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

Good morning, everyone. My name is Erik Woodring. I am the lead IT hardware analyst here at Morgan Stanley. Before I introduce everyone here on the stage, let me just quickly read this disclaimer. The views expressed or represented by non-Mortgage Stanley speakers during this event do not represent the views of Morgan Stanley or Morgan Stanley Research. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. So with that in place, I'm pleased to welcome Seagate Technologies here to the stage. I'm pleased to be joined by Joan Motsinger, SVP of Business Sustainability and Transformation at Seagate as well as Shanye Hudson, Head of IR. Joan has been at Seagate for nearly 4 decades. And I'm going to read this because I find it very impressive. Over her tenure, she's had many roles in engineering, operations, supply chain and now corporate responsibility. You're the Board Chair of the RBA, the world's largest industry coalition for corporate social responsibility. In global supply chain, she remain an active Board member. So we have the right person here in place, obviously. Seagate was a founding member of the RBA. It's a strong support of the UN Global Compact. And so a lot to talk about here with Seagate. Very exciting. Thank you both for being with us this morning.

Great to be here, Erik.

Awesome. So no, I think it's probably helpful just to start out with a high-level introductory question or comment that would be and that is some of us might be more ESG than technology or hardware-focused analysts. So maybe can you just provide kind of an overview of who Seagate is and what your product offerings are? Maybe we'll go from there.

Sure. I'll take this one, Joan. So first, Erik, thank you. We were talking before we started, and it's so good to be back face-to-face with people. So thank you for having us and for those of you in the room here. Before we get started, I do have to say we might be making forward-looking statements, and I encourage you to look on our website and check out our SEC filings to understand more about the risks around those statements. But as you said, some of you might not be familiar with Seagate. We are a global leader in mass capacity, data storage and infrastructure solutions. We have been around for 4 decades. So Joan, when she started in her teens, has started here. I'd say over the last 12 months, we have about $12 billion in revenue and about 19% in operating margin. If you go back maybe a decade ago, more than 50% of our sales was really pointed toward PC. You and I, storing our pictures and our memories and our personal data right there with us on laptops. Today, I store most of that in the cloud, and data centers for the cloud are part of what we call mass capacity data. And today, that represents about 70% of our hard disk drive business. Seagate is one of only three companies in the world that make hard disk drives and for cloud data centers. About 90% of their exabytes are stored on this drive. So a very lucrative part of our business. And as a high-tech company, innovation is key. And so certainly, that longevity is really because we have been able to innovate and keep pace with the changing storage industry landscape. But one of the reasons that we're here today is that longevity is also because we're focused on sustainability and building a sustainable business. And for Seagate, sustainability means building a healthy and strong supply chain. It means investing in our employees because, hopefully, in the next 40 years, it won't be Joan and I up here, but Seagate will be around. And then it's cultivating strong relationships with our customers. So for us, that's really what sustainability is about.

Great. And this is the first time that we've hosted you here, so very exciting to have you here this year. So maybe, Joan, I'll go to you with the next question. And again, I'll keep it high level, then we'll dig in a little deeper. But broadly speaking, how does Seagate incorporate sustainability into your business practices? Kind of how has that changed over the years as you've been in charge of a number of initiatives?

Sure. So I think all of us are highly committed to a sustainable business. And for us, at Seagate, that's really living our values. ESG is synonymous at Seagate with living our values of integrity, innovation and inclusion. So that's our vernacular inside the walls of Seagate. And that really is committing to not only profitability long term but also our people and our planet. So it's in our culture and it's -- if you look at our 40-year company, you can see that for many years, we have been working on this. For 20 years, we've been committed to transparently reporting our energy and our water and our waste. For 10 years, we've been very transparent on human rights and not tolerating any abuse and being very clear on being -- striving towards conflict mineral -- conflict-free mineral sourcing. All critical. And for 5 years, our focus has really been on energy and greenhouse gas emissions. And so modeling where do we go to reduce our carbon footprint. And in doing that, making commitments, not only science-based targets, which many companies are these days, but also just beating those. Given we have a long history, and it's in our culture, we've published about 16 annual sustainability reports. And that's our commitment to reporting and assurance. And so just having done that just in birthday last month, we also committed to 100% renewable energy by 2030 and carbon neutrality by 2040. So we don't make shallow commitments. So we really do believe this is important, and it's our priority. Thanks for asking.

Yes. No. No, that's why you're here. No, it's something that's obviously, interesting in my world is there's a number -- a number of my companies make products, right? And so the sustainability in the environment is obviously huge in terms of recycling and making sure you're sourcing materials sustainably and ethically. And so during my introductory -- my long introduction, I mentioned the Responsible Business Alliance. You guys were a founding member of that. Again, I mentioned you were Chair, you serve as a Board member. Maybe just help us understand what is the relevance of the RBA in the world today in kind of creating a sustainable supply chain?

Sure. Great question. And you may not be familiar with the Responsible Business Alliance. So it is the world's largest industry coalition, focused on electronics, focused on responsibility. So if we -- if you are a member of the Responsible Business Alliance and many of the high-tech companies are, hundreds are. That means that we will operate our businesses, our factories, our supply chain to a code of conduct. And that means that we will have policies, and we will have processes and that we will be third-party audited. So when we -- when you meet up with the company who says, I am an RBA member, I'm fully compliant, that gives you that seal of approval that we are responsible and we do act with a code of conduct. So that's been really good. That's been in place since 2004, and we were a founding member of that along with some of the larger OEM or hardware companies in the compute industry over the past years. Now you're going to see that the RBA is not only going to be responsible for human rights and really making sure that is upheld, but we're also pioneering climate change and compliance to climate change. Pretty important to work together in the collective on climate change, right? You don't accomplish any mission alone in climate change. So the Responsible Business Alliance is really that format that structure for us to achieve that. So it's a great coalition.

Awesome. Very helpful. So I think when it comes to ESG, there are a lot of initiatives you've talked about. I think it's helpful if you can kind of place statistics or data to that, right? Obviously, you've talked about some of your goals, but is there anything that you can cite to help us better understand kind of how ESG is having a positive impact on whether it's your culture, your operations, your cost, your products, just anything that you could help us with there?

I think you might try this one.

Okay. I think one of the things that I think we're pretty proud of, at least in the last fiscal year, the teams worked really hard. We have 7 manufacturing facilities worldwide. And we gained certification to ISO 50001 in fiscal '21 for us. And this is for our energy management systems. And that really, again, is an attestation to the commitment that we have to reducing water, reducing waste, lower energy, lower ESG, lower cost, right? And it's not just for Seagate. If you look at our supply chain, 70% of our suppliers or about 70% of our suppliers, they too have commitments to reduce and target lower greenhouse gas or lower water. So I think that's one thing that kind of site-wide for us. We were pretty proud of. I think maybe if I switch gears and not talk maybe about environmental, for Seagate, it's not just about the success of the company, but our commitment to the success of our customers. We have a commitment to serving our customers with integrity and ensuring that we are delivering a positive total customer experience. We call it TCE, and we actually ask our customers to measure us on a wide variety of metrics that span our technology road map. Are we delivering technologies that meet their needs and in a time frame that they have? Are we delivering products that are of a quality that is meeting their needs? Supply chain and logistics, which if you think about the last couple of years, you're hard-pressed not to hear about the disruptions in the supply chain and are we able to deliver products on time to them. And so TCE, total customer experience, I think, again, it goes back to us building this sustainable business, which is not only upstream with our suppliers, but also downstream with our customers.

Perfect. So touched you on suppliers there, which is kind of a perfect segue into my next question, which is you have obviously great relationships with your suppliers. In my world, supply chain has been a big factor, a big headwind for a lot of companies. You've navigated the supply chain better than others. Can you just talk about, again, maybe just building on what you just said, your global supply chain footprint, how your sustainability efforts influence your interactions with different parts of your supply chain? And could your -- again, I'm focused on sustainability here, but could your sustainability efforts maybe drive a change in your supply chain? Or do you -- would it need to drive a change in your supply chain over again, call it, the next 5 years, something like that?

Sure. I'll take that. A healthy supply chain is pretty darn important these days, right? Yes, so -- and I think that's built on strong relationships. We do have a history in our industry that's very strong and that history is not only built on relationships, but it's built on trust. And also on good engineering, which means that you have good technology road maps and you complement that with the tactical execution that's supply continuity, business continuity, if that's making sure we're addressing cost. You're bringing all of those factors to the table. And so I think you're right. We've been given a myriad of challenges over the past couple of years, even in the past 10 years with -- if you think back about floods and things like that. So we're not -- we're used to challenges, and we're used to being agile. And I think for us, we believe our suppliers are just an extension of our company. They're critical. They're just alongside us as colleagues. And so that relationship with trust and integrity spans to them. . Maybe just one thought as well is -- and I talked about volume or cost or technology, I think as of late, trust also means supply chain security. So we're having many more discussions with our suppliers about what is your cyber resilience? What is your products? Are your electronic components secure? Do you have good data privacy and protection? Those kind of discussions, you just have to keep amping up to make sure that trust and integrity is tactically underpinned and executing. So if you think about it, our relationships have been built on long-standing trust, human rights, all of these factors I brought up. And now we're adding an environment to that. Like Shanye said, if you can have the majority of your companies are already worried about water, already worried about electricity and greenhouse gas, I feel like we're well on our way together. So that's really good and thankful.

And I'll just ask one more on top of that because part of today is about kind of circularity and recycling. And so what actions is Seagate taking to kind of enable more circularity kind of within your technology ecosystem?

Sure. Well, we take a bit of a product -- total product life cycle analysis relative to mine to back to dirt approach to this. And so when we think about circularity, and we are a manufacturer, so the burden rests with us and our suppliers to make this happen. We do take that total life cycle approach. Yes, we have life cycle analysis. So we know what human toxicity is. We know what metals, water depletion is, and so we can get at it. So I think there's 3 prongs we're after here. First, sustainable operations. We must help ourselves, our suppliers and our customers be more sustainable in our operations. Think greenhouse gases or think energy efficiency, think getting rid of hazardous chemicals. That's when I think about when I think of our operations. And that's fundamental if we're going to enable circularity. Then I think you can start designing products that are much more sustainable. There are eco design standards that can be deployed. We do design for sustainability, and we are on that path to make that happen. That's so that we can more easily refurbish, reuse, recover, recycle materials. These are all those words that we need to incentivize our value streams to implement. And I think that helps customers use, reuse and extend the end of life of our products. And then at the end of life, we want to partner clearly with them on the recovery, on the recycling. We don't want that back in the earth. We know that we use finite rare earths, and we know together that we have to address that. So circularity is pretty darn critical to us. And we really do want to incentivize our industry to move in that motion quickly.

Right.

Maybe if I could just add to what you were saying, Joan, and to the last part, it's not just our -- it's not just Seagate that's looking to reduce greenhouse gases or have carbon neutrality. To your point around partnering with customers, we have very large customers, global hyperscale customers that are working with us to help with product take back, to help us reuse some of these materials. So it's very much in our interest, but it's also in our customers' interest. Yes.

That's right. Lots of stats on aluminum recycling, rare earth recycling -- and that's what we have to move out, not only show feasibility but scale.

Well, you essentially just asked my next question for me, which is perfect.

Sorry.

No. No, not, it's a perfect segue, which is we've talked about internally with you guys and then with your supply chain partners. So how about customers? Can you maybe talk about how customers are integrating sustainability into their purchasing decisions? Is that a big deal? Has that changed over time? I think that's probably critical. Again, just building off with Shanye, what you just talked about?

Yes. Customers. Obviously, the customer scorecard is pretty darn important. And they have been building sustainability into their scorecards for some time. That can be realized through human rights, through conflict mineral sourcing -- conflict-free mineral sourcing. And as of late, we're seeing not only human rights, conflict-free sourcing, but now an emergence of more environmentally focused measures. They are asking us when will we be 100% renewable energy? When will we work with them to achieve carbon neutrality together? So it's very relevant. Our moon shots as we've called them as we published are super relevant and well aligned to the customer, so we feel pretty good about that. All of that is built on other things, right? This is all substantially built on our code of conduct. Once again, back to RBA. If our customers, our members and war members, we can drive that responsibility through the value chain. So like I said, human rights, minerals, environmental. It's pretty well in there. And our scorecards are starting to reflect it. And thankfully, being ahead of the game, we believe this is affecting our share, our market share in these industries. So we're super [indiscernible]

And that's customer led.

Customer led, yes.

So something that's interesting is, obviously, you guys play a vital role in what we call the data era, right, the ability for companies and businesses to leverage the data that they collect, utilize that data and make business decisions. So we're almost having a circular conversation [indiscernible]. But being able to store a lot of this data is obviously critical, right? You need to be able to track your greenhouse emissions and your energy usage and you need to store that. You need to analyze that. That's where Seagate Technology comes in. So maybe can you just talk about your efforts to both develop products, but just maybe use cases or examples of customers leveraging your technology to meet their sustainability goals?

Sure. Data is key. Data is key to environmental efforts, social efforts, and a lot of the data is at the edge or the end point. So thankfully, we've got the products to do that and our customers are thrilled to partner with us on that. I think we're all committed to working together. So first of all, we've got to have the same common reporting frameworks, GRI, SASB, TCFD. Those are the 3 that we're following right now and, of course, report and measure ourselves and performance of that. And I think that creates a good common vernacular for the work we do. Much of the energy use data, human rights data, supply chain security, that is all at the edge, right? So thankfully, we understand and our customers understand the value that we have to do to collect all that, aggregate it, so that we have strong reporting and assurance in those numbers. We can report progress, address issues. So our customers are relying on that. We're relying on that. We're working on that with our suppliers as well. Scope 3 will not occur unless we're working in the collective, and we're aggregating that data. So -- and I think we'll watch what the SEC or other environments produce here on our requirements that being first and foremost in data collection and data reporting and aggregation is pretty darn critical. We're going to make progress in the collective.

Okay. Great. So maybe now if we kind of take a lot of what we've just talked about in terms of sustainability, circularity, recycling, you established science-based targets at the end of 2020 to reduce your carbon footprint, reach carbon neutrality. Again, maybe just help us all understand the ultimate relevance of these objectives for Seagate?

Sure. Science-based targets. These are what companies will do to show that they're responsible and accountable for reducing their greenhouse gas emissions. If that's to complete carbon neutrality or just reduction commitments, the science-based targets gives everybody a commitment structure to make that happen. So it's pretty important for us. We went off to start modeling about 5 years ago, as I said, on our Scope 1, Scope 2 and Scope 3 so that we could make science-based target commitments. And now that we feel they're well underpinned, and we have a line of sight, we feel we can beat them. I encourage every company. This is not a competition. Let's get every company to get -- make their commitment to science-based targets. Like I said, it is about modeling. It is about data at the edge being aggregated. And so science-based targets are pretty darn important if we're going to make this achievement together. A lot of trade-offs to be made. So that's a little bit about what SBTs are, how important they are.

And so, again, now when we think about reaching carbon neutrality, there's a lot of initiatives, a lot of steps that are important to get there. What are the key enablers? What are the key initiatives, the key steps that will help Seagate get to that point?

Well, we are a manufacturer. So Scope 1 and Scope 2 is pretty down important if that's direct emissions or use of energy. So Scope 1 and Scope 2, we feel pretty good about. We've done a lot of modeling in that area. Scope 3, which is that next big lift for carbon neutrality is where we work with our suppliers and our customers, and we engage them, not only with standards, but with measurement and actions. So carbon neutrality for us is now working in parallel in the collective to bring them along. We're going to have to make trade-offs. I'm not one company who can achieve carbon neutral. We're going to have to do it in the industry. So when we say 2040, we've got a big lift here to make. Thankfully, as Shanye said, our customers are highly motivated, and they're right alongside us, asking us, "Hey, what is your renewable energy? What is ours? What are we doing in these geos?" We're getting those kind of calls and how do we work together with governments, with the electricity providers and then, of course, customers and suppliers to make that happen. So we feel our commitment can be underpinned because we're all pretty highly motivated. Any other comment you want to make?

I was just going to say maybe you can chime in here, Joan, but one of the things that you said really as I talked to investors around our targets, one of the things you said really strikes me. And I say this because you're the one that sort of employed this to me before we make a commitment, we really do underpin it. So when we talk about Scope 1 and Scope 2, we have factories today that are running on renewable energy, and we have a path to get the balance of those running on renewable energy. We do Pareto charts, so we know exactly what are the actions that we need to take. I don't know if you want to talk about any kind of Scope 1, Scope 2 perspective because as you said, Scope 3 is probably the longest pole in the tent for us and probably for many manufacturers out there that involves beyond us, upstream and downstream.

Yes. If you're familiar with high tech, there are a lot of hazardous chemicals, and we need to mitigate, remove those. That's what Scope 1 is all about. It's about really making clean manufacturing decisions and limiting carbon, high carbon materials going with less virgin materials. So that's what Scope 1 is about. That's what our priority is. Scope 2, renewable energy. So when Shanye mentions these 7 factories, wherever they're located, Northern Ireland, Thailand, China, Malaysia, Singapore, Minnesota, we have to work with those governments to supply that grid that's renewable. So that's our highest priority as well. So when Shanye says, yes, we don't make these comments lightly, it is because we've been doing the heavy lift, not only to model, but to engage in the collective to make that happen. So hopefully, that comes from [indiscernible]

And I think, again, this -- it's a perfect segue into my next question because you guys have incorporated quantitative environmental and social targets into executives' long-term compensation plans. And so you're not just talking the talk, you're walking the walk. So what are some of these targets? And maybe just elaborate on your decision to incorporate those targets into executive pay.

Go ahead if you want.

Sure. And thanks for bringing that up because I think this is an area that I was pretty personally excited about. So starting this fiscal year, this is fiscal year '22 for us. And we incorporated 2 targets, one on environmental and it's really plans to move forward and achieve our science-based targets initially and then longer-term carbon neutrality. And so we have underpinned plans and those are what are linked to our executive pay. The second is on the social side, and it's extending our gender diversity. We certainly are focused on enhancing a culture that is diverse, equitable and inclusive. We are a technology company. You have 2 women up here, and we're looking at enhancing the women in leadership positions. I think -- in fiscal year '21, we grew the percentage of women in both executive roles and directors. That's something that we're highly focused on. And so walking the walk is -- or putting our money where our mouth is frankly is what we're doing, so.

Literally. Yes. Yes, perfect. So we have, call it, 6 minutes left. So I just want to make sure I have 4 more questions for you. So I want to kind of prioritize and make sure that we kind of touch on these big picture topics at the end because we've talked a lot about sustainability, and again, externally, but I think it would be helpful to spend a minute or 2 talking about ESG and the incorporation into your own company culture, right? You just touched on it in terms of diversity. But any more details that you can share on just how you're incorporating ESG as a whole into the Seagate culture?

I can take that. I talked about living our values integrity, innovation, inclusion and how that really is the vernacular that we use inside. And that helps us with our decision-making, our prioritization. Maybe just to pivot and I'll talk a little bit more about corporate, the governance of that. I think that's pretty important, too. I mentioned GRI, SASB, TCFD, and reporting. The Board does have oversight of our programs. And so semiannually, I'm speaking to them about our priorities for ESG with my colleagues. The Audit and Finance Committee also audit our practices as well, especially when they do have financial ties, the nom and gov committee look at our compensation as a function of our performance. So it's pretty well integrated. And of course, it's the leadership team that sets the tone at the top. When we say profitability, long-term prosperity, and we balance that with people and profit that sets the tone for the decisions we're making. So that's how work gets done. Maybe just a thought about data governance and data privacy. Back to data, it's so darn important and it's our currency. Data privacy and data protection, data provenance. These are the words that are so critical, right? Your data is your data. And so we also consider, ESG, living our values to be critical relative to data and data privacy, protection and provenance. And so security risk management includes for us, like I said, not only cyber product, but data privacy and protection and trust. And so we do bring that into our corporate governance around ESG, too. When we think about governance and that G, we think about data. And making sure that not only are we ethical, but also that our data is super and your data is secure. So that's one of the structures that we think is highly relevant for us. So -- and I think that's about it as far as some of our management areas.

Well, that's great. That's great. So now let's look out into the future as you think about the world and call it the next 5 years. What are your -- Seagate's most pressing ESG priorities? And kind of what are the steps that you need to get from point A to point B and beyond?

I'll take a pass at this. Please complement. So I think in short -- and thanks for asking the question, if I rambled it all. In environment, it's most important that we drive product circularity. As a manufacturer and a technology company, we have the responsibility to do that. So we're going to drive product circularity. We're also going to drive renewable energy and carbon neutrality. That's environmental. I think for social as Shanye said, women in tech and women in leadership, they're priority, not for just us two at the table, but we believe that inclusion brings better innovation, and it's the integrity of our solutions, so women in tech, women in leadership. And then in governance, like I said, it's about the data. And so that means data privacy, data protection, data provenance as we call it. All of these are critical aspects that not only do we want to govern our company by, but we want to ensure our products have those provenance aspects to it. So those are the 3 priorities for us in environmental, social and governance. Anything I missed there?

No, I think if I bring it back around, one of the things that we're working with customers on, we have something called secure erase. And if you think about your personal data on a hard drive, customers too are saying, well, we're not really sure that we want to give that back to you. The secure erase gives them the confidence that, that data is gone and we can kind of take back those drives and your data is secure. So it almost is in the spirit of circularity and sort of kind of closes that loop.

Yes, I probably should have brought that up and apologies if I'm going to make an error. Two technical aspects that are really important to sustainability and circularity: one is power, how many watts are you using in that data center. And so that's a high priority for us. And the other that Shanye mentioned was security. You need to be able to trust us that we can secure your data and then we can erase and sanitize and you can repurpose that. The more we build trust into our data markets, and we'll do that with our technologists and continue to do that, I think you can trust that we can build that circular economy. So thanks for bringing that up.

No worries.

So Shanye, I'll save the last one for you and kind of tie this all back together because at the end of the day, I am a fundamental equity analyst. And so I'd be remiss if I didn't get to just ask you. You just reported March quarter earnings are about a month ago. Maybe just help us all understand kind of walk through the puts and takes of kind of what's shaping the current environment for you as we think about the quarter.

Yes, absolutely. And I might -- I might build on to your commentary around power. I'll leave that back in there. But I think over the last 2 years, like every quarter has brought a new set of challenges and the March quarter did not disappoint, right? So I had mentioned we've been navigating supply chain disruptions. I think Seagate has done an incredible job of actually securing the HDD supply that we need. We have a great supply chain team. We've built strategic inventory and have met demand. In the March quarter, we talked about sort of some additional disruptions. One, the tragic war that's taking place in Ukraine. And we stopped shipments at the onset of the war. So that had an impact on our revenue. We characterize that as about 1% to 2% of revenue. Second, while in many parts of the world, we're sitting here face-to-face in many parts of the world, there's still the pandemic that's having a great impact in parts of our business. So in the mass capacity storage markets, video and image applications, and we refer to it as VIA. A lot of exposure in China. And China right now, with COVID lockdowns, that's having what we would see as constraining demand over the near term. So near term, we're working through some challenges. I think longer term, as Joan said a couple of times today, it's all about data. And data, particularly in mass capacity storage. I had mentioned at the onset of the session, cloud as being a strong growth driver for us for the -- for 2 years plus now, the cloud market has been very healthy. That's part of our mass capacity markets. In those markets, we expect to double about once every 5 years or so and project mass capacity hitting it, revenue TAM of about $26 billion by calendar year '26. So I think again, every quarter has presented something new, and we'll continue to navigate those over the near term. We think longer term, the growth in data and ultimately, the need to store that so that you can extract value, exists. And Seagate is in a really good position to capture those opportunities.

Perfect place to end. Thank you, Joan. Thank you so much for joining us.

Thank you, Erik.

It's lovely to meet with you.

Thank you.

Thanks. Thank you for listening.