Seagate Technology Holdings plc (STX) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

Seagate's earnings call indicates strong financial performance with record revenue growth, improved profitability, and significant demand for new products like HAMR. Despite slight revenue guidance concerns, the overall sentiment is positive due to robust demand, operational efficiencies, and resumed share buybacks. The Q&A session revealed confidence in product transition and growth potential in AI-driven markets. These factors, coupled with strong financial metrics and optimistic guidance, suggest a strong positive stock price reaction.

Key Financial Performance

Revenue for June quarter $2.44 billion, up 13% sequentially and up 30% year-over-year. The increase was driven by strong demand for data center products and favorable product mix.

Non-GAAP Gross Margin 37.9%, expanded by 170 basis points sequentially. The improvement was due to increased adoption of latest generation products and ongoing pricing adjustments.

Non-GAAP Operating Margin 26.2%, increased by 270 basis points sequentially. This was supported by strong demand for data center products and operational efficiencies.

Non-GAAP Earnings Per Share (EPS) $2.59, near historic highs, driven by strong revenue growth and operational execution.

Fiscal Year 2025 Revenue $9.1 billion, up nearly 40% year-over-year. Growth was attributed to strong demand for data center products and supply-demand alignment.

Non-GAAP Operating Profit for Fiscal Year 2025 $2.1 billion, more than tripled year-over-year. This was due to operational efficiencies and strong demand for data center products.

Mass Capacity Revenue Over $2 billion, up 15% sequentially and 40% year-over-year. Growth was driven by strong demand for nearline products in cloud and edge data centers.

Nearline Shipments 137 exabytes, up 14% sequentially and 52% year-over-year. Growth was driven by adoption of 24 and 28 terabyte PMR products and ramping of HAMR-based Mozaic products.

Free Cash Flow for June Quarter $425 million, nearly doubled from $216 million in the prior period. This was due to strong profitability and operational execution.

Cash and Cash Equivalents $2.2 billion, increased 9% sequentially. This was supported by strong free cash flow generation and reduced debt balance.

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Operating Highlights

High-volume ramp of two new nearline platforms: Including the industry's first heat-assisted magnetic recording (HAMR) hard drive, which is cost-effective and energy-efficient.

HAMR-based Mozaic products: Three major cloud service providers are qualified, with additional qualifications progressing well. Volume ramp expected in the first half of calendar 2026.

4+ terabyte per disk qualification: Supports cloud workloads with capacities up to 44 terabytes and lower capacity drives for edge workloads. Qualification started with a global CSP.

5 terabytes per disk technology: Expected market introduction in early calendar 2028, with plans to demonstrate 10 terabytes per disk in the lab by the same time.

Global cloud demand: Strong demand for nearline products, with production capacity largely spoken for through mid-next calendar year.

Edge data centers: Growing demand due to data sovereignty regulations and AI-driven insights. Mass capacity hard drives critical for localized data storage.

Revenue growth: Fiscal 2025 revenue increased by 39% to $9.1 billion, with non-GAAP operating profit tripling.

Mass capacity shipments: 151 exabytes shipped in the June quarter, up 40% year-on-year.

Free cash flow: Nearly doubled in the June quarter to $425 million.

Resumption of share repurchases: Expected later this quarter to enhance capital returns to shareholders.

New market framework: Starting in fiscal 2026, focus will shift to two main areas: data center and edge IoT.

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Risk or Challenges

Trade Policy Landscape: The evolving trade policy landscape poses potential risks, though the company currently expects minimal tariff-related impacts. However, there is a need to closely track developments and deploy mitigation strategies to minimize potential future impacts.

Global Minimum Tax Rate: Starting in fiscal 2026, the company will be subject to a global minimum tax rate in the mid-teens, which could impact profitability.

Supply Chain and Production Capacity: While the company has strong visibility into nearline exabyte production capacity through mid-next calendar year, any disruptions in supply chain or production could impact the ability to meet demand.

Customer Qualification Timelines: The qualification of key global CSP customers for HAMR-based Mozaic drives is expected by mid-calendar 2026. Delays in this timeline could impact revenue and market positioning.

Economic and Market Conditions: The company is reliant on strong demand from cloud and edge data centers. Any economic downturn or reduction in demand from these sectors could adversely affect financial performance.

Debt and Leverage: The company has a gross debt of approximately $5 billion. While the net leverage ratio is improving, high debt levels could pose financial risks if profitability or cash flow generation declines.

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Guidance & Outlook

Revenue Expectations: Seagate expects September quarter revenue to be in the range of $2.5 billion, plus or minus $150 million, reflecting a 15% improvement year-over-year.

Margin Projections: Non-GAAP operating margin is expected to expand into the mid- to high 20s percentage range for the September quarter.

Capital Expenditures: Capital expenditure for fiscal '26 is anticipated to be within the target range of 4% to 6% of revenue, maintaining capital discipline.

Market Trends: Strong global cloud demand for nearline products is expected to continue, with visibility into production capacity largely spoken for through mid-calendar 2026. Installed data center capacity is expected to more than double by 2029.

Business Segment Performance: Momentum for high-capacity HAMR drives is building, with volume ramp expected in the first half of calendar 2026. Exabyte shipment crossover on HAMR-based nearline drives is targeted for the second half of calendar 2026. The company also plans to introduce 5 terabytes per disk technology by early calendar 2028, with a goal of demonstrating 10 terabytes per disk in the lab by the same time.

Strategic Plans: Seagate plans to resume share repurchases later this quarter. The company is also focused on executing the 4-plus terabyte per disk qualification and volume ramp in fiscal '26, supporting cloud workloads with capacities of up to 44 terabytes.

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Shareholder Return Plan

Quarterly Dividends: In the June quarter, Seagate returned $153 million to shareholders through quarterly dividends.

Fiscal Year Dividends: For the fiscal year, Seagate returned nearly 75% of free cash flow to shareholders, demonstrating a strong commitment to its capital return strategy.

Share Repurchase Program: Seagate expects to resume share repurchases in the current quarter, reflecting confidence in its financial position and enhancing capital returns to shareholders.

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Key Q&A

Q:Can you confirm the implied gross margin guidance for the September quarter and explain why there isn't significant gross margin expansion despite confidence in reaching 40% gross margins?

A:Gianluca Romano stated that the estimate provided was significantly lower than what is implied in the guidance. He emphasized that the company has achieved record-high gross margins and is on track to achieve the milestones discussed at the Investor Day.

Q:What is the demand outlook for AI inference edge, both on the cloud and edge side, and its impact on exabyte demand?

A:William David Mosley explained that the cloud demand is driven by video properties and diverse video data sets stored in the cloud. On the edge, applications like factories, safety, and hospitals are driving data growth. He mentioned that the company is sticking to mid-20s exabyte CAGR and is observing interesting viral applications that are data-dependent.

Q:What was the HAMR contribution to revenue this quarter, and what is the expected impact on gross margins in the September quarter?

A:William David Mosley and Gianluca Romano stated that HAMR is growing steadily, with three major cloud customers qualified. They expect HAMR to positively impact gross margins due to higher capacity and lower cost per terabyte.

Q:Why was revenue guidance slightly below consensus for the September quarter, and how is HAMR capacity ramp aligned with demand?

A:Gianluca Romano explained that the guidance is based on supply readiness and strong demand exceeding supply. Some production is allocated for customer qualifications, impacting sellable volume. The company is confident in its direction and expects continued improvement in revenue and profitability.

Q:What is the adoption level of HAMR among customers beyond the first major customer?

A:William David Mosley confirmed that other customers are starting to ramp, with strong pull for the new products. The company is focused on transitioning to more efficient products to meet exabyte demand.

Q:What are the pricing assumptions in LTAs, and how will HAMR cost advantages affect pricing?

A:William David Mosley and Gianluca Romano stated that there is no need to incentivize transitions as the TCO benefits are significant. The pricing strategy remains unchanged, with slight increases in like-for-like pricing during contract renewals.

Q:How should we think about free cash flow generation, CapEx spend, and share repurchase plans?

A:Gianluca Romano mentioned that free cash flow is improving significantly, and the company has restarted share buybacks. CapEx will remain within the 4%-6% range, with some increase to support HAMR ramp and equipment replacement.

Q:What are the AI video drivers in the business, and is there any visibility into generative AI in the autonomous sector?

A:William David Mosley highlighted video properties, unstructured data, and video generation as key drivers. He noted that autonomous vehicles currently focus on training and inferencing rather than generating and monetizing data.

Q:Why is the September quarter revenue guidance only up 2% despite an extra week?

A:William David Mosley explained that supply planning was done six to nine months ago, and the focus is on transitioning to new products rather than increasing gross capacity.

Q:What is the impact of the global minimum tax on the company's tax rate?

A:Gianluca Romano stated that the global minimum tax will impact both GAAP and non-GAAP tax rates, with the non-GAAP tax rate expected to be 16%.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the exact percentage of revenue contribution from HAMR in the next few quarters, the precise impact of the global minimum tax on GAAP tax rates, and the exact December quarter revenue guidance despite being asked about visibility into shipments.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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