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

Okay. Good morning, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Seagate Technology and CFO, Gianluca Romano, to be here with us today. Thanks, Gianluca, for being here.

Thank you very much. .

Maybe start off at the highest level. Help us understand where do you think we are in the buildout of mass storage for AI infrastructure. And where do you see the biggest opportunities specifically for Seagate over the next, say, 12 to 18 months? .

Yes. Before we start, let me inform everyone that I will be making forward-looking statements today, and you can learn more about the risk associated with those statements on our website. Well, it's a very good question. How if you look at the CapEx of our customers, the growth in their CapEx is signaling still being in the fourth part of the phase of AI investments and therefore, for what we are concerned on investment in storage, in data stage, especially in the big public cloud. And more recently, I would say even more on on-prem data center with a fairly good growth on enterprise OEM.

Okay. Great. With your competitors, you've been able to significantly increase the amount of exabytes being brought to the market without really significant increase in unit production and by just doing the capacity additions rather than unit volume. So the industry has been prudent on supply additions seems the strategy has really paid off for most of the players, yourself included. How do you think about striking that balance into next year and beyond?

In general, I would say, it's important for VC to be disciplined with CapEx and with capacity addition. I think we have been very well aligned to this discipline for 2 or 3 years at this point in time. The business is growing because of technology, not because of more units. We move up in technology with products that have more content in science, and that is generating at the end of the quarter, more exabyte. And finally, this industry is selling exabytes not unit. So what we need to focus is, of course, always looking at supply and demand and keeping a good balance between the 2 and also strongly, strongly pushing on our technology to continue to grow in exabyte year after year. .

I mean, what is your view on sort of the long-term exabyte growth for the industry? You've talked about 20% long-term growth as a target. Clearly, you've been outstripping that for a little while now. Is that still long term -- the right correct long-term target? Or do you think we can kind of sustainably ship above that given the sort of current supply balance we have. .

Well, every quarter is different. Every year is different. We gave this mid-20% CAGR for a fairly long period of time, we said about 3 or 4 years. Of course, you need to look at the real exabyte growth, not only in percentage, but also the real number in absolute number. And of course, when the base start to grow, you had a lot of exabytes maybe in percentage is not exactly the same of what you were doing 2 or 3 years before. But actually, exabyte, but is more. So that increased number of exabytes is actually what is impacting positively your revenue growth. So when the base change percentage it could be a little bit misleading. So I always look more at the absolute numbers and percentages. But this -- this industry and sign particular, I think, is growing very strongly in exabyte. And as we said, this will continue because of the applications that are today and in the future, impacting the need for more storage. If I look today where storage is, but it's a lot of traditional applications and then there is the new impact from starting robotic AI or if you are here in San Francisco, you see a lot of auto almost driving all those cars have a lot of camera and all the data that they collect all day long, gets tough. If you multiply San Francisco for the rest of the world, you can just imagine, imagine how much data autonomous driving will generate and the need for storage. And this is just 1 application. -- even robotic AI is just the beginning. But it's a lot of quality control that is done connected to AI so that you get an input from ai, I don't know how to identify an eventual problem and eventually how to fix the eventual product. Some of that is in the form of video and video consumed a lot of exabyte. So there are a lot of new applications, but the common team of those application is everything is based on data. And that data is very, very valuable. When you have a valuable data the cost of storage is minimal comparing to recompute with data. And that's why storage is growing at the pace that you have seen in the last 2 or 3 years.

Yes. I mean you mentioned this idea of absolute exabyte growth for the industry. That's a very interesting notion. I think I remember you writing that before. Curious, is there a way to frame the industry growth in terms of absolute exhibits?

No, I think you can look at it as a trend, but because we are growing fairly rapidly in terms of exabyte now the base is really growing. If you look at growing, I don't know, 25% or 30% this year, comparing to 3 years ago, that is maybe a 50-plus percent if you look at the number of extra. So when you look at the revenue growth, you need to look as an exabyte that we sell and what will be the price for those exabytes more than a percentage because it gets the data is very different. It could be a little bit misleading.

Yes. Okay. And then so if you think about kind of all the things you said that are driving demand for data, you've also been driving a lot of your ex growth through technology transitions as well, especially with HAMR, which we'll get to -- so do you think you can continue to support all the exabyte growth you expect through tech transitions alone?

Well, today, this is our view. This is our objective to go as fast as we can on technology. Now technology can give us a fairly good growth in exabyte. When we go from a 20-terabyte drive to a 40-terabyte drive, we can have 33% more content. So that, of course, is implying a huge increase in exabyte even if, of course, we don't just produce 1 tries -- there is a big mix. But when you can have that kind of growth in your -- through your technology, you can generate a good growth in exabyte overall. That is what finally we said now we say exabyte. And of course, growing the exabyte and keeping a good balance between supply-demand is what is making this industry very successful. And so we don't see any reason today to change this strategy as has given us huge improvements together with our pricing strategy, the exabyte growth through technology and the pricing strategy that we have applied for the last 3 years, allow us to almost triple our gross margin without really impacting our customers too much. So we are low to mid or single-digit of their CapEx. If we are reasonable with the pricing strategy that will allow us to apply this strategy for a very, very long period of time and continue to improve our performance from a financial standpoint. We have done that for 12, 13 quarters. Based on our PO that we already have in place for the entire of our fiscal year. We are now at the beginning of the fiscal year. We said we see every quarter of this fiscal year having higher revenue and higher margin. So this strategy is really working well, and we don't see any reason today to change it.

Right. Okay. And so to that point, on -- you raised the topic of pricing -- so maybe I wanted to think about that for a second, a zoom out for a second, several years ago, we were talking about mid-single-digit declines in price per exabyte then we went to flat, then we went to mid-single-digit growth. Last quarter, you talked about 11% year-over-year price per exabyte increase. So we're going to comfortably in the double digits now. How should investors think about sort of the cadence of pricing growth over the next few quarters? And should last quarter be kind of like a good ballpark to use modeling forward for this fiscal year?

we changed the pricing strategy about 3 years ago. I would say there are 2 reasons why this strategy is working well. The first 1 is, of course, the supply-demand balance is different than what was 4 or 5 years ago. The second, the value of storage is much higher. As I said before, when you have a data and bad data as a value for you, you want to keep it. You don't want to recompute later because recomputing later will cost you more. So there is always that double check between keeping the data or the cost of recreating the data later. And of course, there is at least today, there is a huge difference between the cost of storage and storing the data or recomputed later. .

Got it. Okay. You often reference to cost of ownership as a way to sort of approach the economics of higher capacity drives at least from the customer perspective. Now how receptive have customers been to serve these higher per drive and per exabyte prices? And is there really any different from prior cycles in terms of the way they perceive TCO.

I would say the value of data is for sure growing. And our customers, of course are pushing more and more on optimizing their structure. That means optimizing the storage and the compute and how much storage to support that compute. And of course, they realize that the value of data is not the same today, but was 10 years ago or 5 years ago. And that, of course, is giving us the opportunity to also optimize our own business. And driving through technology to generate a little bit more exabyte every quarter and of course, trying to get the targets that we discussed before for the CAGR, but also extract some more value for us and, of course, increasing pricing is part of the strategy. And as I said before, this is a huge contribution to our gross margin and operating margin at the end.

Okay. I mean, it may seem really hard to imagine in the current environment. But let's say we find ourselves in a situation, some place online where the industry is overshipped in demand, customers cut orders. What kind of risk in a downside scenario to C in that kind of eventuality. And what measures has the company put in place from a manufacturing perspective to sort of derisk that?

Yes. Today, we don't see that situation happening. Now as I said before, we already have purchase orders in place for the next 4 or 5 quarters. And as I said before, based on those purchase orders, we actually see a revenue increase and profitability improving. So we don't see that possible change in trend happening for the next many quarters. I would say now being disciplined with CapEx is, of course, something that will help you at a certain point if the trends change or if for some reason, our customer despite having a very high demand, maybe they cannot build all the data center, but they would like to because of some constraint. It can be a power constraint, can be a delay in building permit, can be some components that is not fully available. So there are many reasons why eventually, even if demand is very high, our customers could have a need to slowed down a little bit, the building of the new data center and pushing the demand out in time is not going away, it's just pushing that out in that. But if that happens, I think the fact that we are very disciplined with the CapEx and how we increase capacity through technology instead of through units will allow us to eventually manage much better a possible change in cycle.

Yes. Fair. So I want to actually to the point shift to the technology and product side for a moment. Following the qualification of MOSAIQ 4 with 2 hyperscalers you talked about last quarter, what further progress we have made with additional customers beyond those 2? And what feedback have they given you on Mosaic?

It's very good. Now I would say HAMR is a fantastic technology, is allowing us to really have very good results, not only in terms of more exabyte volume but also in terms of financial performance. And you will see more, the more we scale upping capacity per unit, so going from 30 terabytes that we are already selling to all the hyperscalers in the world, those are big guys, to the 40 terabyte that we're already selling to the 2 biggest hyperscaler in the world and that we are qualifying with a few more. And so we will be able to qualify fairly soon. And then we discussed at our earnings release already the next product that would be 50 terabyte. So you can see how quickly and how much we can grow in terms of content per unit. And the 50 terabyte will be more calendar '27 or through the end of calendar year '27, so very good progress. We are very happy with them. I would say it took a long time to develop the technology, many years. And it took a little bit of time to qualify the force product because it was new, new technology, new product -- it has to work. We have to find the right configuration to work in the cloud. After that, everything went really well. And we qualified the top 8, 10 customers in basically a year on the 30 terabyte drive, and we are already qualifying on the 40 terabyte a good number of customers, both in U.S. and in Asia and we will do the same with the 50 fairly soon.

Yes. You've also talked about getting volume crossover of HAMR by the end of this calendar year. Is there anything changed that would allow you to even pull that in? Or is there anything that would delay at all? .