Seagate Technology Holdings Plc (STX) — Q1 2020 Transcript

Thank you. Good morning, everyone and welcome to today's call. Joining me today are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our September 2019 quarter 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 Form 8-K that was filed with the SEC. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable efforts. As a reminder, this call contains forward-looking statements, including our December-quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities and general market conditions. These statements are based on management's current views and assumptions and should not be relied upon as of any subsequent date. Actual results may vary materially from today's statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K filed with the SEC and the supplemental information posted on the Investors Section of our website. Following today's prepared remarks, we will open the call for questions. And with that, I'll now turn the call over to Dave.

Thanks, Shanye. Good morning, everyone. And for those of you here in Europe, good afternoon. Thanks for joining us. I will start today's call by summarizing key highlights from the September quarter, sharing our views on the market relevant to Seagate, and outlining the progress we've made on our key priorities. Afterwards Gianluca will provide further details on our financial results and our outlook for the December quarter. Seagate had a solid start to the fiscal year, with increases in revenue, non-GAAP operating profit, earnings per share, and cash flow quarter-over-quarter. Our focus on optimizing profit dollars is driving strong and sustainable operating cash flow to fund our future growth, extend our technology leadership, and sustain our strong capital return program. Over the past 12 months, we have returned a total of $2 billion to our shareholders through a combination of dividends and share repurchase, reflecting our ongoing commitment to enhancing shareholder value. Our Board approved an increase to our quarterly dividend, demonstrating their confidence in our future growth and cash generation capabilities. This marks the first time in four years that we've raised our dividend. Moving forward, we plan to review the dividend payment consistently over time. Let me now share some perspectives on the near-term market environment, starting with mass capacity storage. This market is growing, both in terms of dollars and exabytes, and is composed of nearline, video, and image applications, including surveillance, and NAS drives. The mass capacity storage market supports cloud and edge applications that are data-centric and require reliable, cost-effective, high-capacity storage best suited to HDD. In the September quarter, we delivered strong double-digit revenue growth in nearline, supported by improving demand across cloud and hyperscale customers. We are aggressively ramping our 16-terabyte nearline drives to fulfill strong customer demand for these products. With more than a dozen cloud and OEM customers qualified and several others underway, we are executing very well and are tracking to plan against our product maturity and customer qualification timelines. Based on our current outlook, we expect to ship more than 1 million drives in the December quarter, which would make 16 terabytes the fastest nearline product ramp in Seagate's history. Revenue from video and image applications declined in the September quarter following an unusually strong June period. Geopolitical tensions and regulatory hurdles continued to disrupt customers' typical buying patterns across multiple markets, including surveillance. We expect some demand volatility to persist over the near term. And with the transition to IT 4.0, we see the emergence of edge storage applications, which, like surveillance, utilize high-definition video and image processing. For example, smart factories, smart cities, and IoT, all require large amounts of data, which can benefit from low-cost, high-reliability disk drives. We believe these video and image processing applications continue to represent meaningful growth opportunities for Seagate over the long term. In our legacy markets, which include mission critical, desktop, notebook, DVR, gaming and consumer applications, we saw a seasonal uptick in revenue in the September quarter. As we shared in the past, these markets contributed to Seagate's cash flow while requiring a little additional investment. Importantly, many of the enterprise customers and OEM partners that we are supporting in the legacy markets are the same ones we expect to create new storage growth opportunities at the edge and in private clouds, along with other new customers. With the trend towards a multi-cloud world and the build-out of the private cloud, customers are seeking to follow the same economical disk-centric storage architectures as the large public cloud providers. Low cost, high-density storage platforms are integral part of the solution to address data-rich workload requirements, as Seagate's high-density scalable system solutions are ideally suited to these big data applications. We believe Seagate's strong technology roadmap, broad product portfolio, and deep customer relationships make us well positioned to capitalize on the significant opportunities we foresee ahead. We forecast the mass capacity storage revenue total addressable market will more than double from current levels by 2025, supported by ongoing demand from the public cloud, the build-out of the private cloud, and emerging edge storage applications. To capture this growing demand, we are executing our strategy to be the first to introduce new product solutions in the market and consistently deliver cost and performance benefits to our customers. Today, Seagate is the only company mass-producing 16-terabyte drives, which are the capacity benchmark for the industry. We are preparing to ship 18-terabyte drives in the first half of calendar year 2020 to maintain our industry capacity leadership. We are also driving areal density leadership with our revolutionary HAMR technology, which enables Seagate to achieve at least 20% areal density compound annual growth rate over the next decade. We remain on track to ship 20-terabyte HAMR drives in late calendar year 2020. As drive densities increase, multi-actuator technology is required to maintain fast access to data and scale drive capacity without compromising performance. We generated revenue from our MACH.2 dual actuator solutions for the first time in the September quarter. We are working with multiple customers to qualify these drives, including a leading US hyperscale customer, who is qualifying the technology to meet their rigorous service level agreements without having to employ costly hardware upgrades. We expect to see demand for dual actuator technology to increase as customers transition to drive capacities above 20 terabytes. With that, I'll turn the call over to Gianluca to go into more depth on our September quarter results and share our outlook for the December quarter.

Thank you, Dave. We executed well in the fourth quarter, growing revenue, operating income, and operating cash flow to support strong returns for our shareholders. Compared to the prior quarter, revenue increased 9% to $2.58 billion, above our guidance midpoint. Non-GAAP earnings per share were $1.03, at the high end of our guidance range. Our performance was underpinned by improving demand for mass capacity storage. Further, exabyte shipments increased 16% quarter-over-quarter to 98 exabytes, driven largely by our nearline products. Revenue for the enterprise market, which includes nearline and mission-critical drives, represented 45% of total September quarter revenue, up from 41% in the June quarter. Exabyte shipments into the enterprise market increased 34% sequentially to 51 exabytes, with nearline drives representing the vast majority of that total. Average capacity for nearline drives increased 10% quarter-over-quarter, reflecting the ongoing transition to higher capacity volume. Our 16-terabyte drives were the fastest-growing nearline product, both in terms of revenue and exabytes. We anticipate strong demand for these products across cloud, hyperscale, and OEM partners, and expect the 16-terabyte to be our highest enterprise revenue product in fiscal Q2 and our largest company revenue contributor in fiscal Q3, ahead of our prior expectations to meet these milestones in the fiscal Q4 timeframe. Revenue and exabyte shipments for our mission-critical drives were sequentially higher in the September quarter. We continue to serve this customer demand for these performance drives, which have remained fairly consistent over the past several quarters. Revenue for the edge non-compute market represented 31% of total September quarter revenue, compared with 34% in the June quarter. Exabyte shipments remained flat at 33 exabytes quarter-over-quarter, as non-compute comprises surveillance, NAS, gaming, DVR, and consumer applications. As noted on our prior call, a few surveillance customers accelerated demand into the June quarter, which resulted in slightly lower revenue in this quarter. As Dave mentioned earlier, applications such as surveillance, which utilize high-definition video and image processing, continue to be a meaningful growth opportunity for Seagate moving forward. Revenue from the edge compute market, including desktop and notebook sales, contributed 17% of total revenue compared to 18% in the June quarter. Exabyte shipments increased 7% sequentially to 15 exabytes, reflecting seasonal demand for both desktop and notebook drives. Aligning with what we presented during our recent Analyst Day, we will change how we present our HDD business. Starting in the December quarter, we will break out revenue and exabyte shipments into two primary categories, mass capacity storage and legacy market. Mass capacity is made up of nearline, video, image applications, and NAS. This represents a growing market that supports data-centric applications requiring high-capacity, low-cost storage well suited to HDD. Our other HDD products are sold into the legacy market. Mass capacity storage has been increasing as a percentage of our total revenue and contributed 47% of September quarter revenue, compared with 35% just two years ago. We expect this growth trend to continue over the next few years. The legacy markets made up 46% of total September quarter revenue. Our non-HDD business made up the remaining 7% of revenue with growth from both system and SSD solutions. By adding non-Hard Disk Drive revenue, we increased 12% quarter-over-quarter. We continued to gain traction in our system business with OEMs and other customers. Within our SSD business, the pricing environment has been challenging for multiple quarters. Our main focus has been on enterprise SSDs, which complement our mass capacity HDD solution to provide our customers with a more complete storage solution portfolio. We remain focused on servicing those areas of the market where Seagate can deliver value to our customers. As a reminder, we're extending the useful life of our capital equipment from a range of three years to five years to a range of three years to seven years, which resulted from a more efficient use of capital. This change lowered September quarter depreciation by approximately $23 million, a majority of which was included in cost of goods sold. Accounting for these changes, non-GAAP gross margins for the September quarter were approximately flat with the prior period at about 27%. On top of the challenging industry conditions we discussed over the last few quarters, we incurred higher-than-expected costs associated with the initial ramp of our new products, which impacted gross margin by approximately 50 basis points. Looking ahead, we expect margins to improve as production scales and 16-terabyte drives become a more meaningful part of our total revenues. Non-GAAP operating expenses for the 14-week quarter came in lower than planned at $359 million. Discretionary costs and costs associated with the extra week were both lower than our original outlook. We are continuing to efficiently manage expenses and optimize profitability. In the September quarter, we expanded non-GAAP operating income to $329 million or approximately 13% of revenue. We expect to see financial leverage as we grow revenue and execute our roadmap to reduce the cost per terabyte. We delivered non-GAAP EPS of $1.03, which was at the high end of our guidance range. Capital expenditures for the quarter were $147 million, representing about 6% of September quarter revenue. We expect capex for the fiscal year to be near the midpoint of our target range of 6% to 8% of revenue to support our exabyte capacity expansion plans and prepare for the ramp of our HAMR technology. We delivered healthy free cash flow of $309 million, up 4% sequentially. We utilized $450 million to retire 9.2 million ordinary shares, exiting the quarter with 263 million shares outstanding, down 8% from the prior year. Through a combination of opportunistic share repurchase and dividends, we returned $620 million to shareholders in the quarter. As we announced during the Analyst Day, our Board approved a 3% increase to our quarterly dividend payment to $0.65 per share, payable on January 8, 2020. This increase reflects our positive long-term demand outlook, as well as our confidence in sustainable cash generation. We've also been focused on further improving our balance sheet. During the September quarter, we successfully marketed a $500 million six-year term loan to restructure a portion of our debt. Through these efforts, we extended leverage debt maturity profile, lowered annual interest expenses by $13 million and reduced total debt to $4.1 billion. As of the end of September, cash and cash equivalents were $1.8 billion, with access to up to $1.5 billion available through our revolver. Looking ahead to our outlook for the December quarter, we expect total revenues to be in the range of $2.72 billion plus or minus 5%. Non-GAAP operating margin is expected to be above the midpoint of our long-term target range of 13% to 16% of revenue, driven by top-line growth and improved gross margin. And non-GAAP EPS is expected to be $1.32 plus or minus 5%. Overall, we are executing very well, and while we continue to face geopolitical challenges, we believe improving industry demand combined with the ramp of our 16-terabyte drives provides a solid foundation for revenue and profitability growth in fiscal year 2020. I will now turn the call back to Dave for final comments.

Thanks, Gianluca. In summary, Seagate is consistently delivering solid performance and advancing our key business initiatives. We're generating sustainable cash flow and directing capital towards areas that provide the greatest return for all of our stakeholders. We are successfully scaling exabyte capacity and executing the Company's fastest ever production ramp on a nearline drive at 16 terabytes. We are on track to introduce HAMR and MACH.2 dual-actuator technologies to drive areal density and scale performance with capacity to deliver lower total cost of ownership to our customers over the next decade. While we are mindful of global macro uncertainties and the recent industry dynamics, we remain focused on delivering value for all of our stakeholders by executing our technology roadmap and optimizing profitability, and free cash flow. We continue to expect revenue and profitability to grow in fiscal 2020, with the second half projected to be somewhat stronger than the first, supported by our 16-terabyte ramp and improving mass capacity storage demand. Through our ongoing execution, leading technology roadmap and deep customer relationships, Seagate is well positioned to capitalize on the significant opportunities in mass capacity storage. Before opening the call for questions, I would like to take a moment to thank our customers, suppliers, business partners and employees for their contributions to the ongoing success of our business. Gianluca and I will now take your questions.

Hey, good morning, everyone. Thanks for letting me ask the question. Two if I may. There has been much investor debate whether you are better positioned among peers, who are gaining share in nearline, as you and one peer have 16-terabyte today, another one is in the lead on 14-terabyte. But are there any other attributes that you'd like to call out that we should be aware of aside from just capacity per drive that would enable you to gain share over the next few quarters? And I have a follow-up, please.

Yes, thanks, Karl. I think, simply put, the demand is increasing in nearline, and we also see that the 16-terabyte is lasting with customers, and so we have fairly good relationships, predictably getting into their architectures. I think we feel pretty comfortable that we'll be able to hit this volume ramp. I can't really speak to what other people might do on their capacity points, but being that, that's a leading exabyte point that's right in front of us. And probably, through a significant portion of the next calendar year as well, we feel pretty strong.

Got it. That's helpful. If I could ask you a question about gross margins, I know that the focus today and on your Analyst Day has been around operating margins. However, one of your competitors mentioned some pricing pressure in nearline this week. Do you expect that pricing pressure to worsen before it improves? Is pricing the primary reason we haven't yet seen an inflection point in your gross margins despite the increased enterprise mix? More importantly, as we continue to enhance aerial density, you have the capability to leverage the additional capital needed to pursue the greater complexity of heads and disks in high-capacity points. Why can't margins move toward that target?

They certainly can. I'll let Gianluca elaborate on the impact of the ramp costs he mentioned earlier. But first, I want to say that in our business, gross margin is influenced by supply and demand, specifically regarding the demand for our products. Over the last few quarters, exabyte demand has been relatively weak. Looking back three quarters, we recognized this trend and made a deliberate choice to control our bills and manage cash and inventory carefully, while also beginning to transition production to new platforms. It's important to note that the new platforms include more than just the 16-terabyte product; we have also been implementing various cost reductions across our portfolio. Demand is definitely increasing, which is one reason for our confidence. We expect this strong demand to continue through the latter half of this fiscal year and possibly beyond. Therefore, we believe that 2020 will perform significantly better than 2019. With our new products, I am confident we will soon reach the operating model range we discussed. This is why Gianluca mentioned that we expect to be above the midpoint of our long-term operating range in the second quarter.

Yes. Hey, Karl, thank you for the question. So, as we discussed in the previous earnings release call, we did not ramp all the production at full capacity in the last two or three quarters. And that was generating under-utilization charges that were higher, let’s say, three quarters ago and they’re starting to reduce. During this period of time, we are still adding capex, giving us the opportunity for even higher capacity when we are ready to take benefit from that. And I know we have strong demand. So we are ramping hard. It's basically on our 16-terabyte, but also other products on lower capacities. When we ramp so fast, sometimes you have additional costs, a little bit lower yield, a little bit of additional scrap. We had a little bit of those impacts in F Q1. We don't expect that to happen again in F Q2 and after that. So we expect margins in general, so gross margin and operating margin, to improve starting F Q2.

We need to ensure that we are making the necessary investments. We have been putting money into capital expenditures for the resources and media required to prepare for significant growth. It's important that we prioritize these investments and see returns on them. We are also considering the long-term implications of this approach.

Thanks, good morning. I had two questions. First on, a follow-up on the gross margin question. I know you're not providing guidance beyond the current quarter, but is it safe to assume that as you ramp capacity the yield issues and scrap issues that you mentioned are less than the incremental margins that you would garner from the new products? If you could just sort of elaborate on what that path might look like? And then I have a follow-up.

Yes, Steven, that's exactly the right way to think about it. And it's not just one capacity point, which we all tend to fixate on, there's other cost refreshes as we talked about through the rest of the portfolio. So we feel pretty good about that strength going into next year.

And in this, to bear in mind, we are saying that we expect the second half of the fiscal year to be stronger than the first half. So, of course, this is part of our confidence in the result.

All right, that's helpful. And then just a question on the surveillance drives. I understand what you said in the prepared remarks about the tougher comparisons in some of the changes that you saw this quarter. What is the recent demand, say, though for surveillance drive prospects for the next few quarters? Are you lowering those or do you see different mix of capacity points, etc? Could you just give a little bit more view on that? Thanks.

That's a great question. Looking back about a year to 18 months, demand for boxes was actually higher. The exabyte growth has certainly been noticeable in surveillance and other mass capacity markets. We began discussing demand disruptions roughly three quarters ago. While some people tend to think this issue is localized, it actually has broader implications, possibly linked to speculation or efforts to gain market share. This disruptive demand has been ongoing for some time. However, the end market demand for exabytes remains strong, and we expect it to grow robustly next year. The way we will meet that demand is still uncertain. Interestingly, many global markets are more aligned with white brand products, where the final purchasing decision is tied to either business or home integration, often involving smaller box sizes. We do not believe that end demand is decreasing; in fact, we anticipate it is on the rise.

Great. That's helpful. Thank you.

Thank you. A couple of questions. First, enterprise price per exabyte sells much more this quarter than in recent history. Can you just talk about, is that mix or like-for-like price aggression in the market?

I believe our performance hasn't declined significantly. We're still evaluating what has increased. However, I don't see our numbers dropping much. A few quarters ago, demand was weak, which may have influenced some behaviors. Moving forward, we are very confident in our position, and that's a key reason we believe we can return to that gross margin range.

And then last quarter you talked about some different behavior in buying in the China market. Intel gave an actual revenue attribution to some pull forward of demand ahead of tariffs. Any dynamic in your business this quarter, as it relates to a benefit from early buying around trade negotiations?

I would say that it's still troubled. To your point, that's what we discussed not only last quarter but also the quarter before. The disturbances are still present. We mentioned something similar in our prepared remarks. I believe the end demand is still not strong, but I think that the calendar year 2020 will be an improvement over calendar year 2019. Last January, we indicated that we were observing some softness. So, the end demand is still there, and it’s just a matter of how we fulfill that end demand.

And then going back to your question for price impact terabyte in nearline, as you know, we also increased our average capacity per drive in that segment. And usually when you have this increase of the average capacity, you have a little bit of a decrease in price per terabyte.

Thank you for taking my question. I have two questions, if possible. First, regarding the gross margin, I want to discuss the yield ramp on 16 TBs and the advancement of HAMR into next year. As we increase capacity, how should we understand the amount of capacities shipped compared to your full utilization level in the upcoming quarters? I'm particularly interested in how this relates to the last quarter's 98 exabytes.

Yes, I believe the exabyte capacity will increase significantly over the next few quarters. I'll let Gianluca speak shortly. However, I would mention that 16 terabytes are among the key factors contributing to this. There are also other products in our portfolio that are contributing to the margin improvement. We feel we have positioned ourselves effectively. It's a nuanced point, but much of our capital positioning is actually focused on heads and media, which is different from drive capacity. Therefore, we are proactively addressing the growth in exabytes, ensuring that we have the right products developed with good yields to meet increasing demand.

Yes, we are still not at full capacity, and we are still adding some capex. We have a huge expectation for volume increase in demand in the next, I would say, two or three quarters. So we are preparing to satisfy that demand. And we should be at full capacity, I would say, maybe in two quarters from now. But of course CapEx we want to add in a few days.

Over the long term, we need to ensure that we have the necessary capacity in place because we anticipate there will be constraints.

Okay. Just as a quick follow-up, there was a company that mentioned a notable pause at one of the hyperscale providers. They also discussed hyperscale companies moving towards a more real-time procurement cycle. How would you describe your engagement with the hyperscale providers regarding visibility in demand for the nearline drives? Has that changed at all over the past few quarters as we consider this ongoing recovery that you are confident will continue over the next few quarters?

I would describe our engagement as very strong, though the challenges faced by different customers are varied and often quite complex, meaning there isn't a one-size-fits-all solution. Part of the issue seen with some companies, which I won't speculate on too much, is that if they are qualified for one aspect of an architecture and that architecture experiences delays for any reason, it can have an impact. Generally speaking, components like hard drives are fairly broad-based; for example, we might have an 8-terabyte drive qualified on one architectural point, but if that doesn't progress quickly, it doesn't mean the entire fleet transitions simultaneously. These customers face intricate supply chains and complex challenges globally. As the world becomes larger, there are inherent obstacles to transitions, and they need to ensure they conduct tests against a more complicated set of criteria. Thus, it's not unexpected that occasionally one architecture might impact another. However, the demand we observe is broad-based across architectures, which reinforces our confidence.

Okay. Thank you.

Yes, thanks for taking the question. Your first question, as you think about the 16-terabyte ramp really accelerating in the first half of the year, how should we think about seasonality into your March quarter versus what typically at least over the last five years has tracked down 10% sequentially?

Yes, that's a good question. Thank you. There will be some seasonal effects in certain legacy markets that we often discuss. However, I believe that the demand for exabytes in the mass capacity markets is robust. Naturally, there are influences in one quarter due to the Chinese New Year, followed by the typically weakest quarter. Nevertheless, we are confident about our revenue projections for the latter half of the year, which I may have mentioned earlier. Additionally, there is a significant transition underway as users switch from 8s, 12s, or 14s to 16s or 18s, likely happening next year. As these transitions occur, the growth in exabytes looks very promising. Hence, prioritizing substantial progress is our main focus.

Very helpful. As my follow-up, considering you had the extra week in the September quarter, is the math just simply removing that week, so roughly $350 million opex, and as part of that, how should we kind of model that trajectory of opex beyond the December quarter into calendar 2020?

Yes, OpEx for F Q1 was actually better than what we were planning. But you are right. So if one extra week, I would model fairly flat for the next, maybe quarter or two.

We believe we can manage all customer transitions needed without increasing operating expenses. We can make cuts if necessary based on macroeconomic conditions, but we don't see that as necessary at the moment. Therefore, I think it's reasonable to model it as flat.

So to be clear. So flat at $378 million even though you had the extra week in September?

I think your $378 million is providing including share-based compensation. So you should take that out of there. Just look at what we reported yesterday.

Yes, thanks for taking the question guys. I was going to say good morning but good afternoon for you guys. Two, if I could. The first is a clarification on gross margin. Gianluca, you had mentioned one or two items that could be adjusted back to get a sense of structural gross margin. You mentioned 50 basis points headwind from new product ramp costs, and then there is mention of a $23 million impacting gross margin as well. Are those separate items? And I guess, my question, if they are, is it an accurate way to think of kind of structural gross margin, I guess, 50 basis points impact from each of that. So it would actually be a 100 basis points higher for the quarter? And walk us through that if that's not accurate. Thanks. And then I have a quick follow-up.

I'm sorry, Ananda, we couldn't hear your second part of the question. So a 50 basis point we got it. What is the second one?

There was a mention of a $23 million impact. Is that separate from the 50 basis points related to the new product cost ramps?

Yes, the 50 basis points related to lower yields and higher scrap due to that ramp are not expected to occur in the second fiscal quarter, which should be seen as an improvement. The $23 million I referred to earlier was due to a change in depreciation, and in the second fiscal quarter, you will see a slightly higher impact from that. It's important to consider the timing of when the changes begin, as part of the impact will be reflected in inventory. The first quarter's profit and loss impact was $23 million, which may be slightly higher, but not by much.

Yes, from the demand perspective, it's in line with our expectations. While it may not perfectly align everywhere we thought it would, it is relative to our expectations. There are signs indicating some urgency regarding the complexity that global partners face in qualifying new products. This suggests that even if the return to higher demand happens later than anticipated, it reflects a stronger demand to reach the levels we saw 18 months ago when demand was very high. This is one reason we feel reassured about the demand cycle. Regarding the 16 terabyte product, we are on track to slightly exceed our plan. I'm pleased with the qualifications we've achieved with over a dozen OEMs. We began shipping those initial drives in April, and it has taken considerable effort to reach this point. The qualifications have proceeded smoothly, customer demand is strong, and that makes us more optimistic.

Hey everyone. I appreciate the opportunity to ask my questions. My first question is about the data center segment. If I understand correctly, it seems that this area is likely to be one of the fastest-growing markets for you between December and March. Can you provide any insights regarding which markets are performing particularly well in the upcoming quarters?

Yes, I believe data centers are definitely a strong area for us. While I understand your point, different regions are developing various types of data centers. Overall, we refer to this as nearline strength.

Yes. The second one I had is, your competitors kind of talked about the 30% gross margins for hard disk drive in December. So how long should we expect kind of a product transition? I kind of understand the investments cycle out there. But how long should we wait? And do you guys think you can hit maybe 30% on the HDD side?

Well, we don't guide gross margin. As I said, we expect F Q2 to be higher than F Q1, and you can probably model based on our revenue and EPS guidance. But as we said, we expect an improvement quarter-over-quarter.

Yes, the operating expenses will be above the midpoint of the range. We will continue to assess the value we provide, and customer demand remains strong. We are making good progress on cost reductions, and all aspects are moving in the right direction. However, we prefer not to provide specific guidance.

Yes, let me ask you in a different way. Is 30% attainable for the Company, gross margins long term?

Certainly, if the demand picture is high enough. Yes. I mean we...

Perfect. Thank you so much.

Yes, good morning. I have two questions as well. Thanks for taking them. First is on the fiscal 20 revenue outlook. I think at the Analyst Day the Company talked about the potential for revenue to increase in fiscal 2020. And on the comments today, I think, we talked about having some good backlog and expecting strength in the second half of fiscal 2020. So as you sit today, do you still think that's achievable? And any more quantification you may be able to provide around fiscal 2020 revenue.

Yes, that's the right takeaway, and that's where the confidence comes from. One thing I mentioned earlier is that despite the ongoing global transitions between platforms and different customers, there is more opportunity for us to enhance our product portfolio. Whether it's lower-cost, lower-capacity drives or the 16-terabyte marquee point, these present us with opportunities to generate more revenue than we currently have.

Okay. That's helpful. And my second question is a follow-up on some of the prior questions on gross margins. I understand and there has been some near-term headwinds around cost and yields. But if we look at gross margins for both Seagate and your main competitor there, they're down cycle-to-cycle compared to where they had been in past points when nearline was doing well. I'm assuming pricing has gotten a bit more difficult. But is there anything else beyond pricing, that those maybe more structural? I don't know if nearline mix increases more towards hyperscale compared to be more balanced in the past between OEM and hyperscale. Is that having an effect or anything else that may be more structural versus temporal in nearline gross margins? Thanks.

Yes, I can only really speak to us. So what I would say is that demand is not as strong as it was 18 months ago, to your point. The peak at the last cycle, Q4, Q1 a year ago, demand was quite strong then. So it's not been a strong, but we think it's the strength of building, and that's what we've been talking about. And then having the right products in the market that we feel comfortable to ramp and high volume against that, that's what gives us the confidence.

Yes, hi guys. I just wondering as you look at the next time of transition, when do you expect that to ramp? What do you expect the mix would be end of 20 years, mid-2021? And if you could give us some margin profile or cost profile on that? Thanks.

Thank you for the question. The highest capacities can vary depending on the shipping location, and the qualification cycles may be lengthy or brief. Additionally, there are chances to develop even lower capacities within the same platform. We will scale this up as the yields and costs justify entering the market. Over time, we are gaining confidence by addressing the engineering challenges. We're optimistic about this progress. We previously mentioned 18-TB and 20-TB options, which we expect to bring to market. The HAMR transition will ultimately help propel us forward into 2021 and 2022, and we'll keep increasing our production.

Got it. And then, I think you mentioned nearline or overall you're seeing a little softness. As you look through 2021, do you expect overall data center spending, nearline spending to be more back half loaded or middle of the year, any more colour if you can give? Thanks.

Are you talking about fiscal year or calendar year?

Calendar year, sorry.

Calendar year 2019 was relatively muted, especially in the first two quarters. Calendar year 2020 will be stronger year-over-year and it's more broad-based. This is due not only to the ongoing exabyte transitions but also the overall demand picture.

Thanks very much. Earlier in the call, you mentioned you will be fully loaded or higher utilization rates; can you remind us of that time period, and was that calendar or fiscal year? And then as a follow-up, as HAMR ramps up, will there be much of a impact to operating or gross margins? As we go about that, I know, certain technology changes. Do you have a meaningful impact to margins like short-term headwind and then longer-term positive, but I just didn't know what's HARM ramping if it's going to be material to your company-wide margins? Thank you.

Yes, in terms of capacity, I said we will be close to full capacity in the next couple of quarters. So let's say in the first half of the calendar year. And Dave, maybe taking the HAMR question.

Yes, I think on HAMR we will do the right thing. As time goes on, we'll continue to manage for operating income and free cash flow and continue to work the cost to the earlier question. I don't expect it to change the model. Obviously, we want to drive the model as hard as we can, and if we can drive it to the high end or drive the model up, that's great too. But I don't expect HAMR to change the model.

Thank you. Once again, thank all of our employees, customers, suppliers, and business partners for all their contributions to our third quarter performance, and thanks to our shareholders for their ongoing support. We'll talk to you all next quarter. Thanks.