Good afternoon, everyone, and welcome to the Seagate Technology Fourth Quarter and Fiscal Year 2022 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.

And at this time, I'd like to turn the conference call over to Shanye Hudson, Senior Vice President; Investor Relations and Treasury. Ma'am, please go ahead..

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've posted our earnings press release and detailed supplemental information for our June quarter and fiscal year 2022 results on the Investors section of our website.

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

We've not reconciled certain non-GAAP outlook measures because the 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 efforts.

Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today, and should not be relied upon as of any subsequent date.

Actual results may differ materially from those contained in our – in or implied by these forward-looking statements, they're subject to risks and uncertainties associated with our business.

To learn more about the risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website.

As always, following our prepared remarks, we'll open the call for questions. Now I'll hand the call over to Dave for opening remarks..

Thank you, Shanye, and welcome to those of you joining us on today's call. Our June quarter financial results reflected near record of data center demand, contrasted with the impacts from a confluence of macro headwinds in other end markets, particularly in the consumer-facing legacy markets.

We believe the secular data trends driving long-term demand growth for mass capacity storage and infrastructure remain intact, as I will discuss a bit later. However, the impacts from COVID lockdowns in Asia, non-HDD component shortages and global inflationary pressures intensified late in the quarter.

Our resulting June quarter revenue and non-GAAP EPS declined quarter-on-quarter to $2.63 billion and $1.59, respectively. While macro events are weighing on our near-term performance, Seagate's financial achievements for fiscal 2022 were noteworthy. We grew revenue by 9% year-over-year, fueled by 24% growth in our mass capacity products.

We expanded profitability even faster than revenue, leading to fiscal year non-GAAP gross margin above 30% and non-GAAP operating margin above 18%. And we achieved record non-GAAP EPS of $8.18.

In fiscal 2022, we generated $1.3 billion in free cash flow, our highest level in 4 years and maintained our commitment to returning cash to our shareholders, funding $610 million in dividends and repurchasing 9% of our shares outstanding.

We are also demonstrating technology leadership and executing our product road map to support the growing demand for data. We attained our fastest ever ramp with a 20-plus terabyte nearline platform, handily beating the projections that we made at the start of the quarter.

We are on track to achieve volume and revenue crossover with the 18-terabyte drive in the current quarter. The 20-plus terabyte product family is based on our highly successful common platform design, which has enabled us to scale and ramp the yield quickly, as evidenced by the results I just shared.

We have the flexibility to extend into the mid to upper 20 terabyte capacity points with minimal changes to our design, which allows us to meet customers' timing, readiness and offers an attractive cost profile for both customers and for Seagate.

We have worked tirelessly over the last 3 to 4 years, improving the resilience of our supply chain, aligning our mass capacity product portfolio to our customers' needs and strengthening our financial foundation.

Our operational execution, combined with structural changes that have taken place in the industry, namely the transition to mass capacity products and increased supply discipline, support our view that the company is fundamentally stronger today and better positioned for the future. Let us now turn to the current market environment.

Despite the ongoing impacts of COVID lockdowns and supply challenges, mass capacity revenue was flat quarter-over-quarter, due in part to strong cloud customer adoption of our 20-plus terabyte nearline drives. U.S.

cloud data center demand remained strong However, persistent non-HDD component shortages have led to inventory imbalances, precluding new data center build-outs from being completed.

These, along with other supply disruptions have led to a buildup in inventory levels across a broad spectrum of customers, a trend that continued through the end of the quarter.

As macro uncertainties and inflationary pressures intensify, we expect customers will increasingly focus on reducing their inventory levels, while maintaining the ability to address end market demand.

At the same time, our Asia-based cloud customers are dealing with the impacts of COVID restrictive measures, which have had four reaching effects across all of the end markets that we serve in the region.

In the VIA markets, recall that many of the major projects driving demand are in the Asia region, particularly in China, where lockdowns are impacting our near-term revenue. While the situation remains fluid, we are confident that mass capacity demand growth will resume once lockdowns ease and inventory levels normalize.

Within the legacy markets, demand rapidly deteriorated at the end of the quarter, as lockdowns and surging inflation severely impacted consumer spending for PCs and external drives. Exiting the June quarter, the legacy business represented only 20% of our HDD revenue, which is a historic low.

In response to the current business conditions, Seagate is taking actions to maintain strong supply discipline and a favorable pricing environment. We are reducing our manufacturing and production plans, while continuing to focus on driving efficiencies in the factory and across supply chains.

We are maintaining prudent cost controls across the business and executing our product road map which also helps to support our customers' TCO objectives. While the current environment is challenging, the multiple secular drivers fueling long-term demand for mass capacity storage have not changed, and, in fact, continue to expand.

Digital transformation is still in the early innings, according to leading cloud service providers who have estimated that only 10% of corporate IT has moved to the cloud.

New AI applications continue to emerge with the AI engines requiring a massive amount of new data for training, data that must be captured analyzed, stored and moved across a more distributed and multi-cloud network.

And as the digital and physical worlds begin to converge, enterprises are employing data-intensive digital twins to enhance decision-making and overall business efficiencies.

These trends dovetailed into a view that businesses will need technology investment strategies to remain competitive in a data-driven world, which includes the need for mass capacity storage and infrastructure.

Seagate is poised to benefit with a broad product portfolio of cloud and edge infrastructure solutions from mass capacity HDDs to enterprise systems to our live cloud and mobile service offerings.

We are executing our development plans for the 30 terabyte plus product family based on our innovative and HAMR technology, which enables capacity points of 30, 40, 50 terabytes and beyond to support future data demand growth. Seagate's innovation extends beyond our HDD technology leadership.

We're garnering recognition for our systems portfolio, capturing the coveted Product of the Year Award for Hardware Infrastructure at this year's NAB show for our CORVAULT storage system.

CORVAULT has also gained customer attention with its unique autonomous drive regeneration technology, which combines our device and systems expertise to enable self-healing capabilities. These systems provide enterprise CIOs with peace of mind that their data will be protected, while offering a strong TCO value proposition.

Additionally, technologies such as self-healing, distributed data protection and secure rates play a critical role in reducing the environmental impact of our products. Drives with these technologies can be repaired, reused or recycled rather than just discard it, thus helping to preserve the ears and precious resources.

These efforts are critically important to Seagate and a key pillar of our product circularity strategy. We are also receiving very positive feedback from customers on a global basis for our work in this area. In closing, Seagate has a broad exposure to the strong secular tailwinds driving demand for mass capacity storage.

These trends remain intact, which lends confidence that growth will resume as supply constraints and COVID lockdown impact ease. Seagate is fundamentally a stronger company today and is exceptionally well positioned to endure the current market environment.

We have the right product portfolio, deep customer relationships and operational agility to optimize profits and fuel growth. I'll now hand the call over to Gianluca to discuss the financial results..

Thank you, Dave. While demand for our mass capacity products remain very healthy in the June quarter, the intensifying economic pressures buildup of inventory at our customers and COVID restrictive measures that Dave discussed earlier and the most significant impact on our results than we were anticipating, particularly in the legacy business.

Despite lower-than-anticipated revenue level and extraordinary cost pressures, our non-GAAP gross margin expanded slightly to 29.3% in the June quarter with HDD gross margin remaining comfortably inside our target range of 30% to 33%.

Our results are due in part to steady demand for our mask capacity products and a mix shift toward higher capacity drive.

In the June quarter, total hard disk drive capacity shipments increased slightly to 155 exabytes, of which the mass capacity market made up 90% of the total, with shipments of 139 exabytes and 4% sequentially and 12% year-over-year. Our nearline products contributed 119 exabytes, up 1% sequentially and 17% year-on-year, most or by strong U.S.

cloud customer demand for our 20-plus terabyte product family. With richer mix of high capacity nearline drives supported a record total HDD capacity per drive of 7.8 terabyte compared with 5.4% terabyte just 1 year ago.

On a revenue basis, mass capacity represented 80% of total HDD revenue at $1.9 billion in the June quarter, less compared to the prior quarter and slightly higher than the prior year period. Strong U.S.

cloud demand, combined with a sequential improvement in the VA market albeit of very weak March levels, offset lower-than-expected sales into the Asia south markets, which have also been affected by COVID lockdown.

While we believe the end market demand disruptions are temporary, we are mindful of prevailing macro uncertainties, which influence how quickly the VA and other mass capacity markets will return to strong annual growth. Within the legacy market, revenue was $489 million, down 24% sequentially and 43% year-over-year.

The decline was most pronounced in the client PC end markets, which now represent a mid-single-digit percentage of our overall revenue. Consumer demand also deteriorated more than anticipated, reflecting the sharp rise in inflation impacting consumer discretionary spending.

Finally, revenue for our non-HDD business was $219 million, down about 8% sequentially and 21% year-over-year. We saw a sharp uptick in our system business as we were able to mitigate some of the component shortages we have been experiencing, which enabled us to begin shipping some of the record order backlog.

However, component availability remains a challenge and impacted the SSD business during the quarter, leaving us unable to fulfill all the customer demand. We continue to work with our suppliers to support customer demand as constrained yield Moving to our operational performance.

Non-GAAP gross profit in the June quarter was $771 million, corresponding to non-GAAP gross margin of 29.3%, up 10 basis points quarter-over-quarter. As noted earlier, the increased mix of mass capacity products and transition to higher capacity drives more than offset lower business volumes and higher component costs.

Non-GAAP operating expenses were $349 million, slightly up quarter-over-quarter and in line with our expectation, as business drivers and sales and marketing activity in resumed. Our resulting non-GAAP operating income was $422 million, or 16.1% of revenue.

We will continue to focus on managing costs and balancing supply with demand to position the company to expand operating margin back into the target range of 18% to 22 when top line growth resume, which we believe could begin later in the fiscal year.

Based on diluted share count of approximately 117 million shares, non-GAAP EPS for the June quarter was $1.59. Moving on to the balance sheet and cash flow. Inventory increased to approximately $1.57 billion, as we ended the quarter with higher finished goods consistent with the rapidly changing business environment.

We continue to maintain a higher level of critical components and use the ocean freight to reduce logistic cost and support future product demand. Based on our current outlook, we expect inventory to decline slightly as we move through the calendar year.

Capital expenditures were $72 million for the quarter and totaled $381 million for the fiscal year or just over 3% of fiscal year revenue, expecting our focus on aligning supply and demand. Given the current business environment, we will continue to carefully manage our investment and supply.

Free cash flow generation was $108 million in the June quarter, down from $363 million sequentially, due to a combination of factors, including higher inventory levels, the timing of sales and which was heavily weighted to the back end of the quarter. This impact should normalize in subsequent quarters.

Overall, we are pleased with our free cash flow for fiscal 2022, which increased 13% year-over-year to approximately $1.3 billion. We currently expect continued growth in our annual free cash flow generation in fiscal 2023, depending on the pace of economic recovery.

Consistent with our commitment to returning cash to shareholders, we used $152 million for the quarterly dividend and $486 million to reverse 6 million ordinary shares, exiting the quarter with 210 million shares outstanding and approximately $2.4 million remaining in our authorization.

Over the past 2 years, we have reported more than 20% of Seagate share outstanding at an average price of approximately $71 per share. We ended the fiscal year with cash and cash equivalents of $615 million, and total liquidity was approximately $2.4 billion, including our revolving credit facility.

Total debt balance at the end of the quarter was relatively flat with the prior period at $5.6 million. Adjusted EBITDA was $2.5 billion for fiscal '22, resulting in total debt leverage ratio of 2.2 time. As we enter fiscal 2023, we expect macro uncertainties and non-HDD component shortages to continue pressuring our end market over the near term.

Drawing on our data of experience in managing the company through dynamic industry environment, we are taking action to carefully manage our cash and safeguard profitability, including managing our supply to restore healthy customer inventory levels.

With that in mind, our outlook for the September quarter is as follow, we expect revenue to be in the range of $2.5 billion, plus or minus $150 million. At the midpoint of our revenue guidance, non-GAAP operating margin is expected to be slightly above 15%. And we expect non-GAAP EPS to be in the range of $1.40 plus or minus $0.20.

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

Thanks, Gianluca. Last quarter, I expressed confidence in the long-term growth trajectory of our business, and that view holds firm today. The multiple secular trends fueling demand for mass capacity HDD storage also catalyze growth for our system solutions and live services business and Seagate is well positioned to benefit.

Our products are funded on our drive innovation, and we continue to execute our strong HDD product road maps. We are shipping the 20-plus terabyte family of nearline drives and high volume, and we are well down the development path towards launching our 30-plus terabyte family of drives based on HAMR technology.

We expect to begin customer shipments of these HAMR-based products by this time next year. Seagate will navigate through the near-term market dynamics by focusing on what we do best, namely run efficient and predictable operations, partner closely with our customers, put in place prudent spending controls and align the supply with demand.

We believe that these actions position us to quickly return to our long-term financial model once these macro pressures abate, delivering 3% to 6% revenue growth and operating margins of 18% to 22% of revenue, all the while maintaining our commitment of returning capital to shareholders.

While the dynamic market environment is disrupting typical demand patterns, the underlying demand for data remains strong, which supports flat or even slightly higher revenue in fiscal 2023, depending on the timing and pace of the economic recovery.

I'd like to conclude by expressing gratitude to our employees for their incredible efforts through the fiscal year. I'd also like to thank our suppliers, customers and partners for their contributions to our results and our shareholders for their ongoing support. Gianluca and I will now take your questions..

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from Aaron Rakers from Wells Fargo. Please go ahead with your question..

Yeah. Thanks for taking the question. I guess I want to go down the path on the nearline business.

As you look back over this past quarter, relative to the 119 exabytes that you shipped, I guess the first part of the question is, did that play out largely as you expected? Did you see demand slow down at all through the course of the quarter? Any kind of changes relative to your initial expectations coming into the June quarter? And how are you currently kind of thinking about the demand profile of that end market, considering your comments on inventory as you kind of look at your current quarter guidance? Thank you..

Hey, thanks for the question, Aaron. If I look at where we were two quarters ago, predictability of the cloud, 20-terabyte transition, those kind of tactics that you referred to. I think it's been fairly predictable through the end of last quarter. We do see, in particular, in China and some of the CSPs, some inventory overages.

So what we're doing to try to compensate for that is to not make sure we don't pack into it, not building too many '16s and '18s, if you will, and hurting up the transitions to the 20s there. So it's more of a looking forward where I see issues. It's not really with U.S. CSPs.

I mean everyone is having the same supply chain issues out in the world, but some people were navigating it differently. And I think there's a good market demand for mass capacity and especially in the cloud businesses.

I do think there are some temporary issues that people are getting through given their supply chain points or COVID lockdowns or things like that..

Yeah. And any thoughts on how we think about the end demand? I know in the past, we've talked about kind of a longer-term growth rate in that nearline market being kind of in that 30%-plus range.

Did you think that to kind of get back to that flat to slight revenue growth into - for fiscal '23, that, that's how we should kind of think about the demand profile into the back half of the fiscal year? Is that kind of how you're thinking about it?.

Yeah. So we're going to pause a little bit because you know, make sure the inventory flows through here in the front half of the year, but we'll eventually get back on that.

And we do have products coming higher capacity points, which actually helps drive the exabytes demand as well as those customers wake up, maybe they were stuck on '16 before and now they're going to be a 20-year plus - 20-plus, right? So that will help the exabytes demand as well.

Ultimately, we're going to be driving out of the back of this fiscal year, like we said, 30 terabytes. So we should get back to some healthy exabytes growth. But I think what we're seeing right now is very tactical..

Okay. Thank you..

Thanks..

Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question..

Yes, thank you. Thanks for taking my question. Dave, you mentioned a return to growth later in the fiscal year.

I was hoping you might give us some color around how you're thinking about the trajectory of recovery, both in mass capacity, are you assuming that you basically have a 2-quarter sort of slowdown here as inventory gets worked down and the demand headwinds are made. And is gross margin going to be following a similar trajectory.

So are we sort of at the bottom of gross margin or should we expect gross margins to contract further from here? Thank you..

Thanks, Wamsi. I'll let Gianluca answer the gross margin point. From a demand perspective, the legacy was hit pretty hard as we talked about in the prepared remarks. And that's - there are a lot of legacy products that are - the inventory is too high.

Now on things like PCs, it's - so de minimis as a part of our portfolio now that we're probably not going to pack anything into it, but some of the legacy products will suffer this quarter and then they'll come back a little bit. On - the stuff it's more salient for us now because 80% is mass capacity.

There still are some things like the VA market that are not going through their normal seasonality gyrations. They're actually more impacted just because of COVID lockdowns and so on. But we do think that after we get through that period, whether that starts at the end of Q1 or Q2, we don't know right now.

But we think there's a lot of pent-up demand that's coming.

And so that's one of the reasons what we're doing is we're changing over from some of the more - the older products that might be going into life to some of our newer products like the 20-plus terabyte, some of the mid-cap nearline products is making sure that the inventory that we do have is more current and when those customers are ready for the strong poles again, then we have the best stuff out in front of us.

Gianluca, do you want to talk about gross margins?.

Yeah. Clearly, we are positive on our expectation for the business to recover soon and control sequentially. I think seasonality will be different than what we are seeing in the last year, for example. I would say mass capacity is actually strong already. We have done five consecutive quarters of record or near record revenue and volume.

And gross margin, actually, the trend in gross margin is a bit different depending from which segment you are looking at. The legacy part and the non-HDD part has seen some decline in gross margin in the last four quarters. The mass capacity part has been very strong.

So at the total level, we don't see a lot of change because the increase in mix to the mass capacity basically is offsetting the decline for the legacy and the nearline hard disk.

But in future with a continued improvement in mainly mass capacity and the mix continues to go into the 80% plus of the total being mass capacity that should bring an improvement in gross margin..

Okay. Thank you so much..

Our next question comes from Krish Sankar from Cowen and Company. Please go ahead with your question..

Yeah, hi. Thanks for taking my question. The first one is for Dave. You mentioned the U.S. CSPs are pretty strong. How do you think about the demand into the calendar second half of this year? Or do you think that is the next shoe to drop? And then quick question for Gianluca.

You said you have like $2.4 billion remaining in the buyback, but your cash levels have come down. So how to think about the sustainability of the buyback over the next few quarters? Thank you very much..

Thanks, Krish. I don't think there's another shoe to drop to be very clear. I think depending on which customer, there may be very specific challenges that they have in their data center build-out. But in general, they're the cloud storage demand growth continues and their CapEx investments continue.

And so I think in some places, it's becoming very predictable with them. And so that's why one of the reasons why we've kind of established the businesses we have as we pivot our mass capacity.

It's interesting right now, but I think most of the capacity transitions that we're talking about with 20 terabytes and beyond, are the – people we still have yet to transition are the people who are in the markets that are actually most impacted by some of the COVID shutdowns and things like that.

So that's the way I think about it, if that's all – that helps. And then Gianluca, can answer the question..

Yeah. We are very committed to our shareholder return program, and so to both the dividend and the share buyback. As you said, we still have $2.4 billion of – as amount authorized for our share buyback. Our free cash flow in fiscal Q4 was lower than what we were expecting for the reason that I explained in the in the remarks.

Of course, we expect free cash flow to improve, strongly improve in the next few quarters and that will help us to continue our shareholder return and also increase our cash balance..

Thank you very much. Thank you..

Our next question comes from Timothy Arcuri from UBS. Please go ahead with your question..

Hi, thanks a lot. This is Jason on for Tim from UBS. Just a couple of questions. So my first one is, as you noted, there has been a lot of concerns around leaking consumer demand. I know consumer legacy market is still a much smaller portion of your business than nearline market.

But how can we think about the trajectory of your legacy businesses in terms of exabytes shipments for the second half of this calendar year? Also, could you provide the same color on the DI margin in terms of exabytes shipment as well? And I have a follow-up. Thank you..

Thanks, Jason. So on the legacy demand, the consumer facing. So for example, the USB drives and the like, been a strong market through the COVID work-from-home period. Right now, the consumers in the world have decided that they're spending money on other things.

I think everyone knows this around - you can see these consumer spending patterns in many, many different markets, and we're not immune to any of that. I think that some of the stuff that we have to make sure we pull back and position the right inventory.

Those markets, in particular, are not going away, they may be slowly going down, but they're not like the PC or notebook markets, which are effectively already gone. So we wouldn't have to divot those markets anymore because they're effectively gone. Mission-critical has been a little bit choppy through the COVID period.

It is slowly declining as well, but it has a long tail, so that's another place where there's probably a little bit too much inventory. So when we lump in together in those legacy markets, they will have longer tails that we're talking about now because the ones that we're going to go to zero effectively already gone there. So Gianluca….

For exabytes we have a fairly low in the June quarter. We expect September as Dave was saying not to be a strong quarter for legacy. Now usually, it is the quarter where you see some improvement from seasonality. We don't see this happening this year. But in December north is a quarter where you will see some improvement.

And then the second part of the fiscal year should anywhere..

Got it. Thank you. And my second question is on the product road map. Your main competitor shared some color on their 20 and 22 terabyte product plans, where they're expecting the 20TB close over by the end of this year, going and so I was wondering if you could share any color or time lines on your product brands for 20 and 22 drives? Thank you..

Yeah. We said in the prepared remarks that our '20 would cross over relative to our '18, if you will, this quarter. So the quarter we're in right now. So we're ramping the '20 very hard. We met the fastest growth target that we never had before.

We said that a couple of quarters ago, and we've actually met that very happy with the 20-plus terabyte family. There's a lot of variants of this family. There are variants that continue to be CMR. There's variants that are SMR. Those drives are out there in the world in various places.

As a matter of fact, I think I said last quarter that most of the 20s are actually being used above 20 because of some of these variants. So we're fairly happy with how that's latching on the world. It's already at high volume. And with small changes, we can continue that a little bit.

To the conventional platform we don't need any major technology transitions with a bigger change to the heads and media and the recording channel and so on by the end of the year, we'll take that platform to 30 terabyte. So we're very confident in our product portfolio.

We don't really talk about all the details of 2022, you know, '23, whatever people are using things out because I don't think that setting the right narrative, it's more just - we want to make sure that we have flexibility with our platform that we're on today and then launching the 30 share by platform in the future with all the technology that comes in there, we're confident and we're driving it as hard as we can..

Thank you very much..

Our next question comes from Patrick Ho from Stifel. Please go ahead with your question..

Thank you very much. Maybe, Dave, first off, on the big picture basis, you talked about introducing HAMR technology at 30 terabytes next year.

Given the common platform that you have that you mentioned about 20 terabytes to the mid-20s and the upper 20s, how do you correlate the demand trends from your customers in supplying these very attractive cost-efficient drives that you just talked about, along versus, say, the 30-terabyte HAMR drive, which I assume are going to be a little more costly in its initial ramp?.

Yeah. Thanks for the question, Patrick. So it is a question of what can you make in high volume, where do we get our scrap and yields? And since there are so many heads and disks and they are component, readiness for the ramp is critical in our margins. And then going to the 30 terabyte there are cost adders.

There's a number of different technology transitions, not just to the right or the HAMR, if you will, the media has to change, the reader has to change. All of the platform things, the electronics sort of organic, everything that gets you to 30 terabit has to change.

So we're very confident in that, but how fast do we make that turned, that's a good question. A lot of it is our ability to go to work the yields in the scrap and cost to the point where we need to be. I think from a customer perspective, that's a fairly big jump from one to the other.

And the TCO benefits when you think about building a data center and running it for 5 to 7 years, you're willing to entertain the discussion and then the more positive feedback you see on those initial drives, the more you'll be able to drive it hard. We've had customers that have been working with us on these technologies for a number of years now.

And I think when we launched the product, I think they'll be very open to those discussions because they see tremendous benefit as well. So I think balancing all these things is exactly the point of what we have to do in our operations, and that's what we're focused on..

Great. That's helpful. And just as my follow-up question for Gianluca.

In terms of the cost pressures from COVID elevated component costs, logistics costs, how much of an impact was it this past quarter? And how do you see I guess, those additional basis points pressure on a going-forward basis?.

Yeah. In the June quarter, we had a lot of cost pressures, not only from COVID, but also for inflation, some of our component costs have increased. As we have seen, we were able to keep the gross margin stable, actually slightly up quarter-over-quarter despite a lower revenue.

So we are we are taking our measure to offset the majority of those cost increase. Mix is also now, of course, very important to us. I would say for the future, the part that is coming from inflation is probably not going to a date very quickly, so we'll probably has the same impact for the next couple of quarters.

On the COVID side, on the logistics side, we have seen a little bit of improvement in the June quarter compared to the prior quarter. But I think I said in the past that, the COVID cost was about 200 basis points of our gross margin for June it was probably around 150, this is not of course including all the extra costs coming from inflation..

Great. Thank you very much..

Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead with your question..

Hi. Thanks so much for taking the question. Dave, you talked about cutting production. I was hoping you could expand on this, I guess, specifically in terms of utilization rates, where do you expect to be over the coming quarters relative to the past couple of quarters.

And I guess, given the production cuts and given how you're vertically integrated, I guess I'm a little positively surprised by how well gross margins are hanging in.

I guess, what are some of the offsets that you're incorporating in your September quarter guidance?.

Yeah. Thanks for the question. I think I'll ask Gianluca to break down some of the - the F Q1 bridge, if you will, on gross margins. But let me give you a little perspective. Where we see too much inventory in the chain is in some of the markets that we were planning on building towards, and we don't want to do that.

If I've learned one lesson in my life its when you see so much inventory, don't back into it. Its exacerbated a little bit by the linearity of last quarter was 4. And therefore, almost by definition, you go to the next quarter, and it's linearity is poor again.

And especially in these times, when you get out to the back of the quarter, you don't have an opportunity to cross ship you know, because claims are choked and that drives costs. We're trying to put on a little bit more inventory so that we can use ocean freight, it becomes very problematic.

And so that's one of the reasons why we're intentionally not packing into it. Relative to the build plan, so yes, by slowing things down on some lines that does have some financial impact.

What we're really doing is pivoting over since the lead times, wafer lead times are quite long, product lead times are quite long for, say, 20 terabytes, pivoting more towards 20 terabytes beyond or pivoting more towards the new mid-cap nearline drive, we can do it. It just doesn't happen very quickly.

And so the factories are still relatively full of that - that's help exactly your question.

You don't see as much absorption hit net-net, even though you're taking down the old products as pushing out the new, but there's an intention around not pushing too much into the chains, not having to price that stuff to move eventually into customers that really don't need the product right now.

And I would say this is where inflation is playing a role for everyone because you have the CFOs of those companies saying hey, slow down a little bit, and we ought to be able to help our customers do that. So Gianluca, you want….

Yeah, we will have some costs coming from the underutilization, but we also have an increase in the volume from our 20 terabytes sequentially, and that is positive for the gross margin. I also have to say the pricing environment, especially in the market part is still very favorable.

So we don't see a - despite the decline in revenue, we don't see a major impact to our gross margin and profitability in general..

Great. As a quick follow-up, I guess, to your last statement, Gianluca, just on the overall pricing environment. Generally speaking, when demand softens and you've got excess inventory in the system, there's typically downward pressure on pricing.

But at the same time, the industry overall has been very disciplined in the past, I guess, several quarters, if not a couple of years, you've got inflationary pressures as well. So I guess you've got an incentive to potentially pass through some of those inflationary pressures.

So net-net, how should we think about pricing across the legacy markets and mass capacity over the next couple of quarters. Is there a possibility for you guys to raise pricing? Or is that difficult just given the demand backdrop? Thank you..

Well, first of all, we need to align supply and demand. And we see it now, what Dave was saying before, when there is extra inventory in the business, we need to reduce our supply so that demand and supply are were aligned. When we have that alignment, of course, the pricing environment gets better.

And so right now, we are in the situation of transition from, let's say, in a high inventory to a more healthy business situation. And then, of course, during the rest of the year when demand comes stronger and we're aligned to our supply, we will take any possible action on pricing, but we will look at that later during the year..

I think this is where the LTAs have served us pretty well over time to understand all of the macro economic inputs and like I always say that some of the procurement people that are sitting on the other side of the table from us are – they understand what's going on in commodity pricing and freight, just as well as we do.

So we work together to come up with a predictable outcome. We believe in the mass capacity markets at least that there's going to be a strong rebound coming. And everyone factoring all these things in, I think it serves us well to know exactly what we're building, what we've qualified and what we'll apply.

And so that's what we're trying to do right now is to change the – pivot the operations towards that future supply..

Great. Thank you..

Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question..

Hi, thanks. Good afternoon. Two questions, please. First of all, Gianluca, any help on what you're thinking for CapEx spending this fiscal year? And then secondly, Dave, given that you basically were surprised negatively just a few weeks ago.

I'm just trying to understand the biggest factors that make you come out and say that you should start to see a recovery in a couple of quarters.

You've touched on a few things, but just maybe give us a sense from - about where that confidence is going at when demand holds up on the data center side and two, that you're not overbuilding into like what could be even a worse macro? Thanks..

On the CapEx side, as you have seen, we have already reduced our spending in fiscal Q4, probably for the fiscal year '23 I don't want to change the range. I think 4% to 6% of the revenue is a good range. But for sure, we'll be in the lower part of the range and similar to what we have done in fiscal '22..

Yeah. And I think longer-term discussions with our customers, the bigger the customers there are, the more they're convicted they are on their ultimate need to add capacity because they're the ones that manage cloud storage.

Some of the customers that are having, I mentioned a few people that are smaller CSPs that are having some of the inventory issues, we are working closely with them to make sure that we transition to the right products that so we don't build the wrong thing into it. And that's a very tactical thing.

That's why we have a conviction that this thing is going to be over pretty soon. We're all cognizant of all the macro trends and watching them every day. So I don't want to gloss over that. But I think as far as demand for data products, I do think there's – there will be a rebound coming when all these issues abate..

Great. That's helpful. Thank you..

Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead with your question..

Awesome. Thanks for taking the question. Maybe Gianluca, any comments you can just share on cash flow thoughts as we move into this next fiscal year after a strong 2022? Should we expect growth maybe similar to your comments on revenue or just maybe help us parse out how to think about that? And then I have a quick follow-up. Thanks..

Well, free cash flow, as you said, was good in fiscal '22. We increased about $400 million over fiscal '21. We gave an indication of what we expect for the revenue in fiscal '23, and now you bet comes through, free cash flow will continue to increase, would be the same level of this improvement in fiscal '22, maybe even it could be higher..

Especially at these times, we'll manage cash very carefully, but we also see the mass capacity rebound is what we're projecting that we should be able to - to continue to grow cash flow..

Okay. Super. Thanks for the help. And then maybe along those same lines, Gianluca, just obviously, a more challenging macro environment. But any comments you can help us better understand kind of how you're thinking about OpEx as the quarterly run rate is still kind of 350 or any puts and takes that you can help share there would be great. Thanks..

Yes. I think between 350 and 360 will be in the range through the fiscal year. We have done a strong control of the OpEx in the last two or three years already. So we think we'll start from a good point. September is demand where we have our annual salary increase.

So we expect little bit of increase starting basically the December quarter, but still in the range, 350 to 360 should be the right range for us..

Awesome. Thanks, guys..

Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead with your question..

Thank you. I have a quick clarification. I think you - Gianluca talk about expecting revenue growth can resume later in the fiscal year, but you're not necessarily meaning the December quarter, which means - I guess is that right.

But my question is when I look at the inventory adjustments and your customers, whether in the PC or elsewhere, what is your thinking about when they will get to the quivering point that your customers stop drilling inventory? And what gives you that kind of confidence?.

I'll say, in general, no, we are trying to use this quarter to realign inventory. Of course, as you said, is not - it doesn't depend only from us, but we are reducing our production, and we are taking a fairly low revenue in the quarter in order to do this realignment, So I would say after that, we actually expect to increase revenue sequentially.

So December should be better than September quarter and to achieve the revenue that Dave indicated in his prepared remarks, we need to have a fairly good level of revenue in all the three quarters after September..

Okay. Great. Maybe I'll just jump into my second question. There's a lot of questions on the cloud already. But I'm curious on the enterprise OEM side of the nearline business. Last quarter, you mentioned you were limited by non-supply shortages.

I'm just curious, are you seeing any changes in the demand on that side of the business? And does that business has also as covered as by the LTA as your cloud customers? Thanks..

Yes, is the answer to your question - to your last question, it's a little bit more complicated than some of the cloud customers. But what I would say, for example, in our prepared remarks on the systems business, we talked about how we saw one of the components that we needed to go chase after revenue and we did that.

That's because I think some of the supply-demand picture is changing very rapidly, the things that were constrained components six months ago may not be constrained anymore because of a lot of macro issues. It's not completely all clear yet. There are still component shortages that are affecting the enterprise.

I think also the spending reductions by - again, I always see nervous CFOs, which are talking to the CIOs of the world, you know, that's, I think, impacting us a little bit right now as well.

Look, long term, I believe that on-prem enterprise is going to be healthy because there's going to be hybrid clouds, not just - not just in the public cloud, but also in the private cloud as well. And so I think those will be strong businesses.

They still - they are various challenges there supply-related still, and I think some of that will start to break free over the next six months..

Okay. Thank you..

Our next question comes from C.J. Muse from Evercore ISI. Please go ahead with your question..

Yeah, good afternoon. Thank you for taking the question. I guess two questions. First, you talked on the call about excess inventory in the channel for your various end markets. I was curious if you could rank order perhaps works the best by end markets so we get a flavor of where things need to correct. And then I guess, specifically for U.S.

data centers. You talked in your prepared remarks around a correction there. It sounds like it's a handful of players. Could you provide perhaps more color on what you're seeing there? And when you think that will start to recover for you? Thanks so much..

Yeah, C.J., let me just picture, I got all this right. So the first one was ranked order. I think China generally is the biggest impact. There's impact in distribution channels worldwide consumer and disti so Europe, Americas, they're both down significantly year-over-year, and that's part of the macro malaise that we've been talking about.

The China itself has not only that, but also the VM market and some of the cloud service providers. There's inventory challenges each place, I think, that we're steering at, working through it with those customers. Some of that is macro.

Some of it is COVID lockdowns, there's kind of just trepidation in the market because some of the lockdowns happen and then they go for reopening, they pull inventory in and then they can't reopen. I think the world is going to get through these things, but we just have to kind of wait it out.

Can you ask the answer - or ask the second part of your question again?.

Yeah, sure. In your prepared remarks, you spoke to what I thought I heard was inventory correction that select hyperscale plans.

And so I guess, did I hear that correctly and then maybe if you could provide more color on your expectations for that to be cleared out?.

I don't think there's too much inventory problems as U.S. hyperscalers. I think everyone's having a supply challenges, not necessarily hard drives or whatever. There's - maybe the way I would characterize it is to say that there is pent-up demand for data storage in a lot of markets.

And once the world gets through all of these supply challenges, whether they're power supplies or chassis or compute or memory or whatever it is for the each one individual, I think we'll be in a better place.

People are working this very hard, and everyone's got their own challenges, but I think we're - that's the thing that the world is just not firing on all cylinders like it was maybe 3 or 4 years ago. And I think we will be able to get back to reach some kind of equilibrium over time..

Very helpful. Thank you..

Our next question comes from Thomas O’Malley from Barclays. Please go ahead with your question..

Hey, guys. Thanks for taking my question. My question was just on the long-term agreements that you guys talked about on the call here.

When Micron took down numbers, they were asked specifically about whether those long-term agreements were take or pay, and they kind of talked about the fact that they can't really force customers to take their product.

What gives you guys the confidence that when you're looking at the back half of this year, your customers aren't going to walk away from those long-term agreements if the market looks a little bit worse than it does today?.

Yeah. Thanks, Tom. I kind of agree with what you said. We have to work with our customers on these things. I said, I think last quarter, I talked about co-planning more.

It's just how many units do you need? What kind of products need to be qualified and it has to go out further because as we're making 20-plus terabyte products or even starting 30-plus terabyte products, we need to know exactly how many of the customers are willing to take and how much to use our factory - use inside of our factories.

If something else happened then I think we'd have to work it through with the customers at the time. So it's not really take or pay. And that, from my perspective, the customers have been great working through that. Just trying to give us the right visibility and we hold each other accountable on both sides of the table there. It's working pretty well..

Great. And then just my follow-up is, even if you do assume some accelerated growth in the back half, obviously, the inventory is working down so that helps a bit. Free cash flow does become a bit challenged. If you were to look at an environment in which free cash flow quarterly perspective goes negative.

Can you just talk about or rank order of capital returns? Do you think that you would buy back less stock first? Or do you think that you would rationalize the dividend? Can you just talk about priorities there in terms of where you would be - where you'd be cutting first if the environment kind of persist like it is?.

Tom, I don't see that coming through. I don't see any quarter where our free cash flow will go negative. So we have a capital allocation strategy. As I said before, we want to stay focused on shareholder return. I think our free cash flow will be strong in fiscal year '23.

I don't see the situation you are - you are showing here?.

Yeah. The way I'd say it, Tom, is that we're going to go over the cash flow. We had some period very specific things that Gianluca talked about in Q4. I think we can go recover some of those things over time. And some of it is just too much inventory, like I said, before making sure we're building the right thing.

So I think once we get through that period, I think we're going to be just fine from a cash flow perspective and even have an opportunity to grow it year-over-year. We have a lot of levers that we can still continue to control..

Great. Thank you, guys..

And our next question comes from Kay Cassidy from Rosenblatt Securities. Please go ahead with your question..

Thanks for taking my question. Yeah, just two quick questions.

With all the long-term agreements you have in place, what are the lead times? Or what is the visibility that you're getting from your customers? Second is, are you seeing any change in the trends of lockdowns in China?.

Yeah. Thanks, Kevin. There's different kinds of LTA depending on the market, depending on which specific customer and their appetite in typically six months to a year, the visibility that we're working together.

So - over the last few years, it's gotten longer, so that's good, just making sure we have the right product stage for what they're going to need at that point in time with the predictable economics with them and so on. And relative to China, I think I made a comment earlier, even our own factories have been impacted recently.

So making sure that we're doing the right things for the employees, not working them in places where we don't need the materials and things like that is a challenge.

I particularly – I personally, you think that things are already getting better, but I also think part of the problem is that we said that three or four , five times and people pulled inventory against a reopening, if you will. It's not even much of a matter of what you're capable of in your factory.

It's also what your customers are ready for and whether you can get to just like in the front end of COVID, whether you can get people into build the data centers and all these other things that are going on.

The thing I'm focused on the most is the small business aspect of talking to some of our customers about people who have to go actually go in and do the builds in the smart city builds, the smart buildings, hospitals, things like that. That's where any kind of lockdown just really throw that to a loop.

And I do think that we're going to continue to see some of it, it will be able a little bit and then we're all looking for improvements in Q2, and it's going to have a break free at some point, so..

And our final question today comes from Vijay Rakesh from Mizuho. Please go ahead with your question..

Yeah, hi. Thanks. Hey, Dave and Gianluca, I know you guys mentioned slightly higher inventory levels.

Just wondering if you could help us level set what the inventory levels were, let's say, in China versus or in Asia versus the U.S.? And is your expectation that the inventory normalizes within the quarter here because I think you talked about maybe December quarter revenues start to improve?.

Right. We're taking action to make sure it improves this quarter. Gianluca made the point earlier is I don't think it will improve all the way, but we'll get the lion share of what we do need to get done this quarter.

And again, depending on the pace of some of these recoveries like COVID and some of the other pressures that people are feeling it will happen faster.

And the important thing for us is that we make sure that we pivot the customer qualifications and our product towards the stuff that's more modern, higher margins for us that we can make with – that we can make that people actually want to buy that we don't have to go disrupt market anymore..

Got it. And I think you mentioned utilization levels. I mean, I believe you indicated that the gross margins should be flat sequentially. Is that right, given that utilization still stay high with the 20-terabyte ramping, I guess, right? Even as you thought is on the supply back.

Is that the way to look at it?.

Well, we did not guide directly gross margin, but I was answering to a question. I said the negative impact in the December quarter because of some underutilization cost, but is also positive impact coming from higher 20 terabytes and I also said the pricing environment is also still favorable.

So overall, we don't see major changes to our profitability..

Got it. Great. Thanks a lot..

Thank you..

And ladies and gentlemen, at this time, I'd like to turn the floor back over to management for any closing remarks..

Thanks, Jamie. I'd like to take the opportunity to once again thank our employees for their incredible efforts and recognize our suppliers and customers for their ongoing support this quarter. It's a challenging environment across the ecosystem, and we appreciate all of your partnerships.

Likewise, I appreciate our shareholder community for your ongoing trust in Seagate. Seagate will continue to take actions managed through the current macro dynamics.

However, long term, I'm confident that the secular demand for mass capacity storage and infrastructure remains high and remain excited by Seagate's opportunities to deliver value for all the stakeholders. So thanks for joining us, everyone..

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines..