The operator welcomes participants to the Seagate Technology Fiscal First Quarter 2024 Conference Call and gives instructions for the call. Shanye Hudson, Senior Vice President of Investor Relations, introduces the speakers and mentions where the earnings press release and supplemental information can be found. Non-GAAP and GAAP measures will be referenced and reconciled. The call contains forward-looking statements that may differ from actual results due to risks and uncertainties.

The paragraph discusses the financial results of Seagate for the September quarter, including revenue and non-GAAP loss per share. The company experienced softer demand in legacy markets and a weak economic trend in China, but is encouraged by positive progress in U.S. cloud inventory consumption. Seagate continues to prioritize cash generation, strengthening their balance sheet, and driving profitability. They also mention hitting key milestones in HAMR product development, which will lower storage costs and enhance profitability in the future.

The company's plans for their high capacity products are on track and they have seen an increase in demand from U.S. cloud customers. They expect further growth in the December quarter and are optimistic about demand in 2024. Cloud customers are shifting their spending towards AI-related infrastructure, but traditional IT investments are expected to resume soon. China's market is lagging due to economic conditions, but there is strong demand for video and image applications. Smart city and security projects are driving demand in the VIA market.

The company is optimistic about the VIA market due to the increasing use of AI and deep data analytics. They believe that their mass capacity storage portfolio will play a vital role in harnessing the benefits of AI and generative AI applications. They have recently announced high capacity Nearline products and are engaging with customers for qualification, with volume shipments expected to begin in the first half of 2024. They also plan to ramp up 3 terabyte per disk products based on HAMR technology in early 2024.

Seagate is introducing new drives with a capacity of 30 terabytes that use either CMR or SMR technology. Customer qualifications are going well and the company is receiving positive feedback. The company has been thoughtful in building their product roadmap and has leveraged existing designs and processes to improve efficiency and reduce complexity. HAMR technology has been a key factor in increasing areal density and the company expects to launch products with 4 terabytes per disk in less than two years. This will differentiate Seagate and meet the high demand for mass capacity storage in today's data-driven business economy.

The company is confident that their HDD advancements will continue to provide cost advantages over NAND solutions for mass data storage. Upgrading to higher capacity drives can offer significant savings in costs, power, and floor space for customers. The company is also focused on capturing the value of their product portfolio and adjusting prices accordingly, which has already shown some benefit. The September quarter results were in line with expectations.

The company reported a decline in revenue but an increase in non-GAAP gross margin. HDD revenue declined due to a decrease in the legacy market. However, mass capacity sales and shipments improved, driven by demand from cloud customers. The company expects demand to continue to improve in the VIA market, but the uncertain economic environment in China may affect the recovery. It may take until the end of the year for inventory levels among CSP customers to rebalance.

In the September quarter, legacy product revenue decreased by 31% due to lower demand in all three markets served. Non-HDD revenue also decreased, and IT spending patterns remain a challenge for the enterprise system business. Non-GAAP gross profit decreased by $25 million, but gross margin expanded slightly due to pricing adjustments and cost savings. The company has extended the useful lives of certain capital equipment, resulting in a reduction in depreciation expenses. Non-GAAP operating expenses decreased, but are expected to increase slightly in the December quarter due to the conclusion of certain spending reduction measures.

In the September quarter, the company reduced inventory and had a significant reduction in capital expenditures. They generated $57 million in free cash flow, used $145 million for dividends, and ended the quarter with $2.3 billion in available liquidity. They raised $1.5 billion in new capital through convertible notes and used a portion to fund a capital co-transaction. They used the remaining proceeds to retire outstanding balance on term loans, resulting in expected annual cash interest savings of $15 million. The company also renegotiated the terms of their credit agreement and had relaxed debt covenants through fiscal 2025. Overall, their debt balance increased by $215 million to $5.7 billion.

In the December quarter, Seagate expects non-GAAP interest expense to remain flat at $84 million and mass capacity sales to increase slightly due to demand for Nearline products. The company also predicts higher seasonal demand from the consumer market and flat non-HDD revenue. They anticipate revenue to be around $1.55 billion and a non-GAAP operating margin in the mid-single-digit percentage range. They expect to narrow their non-GAAP loss per share to $0.10 and are focused on generating free cash flow, restructuring debt, and executing their product roadmap to capitalize on future data growth. Despite the current industry conditions, Seagate is confident in their ability to deliver value to customers and shareholders.

The speaker thanks stakeholders for their support and opens up the call for questions. The first question is about the expected growth of mass capacity exabytes, which was previously projected to be 35% annually but may now be more in the mid-20s due to current events. The speaker notes that growth may not be linear and could be choppy, but there may be occasional spikes due to data moving into data centers during the pandemic.

Dave Mosley discusses the growth potential for data centers and the impact of new applications such as AI. He predicts a healthy demand growth of 25% in the next few years, but acknowledges that it may not be linear and there will be periods of digestion. He also mentions the prioritization of customers for HAMR qualifications and the importance of ensuring supply meets demand. Finally, he discusses the value proposition of HAMR and its potential to increase dollars per terabyte.

Dave Mosley, CEO of Seagate, discusses the factors contributing to the cost of acquiring new drives and the expected growth in the industry. He also mentions the company's focus on increasing visibility and collaboration with customers to improve predictability in demand. The US cloud market is showing signs of recovery and Seagate expects volume shipments in the millions of drives next year. The industry has been facing challenges due to lower demand, but this is expected to improve in the coming months.

The speaker discusses the challenges of running factories and the need for predictability in order to satisfy customer demand. They mention a 25% CAGR in data growth and the importance of managing schedules for better economics. They are currently engaging with multiple customers for their HAMR technology and state that its reliability metrics will be the same as traditional drives.

The speaker discusses the lack of change in power and reliability in their products, as well as the decline in their systems business due to on-premises enterprise applications. They believe this sector will eventually recover and they are satisfied with their penetration into multiple accounts.

During a conference call, Aaron Rakers from Wells Fargo asked about the company's gross margin and its expected impact on the upcoming quarter. Gianluca Romano, the operator, responded that the guidance for the December quarter indicates an improvement in gross margin, which is not due to underutilization but rather pricing actions and a better cost structure. He also mentioned the full impact of their restructuring plan and the need for a lower revenue to achieve a 30% gross margin. Timothy Arcuri from UBS then asked a question.

Timothy Arcuri asks about the impact of HAMR technology on gross margin and the trajectory of margins in the future. Gianluca Romano and Dave Mosley explain that HAMR will increase capacity and improve gross margin, with the biggest improvement coming at higher capacity points. They also mention that there may be some initial lower yields, but overall gross margin is expected to improve sequentially. Arcuri also asks about the impact of the change to build-to-order on bookings, and the executives note that while revenue is expected to remain flat, bookings are improving.

Dave Mosley discusses the impact of the shift to bill to order and customer inventory levels on bookings and revenue trajectory. He notes that some customers are embracing the predictability of the model, while others are not yet leaning into multiple years. Mosley believes the model is generally working well and as the industry shows higher value, he expects bookings to pick up steam. Negotiations are ongoing, but Mosley is confident that the company will continue to return value to all stakeholders and invest in the industry.

Krish Sankar of TD Cowen asks two questions to the operators of the conference call. First, he asks if the company will hit the 100 exabyte run rate for Nearline customers by calendar year 2024, given that they shipped 56 exabytes in the current quarter. He also asks about the increased confidence in the HAMR ramp and gross margin compared to previous quarters, wondering if there were any improvements or increased customer demand driving this. The operators respond that all factors, such as progress in yield targets, reliability, and qualifications, contribute to their confidence in the HAMR ramp. They also mention that the company is starting qualification with a 2.4 terabyte per platter, which will help drive more volume and predictability. They do not give a specific answer for hitting 100 exabytes next year, but mention that they will continue to update everyone on the progress.

The company does not expect to double the exabyte for the current fiscal year, but they do anticipate sequential growth in all quarters. They still expect a gradual uptick in the market, with the possibility of some global cloud customers being affected by economic issues. The company is still on the same plan for recovery as discussed last quarter. They anticipate a gradual uptick rather than a sudden increase. The gross margin is expected to improve by 200 basis points due to pricing increases and possibly other factors.

The speaker is responding to a question about the factors that are driving the company's gross margin up in December. They mention pricing and cost as important factors, and also mention product transitions and customers being incentivized by a better TCO proposition. The next question is about macro headwinds and how the company's business can continue to recover despite them. The speaker acknowledges the tough environment but mentions that data continues to grow and people want to improve their economics.

The data centers around the world have a large number of hard drives, and there will be a refresh of these drives for various reasons. This will have economic benefits and opportunities for cost savings. The data growth is bucking the trend of the macro environment, and there will still be investments to make. There will also be underutilization costs in the first half of next year, although they may be lower than in December.

Dave Mosley discusses the potential for tightness in the hard drive industry as data centers continue to grow and capacity is taken offline. He predicts that this could lead to customers upgrading their fleets and causing lead times to increase, resulting in potential challenges for the industry. This could lead to price increases and long-term agreements with customers.

The company is focused on providing built-to-order models to customers in order to help them achieve a predictable financial outcome. They believe there are opportunities for AI in areas such as cameras, but it is difficult to quantify the potential sales impact at this time. The company is closely monitoring the trend of retaining data for longer periods of time for potential future benefits, and believes that much of this data will be used at the edge rather than in the cloud. They are keeping an eye on new AI applications and their potential uses.

The speaker discusses the potential of generative AI as a new user interface and the importance of data integrity. They also mention a lower CapEx for fiscal 2024 and their plans for HAMR technology, but do not provide specific guidance on the mix of HAMR units or exabytes by the end of 2024. They express confidence in their technology and mention long wafer lead times.

The speaker discusses Seagate's focus on their technology roadmap and their belief that it will lead to increased profitability and opportunities in mass capacity storage. They thank shareholders for their support and conclude the conference.

This summary was generated with AI and may contain some inaccuracies.