Seagate Technology Holdings Plc (STX) — Q3 2021 Transcript

Thank you. Good afternoon, everyone, and welcome to today’s call. Joining me 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 March 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 have 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, reconciliation to the corresponding GAAP measures is not available without unreasonable effort. As a reminder, this call contains forward-looking statements, including our June quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions. These statements are based on management’s current views and assumptions and information available to us as of today, which 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 and 10-Q filed with the SEC, our Form 8-K filed with the SEC today and the supplemental information posted on the Investors section of our website. As always, following our prepared remarks, we will open the call for questions. I will now turn the call over to you, Dave.

Thank you, Shanye. Welcome, everyone, and thanks for joining us today. Seagate delivered an outstanding March quarter, executing well across multiple dimensions. We grew revenue quarter-over-quarter and year-over-year. We expanded non-GAAP operating margin into the recently increased target range, and we achieved non-GAAP EPS above the high end of our guidance range. We also continue to drive forward on our commitments of enhancing value for our shareholders, returning a combined $912 million during the March quarter through dividends and share repurchases. Fiscal year-to-date, we have repurchased approximately 12% of our common shares outstanding, demonstrating our confidence in Seagate’s long-term business prospects. Gianluca will share more details on the financials shortly. For the remainder of my remarks, I’ll focus on the business trends that we see unfolding this year and how Seagate is well-positioned from a product and technology perspective to unlock more value for our customers. Strong cloud data center demand and ongoing recovery in the enterprise markets drove our highest ever HDD shipments of 140 exabytes, a record mass capacity revenue of more than $1.6 billion. These trends underscore the strong secular demand dynamics we are seeing in the mass capacity markets, and support our outlook for the TAM to more than double by 2026 to roughly $26 billion. While customers are helping drive this market expansion by investing in scale and infrastructure to support the acceleration in digital transformation in businesses worldwide, as well as growing demand for AI and data analytics. Seagate’s high capacity nearline drives are a vital component of these infrastructure investments, and we believe that our strong technology roadmap and focus on delivering the best total customer experience is helping drive broad adoption by the global cloud ecosystem. These factors were the driving force behind a number of new strategic partnerships and agreements formed last quarter with several of the world’s leading cloud providers. These multiyear collaborations are focused on delivering innovative and reliable mass capacity storage at exabyte scale. In the enterprise markets, we are seeing a continuation of the recovery trends that we discussed last quarter, as businesses increased investments in traditional on-prem IT hardware. Recent CIO surveys highlight increased 2021 budget growth expectations to support their post-pandemic application and infrastructure needs. We realized strong double-digit sequential revenue growth for both our enterprise nearlines and mission-critical products in the March quarter, and currently anticipate healthy demand through the calendar year. The record demand that I cited in the nearline markets more than offset anticipated seasonal declines for video and image applications. We see VIA market demand improving in the June quarter and sustaining through the calendar year, as planned smart city projects are slated to begin in the coming months. Video analytics extends well beyond public safety. As I discussed at our recent analyst event, there is a growing list of edge applications that leverage video image sensors in areas such as retail, manufacturing and healthcare to drive valuable data insights. These applications support our longer-term exabyte and revenue growth projections. Seagate is well-positioned to benefit from these trends, as we continue to lead the VIA market at all capacity points driven by product aerial density competitiveness and strong customer engagement. Finally, looking quickly at the legacy markets, higher enterprise mission-critical sales and relatively stable desktop PC demand led to better-than-anticipated revenue in the March quarter, despite this period’s typical seasonal slowdown. With a broader industry shift to mass capacity storage forming the foundation of our future revenue growth outlook, we have built a strong technology roadmap, streamlined product portfolio, and are growing a pipeline of solutions and services that make us ideally suited to address big data demand now and well into the future. Average capacity per drive increased 17% sequentially to pass the 5 terabyte mark, a milestone that reflects the growth in mass capacity storage and demand for Seagate’s high capacity nearline drives. Today, Seagate is servicing the vast majority of market demand for 16-terabyte and higher capacity drives. We’ve started to aggressively ramp 18-terabyte volume, and current demand suggests strong sequential growth through at least the calendar year. We’re also rapidly gaining traction with our industry-leading MACH.2 dual actuator technology. MACH.2 has been proven to address TCO and performance requirements for certain applications with heavy data traffic, such as content streaming. We’ve recently begun the high-volume ramp of MACH.2 drives with a leading hyperscale customer and plan to expand shipments to additional customers later in the calendar year. And that brings me to HAMR. We believe HAMR is the technology to achieve drive capacities of 30 terabytes and beyond. Today customers are testing 20-terabyte HAMR drives in their production environments, which offers valuable feedback that we are factoring into our product roadmaps. I would highlight that through our innovation capabilities and our common platform approach, we have the flexibility to offer multiple versions of 20-terabyte drives to meet customer needs, not only with HAMR technology. We are focused on delivering solutions to customers that meet their roadmaps and lower their TCO and do so in a way that also drives value for Seagate. To that end, we plan to begin shipping a few versions of 20-terabyte drives in the second half of the calendar year. This quarter, we introduced new key components of our Lyve edge to cloud platform. We launched Lyve Data Transfer, enabling data movement on demand between the edge and the cloud. Lyve Data Transfer works seamlessly with Lyve Cloud, an object-based storage-as-a-service solution delivered in collaboration with Equinix and strategically located at the metro edge. In a recent survey conducted by IDC, a majority of respondents considered it increasingly important to colocate data adjacent to applications or cloud services. We are progressing our build-out plans and are on track to have four Lyve Cloud sites up by the end of the calendar year. We are gaining ecosystem support and have now been certified with each of the leading backup software vendors. We’re very excited about the future potential for Lyve products and services, which open a large and growing market opportunity for Seagate estimated to reach about $50 billion by 2025. However, I do want to reiterate that we are still in the early stages. We’re being deliberate in how we build out the platform and capabilities to position Seagate for long-term success. We are listening closely to customers to make sure we’re designing and evolving our services to best serve their needs, particularly as the distributed enterprise itself evolves in the growing data sphere. In the March quarter, we hit a milestone that took four decades to achieve. Seagate has now shipped a cumulative 3 zettabytes of HDD capacity, shipping over 3.3 billion disk drives. For perspective, at the 140-exabyte rate we shipped in the March quarter, we would ship our next 3 zettabytes in about five years. That is an amazing commentary on the exploding global data sphere we live in today. And I think Seagate’s in an outstanding position to drive great future value for our stakeholders. I’ll now hand the call over to Gianluca to cover details of our financial results.

Thank you, Dave. Seagate continued to execute exceptionally well as demonstrated by our strong March quarter performance. We delivered revenue of $2.73 billion, up 4% sequentially and above our guidance midpoint. We achieved non-GAAP gross margin of 27.4%, up 60 basis points sequentially, and we expanded non-GAAP operating margin to 15.4%, in spite of the recently increased long-term target range of 15% to 20% of revenue. Strong demand for our mass capacity products supported record hard disk drive capacity shipment of 140 exabytes, up 8% sequentially and 16% year-on-year. Nearly 80% of our total exabytes were shipped into the mass capacity markets, which include nearline, data and image application or DIA and NAS products. Mass capacity shipments increased to a record 111 exabytes in the March quarter, up 21% compared with March 2020, which was our prior shipment record. Based on our current outlook, exabyte shipment growth should continue through the calendar year, consistent with our long-term CAGR forecast of about 35%. Ongoing demand for our high capacity nearline drives led to record mass capacity revenue of $1.6 billion, up 8% sequentially and up 5% compared with the prior year period. Mass capacity represented about 65% of total HDD revenue. Nearline revenue increased sharply quarter-over-quarter, driven by strong recovery from enterprise and OEM customers, as well as healthy growth from cloud. Nearline shipments were 95 exabytes, up 34% sequentially and 25% year-on-year. Average capacity for nearline drives increased 12 terabytes, driven by the strength of our high-capacity drives. 16 terabytes and higher capacity contributed approximately 50% of our total March quarter exabyte shipments. Demand trends in the VIA market are playing out much as we expected due to seasonality. Revenue declined sequentially in the March quarter from the record demand we saw in the December quarter. We are already seeing demand improve as some of the smart city projects that Dave mentioned take shape. We support our outlook for stronger VIA sales in the June quarter and into the second half of the calendar year. The legacy market made up 35% of March quarter HDD revenue. This market held up well in the seasonally slower period with revenue of $864 million, down 5% sequentially and 11% year-over-year. Improving demand for mission-critical drives and stronger than anticipated demand for desktop PC partially offset the anticipated decline in consumer drives. We shipped a total of 29 exabytes into the legacy market, down 9% on our sequential basis, offsetting the lower mix of consumer drives. Looking ahead to the next few quarters, we expect the pace of year-on-year revenue decline to moderate, supporting relatively stable demand for mission-critical and consumer drives. Revenue from our non-HDD business increased 20% sequentially to $238 million or 9% of March quarter revenue. The strong growth was driven by our system business, as we began to ramp revenue from our customer wins in the December quarter. We expect growth momentum to continue in our non-HDD business in the June quarter. In the March quarter, non-GAAP gross profits increased to $749 million compared with $704 million in the December quarter and included $24 million of COVID-related costs. We are currently planning to incur a similar level of COVID-related costs throughout this calendar year, mainly driven by higher freight charges. Our resulting non-GAAP gross margin was 27.4%, including about a 1% impact from these COVID-related costs. HDD margin expanded quarter-over-quarter driven by favorable mix, offsetting the sequential growth of our non-HDD business which carries a lower gross margin profile. To date, our mass capacity gross margin is already at the low end of our target range of 30% to 33% that we outlined at our recent analyst event. We are on track for total company gross margin to be at the low end of our new long-term range by the end of fiscal '22, supported by the ongoing shift to mass capacity products, higher revenue contribution from cost optimized 2 terabyte disk drives, which make up less than 20% of revenue today, a gradual reduction in COVID-related costs and our continued focus on aligning supply with demand. Non-GAAP operating expenses came in at $329 million, up $10 million sequentially. The increase reflects higher variable compensation associated with strong performance and increased R&D material expenses to support new product development. Comparing with the same quarter last year, OpEx was down $11 million, supporting a slightly higher revenue level, demonstrating operational leverage and disciplined expense management. Looking ahead, we expect operating expenses to be a bit higher in the June quarter as we gradually resume normal on-site business activities and travel. Our resulting non-GAAP operating income was $420 million and non-GAAP operating margin was 15.4% of revenue, up 70 basis points sequentially and inside our recently increased long-term target range of 15% to 20% of revenue. Based on the diluted share count of approximately 237 million shares, non-GAAP EPS for the March quarter was $1.48, up 15% sequentially and exceeded the high end of our guidance range. The $0.18 outperformance relative to our guidance midpoint was driven mainly by higher revenue and operational leverage, while our share repurchase activities enhanced EPS by $0.04. Capital expenditures were $104 million in the March quarter, which represented approximately 4% of revenue and in line with our expectation for CapEx to be inside our long-term range of between 4% and 6% of revenue for the fiscal year. We will continue to focus on capital discipline to better align supply with demand through platform simplification and manufacturing efficiency improvements. We had inventory relatively flat at $1.3 billion, consistent with our strong mass capacity product demand outlook. Given the broader market dynamics and well-publicized component shortages, we’re continuing to carry a higher level of strategic inventory to protect against potential future supply chain risks as well as towards managed state logistics. We believe these actions enable us to support customer demand, and we continue to monitor current market conditions. Days inventory outstanding reduced by 3 days sequentially to 59 days. We generated $274 million of free cash flow in the March quarter compared with $314 million in the December quarter and $260 million in the year-ago period. In the March quarter, we used $161 million to fund the dividend and $751 million to retire 11.3 million ordinary shares, exiting the quarter with 230 million shares outstanding. The investment in Seagate shares underscores our confidence in the long-term business strategy and future cash generation ability. As a reminder, during the quarter, the Board authorized an increase of $2 billion to our existing share repurchase authorization. As of the end of the quarter, we had $4.4 billion remaining in our authorization, subject to the availability of distributable reserves. As we communicated at our recent analyst event, we expect to return more than 100% of free cash flow to shareholders in fiscal 2022. We will do this while maintaining a strong balance sheet and liquidity profile. Cash and cash equivalents were $1.2 billion, and total liquidity was approximately $3 billion, including our revolving credit facility. These levels are more than adequate to support our operation and business mix. Looking ahead to our outlook for the June quarter, we expect revenue to be in the range of $2.85 billion, plus or minus $150 million, supported by continued strength from cloud data center and enterprise customers along with increasing demand from the VIA market. We expect non-GAAP operating margin to be at the lower end of our new long-term target range of 15% to 20% of revenue. And we expect non-GAAP EPS to be in the range of $1.60, plus or minus $0.15, representing a sequential growth of 8% at midpoint. At the midpoint of our fourth-quarter guidance range, fiscal '21 revenue would be $10.5 billion, flat year-on-year and aligns with the goal we set at the start of the fiscal year. In closing, we continue to deliver on our financial commitment and remain on track to achieve the fiscal 2021 goals we have set, while also demonstrating a clear path to meet the long-term objectives outlined at our analyst event. I will now turn the call back to Dave for final comments.

Thanks, Gianluca. In summary, we had a great quarter. Our growing mass capacity markets are showing strong demand and enterprise spending is in recovery. We’re executing on our technology and product roadmaps, and seeing positive customer engagement with our newest mass capacity offerings. We currently expect annual revenue growth of at least 10% in calendar year 2021, as the shift towards the less seasonal mass capacity markets supports a more stable revenue outlook through the year. We’re also making deliberate steps to build out our Lyve platform, particularly Lyve Cloud and are excited by the early reaction from customers. All of this inspires confidence in our positive outlook for the Company. And that confidence is illustrated by our active return of capital to our shareholders. In recognition of Earth Day, it is fitting to highlight that we published our 15th global citizenship annual report this week. We are proud of our longstanding commitment to build sustainable supply chains and products to conserve the world’s precious resources. In the most recent reporting period, we increased water recycling by nearly 9% and recycled the equivalent of 1,100 Olympic-sized swimming pools. We reduced our production energy consumption by about 19% on a per exabyte basis. And we are executing plans to reduce our carbon footprint by 20% by 2025 and 60% by 2040, in accordance with science-based targets. Consistent with our core value of integrity, we will continue striving to balance our business decisions around people, our planet, and profitability. Prior to closing, I’d like to thank our employees for their extraordinary efforts, as well as our customers, suppliers and shareholders for their ongoing trust and support in Seagate. With that, Gianluca and I are now happy to take your questions.

Yes. Thank you and congratulations on the strong results. Could you maybe help us think about gross margins in terms of utilization rates across components, and where you see the most room to improve? I appreciate the color you shared both around where you are with mass capacity, and when you’re getting to the low end of that long-term range. Maybe some color around the main factors that can cause you to achieve that level a little faster, or maybe what would cause it to be pushed out would be helpful. And I have a follow-up.

Hi Wamsi. I’ll let Gianluca discuss some details, but I’ll summarize quickly. As we transition to the common platform, we’re dealing with 16 to 18 terabytes and potentially more. We have significant control over many internal aspects. We believe these transitions will improve our ability to manage costs, which in turn helps our margins. It’s important to note that our gross margins are still largely affected by global logistics. Even if customers expect immediate product availability, the costs to achieve that are quite high. This is currently a challenge for us, but we anticipate some improvement in the next six months.

Well, I would say, first of all, we are fairly satisfied with improvement in our margins. We improved by 60 basis points. It is a fairly big jump in just one quarter. We are expecting further improvement. As we discussed at the Analyst Day, we are near the target of 30% to 33% in just a few quarters from now. We communicated today that our mass capacity segment is already in that range, and that it is also, of course, very important for us because as you know, we have 65% of hard disk drive revenue coming from that segment. We need to look at the mix; for example, the traditional hard disk part of the business has grown fairly materially in the last quarter. As you know, that part of the business has a lower margin percentage. But it is a significant contributor to our free cash flow, so it's a very important part of our business. As for the future, as Dave said, one big element is COVID; the second big element is the continued transition to mass capacity. We expect a fairly strong quarter in June in the nearline part and a good recovery in surveillance that is more seasonal than other parts of the mass capacity segment. It was down in March, and we expect stronger performance in June. Then, consistent alignment between supply and demand is key. As you know, we are building our CapEx in order to increase capacity but also to increase in a way that is quarter after quarter aligned better to demand that is coming fairly strong. We guided gross margin but you can extrapolate the gross margin for fiscal Q4. It has a slight improvement sequentially. I would say, potentially we can do better than what we provided in guidance. And now, we need to go through the quarter, but I’m optimistic.

No. That’s great. I appreciate the color. And if I could, it’s really interesting to see that the legacy exabytes have stabilized and you called out the higher mission-critical and desktop PC demand holding that up. When you think about the sustainability of that, frankly, I mean, if you’re right on OEM, an on-prem demand increasing through the course of the year, and also desktop PC, potentially going through a replacement cycle with folks moving back into the offices, and even a stronger PC cycle in the second half of this year. Would you say there is actually an opportunity for legacy exabytes to grow meaningfully in the second half of the year? Thank you.

Yes. Wamsi, I would say it’s possible. But as you said, strong demand in a lot of these segments, obviously, over the long haul, we expect continued erosion, but mostly the big erosion has already happened, to your point. And so, a lot of the systems that are out there, certainly mission-critical replacement rates and PC business still exist. I think they're much more stable. And to the extent that some of the recovery that happens after the pandemic in certain places in the world may actually drive needs for that kind of equipment, there may be a temporary run on that stuff is possible.

A couple of questions. I think, Dave, you mentioned when you were talking about the mass capacity business and 18-terabyte that you expect sequential growth through at least this calendar year. Was that just for 18-terabyte or was that for mass capacity nearline and more broadly speaking?

Right. All of the above.

Okay. All of the above. And then, what were the drivers of material upside in the non-HDD business this quarter, and how should we think about the growth rate of that segment for calendar ‘21?

Yes. I think there is mass capacity in the systems business for example, which is largely boxes full of mass capacity drives. But to the extent that there is incremental revenue from the boxes from the chassis themselves and controllers that we use and things like that, there is revenue in that. And there is high demand for that as well for mass capacity. And then, the consumer and the consumer SSD business doing quite well and strong demand. I think our brand is moving a lot of product there as well. So, I think those are the big drivers there, and it’s a little bit seasonal to your point.

And we discussed last time that Goodwin is an important customer. And now relative to the vaccine, it will add also during the June quarter. So, we expect a good result also in the June quarter.

Okay. And then, just lastly, I think I asked you last quarter about supply-demand dynamics and the potential for an improved pricing environment. There has been some more evidence that in some channels prices are increasing. Some of the hyperscalers are talking about having to pay a little bit more for drives. How would you characterize the pricing environment, both that you saw in the March quarter but also what you expect over the next couple of quarters?

We have long cycle times and planning cycles with our large scale customers, making those aspects fairly predictable. Everyone is experiencing various forms of component shortages, which may impact end demand based on availability. However, I believe the overall environment is relatively stable from that standpoint. There are interesting global trends regarding mass capacity storage, leading to numerous innovative developments, especially as recovery occurs. We are closely monitoring this. In the distribution channels, there is strong demand for mass capacity. Additionally, some file sharing platforms, like IPFS, are gaining traction, creating a dynamic and vibrant landscape as creative professionals develop new applications that also drive demand. This is particularly noticeable when examining those specific channels.

Okay, great. Thank you.

Thank you for taking my question. I just want to confirm my understanding. Dave, at the end of your prepared remarks, you mentioned that you expect at least 10% year-over-year growth in calendar 2021. Can you clarify if that's correct and how your outlook has changed? What factors have contributed to this change over the last three months?

Looking back at 2020, we experienced disruptions in supply and demand. Initially, when supply was impacted, factories were shutting down, leading to a significant reduction in demand. By around July, the realities of demand began to stabilize. We went through that in 2020. In 2021, there are still concerns regarding supply, particularly with components, and some companies are increasing their orders. However, from my perspective, mass capacity is relatively shielded from these issues, and we have fairly stable relationships in place. We believe the impact this year will not be as severe as it was in 2020, which supports our expectation of a 10% growth in capacity. Additionally, mass capacity along with certain VIA markets and the resurgence of cloud and on-premises enterprise solutions will contribute to this growth.

Yes. We said two things, at least 10% and we also said that we expect revenue to be maybe more stable throughout the quarter. So, we don’t expect relative seasonality. And I think that is important when you model your quarters off.

Yes. That’s helpful. And then, just as a real quick follow-up for second question. On gross margin trajectory, you’ve now got, I think 65% of your revenue coming from mass capacity. You had talked about that business now running at the low end of that 30% to 33% guidance, long-term target model. How do you think about that longer term? Do you think actually that mass capacity gross margin can trend up at the high or even above the high end of that long-term model range that you’ve outlined?

Yes, I believe we need to align all of our manufacturing capacity correctly. As our legacy products decrease, they will benefit us, and there are additional opportunities, such as platform commonality. We have indicated that the 16-terabyte models are becoming outdated, which is why we aim to speed up the introduction of the 18-terabyte and 20-terabyte models. Each upgrade allows us to refresh our offerings and potentially reduce costs. Additionally, new designs in our factory will provide us with platform leverage. I hope this information is useful.

Yes. Good afternoon. I guess, Dave, you’ve referenced this in an earlier question. In recent days, there have been reports of some significant price hikes in the retail aftermarket as hard drives are being used for new applications, like crypto mining. While you have less control over the retail market from a pricing perspective, I was hoping you could discuss how demand in the channel may be impacting your factory utilization and lead times across your customer base?

Yes, we consistently allocate sufficient capacity for the channel. Our customers within these channels are diverse and significant to us, so we ensure that we are sourcing well. We have noticed the increase in demand that you're mentioning, and we are observing the different trends driving it. Some of these trends are quite interesting, and we appreciate that. However, it's still early to determine how long this demand will persist. We are just starting this quarter, making it difficult to predict the response from the distribution channel. Additionally, the global challenge of delivering products immediately poses issues for our manufacturing capacity. Even if we produce items at our factory, logistics to get them to channel locations can be problematic. Therefore, we need to consider all of these factors, including lead and lag times, to understand how this demand is evolving and how we can meet it.

If I may, along the topic of cryptocurrency, I could be wrong. But, I believe you still maintain your stake in Ripple, which has appreciated over the last few years. So, I guess, A, do you still maintain a stake there? And then secondarily, are there ways to monetize that stake today? Thank you.

Yes, we won't delve into the latter part. But yes, we do maintain a stake. These are vibrant segments that we've been observing for quite some time. We have a significant number of people focused on data flow, and recently a lot of attention has been on data storage specifically. These are factors we monitor to guide our investment decisions, both in terms of external investments and our internal technology developments. So, we are maintaining our stake.

Hey, everyone. Good results and thank you for taking my question. My question is about the VIA market. In the last earnings call, Dave mentioned that revenue was down in the mid-teens. Specifically, for exabytes, which you report separately, it was down around 40%. Do you expect a stronger recovery in the June quarter given the significant drop in March? Additionally, could you explain why there was such a steep decline in March and what factors might contribute to a rebound in June?

Yes. This is typically a seasonal market tied to government spending and development. Recently, a lot of that has been disrupted in various parts of the world. If you look back four quarters, the edge markets were quite depressed because many were not utilizing on-prem solutions. This year has shown a high level of cyclicality. Currently, we are witnessing not only the replenishment of disrupted supply chains but also an early investment cycle in smart city applications. This may be influenced by healthcare data needs or buildings reopening, as there hadn’t been significant investments for a while. It appears we are experiencing an earlier seasonal trend right now.

Yes. Inside the mass capacity segment, VIA is probably the only one that is seasonal. So, it was not unexpected. We knew that into the March quarter, we were going to have a decline. As I said before, June quarter will have to be a much stronger quarter for the year and we continue to increase in the September and December. December is typically a stronger quarter for the year.

And sorry, one other point too. Our central thesis is that the data at the extreme edge is not being properly utilized. As a matter of fact, a lot of times this gets deleted. And we think there are people who are starting to answer questions about how do I store that for a little bit longer and then process the data with AI and make value-based decisions on the data. Maybe not necessarily in the next minute but it may be a day later or a week later. And so, as that happens, we expect some of this seasonality to be more muted over time.

Great. That’s helpful. And then, my follow-up was really around nearline. Obviously, you guys don’t really talk about share, but let’s just look at exabytes. If you look at what the markets was forecasting for March, you have 50 plus percent share of that market. A better way to ask it other than share is, could you talk about the dialogues that you’re having with customers with nearline drives? What kind of success are you seeing over the next couple of quarters? And what kind of led you to the position where you are right now, where you’re maintaining this higher percentage of share? You can answer that however you want. But I just wanted to dive in there.

Yes, that's great. I don't really think about it in terms of share because we engage directly with customers. Given the long lead times on our products, we have good discussions about their needs, not just for six weeks ahead, but for six months out. This approach has been effective, and our customers value it. We still offer them flexibility, and we are collaborating closely in this regard. That strategy has served us well. As for share, I don't have clear visibility into how that might change; I only know our current demand. There have been times in recent quarters when Seagate has been pulled more than we anticipated, which could be due to competitive factors or customers keeping some demand in reserve. However, the environment has become much more stable compared to before. We are no longer in a phase of making guesses, producing large quantities, and then trying to sell them at the last minute.

Thank you for taking my question. I appreciate the solid results and good execution. I have two quick clarifications. Dave, regarding pricing, you mentioned that things are fairly benign. Does that suggest that there might be an opportunity for pricing to improve as we progress through the year compared to what you anticipated 90 days ago? I would like to understand your thoughts on that and ensure I didn't miss anything. Additionally, I have a brief follow-up about nearline pricing specifically.

Yes. I would say, relative to 90 days ago, I mean, again, we’ve been fairly predictable in giving our customers what they need. And to the extent that that’s locked in with our manufacturing capacity, not much has changed on that front. I do think across the broader world, procurement people tend to be more concerned about supply. So, some of the discussions are being even more mature than we had thought 90 days ago. That’s the way I think about it. And we made reference to this in the prepared remarks about some of the long-term agreements that we’ve been able to establish in the last quarter.

Got it. And to LTAs, I mean, is it useful for us to think about their use in an increasingly structural sense like our 2012, which was an extreme case? But it was sort of material financial impact. Is it useful at all to think about it in such a context or is this more on the margin?

I think that was much more profound back then. From my perspective, supply and demand is a lot more imbalanced than back in those days. As a matter of fact, supply disrupted last year and demand was disrupted as well that we’re still feeling the reverberation. It’s very different than the 2012 environment. I would say that the biggest difference is the lead times on the products. I mean, the wafer starts that we’re doing right now are realistically hitting the back end of our testers probably around Christmas. And if you think about that, that’s driving really good, healthy discussions on what people exactly need and what kind of flexibility they need.

Yes. Thanks for taking my question. Two follow-ups. I believe that you guided to nearline exabyte growth of 35%. Is that correct? Did I hear that right?

That’s right, Mehdi. That’s right. That’s what we’ve been saying, 35%. It’s been a little bit stronger than that for the last couple of years for us. But that’s we think the long-term growth rate is, 35% to 40%.

It seems to me that you might be taking a more conservative approach. I mention this because if I consider the next assumption for the June quarter, it suggests an acceleration in the second half of the calendar year in order to reach that 35%.

I think we do think that mass capacity is going to continue to grow. I think we’ve talked about this a little bit. Cloud service providers around the world have to make tough decisions on exactly how they’re making investments. And so, not all of those investments are necessarily mass capacity related. We do expect they continue to grow in that capacity into the back of the year, and that’s when Gianluca made the comment earlier about the seasonality that’s what he was talking about.

Yes. I think that’s important. We see strong cloud and enterprise OEM, but we also need to consider a sequential improvement in surveillance and the VIA market in general that is increasing in volume and in revenue through the calendar year.

And just to be clear, you’re referencing year-over-year growth or sequential growth?

Well, in the remarks, we said 10% year-over-year. Of course, the surveillance comment is sequential. If you’re looking at the second half of the calendar year compared to the first half or you’re just comparing year-over-year.

Maybe Dave, first off, it’s good to hear some of the commentary about your 18 terabytes growing through the rest of this year. Can you just give a little qualitative color, whether you’re getting that 18 terabyte demand from co-existing customers or low capacity points or are they from potential new customers that haven’t used Seagate over the last few capacity points?

No. Maybe the way I would characterize it is there are some customers that were using 16 in translation, but there are also other customers that were not transitioning from previous 12s or 14s or wherever they were before. And I think we have fairly broad representation. I do think the markets are generally moving up. From my perspective, data center build-outs around the world are using that mass capacity, leading edge drive much more aggressively. So, from my perspective, 18 terabyte is experiencing very broad adoption. And I’ve already said, we like the platform quite a bit because we’re continuing to get cost leverage out of it.

Yes. OpEx year-on-year was about $10 million lower. Sequentially, it was a bit higher. The increase sequentially was basically due to variable compensation and a little bit higher in R&D material spending. We set our normal trend to be around $340 million per quarter. So, we are very well aligned to the expectations, and we think that probably will have a lot of revenues the next couple of quarters.

Thank you. Earlier, you talked about challenges of shipping into the retail channel. But, I’m wondering if you could speak to how the current supply chain issues are impacting other segments of your business and how you sort of incorporated them into the model. And I have a follow-up. Thank you.

Yes, sorry Shannon. We're not experiencing significant supply issues ourselves, although we recognize that long-term supply concerns are being monitored by everyone. In the short term, customers have reported difficulties in obtaining the final product. This typically affects our revenue, as they may have already secured that revenue or customer win. Therefore, we need to remain very adaptable.

Do you see it basically just pushing out demand out right as opposed to take it into your way from a long-term perspective?

Yes. I think to your point, I mean, I think the demand is there. It’s just that how exactly quickly it can be served. And then, obviously, some customers, they get service, somebody else won’t. So, there is a lot of those dynamics we have.

Right. And then, my second question, and I realize it’s new. But, you mentioned you’ve had some positive feedback on Lyve cloud. I was wondering, which segments are seeing the most interest, and maybe if you can give a little more color on what you’re hearing from the customers. Thanks.

Sure. If you consider Lyve Cloud to be akin to an external storage or hard drive in the cloud, it's quite straightforward. There are no fees for data transfer in or out. It functions as a scratch pad, which is how I view it. You can use it temporarily or permanently if you choose. Some customers consistently aggregate data from specific locations and seek a temporary landing spot until they determine their long-term data storage solutions. These are the types of customers providing us with valuable insights for further development, and we are not limited to those storing just tens of terabytes; it can be even larger.

I have two questions. The first is regarding the 10% revenue growth you mentioned for calendar 2021. If my calculations are correct, that suggests the average revenue for calendar Q3 and Q4 will likely be consistent with or slightly below calendar Q2. I would have expected those numbers to continue to rise sequentially given the recoveries you’re experiencing. While I understand you anticipate at least 10% growth, are there factors we should be aware of?

Yes, we don’t provide guidance for individual quarters. However, you can easily calculate that we will pay at least 10%. The exact amount over 10% is yet to be determined for the calendar year. We anticipate strong performance moving into the next quarter, so please wait for two more months to get more details on the quarters.

But Sidney, I would say that what we are trying to say is that I think things are relatively full and we expect a muted seasonality, if you will, as we look forward. That’s definitely true.

Hi. Good afternoon. Thanks for squeezing me in. Two kind of clarifications. First of all, on the video side, in terms of the recovery, I’m not sure actually I understood that it’s mainly surveillance still or were you, Dave, trying to imply that you’re also seeing some of these other edge use cases really take off? Or if not now, can you maybe talk about when? And then, secondly, as you buy ahead on components, I understand building the safety stock. But given how the supply chain is changing, do you see that sort of delta increasing, decreasing, staying the same versus your actual needs? Thanks.

Yes. I would say that we have long lead times for our components internally. We operate our factories every day, 91 days a quarter. Therefore, to the extent that we know exactly what we need for this common platform and for all the other products we’re developing, we ensure that we have sufficient stock for any contingencies. Regarding smart city applications, they are no longer limited to the surveillance market. We are observing many different types of edge use cases starting to emerge. Even building security applications are now expected to have many more features than before. They are not just the usual form of security we have been accustomed to. Additional features are being integrated. Consequently, if you’re purchasing a solution for a facility, one of those features is contributing to an increased demand for greater capacities. Additionally, as mentioned earlier, last year's supply-demand disruptions led people to invest more in the edge. This investment is likely a factor in the market pull we are experiencing this year.

Thanks Gabriel. And thanks to all of you for joining us today. Seagate continues to execute well and remains excited about the tremendous opportunities we foresee ahead, both in the near-term and longer term, driven by massive growth of data. I’d like to once again thank our customers, suppliers, business partners and important, our employees for their ongoing support of Seagate.