STX Q4 2025: Record Gross Margin, 50% Incremental GM from HAMR Ramp
- Robust Revenue and Margin Expansion: Management highlighted record-setting non‑GAAP margins with significant sequential improvements, supported by double-digit top‐line and bottom‐line growth. This robust performance indicates strong pricing power and operational execution.
- Successful Product Transition and HAMR Ramp: The call emphasized the acceleration of HAMR technology adoption—with multiple major cloud customers already qualified and expectations to ramp additional customers by early fiscal ’26—suggesting future margin and revenue upside from higher capacity, lower cost per terabyte drives.
- Strong Free Cash Flow and Capital Discipline: The company doubled free cash flow sequentially and is committed to returning nearly 75% of free cash flow to shareholders through dividends and share repurchases, reinforcing financial strength and low net leverage (1.8×) for continued growth.
- HAMR Ramp and Qualification Delays: A significant portion of production is being held for qualification and product transitions. If these qualification processes slow down, it could constrain sellable volume and delay the adoption of the higher-density HAMR products, thereby affecting revenue growth.
- Margin Pressure Concerns: Despite guidance for improved gross margins, there are questions regarding whether the incremental margin gains—especially from pricing improvements and the HAMR mix—will materialize as expected. This uncertainty could lead to underperformance in profitability metrics.
- Cost Pressures and Tax Impact: The anticipated uptick in capital expenditures to support new technology transitions and the upcoming global minimum tax may create future cost headwinds, potentially compressing margins and earnings.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q4 2025 | $2.4 billion ± $150 million | no current guidance | no current guidance |
Non-GAAP Operating Expenses | Q4 2025 | $285 million | no current guidance | no current guidance |
Non-GAAP Operating Margin | Q4 2025 | mid-20s percentage range | no current guidance | no current guidance |
Non-GAAP EPS | Q4 2025 | $2.40 ± $0.20 | no current guidance | no current guidance |
Non-GAAP Tax Expense | Q4 2025 | Roughly $10 million | no current guidance | no current guidance |
Impact of Tariffs | Q4 2025 | Minimal direct impact expected | no current guidance | no current guidance |
Free Cash Flow | Q4 2025 | Expected to improve sequentially | no current guidance | no current guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
HAMR Technology | Q1–Q3 discussions focused on ramp‐up progress, qualification challenges, and early production issues (e.g., Q1: qualification progress and some failure modes , Q2: initial ramp challenges and qualification with multiple customers , Q3: steady ramp and early customer qualifications ). | Q4 updates show a steady, well‐executed ramp with focus on transitioning to a 4TB per platter platform, robust customer qualifications, and margin‐accretive outcomes ( ). | Consistent progress with improved execution and sentiment as early issues are resolved. |
Supply Constraints | Earlier periods noted capacity management and production issues: Q1 mentioned supply constraints with potential demand surges ( ), Q2 highlighted production issues on non‐HAMR drives affecting volumes ( ), and Q3 discussed temporary supply constraints and unmet demand ( ). | In Q4, constraints remain due to allocation of production capacity for HAMR qualifications, but overall demand remains strong with expectations for recovery ( ). | Persistent yet managed constraints – earlier challenges continue to be monitored as short‐term impacts while long‐term supply alignment improves. |
Revenue and Margin Expansion | Q1 demonstrated robust revenue growth and margin expansion with strong pricing and product mix ( ); Q2 reported notable gross margin improvements and rising nearline revenues ( ); and Q3 continued to show sequential improvements and healthy operating margins ( ). | Q4 reported strong revenue (e.g., $2.44B in June) with expanded non‐GAAP gross margins and operating margins, reinforcing the growth narrative ( ). | Consistent robust performance with margins and revenues growing steadily and a positive outlook for profitability. |
Evolution of Product Portfolio | Q1 detailed an aggressive ramp of the PMR platform and early HAMR qualifications ( ); Q2 emphasized the ramp-up of Mosaic HAMR products along with aerial density improvements ( ); and Q3 confirmed continued ramp of high-capacity PMR and HAMR drives with emphasis on exabyte efficiency ( ). | Q4 continued to highlight high-capacity drives with widespread adoption of 24TB/28TB PMR products and detailed plans for the HAMR roadmap (including the transition to a 4TB per platter platform) with aerial density improvements ( ). | Ongoing, consistent evolution toward higher-capacity, more efficient drives with smooth transitions from legacy to next-gen technologies. |
Build-to-Order Model | Q1 established strong demand visibility and predictability for several quarters ahead ( ); Q2 reinforced meeting full build-to-order commitments despite supply issues ( ); and Q3 reiterated visibility into demand extending through the next year ( ). | Q4 maintained this strong visibility with the model enabling production planning six to nine months out, ensuring alignment with customer qualifications ( ). | Steady and dependable demand planning that continues to build confidence in production and capacity management. |
Cyclical Peaks, Seasonality, HDD Overcapacity Risks | Q1 acknowledged historical seasonality and cyclical market trends while noting measures to prevent overcapacity ( ); Q2 mentioned expected seasonal declines in certain segments ( ); and Q3 discussed modest seasonal impacts with a focus on exabyte efficiency ( ). | Q4 observed that seasonality is diminishing, with legacy seasonality effects subsiding and no explicit mention of overcapacity risks as demand remains strong ( ). | A trend toward reduced seasonality concerns and improved inventory/overcapacity management through technological efficiency. |
Emerging Data Storage Demand (AI, Generative AI, and Video) | Q1 highlighted video applications, AI workloads, and emerging generative AI trends driving data storage needs ( ); Q2 focused on exponential growth in data from AI and video applications, forecasting massive future expansion ( ); and Q3 emphasized long-term demand driven by AI-related storage requirements ( ). | Q4 emphasized that applications such as video (including cloud-hosted and edge applications) and early impacts from generative AI are significantly driving storage demand ( ). | Growing prominence and bullish sentiment, with a clear upward trajectory as AI and video-driven data storage become increasingly central. |
Capital Discipline, Free Cash Flow & Shareholder Returns | Q1 discussed modest free cash flow improvement, disciplined CapEx (around 4%–6% of revenue), and dividend increases ( ); Q2 showed improved free cash flow and consistent CapEx discipline ( ); and Q3 highlighted further free cash flow growth with robust dividend returns and debt reduction ( ). | Q4 reported that free cash flow nearly doubled and strong shareholder returns were maintained through dividends, share buybacks, and debt reduction ( ). | A steady emphasis on financial discipline with progressively stronger cash flow generation and shareholder returns over time. |
Tariff Risks, Rising CAPEX & Global Minimum Tax Implications | Q1 and Q2 did not address these topics; Q3 discussed minimal direct tariff impacts, ongoing CAPEx discipline, and forecasted global minimum tax implications starting fiscal 2026 ( ). | Q4 omitted tariff risk discussion but reiterated rising CAPEX (with investments around 3% of revenue) and clear guidance on global minimum tax impacts (non‐GAAP tax rate around 16% starting fiscal 2026) ( ). | An emerging focus compared to early periods – while tariffs are less emphasized now, CAPEx adjustments and tax regime changes have become more prominent topics. |
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Margin Guidance
Q: Confirm margin guidance calculation?
A: Management explained that the estimated sequential margin expansion is significantly higher than some models suggest, as they recently hit a record gross margin and are guiding robust improvements in both gross and operating margins. -
HAMR Revenue
Q: What’s HAMR’s revenue contribution?
A: The team emphasized that HAMR is growing steadily—with three major cloud customers qualified and a ramp toward the four terabyte per platter product—bringing positive effects on both revenue and margins. -
LTAs Pricing
Q: What pricing is built into LTAs?
A: Management confirmed that they are not changing their pricing strategy; like‐for‐like pricing continues to increment slightly over time to reflect the strong TCO benefits of new products. -
Free Cash Flow
Q: How’s free cash flow affecting share repurchase?
A: They noted that free cash flow is improving markedly, which, alongside a slight uptick in CapEx, has enabled restarting share buybacks and returning approximately 75% of free cash flow to shareholders. -
Revenue Growth
Q: How will revenue grow short and long term?
A: Guidance is based on production capacity and a focus on product transitions that drive exabyte volume, paving the way for short-term boosts and longer-term revenue growth in the low to mid-teens percentage range. -
Guidance vs. Consensus
Q: Why is September guidance below consensus?
A: They clarified that build-to-order production and dedicating some capacity to product qualification are central to the guidance, even though overall demand remains very strong. -
HAMR Diversification
Q: Are additional customers driving the HAMR ramp?
A: Management stated that beyond the initial major customer, other customers are ramping up and creating strong demand, confirming healthy diversification in the HAMR portfolio. -
Incremental Gross Margin
Q: What underpins the 50% incremental gross margin?
A: They noted that the guidance implies a much higher gross margin than some models predict, targeting 40% GM at $2.6 billion revenue and then adding an incremental 50% margin improvement as the mix improves. -
Gross Margin Breakdown
Q: How are pricing, utilization, and mix affecting GM?
A: Management attributed the margin pickup to a combination of increased HAMR volume, stable pricing, and cost declines per terabyte, all clearly steering margins upward. -
Capacity Visibility
Q: Do you know December’s shipment outlook?
A: They affirmed that while build-to-order lead times mean precise December guidance isn’t provided, there is strong clarity and demand with capacity booked through mid-2026. -
AI Inference Edge
Q: What’s driving AI inference demand?
A: Leaders observed that growing video storage and unstructured data needs in both the cloud and edge environments are powering robust AI inference demand. -
AI Video Drivers
Q: What are the key AI video drivers?
A: They highlighted that diverse video content—both stored and generated—continues to spur demand, while noting limited generative AI impact in autonomous applications so far. -
Seasonality & Receivables
Q: Is seasonality affecting receivables?
A: Management explained that traditional seasonality in legacy markets is diminishing and the recent receivable increases are attributed to changes in factoring practices, not underlying business weakness. -
NAND Cannibalization
Q: Are NAND trends pressuring HDD demand?
A: They clarified that HDD and NAND serve different roles in mass storage, and despite NAND’s developments, their value proposition in cloud data storage remains firm.
Research analysts covering Seagate Technology Holdings.