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    Seagate Technology Holdings PLC (STX)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$89.17Last close (Jan 24, 2024)
    Post-Earnings Price$91.20Open (Jan 25, 2024)
    Price Change
    $2.03(+2.28%)

    What went well

    • Seagate is ramping up production of its HAMR-based drives, which are expected to significantly improve profitability and gross margins. The company is positive about the profitability from HAMR products, with improvements already seen in guidance and more expected throughout the calendar year.
    • The demand environment is improving, particularly from cloud and hyperscale customers. Seagate notes that hyperscaler inventory levels have "basically cleaned up," and consumption is expected to accelerate slightly, leading to sequential improvements in demand and margins.
    • Implementation of build-to-order plans is enhancing order visibility and predictability, supporting better capacity planning and profitability. The company is getting better visibility into future quarters and is rewarding customers for predictability, which helps stabilize the supply chain.

    What went wrong

    • Demand remains weak compared to historical levels, with the CEO noting that "raw demand is still not what it was 2 years ago" and "the industry does not have enough demand relative to the capacity that has online yet." ,
    • Challenges in ramping new HAMR products may delay profitability improvements, as the CFO stated that "we take a little bit of time to ramp high-volume production for the new product."
    • Supply chain instability and underinvestment in capital could impact recovery, with the CEO mentioning "the industry is, therefore, underinvested in capital and lead times are going up" and "we have numerous upstream supplies that need to be stabilized as well. So it's still going to take some time."

    Q&A Summary

    1. Margin Outlook and HAMR Impact
      Q: How will the HAMR ramp and demand affect margins?
      A: The ramp of HAMR will drive margin improvement; as we increase HAMR volumes, margins will improve. We are becoming more optimistic and believe we can reach our gross margin target range of 30% to 33% at even lower revenue levels than previously thought.

    2. Hyperscaler Demand and Inventory
      Q: What's the outlook for hyperscaler demand and inventory levels?
      A: Inventory at hyperscalers is much better than six months ago, essentially cleaned up. Consumption isn't what it was two years ago, but we forecast exabyte growth in the mid-20% range. AI investments have delayed storage spending, but we expect data backend needs to grow, benefiting from higher capacity drives.

    3. HAMR Transition and Customer Qualification
      Q: How is the HAMR transition progressing and when will it impact revenue?
      A: The HAMR ramp is continuing at a healthy pace, and we're aggressively driving the transition this year. Some customers have shorter qualification times, and as they see TCO benefits, they are trying to speed up qualifications. We aim to drive as many HAMR exabytes into 2025 as we can.

    4. Operating Expenses and Free Cash Flow
      Q: What's the outlook for operating expenses and free cash flow?
      A: Operating expenses increased slightly due to salary actions ending; we expect OpEx to stay around this level until next fiscal year, probably between $270 million to $280 million per quarter. Free cash flow is expected to improve sequentially through the next few quarters.

    5. Pricing Actions in Mass Capacity HDDs
      Q: Will previous pricing actions across the channel occur over the next quarters?
      A: Improvement in profitability is partly due to pricing and mix improvements, and we'll continue executing our strategy. Demand isn't at previous levels and the supply chain isn't fully healthy, so price increases may be more on legacy products. Over time, as demand picks up, things will stabilize.

    6. Build-to-Order Program and Customer Visibility
      Q: How is the build-to-order program impacting visibility?
      A: The program is active and helps us run factories with improved visibility and predictability. We're rewarding predictability with our customers, and progress has been good, with better visibility into the next quarters.

    7. AI-Related Opportunities
      Q: What traction are you seeing from AI-related opportunities?
      A: While still in early stages, AI applications may increase data storage needs over time. Currently, the focus is on compute infrastructure, but applications are generating data requiring storage. Power and space are at a premium, so higher capacity drives that reduce power and space may be an opportunity, potentially helping us exceed the 25% exabyte growth rate.

    8. Customer Value with HAMR Drives
      Q: Will customers get lower price per terabyte with 32TB HAMR drives?
      A: We'll balance yields and costs to incentivize customers. The price per terabyte is nominally the same, perhaps slightly lower, but customers will benefit from power and space reductions, improving their TCO, providing incentive to move off lower capacities.

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