Seagate Technology Holdings plc (STX) Q1 2026 Earnings Call Transcript

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Overview

The earnings call presents a positive outlook with strong revenue and margin projections, driven by product transitions and cloud demand. Share repurchases and strategic plans for HAMR technology bolster investor confidence. The Q&A section highlights strong demand and predictable pricing, despite some vagueness in management responses. Overall, the positive financial outlook and strategic initiatives outweigh minor uncertainties, suggesting a positive stock reaction.

Key Financial Performance

Revenue $2.63 billion, up 21% year-over-year. The increase was driven by strong demand from global cloud service providers and enterprise customers, particularly in the data center market, which represented 80% of overall revenue.

Non-GAAP Gross Margin 40.1%, a record for the company, up 220 basis points sequentially. This growth reflects increased adoption of the latest generation products and effective pricing strategies.

Non-GAAP Operating Margin 29%, up 280 basis points sequentially. This improvement was attributed to strong top-line growth and significant financial leverage.

Non-GAAP EPS $2.61, exceeding the high end of the guidance range. This underscores the company's focus on expanding profitability.

Exabytes Shipped 182 exabytes, up 32% year-over-year. The growth was primarily driven by demand from global data center customers, with 80% of nearline volume on drive capacities at or above 24 terabytes.

Data Center Revenue $2.1 billion, up 34% year-over-year. This growth was fueled by increasing demand from global cloud customers and improvements in the enterprise OEM markets.

Edge IoT Revenue $515 million, representing 20% of total revenue. This segment experienced lower sequential sales but is expected to see seasonal improvement in the next quarter.

Non-GAAP Gross Profit $1.1 billion, up 46% year-over-year. This increase was driven by strong demand for high-capacity products and effective pricing strategies.

Free Cash Flow $427 million, flat quarter-over-quarter. The company expects free cash flow generation to expand in the next quarter.

Capital Expenditures $105 million, approximately 4% of revenue. The company anticipates maintaining capital discipline with expenditures within 4%-6% of revenue for fiscal 2026.

Cash and Cash Equivalents $2.4 billion, up 25% sequentially. This includes an undrawn revolving credit facility of $1.3 billion.

Net Leverage Ratio 1.5x, based on adjusted EBITDA of $831 million, up 67% year-over-year. The company expects this ratio to trend lower as profitability increases.

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Operating Highlights

HAMR-based Mozaic platforms: Seagate achieved several milestones, including qualifying 5 global CSPs on Mozaic 3+ terabyte per disk products, with capacities up to 36 terabytes per drive. Over 1 million Mozaic drives were shipped in the September quarter, and the company is on track to achieve 50% exabyte crossover on nearline HAMR drives in the second half of calendar 2026. Initial volume ramp for Mozaic 4+ terabyte per disk platform, offering capacities up to 44 terabytes, is set to start in the first half of next calendar year.

AI-driven storage demand: AI applications are driving demand for high-capacity nearline drives. AI inferencing generates large volumes of data, increasing the need for storage. For example, Google reported over 275 million AI-generated videos on its Veo platform within 5 months, highlighting the growing demand for storage solutions.

Data center market: The data center end market represented 80% of overall revenue, with demand strength led by global cloud service providers. Longer-term agreements with global data center customers provide visibility through calendar 2027.

Edge IoT market: Edge IoT market revenue was $515 million, making up 20% of total revenue. Seasonal improvement is expected in the December quarter.

Revenue growth: Revenue grew 21% year-over-year to $2.63 billion, with data center revenue up 34% year-on-year.

Profitability: Non-GAAP gross margin reached a record 40.1%, and non-GAAP operating margin climbed to 29%. Non-GAAP EPS was $2.61, exceeding guidance.

Dividend increase: Seagate announced a 3% increase in its quarterly dividend, reflecting confidence in cash flow generation.

Debt management: Net leverage ratio improved to 1.5x, and the company is exploring opportunities to further reduce debt.

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Risk or Challenges

Market Conditions: The demand environment remains strong, particularly among global cloud data centers. However, tight supply conditions are noted, which could impact the ability to meet customer demand and accelerate qualification timelines for high-capacity products.

Competitive Pressures: Seagate is advancing its HAMR-based technology to maintain a competitive edge. However, the need to continuously innovate and achieve aerial density advancements poses a challenge in staying ahead of competitors.

Regulatory Hurdles: Emerging trends around hybrid cloud environments and data sovereignty regulations require compliance with strict requirements for data processing, storage, and management locally. This could increase operational complexity and costs.

Supply Chain Disruptions: Tight supply conditions are mentioned, which could impact the production and delivery of high-capacity nearline drives and other products.

Economic Uncertainties: While not explicitly mentioned, the reliance on global cloud service providers and enterprise customers exposes the company to potential economic downturns that could affect demand.

Strategic Execution Risks: The company is heavily reliant on the successful execution of its HAMR-based product roadmap and the transition to higher capacity drives. Any delays or failures in this area could impact its competitive position and financial performance.

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Guidance & Outlook

Revenue Projections: Seagate expects December quarter revenue to be in the range of $2.7 billion, plus or minus $100 million, representing a 16% year-over-year improvement at the midpoint.

Non-GAAP Operating Margin: Non-GAAP operating margin is expected to expand to around 30% in the December quarter.

Non-GAAP EPS: Non-GAAP EPS is projected to be $2.75, plus or minus $0.20, for the December quarter.

Capital Expenditures: For fiscal 2026, capital expenditures are anticipated to be within the target range of 4% to 6% of revenue.

Free Cash Flow: Free cash flow generation is expected to expand in the December quarter.

Debt Reduction: Seagate is exploring opportunities to further reduce debt, supporting a positive leverage ratio trajectory.

Cloud Growth: Demand from global cloud data centers is expected to remain strong, with cloud growth projected to outpace enterprise demand.

HAMR-Based Mozaic Drives: Seagate plans to achieve 50% exabyte crossover on nearline HAMR drives in the second half of calendar 2026. Initial volume ramp for Mozaic 4+ terabyte per disk platform is expected in the first half of calendar 2026.

Product Roadmap: Seagate is advancing its aerial density roadmap, targeting 10 terabytes per disk, and leveraging technologies like silicon photonics to maintain a competitive advantage.

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Shareholder Return Plan

Quarterly Dividend Increase: Seagate announced an increase to its quarterly dividend by approximately 3%, reflecting confidence in its execution and sustainability of cash flow generation.

Dividend Payout: In the September quarter, Seagate returned $153 million to shareholders through dividends.

Share Repurchase: Seagate repurchased $29 million worth of shares at an average price of $187 per share during the September quarter.

Shareholder Return Commitment: Seagate remains committed to returning at least 75% of free cash flow to shareholders over time and will continue opportunistic share repurchases.

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Key Q&A

Q:Are there plans to add capacity or address supply chain bottlenecks given the strong order backlog through 2027?

A:The strategy for adding capacity is through product transitions rather than increasing unit capacity. While some capacity is lost during transitions due to higher process content, exabyte capacity is added. The focus is on product transitions, improving yields, and achieving higher capacity points to meet hyperscaler demand for efficient exabytes.

Q:What is the update on HAMR rollout and customer adoption?

A:The HAMR rollout continues as planned, with five hyperscaler customers qualified. The transition to higher capacity drives, including HAMR, is contributing to revenue and profitability growth. No additional updates beyond what was shared in the prepared remarks.

Q:Should we expect incremental margins to remain higher than the 50% outlined at the Analyst Day?

A:Incremental margins have been higher than expected due to a better mix of higher profitability products. While every quarter varies, the short-term results are strong, and the December quarter guidance implies higher margins than the 50% incremental margin model.

Q:What level of cost reduction is expected on a blended basis by calendar 2026?

A:Cost reduction is driven by the transition to higher capacity drives, with a focus on reducing cost per terabyte. The mix of products will play a significant role, and the transition to HAMR and 40-terabyte drives will contribute to cost reductions.

Q:What is the visibility of inference demand and its impact on seasonality?

A:Inference demand is driven by the growth of video content, which constitutes over 80% of internet traffic. While the impact on seasonality is uncertain, the March quarter is expected to have lower seasonality due to the high proportion of data center revenue (80% of total revenue).

Q:How is pricing managed in the current constrained environment?

A:Pricing is managed predictably through long-term contracts. Customers moving to higher capacity products may see a slight decrease in price per terabyte, but profitability is supported by cost reductions and price increases for the same products during renegotiations.

Q:What is the impact of SSDs on HDD demand, and how is supply managed for cloud customers?

A:There is no significant shift to SSDs due to the constrained HDD environment. Customers are focused on predictable supply and product transitions to meet demand. Supply for edge IoT products is being reallocated to cloud demand where possible.

Q:Is there a change in pricing strategy for HAMR given the AI tailwind and cloud demand?

A:The pricing strategy for HAMR remains focused on predictability and long-term contracts. While some customers received lower prices during initial qualifications, pricing will adjust over time as the market develops.

Q:Are customers co-investing in capacity expansion due to strong demand?

A:Customers are not co-investing in capacity expansion but are focused on predictable long-term plans. Exabyte capacity will increase through product transitions rather than adding unit capacity.

Q:What is the expected timeline for the transition from Mosaic 3 to Mosaic 4 platforms?

A:The transition to Mosaic 4 is expected to ramp in the second half of fiscal 2026, with a crossover point likely in the first half of fiscal 2027. The transition speed depends on yield improvements and supply chain adjustments.

Q:What is the duration and impact of long-term agreements for HAMR?

A:Long-term agreements provide visibility into exabyte demand through 2027, with most nearline exabytes committed through calendar 2026. These agreements ensure predictable supply and pricing for customers.

Q:What is the impact of video content growth on exabyte demand?

A:The growth of video content, driven by AI and creative tools, is increasing exabyte demand. While the long-term impact on the 20-25% exabyte growth forecast is being studied, demand is expected to remain strong.

Q:Are margins and yields for HAMR drives at parity with PMR drives?

A:HAMR drives are not yet at parity with PMR drives in terms of margins and yields. Efforts are focused on improving yields and reducing costs for HAMR drives.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the cost reduction percentage expected by calendar 2026, the exact timeline for HAMR yield parity with PMR drives, and the precise impact of video content growth on the 20-25% exabyte growth forecast. Additionally, responses to questions about potential co-investment by customers and the impact of SSDs on HDD demand were somewhat vague.

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Earnings Word Cloud

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

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