Seagate Technology Holdings Plc (STX) — Q2 2026 Transcript

Thank you, and hello, everyone. Welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our December quarter results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included on our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as are subject to risks and uncertainties associated with our business. To learn more about these risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. With that, I'll turn the call over to you, Dave.

Thanks, Shanye, and hello, everyone. Seagate closed out calendar 2025 with a record-breaking quarter, driven by sequential revenue growth across nearly all end markets. December quarter financial results exceeded both top and bottom line expectations and set new company records for exabyte shipments, gross margin, operating margin and non-GAAP earnings per share. We expanded non-GAAP gross margin above 42%, supported by the execution of our pricing strategy, along with an improving mix of our high capacity drives as HAMR shipments ramp. Looking at the entire calendar year, 2025 marked a transformational period for Seagate, both financially and operationally. Over the calendar year, we increased revenue by over 25%, improved gross margins by nearly 740 basis points and expanded operating margins by an even greater amount, demonstrating the profitability leverage in our financial model. 2025 also solidified HAMR technology as a long-term enabler of mass capacity storage. We ended the year shipping 3 terabyte per disk Mozaic-based HAMR products to our first cloud service provider. And by year's end, quarterly HAMR shipments exceeded 1.5 million units and have continued to ramp. Mozaic 3 HAMR drives are now qualified with all of the major U.S. cloud service providers and qualifications for our second-generation Mozaic 4 terabyte per disk products are tracking well to plan. These developments align with our long-term areal density roadmap that extends to 10 terabytes per disk, which we expect to deliver early in the next decade. I want to thank our Seagate teams around the world for exceeding our performance expectations and delivering outstanding value to our global customers. We continue to operate in an exceptionally strong demand environment, particularly within the data center end markets. In the December quarter, we saw sustained demand growth for our high capacity nearline drives across global cloud data centers as well as continued improvement from the enterprise edge. Based on our build-to-order pipeline, we anticipate these positive demand trends will continue for some time. Our nearline capacity is fully allocated through calendar year 2026, and we expect to begin accepting orders for the first half of calendar year 2027 in the coming months. Further out, demand visibility is strengthening based on the long-term agreements in place with major cloud customers through calendar '27. Additionally, multiple cloud customers are discussing their demand growth projections for calendar '28, underscoring that supply assurance remains their highest priority. We will continue to meet strengthening demand through our strategy to maintain supply discipline and satisfy exabyte growth through areal density advancements and without increasing unit production volume. In the December quarter, our average nearline drive capacities rose by 22% year-over-year, approaching 23 terabytes per drive, with those sold to cloud customers averaging significantly higher. This trend underscores the strong adoption of our higher capacity drives to support demand growth. At the same time, revenue per terabyte sold has remained relatively stable, reflecting the effectiveness of our pricing strategy. Seagate is well positioned to continue benefiting from the combination of powerful secular tailwinds and supply discipline. Video applications continue to drive significant demand for hard drives with platforms like YouTube witnessing 20 million video uploads daily, up from just 2 million 3 years ago. This staggering pace of growth extends to other cloud video platforms and doesn't yet include the full surge in content generation expected from emerging AI-driven video applications. These applications are not only fueling social media uploads, but they are also transforming how organizations turn their data into tangible value, enabling personalized marketing, interactive education and advanced simulations, capable of training manufacturing, engineering, health care and other professionals. The strategic value of data is further underscored as new applications and use cases emerge across cloud and edge workloads. Among the most promising of these is agentic AI, which relies on persistent access to large volumes of historic data to enable effective planning, reasoning and independent decision-making. Adoption is already gaining momentum with one recent survey conducted by a leading cloud service provider reporting more than half of participating customers were actively using AI agents. Early adopters are already realizing measurable returns with benefits ranging from lower costs to increased revenue opportunities. With the deployment of AI agents at the edge, where untapped data often resides, we believe the stage is set for a sustained and meaningful increase in data generated and stored that will support inferencing, continuous training and also maintain model integrity. Modern data centers have evolved to address the complexity and scale that massive workloads bring through sophisticated data tiering architectures, ensuring that the right data is available at the right time and place. Hard drives are essential to these architectures, anchoring the mass capacity data tier that stores the vast majority of exabytes from storing the checkpoint data sets used to train and maintain model integrity to supporting vector databases that provide the context necessary for accurate inference results and agentic AI performance. By leveraging hard drives, data center operators, whether in the cloud or on-prem, can achieve the optimal balance of performance, capacity and cost efficiency at scale. Against this transformational backdrop, Seagate's HAMR technology roadmap positions us to meet growing demand and deliver ongoing total cost of ownership improvement for our customers. HAMR is a proven technology with large volumes of drives running in cloud production environments for more than 3 quarters now, and performing well across a broad spectrum of use cases. We are systematically ramping our Mozaic 3 HAMR products to qualified customers while maintaining focus on optimizing the profitability of our available supply. As noted earlier, Mozaic 3 is now qualified with all major U.S. cloud service provider customers and remains on track to have all global cloud service providers qualified within the first half of calendar 2026. Additionally, qualifications of our second-generation Mozaic 4 products are progressing well. We expect to begin the ramp of Mozaic 4 later this quarter and have multiple cloud service providers qualified in the coming months in line with our plans. We continue to set the pace for the industry, recently demonstrating 7 terabytes per disk capability in our labs. As one of our largest cloud service provider customers recently aptly described, hard drives are engineering marvels, a sentiment that we obviously share. Our deep expertise across mechanical engineering, material science, nanoscale fabrication, and now advanced photonics, not only enable Seagate to deliver on the HAMR roadmap, but also creates a durable competitive moat for hard drive technology well into the future. Wrapping up, 2025 was a milestone year for Seagate in every respect: financial performance, operational execution, and technology leadership. We are carrying this momentum into calendar 2026 supported by a powerful demand backdrop as new AI applications start to complement traditional workloads. We will remain highly disciplined and focused on expanding profitability through our higher capacity product mix, underpinned by the strong economics of HAMR. Our areal density roadmap positions Seagate to sustain the core total cost of ownership and efficiency advantages of hard drives as data creation and storage requirements accelerate in the AI era. We believe this foundation creates a compelling long-term value proposition for the company, our customers and our shareholders. I'll now turn the call over to Gianluca to cover our results in greater detail.

Thank you, Dave. Seagate delivered another quarter of strong year-over-year revenue growth and set new record profitability metrics in the December quarter, underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in 8 years. December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year-over-year. We achieved non-GAAP gross margin of 42.2%, up 210 basis points sequentially, and we expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. Our resulting non-GAAP EPS was $3.11, up 19% quarter-over-quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology roadmap to support demand growth. To that end, we shipped 190 exabytes in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across the enterprise OEM markets. We shipped 165 exabytes in the data center market, up 4% sequentially and 31% year-on-year. Data center revenue grew at roughly the same pace totaling $2.2 billion for the quarter, up 5% sequentially and 28% year-on-year. Against this strong demand backdrop, both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud nearline capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with the ramp of HAMR-based Mozaic products. As Dave highlighted, Mozaic drives are running very well in production environments and meeting all performance, reliability and integration expectations. In the enterprise OEM market, we are benefiting from slight improvement in traditional server units, along with increasing demand for storage servers, driven in large part by the adoption of AI applications and the need to store data at an enterprise edge. The edge IoT market made up the remaining 21% of revenue at $601 million, supported by anticipated seasonal improvement for consumer products in the client market. We project the broader client market to grow over time with the largest growth contribution coming from client nearline products that are captured as part of our data center end market. Moving on to the rest of the income statement. Non-GAAP gross profit increased to $1.2 billion, up 14% quarter-over-quarter and 44% compared with the prior year period, significantly outpacing revenue growth. Non-GAAP gross margin expanded to 42.2% in the December quarter, up from 40.1% in the prior period. This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high capacity products, which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non-GAAP operating expenses were $290 million, relatively flat quarter-over-quarter and in line with our expectations. Operating expense as a percent of revenue declined to 10.3%, rapidly trending towards our long-term target of 10%. The combination of strong top line growth and significant financial leverage drove an 18% sequential improvement in non-GAAP operating profit to $901 million, almost 32% of revenue. Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income and expenses to remain relatively flat in the March quarter. We grew non-GAAP net income to $702 million with corresponding non-GAAP EPS of $3.11 per share, based on tax expenses of $129 million and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet. We invested $116 million in capital expenditures for the December quarter or roughly 4% of revenue. We are maintaining capital discipline while we continue to transition and ramp HAMR technology. To support these objectives, we anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4% to 6% of revenue. Free cash flow generation was strong at $607 million, up 42% from the prior quarter. Looking ahead, we expect free cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiency, and capital discipline. These factors position us well for durable long-term cash flow generation. Cash and cash equivalents totaled just over $1 billion at the end of the December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility. During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from business and optimize cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1x based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter-over-quarter and up 63% year-on-year. We expect the net leverage ratio will trend lower as profitability and cash generation increase while we continue to evaluate opportunities to further reduce debt. Turning now to the March quarter outlook. The demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March quarter revenue to be in the range of $2.9 billion, plus or minus $100 million, which represents a 34% year-over-year improvement as a midpoint. Non-GAAP operating expenses are expected to be approximately $290 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to approach the mid-30% range. Non-GAAP EPS is expected to be $3.40 plus or minus $0.20, based on a tax rate of about 16% and non-GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible notes of approximately 7.6 million shares. Seagate's strong December quarter performance and March quarter guidance underscore our continued focus on driving growth, enhancing profitability, and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders over the long term.

Given the supply-demand dynamics, you're obviously in an advantageous position. I wanted to really try to get some more detail on gross margins going forward. Your philosophy historically has been to share gains with both your customers and yourselves. But at the same time, given this tight environment, you are raising like-for-like pricing. So I’m curious, is there a framework to think about in terms of the incremental gross margins that we should model from here? And then, I guess, maybe bigger picture, as you think about overall average pricing per exabyte, we've gone from down double digits to high single digits. And I think we just exited the quarter down 4% year-on-year. Do you see a world where pricing could flat or even move positive year-over-year?

Yes. Thanks, C.J. I'll let Gianluca chime in here as well, but the pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into '27 and '28, we look at how much capacity we're having. We're bringing online by virtue of the fact that we're making all these aggressive product transitions. We'll bring more exabytes to bear and then people go out there and renegotiate for those. I think flat to slightly up is certainly possible. And that's the way we're really managing it as we talk to our customers. The value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong.

C.J., so on the gross margin, we are executing very well, but executing a little bit better than what we discussed at our Investor Day, where we presented a model with a 50% incremental margin above $2.6 billion of revenue. We have done better every quarter, of course, it is our objective to continue to optimize what we produce, what we sell and finance the profitability that we can get from the product. So the models cover over a longer period of time, now 2 to 3 years, not 2 or 3 quarters, but I'm positive we are continuing to progress in the right direction.

I have a similar type of question. I guess the gross margins in the guide and the incremental quarter-on-quarter gross margins on the guide are very strong. Can you maybe help bridge the drivers between mix and price? Obviously, you've got a better mix of data center revenue next quarter. But just wondering if you can dimensionalize that. And the opportunity for pricing, David, you just said sort of flat to up as possible. But as we think about the pricing that might be getting embedded within these long-term agreements and sort of beyond '26, why can't that be a lot higher just given the tightness in the supply-demand environment?

Yes. I think this gets into how persistent the demand is going to be. Wamsi, we talked about 2 or 3 years from now. The one behavior change that I really like in the last year is that people are starting to say, if I can't get it now, I'll plan next year better and the following year better. So we're having great dialogues on that front. Of course, supply has risen quite a bit in the last year’s supply of exabytes from the industry. The industry has reacted pretty well, but I think demand is still pretty strong. And my perspective on this is I think demand will stay strong for quite some time. So in that kind of world, we're having great discussions with customers further out in time. And the biggest part that helps us in our planning is through these product transitions. They know that's how they get more exabytes.

Yes. And Wamsi, we are saying in the script today that for the rest of the calendar year, we expect revenue and profitability to continue to improve sequentially every quarter. So we are not implying in any way that this trend is changing. It's actually now getting better somehow.

Congrats on these results, incredible. Dave, at your Analyst Day last year, you kind of pointed to a mid-20% exabyte growth CAGR. And I'm just wondering where you think that supply growth can land this calendar year. And as you get closer to that HAMR crossover point later this year, does that pace of exabyte growth accelerate? And I'm just asking this because demand is clearly outpacing supply. So can you maybe just help us try to better understand the shape of your exabyte supply growth because obviously, it will dictate exabyte shipments for the year.

Yes. Thanks, Erik. So we are planning to transition to 4 terabytes of platter fairly aggressively, but I think what people have to keep in mind is that we were fairly tight all throughout manufacturing. So we have products that are in the pipeline already that are committed to customers and so on. We don't just move very quickly to 3 or 4 terabytes of platter as things come. And it's a good problem to have, actually. We're running manufacturing quite tight right now. So I think it will be a fairly prescriptive ramp, to your point. It won't be as fast as maybe we've done some ramps in the past, but it will be very profitable, and that's the way we look at it. As we go further out in time, I'm very optimistic that the 4 terabytes per platter is a very strong product. It will start to replace some of the other legacy products, I'll say it that way and because it has so much better value proposition in a lot of those markets. And then when that happens, then we see more opportunity.

Great results here. Just a couple that are related to the prior question. You guys gave some projections on HAMR, not just for fiscal year '26, but even into fiscal '27. So if you could talk about upside to achieving those targets for the HAMR rollout. And related to that, how we should think about the blended cost reductions, pretty impressive, again, margins here and guiding for improved profitability. So if you could talk to us a little bit about the cost reductions going forward, especially as you ramp HAMR here with the Mozaic 4, that would be great.

Yes, Asiya. So I would say, first of all, we are very happy with the transition to HAMR. We qualified the last big cloud service provider in the U.S. and we have qualified 6 out of 8 of the top cloud service providers. So the transition from PMR technology to HAMR technology is progressing very well. And we are now qualifying the new product, the 4 terabyte per disk to 40 terabytes per drive. Of course, this will help with the increase in exabyte in terms of mix. We gave a good indication, I think, at our Investor Day, and we want to be aligned to that. And the cost will be favorably impacted, especially when we start ramping high volume of the 40 terabyte drive. Of course that will drive a fairly important reduction in cost per terabyte compared to the current HAMR, and of course will be a good contributor to further increase our gross margin.

I was hoping you could clarify what portion of your long-term agreements for overall nearline HDD capacity has fixed or multi-quarter pricing agreements. I ask because as these long-term agreements roll off throughout 2026, any new agreements will be locked in at higher values reflective of not only the demand use case but also the widening price per terabyte gap between enterprise hardware drive HDDs.

And Karl, your second part of your question was a little fuzzy. So we captured the first part, but I might ask you for clarity on that second.

Sure. Yes, I'll just repeat, if I could. As these long-term agreements roll off throughout 2026, I would imagine those new long-term agreements will be priced at perhaps a higher value or higher order value, particularly given the widening gap between hard drives and SSDs. So if you can comment on the mix of long-term agreements and how you think that progresses throughout '26, that would be great.

Yes. Thanks, Karl. So as we roll off, say, for example, somebody might have been qualified on a 2.4 terabyte per platter product, and then they might be qualifying a 3.2 or even a 4-terabyte per platter as we roll forward. So we change based on the demand that we see, and our available supply changes the pricing dynamic there. I think that's one of the biggest things you're pointing out. I'll say that '26 is fairly booked. We talked about that in the call a bit to the extent that we can out-execute our plan, it will be marginal like you saw last quarter, we get the qualifications done a little faster. We ship a few more drives. That's how we can do better than planned. But other than that, it's fairly predictable in '26, and we're looking to start '27 the same way.

Could you provide some guidance on where you might expect exabyte shipments to be for calendar '26 compared to '25, considering your previous long-term targets? It seems you might perform significantly better than those targets, so I'm looking for your expectations in terms of a numerical range.

Jim, we are not providing guidance for calendar '26. However, in our financial model, we anticipate nearline exabytes to grow in the mid-20% range. We have actually performed slightly better in the past few quarters, and as Dave mentioned earlier, we consistently aim to maximize exabyte output from our manufacturing. We will maintain this trend, but we do not provide guidance for calendar '26.

But moving from 2.4 terabytes per platter to 3 per platter to 4 per platter indicates that we're on a promising path. When it comes to individual customers, we need to be very reliable because they depend on what we promised to support their data center expansion. We will keep following that plan and hope to improve as we transition to 4 terabytes per platter.

Gianluca, can you discuss the guidance for the March quarter? It appears there is a significant increase in gross margins, about 250 basis points or more than 100% incremental. Is there anything specific in the March quarter contributing to this margin expansion? Is this primarily from the core HDD business, or could there be benefits from the old systems business as well?

Amit, well, I would say, we expect it to be a very good quarter. I don't think it's different than what we have done before. It's always based on the pricing strategy and the mix, as you know. We qualified another customer on HAMR, so we will ramp a little bit more volume on HAMR. This is helping us to get better margin. But fundamentally, it is not really different in how we think we are going to execute the quarter and it is good. I think the incremental margin was very good.

Yes. And it's not the systems business. The systems business is doing well, but it's fairly small scale in comparison.

Congratulations on the excellent results today. I would like to revisit the long-term agreements and pricing structures you have in place. Do you believe there is potential for more substantial price hikes in NAND flash? We've heard reports of increases ranging from 40% to 100% on a quarter-by-quarter basis for certain contracts. I recognize that hard disk drives have very long-term agreements, but I have several questions regarding this situation. As these long-term contracts expire, is there potential for some to be adjusted to higher prices that could shift the trajectory? Your numbers are impressive, and you are generating substantial revenue. We are trying to assess whether we might see more significant price increases given that currently, prices appear somewhat stable with slight fluctuations, but overall they remain flat. This seems to result from a small uptick in like-for-like pricing being balanced by the introduction of new products at lower prices. I am curious if this trend might change. Additionally, could you provide a brief update on the HAMR mix and its projected trajectory?

Thanks, Mark. There are a few points to address. We have limited ourselves on the 3 terabyte per platter because our factories are quite busy, and we are preparing to launch the 4 terabyte per platter product. We are focusing on that and ensuring it successfully moves through the development and qualification stages. Over time, we will actively transition to the 4 terabyte per platter. This will positively influence our mix. Additionally, the demand for the HAMR products will be concentrated on higher capacity options rather than the lower capacity alternatives at this stage. Regarding pricing, as I mentioned previously, as each long-term agreement comes to an end, we fulfill our existing supply commitments while customers consider new products. Given the limited supply of these new offerings, we analyze the demand and set our pricing accordingly. Initially, I indicated that prices could remain flat or experience a slight increase. This perspective hinges on demand, which remains robust. We’re observing that customers unable to obtain what they need presently are expressing a desire for more predictable planning for their data center procurement in the future. This desire for predictability has enhanced our visibility and enabled us to operate our factories more efficiently, which is beneficial.

I had a question, I just want to put it in 2 parts. One is how much was your HAMR as a percentage of your exabyte shipment last year? How much do you expect it to be this year? The genesis of the question is I'm just trying to figure out, obviously, a lot of questions on the very strong gross margins. If there's a way to put it in 3 buckets, like how much of the gross margin upside is driven by pricing? How much is driven by product mix? How much is driven by cost reduction by offshoring manufacturing?

Yes, there is no offshoring of manufacturing involved. Our global manufacturing operations are performing well and are at full capacity, which is beneficial from a cost perspective. However, there has been no change in our manufacturing strategy. A significant portion of the benefits we are experiencing comes from a favorable mix of products. This is not only due to our transition to higher-quality products over time but also because the demand for these products is strong. For example, if you're constructing a data center using a 3 terabyte per platter versus a 4 terabyte per platter, you will likely prioritize the higher capacity option for long-term operation. Our ability to deliver this capacity predictably is what's contributing to market stability and assisting us in our planning.

Yes, Krish, we don't give specific details on the impact of pricing, mix and cost. But they are somehow interrelated. I would say the change in mix is helping with the cost reduction and the supply-demand situation is, of course, supporting our pricing strategy. So they are all very good contributors to the increase in gross margin. And as we said before, this is going to continue through the calendar year.

How much of HAMR as a percentage of the mix?

Well, Dave gave an indication of the unit that we shipped in the last quarter. So I think you can fairly easily calculate that.

I was wondering about the average capacity per drive increasing by 22%. Given that the supply-demand environment has tightened over the last year, are you taking steps to accelerate that mix as customers push for it? I'm curious about how much control you have going forward with even tighter supply to assist your customers in terms of the total petabytes you're delivering.

Thanks, Steve. Yes, the lead time out of the wafer fab is quite long, so we need to be predictable for our customers, looking at timelines of 6 to 9 months ahead. That's one reason we discuss our long-term agreements on an annual basis. We start manufacturing wafers based on what we know we can deliver to remain as predictable as possible for our customers. When deploying engineering resources for manufacturing, we're focused on navigating product transitions. Achieving this mix is our goal, which clarifies our strategy.

It does, Dave. I'm just wondering like when you had your analyst meeting, you said that sort of a pretty well-defined timeline for node transitions. Maybe just can you give yourself a report card on how you're doing on some of those timelines if we look out now versus the next year or longer term?

Yes, I think that’s good. We're either on track or slightly ahead. Most of that is within our control, and we have been executing well. Some aspects are also influenced by our customers. The changes in customer behavior I mentioned earlier show that they are demanding more exabytes, which helps us complete tasks more quickly, ensures alignment in our plans, and improves specific supply alignment, benefiting our factories.

Congratulations on the results. I want to return to the topic of gross margin. You've discussed the pricing dynamics and the visibility you possess, but what stands out is your consistent execution in achieving a mid-teens year-on-year decline in cost per terabyte over the last several quarters. As you introduce the 4 terabyte per platter Mozaic drive, how should I perceive the cost reduction trajectory? Is it expected to be in the mid-single digits? Can you maintain double-digit reductions? Additionally, wouldn't we anticipate that the 4 terabyte per platter HAMR drive could potentially accelerate the cost decline since it could be introduced to lower-end markets beyond just the nearline platforms? I'm interested in your thoughts on this cost reduction curve.

Yes, we have a very positive outlook on the 4 terabyte per disk regarding its cost impact, as we previously mentioned. The unit costs are generally quite comparable. However, we are adding a significant amount of content for each unit, which will help in reducing costs and enhancing profitability. As you are aware, we are in the process of qualifying two major customers for these new products. We expect to finalize this process and ramp up by the end of the calendar year, with a strong impact anticipated for the next calendar year as well.

And we plan on making a big transition to 4 terabytes per platter over the coming few years and then getting to the 5 terabytes per platter as well. We do add complexity as we make those transitions. But I'd say the first order, the things that dictate the speed of the ramp are our ability to go work scrap and yield, all through our supply chain and so on, and we're working very hard on that. I like the product. So I think it provides for a bright and stable future for us. We just need to stay focused on it.

I want to ask about long-term service agreements. I think you said nearline capacity is allocated through 2026. So it sounds like both pricing and exabytes are locked in this year. But for '27, I think you said something that I took that exabyte and pricing is not locked in, but you have some sort of agreement. So I guess I had 2 questions. First of all, is it right to assume that pricing is also locked in for all of '26? And what sort of agreement are you referring to for 2027 if volume and pricing is not locked in next year?

Yes. For this calendar year, we have purchase orders for all the quarters, so both volume and pricing are clear. As Dave mentioned earlier, if we can produce a bit more in a quarter, we will sell those additional exabytes in the open market at a good profit. However, I would say that the vast majority of the volume is already allocated. We will begin working on 2027 fairly soon. While we have a strong indication and agreement on volumes, we haven't locked in the price yet.

Yes. And Tim, if this helps, we haven't really started working on the long lead time parts, but we will very soon for the start of '27. We need to begin discussions with our customers about which orders we will fulfill together and what the plan is, as many of them require predictability. Therefore, we'll need to adjust our factories depending on how much demand they have for those new products.

Just a quick housekeeping item. Gianluca your CapEx has been increasing on a Q-over-Q basis. How should I think about depreciation, especially since it did dip in the December quarter? Any color here would be great looking forward.

Yes. No, our capital expenditures is aligned to our target of 4% to 6% of revenue. We are actually at the bottom of that range. So it is not increasing in terms of what we want to achieve and what we said, of course, comparing to a period where we were more in the down cycle in terms of dollars, of course, is higher. We are supporting our HAMR transition and HAMR ramp. So I would say there is nothing different than what we said.

Yes, the way I think about it as well, Mehdi, is that if you go back 2 years ago, and you use that as a baseline, we were still significantly lower revenue, but also we were challenged on the supply-demand balance. Right now we're in a totally different environment, of course. So we'll probably stay well within the 4% to 6% range. But as the revenue goes up, we'll spend a little bit more and probably the first priority is maintenance tools and the things that we weren't doing a couple of years ago.

Depreciation will be aligned with capital expenditures. Based on your revenue model, you can estimate 4% to 6% of capital expenditures. Our depreciation is based on a useful life of 10 years, so you can model it accordingly.

It's not like other fabs; it's not necessarily a major part of the cost drivers. There are many other aspects of the cost that we can manage.

Dave, while we have you, can you share what kind of activity you're noticing in the so-called warm tier of storage? This topic often comes up in our discussions. We've heard that it's growing, with both hard drive and flash storage contributing positively, but I would appreciate your insights. We want to confirm if the information we have is accurate. Additionally, many people seem to think that this tier is primarily becoming a NAND tier in the GenAI landscape. Any context you can provide would be great.

Yes, I think you need to be a bit cautious, Ananda. There are applications that heavily rely on memory linked to compute, and I find some of these applications interesting. When discussing big data storage in data centers, the tiering architecture is fairly established and is unlikely to change due to economic factors and known architectures. People have a good understanding of how to navigate this. If the idea is that drives are not utilized intensively and are merely background storage, that’s not an accurate perspective. Currently, hard drives are operational around the clock. Often, they are optimized for performance, primarily for streaming, rather than handling random small block workloads, which typically require more memory. Thus, if an application involves random small blocks, it is likely more memory-focused. For big data, it may involve a small amount of memory on the front end with a much larger reliance on hard drives at the back end. We recognize that there are applications across the whole spectrum, but we believe that in the future, as we delve into concepts like checkpoints, physical AI, and video, we're dealing with significant amounts of data. Consequently, the architectural tier for storing this data is expected to remain stable over the next decade.

That's super helpful. I'll keep it there.

Just a quick question on HAMR. I know you're ramping it faster in the March quarter. Should that drive a much better gross margin profile, I guess? And any thoughts on how we should see the margins improve, I guess, as HAMR starts to ramp? And I have a follow-up.

Vijay, if you are referring to the March quarter, of course, ramp of HAMR is included in our guidance. And our guidance is indicating a fairly good improvement in gross margin again. And then I said for the rest of the calendar year, we expect both revenue and profitability to improve sequentially. And of course, part of that is coming from additional HAMR products.

We think demand will be strong for the 4-terabyte per platter, of course. And so that's one of the reasons why we're making that a priority in the transition that we go through this calendar year and into next.

Well, I would say we are getting closer and closer to our fourth target of 10% of revenue for operational expenses. We are almost there. We should be there actually in the March quarter. And then, of course, now that we relax our cost control, we will continue to keep our cost control and revenue is supposed to increase so we can probably do it a bit better.

Yes. I'm glad you asked that, Vijay, because obviously, a few years ago, the tough times that we went through, we weren't investing in ourselves to the rate that I'd like. And of course, it's with the HAMR transition in front of us, that was a lot of work. Now that we've kind of cleared that HAMR transition, we can see the future fairly well. The clouds are parting, if you will. And we can see aerial density opportunities in front of us, and we will take that the money such as it is, even staying within our same model, and we'll take that money and reinvest in ourselves so that we can continue to drive the areal density.

Thank you, Nick, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets and advancing areal density road maps and successfully qualifying customers on our HAMR-based Mozaic products to address the sustained and growing demand for data storage. As data creation accelerates, driven by both traditional workloads and these emerging AI applications, Seagate's transformational technology positions us well to capture the significant demand opportunities ahead. I'd like to thank our employees for their dedication and innovation and our customers and suppliers for their trust and collaboration, and our shareholders as well for their continued support. Together, we're driving Seagate's ongoing success. Thank you.