Q1 2025 Earnings Summary
- Seagate has strong visibility into customer demand extending out 9 months, supported by their build-to-order model, providing confidence in mass capacity demand through fiscal 2025.
- Significant upside to gross margins is expected, driven by increased aerial density gains and cost reductions, enabling efficient introduction of higher capacity drives in the 20s, 30s, and 40s terabyte range, improving their competitive position.
- The ramp-up of the latest high-capacity PMR and HAMR products, with strong customer reception, is contributing to revenue growth and profitability improvements, focusing on consistent quarter-over-quarter growth.
- Concerns about a cyclical peak in the HDD industry and potential overcapacity or inventory build-up. Analysts fear that Seagate may be sitting at cyclical peak levels, and despite the company's efforts to manage supply and demand, there is uncertainty about future demand sustainability.
- Delays in HAMR technology qualification with the lead customer due to failure modes. The qualification process has been slowed down by a failure mode that occurred during ramp-up to high volume in the spring and summer, and while the issue is reportedly resolved, it has caused delays in product deployment.
- Seasonality and potential weakness in demand expected in the March quarter, including in mass capacity products like VIA (surveillance). The March quarter is typically the slowest quarter, with seasonality not only in legacy products but also in some mass capacity products, possibly leading to reduced revenues.
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HAMR Technology Ramp
Q: What's the status of HAMR qualifications and impact on margins?
A: Dave Mosley stated that the issues delaying the HAMR ramp are resolved, and they're confident in qualifying and ramping HAMR with customers. HAMR's cost per terabyte is lower than PMR, and they expect it to be accretive to gross margins. -
Capacity Constraints and Exabyte Growth
Q: How will you manage exabyte growth amid capacity constraints?
A: Mosley explained they will expand exabyte capacity by transitioning to higher-capacity drives through technology advancements like HAMR, enabling more exabytes without significant physical capacity increases. -
Gross Margin Outlook
Q: What's driving gross margin improvements, and will they continue?
A: Gianluca Romano noted improvements are due to better pricing, cost structure, and higher capacity ramps. They expect further gross margin gains but at a more moderate pace, aiming for consistent quarterly improvements. -
Market Share Dynamics
Q: Why has market share dipped, and future expectations?
A: Mosley said market share decreased as they prioritized predictability over share during low demand, but they expect share to rebound as demand grows, especially with higher-capacity products. -
Demand Visibility and Build-to-Order Models
Q: How's your demand visibility with build-to-order models?
A: The company has good visibility up to 9 months, thanks to build-to-order models providing predictability into next year, accounting for seasonality. -
AI Impact on Business
Q: How is AI affecting demand?
A: Mosley noted that AI applications, especially video, are driving demand. They are receiving orders linked to new AI workloads and are excited about future growth, though it's still early stages. -
Capital Allocation and Debt Repayment
Q: How does debt repayment affect capital allocation plans?
A: Gianluca Romano said they will repay $480 million of debt maturing in January with cash on hand, aim to reduce debt further before resuming share buybacks, prioritizing dividends and lowering debt. -
Seasonality Expectations
Q: What are your expectations for seasonality?
A: They anticipate some seasonality in the March quarter, particularly in the legacy and surveillance parts of mass capacity, but overall mass capacity demand remains strong with good visibility. -
Operating Expense Outlook
Q: How should we model OpEx going forward?
A: OpEx increased due to variable compensation; they expect expenses to remain flat at around $280–$285 million per quarter for the rest of the fiscal year. -
SMR Mix and Customer Demand
Q: What's the current SMR drive mix and outlook?
A: SMR drives are supplied to select cloud and client-server customers. They focus on configuring drives to customer needs, leveraging their technology across markets.
Research analysts covering Seagate Technology Holdings.