Good afternoon, and welcome to the Seagate Technology Fiscal Second Quarter 2022 Financial Results Conference Call. My name is Brent, and I will be your coordinator for today. [Operator Instructions] 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 fiscal 2022 results on the Investors section of our website. .

During today's call, we'll 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 included in our Form 8-K that was filed with the SEC.

We've 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, a reconciliation to the corresponding GAAP measures is not available without unreasonable efforts. .

Before we begin, I'd like to remind you that today's 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.

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These statements are based on management's current views and assumptions and information available to us as of today and 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'll open the call up for questions. .

Now I'll hand the call over to you, Dave. .

Thank you, Shanye, and hello to everyone joining us on today's call. Seagate ended calendar year 2021 on a high note, delivering another solid performance in the December quarter, highlighted by revenue of $3.12 billion, our best in over 6 years. And non-GAAP EPS of $2.41, representing the highest level in nearly a decade.

This performance is all the more impressive in light of the supply chain disruptions and inflationary pressures we are experiencing today and further demonstrates the consistent execution, operational agility and sharp focus on expense discipline that we have displayed throughout the year. .

To that point, in calendar year 2021, we achieved revenue of nearly $12 billion, up 18% compared with the prior calendar year. We expanded non-GAAP EPS by more than 75%, and we grew free cash flow by nearly 40%, truly an outstanding year of growth that shows we are capitalizing on the secular tailwinds driving long-term mass capacity storage demand.

As we shared many times before, driving profitability and free cash flow generation remain 2 of Seagate's top priority and underpin our focus on enhancing value for our customers and shareholders. .

Since the onset of the pandemic, we have consistently executed our product road map and made investments to deliver cost-efficient, higher capacity drives that offer business value for our customers while also enhancing Seagate's financial profile. We extended our proven common platform drive family from 16 to 18 and now to 20 terabytes and beyond.

We also address cloud customers' performance needs through our industry-leading dual actuator technology. We've made these advancements while notably returning more than $4 billion to our shareholders through our quarterly dividend and share repurchase programs. .

Our execution and product momentum position Seagate to deliver a third consecutive calendar year of top line growth. We currently expect calendar year '22 revenue to increase 3% to 6% with further growth beyond, consistent with our long-term model range. .

Let me spend a few minutes discussing the current business environment. In the December quarter, we again generated record mass capacity revenue with growth led by demand from cloud customers.

We achieved our highest ever cloud customer revenue, supported by sales of our 18 terabyte nearline products, which significantly increased quarter-over-quarter consistent with our plans. .

HDDs are a critical enabling technology for the growing data sphere. As we shared a year ago at our analyst event and our results demonstrate, HDDs have a well-established place in the data center ecosystem, and we do not expect that to change over the next decade or longer. .

For the past couple of years, Seagate has been a beneficiary of increasing cloud data center investments to support remote work, remote education and the digital transformation trends that continue to take place. Analysts forecast another year of strong double-digit cloud CapEx growth in calendar 2022.

Several powerful themes emerged from this year's CES conference that support our longer-term demand outlook. And underscore a clear business need to capture, access and analyze massive and growing volumes of data. .

New use cases highlight how data-intensive applications such as AI, autonomous vehicles or smart cities can improve business or social value and drive demand for mass capacity storage, both in the cloud and at the edge. We have previously shared how emerging use cases at the edge are driving meaningful opportunities within the VIA market.

These applications utilize high-definition video and AI analytics to capture and extract data value. .

In the December quarter, sales of our VIA products remain healthy, and we expect the March quarter to be seasonally slower, consistent with historical trends. Longer term, we continue to forecast exabyte growth in the mid-teens, supported by expanding opportunities at the edge. .

Moving to our other markets. Sequential growth from the cloud in the December quarter was somewhat counterbalanced by lower revenue in the enterprise, OEM and legacy PC markets that we attribute primarily to the COVID-related supply challenges that dominated broader industry headlines. .

As we indicated last quarter, non-HDD component shortages are disrupting some of our enterprise and OEM customer shipment plans, which impact both mass capacity nearline and legacy mission-critical drives.

We are mindful that these supply pressures and other COVID-related measures could further weigh on the typical March quarter seasonality that we anticipate in the VIA and legacy markets. However, customers are managing through the tight supply environment and expect conditions to ease over the next couple of quarters. .

Seasonality and temporary constraints aside, the long-term mass capacity demand trends remain strong.

In this environment, we remain focused on exercising capital discipline to align supply with demand and continue to engage with customers on their longer-term demand requirements to ensure that our production capacity plans align with their future ramp time lines.

With lead times for high-capacity HDDs of 6 months or longer, an increasing portion of our nearline drive revenue is under long-term agreements with momentum to expand even further. .

We are executing our innovative mass capacity road map and cost reduction plans to offer a compelling value proposition for our customers that is also financially attractive for Seagate. We are ramping 20-terabyte drives, extending our common platform to a third generation.

For a couple of quarters now, cloud data center customers have shown very strong pull for these drives. .

The TCO value proposition for transitioning to higher capacity drives is compelling. Consider first that a move from 18 to 20 terabytes represents an 11% boost in storage capacity, and then layer on the savings realized across the data center buildout.

At the system level, customers require less networking gear and other ancillary parts to support the same storage capacity. On both fronts, these gains translate to meaningful cost efficiencies, which may be further enhanced given the part shortages and inflationary pressures in today's market. .

All indications point to a very steep production ramp for our 20-terabyte products with the potential of surpassing the record-setting ramp we saw for our 16-terabyte drives. As a result, we are using the seasonal slowdown in the March quarter to stage our factory operations to support strong 20-terabyte demand as the year unfolds.

Our common platform approach helps to facilitate this process by enabling us to quickly transition and ramp new products into the market. .

Our 20-terabyte drives highly leverage the head and media technology that power our 18-terabyte product family, making the production process well understood and haste in time to yield.

This strategy also provides manufacturing flexibility and improves our overall cost efficiencies across the breadth of our common platform family, which currently spans 16 through 20 terabyte capacities for CMR products with some customers stretching to 22 terabytes using SMR feature sets. .

We are driving additional manufacturing and cost benefits by incorporating the same media and head technology to produce cost optimized drives, spanning capacities down to 2 terabyte drives. .

In addition to improving manufacturing flexibility, these cost optimized drives can require fewer heads and disks, which offset some of the near-term inflationary component pressures. In the December quarter, the revenue contribution from products using higher aerial density drives increased to nearly 40% of total HDD revenue. .

Wrapping up, we entered the March quarter amid a challenging supply environment. However, I remain optimistic for conditions to gradually improve.

Importantly, our strong product portfolio and operational execution put Seagate in excellent position to deliver on our long-term revenue growth model and generate strong free cash flow in 2022 and beyond, underpinned by growing demand for mass capacity storage beyond 20 terabytes. .

I'll now hand the call over to Gianluca to cover the financial results. .

Thank you, Dave. Seagate continued to execute well and navigate a complex business environment to deliver a solid financial performance aligned with our expectations. In the December quarter, we grew revenue to $3.12 billion, up 19% year-over-year.

Delivered non-GAAP operating margin of nearly 20%, up 520 basis points year-over-year and increased non-GAAP EPS to $2.41, up 87% year-over-year. .

In our HDD drive business, we achieved the fifth consecutive quarter of record capacity shipments, totaling 163 exabytes, up 3% sequentially and up 26% year-on-year. Ongoing cloud demand for our nearline products supported mass capacity revenue of $2 billion, up 1% sequentially and up 25% compared with the prior year period.

Shipments into the mass capacity market totaled 137 exabytes, up 4% sequentially and 41% year-over-year. .

Nearline remains our fastest growing product segment with revenue outpacing the broader mass capacity business.

In the December quarter, we increased shipment to 111 exabytes, up 4% sequentially and 56% year-on-year, supported by the ongoing cloud adoption of 18-terabyte drives as well as healthy demand for mid-capacity products from enterprise and OEM customers. .

Our 20-terabyte product family is growing strong customer interest, and we are continuing to scale 18 terabyte shipments while also preparing for an anticipated steep 20-terabyte ramp in the coming quarters to support demand. .

Sales into the VIA markets remained healthy in the December quarter, following 2 quarters of rapid growth and near record revenue in September. We project a seasonal slowdown in the VIA market during the March quarter, but expect revenue to remain up on a year-over-year basis. .

Within the legacy market, revenue came in at $775 million, down 7% sequentially and 15% year-over-year. Seasonal demand for consumer drives partially offset weaker-than-anticipated PC sales due in part to ongoing PC component shortages and lower mission-clinical sales.

As we discussed last quarter, component shortages are also impacting sales in our system business as customers delay some ordered product deals due to constrained supply of nondrive components. .

Despite these headwinds, non-HDD revenue increased 17% sequentially and 48% year-over-year to a record $294 million, boosted by strong SSD demand.

While we continue to face near-term supply challenges for both the system and SSD businesses, we remain confident in growing the non-HDD business in fiscal 2022, particularly for our system solution, where we see ongoing demand and continue to capture new customer logos. .

Looking at our operational performance. Non-GAAP gross profit in the December quarter was $958 million. Our corresponding non-GAAP gross margin was 30.7%, down 30 basis points sequentially, but up nearly 400 basis points year-over-year.

The ongoing transition to both higher capacity drives and cost-optimized products mostly offset higher freight and logistic costs and the less favorable product mix with a record non-HDD sales. Notably, HDD gross margin remain in the upper half of our long-term target range of 30% to 33%, flat with the prior quarter. .

We maintained relatively flat non-GAAP operating expenses at $337 million, lower than expected, reflecting our disciplined expense management and the timing of certain spending. We expect OpEx to be somewhat higher in the March quarter due to an increased R&D expenses and business travel.

Our resulting non-GAAP operating income was $621 million, down 1% sequentially and up 61% year-on-year. Non-GAAP operating margin remained relatively flat with the prior quarter at 19.9% and at the top end of our long-term target range of 15% to 20% of revenue. .

Based on diluted share count of approximately 225 million shares, non-GAAP EPS for the December quarter was $2.41, which is $0.06 above our guidance midpoint. We increased inventory by approximately $100 million with days inventory outstanding of 54 days to support the upcoming 20-terabyte product trend. .

Capital expenditures were $95 million for the quarter, down 19% sequentially. For fiscal '22, we continue to forecast CapEx at the low end of our target range of 4% to 6% of revenue, which is sufficient to support our future product road map while maintaining alignment between near-term supply and demand.

Free cash flow generation increased to $426 million, up 12% quarter-over-quarter and 36% year-over-year. .

We delivered strong performance in the December quarter and expect to improve free cash flow generation through the fiscal year, enabling us to continue to fund our strong capital return program.

In the December quarter, we used $151 million for the quarterly dividend and $471 million to repurchase 5.1 million ordinary shares, exiting the quarter with 219 million shares outstanding and approximately $3.3 billion remaining in our authorization. We ended the December quarter with cash and cash equivalents of $1.5 billion.

And total liquidity was approximately $3.3 billion, including our revolving credit facility. .

Adjusted EBITDA increased to $723 million in the quarter, our highest level in 7 years, and was $2.6 billion for the 12-month period ending in December. Total debt balance at the end of the quarter was $5.9 billion, and as we previously reported, we plan to repay $120 million in debt coming due in March. .

In summary, we delivered solid financial performance, maintaining our focus on driving profitability and free cash flow generation while navigating a dynamic business environment. .

Looking ahead to the March quarter, we expect a continuation of the healthy demand environment in the nearline market with anticipated seasonal decline in VIA and the legacy markets.

As Dave noted, we are mindful of the ongoing impact related to corporate dynamics and will continue to manage through supply chain constraints and other inflationary pressures that we expect to persist through at least the fiscal year. .

We expect March quarter revenue to be in the range of $2.9 billion, plus or minus $150 million. We expect our operating margin to be impacted by COVID-related pressure, what I just discussed over the near term.

However, we believe the structural changes in the industry combined with Seagate disciplined execution will support a higher operating margin over time. .

As a result, we are raising our long-term target non-GAAP operating margin range to 18% to 22% of revenue compared with our prior range of 15% to 20% of revenue. With that in mind, we expect our March quarter non-GAAP operating margin to be at the lower end of our revised long-term range of 18% to 22% of revenue.

And finally, we expect non-GAAP EPS to be in the range of $2, plus or minus $0.20. .

Looking further ahead, ongoing demand for mass capacity storage, combined with our strong product pipeline, give us confidence to further raise our fiscal year 2022 revenue growth to be between 12% and 14%, up from our prior outlook in the low double-digit range. .

I will now turn the call back to Dave for final comments. .

Thanks, Gianluca. I'm very proud of the results Seagate posted in the December quarter and also our ability to deliver consistent performance during this unique period of transitory issues. Through it all, the trends driving explosive growth in data remain powerful.

Longer-term demand tailwinds that will push growth in mass capacity stores in 2022 and for years to come. .

Seagate has the right product portfolio, operational know-how and partnership focus to capture these opportunities and lend confidence in our ability to deliver on the annual growth targets we've outlined today as well as achieve strong profitability and cash generation to fund our robust capital returns program. .

Seagate has been a technology company, innovation leader for over 4 decades. We are now leading the industry into a new era of technology with HAMR and multiactuator drives. The industry has undergone a positive structural change with the transition of mass capacity markets.

These innovations are the result of years of intense focus and significant investments that bring value to our customers and to their customers by unlocking the power of their data.

We are focused on capturing an appropriate return to continue fueling our mass capacity innovation engine, which we believe is healthy for Seagate and for the industry at large. .

In closing, I would like to thank our employees who deserve the credit for Seagate's outstanding performance this past year. We are a values-driven company, and last week, we published our third annual diversity, equity and inclusion report that captures the many ways we put our value of inclusion into action.

Among the many positive measures in the report, I want to highlight an increase in the overall percentage of women in director and executive roles as well as an increase in minorities in our U.S. workforce.

These are important areas of focus for the company and reflects positive progress in our efforts to build a more global, diverse and inclusive workforce, which we believe leads to better business sustainability. I would also like to thank our customers and suppliers for their continued support and our shareholders for their trust in Seagate. .

Gianluca and I are now happy to take your questions. .

[Operator Instructions] Your first question comes from Wamsi Mohan with Bank of America. .

Dave, Gianluca, when you look at the gross margins that came in slightly down quarter-on-quarter, 30 basis points, can you talk about the moving pieces there, not just for this quarter, but as you think through gross margin trajectory in terms of both price and the very strong inflationary cost pressures that everyone seems to be absorbing? You guys have done a great job on a year-on-year basis, but how should we think about the next few quarters?.

[Technical Difficulty].

Your first question comes from Wamsi Mohan with Bank of America. .

Dave, can you hear me?.

Yes, I can hear you, Wamsi. .

Okay. Great. Dave, when you look at the gross margins coming in slightly down quarter-on-quarter, can you talk about the moving pieces there just in terms of price versus the inflationary pressures that we have seen over the last few quarters? You guys have done a great job on a year-on-year basis.

But how should investors think through these moving pieces over the next few quarters?.

Appreciate the question. We've tried hard, as you know, to be as predictable as we can. There are a lot of near-term margin headwinds that we described in the prepared remarks. We still remain focused on and as prescriptive as we can over time.

We don't view that our current range is some kind of ceiling or anything like that, but there are near-term headwinds. And I'll ask Gianluca to illustrate with a few numbers here in just a second. .

Big picture, what's going on in our industry is our drives are becoming more and more mass capacity, of course. And which means inside the drive, there's more heads, more disks, all the time. So I think for the last quarter, it grew yet again, and it probably will for the course of the next few years also. .

And so as we do that, those are long investments -- long-term investments and factories and the entire supply chain around heads and media. Those constituents of the BOM become more under our control, and I think it allows us to go drive for a little bit more predictable return on investment. But obviously, this is a challenging period.

So Gianluca, do you want to highlight some of the challenges?.

Yes. I would say, first of all, the change quarter-over-quarter is mainly coming from mix. If you look at the hard disk drive gross margin, is completely flat to the prior quarter. So we don't have any change in profitability for the hard disk.

We have increased a lot our non-hard disk revenue, mainly in the SSD part of the business, and that is driving some reduction in the overall gross margin. But of course, it was also very helpful at the revenue level and the free cash flow level. .

Now when you look inside the hard disk, mass capacity was at a record high, fairly close to September as we were expecting about 1% higher, but still a good record high. Legacy was sequentially down in mission-critical, but as you know, is a high gross margin segment. And was actually higher in consumer that is actually a lower gross margin segment.

So there is a lot of mix going on into December. But finally, the reality is hard disk in total, was flat gross margin compared to September and the increase in the non-hard disk part was driving the slight decline at the company level. .

Now when you go into the March quarter, where it's still a mix impact, it's a different kind of mix. This is more a seasonality impact. Some of the segments that will be seasonally low are fairly high gross margins like surveillance, like mission-critical. Other segments are actually fairly, let's say, not low but low at gross margin like consumer.

And we also expect at this point, some decline in the SSD part of the revenue. .

So when you put all together, again, the mix is probably driving the gross margin in the March quarter, slightly down from the December quarter, but it's not coming from the business. It's coming mainly from the mix. As Dave was saying before, of course, we have also some cost increases, mainly in the freight and logistic cost.

We thought 2 quarters ago to be at already the high level of the freight cost, but it continued to increase in September and again in December. This we expect to start declining in the next few months.

But with our spending control, with the strong mass capacity business that we have, we have mainly offset those bad news coming from the cost leaving the mix impact, of course, impacting the total result. .

Your next question comes from the line of Karl Ackerman with Cowen and Company. .

Two questions, if I may. One is a follow-up to Wamsi's most recent question. But Gianluca, you spoke about non-HDD component shortages disrupting some of your enterprise customer shipment plans. If I may, are you referring to mission-critical here? Or is this weighted toward mass capacity? And I have a follow-up. .

No, I would say the shortages, we have experienced in 2 parts of the business. One is the PC and one is a system solution. .

Understood. That's clear. .

So I think to break it down a little bit, Karl. There is some mission-critical and there is some nearline components to that, if that makes sense. .

Great. I guess from an end demand perspective, to me, it sounds like most end markets may moderate in March, except for the nearline hard drives.

But I was hoping you could discuss the visibility you have across your data center customers today for high-capacity drives, which some of these are -- some of these customers are sounding signing long-term agreements?.

And then second, just the visibility in the trajectory you have for the remaining areas of your business as you contemplate that 3% to 6% growth for calendar 2022?.

Right. Good. So as we said in the prepared remarks, the 20-terabyte demand is quite strong. And so we're using this period, this quarter, to transition between whatever components that are flowing through that are 18 specific. There aren't very many because it's a leveraged platform to the 20s and really get staged for high growth on the 20s.

And the visibility is very good for those products. I think the customer demand has been -- customers are quite receptive to that. They see a TCO benefit. .

On all of the other markets we continue to watch and forecast and have, in some cases, we have very deep relationships with the customers that can also provide some level of confidence there as well. So in aggregate, I think it's going to be a very strong year for exabytes as well, and we'll translate that into revenue.

There are some temporary problems that are going on right now because of supply chain issues that are affecting everyone. It's more affecting our demand than it is our supply, but we're mindful of that and paying attention to it. I think the demand picture for mass capacity data in particular remains strong. .

Your next question comes from the line of Tim Arcuri with UBS. .

This is Jason Park on for Tim Arcuri.

Our first question is how can we think about the June quarter if June is close to normal seasonal, which is usually flat or up a little than the implied second half of the calendar year has been pretty strong, like 53% of the year, which is about the strongest second half of the calendar year loading we have seen? So just wanted to ask what are the drivers there? And what gives you the confidence? Then I've got a quick follow-up.

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Right. I think you're on the right point, which is so if you look at the tale of the tape, we go back -- so when we entered this calendar year, we were talking about low -- sorry, high single digits for revenue. And then we said maybe low double digits.

Now in these remarks, we said 12% to 14% and we're already more than halfway through the fiscal year. So exactly, you can start to look at Q4 and see that we are right now forecasting strength. .

Some of that's coming on the back of the 20 terabytes that I just talked about to the response to Karl. Some of it's also the transition to the cost optimized drives that we made reference to as we transition to that platform.

We -- all the way from 2 terabytes, 8 terabytes, 10 terabytes, we can actually predict that market pretty well and have great conversations with customers there as well. So we feel fairly comfortable with that part of the guide. And then we talked about the entire calendar year as well as growing on top of last calendar year.

So it's all baked into our forecast. .

Got it. And my follow-up question is on the demand in China. So we just wanted to gauge your level of concerns in China as we think most of the nearline business is direct rather than to a channel. But there are a lot of concerns about demand weakness there due to some of the problem restrictions.

So my question is, what are you seeing from the hyperscalers in particular in China?.

There have been pockets of build-out that's been pushed out, largely because of other supply chain issues, not necessarily mass capacity issues. I think those investments are still planned. Now some of that push-out may be happening because of component shortages.

It may also be happening because of prioritization of budgets into COVID measures or other things that the end customer is actually prioritizing. But we're not really that worried about it long term. We have great relationships with the OEMs. And I think -- and in the cloud service providers. .

And I think long term, I think these continued build-outs are going to come. Not just in China, but I would say for all of Asia, there's a lot of new applications that are coming online, lots of smart city applications. We're quite excited about it. So we see -- that's all baked into our revenue forecast that we just gave. .

Yes. I think we need to be careful on not confusing seasonality with lower demand. So when we go into the March quarter, our mass capacity -- part of our mass capacity will be impacted by seasonality, especially in the surveillance part of the business.

But that is not because of a high level of inventory or unusual lower level of demand, it is a normal seasonality that we expect for that segment in the March quarter. And then in the June quarter, usually start to improve and get very strong in September and December. .

Your next question comes from the line of Tom O'Malley with Barclays. .

My question was related to the VIA business. You're describing some seasonality into March. But you made the comment on the call that from a revenue basis, it would be up year-over-year. Obviously, when you look at exabytes, March was extremely low for the business in terms of exabyte shipments in VIA.

Can you just try to dial us in a little bit between those 2 field go posts there? When you look at what is traditional seasonality into that March quarter, what should that look like just because it's hard to get a gauge, given how weak March of '21 was?.

That's a great point, we compare it back to a year ago and I think anybody trying to forecast off of the pandemic kind of investment behaviors is going to be challenged. I would say that there's strength in smart city applications that are coming online. .

In Q2, things could have been even a little bit better. It was clearly better year-over-year, but it could have been even a little bit better. I think to the earlier question, there are reasons to believe that some of those buildouts are getting pushed out.

And unfortunately, the COVID pandemic is still with us and some of those priorities are still being made this quarter. .

We do forecast over time that the market should strengthen. And as we talked about mid-single digit -- or sorry, mid-double-digit growth in the VIA markets. I think it all depends on applications and then the economics of the investment that will have to be made across the breadth of the compound supply chain. .

From our perspective, the demand for data products is quite strong in these markets. And so we should still see that growth and maybe even more as time goes on. .

Okay. And then my follow-up was just on the inventory side. There's obviously an uptick. You mentioned in your prepared remarks that, that was mostly related to a buildup in 20T.

Are there other parts of that inventory that are climbing just because of the supply dynamics of the market where your not shipping product? I think you mentioned also that some of that was actually demand related, and that could be because of componentry, et cetera.

But can you just dive into that inventory number? Is it all the increase due to 20T? Or is there some other pieces in there as well? That would be helpful to under. .

Largely, it's the 20T. We're able to use those parts against a broader portfolio than just 20s, of course, we can go to 18s, 16s or all the way, like we talked about, some of the complements are very, very similar, down even further. So at the end of the cost optimized drive.

So that's the way we think about it is that, yes, there's some inventory buildup going on right now. Some of that's just staging for bigger growth in subsequent quarters after this quarter. And the components are very usable across multiple families. So we're really not worried about the growth. .

In the last few quarters, we have built some strategic inventory, of course, to be a little protected by this supply chain situation, but not much in the December quarter. So I will say we have done it before. The increase that you have seen in the last 3 months is mainly related to the 20 terabyte trends. .

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

The March quarter revenue is typically down mid- to high single digits, which aligns perfectly with your guidance. In your prepared remarks, you did mention that supply pressures could put some additional pressure.

And I wasn't sure whether that could be incremental to downside to the revenue guidance? Or if that's something that you had baked in for the March quarter?.

And then just connected to that, the implied June revenue looks to be better than seasonal, up sort of 2% to 3%. Is that because you would expect some of these supply headwinds to resolve themselves as you go into June? And then I have a follow-up. .

Yes. Thanks, Katy. There are a number of different dynamics. And I think the latter part of your question first, yes. There are components that we've field will break free in the next few weeks. And so -- and yes, we've tried to bake that into our guide as much as we can for this quarter.

There are some components that won't break free for quite some time, and you have to make sure that you're staging those well against your build plans.

That goes maybe for our builds, but we're also trying to look at the broader tech ecosystem because we do know that there are customers, generally speaking, they are the smaller customers, but they've had trouble getting some of these complete kits. .

And so all of this is tough for the customers right now. We're just trying mainly to help them get through the periods. There are some things that will get better near term, and there are some other things that are going to stay for a little bit longer. .

Okay. That's helpful. And then maybe, Gianluca, if you can extend the discussion you had with Wamsi on gross margin into how we should think about the March quarter. Your revenue and EPS guide is really in line with the consensus. But on the gross margin line, consensus was I think you could hit north of 31%, which would be an improvement.

Do you see the mix shift back towards HDDs helping you expand gross margin sequentially in March?.

Well, in March, the main impact will be coming from the mix and surveillance. VIA market, in general, is a very high gross margin segment. So we will have some impact from that business declining and also mission-critical. So when we look at seasonality and look at the segments that are really impacted are segments that are fairly high gross margin.

Of course, the continued increase in our mass capacity. So in the cloud, in the nearline and the OEM part of the nearline, that is all positive.

And I think we will continue to see improvement in our gross margin after the March quarter when we go into less seasonal part of the business and, of course, even stronger when you go into September and December. So there is an impact that is due to seasonality and is normal for this industry. I will not look that as unexpected. .

So gross margin sort of flat to down in March seasonally and then improvement off of that base?.

Yes, let me see how we guided, yes. .

Yes. The best that we can drive gross margins is to continue to transition to more mass capacity products to get more of the constituents of the BOM into the drives that are heads and media. .

Your next question comes from the line of Mark Miller with The Benchmark Company. .

Just was wondering, you mentioned that some of your nearline people were facing some supply constraints.

What about your own supply of chips, is that holding up?.

Yes. I think we have deep partnerships with our suppliers, we've been with them for a long time. I think there are a lot of dynamics that smaller customers have that we try to help them with. And then from my perspective, there's a certain amount of volatility with that.

But like I said before, stuff is becoming more predictable over time even if it might not be the level of what some of those customers want. So we're getting better visibility as time progresses. .

Is there anything -- you mentioned SSD sales.

Anything else driving your other sales in terms of enterprise, there's been very strong growth over the last year?.

I do think there is demand for data out there on-prem and some of that's probably not being serviced, I mean, as well as it could be if there weren't some of the supply constraints, Mark. So yes, I think there's probably some underserved demand. But it may be part of other build-outs as well.

It may have problem getting compute or they may have problem getting networks so they don't do the entire build-out. I think this is going to shake out over the next few months. .

Next question comes from Mehdi Hosseini with SIG. .

I want to get your thoughts on nearline mix expectation for '22. And how we should think about the migration from 16 to 18 and then to 20, especially given your commentary that was focused on 20 terabyte. And I have a follow-up. .

Yes. Mehdi, we're largely transitioned to the platform that can actually give 18s or 20s if we wanted to or back to 16s, if we wanted to. So we mix according to what the customer demand is. We don't really build a theoretical mix..

So we're talking to customers. Some people aren't ready for transitions to 20s. Some people want to stay on 18. Some people want to stay on 16 and so we're here to serve them. The fact that we have these new platforms what are changes tweaks that were to this common platform will actually put us in a little bit better cost position.

And I would say relative to the aggressive ramp that we made, we referenced in our prepared remarks, the 20-terabyte ramp is going to be a very, very aggressive ramp. So -- and that's what we're staging for in this quarter -- last quarter and this quarter.

But that will be transitioning over to the next -- over the course of this calendar year to higher and higher bonds. .

Got it. And then just going back to the gross margin topic. I understand the mix impact. You also highlighted material cost that has gone up. And I want to better understand how you're able to pass on that incremental cost to your customer. Would it be fair to say that there is a really unusual pricing dynamic for different products.

And in that context, would you be able to pass on that incremental cost increase to customers?.

Yes. To be specific, most of the cost increases, we said not all, but most of them are freight and logistics related, especially when we don't or the customers don't predict the demand perfectly. And again, it's a very hard -- difficult world to get the right kits in the right place at the right time that everybody is trying.

And then you have to pay the freight and logistics fees to get the stuff there as quickly as possible. That becomes problematic. We don't necessarily look first to pass that along. We work with our customers who are supply chain experts themselves to find ways to mitigate those costs because everybody really wants.

That's in the spirit of partnership now in the supply chain. .

There may be places where we will ultimately have to pass those costs along. And that will -- there's a time lag associated with that, of course, as we run the plays that we have. But from my perspective, we have deep discussions with our customers on this. They understand, and in some cases, they run massive supply chains themselves.

They understand exactly what's going on. So we work together with them on it. .

Yes. I would say that the favorable price environment is mainly related to the good alignment between supply and demand, not too much on transferring of cost from a supplier to the customer. .

But most of our investments are going to head some media for mass capacity now. They're really long lead investment cycles and things like that. So that's what we're focused on. .

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

This is Jeff Rand on for Sid. How should we think about the trajectory of operating expenses as we go through calendar year 2022? I would assume you'll see an uptick in travel and labor costs, but perhaps a decline in some COVID safety costs. .

It's a good question. I would say in the December quarter, OpEx came up a little bit lower than what we were expecting. Part of the reason is exactly what you were saying. We were not expecting the resurge of the COVID situation. So our travel was kind of limited again in the December quarter.

We think this -- now will start -- this situation will start to improve possibly already in the March quarter and in the following quarters. .

So probably our OpEx will increase a little bit through the calendar year, still in the range that we discussed last quarter between the $340 million and $350 million per quarter, which is right now what we expect. .

Great.

And then on the nearline side, how do you think about your gross margins of your higher capacity drives as you continue to increase capacity? Should the 20 terabytes have a similar gross margin profile to the 18 terabyte when fully ramped?.

Yes. I think there's opportunities, of course, to increase as we introduce any new technology node, whether it's 20 terabytes or the generations that come after it. A lot of that comes down to how fast can we get up the media and head yield curves and where our scrap bills are and things like that, but they're firmly under our control.

So we transition according to what customers need. We transition according to how fast we can based on all of our internal metrics as well. And so I think there is opportunity to build that over time. .

Your next question comes from Ananda Baruah with Loop Capital. .

Yes, 2 quick ones, if I could. I guess one for each of you. Dave, any change over the last 90 days in your perspective on sort of nearline demand either in terms of -- and you guys just gave a growth outlook. But I guess, either in terms of length of cycle or punch of cycle, would love any context there. And then just a quick follow-up. .

Ananda, against the big backdrop, I think, no. Going -- at the start of the pandemic, we knew that work from home and much of the challenges that people had getting IT professionals to work on on-prem solutions. All that meant people pushed into the cloud. That -- the cloud is growing faster than we thought because of a lot of that push.

I think -- and it's not just storage, of course, there's compute, there's network and there's other parts that are really stressing those businesses as well. But the storage will come. .

And so we think it's been fairly predictable in the conversations with our customers about what kind of build-outs we want to do. we think there's more opportunities because the value of the data just gets better and better.

So there hasn't -- even though there are temporary supply chain problems for a lot of people out there, I don't think there's been any real significant change shift in the mass capacity demand. .

Okay. That's super helpful. And then just a follow-up for Gianluca. Gianluca, you sort of made mention briefly of ASPs a few moments ago. Like can you just describe to us how you view ASPs? And you had mentioned sort of pretty aligned supply demand.

Could you also just sneak in some context about your capacity situation? And do you need to put on more capacity to meet the demand as you go through the year?.

Yes, Ananda. As you know, we are spending a relevant amount of CapEx every quarter. So the fact that the supply and demand are now very well aligned. It's not because we are not investing is because demand is strong. And we put in place the capacity that is needed and try not to put more than what is requested.

Of course, because there is some seasonality through the year, there are quarters where that capacity is not exactly matching demand. .

But in general, part of our job is to estimate demand and define what is the CapEx that is needed to match the demand and satisfy our customer demand without putting capacity that is not needed. That is the main driver for the pricing.

And in the last several quarters, as we have seen, the pricing environment has been much better than a year ago or 2 years ago. And we think this industry deserves an appropriate return follows a significant investment that we are making and the industry in general is making. And all the value that we deliver to support the mass capacity growth.

And this is what we are driving for. .

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

Dave, maybe first off, it seems like you're getting really good traction and adoption for the 20-terabyte drives over the next few quarters.

Can you give us your thoughts on the HAMR drive, whether the common platform could potentially delay adoption of HAMR or is that still on track? And how is customer acceptance of the next-generation HAMR drives?.

Yes. Thanks. So the HAMR has always been planned to go into the common platform. There will have to be some changes specifically for that. Exactly to your point, we plan to continue to do customer evals. So the customers know exactly what kind of behaviors they'll get. There will be higher capacity drives when they ultimately come with HAMR too.

Very happy with the progress actually on HAMR. So I think we said a couple of quarters ago, this is happening right now. We're in an intense product development, engaging with customers. They're partnering with us on it. .

As far as transition goes, exactly to your point, a lot of people know fab. They know that you have to take some stuff offline to replace it with other stuff. And we'll do that as we see the yields come up and the opportunity there. We'll have to work with the customers as well on their adoption profile.

But we're in the middle of all those discussions right now. .

Great. And as my follow-up question, maybe for Gianluca, in terms of the investments into the company. You've obviously invested a lot into HAMR and the common platform.

Can you discuss some of the investments maybe on a big picture basis for stuff like your Lyve platform? How much investments are needed to kind of build up that business, additional solutions offerings that will come out of that platform over time? How much more do you need to invest as it relates to Lyve?.

It's a very good question. The Lyve business is mainly based on hard disk, is a cloud storage that is based on hard disk. So it's not really requiring a lot of additional CapEx. It's part of what we use for our normal production that, depending from demand, we move between customer allocation and the internal need. .

Yes. These aren't big investments, Patrick. But what I would say is that we constantly look for ways that we can develop go-to-market chains in particular that can use the products that we're making into -- in different ways. So think circularity and recycling the product and having outlets for product.

There's a lot of opportunities that we have in our systems business and also inside of the Lyve platform, and we think about this as a way to help us not only construct channels that are economic great benefit to customers. But also ultimately help us manage the panoply of different parts issues that we're going to see in the world given our scale. .

Your final question comes from the line of Jim Suva with Citigroup. .

My question is on pricing of your products. It seems like the past -- geez, it must have been 2 years, has been much stronger than historical precedents for pricing. Do you foresee that happening? How much longer? Because you mentioned some of your components are going to be freed up here in the next few weeks.

Then you mentioned some others are going to be elongated.

So I'm just wondering for pricing how long do you think we'll be in this environment of much more historically stronger than what normal is?.

Right. Jim, I think it's right to point out that if you look back 5 or 10 years ago when we had so many client server drives that were in our factories, very different environments than when you have mass capacity with really long lead times and things like that.

So as we've transitioned over the last couple of years to the mass capacity, then we can actually say these are the investments we're making. These are the starts we're doing, and we can get working on long-term agreements and just predictability within the markets in that. .

Of course, there can always be some disruption to the extent that there are more and more heads and media related that's under our control. If there are external piece parts, then like COVID has affected quite a number of suppliers of ours, but also customers and end markets, that's where things get a little bit more volatile.

But I think if you -- from my perspective, generally speaking, as we go to more and more mass capacity drives as the drives have more heads and media in them, then things get a little bit more predictable because we have to get the return on investment. .

There are no further questions at this time. I will now turn the call back over to management for closing remarks. .

Thanks, Brent. As you can all see, calendar '22 is an outstanding year for Seagate, and we believe that our strong product and technology road map, combined with our ongoing solid execution position as well to capture secular growth opportunities for mass data infrastructure for years to come.

I'd just like to once again thank our employees for their outstanding efforts and our customers and suppliers and investors for their continued support of Seagate. Thanks for joining us today. .

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect..