Seagate Technology - Q1 2025

Transcript

Operator (participant)

Please note, this event is being recorded. I would now like to turn the conference over to Shani Hudson, Senior Vice President, Investor Relations. Please go ahead.

Shanye Hudson (SVP of Investor Relations)

Thank you. Hello, 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've posted our earnings press release and detailed supplemental information for our September 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 in 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 the 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, 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 they are subject to risks and uncertainties associated with our business. To learn more about the 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. I'll now hand the call over to you, Dave.

Dave Mosley (CEO)

Thank you, Shani, and hello, everyone. Seagate delivered a strong start to the fiscal year, with revenue growing nearly 50% and non-GAAP gross profit increasing over 150% compared with the prior year period. These results demonstrate our ability to drive profitable growth, which is the outcome of sustained supply discipline and the strategic cost efficiencies that we have built into our operations. Fiscal first quarter revenue came in at $2.17 billion, and non-GAAP EPS was $1.58. Both were above the midpoint of our guidance range, benefiting from a better than anticipated mass capacity product mix and an improved pricing environment. Continuing cloud demand strength, coupled with improvement in the enterprise and OEM markets, drove top-line growth and also contributed to enhanced profitability.

Company non-GAAP gross margin expanded by 240 basis points sequentially to 33.3%, the highest level in over a decade. This impressive performance was driven by our HDD business, with non-GAAP gross margins now in the mid-30% range. Amid a healthy industry supply-demand environment, we anticipate further margin expansion opportunities as we ramp our portfolio of high-capacity nearline drives, including our Mozaic-based HAMR products, which I'll discuss shortly. The increasingly favorable business landscape, combined with our industry-leading technology roadmap, lends growing confidence in Seagate's future opportunities. Reflecting this confidence, we are increasing our quarterly dividend by nearly 3%. Our optimism is reinforced by our build-to-order model, which provides us with good demand visibility over the next few quarters. We see the potential for significant revenue growth for fiscal 2025, inclusive of the seasonal demand fluctuation that is typical for the March quarter.

We are maintaining supply discipline and will address near-term EB demand growth by efficiently leveraging our available capacity. Beyond that, we are well positioned to support further demand growth, mainly through technology node transitions, with HAMR playing a vital role as we complete qualifications and ramp shipments. Turning to the mass capacity market trends, cloud demand for our nearline drives remains robust, and we believe customers are managing their inventory levels well. In the September quarter, revenue growth was driven by US cloud providers, though we continue to see positive demand trends globally. For instance, some customers have highlighted the growing use of video content on e-commerce and social media platforms. Data indicates that video is the most effective format for engaging digital audiences. Furthermore, research suggests that longer-form video content and personalization through AI technology can significantly enhance revenue generation opportunities for our customers.

These trends bode well for mass capacity HDDs, which are ideally suited for storing large and diverse data-intensive video content. HDDs comprise close to 90% of bytes stored in public cloud environments, and we are confident that proportion will hold for the foreseeable future. Among the enterprise and OEM customers, we observed the first meaningful uptick in nearline demand following a multi-quarter period of stability. This increase reflects an improvement in traditional server demand, as well as higher storage content per unit, pushing the average capacity per enterprise drive to a new record high. In the VIA markets, sales remained stable in the September quarter and slightly ahead of our expectations. We are witnessing a shift towards more cloud-like storage solutions that utilize higher capacity drives. This transition is due in part to longer data retention needs and increased video analytics.

Our HDD solutions, including Mozaic HAMR products, provide cost efficiency and scalability to our VIA customers' evolving demands. These same advantages are also crucial for generative AI applications, which is why we continue to believe Gen AI will be a driver of mass capacity storage, simply by being a powerful catalyst for data creation. HDDs provide a trusted, economical, and secure platform to host data that feeds into AI engines and preserves the content produced by AI-powered applications. This data is ultimately fed back into the AI training models in a continuous cycle. As data center architects prepare for Gen AI to move into the widespread adoption phase, they continue to grapple with cost, scale, and power challenges. Seagate's product roadmap is addressing each of these key challenges.

Compared with NAND-based storage alternatives, our HDD solutions offer approximately six times lower cost per TB, and HDDs are roughly nine times more capital efficient, delivering the economies of scale necessary to support the anticipated surge in data demand, and according to cloud customers, HDDs have ten times lower embodied carbon per TB relative to NAND, which can translate into a much lower carbon footprint. Very important, given the world's growing number of data centers. That provides a good segue into our product ramp and qualification plans. We have three primary areas of focus for fiscal 2025, aimed at driving profitable growth over the long term, and we're progressing on all of them. They include ramping the company's last PMR platform, expanding Mozaic adoption, and executing our Mozaic product roadmap that will enable Seagate to address the breadth of customers' mass capacity storage needs.

Consistent with our plans, we began to aggressively ramp our final PMR platform in the September quarter, which is currently up to 28 TB in capacity. We are very pleased with the pace of customer adoption. These drives have quickly catapulted to our second-highest revenue product, and we are continuing to both ramp volume and broaden our customer base in the December quarter. We have expanded customer qualifications on our 3+ TB per disk Mozaic HAMR-based platform, with a few customer quals already completed, spanning the enterprise nearline, VIA, and NAS market segments. The qualification with our lead CSP customer is progressing well through what has been a very intensive and thorough testing process. The learnings that we have gained are already being leveraged into future customer qualifications and product generations. To that end, HAMR qualification drives are now in the hands of multiple global cloud and enterprise customers.

Our expectation for shipment and revenue ramp timing across the broader customer base still points to mid-calendar 2025. Our confidence in HAMR technology remains strong, and customer feedback has reinforced our value proposition that the Mozaic platform provides the foundational technologies required to satisfy high-capacity storage requirements at the lowest total cost of ownership. We expect to extend our technology leadership as we deliver on the next stage of our HAMR roadmap, the 4+ TB per disk platform. As a reminder, the step function capacity increase to 4 TB per disk is being achieved entirely through areal density gains, supporting our cost per TB reduction path with additional benefit to both customer TCO and Seagate's structurally improved margin profile. In closing, Seagate is performing well amid an improving demand backdrop with healthy industry supply dynamics.

We are at an exciting inflection point rooted in the structural changes we've made to our business and with our compelling technology roadmap. These factors underpin our ability to build on the last four quarters of strong sequential performance and drive future profitable growth to create long-term value for our customers and stakeholders. Thank you, and I'll now hand it off to Gianluca.

Gianluca Romano (CFO)

Thank you, Dave. Seagate started fiscal 2025, delivering strong revenue and profitability growth for a fourth consecutive quarter. September quarter revenue was $2.17 billion, up 15% sequentially and 49% year over year. We increased non-GAAP operating income 35% sequentially to $442 million, translating to a non-GAAP operating margin of 20.4% of revenue. And our non-GAAP EPS was $1.58 at the high end of our guidance range and reflecting improving demand trends, ongoing price adjustment, and continued cost discipline. Within our hard disk drive business, EB shipments grew 20% sequentially to 138 EBs, and revenue increased 16% to $2 billion. Mass capacity revenue grew for the fifth consecutive quarter, more than offsetting the expected decline in the legacy business.

Mass capacity revenue was $1.7 billion, up 21% sequentially, driven by continuous strength in nearline cloud demand, along with a significant uptick in nearline enterprise sales. Mass capacity shipments totaled 128 EBs, compared with 104 EBs in the June quarter, up 23% sequentially. Mass capacity shipments now represent a record 93% of total HDD EBs, reflecting the continued long-term secular growth for cost-efficient, scalable storage. As planned, we began to ramp our 24 and 28 TB PMR, which helped to boost Seagate nearline shipments to 109 EBs in the quarter, up from 84 EBs in the prior period. As Dave highlighted earlier, customer reception for this product has been strong and represented more than 20% of our nearline revenue in the September quarter.

We expect nearline demand will continue to improve in the December quarter, as shipments for our latest high-capacity products broaden across global CSP and enterprise customers. Demand for our VIA products remained relatively stable in the September quarter, and we currently project similar revenue in the December quarter. Smart city projects remain a key demand driver for VIA products worldwide, and regional economic conditions play a key factor in budget decision for the new projects. The ongoing economic uncertainties in China have been a headwind for the VIA business in that market. We are cautiously optimistic that the recently announced stimulus plan in China could positively impact on VIA demand over time. Sales of our legacy products totaled $270 million, representing roughly 12% of total revenue.

The remaining 8% of revenue was derived from our other businesses, which held steady at $164 million. The other businesses include system, SSD, and refurbished drives, a business that has grown by about 25% year over year and includes drives under our circularity programs. Moving on to the rest of the income statement. Non-GAAP gross profit increased 24% sequentially in the September quarter to $723 million. The significant increase reflect a favorable mix shift to our mass capacity products, continued price adjustment, and ongoing cost efficiency in an improving demand environment. Our resulting non-GAAP gross margin was 33.3% at the company level. Overall, non-GAAP gross margin expanded by 240 basis points quarter over quarter, which was slightly more than we had originally anticipated.

Non-GAAP gross margin for the HDD business and mass capacity in particular, remained significantly higher than the corporate average. Non-GAAP operating expenses totaled $281 million, up 10% quarter over quarter, and above our original plan, largely due to higher variable compensation commensurate with improved profitability levels. Other income and expense were $86 million, and we project similar levels in the December quarter. Adjusted EBITDA continued to improve and was up 23% sequentially in the September quarter to $498 million. Non-GAAP net income increased to $337 million, resulting in non-GAAP EPS of $1.58 per share, based on a diluted share count of approximately 213 million shares. Moving on to cash flow and the balance sheet.

Free cash flow generation was $27 million, reflecting our initial steps to normalize working capital to support our supply chain, while at the same time, meeting increasing mass capacity demand. It will take a couple more quarters for working capital to fully adjust, which will have some impact to free cash flow generation. Even so, we expect free cash flow to improve in the December quarter and through the rest of the fiscal year. Capital expenditures for the quarter were $68 million. For fiscal 2025, we will maintain capital discipline and continue to expect CapEx to be at the low end of the long-term target range of 4%-6% of revenue. We returned $147 million to shareholders through the quarterly dividend, exiting the quarter with 211 million shares outstanding.

As Dave mentioned earlier, the company approved an increase to our quarterly dividend, raising the quarterly payout to $0.72 per share and reflecting our long-term confidence in the business. We closed the September quarter with $2.7 billion in available liquidity, including our undrawn revolving credit facility. Inventory increased to $1.4 billion, including material that we are staging in support of improving mass capacity demand. Our debt balance was $5.7 billion at the end of the September quarter, with more than 90% of our long-term debt obligation maturing in fiscal 27 and beyond. We exited the quarter with a net leverage ratio of 3.2 times and expect to see further reduction in the coming quarters. Turning now to our outlook.

Mass capacity revenue continues to trend higher, with growth driven by global cloud customer demand for our high-capacity nearline drives, along with ongoing improvement in the enterprise and OEM markets. These positive trends are expected to more than offset lower sales into the legacy and other markets. We anticipate profits to further expand from the richer mix of mass capacity revenue that I just described and ongoing pricing actions. With that as the context, December quarter revenue is expected to be in a range of $2.3 billion, ±$150 million. At the midpoint, this represent an increase of 6% sequentially and 48% year over year. Non-GAAP operating expenses are expected to be in the range of $285 million.

At the midpoint of our revenue guidance, we expect non-GAAP operating margin to expand into the low 20s% range. We expect our non-GAAP EPS to be $1.85, ±$0.20, based on a diluted share count of approximately 214 million shares and a non-GAAP tax expense of about $20 million. I will now turn the call back to Dave for final comments.

Dave Mosley (CEO)

Thanks, Gianluca. In closing, Seagate is achieving significant profitability expansion in a favorable demand environment. I'm confident that the structural improvements we have implemented and our differentiated technology roadmap will further enhance said profitability and meet the evolving requirements of our customers. Demand for our high-capacity nearline drives remains strong, and we will build on that momentum to deliver scalable, cost-efficient storage solutions to support the anticipated growth in data demand, including from Gen AI applications. Seagate's dedicated global team, strong business model, and technology leadership form a winning combination that positions us well for future success and underscores our confidence in deploying capital and enhancing value for our shareholders. Operator, let's now open up the call for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, we ask that you limit yourself to one question. If you have further questions, you may reenter the question queue. Once again, that was star, then one to ask a question. At this time, we will pause momentarily to assemble our roster. And our first question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Wamsi Mohan (Analyst)

Yes, thank you so much. Dave, I was wondering if you could flesh out a little bit your commentary around this build-to-order and very good demand visibility into this fiscal year. You noted significant demand growth, including some seasonality that you'd typically expect around March quarter. I was wondering if you could maybe elaborate a bit on maybe some bookends around what you're thinking around demand growth. Is March quarter seasonality going to be different from what you've experienced before? And I'd be curious to also hear your thoughts around, if I could, the how you're expecting to compete versus your competitors' products, which have slightly higher capacities currently as you're ramping HAMR. It sounds like HAMR gets there sort of mid-next year in volume. Thank you so much.

Dave Mosley (CEO)

Thanks, Wamsi. So a couple of things. If I go back at six months ago or a year ago, we instilled these build-to-order models largely to get predictability, and I think it's working well. As we look into the next year, we're confident that we've booked those quarters pretty well, so I'm very happy the way we're running the business with given that predictability, and we're only going to build what we need to build. You know, we're still not fully recovered as an industry from what we just went through a couple of years ago, so I'm quite pleased with how the build-to-order models have gone. There is some seasonality in some markets, as you allude to, and we'll watch that carefully, but you know, I think everyone is a little cautious on next year.

From a cloud perspective, I don't think inventory has built up any. I think the buffers are still low from my perspective, so I think we are happy with the cloud predictability, the mass capacity predictability from here. On the second part, I think from a capacity point leadership perspective, we're shipping the leading products. You know, from a CMR perspective, no one else is shipping over 30 TB, for sure. And as we, you know, mentioned in the prepared remarks, there's capacity points even higher than that going up, and if we put SMR on top of that, we can call even higher. I'm very comfortable with our positions there. I'm not quite sure exactly what you're referring to on, you know, capacity leadership or lack of leadership.

I mean, from our perspective, we've got to get all the quals and all the ramps done and, and so on, and then, you know, we get on to 4 TB a disk and so on. We're very comfortable with our technology portfolio that way.

Wamsi Mohan (Analyst)

Thanks, Dave.

Operator (participant)

... Our next question comes from Krish Sankar with TD Cowen. Please go ahead.

Krish Sankar (Analyst)

Yeah, hi. Thanks for taking my question. Dave, I had a question on your market share. You know, historically, you're more in the mid-forties, but last few quarters, it's kind of dipped down to 30% to high 30% range. Can you talk about the factors that are behind this low share? Is it potential disruption from HAMR causing temporary share loss? Is it customer specific, where WD customers are ordering more than yours? And along the same path, how to think about the industry pricing in calendar 2025? It's been extremely rational in HDD. How to think about it in 2025? Thank you.

Dave Mosley (CEO)

Thanks, Krish. Yeah, for market share, I've said a number of times, market share is an outcome of running your play, and exactly to Wamsi's question, we changed our plays a year ago when we said we want these built to order. So we said, "I want predictability, you know, a longer time horizon," rather than we're building a bunch and then hoping to push it into a channel and that, you know, going for market share or something like that. I think when we were at the bottom of the demand cycle, market share doesn't really matter. It's more the predictability of the cash that you're generating and so on.

As we get back into things, you know, obviously, we're taking. Now that the margins are higher, we're getting rewarded for the money that we extend and the investments we've made and so on, then, you know, we'll clearly take more, more of that demand our way, and so I think the market share will re-equilibrate. From an EB share perspective, I think, you know, we'll just be fine because as customers want to continue to push the TCO proposition, going to higher and higher capacity points, I think we're going to be fine there. On the pricing side, I think I'll let Gianluca-

Gianluca Romano (CFO)

Yeah.

Dave Mosley (CEO)

-answer the question there.

Gianluca Romano (CFO)

Thank you, Dave. Yeah, I think, the pricing environment continues to be, positive for the industry. Every quarter, we have seen a little bit of improvement, and this is what is also driving our gross margin, higher a little bit every quarter. As you know, on the cost side, we still had some unused capacity in the June quarter, and in September quarter, we don't have any of those extra costs, so we also had a little bit of that, help in, in the gross margin. And going into December, if you look at how we guided, we expect further improvement in, in gross margin, further improvement in operating margin, which is, of course, very important to us, and that is coming from the mix, ramping more of our latest PMR product.

Of course, we also have a certain volume of HAMR in our December quarter and the pricing actions that is still ongoing. You know, we have a good balance between supply and demand in general for Seagate, and I think for the industry, and we are continuing for our long-term strategy.

Krish Sankar (Analyst)

Thanks, Dave. Thanks, Gianluca.

Gianluca Romano (CFO)

Thanks.

Operator (participant)

And our next question comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani (Analyst)

Yep, good afternoon. Thanks for taking my question. You know, I guess my question, Dave, is around there's always this fear that the HDD industry broadly, Seagate specifically, are sitting at these cyclical peak levels. I'd love to get your perspective as you look at the EB shipment that you have right now, you know, how do you get confident that what you're shipping is actually getting deployed by your customers versus perhaps ending up in inventory for them? How do you kind of gain that confidence? And then really related to that cyclical fear, I would say, you folks are very confident that there's a lot more upside to gross margins versus where you are today, which is actually about your long-term target. What do you think is the appropriate margin framework for Seagate as you go forward now?

Dave Mosley (CEO)

Thanks, Amit. Yes, we have run a cyclical business over the many, many years. I think it's changed quite a bit as we came down from client-server. You know, there used to be a lot of seasonality in that market, and now as we're in the cloud, the cyclicality. I'm not sure it's totally periodical, but, you know, the pandemic, in particular, caused a very big bubble and then a big crash on the backside of it. So I think that's kind of an anomaly there. How do we know what customers actually have? We have to triangulate ourselves and, you know, I think we've really improved our processes for being able to do that, but we're also not pushing in nearly as many drives, total units or EB points.

And some of this, the build-to-order model actually helps us with quite a bit, so that we know that we're not overbuilding, if you were planning to overbuild. Exactly to your point on upsides to gross margin, I mean, we believe that the way we bring on more capacity is to drive for more areal density gains, and we have to go work the costs on those platforms, and that's what we're really focused on doing, making sure that we can introduce, TBs in the twenties and thirties and forties with lower and lower costs to be able to serve the market.

A good TCO proposition for our customers who are building data centers and want to support data centers for a long time is to put more capacity online because it's so much more efficient for them, but, you know, we need to be able to get that efficiency through our continued cost reduction also. So I do think there's significant upside to gross margin still, but it all starts, to your point, with supply and demand, managing supply and demand properly.

Operator (participant)

Our next question today comes from Erik Woodring with Morgan Stanley. Please go ahead.

Erik Woodring (Analyst)

Great. Thank you, guys, for taking my question. Gianluca, maybe if we just stay in the theme of gross margins here. You know, I think your guidance for the December quarter implies about a 34% gross margin.

up roughly 70 basis points sequentially. You've been growing gross margins by about two to four points sequentially over the last four quarters. And so I'm just wondering if pricing and mix are still favorable, and obviously, Dave just made some positive comments on gross margins. Can you help me understand why we might not be seeing more gross margin expansion in the quarter, again, relative to the multiple points of gross margin expansion you've been able to drive over the last 12 months? Thanks so much.

Gianluca Romano (CFO)

Yes, Erik. Well, as I said before, in the September quarter, we also had the support from better cost structure because of you know, higher capacity and the elimination of the underutilization charges. That was about 100 basis points in our gross margin improvement. We are not going to have that improvement in the December quarter because now we don't have any underutilization charges anymore. But we are still progressing with our pricing structure, and we are making a good ramp of our latest PMR product, and we will see some volume on HAMR, so all those are positive. And as you know, we guide based on on a forecast that we have at the beginning of the quarter, and then we execute during the quarter as best as we can.

Our focus is to keep improving quarter after quarter. We are not trying to increase too much at one time. We want to be consistent and keep this cycle up for, you know, for as long as we can.

Operator (participant)

Our next question today comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari (Analyst)

Hi, thank you so much for taking the question. I had a multi-part, one on HAMR. I think on the last call or at a conference, you guys talked about your expectation around getting qualification at your lead customer in Q3, I believe. Is that now Q4? Is that early '25? Any thoughts on that would be helpful. And then, Dave, you talked about additional cloud companies or customers having qualification products on hand. Should we expect the qualification process at some of those customers to be smoother than your lead customer, given sort of the debugging process that you've been through over the past year or so? Thank you.

Dave Mosley (CEO)

Yeah, thanks, Toshiya. Yeah, the failure mode that slowed us down as we ramped to high volume this spring and summer is behind us. The teams worked really hard to make sure we get all the process improvements that we talked about last time. And I did speak on last earnings call about the... Our confidence was based on the test beds that we have running that are all designed to detect these fail modes with, you know, intense stresses that are way beyond our spec. And here we are, another quarter later, we have more drives, more configurations running, more months of test, and we haven't seen hide nor hair of the failure mode. So we're confident that it's behind us. That's that initial learning that we get.

Relative to proving it, sometimes it takes a little bit of time with the customers to prove it, but I, I'm confident we're going to be able to prove it. Right now, those tests are ongoing. The customers know exactly where we are. That when we think about qualifications, there's a lot of different facets to quals. It's interoperability in different data center applications and so on and so forth. No, no significant concerns there. It really does come down to this one last issue, and, and that's why we have confidence that, confidence that no one else is going to see it, because as we ramp to high volume, those other customer- we've got this problem fixed, I'd say those other customers want. Some, multiple non-cloud customers have already qualified the product and we're already getting volume shipments there.

They run tough quals themselves, but may not have these same kinds of stresses, but now that we have the recipe, I think we're going to apply it everywhere.

Toshiya Hari (Analyst)

Thank you.

Operator (participant)

Our next question today comes from Asiya Merchant with Citigroup. Please go ahead.

Asiya Merchant (Analyst)

Great. Thank you very much. As you guys ramp HAMR, you know, and you start to see more qualifications and more shipments, let's say, here in December and into the March, is that a negative to gross margins, just given, you know, the shipment volumes are lower, the, you know, there might be some ramp issues there? How should we think about overall impact to margins as HAMR ramps? And I get the sense that, you know, obviously, once you guys are much further along, that's a margin driver. But near term, how should we think about the impact to margins from HAMR ramping? Thank you.

Dave Mosley (CEO)

Thanks, Asiya. Yeah, near term, we don't want to give it away. Long term, we don't want to give it away. So, you know, we definitely want HAMR to be accretive to gross margin, and we think it does add benefit to our customers as well. So there's a trade-off. You know, do they want to, you know, increase the higher the capacity for the data center build-outs that they're doing, and then we have to say, "You have to make sure you pay for it to replace the drives?" As we said before, our factories are largely full, so, you know, to take drives out of those or take the supply out and turn it over to HAMR, we have to make sure we're getting paid for it. And I'm confident we can do that in the near term as well.

It's just a matter of managing the supply and demand picture properly.

Gianluca Romano (CFO)

Yeah, I would say on the cost side, a similar level of volume, HAMR cost per TB is below the PMR cost per TB. So for sure, there is an advantage on HAMR. And the pricing, of course, depend from, you know, the timing and where we are in the cycle. But at this point, in the short term, there is no reason why HAMR should not be accretive to our gross margin.

Operator (participant)

Our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Rakers (Analyst)

Yeah, thanks for taking the questions. A couple just real quick model questions. It looks like your OpEx was a little bit higher than you expected in this quarter. I'm curious, as you know, relative to the $285 million guide, how do we think about the trajectory of operating expenses as we look out into the March quarter or beyond any kind of framework of what kind we could think about from a normalizing operating expense perspective? And then, as you know, the kind of quick follow-up, as you get the, I think it's $480 million of debt maturing in January, you know, from that level, you know, how are you thinking about the possibility of re-entering, you know, share repurchase activity going forward?

Gianluca Romano (CFO)

Yes. On the OpEx, the increase between June and September is only due to variable compensation. So we are not hiring more people. It's just a matter of, you know, last year we didn't have variable comp, and this year we have variable comp at a fairly good level. So from here, I would say probably we stay fairly flat through the rest of the fiscal year, around the, you know, 280 to 285. I think that is that is the new range. The debt, as you said, is maturing in beginning of January. So as we said before, we are going to address that with cash on hand, so we start reducing our debt. We want to be even a little bit lower before we will start share buyback. So I would say, as you know, we have increased dividend.

That is the top priority for the company, and then we want to take care of the debt, and then after that, we will look at share buyback, probably, you know, a little bit further in time.

Aaron Rakers (Analyst)

Good. Thank you.

Gianluca Romano (CFO)

Thank you.

Operator (participant)

Our next question today will come from Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri (Analyst)

Thanks a lot. I had a question about the capacity outlook now, given that you're kind of bumping up against your max, you know, today. So unless you decide to add more, you're, I mean, you're gonna ship close to that 130 EB of nearline, you know, probably not in December, but you know, quite soon. So I mean, you've grown nicely off the bottom on mix and on you know, EBs coming back, but if you're not gonna expand capacity, should we think of things starting to flatten off from here? And you know, I realize that pricing is gonna go up, but it seems like you kind of lose a you know, degree of freedom in the model unless you start to expand EB capacity. Thanks.

Yeah, Tim, I think exactly to your point, we'll expand EB capacity by transitioning to new products. And so if you think about it, as I go from 20 TB-ish to 30 TB-ish to even 40, you know, someday, we'll be able to expand EB capacity without adding significant capacity from a drive, heads, or media perspective. We'll just use it much more efficiently on an EB basis. And you know, that's where we're confident that we'll be able to also take out cost at those higher capacity points, which is what builds into the margin proposition into the model.

Operator (participant)

And our next question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead.

C.J. Muse (Analyst)

Yeah, good afternoon. Thank you for taking the question. Dave, in your prepared remarks, you talked about good visibility for growth in fiscal 25, notwithstanding seasonality for March. So I was hoping you could kind of speak to, you know, where your visibility is today, for nearline. Is, is it three, six, nine months? And then, you know, based on that backdrop, how should we be thinking about at least for mass capacity, what seasonality will look like into the March quarter?

Dave Mosley (CEO)

Yeah, I think, mass capacity is pretty full, and it goes out that nine-month period that you talked about, CJ. And that's a virtue of the build-to-order model that we've actually established, and I think customers understand that. They get, you know, predictable economics, and then, and we're all going through these qualification processes, so they get access to that technology as well. That's all serving as well. I think, you know, right now, I would say the total demand is not, is not significantly higher than, you know, historical demands, and I certainly don't think there's inventory buildup going in or anything, so I don't think there's a cycle coming. I think we're running a fairly predictable business, and we'll get better visibility as we get through, you know, obviously, early next year.

People are, you know, re-upping, if you will, the build-to-order configurations. But right now, I feel fairly confident, certainly through the front half of the year and probably even into the back half of the year.

Gianluca Romano (CFO)

Yeah, on the seasonality, CJ, usually the majority of the seasonality is on the legacy part of the business, where the March quarter is a lower quarter. It's the lowest quarter in the year. But we also have part of mass capacity, in particular, VIA, so the surveillance part of the business. That is usually fairly weak in March, and then start to grow in June, and it's fairly strong in September and December. So when you model your four quarters for calendar 2025, consider that there is seasonality, not only in the legacy part, but also in some of the mass capacity products.

C.J. Muse (Analyst)

Very helpful. Thank you.

Gianluca Romano (CFO)

Thank you.

Operator (participant)

Our next question today comes from Steven Fox with Fox Advisors LLC. Please go ahead.

Steven Fox (Analyst)

Thanks for taking my question. Good afternoon, guys. I guess just following up on the point on how much capacity you have available. I think I understand how you create capacity when you go from, like, 3 TB per platter to four. But from here, going over, say, the next twelve months, I think last quarter you talked about debottlenecking. There's a potential that maybe you do get a better cycle in enterprise and VIA next year. Like, how do we, how do we get comfortable with the idea that you can manage all that and still satisfy all your customer needs, or any, any further color on that would be helpful?

Dave Mosley (CEO)

Yeah, I think that's it's a question, a good question about how big could things get if the edge really turns on, if, you know, Gen AI turns on, which, you know, I would say is still very, very early innings of that. You know, if there's some kind of macro recovery in all the markets, and we're not there yet. We're still being very cautious on any supply. And any additional supply we would have to put on would be very long lead time. So we can satisfy more EBs, exactly as you described, and we've talked about earlier, but, you know, additional drive demand, if you will, I think we'd have to add supply, which would be longer, much longer lead time.

As we spend 4% of our revenue on CapEx, we do add technology transition capacity, so you get some small capacity adds because of that. As you're buying new tools, they're more efficient, but the growth would be necessarily slow, I think.

Steven Fox (Analyst)

Okay, that's helpful. Thank you.

Operator (participant)

And our next question today comes from Ananda Baruah with Loop Capital. Please go ahead.

Ananda Baruah (Analyst)

Yeah, good afternoon, guys. Thanks for taking the question. I guess, Dave, sort of sticking right there on the capacity question, you know, if things progress as you anticipate with HAMR, in the event that even with HAMR and areal density increases, you know, sort of data increases, you know, Gen AI, video apps, et cetera, you know, all of that were to put you in a position where you were to want to be increasing capacity, what? You just mentioned long lead times. What does that process? Can you give us some sense of what that process could look like? You know, we've also heard about, you know, just kind of the whole component change that you have also needs to be tended to. I guess, just what would be the ways that you guys could maybe generate that?

That, that'd be helpful. Thanks a lot.

Dave Mosley (CEO)

Yeah. Thanks, Ananda. I think that we fixate in our industry on the highest capacity point, and obviously, you know, that, that's the max capacity gets a lot of attention. But, you know, when you get into the growth of some of these other markets, we would be talking about 20 TB or, you know, maybe even less than that. You know, what's your value prop at that level? And by pushing forward in areal density, we get to take components out of those capacity points, so we can actually hit much more aggressive price bands, if we want to, and still maintain really good margins. And then those components that are freed up go, you know, you can make twice as many drives with half the components being dedicated to each drive, right?

You know, I think that's where, if we saw a resurgence, yeah, areal density helps solve a lot of problems because you can go address those markets that are, you know, half capacity, if you will, of the max capacity, in a much more efficient way.

Ananda Baruah (Analyst)

I got it. That's, that's super helpful. Then, and just to complete that, does that mean, like, even in, like, a strong case with HAMR, you, you guys feel pretty good when you sort of map out ability to hit, you know, EB shifts for the industry, for a good amount of time to come? I mean, measured in probably years, not months.

Gianluca Romano (CFO)

It depends, right? We have our supply plan. We know if demand is much higher than our supply plan, of course, we will have a little bit of imbalance, but we have time to address. But our focus is on technology transition, is not on more volume, and we think this is the most profitable way for the industry to progress in this period of time, and this is what we want to do. Let's see where demand is in two or three quarters from now, but we know where our supply will be.

Ananda Baruah (Analyst)

Thanks, guys.

Gianluca Romano (CFO)

Thanks.

Dave Mosley (CEO)

Thanks.

Operator (participant)

Our next question today comes from Vijay Rakesh with Mizuho. Please go ahead.

Vijay Rakesh (Analyst)

Hi, Dave. I'm just wondering if you gave a high, what you think the unit shipments could be for calendar 2025. And Gianluca, I think in the past, you talked about trying to bring on some of the idle capacity and headcount as you, you know, start to bring some of the capacity back on. Can you lay out how that roadmap looks like? Thanks.

Dave Mosley (CEO)

Thanks, Vijay. Yeah, we didn't speak specifically about how many units and how fast we'll push. We just said that, you know, mass qualification will be done for all these customers that we just shipped to, probably by mid-2025. You know, from my perspective, the factories are relatively full right now, and so as we plan with those customers, and they say, "Hey, I'd like the EBs in this form rather than this form," we'll make the transition, but it'll be probably a less of a transition than we would have made, you know, say, a year ago when we had empty factories. We would have ramped much more aggressively. This time, I think we'll make sure that we pivot accordingly and carefully.

It's very important that to realize that the components that we use in our last generation of PMR product are very, very similar to the components we use in HAMR as well. So not the critical components, heads and media, obviously, but all the other components. And so we feel very comfortable being able to pivot from one product to the other if we have to. The mechanics, the electronics, there's so much leverage there. So that's what allows us that flexibility.

Gianluca Romano (CFO)

Yeah. From a idle capacity standpoint, I would say at this point, we don't have much idle capacity anymore. So what we are doing is now moving faster into technology transition, now with our latest PMR product, that we are ramping very aggressively already in the September and December quarter, and then the transition to HAMR will generate now a certain level of additional EB that will support the increasing demand.

Vijay Rakesh (Analyst)

Right. Thank you, Dave and Gianluca.

Dave Mosley (CEO)

Thanks.

Operator (participant)

And our next question today comes from Thomas O'Malley with Barclays. Please go ahead.

Thomas O'Malley (Analyst)

Hey, guys. Thanks for taking my question. Dave, if you would just humor me, as I try to clarify things here. But just in the back half, it sounds like you are fully at capacity and technology transitions are getting you some growth, and it sounds like that looks really good. It's obviously been a couple of really good quarters for you guys. But let's just say we head out into fiscal year 2026, you're talking about more volume for HAMR kind of coming in the middle of the next calendar year, and so you would imagine more substantially into the next fiscal year for you guys.

If you guys were to see further delays on the HAMR side, what actions would you guys take, just given the fact that you're at capacity and wouldn't, you know, from a factory perspective, and you wouldn't see the technology transitions? Just walk me through what you would do in that instance. Obviously, that's not ideal and you're not planning for that, but we've seen the qualifications slip a couple quarters with the largest guy. So just wanna understand how you guys think about things if it's further delayed.

Dave Mosley (CEO)

Yeah, I'm not really worried about it for exactly the reasons that you talked about. We see how the test beds are running, we see how the qualifications are running, and we're very confident in being able to make the pivot. But exactly to the earlier question, I think it was Vijay's question, you know, we can pivot from the last generation PMR to the HAMR technology very, very easily. And last generation PMR is a great product for us with really good margins that we're not fully ramped on yet either. So, from that perspective, if it came down to, like, one quarter of delay and some customer said, "I want it like this rather than like this," we can very easily pivot back.

Thomas O'Malley (Analyst)

Helpful. And then in terms of just your outlook on AI, you obviously made some comments earlier on the call. You're saying it's still kind of on the come. In terms of, you know, initial conversations with customers, do you have a timeframe of when you may start to see some contribution there? Is that something that would come as early as this next fiscal year?

Dave Mosley (CEO)

Yeah, thanks, Tom. This is a really complex topic because, you know, I think there's a lot of different things that are called AI. Some of them are traditional workloads that we've seen for years and years, and some of them are brand-new workloads. And we are seeing demand that's coupled to brand-new workloads, right? With, you know, purchase orders that reference specifically things that people would identify as predictive AI or gen AI applications. What I would say is that the recent trends are really more towards video, which we talked about in our prepared remarks, and that's the biggest thing that we're seeing right now grow.

I'll call that AI for a while because I think it is a much more efficient way to drive our customers' business models, and we see that demand flowing through right now. I don't think that there's a bubble going on in there. I think there's a continued value competition happening in a bunch of different vectors with new technologies, new applications coming that you know could continue to drive video as a you know fundamental value store for our customers. That's why we're excited about it. You know, I know some people call those traditional workloads, but you know, I'll give credit to AI because I think they're being used in very interesting, creative, new ways.

Operator (participant)

Our next question today comes from Mark Miller with The Benchmark Co. Please go ahead.

Mark Miller (Analyst)

Congratulations on your upside results and your good guidance. I just want to go back to AI and the opportunity there. Do you believe that PCs with AI chips will drive a major refresh cycle? And if so, when? Second half of next year?

Dave Mosley (CEO)

Yeah, thanks, Mark. I don't have a ton of visibility into that, although I do talk to some of these customers that I grew up with about that exact topic. Look, I think that the PC space has been relatively slow to adopt new applications of late, and I think that's about to change. How quickly it'll change is still anybody's guess. And of course, it's not about speccing new hardware, it's about speccing new applications that come. And most of those applications are, to your point, they're video applications.

So yes, I do think that when you can enable creative professionals, certainly, to do to create, especially video, but audio counts as well, and, you know, all kinds of other analytical tools that happen at the edge, you allow them to create much more aggressively. I think they'll spin off more data. Some of that data will be serviced by the cloud service providers, they already are, and so, you know, we see those applications growing, but some of it may be closer to the edge, and we're really excited about that. It's still very early, but, and I can't really predict where AI PCs are gonna be just yet, but I think. From what I'm seeing from application development, I'm excited about it, and I think it is going to be a driver in the near future.

Mark Miller (Analyst)

Okay, just one other question. You mentioned there was little idle capacity at the moment. What is the factory utilization in your HDD media fabs? Are they 85% or higher?

Dave Mosley (CEO)

Yeah, fairly high in both. You know, I think we do have capacity as we transition to HAMR. We can because we've you know dedicated a lot of that space to experiments, if you will, in the last few years. And so now some of that can become production instead of experimentation. You know, think very high, over 90% utilization right now, and that's the way we want to keep it. We don't wanna you know dip down because as you know, that has a lot of cost implications back into the business, and we want to make sure we maintain this fabs running full.

Mark Miller (Analyst)

So the greater than 90% is both for head and media fabs. Is that correct?

Dave Mosley (CEO)

That's right.

Mark Miller (Analyst)

Thank you.

Operator (participant)

And our next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman (Analyst)

Yes, thank you. I was hoping you could discuss your build-to-order visibility, and whether it's based on take-or-pay contracts, or if it would be better characterized as strong indications of interest as you and customers plan their storage capacity additions over the coming quarters, and secondarily, if I may sneak in another one, I was just hoping you could also discuss the mix of SMR today and perhaps going forward as we think about the mix of these higher capacity products going into December and into 2025. Thank you.

Dave Mosley (CEO)

Yeah, thanks, Karl. You know, I'll let Gianluca do the build-to-order question. Just on the SMR, I say this many times, there's only a couple of cloud customers that really take SMR. There's a couple client server customers that take SMR as well, so we ship it into multiple markets. But you know, we talk about SMR versus CMR, but I just look at it as drives, how does the customer need them? We can configure them for those applications, for those particular customers, whether it's one or two people, accordingly. From my perspective, we have a great technology set that we can deploy every place, and we'll try to keep those factories as full as we possibly can and maximize it. So that's how I think about the SMR mix.

Gianluca Romano (CFO)

Yeah, on the build-to-order, we have different kind of agreements with different customers, but the vast majority are orders that are fully committed by customers out in time.

Karl Ackerman (Analyst)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Dave Mosley for any closing remarks.

Dave Mosley (CEO)

Oh, thanks, Nick. Our strategic improvements in advanced technology roadmap position us well to meet evolving customer needs and drive future growth. We remain committed to delivering value and scalable storage solutions for our customers. I'd like to thank our dedicated team, our supply chain partners, and our shareholders for your continued support. Thanks. Talk to you next quarter.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.