Seagate Technology Holdings plc (STX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Seagate Technology Fiscal Third Quarter 2021 Financial Results Conference Call. My name is Gabriel, and I will be your coordinator for today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. At this time, I would like to turn the call over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye.

Thank you. Good afternoon, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We have posted our earnings press release and detailed supplemental information for our March quarter on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and Form 8-K that was filed with the SEC. We'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. As a reminder, this call contains forward-looking statements, including our June quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions. These statements are based on management's current views and assumptions and information available to us as of today, this 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 for questions. I'll now turn the call over to you, Dave.

Thank you, Shanye. Welcome, everyone, and thanks for joining. Seagate delivered an outstanding March quarter, executing well across multiple dimensions. We grew revenue quarter-over-quarter and year-over-year. We expanded non-GAAP operating margin into the recently increased target range and we achieved non-GAAP EPS above the high end of our guidance range. We also continue to drive forward on our commitment of enhancing value for our shareholders, returning the combined of $912 million during the March quarter through dividend and share repurchases. Fiscal year-to-date, we've repurchased approximately 12% of our common shares outstanding. A statement that demonstrates our confidence in Seagate's long-term business prospects. Gianluca will share more details on the financials shortly. For the remainder of my remarks, I'll focus on the business trends that we see unfolding this year and how Seagate is well positioned from a product and technology perspective to unlock more value for our customers. Strong cloud data center demand and ongoing recovery in the enterprise markets drove our highest ever HDD shipments of 140 exabytes and record mass capacity revenue of more than $1.6 billion. These trends underscore the strong secular demand dynamics we're seeing in the mass capacity markets, and support our outlook for the TAM to more than double by 2026 to roughly $26 billion. Cloud customers are helping drive this market expansion by investing in scale and infrastructure to support the acceleration in digital transformation in businesses worldwide as well as growing demand for AI and data analytics. Seagate's high-capacity nearline drives are a vital component of these infrastructure investments. And we believe that our strong technology road map and focus around delivering the best total customer experience is helping drive broad adoption by the global cloud ecosystem. These factors are a driving force behind a number of new strategic partnerships and agreements formed last quarter with several of the world’s leading cloud providers. These multi-year collaborations are focused on delivering innovative and reliable mass capacity storage at exabytes scale. In the enterprise markets, we are seeing a continuation of the recovery trends that we discussed last quarter as businesses increase investments in traditional on-prem IT hardware. Recent CIO surveys highlight increased 2021 budget growth expectations to support their post-pandemic application and infrastructure needs. We realized strong double-digit sequential revenue growth for both our enterprise nearline and mission-critical products in the March quarter, and currently anticipate healthy demand through the calendar year. The record demand that I cited in the nearline market has more than offset anticipated seasonal declines for video and image applications. We see VIA market demand improving in the June quarter and sustaining through the calendar year as planned smart city projects are slated to begin in the coming months. Video analytics extends well beyond public safety. As I discuss at our recent analyst event, there's a growing list of edge applications that leverage video image sensors in areas such as retail, manufacturing and healthcare to derive valuable data insights. These applications support our longer-term exabyte and revenue growth projections. Seagate is well positioned to benefit from these trends as we continue to lead the VIA market at all major capacity points driven by product areal density competitiveness and strong customers engagement. Finally, looking quickly at the legacy markets, higher enterprise mission-critical sales and relatively stable desktop PC demand lead to better-than-anticipated revenue in the March quarter, despite this period's typical seasonal slowdown. With a broader industry shift to mass capacity storage forming the foundation of our future revenue growth outlook, we have built a strong technology road map, streamlined product portfolio and are growing a pipeline of solutions and services that make us ideally suited to address big data demand now and well into the future. Average capacity per drive increased 17% sequentially to top the 5 terabyte mark, a milestone that reflects the growth in mass capacity storage and demand for Seagate's high capacity nearline drives. Today, Seagate is servicing the vast majority of market demand for 16-terabyte and higher capacity drives. We have started to aggressively ramp 18-terabyte volume and current demand suggests strong sequential growth through at least the calendar year. We are also rapidly gaining traction with our industry-leading MACH.2 dual actuator technology. MACH.2 has been proven to address TCO and performance requirements for certain applications with heavy data traffic such as content streaming. We've recently begun the high-volume ramp of MACH.2 drives with a leading hyperscale customer and plan to expand shipments to additional customers later in the calendar year. And that brings me to HAMR. We believe HAMR is the technology to achieve drive capacities of 30 terabytes and beyond. Today, customers are testing 20-terabyte HAMR drives in their production environments, which offers valuable feedback that we are factoring into our product road maps. I would highlight that through our innovation capabilities and our common platform approach, we have the flexibility to offer multiple versions of 20-terabyte drives to meet customer needs, not only with HAMR technology. We are focused on delivering solutions to customers that meet their road maps and lower their TCO and do so in a way that also drives value for Seagate. To that end, we plan to begin shipping a few versions of 20-terabyte drives in the second half of the calendar year. This quarter, we introduced new key components of our Lyve edge-to-cloud platform. We launched Lyve data transfer, enabling data movement on demand between the edge and the cloud. Lyve data transfer works seamlessly with Lyve Cloud, an object based storage-as-a-service solution delivered in collaboration with Equinix and strategically located at the metro edge. In a recent survey conducted by IDC, a majority of respondents considered it increasingly important to co-locate data adjacent to applications or cloud services. We are progressing our build-out plans and are on track to have 4 Lyve Cloud sites up by the end of the calendar year. We are gaining ecosystem support and have now been certified with each of the leading backup software vendors. We are very excited about the future potential for Lyve products and services, which open a large and growing market opportunity for Seagate estimated to reach about $50 billion by 2025. However, I do want to reiterate that we are still in the early innings. We're being deliberate in how we build out the platform and capabilities to position Seagate for long-term success. We are listening closely to customers to make sure we're designing and evolving our services to best serve their needs, particularly as the distributed enterprise itself evolves in the growing datasphere. In the March quarter, we hit a milestone that took 4 decades to achieve. Seagate has now shifted cumulatively 3 zettabytes of HDD capacity, shipping over 3.3 billion disk drives. For perspective, at the 140 exabyte rate we shipped in the March quarter, we would ship our next 3 zettabytes in about 5 years. That is an amazing commentary on the exploding global datasphere we live in today, and I think Seagate is in an outstanding position to drive great future value for our stakeholders. I'll now hand the call over to Gianluca to cover details of our financial results.

Thank you, Dave. Seagate continued to execute exceptionally well as demonstrated by our strong March quarter performance, with a revenue of $2.73 billion, up 4% sequentially and above our guidance midpoint. We achieved non-GAAP gross margin of 27.4%, up 60 basis points sequentially, and we expanded non-GAAP operating margin to 15.4%, inside the recently increased long-term target range of 15% to 20% of revenue. Strong demand for our mass capacity products supported record hard disk drive capacity shipment of 140 exabytes, up 8% sequentially and 16% year-on-year. Nearly 80% of our total exabytes were shipped into the mass capacity market, which include nearline, Video Image Application or VIA and NAS product. Mass capacity shipments increased to a record 111 exabytes in the March quarter, up 21% compared with March 2020, which was our prior shipment record. Based on current outlook, exabytes shipment growth should continue through the calendar year consistent with our long term CAGR forecast of about 35%. Ongoing demand for our high capacity nearline drive lead to a record mass capacity revenue of $1.6 billion, up 8% sequentially and up 5% compared with prior year period. Mass capacity represented about 65% of total HDD revenue. Nearline revenue increased sharply quarter-over-quarter, driven by strong recovery from enterprise and OEM customers as well as healthy growth from cloud. Nearline shipments were 95 exabytes, up 34% sequentially and 25% year-on-year. Average capacity per nearline drive increased to 12 terabytes, driven by the strength of our high capacity drive. 16 terabytes and higher capacity contributed approximately 60% of our total March quarter exabyte shipments. Demand trends in the VIA market are playing out much as we expected based on seasonality. Revenue declined sequentially in the March quarter from the record demand we saw in the December quarter. We are already seeing demand improve as some of the smart city projects that Dave mentioned take shape, which support our outlook for stronger VIA sales in the June quarter and into the second half of the calendar year. The legacy market made up 35% of March quarter HDD revenue. These market end up well in the seasonally slower period with revenue of $864 million, down 5% sequentially and 11% year-over-year. Improving demand for mission-critical drives and stronger-than-anticipated demand for desktop PC partially offset anticipated decline in consumer drives. We shipped a total of 29 exabytes into the legacy market, down 9% on a sequential basis, reflecting the lower mix of consumer drives. Looking ahead to the next few quarters, we expect the pace of year-on-year revenue decline to moderate, supporting relatively stable demand for mission-critical and consumer drives. Revenue from our non-HDD business increased 20% sequentially to $238 million or 9% of March quarter revenue. The strong growth was driven by our system business as we began to ramp revenue from our customer win in the December quarter. We expect growth momentum to continue in our non-HDD business in the June quarter. In the March quarter, non-GAAP gross profit increased to $749 million to compared with $704 million in the December quarter, and included $24 million of COVID-related costs. We are currently planning to incur a similar level of coverage related costs throughout this calendar year, mainly driven by higher freight charges. Our resulting non-GAAP gross margin was 27.4%, including about 1% impact from this COVID-related costs. HDD margins expanded quarter-over-quarter, driven by favorable mix, offsetting the sequential growth of our non-HDD business, which carries a lower gross margin profile. Today, our mass capacity gross margin is already at the low end of our target range of 30% to 33%, that we outlined at our recent analyst event. We're on track for total company gross margin to be in the low end of our new long-term range by the end of fiscal '22, supported by the ongoing shift to mass capacity products, higher revenue contribution from cost-optimized 2-terabyte per disk drive, which make up less than 20% of revenue today, and gradual reduction in COVID-related costs and our continued focus on aligning supply with demand. Non-GAAP operating expenses came in at $329 million, up $10 million sequentially. The increase reflects higher variable compensation associated with the strong performance and increased R&D material expenses to support new product development. Comparing with the same quarter last year, OpEx was down $11 million, while supporting a slightly higher revenue level, demonstrating operational leverage and disciplined expense management. Looking ahead, we expect operating expenses to be a bit higher in the June quarter as we gradually resume normal on-site business activities and travel. Our resulting non-GAAP operating income was $420 million, and non-GAAP operating margin was 15.4% of revenue, up 70 basis points sequentially and inside our recently increased long-term target range of 15% to 20% of revenue. Based on the diluted share count of approximately 237 million shares, non-GAAP EPS for the March quarter was $1.48, up 15% sequentially and exceeded the high end of our guided range. The $0.18 outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage, while our share repurchase activities enhanced EPS by $0.04. Capital expenditure were $104 million in the March quarter, which represented approximately 4% of revenue and in line with our expectation for CapEx to be inside our long-term range of between 4% and 6% of revenue for the fiscal year. We will continue to focus on CapEx discipline to better align supply with demand through platform simplification and manufacturing efficiency improvement. We held inventory relatively flat at $1.3 billion, consistent with our strong mass capacity storage demand outlook. Given the broader market dynamics and well-publicized component shortages, we are continuing to carry higher level of strategic inventory to protect against potential future supply chain risk as well as to help manage freight logistics. We believe these actions enable us to support customer demand and we'll continue to monitor current market conditions. Days inventory outstanding reduced by 3 days sequentially to 59 days. We generated $274 million of free cash flow in the March quarter compared with $314 million in the December quarter and $260 million in the year ago period. In the March quarter, we used $161 million to fund the dividend and $751 million to retire 11.3 million ordinary shares, exiting the quarter with 230 million shares outstanding. The investment in Seagate share underscore our confidence in the long-term business strategy and future cash generation abilities. As a reminder, during the quarter, the Board authorized an increase of $2 billion to our existing share repurchase authorization. As of the end of the quarter, we had $4.4 billion remaining in our authorization, subject to availability of distributable results. As we communicated at our recent analyst event, we expect to return more than 100% of free cash flow to shareholders in fiscal 2022. We will do this while maintaining a strong balance sheet and liquidity profile. Cash and cash equivalents were $1.2 billion, and total liquidity was approximately $3 billion, including our revolving credit facility. These levels are more than adequate to support our operation and business needs. Looking ahead to our outlook for the June quarter. We expect revenue to be in the range of $2.85 billion, plus or minus $150 million, supported by continued strength from cloud data center and enterprise customers, along with increasing demand from VIA market. We expect non-GAAP operating margin to be at the lower end of our new long-term target range of 15% to 20% of revenue. And we expect non-GAAP EPS to be in the range of $1.60, plus or minus $0.15, representing a sequential growth of 8% at midpoint. At the midpoint of our fourth quarter guidance range, fiscal '21 revenue would be $10.5 billion, flat year-on-year and aligned to the goal we set at the start of the fiscal year. In closing, we continue to deliver on our financial commitment and remain on track to achieve the fiscal 2021 goals we have set, while also demonstrating a clear path to meet the long-term objectives outlined at our analyst event. I will now turn the call back to Dave for final comments.

Thanks, Gianluca. In summary, we had a great quarter. Our growing mass capacity markets are showing strong demand and enterprise spending is in recovery. We are executing on our technology and product road maps and seeing positive customer engagement with our newest mass capacity offerings. We currently expect annual revenue growth of at least 10% in calendar year 2021 as the shift towards the less seasonal mass capacity market supports a more stable revenue outlook through the year. We are also making deliberate steps to build out our Lyve platform, particularly Lyve Cloud and are excited by the early reaction from customers. All of this lends confidence to our positive outlook for the company, and that confidence is illustrated by our active return of capital to our shareholders. In recognition of Earth Day, it is fitting to highlight that we published our 15th global citizenship annual report this week. We are proud of our long-standing commitment to build sustainable supply chains and products to conserve the world's precious resources. In the most recent reporting period, we increased water recycling by nearly 9% and recycled the equivalent of 1,100 Olympic size swimming pools. We reduced our production energy consumption by about 19% on a per exabyte basis, and we are executing plans to reduce our carbon footprint by 20% by 2025 and 60% by 2040 in accordance with science-based targets. Consistent with our core value of integrity, we will continue striving to balance our business decisions around people, our planet and profitability. Prior to closing, I would like to thank our employees for their extraordinary efforts as well as our customers, suppliers and shareholders for their ongoing trust and support in Seagate. With that, Gianluca and I are now happy to take your questions.

[Operator Instructions] First question will come from Wamsi Mohan of Bank of America.

And congrats on the strong results. Could you maybe help us think about gross margins in terms of utilization rates across components? And where you see the most room to improve? I appreciate the color you shared both around where you are with mass capacity and when you're getting to the low end of that long term range. But maybe some color around the main factors that can cause you to achieve that level a little faster or maybe what would cause it to get pushed out would be helpful. And I have a follow-up.

Sure, Wamsi. I'll let Gianluca go through a couple of details, but I'll just break it down real quickly as we're going through the transition to the -- on the same kind of platform, we have the 16 to 18 terabyte and even beyond. We obviously control a lot of the internal components. We've said that we like the transitions for our ability to go control cost a little bit better as well. So that does help the margin. Probably the most important part of it relative to our manufacturing transactions, as you said. Obviously, gross margins are still very impacted by freight logistics worldwide. And even if customers want product immediately, we have to -- it's pretty expensive to go get it to them. So that's the other headwind that we have right now. We do see that -- some of that abating over the next 6 months. Go ahead, Gianluca.

Well, I would say, first of all, we are fairly satisfied with the improvement in fiscal Q3. We grow by 60 basis points. A fairly big jump in that one quarter, we are expecting further improvement. As we discussed at the analyst day, we have a clear target, obviously, we're now talking at 33% in just few quarters from now. We communicated today that our mass capacity segment is already in that range, and this is also, of course, very important for us because, as you know, we have 65% of our disk drive that is in that segment. We need to look at the mix. For example, the non-hard disk part of the business has grown fairly materially in the last quarter. As you know, this part of the business has a lower margin percentage, but it's a very good contributor to our free cash flow. So it's a very important part of our business. I would say for the future, as Dave said, one big element is COVID. The second big element is the continued transition to mass capacity. We expect a fairly strong quarter in June in the nearline part and a good recovery in surveillance, but that is more seasonal than other part of the mass capacity segment. So was down in March, and we expect to recover in June. And then the continuous alignment between supply and demand. And as you know, we are using our CapEx in order to, of course, increase capacity by increase in a way that is quarter-after-quarter, aligning better to demand that is coming fairly strong. Regarding gross margin, well, you can extrapolate the gross margin for fiscal Q4, it has a slight improvement sequentially. I would say, potentially, we can do better than what we imply in the guidance, and we need to go through the quarter, but I'm optimistic and positive that we'll have a good result.

No, that's good. I appreciate the color. And if I could, it's really interesting to see that the legacy exabyte has stabilized, and you called out the higher mission-critical and desktop PC demand holding that up. When you think about the sustainability of that, frankly, I mean, if you're right on OEM and on-prem demand increasing through the course of the year, and also, Desktop PC potentially going through a replacement cycle with folks moving back into the offices, and even a stronger PC cycle in the second half of this year, would you say that there was actually an opportunity for legacy exabytes to grow meaningfully in the second half of the year?

Yes. I would say it's possible. As you said, strong demand in a lot of these segments. Obviously, over the long haul, we expect continued erosion. But most of the big erosions already happened to your point. And so a lot of the systems that are out there, certainly mission-critical replacement [ rates ] and PCs that still exist. I think they're much more stable. And to the extent that some of the recovery that happens after the pandemic in certain places in the world may actually drive needs for that kind of equipment. There may be a temporary run on that stuff. I think it's possible.

And your next question will come from Katy Huberty of Morgan Stanley.

So then a couple of questions. I think, Dave, you mentioned when you were talking about the mass capacity business in 18 terabyte that you expect sequential growth through at least this calendar year, was that just for 18 terabyte? Or that was for mass capacity nearline and more broadly speaking?

Right, all of the above.

Okay. All of the above. And then what were the drivers of material upside in the non-HD business this quarter? And how should we think about the growth rate of that segment for calendar '21?

Yes. I think that there's some -- there is mass capacity. Again, the systems business, for example, which is largely boxes full of mass capacity drives. But to the extent that there's incremental revenue from the boxes from the chassis themselves and the controllers that we use and things like that, there's revenue in that. And there's high demand for that as well. It's akin to mass capacity though. And then the consumer and the consumer SSD business is doing quite well and strong demand. I think our brand is moving a lot of product there as well. So I think those are the big drivers there, and it's a little bit [ eBay ] seasonal to your point.

Yes. We discussed last time of a good win with an important customer. And also now we are executing on that win. It will last also during the June quarter. So we set a good result also in the June quarter.

Okay. And then just lastly, I think I asked you last quarter about supply demand dynamics and the potential for an improved pricing environment. There has been some more evidence that in some channels, prices are increasing. Some of the hyperscalers are talking about having to pay a little bit more for drive. How would you characterize the pricing environment, both that you saw in the March quarter, but also what you expect over the next couple of quarters?

I think as you know, we have long cycle times. And so therefore, we have long planning cycles with most of the biggest scale customers. And so I think things on that front are fairly predictable. Everyone's going through certain kinds of components shortage. I think that may actually -- it doesn't really affect our supply, but it may actually affect the end demand. Based on what everybody can get and kit together and things like that. So I think it's a relatively benign environment from that perspective. There are interesting trends that are going on out in the world about what people are doing with mass capacity storage. I think there's a lot of innovation vectors that are taking off and especially as recovery happens. And these are things that we're watching. And I think if you look through the distribution channels, you'll see fairly strong demand for that as well. Again, it's mass capacity demand, but some of the file sharing platforms that exist out there, IPFS is one that we're watching really carefully. It's an interesting dynamic of a lot of kind of vibrancy, the kinds you just love to see, a lot of creative professionals just coming up with new types of applications. And these are driving demand as well. So I think that's probably something you see if you look at those channels in particular.

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

I believe, and I want to make sure I didn't hear incorrectly, but Dave, at the end of your prepared remarks, you had commented that you expect to see at least 10% year-over-year growth in calendar 2021. Can you just help us understand or appreciate how that has changed that -- first of all, is that correct? And secondly, how has your outlook kind of changed? What's been the drivers of that change over the course of the last 3 months or so?

Yes. Thanks, Aaron. So obviously, looking back at 2020, there was supply and demand disruption. So first, when the supply was disrupted, people were shutting down factories, there was a lot of pull-in of demand. And then the demand realities in about July timeframe came to roost, right? So that -- so we lived through that in 2020. I think 2021, there is still some kind of supply concerns that people have about components everywhere. And so there are people pulling things in. From my perspective, mass capacity is relatively insulated from some of that, and we have pretty predictable relationships, exactly to Katy's question. So we look at this year as not having as profound an impact as we did in 2020. That's where we get the 10%. And it's largely on the strength of mass capacity. Some of the VIA markets and things like that will be contributing as well, but it's largely the cloud and enterprise on-prem coming back.

Yes, we said 2 things, we said at least 10% and we also said that we expect revenue to be maybe more stable throughout the quarters. So we don't expect a lot of seasonality. And I think that is important when you model your quarters also.

Yes. That's helpful. And then just as a real quick follow-up or second question is on the gross margin trajectory, you've now got, I think, 65% of your revenue coming from mass capacity. You had talked about that business now running at the low end of that 30% to 33% guidance long-term target model. How do you think about that longer term? Do you think actually that mass capacity gross margin can trend up at the high end or even above the high end of that long-term model range that you've outlined?

Yes, simply put, yes. I think we have to get our -- all of our manufacturing capacity pointed in the right direction there. And as legacy comes down, that helps us. And then there's other opportunities as well like platform commonality and things like that. And then we've kind of said that 16-terabyte was getting a little long in the tooth, that's why we want to accelerate into 18 terabytes and the 20 terabytes. And in each one of those points you get a chance to refresh and maybe take some cost out as well, but based on what new designs are hitting the factory. So -- but we get the leverage of the platform, too. So that helps here.

Your next question will come from Karl Ackerman of Cowen.

Dave or Gianluca, you -- I guess, Dave, you referenced this in an earlier question. But in recent days, there have been reports of some significant price hikes in the retail aftermarket as hard drives are being used for new applications like crypto mining, while you have less control over the retail market from a pricing perspective, I was hoping you could discuss how demand in the channel may be impacting your factory utilization and lead times across your customer base.

Yes, I would say that we always budget enough capacity for the channel. I mean, the channels -- the customers in the channel are varied and important to us. And so we always budget enough capacity to make sure that we're servicing the channels as well. We do see the uptick in demand that you're referring to. Like we said, we're watching the different trends that are causing it. Some of them are really interesting vibrant trends. And we love that. What I would say is that it's a little early in this to know how long prolonged it is, how prolonged it will be. So I think we're even early in this quarter. So it's really hard to know exactly what the distribution channel reaction is going to be. I also think that getting people things immediately is a problem in the world today because -- so back to your question about the manufacturing capacity that we have, even if it came out the back of our factory, getting it around the world to that channel location might be a problem, right? So I think we'll have to look at all these dynamics, look at the lag or lead times, if you will, on how that demand is developing and figure out how we service it.

Understood. If I may, just while on the topic of cryptocurrency, I could be wrong, but I believe you still maintain your stake in Ripple. It halved over the last few years, and that's appreciated 5x since you last reported. So I guess: a, do you still maintain a stake there? And then secondarily, are there ways to monetize that stake today?

Yes. We won't talk about the latter part. But yes, we do maintain a stake. These are, like I said, vibrant segments that we've been watching for quite some time. We have fair amount of people that are -- because it's all about data flow and in the case of recent trends a lot of this is about data storage, in particular. So these are things that we watch and determine how we make investments, not only in external investments that we might make, but also internally, what kind of technologies we're developing. So we are maintaining the stake.

Your next question will comes from Thomas O'Malley of Barclays.

Mine was really related to the VIA market. On the last earnings call, I think Dave described an environment that was like down mid-teens in terms of revenue. And at least with exabytes that you guys break out, you saw it down like in the 40% range. Should you see some of the snap back more violently in the June quarter, given how hard it fell off in March? And just could you walk through what are the reasons why you saw it down so hard in March and why it should come back in June?

Yes. This is typically -- I'll let Gianluca to answer partly as well, but this is typically a seasonal market. It's tied to, I'll say, government spending and build-out. Now obviously, a lot of that has been disrupted at various places in the world right now. And then I think if you go back 4 quarters ago, the edge markets were generally really depressed because I think my comment at the time was nobody is on-prem anyway. So people just aren't making on-prem. So I think there's been a high degree of cyclicality this year to the point. I think what we're seeing right now is not only a replenishment of supply chains that were disturbed, but also an early in the year investment cycle in smart city applications. And some of that may be because of health care data or maybe because of buildings reopening and they hadn't been making investments for a while, but it seems to be relatively earlier and maybe a seasonal right now.

Inside mass capacity segment, VIA is probably the only one that is seasonal, so it's not unexpected. We knew that into the March quarter, we were going to have a decline. As I said before, June quarter will start to be a much stronger quarter for VIA and we continue to increase in the September and December, really December is the strongest quarter for VIA.

And sorry, the one other point, too. Our central thesis is that the data at the extreme edge is not being properly utilized. As a matter of fact a lot of times it gets deleted. And we think there are people who are starting to answer questions about how do I store that for a little bit longer and then process the data with AI or ML and make value-based decisions on the data, maybe not necessarily in the next minute, but it may be a day later or a week later. And so as that happens, we expect some of this seasonality to be more muted overtime.

Great. That's helpful. And then my follow-up is really around nearline. Obviously, you guys don't usually talk about share, but let's just look at exabytes. If you look at kind of what the market was forecasting for March, I mean, you have 50-plus percent share of that market. A better way to ask it other than share is. Could you talk about the dialogue that you're having with customers with nearline drives? What kind of success are you seeing over the next couple of quarters? And what kind of led you to the position where you are right now where you're maintaining this higher percentage of share? You can answer that however you want but I just want to dive in there.

Yes, great. I mean, I don't really think about it as share because, to your point, we go out to the customers we have since the lead times on the products are so long. We have good dialogue about not what do you need in 6 wees, but what do you need in 6 months. And I think that's working quite well. Our customers appreciate that we still have flexibility for them. But we're kind of co-planning in that respect. And I think that served us both very well and them. So the bouncing ball on share, if you will, I don't have a great visibility into how that's going to change. I just know what our demand is. And that's what I'd say. I do think there's a little element in the last few quarters of at the end of quarters, sometimes Seagate gets pulled a little harder than we thought. And that may be a competitive dynamic or may just be the customers were holding a little bit in their back pocket. But in general, it's become a way more stable environment than it used to be. And we're not building things speculatively either. Witness our 18-terabyte ramp, we were ready for that drive mid last summer. The customers weren't really ready. So we've been going up a very predictable ramp for that and keeping our factories full of the 16s, while that was happening and having good dialogues, too. So I think that's serving us well. So we're not in the era of building -- having a hunch, building a bunch and then speculatively trying to move them at the last minute anymore.

Your next question will comes from Ananda Baruah of Loop.

Yes, congrats on solid results and good execution. Just 2 quick ones, if I could. Those are kind of clarifications. Dave, just sort of going back to pricing, you said that things are fairly benign. Does -- I guess, does that mean that they're -- really just trying to understand if you think there are an opportunity for pricing to improve as we go through the year relative to maybe what you thought 90 days ago? And I just wanted to get your thoughts there and see if I lost anything in translation. And then I have a quick follow-up. Yes, sorry, Dave, nearline pricing specifically?

Yes. I would say relative to 90 days ago, I mean, again, we've been fairly predictable in giving our customers what they need. And to the extent that, that's locked in with our manufacturing capacity, not much has changed on that front. I do think across the broader world, procurement people tend to be more concerned about supply. And so some of the discussions are being even more mature than we had thought 90 days ago. And that's the way I think about it. And we made reference to this in the prepared remarks about some of the long-term agreements that we've been able to establish in the last quarter.

Got it. And so the LTAs, I mean, is it useful for us to think about their use in an increasingly structural sense, kind of ala 2012, which was an extreme case, but it was sort of material to financial impact. Is it useful at all to think about it in a structural sense like that? Or is this more on the margin?

I think that was much more profound back then. From my perspective, supply and demand is a lot more imbalanced than back in those days. As a matter of fact, supply was so disrupted last year and demand was disrupted as well, but we're still feeling the reverb, but it's very different than the 2012 environment. I would say that the biggest difference is the lead times on the products, I mean the wafer starts that we're doing right now realistically are hitting -- for the mass capacity drives are hitting the back end of our testers probably around Christmas. And if you think about that, that's driving really good healthy discussions with what people exactly need and what kind of flexibility they need.

Your next question will come from Mehdi Hosseini of SIG.

2 follow-ups. I believe you guided to a nearline exabyte growth of 35%. Is that correct? Did I hear that right?

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

Sure. It seems to me, maybe you're a little bit more on the conservative side. And I said that because if I just take -- make certain assumption for the June quarter, that would imply the acceleration into the back half of the year, like in the second half of the calendar year to get to that 35%?

I think we do think that mass capacity is going to continue to grow. Yes. I think we've talked about this a little bit. The cloud service providers around the world have to make tough decisions on exactly how they're making investments. And so not all of those investments are necessarily mass capacity related. But we do expect a continued growth in mass capacity into the back half of the year. And that's when Gianluca made the comment earlier about a seasonality, that's what he was talking about.

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

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

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

Sure. Got it. And just very quickly as a follow-up to your 20-terabyte commentary that you're going to have several different products. And especially in the context of lower CapEx, is this going to basically enable you to extend your market share from 18 to 20, especially, it seems to me that HAMR may have been pushed out. So now you have alternative technology. Is that how we should think about it?

Again, I don't really think about it as market share. I think more about what customers want, what technology portfolio that we have and how we might service it. And I think it's important to remember that the cloud, if you will, is -- and the mass capacity is not one size fits all. There are many different types of firmware load outs, applications that are -- that require different performance levels that can tolerate different performance. So some are colder storage and some are very much nearline, right? So they're very active 24/7. So there are going to be multiple flavors of the technology. It's all service off the same common platform. And from my perspective, I think we're locked in pretty tight with customers. That's why we've got confidence. And when I say multiple flavors, that doesn't mean 1 or 2.

And your next question will come from Patrick Ho of Stifel.

Nice quarter. Maybe, Dave, first off, it's good to hear some of the commentary about your 18 terabytes growing through the rest of this year. Can you just give a little qualitative color whether you're getting that 18-terabyte demand from existing customers at lower capacity points? Or are they from potential new customers that hadn't used Seagate over the last few capacity points?

No. Maybe the way I would characterize it is there are some customers that were using 16 that are transitioning, but there are also other customers that were not transitioning from previous 12s or 14s or wherever they were before. And I think we had a fairly broad representation. I do think the markets are generally moving up from -- like I said, if I think back to the 6 or 8 terabyte days, people would be stuck on some of those lower capacity points much longer. In general, the people who are doing data center build-outs around the world are using that mass capacity, leading edge drive much more aggressively. So from my perspective, the 18-terabyte is very broad adoption. And I have already said, we like the platform quite a bit because we're continuing to get cost leverage out of it.

Great. And maybe as my follow-up question for Gianluca. You've given really good color in terms of the gross margin level and what's driving that. Can you give us a little color on some of the OpEx levers, what's driving that? Are you adding more [ inventory to ] the increasing demand? Where are some of the moving pieces there?

Yes. So the OpEx was -- year-on-year was about $10 million lower, sequentially was a little bit higher. The increase sequentially is basically due to variable compensation and a little bit higher R&D material spending. We said a couple of quarters ago that we expect our normal trend to be around $340 million per quarter. So we are very well aligned to get expectations, and we think that probably will be our level in the next couple of quarters.

Your next question will come from Shannon Cross of Cross Research.

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

Yes. Again -- sorry, Shannon. So not so much on the supply of parts for us, although I think everybody is watching the same kinds of long-term supply issues. But short term, we hear from customers that they're having problems getting the final kit. And so usually, what that does to us is it makes -- it may mean that in order to hit that revenue or secure that customer win for them, they may need it differently. And so we're having to be very flexible.

Do you see it basically just pushing out demand, though, right, as opposed to taking any away from a long term perspective?

Yes. I think exactly to your point, I mean, I think the demand is there. It's just how exactly quickly it can be served. And then obviously, some customers that they can't service, somebody else will. And so there's a lot of those dynamics out in the world right now.

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

Sure. I think if you think about Lyve Cloud as almost like an external storage or an external hard drive in the cloud, to the comments we made about retail, it's very simple. There's no ingress or egress fees. There's -- it's a scratch pad. That's the way I think about it, and you can use it temporarily, use it permanently if you want. I think there are customers who are very -- all these aggregating data out of certain locations who want a temporary landing spot before they find out exactly where they're going to put their data long term. And so these are the kinds of customers that are giving us a lot of interesting feedback for us to go continue development of the thing. And we're not talking 5 terabytes at a time. This is people that have tens of terabytes or even bigger.

Your next question will come from Sidney Ho with Deutsche Bank.

I have 2. The first question is, Dave, you talk about the 10% -- at least 10% revenue growth for calendar '21. If my math is right, but that would imply the average revenue for calendar Q3 and calendar Q4 will be consistent or maybe slightly below calendar Q2. I would have thought the numbers could keep going up on a sequential basis based on all the recovery you're seeing. I know you said at least 10%. But are there some things that we should consider here?

So, Gianluca wants to answer it.

Yes. Of course, we don't guide individual quarters. I think it's very easy for you to calculate that at least 10%. We didn't say how much more than 10%. We said at least 10% for the calendar year. And then we will discuss the following quarters in the next earning release. We expect revenue to be very strong in the calendar year. So just is wait for a few more months and get more details on individual quarters.

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

Okay. That's helpful. Maybe my follow-up question is related to the 20-terabyte drives. I know you started shipping the HAMR drives back in November. And you seem to think that the PMR is extendable through at least the 20 terabyte. Then you talked about having multiple products at that capacity come out in the second half. I would think qualified multiple products at the same capacity point would increase the cost of your customers. Does it not make sense to say at a certain capacity point, you only offer one type of technology? Or are there other things that we should think about that may mitigate that?

Yes, it's interesting. There are different types of customers who want different performance levels. I think I made reference to that earlier. But to the extent that we already know the heads of media, say, of this platform family really well, and we don't have to turn the heads of media. That's one option. Another option is various flavors of SMR like we talked about. So there's lots of different ways to provide those customer solutions. Is it more complex for us? Yes. But we have this common platform. And so that common platform can go in multiple different directions, and we feel very confident in that. We're not really worried about qualifications or anything like that.

We have time for one final question from Steven Fox with Fox Advisors.

2 kind of clarifications. First of all, on the video side. In terms of the recovery, I'm not sure if I understood that. It's mainly surveillance still? Or are you -- Dave, we're trying to imply that you're also seeing some of these other edge use cases really take off? Or if not now, can you maybe talk about when? And then secondly, as you buy ahead on components, I understand building the safety stock, but given how the supply chain is changing, do you see that sort of delta increasing, decreasing, staying the same versus your actual needs?

Yes. I think the latter question first. We do -- we have long lead times for our components internally. We've got to run the factories every day, 91 days a quarter or so. To the extent that we know exactly what we want for this common platform and for all the other products that we're building, I think we do make sure that we have enough stock for whatever contingencies we have. From my perspective on the smart city applications that we're seeing, they are varied. It's not just -- this is not just a surveillance market anymore, so to speak. There are many different kinds of edge use cases that are starting to develop. And even some of the building security type of applications are -- have a lot more features that are being demanded of them now. So they're not just the same kind of security we're all used to. There's other kinds of features being put in. And so therefore, if you're buying a solution for a facility or you're upgrading the facility, you want all those new features, I think that's actually driving demand for higher capacity storage as well. So -- and then -- sorry, Steven, what we said earlier was last year was so disruptive from a supply demand perspective on this front and what people are investing in the edge, but I think that's why we're seeing this kind of pull-in of the market this year relatively.

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

Well, thanks, Gabriel, and thanks to all of you for joining us today. Seagate continues to execute well and remains excited about the tremendous opportunities we foresee ahead both in the near-term and longer term, driven by massive growth in data. I'd like to once again thank our customers, suppliers, business partners, and importantly, our employees for their ongoing support of Seagate.

This concludes today's conference call. Thank you for joining. You may now disconnect.