The paragraph is an introduction to Seagate Technology's fiscal second-quarter 2025 conference call. The operator and Shanye Hudson, the Senior Vice President of Investor Relations, provide an overview of the call's structure, mentioning that participants will initially be in listen-only mode and that the event is being recorded. Key participants include Dave Mosley, CEO, and Gianluca Romano, CFO. The earnings press release and supplemental information are available on their website. The call will discuss both GAAP and non-GAAP financial measures, with some non-GAAP outlook measures not fully reconciled due to unpredictable material items. The paragraph concludes with a caution that the call includes forward-looking statements, which are subject to risks and uncertainties.

The paragraph discusses Seagate's strong financial performance at the end of calendar year 2024, highlighting a 7% sequential revenue growth and a significant increase in non-GAAP earnings per share. This growth is largely driven by increased demand, especially in the cloud sector, which led to a notable rise in nearline product revenue. Seagate's areal density-driven roadmap and advancements in HAMR-based technology suggest further profitable growth in fiscal 2025. The company has also started ramping HAMR-based products for its initial CSP customer and announced the sampling of Mozaic drives with capacities up to 36 terabytes.

Seagate is in a strong position amidst increasing demand, despite recent supply constraints that have been resolved. The demand for mass capacity storage is primarily driven by cloud services, with a significant rise in nearline products due to increased cloud capital investments expected through 2025. Hyperscale customers are managing inventories while investing in infrastructure to support traditional services and new GenAI applications. GenAI is anticipated to significantly boost mass capacity storage growth, particularly for data-rich content like imagery and video, which is expected to expand 170 times from 2024 to 2028. HDDs are essential for storing large datasets required for AI model training and serve as repositories for data lake storage, supporting continuous AI model development.

A survey of business leaders highlights the importance of data retention and checkpoints in improving AI outcomes, especially at the edge where most data is generated. Enterprises are expected to increase local data storage at the edge as AI computing moves closer to data sources. The VIA market, utilizing AI analytics for smart city and factory applications, has seen record drive capacities, reflecting higher video analytics use and longer data retention. Seagate is well-positioned to meet the increased demand for mass capacity storage with its areal density-driven product roadmap. The company is utilizing Mozaic-based technology to efficiently meet growing exabyte demands and enhance profitability. Seagate's 24-28 terabyte PMR platform is a major revenue and shipment leader, while its Mozaic HAMR technology, delivering capacities of 30 terabytes or more, is gaining traction among customers.

The paragraph discusses the current and future state of a storage platform with multiple qualified customers in mass capacity end markets. Seagate is increasing production for its lead cloud service provider while working on additional customer qualifications, setting up for a significant Mozaic volume ramp in late 2025. The company's Mozaic HAMR technology is highlighted as offering a competitive advantage in mass capacity storage by reducing costs, conserving space, and lowering power consumption. The demand for both hard disk drives (HDDs) and NAND Flash memory in data centers is explained, with HDDs being more cost-efficient and environmentally friendly for bulk storage. Seagate anticipates revenue and profitability improvements in fiscal 2025, driven by supply discipline, technological advancements, and growing data storage needs fueled by AI. The paragraph concludes with the transition to a speaker named Gianluca Romano.

Seagate reported strong December quarter results with a 50% year-over-year revenue growth and a four-fold increase in non-GAAP operating income. The company's revenue for the quarter was $2.33 billion, marking a 7% sequential increase. Non-GAAP operating income rose 22% sequentially to $538 million, representing a 23.1% operating margin, with EPS at $2.03. The Hard Disk Drive segment saw an 8% revenue increase to $2.2 billion, with shipments reaching 151 exabytes. Mass Capacity revenue, driven by nearline cloud demand, grew for the sixth consecutive quarter to $1.9 billion and 140 exabytes. Seagate adjusted its reporting to include nearline exabyte shipments to VIA customers, aligning with industry standards. The December quarter total nearline shipments increased to 126 exabytes. Demand was strong for their high-capacity PMR products, driven by cloud and enterprise markets, with record-high average drive capacity for two consecutive quarters.

In the December quarter, sales of Legacy products increased by 2% to $275 million due to higher seasonal demand. Revenue from the Other business was $156 million, with a decline in SSD sales being offset by improved system demand. Non-GAAP gross profit rose by 14% to $825 million, and the gross margin improved to 35.5%, marking the seventh consecutive quarterly increase. Non-GAAP operating expenses were $287 million, up 2%. Adjusted EBITDA grew by 19% to $591 million, and non-GAAP net income reached $433 million, equating to $2.03 per share. Free cash flow increased to $150 million, with expectations for further improvement. Capital expenditures were $71 million, and the company plans to keep CapEx within 4%-6% of revenue for fiscal 2025.

The company returned $148 million to shareholders via dividends and closed the December quarter with $2.7 billion in liquidity and $5.7 billion in debt. They repaid around $479 million in notes and now have no debt obligations until late fiscal 2027. They aim to lower their net leverage ratio further in the coming quarters. For the March quarter, they anticipate strong cloud demand offsetting declines in other markets, but note that supply constraints could impact revenues by $200 million. They expect March quarter revenue to range between $2.1 billion ± $150 million, marking over a 25% year-over-year increase. Non-GAAP operating expenses are expected around $290 million, and non-GAAP EPS is projected at $1.70 ± $0.20, with non-GAAP operating margin in the low-20% range.

The paragraph highlights Seagate's strong financial performance in the December quarter, emphasizing their focus on profitability, cash optimization, and growth. They are committed to maintaining a balanced supply and demand environment, which they believe will improve revenue and profitability. David Mosley, the speaker, mentions the increasing importance of mass capacity storage, especially with advancements in AI. Seagate is advancing with their Mozaic HAMR platform to meet large-scale data storage demands, which sustains their leadership in areal density and offers economic benefits to customers and the company. Mosley thanks Seagate's global team, suppliers, customers, and shareholders for their support. The operator then opens the call for a question-and-answer session.

In the paragraph, Erik asks David Mosley about a $200 million shortfall due to supply issues in the March quarter and whether it will affect future quarters. Mosley reassures that the issue is temporary, limited to the current quarter, and expresses confidence in predictable growth and product transitions, particularly in exabyte and demand growth, which will also improve the margin profile. Wamsi Mohan from Bank of America seeks clarification on the transitory nature of the $200 million shortfall and queries the potential future cycle of exabyte shipment increases, referencing past cycles of growth followed by pauses. David Mosley is expected to provide insights on the situation.

The paragraph discusses the current stage of a market cycle, noting that the initial overbuild during the pandemic and low exabyte shipments over the last two years make it significantly different from previous cycles. The speaker emphasizes that the build-to-order approach has enhanced predictability in demand for data centers and equipment refreshes, leading to increased confidence throughout the year. However, they acknowledge uncertainty regarding the impact of current quarter results on annual expectations. Despite this, they express confidence in meeting financial goals and succeeding with product transitions. Gianluca Romano adds that although demand is high, limited short-term capacity prevents meeting it fully, yet expects no overall negative effect on results and anticipates improvement throughout the year.

The paragraph is a Q&A segment from an earnings call. Krish Sankar from TD Cowen asks Gianluca Romano about the company's gross margin guidance, noting a baseline of approximately 36% for the March quarter and inquiring about future improvements as nearline grows throughout 2025. Romano expresses optimism, citing a trend of sequential gross margin improvement driven by product mix, high-capacity drives, stable price increases, cost efficiency, and HAMR technology, particularly in the latter half of the year. Amit Daryanani from Evercore then asks Dave about the implications of HDD companies increasing capacity, querying if Seagate is adding net capacity or returning to a baseline, and is surprised at the projected gross margin increase despite revenue and capacity changes.

In the paragraph, David Mosley is discussing the factors contributing to the expansion of gross margins for the March quarter. He attributes the improvement to a shift in product mix, focusing on higher-capacity products, which offer greater value to customers and provide predictable economics for the company. This change has helped improve the margin structure. Additionally, there is a discussion about a $200 million impact, with clarification that it is a supply issue, not a demand one. The impact will be fully felt in the March quarter, and they are actively communicating with customers to manage the situation and ensure commitments are met.

The paragraph discusses a supply issue in which the company was unable to produce enough material during a certain period because they didn't reactivate necessary equipment, leading to a shortfall in supply for the March quarter. Gianluca Romano and David Mosley explain that this issue emerged in late summer, became apparent in November, and is impacting their current ability to meet demand. They highlight the long lead times of wafer equipment and emphasize the need for build-to-order predictability. While they expect to resolve the issue and meet demand by June, they acknowledge the lost opportunity in March and the ongoing challenges due to a steep production ramp. They express confidence in future recovery and demand satisfaction. The operator then introduces a question from Asiya Merchant, who notes the confidence in improving gross margins as HAMR technology ramps up and product mix shifts to higher capacity drives.

The paragraph discusses Seagate's approach to managing margins in light of increased demand for higher-capacity drives, particularly in data centers. David Mosley and Gianluca Romano mention that the demand picture is strengthening, and Seagate's product portfolio is well-positioned for this trend. They focus on optimizing build-to-order negotiations to enhance predictability and note that their target margin range previously mentioned does not include HAMR technology. They expect higher profitability as they ramp up HAMR in the future. Continuous investment in R&D and CapEx is crucial to advancing their technology roadmap, which is essential for delivering value to customers and maintaining competitive margins.

In the paragraph, a discussion unfolds about the company's strategy for optimizing its product and revenue model post-pandemic, emphasizing predictability in financial outcomes. Steven Fox from Fox Advisors asks about the transition to HAMR (Heat-Assisted Magnetic Recording) technology and its impact on market entry, particularly concerning customer adoption and scaling to higher data capacities like 36 terabytes. David Mosley responds by acknowledging initial challenges in productization during the transition but expresses confidence in future improvements and the company's aggressive approach to advancing technology transitions, including shipping drives with up to 36 terabytes capacity. The focus remains on increasing areal density to enhance value in the industry.

In the paragraph, Thomas O'Malley from Barclays asks about the future mix of business related to HAMR technology and its impact on gross margins. David Mosley responds by explaining that the 24-28 platform is experiencing rapid growth and shares many components with HAMR, allowing for a quick ramp-up of the latter. He notes that last year they pushed hard for transitions to improve margins, but this year's demand landscape and customer qualifications are different, leading them to proceed more cautiously. Despite this, HAMR remains margin-accretive, and they intend to scale it up as they work closely with customers, driven by the strong value proposition of higher capacity points that are in high demand.

In the paragraph, Aaron Rakers from Wells Fargo asks about the gross margin of hard disk drives (HDD), specifically focusing on whether the new HAMR technology is improving these margins. David Mosley responds by expressing satisfaction with their current position and emphasizes that they are engaging in profitable business, particularly with higher capacity transitions. He notes that there is potential for margin improvement depending on future demand, acknowledges the progress made in restoring margin structure, and states their intention to continue output growth in a measured way.

The paragraph discusses the current challenges and future plans regarding supply chain issues and product transitions. The company is addressing ongoing supply chain issues expected to last a few more quarters, while also transitioning to future models. Gianluca Romano and Aaron Rakers mention the company's confidence in improving gross margins due to increased volumes of HAMR (Heat-Assisted Magnetic Recording) drives, which offer higher capacity and improved margins. Karl Ackerman from BNP Paribas inquires about customer visibility and production capacity constraints, to which David Mosley responds that the production issues affected non-HAMR drives and emphasizes the aggressive push for HAMR drive transitions for their higher capacity benefits.

The paragraph involves a discussion between Karl Ackerman, David Mosley, and Vijay Rakesh regarding company operations and future expectations. Ackerman inquires about visibility from hyperscale customers amid capacity constraints, to which Mosley responds that the built-to-order (BTO) models provide good visibility and render current supply constraints irrelevant for those models. Vijay Rakesh shifts the focus to HAMR (Heat-Assisted Magnetic Recording) technology, asking if it will constitute 10%-20% of product shipments by the first half of 2026. Mosley and Gianluca Romano express confidence in the hard ramp-up of HAMR production due to strong customer demand, despite not specifying precise figures. The plan includes quarterly improvements and multiple qualifications with customers leading up to mid-2025.

The paragraph discusses a business's expectations for ramping up production of HAMR technology in the second half of 2025, emphasizing that existing tools for non-HAMR products can be converted for HAMR use, negating the need for new equipment. This transition aims to increase areal density, allowing for higher-capacity drives (e.g., 32 terabyte or 40 terabyte), which would enhance the company's offerings, customer value, and profit margins. In response to a question, it is clarified that the $200 million target for March is still anticipated, and the business is assessing the impact of generative AI, particularly in imagery and video, on its demand, noting Meta as a significant contributor.

The paragraph discusses a $200 million commitment related to build-to-order arrangements, clarifying that while there are supply issues, demand remains strong. The focus is on video and imaging applications, particularly at the edge in smart cities and factories, and their transition to the cloud. There's significant growth in video content usage and creation, driven by AI tools enabling creative professionals. This trend is boosting demand in the cloud. The conversation shifts to C.J. Muse and Ananda Baruah from Loop Capital, with Baruah asking about the HAMR (Heat-Assisted Magnetic Recording) transition and when its margins will become accretive.

In the paragraph, the discussion revolves around the introduction and market rollout of HAMR (Heat-Assisted Magnetic Recording) technology, which offers higher gross margins compared to legacy tech. Gianluca Romano mentions that while higher volumes of HAMR are desired, ramping up will take time due to necessary qualifications. David Mosley explains that despite current high margins on legacy products, HAMR remains profit-enhancing. The focus is on transitioning to HAMR to increase capacity and profitability, while also refreshing older products with fewer components for margin improvement. Ananda Baruah acknowledges the plan to ship HAMR as quickly as possible, noting its profitability.

The paragraph discusses the current state of HAMR (Heat-Assisted Magnetic Recording) technology deployment. Wamsi Mohan from Bank of America asks about the sampling of 36 terabyte HAMR drives and whether they have been provided to the same leading cloud service provider (CSP) as before. David Mosley responds by saying that the sampling is broader and not confined to one customer. He mentions that they are now shipping sample units to multiple entities and are seeing high demand for their 24-28 terabyte products, with factories running at full capacity. Going forward, they plan to gradually replace some of these existing products with HAMR ones based on customer readiness and system transitions, as well as completed qualifications. Although ramping up HAMR production is complex due to these factors, they are committed to pushing forward due to its potential benefits.

The paragraph is a transcript from a conference call Q&A session. Krish Sankar from TD Cowen asks Gianluca Romano about the distribution of the 126 exabytes of nearline storage shipped in December, specifically inquiring about the portion allocated to surveillance versus traditional nearline storage, compared to 109 exabytes in September. Gianluca indicates that typically 4 to 5 exabytes per quarter are related to surveillance. Shanye Hudson mentions that their supplemental materials will include historical data for the last five quarters to allow for year-over-year comparisons. The session concludes with closing remarks from David Mosley, who extends New Year wishes, acknowledges the ongoing recovery effort with gratitude to employees and suppliers, and looks forward to future discussions. The operator then concludes the conference call.

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