, you described environment that was like down mid-teens in terms of revenue. And at least with exabytes, which you guys break out, you saw it down like in the 40% range.

So, do you see some of that snap back more violently in the June quarter, given how hard it fell off in March? And just, could you walk through -- what are the reasons why you saw it down so hard in March, and why should it come back in June?.

Yes. This is typically -- I’ll let Gianluca answer part of this as well. But, this is typically a seasonal market and it’s tied to I’ll say government spending and build out. Now, obviously, a lot of that has been disrupted in various places in the world right now.

And then, I think if you go back four quarters ago, the edge markets were generally really depressed, because I think my comment at the time was nobody’s on-prem anyway. So, people just aren’t making on-prem. So, I think there has been a high degree of cyclicality this year to the point.

I think, what we’re seeing right now is, not only replenishment of supply chains that were disturbed but also -- and early in the year, investment cycle in smart city applications.

And some of that maybe, because of healthcare data or maybe because of buildings reopening, and they hadn’t been making investments for a while, but it seems to be relatively earlier and maybe a seasonal right now..

Yes. Inside the mass capacity segment, VIA is probably the only one that is seasonal. So, it was not expected. We knew that into the March quarter, we were going to have a decline. As I said before, June quarter will have to be a much stronger quarter for the year and we continue to increase in the September and December.

And December is a stronger quarter for the year..

And sorry, one other point too. Our central thesis is that the data at the extreme edge is not being properly utilized. As a matter of fact, a lot of times this gets deleted.

And, we think there are people who are starting to answer questions about how do I store that for a little bit longer and then process the data with AI and make value-based decisions on the data. Maybe not necessarily in the next minute but it maybe a day later or a week later.

And so, as that happens, we expect some of this seasonality to be more muted over time..

Great. That’s helpful. And then, my follow-up was really around nearline. Obviously, you guys don’t really talk about share, but let’s just look at exabytes. If you look at kind of what the markets was forecasting for March, I mean, you have 50 plus percent share of that market.

A better way to ask it other than share is, could you talk about the dialogues that you’re having with customers with nearline drives? What kind of success are you seeing over the next couple of quarters? And what kind of led you to the position where you are right now, where you’re maintaining this higher percentage of share? You can answer that however you want.

But, I just wanted to dive in there..

Yes. That’s great. I mean, I don’t really think about it as share, because to your point, we go out to the customers. We have -- since the lead times on the products are so long, we have good dialogues about not what you need in six weeks, but what do you need in six months? And I think that’s working quite well. Our customers appreciate that.

We still have flexibility for them. But, we’re kind of co-planning in that respect. And I think that’s served us very well on both of them. So, the bouncing ball on share, if you will. I don’t have a great visibility into how that’s going to change. I just know what our demand is. That’s why I said.

I do think there’s a little element in the last few quarters of -- at the end of quarters sometimes Seagate gets pulled a little harder than we thought, and there may be a competitive dynamic, or it may just be the customers were holding a little bit in their back pocket. But in general it’s become a way more stable environment than it used to be.

And we’re not building things speculatively either -- ramp, we’ve been -- we are ready for that drive mid last summer. The customers weren’t really ready too, again growing up a very predictable ramp for that and keeping our factories full, the 16, while that was happening and having good dialogue too. So, I think, that’s just serving us well.

We’re not in the era of building --having a hunch, building a bunch and then speculatively trying to move at the last minute anymore. .

Next question will come from Ananda Baruah of Loop. Please go ahead..

Hey. Thanks guys for taking the question. I appreciate it. Congrats on solid results and good execution. Just two quick ones if I could. Those are kind of clarifications. Dave, sort of going back to pricing, you said that things are fairly benign.

I guess, does that mean that they’re -- really just trying to understand if there are things, if there’s an opportunity for pricing to improve as we go through the year, relative to maybe what you thought 90 days ago. And I just wanted to get your thoughts there and see if I lost anything in the translation. And then, I have a quick follow-up.

It’s really on -- nearline pricing specifically. .

Yes. I would say, relative to 90 days ago, I mean, again, we’ve been fairly predictable in giving our customers what they need. And to the extent that that’s locked in with our manufacturer capacity, not much has changed on that front. I do think across the broader world, procurement people tend to be more concerned about supply.

So, some of the discussions are being even more mature than we had thought 90 days ago. That’s the way I think about it. And we made reference to this in the prepared remarks about some of the long-term agreements that we’ve been able to establish in the last quarter..

Got it. And to LTAs, I mean, is it useful for us to think about their use in an increasingly structural sense kind of our 2012, which was an extreme case. But it was sort of material financial impact.

Is it useful at all to think about it and instruct your sense like that or is this more on the margin?.

I think, that was much more profound back then. From my perspective, supply and demand is a lot more imbalanced than back in those days. As a matter of fact, supply disrupted last year and demand was disrupted as well, that we’re still feeling the reverb, and it’s very different than the 2012 environment.

I would say that the biggest difference is the lead times on the products. I mean, the wafer starts that we’re doing right now, realistically are hitting -- for the mass capacity driver, hitting the back end of our testers probably around Christmas.

And if you think about that that’s driving really good, healthy discussions with what people exactly need and what kind of flexibility they need..

Got it. That’s helpful context. I appreciate. That’s it from me. Thanks a lot..

Your next question will come from Mehdi Hosseini of SIG. Please go ahead..

Yes. Thanks for taking my question. Two follow-ups. I believe that you guided to nearline exabyte growth of 35%.

Is that correct? Did I hear that right?.

That’s right, Mehdi. That’s right. That’s what we’ve been saying, 35%. It’s been a little bit stronger from that for the last couple of years for us. But that’s we think the long-term growth rate is, 35% to 40%. .

And it seems to me maybe you’re a little bit more on the conservative side.

And I said that because if I just take the next sort of assumption for the June quarter, that would imply the acceleration into the back half of the year -- in the second half of the calendar year to get to that 35%?.

I think we do think that mass capacity is to going to continue to grow. I think we’ve talked about this a little bit. Cloud service providers around the world have to make tough decisions on exactly how they’re making investments. And so, not all of those investments are necessarily mass capacity related.

We do expect, they continue to grow in that capacity into the back of the year, and that’s when Gianluca made the comment earlier about a seasonality that’s what he was talking about..

Yes. I think, that’s an important. We see strong cloud and enterprise OEM, but we also need to consider a sequential improvement in surveillance and the VIA market in general that is increasing in volume and in revenue through the calendar year..

And just to be clear, you’re referencing year-over-year growth or sequential growth?.

Well, in the remarks, we said 10% year-over-year. Of course, the surveillance comment is sequential. If you’re looking at the second half of the calendar year compared to the first half or you’re just comparing year-over-year..

And just really quickly as a follow-up to your 20-terabyte commentary that you are going to have several different products. And especially in the context of lower CapEx, is this going to basically enable you to extend your market share from 18 to 20? Especially, it seems to me that HAMR may have been pushed out.

So, now you have alternative technology.

Is that how we should think about it?.

I don’t really think about as market share, I think more about what customers want, what technology portfolio that we have, and how we might service it. And I guess, it’s important to remember that the cloud, if you will, is -- mass capacity is not one size fits all.

There are many different types of firmware load-outs, applications that are -- that require different performance levels that can tolerate different performance loads. Some are colder storage and some are very much nearline, right. So, those are very active 20%. So, there are going to be multiple flavors of the technology. It’s the same common platform.

And I think -- from my perspective, I think we’re locked in pretty tight with customers. So, that’s why we’ve got confidence. And I think multiple flavors. That doesn’t mean one or two..

And your next question comes from Patrick Ho of Stifel. Please go ahead..

Maybe Dave, first off, it’s good to hear some of the commentary about your 18 terabytes growing through the rest of this year.

Can you just give a little qualitative color, whether you’re getting that 18 terabytes demand from co-existing customers or low capacity points or are they from potential new customers that haven’t used Seagate over the last few capacity points?.

No. Maybe the way I would characterize it is there are some customers that were using 16 in translation, but there are also other customers that were not transitioning from previous 12s or 14s or wherever they were before. And I think we have fairly broad representation.

I do think the markets are generally moving up from, like I said back, if I came back to the 6 or 8 terabyte days, people would be stuck on some of those lower capacity points, much longer. In general, people who are doing data center build outs around the world are using that mass capacity, leading edge, drive much more aggressively.

So, from my perspective, 18 terabyte is very broad adoption. And I’ve already said, we like the platform quite a bit because we’re continuing to get cost leverage out of it..

Great. And maybe as my follow-up question for Gianluca. You gave really good color in terms of the gross margin leverage, and what’s driving that.

Can you give a little color also on the OpEx leverage? What’s driving that? Are you adding more with the increasing demand, and where some of the moving pieces there?.

Yes. So, OpEx year-on-year was about $10 million lower. Sequentially, it was a bit higher. The increase sequentially was basically due to variable compensation and a little bit higher in R&D material spending. We said a couple of quarters ago that we have set our normal trend to be around $340 million per quarter.

So, we are very well aligned to the expectations, and we think that probably will have a lot of revenues the next couple of quarters..

Great. Thank you..

Your next question will come from Shannon Cross of Cross Research. Please go ahead..

Thank you. Earlier, you talked about challenges of shipping into the retail channel. But, I’m wondering if you could speak to how the current supply channel issues are impacting other segments of your business and how you sort of incorporated them into the model. And I have a follow-up. Thank you..

Yes. Again -- sorry Shannon. So, not so much on the supply part for us. Although, I think everybody’s watching the same kinds of long-term supply issues. But, short-term, we hear from customers that they’re having problems getting the final kit.

And so, usually what that does to us as it makes -- maybe that they’re already hit that revenue or secured that customer win for them. They may need it differently. And so, we’re having to be very flexible..

Do you see it basically just pushing out demand out right as opposed to take it into your way from a long-term perspective?.

Yes. I think exactly to your point, I mean, I think the demand is there. It’s just that how exactly quickly it can be served. And then, obviously, some customers, they get service, somebody else won’t. So, there is a lot of those dynamics we have..

Right. And then, my second question, and I realize it’s new. But, you mentioned you’ve had some positive feedback on Lyve cloud. I was wondering, which segments are seeing the most interest, and maybe if you can give a little more color on what you’re hearing from the customers. Thanks..

Sure. I think if you think about Lyve Cloud as almost like an external storage or an external hard drive in the cloud, to the comments you made about retail. It’s very simple. There is no ingress or egress fees. There’s - it’s a scratch pad. That’s the way I think about it, and you could use it temporarily. You use it permanently if you want.

I think, there are customers who are very -- or always aggregating data out certain locations to want to temporary landing spot before they find out exactly where they’re going to put their data long-term.

And so, these are the kinds of customers that are giving us a lot of interesting feedbacks for continued development of the thing, and we’re not -- this is people tens of terabytes or even bigger..

Great. Thank you..

Your next question will come from Sidney Ho of Deutsche Bank. Please go ahead..

I have two. The first question is, as Dave you talk about the 10% -- at least 10% revenue growth for calendar ‘21. If my math is right, that would imply the average revenue for calendar Q3, and calendar Q4 will be consistent on maybe slightly below calendar Q2.

I would have thought the numbers could go to the keep going up on a sequential basis based on all the recoveries you’re seeing.

I know you guys have at least 10%, but are there some things that we should consider here?.

Yes. Of course, we don’t guide the individual quarter. I think, it’s fairly easy to -- for you to calculate that, at least 10% we are going to pay. How much more than 10%, which has at least 10% for the calendar year. And then, we will discuss that following quarter -- we have said driving to be very strong in the calendar year.

So, I guess please wait for two more months and get more details on -- quarters. .

But Sidney, I would say that what we are trying to say is that I think things are relatively full and we expect -- a muted seasonality, if you will, as we look forward. That’s definitely true..

Okay. That’s helpful. My follow-up question is -- relates to the 20 terabytes drives. I know you started shipping the HAMR drives back in November. And you’ve seen the thing that the TMR extendable to at least the 20 terabytes. Can you talked about having multiple products at that capacity from -- second half.

I would think qualified multiple products at the same capacity point would increase the cost of your customers.

Does it not make sense to say as a certain capacity point, you only offer one type of technology or are there other things that we should think about that may never get done?.

Yes. It’s interesting. There are different types of customers who want different performance levels. I think I made reference to that earlier. But to the extent that we already know that medium term, this platform family really well. We don’t have to turn that to medium. That’s one option, another option, SMR, like we talked about.

So there’s lots of different bases that provide those customer solutions. Is it more complex for us? Yes. But we have this kind of platform. And so that common platforms can go multiple different directions and we feel very confident in that. And we’re not really worried about qualifications or anything like that..

Okay. Thank you..

We have time for one final question from Steven Fox of Fox Advisors. Please go ahead..

Hi. Good afternoon. Thanks for squeezing me in. Two kind of clarifications.

First of all, on the video side, in terms of the recovery, I’m not sure actually I understood that it’s mainly surveillance still or were you, Dave, trying to imply that you’re also seeing some of these other edge use cases really take off, or if not now, can you maybe talk about when? And then, secondly, as you buy ahead on components, I understand building the safety stock.

But given how the supply chain is changing, do you see that sort of delta increasing, decreasing, staying the same versus your actual needs? Thanks..

Yes. I’ll take the latter question first. We do -- we have long lead times for our components internally, we got the factories every day, 91 days a quarter.

So, to the extent that we know exactly what we want for this common platform and for all the other products that we’re building, I think we do make sure that we have enough stock for whatever contingencies we have.

From my perspective on the smart city applications that we’re saying, they are very -- it’s not just, this is not just surveillance market anymore. So, we see there are many different types of edge use cases that are starting to develop.

And even some of the building security types of applications are -- they have a lot more features that are being demanded of them now. So, they’re not just the same kind of security we’re all used to. There’s other kinds of features being put in.

And so, therefore, if you’re buying a solution for a facility or calculating a facility, one of those features, I think that’s actually driving demand for higher capacities for us as well, so. And then, sorry Steven, what we said earlier was last year was so disruptive from supply-demand perspective on this front, people were investing in the edge.

But, I think that’s why we’re seeing this kind of pull in the market this year, relatively..

That’s all the time we have. I’ll now turn the call back over to the presenters for some closing remarks..

Thanks Gabriel. And thanks to all of you for joining us today. Seagate continues to execute well and remains excited about the tremendous opportunities we foresee ahead, both in the near-term and longer term, driven by massive growth of data.

I’d like to once again thank our customers, suppliers, business partners and importantly our employees for their ongoing support of Seagate..

This does conclude today’s conference call. Thank you for joining. You may now disconnect..