Seagate Technology Holdings plc ($STX)

Good morning, everyone. Thank you for being here. I'm Samik Chatterjee, and I cover the hardware and networking companies. As you all get settled, I'll just introduce the next speaker here. So here for the next fireside chat is Dr. Dave Mosley, Chief Executive Officer of Seagate. Dave, thank you for being here. Thank you to the audience as well.

Maybe Dave, I'll start you off with a question that's more broader, more longer term. You've been at gate for nearly 3 decades, CEO since 2017. When you look at the storage industry today versus prior cycles, what is structurally different demand profile. I know everyone wants to say this time it's different, but what do you think investors are still under appreciating about this current cycle that we're in?

Thanks, [indiscernible]. A couple of things, forward-looking statements, risk factors on our website, the way. Yes, it's been a long road for me and for our teams as well. And I don't look at it as small cycles because I think everyone is different. The downside we went through was profoundly different, but created by its own make situations. I look at it more as a macro cycle. I mean from my perspective, data is always growing underneath everything. But our industry went through an enormous build-out period through the client server days up until peaking about 2012. For reference, we shipped 66 million drives in 1 quarter, but they were all low capacity going into notebooks and desktops. And if you think about those times back then, the drives were not full. They were not being utilized very often, just not turned on very much. What's different now is the drives are those heads and media, critical components that we've built out, the factories for back in the a lot fewer drives, but they're big beast now. And if you go into the data centers, they're working very hard 100% utilization in full. So a very different profile for the industry as we've pivoted the supply chain for the last decade.

Okay. Okay. And maybe to get into that a bit further, you've talked about agent general much larger data sets than periodic queries, for example. Can you just go and sort of underlet into that decompose what you're seeing in exabyte growth in calendar '26, '27. And how much is the broadening out of the cases when it comes to training, inferencing, how much of that is becoming a driver of exabyte growth going forward?

Yes. It's really hard to break out because the application space is growing so quickly. And so what some things are called inference 1 day, may be actually developing into something that's actually learning more to the next. I think we try to think about the -- first of all, the recovery that happened in the last 3 or 4 years was really driven by video properties first. And so it's not small text data sets. It's large unstructured data sets, which are usually video data sets. If you think about that happened early days, it was a lot of test for training large language models and being able to get utility out of them and they are very useful. Don't get me wrong. But now it's not about training on ages and ages worth of text that was stored somewhere. It's a lot more about understanding what's going on in the real world and being up to the minute in your cycle and ingesting a lot of the large data sets and then being able to figure out how that is changing so that you can give the proper inference, and we're seeing this all the time. And so if I look at the workloads that are across the drives in some of those applications, they're very diverse there's not a predictable way of using them. And depending on the day or the user or whatever, it can actually change quite frequently. And that's what I would say characterize as AI workloads more than anything.

You've mentioned moving to a build-to-order approach with your customers. How has that impacted visibility for yourself? And is that something that you're seeing across the industry being adopted as well?

It is. I mean, we're driven by very long lead times in our wafer operations. So we have a recording head wafers that take a long time to build. It could be more than 9 months. And then the drives themselves take another quarter like that. So inside of that, we know what's coming out a year from now, and we've basically gone to the customers and said, "Look, if you want to plan this really, well, which you should be for your data centers, we know what's coming out, you can buy this up to a certain period." And so we want to keep that 4 or 5 quarters of visibility, very, very solid for what's being built. But the demand is significantly higher than that. And we know that if we can get a little bit more out of the factories we're sensing the market and the market really wants the exabytes even more. So we're now giving predictability into what we're going to be building in the next year or 2 years, 3 years as technology transition and the customer demand for that is still very strong. So it's not really locked in. The build orders are really only locked in for 4 or 5 quarters. But beyond there, we have great visibility.

What's the financial implication of moving to this model? Like for investors that looked at Seagate over the cycles, how do you think about what changes on the financial side?

Well, what I really wanted out of it when we started was revenue predictability. Just we want to make sure we're building into a forecast that's not real. Now it appears that not only are the forecast real, but the demand is significantly higher. Fundamentally, the financials will be driven by the demand. And we're trying to answer that demand aggressively as we can with our technology, but I think that's why the financials keep getting better. If we have predictability for 4 quarters, but then that starts to -- we start to roll through that period. And we go to re-up the next then we're seeing that the demand is even stronger. And so therefore, the economics get better.

Okay. Okay. You mentioned this lead times are now quite long. We've seen some of the press reports as well mentioning leadtime over year, in some cases, for HDDs. However, when you take a step back, I think investors have always been concerned about the industry adding capacity right at the peak of demand that time that capacity comes online, you're going through a moderation in the demand cycle. What's giving you the comfort now in terms of your capacity planning? And how are you thinking about your capacity or map?

There's a couple of different kinds of capacity. If I go back to the industry 15, 20 years ago, the headway for the fabs, the lead time was only a few -- so very, very fast to turn. Now it's significantly longer with the technology being as complex as it is now. And so that's really what we're gated by those critical components that are lead time as far as the number of drives at the back end, we could be still fairly flexible on that. But because we're able to sell the capacity that's already coming out, we don't necessarily need to. So how do I think about adding -- now it's not just 1 machine you plug in. It has to be synchronized all the way across not only our production but also the supply chain, but it's really long lead time now. And we're adding tools to make our capacity a little bit stronger inside of the manufacturing facilities that have those long lead times, but they tend to be the types of tools that will go through technology transitions rather than pure capacity adds.

So maybe just to follow up on that, and this question comes up often. So I'm sure you've taken this question before is what fundamentally needs to happen for you to add unit capacity floor space capacity rather than just depending on higher capacity drives to add exabytes.

Right. There is an answer to the question, and I'll get to that in a second. But what our customers are driving for right now is more exabytes. And we believe that the way to get the most exabytes is to take our talented teams and really go through these technology transitions. We're targeting mid- growth, which is an enormous CAGR. And the only way we're going to get there is to be able to through those technology transitions, if you will, to take a 3 terabyte per platter product to a 4 terabyte per platter to a 5 terabyte per platter year over year over year. And so that's really the way in it. If we took the teams off and started building new factories or bringing up new machines that would just take too long, would you end up more capacity, if you will, but then you'd slow the rate of growth on that technology. So back to your question directly, the wildcard really is in unit capacity for disk drives, which we, again, could be fairly flexible with once we those heads and media. That gets down to more customer diversification and edge and edge AI and all those use cases, which I think could come someday. So we would take the headset plan and divert them somewhere else should those applications take hold.

Okay. Interesting. Sovereign AI, new clouds, sort of next tier of cloud companies below the hyperscalers, what does opportunity look like for CV?

Yes. It's a complex space. There's a lot of different terms being thrown around. And the way I think about it is NeoClouds generally tend to be compute data centers, if you will, that are failover or being used by the major CSPs, not entirely, but can be. So there's not a whole lot of hard drives in there. And where do they get the when they need it, they get it from major CSPs or the big installs that already exist in the world. So Auburn is a little bit different because sovereign could be more, what I would call, traditional data centers, not just compute data centers. And in a lot of cases, people are saying, "I want my data right here next to me. So that's the term sovereign. We are seeing some of those people build out want to have aspirations themselves. Some of them are still very beholden to the architectures of the CSP. So they're asking the CSP what to build and they're just plugging that in. But some of them have their own architectures as well.

Is that the way I should interpret that is you're not seeing them as direct customers more in terms of demand coming through your hyperscale?

A few direct customers, but it's still very small.

Yes. Okay.

And I would say more of the sovereign behavior has been, hey, I know somebody is going to need this data equipment. I'll build the shell or I'll start plugging gear into the shell that I already have and then I'll go find people that can use it at scale.

Okay. Okay. All investors today associate the Seagate investment bill case. Maybe talk about Hammowhy that's a strong differentiation for Seagate? And do you think that differentiation is defensible against competitors?

So HAMR is heat as guess you're not familiar with it. It's really our ability to use a different material set on our disc iron platinum alloys. And what I would say is that -- the problem with making the discs out of iron platinum is not just making them, but it's also being able to write them. So you need -- we needed a large amount of photonics integrated circuits, picks and lasers to be able to write spot sizes that are 20 or 30 nanometers in diameter. It's been a miraculous journey, really, frankly. We're now at the point where we've shipped millions of HAMR drives not 1 million or 2 million, many more than that, too. And we've got qualifications a little bit of new news here as we've got qualifications against all planned CSPs now on Mosaic 3. We've even got the 4 terabyte qualified at 2 places, which we've already announced. So the qualifications are going very, very well. We're very confident in the technology, and we can get it to 5 as well. This is our desire to bring more of the world. I can't really speak about competition right now because they'll probably figure out their own plans. But I would say that as we keep working really hard to keep marching up the technology curve I think this is the best way to answer what the world ultimately needs, which is more exabytes fast.

Okay. Congratulations on the additional qualifications there. Maybe now thinking about the implications of Hammer financial perspective, how do you think about it leading to market share increases versus lower cost and driving more of the financial returns from a lower cost equation?

Yes. I've said this many times, we don't really think about market share. We think about how many wafers I'm going to start and whether I've sold them or not and what the economics of that is. And we're trying to get predictability not only for ourselves, but also for our customers, for say, 4 quarters or 5 quarters. To the extent that we go from 3 to 4 to 5, we're doing that without adding significant componentry. So the cost leverage we get is really good, actually, and we get a lot more terabytes exabytes out of that. So that's the way I think about the advantage. To the extent that you're making a 40 terabyte or then a 50-terabyte talked about in our earnings call, we'd be doing by the end of next calendar year. That's a huge value proposition for power, space, into a data center if you're going to be running that data center for 5 to 10 years, like that's the way our customers think about it. So I think those products are going to get very good looks from the customer we're going to be able to book them predictably. There is another wild card in this and that there's still a lot of capacity, that's actually a 20 terabytes. So if you think about how you're making a 20-terabyte drive today, how many critical heads and media takes versus at 4 terabytes per platter, 20 terabytes necessarily and 5 disk. 5-turbites bladder, it's fit so you're able to address those price bands with significantly better cost perspective. And so that's the way we think about it, one of the reasons we're driving aerial density so hard.

Got it. I have a follow-up on that, but I'll come back after this question because this will be related. Mosaic I took years to qualify first hyperscaler Mosaic for you qualified it in much shorter duration, like BMR equivalent times at 2 of your largest CSPs, what specifically changed on the customer side? Are customers much more familiar with the platform what's changing the time lines around the qualification?

Yes. I think 2 things. The first is that customers -- it's a new technology. So customers were maybe little bit reluctant at the start. And it's -- anytime you're making big aerial density jumps, people will look at it and say, I have to make sure I check it out. And they did. And we had some issues as well. So we've got through a huge learning curve as we went up to volume ramp. I think the second thing is that there was a lot of noise about HAMR being different. And the reality is, once I deliver the drive to you the customer not different. It's -- but to the extent that you're not ready for a 30 terabyte drive in your architecture, the way your software runs. Now I think people are, they're ready for 30, they're ready 50. So I think the adoption will be much quicker. And we're trying to do this all very predictably. We'll start those head wafers when we know we have demand, and we know we can get through the qualifications quickly and so on and so forth. So that's where we're in the middle of right now.

So the expectation which I had for you as a follow-up is Mosaic 5 and 6 should be qualified in a much quicker time with the same group of...

I think so back to the traditional qualification cycle.

Okay. And going back to the last question, when you said a lot of customers around 20 terabytes. Now do you see them then taking the deep to 40 terabyte rise with Mosaic 4 or still opting to go through that transition with Mozaic 1 then to 4?

I think there are a lot of different use cases in the world where really don't need that much capacity depending on what's going on, especially in small data centers could be on the enterprise edge, which I know needs a little bit better definition out in the world. But our traditional customers may be running small, medium businesses or even large businesses. And so they'll still be able to use low capacity drives. So not everything will move to the highest capacity.

Got it. SP1 As you think about the improvements that you're delivering on cost per terabyte with the ramp on Hammer, you've talked about a 50% exabyte crossover to hammer in the second half of -- once you get beyond that crossover point, what happens to the cost per terabyte curve, like what does it look like once you get over that 50% threshold.

Again, the same number of components if we can keep pushing areal density, the cost stays relatively the same. So the more terabytes we get out, the better. And the demand for terabytes is so aggressive that I think some of our customers willing to work with us on the -- not only the new technology but any new features that will get us there. So with that fundamental cost floor, if you will, I think we're set up pretty well to continue margin expansion. That all comes down to exabyte demand, though. Right.

Maybe on the technology side, you have focused on HAMR and that's one approach that we've seen. There are other approaches we've seen from some competitors in terms of looking at track out being different. How do you think about what makes sense longer term? Do different technology approaches including excluding alternative areas around track layouts to those have a position in your road map as well long term?

Yes. I mean things like SMR get discussed a lot. We started shipping SMR, I think, 2013 when we went from 5 terabytes to 6 terabytes. So we've shipped literally hundreds of millions of SMR drives into desktop markets and things like that. So SMR is a trick we can always pull out of our bag. There are other track layout tricks that may be useful over time. And we -- by the way, we're already doing that for major CSPs as well, just to be clear. So it's HAMR Plus, if you will. One of the things that I'm most interested about the right now is that you get through the transition of being able to use this new media type and getting the photonic circuits, right? There are fantastic new road maps now picks on Photonics circuits and on lasers and being able to use some of the other technologies that exist in the world and take pieces of that and apply them to areal density. So -- there's a lot of ideas on the table now, and I don't think our aerial density road map is going to stall at all. I think it's going to increase.

And so it will be largely building on top of the HAMR platform, but with additional...

I think we'll be using iron platinum for quite some time. It gives a much stronger signal to be read back at small bit sizes. So the bits are about roughly 3 nanometers wide by 7 nanometers down -- so they're already pretty small. You have to make it even smaller. But the HAMR media gives you a great signal out of something that's that size. So we have room to run.

Got it. So maybe flesh out how are you thinking about density of the drive itself? Like when you think about near line being the clear driver of growth here, you've done a quite robust road map in terms of technology innovation. -- when you look past the road map beyond like Mozaic 6, for example, what are the big 2 or 3 technology bets you will have to take today to enable that?

Again, back to Photonics, I think we're going to be pouring in from technology into making the world's smallest admitting lasers and making them behave the way we want and as low cost as we can get them. And then there's a lot of technology to bear at the -- integrating the photonic circuits level. I think recording channels still wide open, a lot of progress being made in silicon. There's a lot of progress made on on things like GPUs and DPUs and learning so that we can actually apply that learning back to what's going on in each individual drive. And so that's one of the reasons I'm very excited about. We have research efforts into all these.

And when you see you will make those investments or efforts, is it all organic? Or do you see that there's a need to do acquisitions to fill the portfolio on that front?

Not afraid of doing acquisitions if we saw the right technology, but some of our technology has always been so bespoke to our application that we'll be doing it. It will be organically led for sure.

Okay. Okay. So before prices of NAND went up where they are today. The popular base thesis on and disties was that you're ceding share to SSDs incrementally. How do you think about that sort of long-term road map now? And is there an overlap with SSDs when it comes to the warm deal of storage that more and more becoming more prevalent? Or with the price increase in NAND, is that actually reducing in terms of how much you overlap?

Yes. I think a lot of this comes back to what happened in the PC. PC forever, the capacity points in the PC were growing and then they stopped and they're still stopped. And this still -- the PC is still the same capacity point it ever was. When that happened, it transition from hard drive to flash for a decade, right? That's the way I think about it. So a lot of people -- it's a very natural emotional thing. You say, well, then the hard drives are going away. And not in the data tiers in the data center a matter of fact, I think the data tiers there are not only stuck on hard drives, but they're stuck for a long way into the future. And that's because people know how to manage them really well and the economics of replacing the amount of data that's in the data centers with flash, it doesn't make sense. And I say this all the time. Flash is great technology. It has a lot of little niches to put product in and there's different kinds of flash. There's a there's more, I'll call it, long-term flash. But it's -- can be tricky to manage, and so on, our customers and the data tiers and the data centers understand all this really well. some of the best storage architects on the planet. They've already figured out exactly how they're going to deal with hard drives and memory layers above. And I don't see that changing. If anything, now that flash has gotten considerably more expensive, they're asking the hard drives, how much more can you do at your tier and then the demand just keeps growing. So you talk about zettabytes worth of storage capacity inside of disk drives to replace that with flash would be ridiculous investment. It's not going to happen.

Makes sense. Let's talk about pricing. Big shift for the industry, particularly on the revenue per terabyte basis, I think pure Western Digital is seeing the same thing. Just talk about the pricing power that you now see, particularly when you engage with hyperscalers and these pricing discussions, how has the balance of power in terms of pricing change?

Yes, I wouldn't say it's power. Fundamentally, it comes down to demand. If -- when we started out of the depths of the last downturn, we said, hey, we want to get paid for what's coming out of our factories, and we cannot just build it speculatively. And because of that, we would locked in certain pricing for, say, 4 quarters back to the BTO discussion. As we -- as those roll forward different customers are on different time lines, of course, you get to the end of that cycle and you say, okay, now there's more demand. And then so let's -- but we're still going for predictability, and that's what's driven that CSP pricing up. The way we test this all the time is if there happen to be any swaps, anybody says I don't need product or we get a little bit more out of our can take the parts that we're already making and make a different product out of them. Then what happens is we go out and offer that to the markets and we see where the new pricing is. And so that's the biggest reason for things to go. We don't see that stopping.

Okay. So maybe let me take a step back and try to address the question, what the longer-term focus is when you look recover most of your gross margins were in that sort of 20%, 25% range for most years. Today, with no investment digital are progressing to 50% gross margin. You're almost there. at this point. One part of it is the demand cycle, as you said. But if the demand cycle would change in a few years, is the company structurally better margin than what it was pre coin?

Yes. I think given visibility, of course, demand is the fundamental answer to everything, right? But given visibility that we have into the demand, there's -- we actually took a lot of supply line by virtue of what we went through after the COVID downturn. And so right now, lead times being what they are, that we can't really on the upside to the demand. And in some respects, if demand were to take were to start going down, we have visibility into it. We would take necessary action, I think, again. So -- but I don't see that really right now, what's happening in the application layer is profound. So the way I think about it, and I'm a hardware person, so you have to be careful with me. Some of the software layers before used to siphon money off the top are not there anymore. And the -- and now what's exposed is, hey, I've got this really fast application, it needs data. And I think that's more of what we're seeing in the world.

Okay. So you mentioned the long lead time. And what a lot of investors ask us about is hyperscalers have been increasing their capital spending plans every time they earnings call, et cetera. With the kind of lead time that you have, the build-to-order framework that you have, what's the typical duration between a hyperscale saying, well, we'll spend more to Seagate seeing that impact on the revenue line?

I think the hyperscalers understand what their -- what workloads are actually driving them and they are seeing these new application spaces say the video for example, they know how much video is being created all the time at the extreme edge. They know how much video could be if it was enabled properly. They know the sources of data on the edge. So they know exactly how much people are uploading to their properties all day long. And so they get a pretty good sense of those businesses. There's new nascent spaces like people talk physical AI and robotics that will need mass capacity. Is that going to be serviced in the cloud or at the edge? Very, very good question. All these applications are being forecast into the future. And and we'll have the storage components as well. So I think that's 1 of the reasons why they're giving us that 2-, 3-, 4-year visibility, even though we haven't locked in the orders, we are getting very good visibility and a nice solid growth. That's another thing different about this demand cycle.

Got it. Okay. In the last 5 minutes, let's try and get through 3 questions. Your -- a big talking point has your 70% incremental margins that you've been delivering consistently. Talk to us about the sustainability of that. The -- as you go through the ramp on HAMR and you continue to deliver more exabytes, should we think about sustainability of the 70% incremental margins that you've been delivering?

Yes. Again, fundamentally, demand will dictate everything. And our execution to the extent that we can, if we get through the 4 terabyte transition aggressively, while the demand is still high. I think that will serve us very well. We have all the assets in place that we needed to do that. Our executing just fantastically. So that's what it really comes down to is from an OpEx perspective. Our team is aligned on the right technology knows exactly how we got to 3 and 4. Now we need to do to get to 5. We have all the tools in place. We've been planning this technology transition for quite a while. So I think it is sustainable.

Okay. Does pricing and how the pricing environment is give you a lever to even exceed the 70% of the incremental margins?

Pricing will always come down to demand. I do think that the difference between terabyte and a 4 terabyte and a 5-terabyte is pretty compelling if you're building a new data center or replacing the hundreds of millions of drivers around in existing data centers. So from a power perspective, the rest of the equipment you need to support that.

The number of exabytes you're running. I could see if the demand continues to remain strong, then we would have that kind of capability. Okay. Operating leverage, significant expansion on operating margins, I think, 1,400 basis points year-over-year in the March quarter, you've been holding OpEx relatively at. And as the business now scales towards a $20 billion annual run rate by fiscal '28, where does -- how do you think about the OpEx envelope that needs to support that overall revenue profile?

Yes. I mean given the downturn we went through, our first priority was giving our people raises and they deserve the bonus they've been getting the variable comp and so on. Again, we have the team, the technologists together to do what we need to do. We could spend more on OpEx over time, but I don't really see the need to right now, hiring more people, great, but it would take a long time to train them. We are just really focused right now on using existing team that we have to go get 5 terabytes of platter going, and then we'll see what happens in the future.

Does broadening out the customer base or investing in these new technologies that you're seeing photonics does that impact the R&D space? Or is that largely sort of similar to the run rate you've been on?

So far, we've been doing that inside of our existing footprint. And we have thousands and thousands of engineers that are in tune with those technologies and markets. But again, we could if we wanted to. I still don't see the need. Right now, we're we love the footprint we have. We love the team we have, and we're trying to stay focused.

Let me end with capital allocation. Clearly, you'll be generating a lot of cash. How are you thinking about capital allocation primarily in terms of how do you invest, where do you and how much do you invest in the business, how much do you allocate to M&A or buybacks, how you're thinking over to the drivers?

Yes. No real change. I mean -- so I think I said this on the earnings call that we just last year was all about patching up the supply chain, just getting working capital back. This year is about readdressing our debt and getting in fighting shape in case there is some other downturn, we don't see that, but we just want to be the best stewards that we can. And then we'll get back to being the Seagate that we want to, which is returning 75% of the cash to shareholders and from -- and we have a strong we always did. We're going to be reassessing exactly how that weighs up versus buybacks, but we believe that it's the shareholders' money. We want to give them back to them. So inside of that, I think we have enough flexible to do anything we need to or whether it's investing back in our own R&D or if we need to do small tuck-ins or something like that for technology access, so we can do that. But we're not really focused that way. We're more focused on just getting through this year, getting that 5 terabyte per platter launched and seeing what the next year holds.

Great. I'll wrap it up there. Thank you for to the conference. Thank you to the audience as well. Thank you, everyone.

Thank you.