Seagate Technology Holdings plc

Operator: Welcome to the Seagate Technology Fiscal Second Quarter 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, Senior Vice President, Investor Relations. Please go ahead. Shanye Hudson: Thank you, and hello, everyone. Welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our December quarter results 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 included on our Form 8-K. 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 corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as are subject to risks and uncertainties associated with our business. To learn more about these risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking 1 primary question and then reentering the queue. With that, I'll turn the call over to you, Dave. William Mosley: Thanks, Shanye, and hello, everyone. Seagate closed out calendar 2025, with a record-breaking quarter, driven by sequential revenue growth across nearly all end markets. December quarter financial results exceeded both top and bottom line expectations and set new company records for exabyte shipments, gross margin, operating margin and non-GAAP earnings per share. We expanded non-GAAP gross margin above 42%, supported by the execution of our pricing strategy, along with an improving mix of our high capacity drives as HAMR shipments ramp. Looking at the entire calendar year, 2025 marked a transformational period for Seagate, both financially and operationally. Over the calendar year, we increased revenue by over 25%, improved gross margins by nearly 740 basis points and expanded operating margins by an even greater amount, demonstrating the profitability leverage in our financial model. 2025 also solidified HAMR technology as a long-term enabler of mass capacity storage. We ended the year shipping 3 terabyte per disk Mozaic-based HAMR products to our first CSP customer. And by year's end, quarterly HAMR shipments exceeded 1.5 million units and have continued to ramp. Mozaic 3 HAMR drives are now qualified with all of the major U.S. CSP customers and qualifications for our second-generation Mozaic 4 terabyte per disk products are tracking well to plan. These developments align with our long-term areal density road map that extends to 10 terabytes per disk, which we expect to deliver early in the next decade. I want to thank our Seagate teams around the world for exceeding our performance expectations and delivering outstanding value to our global customers. We continue to operate in an exceptionally strong demand environment, particularly within the data center end markets. In the December quarter, we saw sustained demand growth for our high capacity nearline drives across global cloud data centers as well as continued improvement from the enterprise edge. Based on our build-to-order pipeline, we anticipate these positive demand trends will continue for some time. Our nearline capacity is fully allocated through calendar year 2026, and we expect to begin accepting orders for the first half of calendar year 2027 in the coming months. Further out, demand visibility is strengthening based on the long-term agreements in place with major cloud customers through calendar '27. Additionally, multiple cloud customers are discussing their demand growth projections for calendar '28, underscoring that supply assurance remains their highest priority. We will continue to meet strengthening demand through our strategy to maintain supply discipline and satisfy exabyte growth through areal density advancements and without increasing unit production volume. In the December quarter, our average nearline drive capacities rose by 22% year-over-year, approaching 23 terabytes per drive, with those sold to cloud customers averaging significantly higher. This trend underscores the strong adoption of our higher capacity drives to support demand growth. At the same time, revenue per terabyte sold has remained relatively stable, reflecting the effectiveness of our pricing strategy. Seagate is well positioned to continue benefiting from the combination of powerful secular tailwinds and supply discipline. Video applications continue to drive significant demand for hard drives with platforms like YouTube witnessing 20 million video uploads daily, up from just 2 million 3 years ago. This staggering pace of growth extends to other cloud video platforms and doesn't yet include the full surge in content generation expected from emerging AI-driven video applications. These applications are not only fueling social media uploads, they are also transforming how organizations turn their data into tangible value, enabling personalized marketing, interactive education and advanced simulations, capable of training manufacturing, engineering, health care and other professionals. The strategic value of data is further underscored as new applications and use cases emerge across cloud and edge workloads. Among the most promising of these is agentic AI, which relies on persistent access to large volumes of historic data to enable effective planning, reasoning and independent decision-making. Adoption is already gaining momentum with one recent survey conducted by a leading cloud service provider reporting more than half of participating customers were actively using AI agents. Early adopters are already realizing measurable returns with benefits ranging from lower cost to increase revenue opportunities. With the deployment of AI agents at the edge, where untapped data often resides, we believe the stage is set for a sustained and meaningful increase in data generated and stored that will support inferencing, continuous training and also maintain model integrity. Modern data centers have evolved to address the complexity and scale that massive workloads bring through sophisticated data tiering architectures, ensuring that the right data is available at the right time and place. Hard drives are essential to these architectures, anchoring the mass capacity data tier that stores the vast majority of exabytes from storing the checkpoint data sets used to train and maintain model integrity to supporting vector databases that provide the context necessary for accurate inference results and agentic AI performance. By leveraging hard drives, data center operators, whether in the cloud or on-prem, can achieve the optimal balance of performance, capacity and cost efficiency at scale. Against this transformational backdrop, Seagate's HAMR technology road map positions us to meet growing demand and deliver ongoing TCO improvement for our customers. HAMR is a proven technology with large volumes of drives running in cloud production environments for more than 3 quarters now, and performing well across a broad spectrum of use cases. We are systematically ramping our Mozaic 3 HAMR products to qualified customers while maintaining focus on optimizing the profitability of our available supply. As noted earlier, Mozaic 3 is now qualified with all major U.S. CSP customers and remains on track to have all global CSPs qualified within the first half of calendar 2026. Additionally, qualifications of our second-generation Mozaic 4 products are progressing well. We expect to begin the ramp of Mozaic 4 later this quarter and have multiple CSPs qualified in the coming months in line with our plans. We continue to set the pace for the industry, recently demonstrating 7 terabytes per disk capability in our labs. As one of our largest CSP customers recently aptly described, hard drives are engineering marvels, a sentiment that we obviously share. Our deep expertise across mechanical engineering, material science, nanoscale fabrication and now advanced photonics, not only enable Seagate to deliver on the HAMR road map, but also creates a durable competitive moat for hard drive technology well into the future. Wrapping up, 2025 was a milestone year for Seagate in every respect. Financial performance, operational execution and technology leadership. We are carrying this momentum into calendar 2026 supported by a powerful demand backdrop as new AI applications start to complement traditional workloads. We will remain highly disciplined and focused on expanding profitability through our higher capacity product mix, underpinned by the strong economics of HAMR. Our areal density road map positions Seagate to sustain the core TCO and efficiency advantages of hard drives as data creation and storage requirements accelerate in the AI era. We believe this foundation creates a compelling long-term value proposition for the company, our customers and our shareholders. I'll now turn the call over to Gianluca to cover our results in greater detail. Gianluca Romano: Thank you, Dave. Seagate delivered another quarter of strong year-over-year revenue growth and set new record profitability metrics in the December quarter, underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in 8 years. December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year-over-year. We achieved non-GAAP gross margin of 42.2%, up 210 basis points sequentially, and we expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. Our resulting non-GAAP EPS was $3.11, up 19% quarter-over-quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology road map to support demand growth. To that end, we shipped 190 exabytes in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across the enterprise OEM markets. We shipped 165 exabytes in the data center market, up 4% sequentially and 31% year-on-year. Data center revenue grew at roughly the same pace totaling $2.2 billion for the quarter, up 5% sequentially and 28% year-on-year. Against this strong demand backdrop, both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud nearline capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with the ramp of HAMR-based Mozaic products. As Dave highlighted, Mozaic drives are running very well in production environment and meeting all performance, reliability and integration expectations. In the enterprise OEM market, we are benefiting from slight improvement in traditional server units, along with increasing demand for storage servers, driven in large part by the adoption of AI applications and need to store data at an enterprise edge. The edge IoT market made up the remaining 21% of revenue at $601 million, supported by anticipated seasonal improvement for consumer products in the VIA client market. We project the broader VIA market to grow over time with the largest growth contribution coming from VIA nearline products that are captured as part of our data center end market. Moving on to the rest of the income statement. Non-GAAP gross profit increased to $1.2 billion, [ up 14% ] quarter-over-quarter and 44% compared with the prior year period, significantly outpacing revenue growth. Non-GAAP gross margin expanded to 42.2% in the December quarter up from 40.1% in the prior period. This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high capacity products, which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non-GAAP operating expenses were $290 million, relatively flat quarter-over-quarter and in line with our expectations. Operating expense as a percent of revenue declined to 10.3%, rapidly trending towards our long-term target of 10%. The combination of strong top line growth and significant financial leverage drove an 18% sequential improvement in non-GAAP operating profit to $901 million, almost 32% of revenue. Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income and expenses to remain relatively flat in the March quarter. We grew non-GAAP net income to $702 million with corresponding non-GAAP EPS of $3.11 per share based on tax expenses of $129 million and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet. We invested $116 million in capital expenditures for the December quarter or roughly 4% of revenue. We are maintaining capital discipline while we continue to transition and ramp HAMR technology. To support these objectives, we anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4% to 6% of revenue. Free cash flow generation was strong at $607 million, up 42% from the prior quarter. Looking ahead, we expect free cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiency and capital discipline. These factors position us well for durable long-term cash flow generation. Cash and cash equivalents totaled just over $1 billion at the end of December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility. During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from business and optimized cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1x based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter-over-quarter and up 63% year-on-year. We expect the net leverage ratio will trend lower as profitability and cash generation increase while we continue to evaluate opportunities to further reduce debt. Turning now to the March quarter outlook. The demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March quarter revenue to be in the range of $2.9 billion, plus or minus $100 million, which represent a 34% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to be approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to approach the [ mid-30% range ]. Non-GAAP EPS is expected to be $3.40 plus or minus $0.20, based on a tax rate of about 16% and non-GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible notes of approximately 7.6 million shares. Seagate's strong December quarter performance and March quarter guidance underscore our continued focus on driving growth, enhancing profitability and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders over the long term. Operator, let's open the call up for questions. Operator: [Operator Instructions] And the first question comes from C.J. Muse with Cantor Fitzgerald. Christopher Muse: Given the supply-demand dynamics, you're obviously in the catbird seat. I wanted to really try to get some more detail on gross margins going forward. Your philosophy historically has been to share gains, both your customers and yourselves. But at the same time, given this tight environment, you are raising like-for-like pricing. So curious, is there a framework to think about in terms of the incremental gross margins that we should model from here? And then, I guess, maybe bigger picture, as you think about overall average pricing per exabyte, we've gone from kind of down double digits to high single digits. And I think we just exited the quarter down 4% year-on-year. Do you see a world where pricing could flat or even move positive year-over-year? William Mosley: Yes. Thanks, C.J. I'll let Gianluca chime in here as well, but the pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into '27 and '28, we look at how much capacity we're having. We're bringing online by virtue of the fact that we're making all these aggressive product transitions. We'll bring more exabytes to bear and then people go out there and renegotiate for those. I think flat to slightly up is certainly possible. And that's the way we're really managing it as we talk to our customers. The value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong. Gianluca Romano: C.J. So on the gross margin, we are executing very well, but executing a little bit better than what we discussed at our Investor Day, where we presented a model with a 50% incremental margin above $2.6 billion of revenue. We have done better every quarter, of course, is our objective to continue to optimize what we produce, what we sell and finance the profitability that we can get from the product. So the models cover over a longer period of time, now 2, 3 years, not 2 or 3 quarters, but I'm positive we are continuing to progress in the right direction. Operator: The next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: I have a similar type of question. I guess the gross margins in the guide and the incremental quarter-on-quarter gross margins on the guide are very strong. Can you maybe help bridge the drivers between mix and price? Obviously, you've got a better mix of data center revenue next quarter. But just wondering if you can dimensionalize that. And the opportunity for pricing, David, you just said sort of flat to up as possible. But as we think about the pricing that might be getting embedded within these LTAs and sort of beyond '26. Why can't that be a lot higher just given the tightness in the supply-demand environment? William Mosley: Yes. I think this gets into how persistent is the demand going to be, Wamsi, we talked about 2 or 3 years from now. The one behavior change that I really like in the last year is that people are starting to say, if I can't get it now, I'll plan next year better and the following year better. So we're having great dialogues on that front. Of course, supply has risen quite a bit in the last year's supply of exabytes from the industry. The industry has reacted pretty well, but I think demand is still pretty strong. And my perspective on this is I think demand will stay strong for quite some time. So in that kind of world, we're having great discussions with customers further out in time. And the biggest part that helps us in our planning is through these product transitions. They know that's how they get more exabytes. Gianluca Romano: Yes. And Wamsi, we are saying in the script today that for the rest of the calendar year, we expect revenue and profitability to continue to improve sequentially every quarter. So we are not implying in any way that this trend is changing. It's actually now getting better somehow. Operator: The next question will come from Erik Woodring with Morgan Stanley. Erik Woodring: Congrats on these results, incredible. Dave, at your Analyst Day last year, you kind of pointed to a mid-20% exabyte growth CAGR. And I'm just wondering where you think that supply growth can land this calendar year. And as you get closer to that HAMR crossover point later this year, like does that pace of exabyte growth accelerate? And I'm just asking this because demand is clearly outpacing supply. So can you maybe just help us try to better understand the shape of your exabyte supply growth because obviously, it will dictate kind of exabyte shipments for the year. William Mosley: Yes. Thanks, Erik. So we are planning to transition to 4 terabytes of platter. And fairly aggressively, but I think what people have to keep in mind is that we were fairly tight all throughout manufacturing. So we have products that are in the pipeline already that are committed to customers and so on. We don't just move very quickly to 3 or 4 terabytes of platter as things come. And it's a good problem to have, actually. We're running manufacturing quite, quite tight right now. So I think it will be a fairly prescriptive ramp, to your point. It won't be as fast as maybe we've done some ramps in the past, but it will be very profitable, and that's the way we look at it. As we go further out in time, I'm very optimistic that the 4 terabytes per platter is a very strong product. It will start to replace some of the other legacy products, I'll say, that way and because it has so much better value proposition in a lot of those markets. And then when that happens, then we see more opportunity. Operator: The next question will come from Asiya Merchant with Citi. Asiya Merchant: Great results here. Just a couple that are related to the prior question. You guys gave some projections on HAMR, not just for fiscal year '26, but even into fiscal '27. So if you could talk about upside to achieving those targets for the HAMR rollout. And related to that, how we should think about the blended cost reductions, pretty impressive, again, margins here and guiding for improved profitability. So if you could talk to us a little bit about the cost reductions going forward, especially as you ramp HAMR here with the Mozaic 4, that would be great. Gianluca Romano: Yes, Asiya. So I would say, first of all, we are very happy with the transition to HAMR. We qualified the last big cloud service provider in the U.S. and we have qualified 6 out of 8 of the top cloud service providers. So the transition from PMR technology to HAMR technology, is progressing very well. And we are now qualifying the new product, the 4 terabyte per disk to 40 terabytes per drive. Of course, this will help with the increase in exabyte in terms of mix. We gave a good indication, I think, at our Investor Day, and we want to be aligned to that. And the cost will be favorably impacted, especially when we start ramping high volume of the 40 terabyte drive. Of course, that will drive a fairly important reduction in cost per terabyte compared to the current HAMR, and of course will be a good contributor to further increase our gross margin. Operator: The next question will come from Karl Ackerman with BNP Paribas. Karl Ackerman: I was hoping you could clarify what portion of your LTAs for overall nearline HDD capacity has fixed or multi-quarter pricing agreements. I ask because as these LTAs roll off throughout 2026, any new agreements will be locked in at higher values reflective of not only the demand use case also widening price per terabyte gap between enterprise hardware drive HDDs. Shanye Hudson: And Karl, your -- the second part of your question was a little fuzzy. So we captured the first part, but I might ask you for clarity on that second. Karl Ackerman: Sure. Yes, I'll just repeat, if I could. As these LTAs roll off throughout 2026, I would imagine those new LTAs will be priced at perhaps a higher value or higher order value, particularly given the widening gap between hard drives and SSDs. So if you can comment on the mix of LTAs and how you think that progresses throughout '26 would be great. William Mosley: Yes. Thanks, Karl. So as we roll off, say, for example, somebody might have been qualified on a 2.4 terabyte per platter product or something, and then they might be qualifying a 3.2 or even a 4-terabyte per platter as we roll forward. So we changed based on the demand that we see, we changed -- and our available supply, we changed the pricing dynamic there. I think that's one of the biggest things you're pointing out. I'll say that '26 is fairly booked. We talked about that in the call a bit to the extent that we can out-execute our plan, it will be marginal like you saw last quarter, we get the qualifications done a little faster. We ship a few more drives. That's how we can do better than planned. But other than that, it's fairly predictable in '26, and we're looking to start '27 the same way. Operator: Next question will come from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe address -- given everything you just said about demand and about the mix effect from HAMR this year, maybe can you give us any kind of directional guidance about where you might expect exabyte shipments to end up on a calendar '26 versus calendar '25 basis relative to the sort of long-term targets you've laid out previously. It seems like you could do materially better than that, but I just wanted to confirm what your expectations were if you could give us a numerical range. Gianluca Romano: Jim, no, we are not guiding calendar '26. But we said in our financial model, we said that we expect exabyte -- nearline exabytes to grow in the mid-20%. We have done a little bit better if you look at the last few quarters, and we always -- as Dave said before, we always try to extract as many exabyte as we can from our manufacturing. So we are continuing this trend, but we don't guide for calendar '26. William Mosley: But moving from 2.4 per platter to 3 per platter to 4 per platter, you can see that we're on a trajectory like you described. It's -- when it gets down to the individual customer level, obviously, we have to be very predictable because they need what they need and what they -- what we've committed to in order to build out that data center. So we'll continue to execute that plan and maybe we can do a little bit better as we transition to 4 terabyte per platter. Operator: The next question will come from Amit Daryanani with Evercore. Amit Daryanani: Gianluca, I'm hoping you can talk a little bit about the March quarter guide because it seems to be a really sizable uptick in gross margins. I think it's up like 250 basis points or 100% plus incrementals. Could you just -- is there any you would call out in March quarter that's unique that's helping drive that kind of margin expansion? And is this really all coming from the core HDD business? Or is there a potential benefit from the old systems business helping you as well? Gianluca Romano: Amit, well, I would say, we expect it to be a very good quarter. I don't think it's different than what we have done before. It's always based on the pricing strategy and the mix, as you know. We qualified another customer on HAMR, so we will ramp a little bit more volume on HAMR. This is helping us to get better margin. But fundamentally, is not really different in how we think we are going to execute the quarter and is good. I think the incremental margin was very good. William Mosley: Yes. And it's not the systems business. The systems business is doing well, but it's fairly small scale in comparison. Operator: The next question will come from Mark Newman with Bernstein. Mark Newman: Congrats on great numbers today. Just want to touch again on this, the LTAs and pricing arrangements you have. Just curious, do you think there's an opportunity here for more significant price increases in NAND flash. We're hearing things like 40% to 100% up Q-on-Q for some contracts. I appreciate hard disk drives -- you have very long-term agreements. But I think there's a lot of questions I'd like to just touch on this as well. And a lot of -- as the LTAs roll off, is there an opportunity for some of those to be repriced at a more significantly higher price to change the trajectory, certainly numbers are great, you're printing. We're just trying to figure out, could you start to see more significant price increases rather than at the moment, you're seeing kind of flattish down a little bit, up a little bit. But overall, your average prices are flat, which I understand is a mixture of like-for-like slightly up, offset by new products coming in at lower price. Just wondered if that may change. And then just a quick update on HAMR mix, if there's any update on the trajectory of the HAMR mix that you've outlined before. William Mosley: Thanks, Mark. A couple of points. On the HAMR mix, we necessarily constrained ourselves on the 3 terabyte per platter because the factories were fairly full, and we knew we would be going to the 4 terabyte per platter product. So we've been leaning harder on that and making sure it gets through the development and qualification phases. As time goes on, then we'll move off and on to the 4 terabyte per platter very aggressively. So that helps you on the mix side. And the other thing about HAMR mix is it will be necessarily mixed up. I think the demand for those products will be at the high capacity points, not necessarily the lower capacity points just yet. And then relative to pricing, I think I said before, as we -- as one long-term agreement rolls into the next year or the next year, we've satisfied our existing supply commitments, people are looking at the new products, we have constrained supply of those new products, then we look at what the demand is, and we dictate where our pricing is. And one of the very first questions I said it could be flat to up a little bit. That's the way I think about it right now, but it all depends on what the demand is. Demand continues very strong. That's great. And again, what we're seeing is people who can't get what they need today, they're saying, okay, I need to be able to plan my data center procurement out in the future, let's get more predictable in the future, has given us better visibility, helps us run our factories for better cost and so on. So that's great. Operator: The next question will come from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I had a question, I just want to put it in 2 parts. One is how much was your HAMR as a percentage of your exabyte shipment last year? How much do you expect it to be this year? The genesis of the question is I'm just trying to figure out, obviously, a lot of questions on the very strong gross margins. If there's a way to put it in 3 buckets, like how much of the gross margin upside is driven by pricing? How much is driven by product mix? How much is driven by cost reduction by offshoring manufacturing? William Mosley: Yes, there's really no offshoring manufacturing or anything like that involved. Our manufacturing operations around the world are doing quite well and quite full. So that's helping from a cost perspective. But really no change in any manufacturing strategy to speak of. Relative -- I would say a lot of what -- the benefits we're seeing is mix and mix not just because we're actually transitioning into higher and more -- better products over time, but also because the demand for those products is quite high. You think about it, if you're building a data center with a 3 terabyte per platter versus the 4-terabyte per platter, you're going to be running that data center for a long time, you want the higher capacity point. And to the extent that we can do that as predictably as possible, that mix is what's driving the stability out in the market for us and helping us plan. Gianluca Romano: Yes, Krish, we don't give specific details on the impact of pricing, mix and cost. But they are somehow interrelated. I would say the change in mix is helping with the cost reduction and the supply-demand situation is, of course, supporting our pricing strategy. So they are all very good contributor to the increase in gross margin. And as we said before, this is going to continue through the calendar year. Sreekrishnan Sankarnarayanan: How much of HAMR as a percentage of the mix? Gianluca Romano: Well, Dave gave an indication of the unit that we shipped in the last quarter. So I think you can fairly easily calculate that. Operator: The next question will come from Steven Fox with Fox Advisors, LLC. Steven Fox: I guess I was just wondering on this -- on your mix question, looking at your average capacity per drive being up 22%. Like how much of that -- like obviously, the supply demand environment has tightened over the last year. And in reaction to that, are you taking steps to accelerate that mix up as the customers pushed you that way? Like I'm just curious how much you can control going forward now that we're here on even tighter supply to sort of help your customers in terms of absolute petabytes you're delivering. William Mosley: Thanks, Steve. So yes, we are -- the lead time out of the wafer fab is quite long. So we have to be predictable for our customers, say, 6 months, 9 months later and so on and so forth. That's one of the reasons why we talk kind of a year at a time inside of these LTAs. So we start wafers based on what we know we're going to be able to deliver, so that we're as predictable as we can be for our customers. As were -- if we're deploying manufacturing engineered resources we're trying to get through these product transitions. That's what gets us the most exabytes after that. And so going, mixing up is kind of our goal. So if that helps clarify what our strategy is. Steven Fox: It does, Dave. I'm just wondering like when you had your analyst meeting, you said that sort of a pretty well-defined time line for node transitions. Maybe just can you give yourself a report card on how you're doing on some of those time lines if we look out now versus the next year or longer term? William Mosley: Yes. I think that's good. We're on the plan or slightly ahead. And again, most of that's under our control. We execute well. We've been executing well. Some of it's under our customers' control as well. And the behavioral changes we've seen in the customer I made reference to earlier, they're really pulling hard because they need more exabytes. And so that helps get the calls done quickly. It helps a road map alignment and then supply -- specific supply alignment, which helps our factories. Operator: So next question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: Congrats on the results. I want to go back to gross margin. I know you talked a lot about the pricing dynamics and the visibility you have. But the thing that stands out to me is you've been executing on like a cost per terabyte of like a mid-teens year-on-year decline in these last several quarters. As we roll out the 4 terabyte per platter Mozaic drive, how do I think about that cost down curve? Is it mid-single digits? Is it -- can you sustain at double digit and would not -- wouldn't we expect the 4 terabyte per platter HAMR drive to actually maybe accelerate the cost down, given the ability to bring that into lower end other outside of the nearline platforms. So I'm just curious how you think about that cost down curve. Gianluca Romano: Yes, we are very positive on the 4 terabyte per disk in terms of impact on the cost, as we discussed before. The unit costs tend to be fairly similar. But of course, we are adding a lot of content per unit. So that will be a good help to reducing the cost and improving profitability. So as you know, we are qualifying 2 major customers on these new products. So the time to finalize the call and their ramp probably through the end of the calendar year and for sure, well into -- the impact will be strong, I think, in the next calendar year, too. William Mosley: And we plan on making a big transition to 4 terabytes per platter over the coming few years and then getting to the 5 terabytes per platter as well. We do add complexity as we make those transitions. But I'd say the first order, the things that dictate the speed of the ramp are our ability to go work scrap and yield, all through our supply chain and so on, and we're working very hard on that. I like the product. So I think it provides for a bright and stable future for us. We just need to stay focused on it. Operator: The next question will come from Timothy Arcuri with UBS. Timothy Arcuri: I want to ask about LTSAs. I think you said nearline capacity is allocated through 2026. So it sounds like both pricing and exabytes are locked in this year. But for '27, I think you said something that I took that exabyte and pricing is not locked in, but you have some sort of agreement. So I guess I had 2 questions. First of all, is it right to assume that pricing is also locked in for all of '26? And what sort of agreement are you referring to for 2027 if volume and pricing is not locked in next year? Gianluca Romano: Yes. For this calendar year, we said basically, we have PO in place for all the quarters, so volume and pricing is well defined. As Dave said before, if in a quarter, we can produce a little bit more, of course, we will sell those exabytes in the open market at a good profitability. But I would say we have -- the vast, vast majority of the volume is already allocated. Calendar '27, we will start working on that fairly soon. Of course, we have very good indication and agreement on volumes, but we have not -- we have not fixed the price yet. William Mosley: Yes. And Tim, if this helps, so we haven't really started the longest lead time parts, but we will very soon for the start of '27. And we need to start having those discussions with our customers which calls are we going to get through together with -- what exactly is the plan, because a lot of them need predictability as well. So we'll have to build in our factories what -- based upon how hard they want to pull on those new products. Operator: The next question will come from Mehdi Hosseini with Susquehanna Financial Group. Mehdi Hosseini: Just a quick housekeeping item. Gianluca your CapEx has been increasing on a Q-over-Q basis. How should I think about depreciation, especially since it did dip in the December quarter? Any color here would be great looking forward. Gianluca Romano: Yes. No, our CapEx is aligned to our target of 4% to 6% of revenue. We are actually at the bottom of that range. So is not increasing in terms of what we want to achieve and what we said, of course, comparing to a period where we were more into the down cycle in terms of dollars, of course, is higher. We are supporting our HAMR transition and HAMR ramp. So I would say there is nothing different than what we said. William Mosley: Yes, the way I think about it as well, Mehdi is that if you go back 2 years ago, and you use that as a baseline, we were still significantly lower revenue, but also we were challenged on the supply and demand balance. Right now we're in a totally different environment, of course. So we'll probably stay well within the 4% to 6% range. But as the revenue goes up, we'll spend a little bit more and probably the first priority is maintenance tools and the things that we weren't doing a couple of years ago. Mehdi Hosseini: I apologize, I may have confused. I was focusing more on depreciation given these several quarters of increase in CapEx, should I expect a step-up in depreciation looking forward? Gianluca Romano: Depreciation will follow the CapEx. So you have your -- I guess you have your model on the revenue, so you can calculate the 4% to 6% of CapEx. And then depreciation for us is on a 10 years useful life. So you can probably model it that way. William Mosley: It's not like -- some other fabs, it's not necessarily the huge part of the cost drivers. There's a lot of other pieces of the cost that we can go manage them. Operator: The next question will come from Ananda Baruah with Loop Capital. Ananda Baruah: Dave, while we have you, a little bit of a technical one, are you -- what kind of activity are you seeing at sort of the so-called warm tier of storage. It's a question that comes up a bunch in our conversations. We've heard that it's obviously growing, it's growing both hard drive and flash storage is participating nicely, but would love to get your input on it. Because I think there's still -- first of all, we love to know if what we're hearing is accurate. But secondarily, I think there's a lot of people that are assuming that that's really like it's becoming a NAND tier. Largely a NAND tier in the GenAI world. And anyway, just love to get any context there that you have? William Mosley: Yes. I think you have to be a little bit careful, Ananda. So there are applications that are very memory dependent that are attached to compute and some of these applications are neat, I like them. When you get -- when you start talking about big data storage, if you will, in data centers, the tiering architecture is fairly well set and probably won't change based on economics and also architectures that are well known. People know how to play. So if the concept is that drives aren't working hard, they're in the background, just storing data. That's not the way -- a good way to think about it. That's not the way hard drives are being used right now. They're working 24/7. A lot of times, they're optimized for performance themselves, largely streaming performance not random small block workloads. That's more of a memory thing. And so if you had an application that's random small block, it's probably memory. If you have big data, it's probably a little bit of memory on the front end and a lot of hard drive on the back end. And we think that there are applications across the entire spectrum, of course, but we think that in the future, when we start to talk about the concepts in their enormity about checkpoints and physical AI and video and things like that. It's large, large data so that the architectural tier that stores the data will probably remain constant for the next decade. Ananda Baruah: That's super helpful. I'll keep it there. Operator: Next question will come from Vijay Rakesh with Mizuho. Vijay Rakesh: Just a quick question on HAMR. I know you're ramping it faster in the March quarter. Should that drive a much better gross margin profile, I guess? And any thoughts on how we should see the margins improve, I guess, as HAMR starts to ramp? And I have a follow-up. Gianluca Romano: Vijay, if you are referring to the March quarter, of course, ramp of HAMR is included in our guidance. And our guidance is indicating a fairly good improvement in gross margin again. And then I said for the rest of the calendar year, we expect both revenue and profitability to improve sequentially. And of course, part of that is coming from additional HAMR products. William Mosley: We think demand will be strong for the 4-terabyte per platter, of course. And so that's one of the reasons why we're making that a priority in the transition that we go through this calendar year and into next. Vijay Rakesh: Got it. Very helpful. And just a quick question also on the OpEx side. Very nice, obviously OpEx same time last year, somewhere in the 14% range, now is down to 10%. I know Gianluca, you said probably that's a long-term target, but it looks like as Dave mentioned, with the top line ramping up with all the design wins, it looks like OpEx could go down again. Is that fair as a percent of mix? Gianluca Romano: Well, I would say we are getting closer and closer to our fourth target of 10% of revenue for OpEx. We are almost there. We should be there actually in the March quarter. And then, of course, now that we relax our cost control, we will continue to keep our cost control and revenue is supposed to increase so we can probably do it a bit better. William Mosley: Yes. I'm glad you asked that, Vijay, because obviously, a few years ago, the tough times that we went through, we weren't investing in ourselves to the rate that I'd like. And of course, it's with the HAMR transition in front of us, that was a lot of work. Now that we've kind of cleared that HAMR transition, we can see the future fairly well. It's the -- clouds are parting, if you will. And we can see aerial density opportunities in front of us, and we will take that the money such as it is, even staying within our same model, and we'll take that money and reinvest in ourselves so that we can continue to drive the areal density. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. William Mosley: Thank you, Nick, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets and advancing areal density road maps and successfully qualifying customers on our HAMR-based Mozaic products to address the sustained and growing demand for data storage. As data creation accelerates, driven by both traditional workloads and these emerging AI applications, Seagate's transformational technology positions us well to capture the significant demand opportunities ahead. I'd like to thank our employees for their dedication and innovation and our customers and suppliers for their trust and collaboration, and our shareholders as well for their continued support. Together, we're driving Seagate's ongoing success. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.