Seagate Expertise Plc (STX) Q2 2024 Earnings Name Transcript

Seagate Expertise Plc (STX -0.07%)
Q2 2024 Earnings Name
Jan 24, 2024, 5:00 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Welcome to the Seagate Expertise fiscal second quarter 2024 convention name. All contributors can be in listen-only mode. [Operator instructions] Please be aware this occasion is being recorded. I’d now like to show the convention over to Shanye Hudson, senior vp, investor relations.

Please go forward.

Shanye Hudson — Senior Vice President, Investor Relations and Treasury

Thanks. Hiya, everybody, and welcome to in the present day’s name. Becoming a member of me are Dave Mosley, Seagate’s chief government officer; and Gianluca Romano, our chief monetary officer. We posted our earnings press launch and the detailed supplemental data for our December quarter outcomes on the Traders part of our web site.

Throughout in the present day’s name, we’ll check with GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures within the earnings press launch posted on our web site and included in our Kind 8-Okay. Now we have not reconciled sure non-GAAP outlook measures as a result of materials gadgets which will affect these measures are out of our management and/or can’t be fairly predicted. Subsequently, a reconciliation to the corresponding GAAP measures just isn’t out there with out unreasonable effort.

Earlier than we start, I might prefer to remind you that in the present day’s name accommodates forward-looking statements that mirror administration’s present views and assumptions primarily based on the data out there to us as of in the present day and shouldn’t be relied upon as of any subsequent date. Precise outcomes might differ materially from these contained in or implied by these forward-looking statements as they’re topic to dangers and uncertainties related to our enterprise. To study extra concerning the dangers, uncertainties, and different elements which will have an effect on our future enterprise outcomes, please check with the press launch issued in the present day and our SEC filings, together with our most up-to-date annual report on Kind 10-Okay and quarterly report on Kind 10-Q in addition to the supplemental data, all of which can be discovered within the Traders part of our web site. As all the time, following our ready remarks, we’ll open the decision for questions.

I will now flip the decision over to Dave for his opening remarks.

Dave Mosley — Chief Govt Officer

Thanks, Shanye, and howdy, everybody. I’m going to give attention to two key matters in my remarks in the present day. First, we delivered strong fiscal second-quarter outcomes with income on the midpoint of our steerage and non-GAAP earnings of $0.12 per share, exceeding the higher finish of our guided vary. And second, final week, we marked a serious inflection level in mass capability storage with the launch of our groundbreaking Mosaic platform.

Mosaic is deliberately named to explain the fusion of modern applied sciences together with Seagate’s distinctive implementation of HAMR that collectively enabled us to increase our aerial density management. As we shared up to now, rising aerial density is essentially the most environment friendly strategy to allow knowledge middle operators to scale mass capability storage to decrease their TCO and to advance their sustainability targets. I will focus on the platform in additional element shortly and in addition share progress towards qualification and quantity ramp of our first HAMR-based Mosaic product. which lays the muse for merchandise posting 5 terabytes per disc and past.

Let me begin by highlighting our fiscal Q2 efficiency. Income of $1.56 billion was led by sequentially bettering cloud nearline demand and a seasonal uptick in client drives, offset partially by the decline in VIA gross sales that we anticipated. Robust value self-discipline and execution on pricing changes resulted in non-GAAP working revenue tripling quarter over quarter and rising roughly 17% yr over yr regardless of decrease income ranges. These efficiency and demand tendencies affirm our expectation for the September quarter to be the underside of this extended down cycle.

The improved self-discipline we have constructed into the enterprise, together with strict value controls, administration of provide, and the strengthening of our stability sheet provides us a wonderful basis to construct on as we transfer right into a broader restoration. Moreover, execution of our product highway map is anticipated to structurally enhance profitability and return us to our focused monetary mannequin, which helps more healthy business economics. We enter calendar 2024 with elevated confidence in our non-GAAP gross margin trajectory, together with our skill to reclaim 30% minimal benchmark degree at quarterly revenues which might be at the least 20% beneath our prior cyclical peak. From a requirement standpoint, gradual restoration throughout the U.S.

cloud market has began to take form, reflecting strong progress in consuming extra stock, together with extra secure end-market habits. Enterprise OEM demand tendencies have additionally stabilized throughout the U.S. markets. Buyer suggestions nonetheless factors to macro-related issues, though IT {hardware} budgets are projected to modestly enhance in calendar 2024, and conventional server development is anticipated to renew tendencies that assist incremental HDD demand development within the calendar yr.

We had been additionally inspired to see incremental demand amongst sure non-U.S. cloud and enterprise clients within the December quarter. Throughout the broader China markets, we undertaking a comparatively slower tempo of restoration given the continued financial challenges throughout the area. Nevertheless, some native governments introduced additional steps to assist the area’s economic system, which our clients imagine will bolster native demand throughout mass capability markets in China within the second half of the calendar yr.

These efforts assist our view for demand within the VIA markets to select up someday after the Lunar New 12 months. Towards the dynamic market setting, Seagate has continued to execute on a mass-capacity product portfolio that additional advances our expertise management and serves the breadth of our clients’ distinctive workload necessities whereas additionally supporting our goal of bettering profitability. I will define the execution path for our newest product launches and the relevance of the brand new platform after which share how we imagine our mass capability options ship financial worth each to our clients and to Seagate. Our product qualification and ramp plans are on monitor with what we have been articulating over the previous a number of quarters.

We started transport preliminary volumes of our 24-terabyte PMR, 28-terabyte SMR drives within the December quarter. Buyer reception has been optimistic, as illustrated by the quite a few energetic {qualifications} underway throughout a number of cloud and enterprise clients. Our three-plus terabyte per disk product is the primary main launch of the HAMR-based Mozaic platform and we’re quickly nearing qual completion with our preliminary hyperscale launch companion. The qual has gone very properly, and we’re working with this buyer at their request to completely transition future Seagate demand to the three-plus terabyte per disk platform.

Quantity ramp is beginning within the March quarter in accordance with plan with a purpose to ship about 1 million items within the first half of this calendar yr. We then anticipate to proceed to ramp by means of the stability of the calendar yr, and we’re at present broadening our buyer engagements. Primarily based on their deliberate timelines, we anticipate to finish {qualifications} with a majority of U.S. hyperscalers and a few international cloud clients throughout calendar 2024.

Beginning at three terabytes per disk, Mozaic delivers a quantum leap ahead in aerial density innovation with a well-defined path that extends to 5 terabytes per disc and past. This transformative platform is the end result of many years of improvement and quite a few applied sciences pioneered by Seagate, together with our superlattice platinum alloy media that permits greater bit density. The revolutionary plasmonic author with built-in laser able to reliability writing every bit and a complicated reader expertise to publish one of many world’s smallest studying sensors. Whereas Mozaic represents groundbreaking expertise, the platform is absolutely plug-and-play with present standard drives and addresses the breadth of our clients’ mass capability workloads.

These drives can be deployed with SMR applied sciences for the few clients in a position to combine SMR to make the most of the extra capability positive factors. As I famous earlier, aerial density positive factors are essentially the most environment friendly strategy to scale storage capability. Let me supply just a few clear examples. First, as we execute our product highway map, we are able to ship more and more greater capability drives with minimal modifications to the invoice of supplies.

This ends in a greater TCO worth proposition for our clients and engaging economics for Seagate. Second, as we scale aerial density to 4 terabytes per disk, this permits extraordinarily cost-effective product choices within the low to midrange capability factors utilized by a majority of our enterprise [Inaudible ] clients. With 4 terabytes per disk, we used half the variety of heads and disks to supply a 20-terabyte drive. Prototypes are already working in our labs with income deliberate for the second half of calendar 2025.

As we ramp manufacturing to broaden to different finish markets, we gained large manufacturing efficiencies, including to the engaging margin alternatives that I simply described. We proceed to construct on our expertise and operational improvements with every successive product era. For instance, we’re executing plans to vertically combine the laser manufacturing course of, which boosts provide flexibility, offers higher management of the expertise, and offers alternatives to decrease manufacturing prices. Collectively, we imagine these actions underpin our mass capability value discount highway map whereas additionally offering a really sturdy TCO story for a broad vary of consumers.

Whereas TCO stays a key driver for mass capability storage, knowledge middle operators are additionally targeted on energy and area consumption, notably as investments in compute-intensive infrastructure proliferates to assist generative AI purposes. For context, the most recent AI GPUs eat as much as 700 watts, which is roughly 100x extra energy intensive than a tough drive working at most efficiency. Our merchandise may also help knowledge middle operators retailer extra exabytes utilizing much less energy and area. To quantify this, a single 32-terabyte Mozaic drive can substitute 310-terabyte drives storing extra capability at one-third of the facility and footprint.

TCO and sustainability positive factors of this magnitude are decision-altering when architecting a brand new knowledge middle and supply a extremely economical path to modernizing present infrastructure. We imagine that this dynamic can doubtlessly speed up the substitute cycle. As we transfer into the early phases of demand restoration, Seagate’s sturdy give attention to sustaining our product and expertise highway map by means of this previous down cycle place us to return to worthwhile development and handle knowledge middle operators most necessary challenges value, energy, and area. We imagine we have got the fitting product on the proper time, heading right into a gradual recovering mass capability market.

With that, Gianluca will now cowl particulars on our monetary efficiency and outlook.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Thanks, Dave. Seagate’s December quarter monetary outcomes mirror strong operational execution. Income was $1.56 billion, up 7% quarter over quarter. Non-GAAP working revenue greater than tripled sequentially to $127 million, resulting in non-GAAP working margin increasing to eight.2% of income, up 540 foundation factors quarter over quarter, and non-GAAP EPS was $0.12, bettering $0.34 sequentially and exceeding the excessive finish of our unique steerage vary, reflecting each bettering demand tendencies and our give attention to profitability.

As these tendencies proceed, we anticipate our outcomes to enhance and attain the goal monetary mannequin over time. Inside our exhausting disk drive enterprise, exabyte shipments grew 6% sequentially to 95, with income rising 7% to $1.4 billion. Income efficiency was primarily pushed by an anticipated enchancment in cloud buyer demand, together with seasonal enchancment within the client market. Inside the mass capability market, income elevated 4% sequentially to $1.1 billion, pushed primarily by sturdy nearline cloud demand, offsetting the anticipated decline within the VIA market.

Mass capability shipments totaled 83 exabytes in contrast with 79 exabytes within the September quarter. Mass capability shipments as a % of complete HDD exabyte was 87%, which is similar to the prior quarter 88%. For nearline merchandise, cargo of 65 exabytes had been up quarter over quarter from 56 exabytes. Common capability per nearline drive proceed to extend sequentially, reflecting modest demand enchancment amongst each U.S.

cloud buyer and China cloud clients. We imagine that stock amongst many CSP clients is reaching extra normalized ranges and anticipate continued nearline demand enchancment within the March quarter and past. VIA market income was down sequentially within the December quarter, in step with our expectations. Trying forward, we anticipate VIA to mirror extra typical seasonal patterns by means of calendar 2024, with the March quarter representing the low level.

Legacy product income was $324 million, up from $278 million within the prior quarter, pushed by greater seasonal demand within the client market. We anticipate the legacy market to be sequentially decrease within the March quarter following typical client demand tendencies publish vacation season. Lastly, income for our non-HDD enterprise elevated to $171 million in contrast with $159 million final quarter, primarily pushed by improved SSD demand. Transferring on to the remainder of the revenue assertion.

Non-GAAP gross revenue elevated sequentially by roughly $80 million within the December quarter to $367 million, forward of our unique expectations. Non-GAAP gross margin of 23.6% expanded almost 400 foundation factors in comparison with the earlier quarter due partially to pricing adjustment and price financial savings from earlier restructuring actions in addition to decrease amortization prices, which had been about $40 million in step with our view for ongoing demand restoration. Nevertheless, we anticipate underutilization value to margin enhance for the following couple of quarters as we transition a few of our manufacturing line to Mozaic. Accounting for this headwind, we nonetheless anticipate to see margin growth each quarter in calendar 2024 as nearline demand continues to enhance progressively and we ramp our newest merchandise together with continued execution of value adjustment throughout all the portfolio.

Non-GAAP working bills totaled $240 million, down from $248 million within the September quarter and reflecting ongoing spending optimization. With the advantage of diligent expense administration and better margins, adjusted EBITDA improved greater than 50% sequentially to $216 million. Non-GAAP internet revenue turned optimistic within the December quarter, leading to non-GAAP EPS of $0.12 per share primarily based on diluted share rely of roughly 211 million shares and tax expense of $17 million. Transferring on to money move and the stability sheet.

Within the December quarter, we had the stock flat at slightly below $1.1 billion. Capital expenditure had been additionally flat sequentially at $70 million. A majority of deliberate capital expenditure had been accomplished within the first half of fiscal ’24. In line with prior commentary, we nonetheless anticipate fiscal ’24 capex to be down considerably in contrast with fiscal ’23, additionally nonetheless ample to assist our innovation-driven product highway map.

We generated about $100 million in free money move and returned $146 million to shareholders by means of the quarterly dividend, exiting the quarter with 210 million shares excellent. We closed the December quarter with $2.3 billion in out there liquidity, together with our undrawn revolving credit score facility. Our debt stability was $5.7 billion on the finish of December quarter, with greater than 90% of our long-term debt obligation past three years. Non-GAAP curiosity expense had been flat quarter over quarter at $84 million, and we undertaking comparable expense ranges within the March quarter.

Turning to our outlook. We anticipate incremental enhancements in mass capability demand from each cloud and enterprise clients to greater than offset seasonal-related decline in VIA and the legacy markets. With higher context, March quarter income is anticipated to be within the vary of $1.65 billion, plus or minus $150 million. a rise of 6% sequentially on the midpoint.

We’re planning for non-GAAP working bills of roughly $260 million as our short-term pay discount ended late within the December quarter. On the midpoint of our income steerage, we anticipate non-GAAP working margin to broaden to the low double-digit share vary together with underutilization value of roughly $50 million. We anticipate our non-GAAP EPS to be $0.25, plus or minus $0.20, primarily based on a diluted share rely of roughly 212 million shares and a non-GAAP tax expense of $27 million. I’ll now flip the decision again to Dave for ultimate feedback.

Dave Mosley — Chief Govt Officer

Thanks, Gianluca. Heading into calendar 2024, we have now elevated confidence in a gradual nearline demand restoration that coincides with the launch of Mozaic. We imagine this platform delivers sustainable aerial density management with compelling TCO benefits, enabling knowledge middle operators to fulfill their rising workload calls for whereas conserving each energy and area. This mix of capabilities is critical, and our timing is fortuitous.

We have navigated the final seven quarters with self-discipline and focus whereas sustaining our product and expertise execution plans. Consequently, we emerge well-positioned to drive optimized monetary efficiency to assist our capital return commitments and return to our focused profitability ranges over time. Our sturdy execution is simply doable by means of the large efforts of our international staff, and I want to thank them for his or her resiliency and dedication by means of this dynamic interval. I’d additionally prefer to thank our suppliers, clients, and shareholders to your ongoing assist of Seagate.

Operator, let’s open up the decision for questions.

Questions & Solutions:

Operator

Thanks. We are going to now start the question-and-answer session. [Operator instructions] At the moment, we’ll pause momentarily to assemble our roster. And in the present day’s first query comes from Wamsi Mohan with BofA.

Please go forward.

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

Thanks a lot. Dave, you alluded to the progress that you have made on Mozaic. Given what you recognize now, how would you characterize the outlook for possibly HAMR items within the second half of ’24 or maybe into ’25? And I believe you talked about your first buyer seeking to transition to three-terabyte HAMR. What sort of exabyte put in base alternative is that? And possibly you might handle it much more broadly throughout hyperscalers.

That may be very useful. Thanks.

Dave Mosley — Chief Govt Officer

Yeah. Thanks, Wamsi. So, we had been very quantitative and prescriptive on the final name concerning the entrance half of this yr. I believe we can’t be as a lot on the again half of this yr, however the ramp is continuous on at a wholesome tempo.

And we’re persevering with to take a look at all what clients want on the last-generation platform, next-generation platform, making an attempt to stability provide and demand rather well. I believe that is the first metric that we’re targeted on, be certain we get monetary predictability. We’ll drive the HAMR transition aggressively this yr. After which Mozaic actually will get into — once we get to 4 terabytes of platter and the way are we populating that chain, I imply, we anticipate to drive as many HAMR exabytes into 2025 as we are able to.

So, we’re off to an excellent begin, I believe, and we’re going up the ramp and making an attempt to work the yields and get all people certified like we talked about. Nothing actually modified within the final 90 days, I’d say, issues are powerful issues, however the staff is knocking them down. So, I am fairly proud of that.

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

OK. Thanks for that. Gianluca, and possibly might you assist us simply take into consideration the margin ramp? I believe you famous some headwinds that may proceed from underutilization costs, however you are additionally anticipating the margins to extend all by means of calendar ’24. May you possibly additionally assist us suppose by means of in that margin commentary, what the margin differential is between HAMR and CMR mass capability drives and the way that may change over time? Thanks a lot.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. Good query. Nicely, initially, our December quarter confirmed an excellent enchancment in profitability. Our gross margin was up about 4%.

Working margin was up greater than 5%, so I will say this profitability restoration already began. A part of that’s, in fact, coming from a price actions that we have now taken within the final nearly two years. And naturally, the combo enchancment and naturally, the pricing motion additionally that we have now taken within the final a number of quarters. So, this can proceed to be mirrored additionally sooner or later quarters.

Combine will proceed to undergo extra mass capability quantity and people value actions are, in fact, persevering with to be very efficient. When it comes to the underutilization defend slightly bit what we ramped in the course of the quarter. Within the December quarter, we ran a bit extra of the wafers, however in fact, has excessive value in our manufacturing to prepare for the achievement of the present quarter and subsequent quarter by way of HAMR. After which now we are able to mediate use it to be the wafer and development extra on the media and, in fact, having extra driving the ultimate take a look at.

So, relying on the bottom of the combo inside our manufacturing. So, we mentioned underutilization costs might be barely greater, slightly bit greater, however not very a lot greater, which is slightly bit greater. So, I anticipate that for the following few quarters to see combine stepping into the fitting path, that means extra high-capacity drive, and beginning to see the affect from some quantity of HAMR. So, March is not going to be notably high-volume, however we could have extra in June.

And as Dave mentioned, we could have much more into the second a part of the calendar yr. With the enterprise bettering, demand bettering, we go into presumably greater income, and we’re, in fact, focusing on to carry again our gross margin into the goal vary of 30% to 33%, as we mentioned within the prior quarter, at a a lot decrease degree of income in comparison with the prior upside.

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

Thanks a lot.

Operator

Thanks. And our subsequent query in the present day comes from Erik Woodring with Morgan Stanley. Please go forward.

Erik Woodring — Morgan Stanley — Analyst

Hey, good afternoon, guys. Thanks very a lot for taking my query. Dave, I used to be questioning should you might simply double-click once more on a few of the dynamics behind the hyperscalers and the place their stock is. How lengthy do you see any extra ache or what their habits is, what your conversations appear like? After which once more, how they’re responding to any pricing actions and manufacturing modifications that you have been making during the last — relative to 90 days in the past? Thanks.

Dave Mosley — Chief Govt Officer

Yeah. The dynamics for them may be very attention-grabbing, and it has affected us fairly a bit during the last yr or so I do suppose the stock state of affairs is far, significantly better than it was six months in the past. So, I will say, it is principally cleaned up at this level. And it is going into the stock modifications going out and being consumed by the info facilities once more.

So, we’re a lot happier with that. The speed of consumption is not what it was two years in the past. However I do suppose it is going to speed up slightly bit. And that is the place we get into the forecast numbers of what the CAGR is the exabyte CAGR.

In 2020, we had been within the excessive 50s after which we stayed within the 30s for 2021 and 2022. After which for the primary time ever for the final yr, yr and a half, we have seen detrimental exabyte development, which does not make any sense. We’re forecasting nonetheless within the mid-20s proper now. And it might be slightly bit greater as individuals get into a few of these substitute cycles that we talked about.

The attention-grabbing dynamic as I look again on the final yr and a half was the push for AI and the way it consumed a variety of compute {dollars} for the compute infrastructure that was happening within the knowledge facilities. And that is essential for many of our clients. They’ve been raised as much as get as a lot compute reminiscence for that compute on-line as they may to have the ability to deal with all these AI purposes everybody’s speaking about. I do suppose finally, there is a knowledge back-end piece of that.

After which additionally, there’s the truth that they had been — as they had been prioritizing that, they had been letting the drives that that they had within the knowledge facilities simply proceed to run. So, there’s the substitute cycle for energy and area and simply total value advantages. We’re all — we’re undoubtedly having these conversations with our clients. After which factoring that into what precisely our quantity plans are for the following three years and saying that is what we’re intending to construct.

That is the economics that you might get it to — and we have talked about this build-to-order earlier than, and I believe we’re getting a variety of good reception is. There’s a variety of different provide chains which might be truly managed this manner by these individuals. So, they perceive it pretty properly, they usually see the TCO advantages of the upper capability drives, so that they need to attain for that, plan it properly they usually’ll get it. And we have now to watch out, in fact, as a result of the factories have been so decimated by this downturn that we have to make it possible for as we develop again, we return in a sensible manner.

Erik Woodring — Morgan Stanley — Analyst

Tremendous. Thanks a lot, guys.

Operator

And our subsequent query in the present day comes from Aaron Rakers with Wells Fargo. Please go forward.

Aaron Rakers — Wells Fargo Securities — Analyst

Yeah. Thanks for taking my query. I needed to possibly simply ask concerning the revenue assertion, simply the P&L trajectory from right here. This steerage that you have given, seems prefer it’s the primary form of sequential enhance in opex that we have seen, and I can respect bettering fundamentals, and so forth.

I am simply curious, how can we take into consideration the tempo of quarterly opex and possibly a normalized degree of working bills looking over a few quarters? After which form of constructing off of that with free money move era returning — simply remind us once more how you consider the capital construction and risk of coming again into the market by way of share repo? Thanks.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Thanks, Aaron. Nicely, by way of opex, should you take a look at — our development has all the time been very optimistic by way of opex management, value management. Just some quarters in the past, we had been at properly above $300 million. So, we went pretty low, particularly within the final quarter, now at $240 million.

As I mentioned within the ready remarks, we have now slightly bit of upper prices anticipated on this quarter as a result of we took some extraordinary motion on wage that ended on the finish of final quarter. So, we have now slightly bit of upper labor value. As common, we’ll give attention to opex management continues to be a really, superb quantity. And I believe within the subsequent few quarters, we’ll keep round this degree of opex till subsequent fiscal yr, as you recognize, within the present fiscal yr, we have no variable compensation total in our COGS and opex, however an enormous half is in opex.

So, I believe this degree might be affordable for fiscal Q3 and monetary This fall. After which subsequent fiscal yr, most likely slightly bit greater value in opex. Nonetheless, I believe properly beneath the $300 million, most likely between $270 million to $80 million 1 / 4 might be an affordable strategy to mannequin it. Free money move, we had one other optimistic free money move quarter.

After all, all the time crucial for us to generate optimistic free money move. Income is rising, profitability is rising and due to this fact, we anticipate free money move additionally to enhance sequentially by means of the following few quarters.

Aaron Rakers — Wells Fargo Securities — Analyst

Thanks.

Operator

Thanks. And our subsequent query in the present day comes from Krish Sankar with TD Cowen. Please go forward.

Unknown speaker

Hey, guys. That is Eddie for Krish. Congrats on the HAMR launch. It is an thrilling alternative for you guys I’ve a query concerning the client worth you’re offering with these two-terabyte HAMR drives.

Will clients be having fun with lower cost for terabyte versus 22 and 24 terabytes CMR drives, for instance, or as a result of HAMR yields have not matured but, this profit can be extra about energy and area and the lower cost per terabyte to happen sooner or later?

Dave Mosley — Chief Govt Officer

Yeah. Nicely, it is a good query. We are going to stability the whole lot, in fact, what our yields are and our prices are, and attempt to get the shoppers incentivized, however there’s some incentive enterprise offered by their energy and area reductions as properly. We name that their TCO proposition.

So, all issues in stability. I do suppose that the value per terabyte, if you’ll, is nominally the identical. It might be simply barely decrease, however there’s undoubtedly going to be a TCO incentive for the shoppers to maneuver off of the decrease capacities and onto greater.

Unknown speaker

That is nice coloration. Thanks, Dave. And if we simply suppose the HAMR transition to the transition from LMR to PMR that happened again in 2006, 2008 you guys went from like 0% PMR combine to 100% inside 5 to 6 scores. Do you suppose the HAMR transition can be as fast, otherwise you see some the explanation why this ramp could also be slightly bit slower transition from LMR to PMR again then?

Dave Mosley — Chief Govt Officer

Cycle occasions are slightly bit longer now. So, I do not suppose it will likely be as quick. I imply, I might prefer it to be as quick and we’ll proceed to drive it as fast as we presumably can. The one factor I’ll say is that our final era PMR product, if you’ll, the two.4 terabytes per platter drive that we have simply talked about has a remarkably comparable package of elements because the HAMR drives do.

So, relative to what we’re making one versus the opposite, it is not an enormous deal and we are able to get by means of buyer transitions simpler. I believe as we achieve extra confidence in a yr over the four-plus terabyte Mozaic platforms, then we’ll undoubtedly need to speed up. As a result of by the point you get to say, five-plus terabytes, then it is such a fantastic substitute on each legacy product that you’ve got that we need to drive the entire portfolio there as a result of utilization is significantly better within the factories and the prices come manner down.

Unknown speaker

Thanks, Dave.

Operator

Thanks. And our subsequent query comes from Thomas O’Malley with Barclays. Please go forward.

Thomas OMalley — Barclays — Analyst

Hey, guys. Thanks for taking my questions. I respect it. So, I simply needed to know the transfer from qualification to income recognition.

It feels like along with your largest buyer, you are ending qualification proper now and also you’re clearly pointing to some huge items within the first half. You talked about on the decision that you simply’re anticipating calls with the vast majority of the U.S. cloud and a few others in calendar yr ’24. Would you anticipate the same time-frame between qualification and income recognition? Like if these are getting certified within the second half of this yr, you might see income from numerous further clients.

Simply needed to know the timing.

Dave Mosley — Chief Govt Officer

Thanks, Tom. It is complicated. There are some clients which might be comparatively shorter {qualifications} and that — a few of that is due to function set, ensuring we get the function set checked out. In the event that they’re on a generic function set that we’re already transport versus their very own distinctive function set we have now to — we have now to ensure we’re doing all these issues, proper? That is regular in any nearline transition.

And I’ll say that lots of people are seeing the TCO advantages. So, they’re asking and making an attempt to hurry these {qualifications} by means of, proper, as a result of they need that profit to move by means of as properly. We may also be restricted on our ramp as to what we are able to do, and the cycle occasions are fairly lengthy. So, we’ll stability all these items collectively, if that helps you.

Thomas OMalley — Barclays — Analyst

Yeah, that is useful. After which I simply needed to ask one on the margin facet. So, you guys have talked about 20% beneath peak however nonetheless getting again to that 30% gross margin goal or at the least on the low finish. In case you take a look at what you are saying for mass capability development for the business, mid-20s should you simply assigned that to form of your income ramp over the following couple of years, it takes most likely a yr and a half to form of get to that $2.5 billion, $2.6 billion mark, simply utilizing like a linear development charge.

Is that the time-frame we ought to be fascinated about till you get again to that 30% to 32% gross margin? Or are you able to get there earlier than? And what are the levers that get you there earlier than income will get again to that $2.5 billion, $2.6 billion? Thanks.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Thanks, Tom. Nicely, the foremost lever is HAMR. The extra we ramp up HAMR, higher would be the margin. So, we have gotten increasingly optimistic on, in fact, the timing of that steady enchancment in our margin.

I’d say we gave a sign final quarter by way of the extent of income. However we predict we have to obtain with a view to get a sure degree of gross margin. That’s most likely I am getting slightly bit extra optimistic proper now. So, most likely we are able to do a fair decrease degree of income.

As you mentioned earlier than, qualification of consumers is necessary, however we’re working exhausting on qualifying increasingly clients. So, assuming we are able to proceed our ramp on him. Now, I am pretty optimistic we are able to do sooner than what you mentioned and in addition on the decrease degree of income.

Thomas OMalley — Barclays — Analyst

Thanks very a lot.

Operator

Thanks. And our subsequent query comes from Karl Ackerman with BNP Paribas. Please go forward.

Karl Ackerman — Exane BNP Paribas — Analyst

Thanks. Gianluca, it is encouraging to see an bettering gross margin trajectory, nevertheless it does not seem like pushed by value but. Given our mass capability means that value per terabyte did fall low single digits sequentially and yr over yr. May you maybe handle whether or not we must always anticipate earlier actions to lift costs throughout the channel might happen over the following couple of quarters? I’ve a follow-up, please.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Hey, Karl. Nicely, I’d say you’ll be able to see the nice enchancment in our profitability. An excellent a part of that’s truly coming from pricing. After all, you should test into the like-for-like pricing.

The combination has, in fact, all the time a serious affect on the typical. We’re very proud of what we’re doing, each on pricing and on value. This quarter present a incredible enchancment in profitability, each gross margin and working margin. And should you take a look at our steerage, this suggest one other sturdy enchancment in profitability.

So, Pricing is an efficient a part of that. Combine is one other a part of that enchancment. And we’ll proceed to do precisely execute a method, and we’re actually we’re very glad with the result to this point.

Dave Mosley — Chief Govt Officer

Yeah. I’d say, Karl, the uncooked demand continues to be not what it was two years in the past. And we have now a provide chain that is not totally wholesome but. Now we have to go proceed to work on these actions.

However I do suppose over time, particularly incentivizing transitions to newer mass capability drives. After which if there’s value raises, it tends to be extra on legacy and to the extent that everybody is beneath the identical pressure all through all the ecosystem, that is the development that we’re seeing, I believe we’ll most likely make the most of it. My sense is that within the subsequent yr or two, we’ll get to the purpose the place we get excessive sufficient of the ramp that we might be very predictable. After which I believe issues will stabilize fairly a bit.

However we’re not at a spot the place the business has sufficient demand relative to the capability that has on-line but.

Karl Ackerman — Exane BNP Paribas — Analyst

Very clear. That is it for me. Thanks.

Operator

Thanks. And our subsequent query in the present day comes from Kevin Cassidy of Rosenblatt Securities. Please go forward.

Kevin Cassidy — Rosenblatt Securities — Analyst

Yeah. Thanks for taking my query, and congratulations on the good outcomes. You applied a build-to-order program along with your clients. Are you able to give an replace on that? Is that also energetic? And the way is it providing you with visibility?

Dave Mosley — Chief Govt Officer

Yeah. Thanks very a lot. It’s, and it is transitioned from my final feedback as properly as a result of the business simply on the ranges that we’re at, to construct on my final remark is simply cannot fund the funding illness make an aerial density and exabyte development over time with the income and margins the place it was and what helps us is to run factories is the improved visibility and the predictability towards that in demand. And so, I believe that is why the HDD business has modified pretty dramatically by means of this cycle, the final six or eight quarters as a result of capability did come on the similar time that individuals had been that demand was down.

And the business is, due to this fact, underinvested in capital, and lead occasions are going up, as we have talked about earlier than. So, we’d like this build-to-order framework to simply get again to a wholesome business. And we’re rewarding predictability with our clients, and we’re incentivizing that predictability and the place the individuals aren’t predictable, they usually are available on the final minute for product that both we do not have it or they need to pay for our flexibility. I believe that is the way in which we’re fascinated about it after which ensuring that we stabilize the availability base as properly as a result of it is not simply ourselves because the HDD provider, however we have now quite a few upstream provides that should be stabilized as properly.

So, it is nonetheless going to take a while.

Kevin Cassidy — Rosenblatt Securities — Analyst

OK. Nice. And also you talked about vertical integration of your laser expertise. Is {that a} value financial savings? Or is it extra controlling the availability chain?

Dave Mosley — Chief Govt Officer

Yeah. I believe at this level, it has been a very long time coming, and we undoubtedly worth the suppliers which have helped us get HAMR merchandise to market. We additionally really feel like given how intricate this silicon photonic circuitry is, is that we wanted our personal functionality to regulate however proper now, it is extra of a expertise second sourcing, if you’ll. And so, we’ll proceed to run with just a few sources.

I believe over time, there ought to be the chance to go drive the price down and stability all issues with a number of sources and the power to regulate the investments that we make in capital, for instance, and issues like that. But it surely’s been a very long time coming and a part of the explanation we’re speaking about it as a part of Mozaic as a result of it is very related as we get the four-terabyte platter and five-terabyte platter I believe additionally there’s been some noise on the market within the business about, properly, as goes the ramp of that provider so goes the Seagate ramp, and that is clearly not true.

Kevin Cassidy — Rosenblatt Securities — Analyst

Understood. Thanks.

Operator

And our subsequent query in the present day comes from Steven Bryant Fox with Fox Advisors, LLC. Please go forward.

Steven Bryant Fox — Fox Advisors — Analyst

Thanks for taking my query. Dave, I used to be simply questioning should you might zoom out slightly bit with out placing any form of time-frame on it, to get to the 30% gross margins, it looks as if you’ll be able to nearly get there from right here on simply the standard incremental margins from volumes. However primarily based on the whole lot you mentioned, it does not appear that simple, particularly early stage with HAMR versus later stage. So, are you able to type of stroll by means of a few of the places and takes, say, over the following two to 3 quarters versus, say, while you hit that quantity crossover the place it turns into extra clean to get to the margin? It is simply — there’s been a variety of feedback round this.

Possibly you might simply sum it up.

Dave Mosley — Chief Govt Officer

Yeah. And Gianluca can share some insights as properly right here. I believe that, initially, we’re ramping HAMR in accordance with some prescriptive schedule. We are able to deploy it into sure mass-capacity hyperscaler markets.

We are able to additionally deploy it in different markets, relying on how we select to do issues so we are able to put it in VIA markets, for instance, over time. And the speed at which we’re in a position to transition and our yields and scrap and issues like that, particularly as soon as we get to 4 terabytes per platter, then I believe that turns into increasingly accretive in margin. Basically, although, I nonetheless suppose the demand image truly goes to form the following few quarters from a margin perspective. My sense is the demand has nonetheless not come wherever near the place it was two years in the past.

We might even see with the expansion of knowledge and with investments that individuals must make in knowledge round all these AI purposes, we might even see demand choose again up once more, and that would be the basic driver. Gianluca, go forward.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. No, I mentioned that earlier than. I believe the mixture of stronger demand by means of the cycle and our superb merchandise primarily based on HAMR expertise. will drive additional enchancment in gross margin, sequential enchancment.

Now, I believe we could have a sequential enchancment by means of all the form of ’24. And that is, in fact, primarily based on our view of the ramp of HAMR and in addition the restoration from the prior down cycle that we anticipate, particularly within the mass capability to proceed by means of all the form of ’24 and truly even form of ’25 in it.

Steven Bryant Fox — Fox Advisors — Analyst

That is useful. Are you able to fill in a single different clean, which is back-end testing capability? How does that type of assist harm margins as this ramp occurs? Thanks.

Dave Mosley — Chief Govt Officer

Primarily based on the place we had been from legacy merchandise years in the past on desktop and so forth and even simply the volumes we had been at a few years in the past, I believe we have now loads of back-end take a look at capability.

Steven Bryant Fox — Fox Advisors — Analyst

However is it an extended take a look at cycle, although? Is not it an extended take a look at cycle?

Dave Mosley — Chief Govt Officer

It’s. It definitely is. The larger the drive, the longer the take a look at cycle, however we nonetheless have loads of capability to cowl the calls for at this degree.

Steven Bryant Fox — Fox Advisors — Analyst

Superior. Thanks.

Operator

Thanks. And our subsequent query comes from Timothy Arcuri with UBS. Please go forward.

Unknown speaker

That is Maia on for Tim. Thanks for taking my query. Only one for me. Now, you do not report orders, however maybe you might give us some coloration on book-to-bill and just a few thought of the place orders are relative to revenues and the place that — how that book-to-bill has been trending and the place you suppose that is going over the following couple of quarters, that may be useful.

Thanks.

Dave Mosley — Chief Govt Officer

Yeah. That does get into our build-to-order plans. We’re undoubtedly, like I mentioned earlier than, very prescriptive on what we’re constructing for individuals two, three, 4 quarters out. And so long as all of us keep on that plan, I believe that is predictable economics for our clients as properly.

So, it is going higher and higher each quarter. I believe once we first launched this, there was questions that I used to be getting on these earnings calls about provide is to this point beneath or sorry, since demand is to this point beneath provide in the present day, how are you going to do one thing like this, however we’d like that predictability with a view to run the availability chain and reward everybody upstream of the availability chain. So, far, the progress has been pretty good, and we’re getting higher visibility within the subsequent quarter and past.

Operator

Thanks. And our subsequent query comes from Vijay Rakesh with Mizuho. Please go forward.

Vijay Rakesh — Mizuho Securities — Analyst

Yeah. Dave, simply on the enterprise exhausting disk drive facet on the toughest asset, do you see, given the 25% exabyte development and restoration on the TC facet this yr, do you anticipate these revenues to get again to that $2 billion run charge exiting ’24, I suppose, calendar ’24?

Gianluca Romano — Govt Vice President, Chief Monetary Officer

No, we do not information after this quarter. So, we simply gave an excellent steerage for the March quarter by way of income enhance and profitability enhance. And as we mentioned, no, we’re ramping right here quantity. We’re seeing higher demand setting.

So, we anticipate sequential enchancment by means of the quarter, however we do not give particular steerage on income for the top of the calendar yr.

Dave Mosley — Chief Govt Officer

Yeah. I’d say that, clearly, we’re watching nearline demand, CSP demand, on-prem enterprise demand persevering with to construct energy however not almost be as huge because it was a few years in the past, however that is superb, and we’re being very cautious constructing into it. The one level that you simply simply raised, which was the entire AI TPC demand, which I believe it is nonetheless very early innings on this, however we do see alternative there. high-end workstations, if you’ll, which might be working AI purposes may very well be an attention-grabbing alternative.

Vijay Rakesh — Mizuho Securities — Analyst

Received it. After which on the gross margin line, sorry to belabor that, do you see you guys getting again to that focus on window 33% exiting this yr? And particularly on the HAMR facet, I believe Dave talked about you are able to do with four-terabyte plus 5 disks or a 20-terabyte drive versus seven to 10 disks now. What are the gross margins on HAMR versus the place you see your company margins in the present day, I suppose?

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. We all know we mentioned up to now amortized gross margin is, for positive, accretive to the company. So, it is all the time above our common. Proper now, as you recognize, there isn’t any HAMR drive in our outcomes.

However now we see beginning within the March quarter, and also you already see some enchancment in our steerage. It will likely be — I anticipate extra once we go into the June quarter and thru the remainder of the calendar yr. So, we’re optimistic on the profitability from that product. And we have to take our time to qualify huge clients after which to start out ramp as a result of, as Dave mentioned, we take slightly little bit of time to hire high-volume manufacturing for the brand new product.

Vijay Rakesh — Mizuho Securities — Analyst

Received it. Thanks.

Operator

Thanks. And our subsequent query comes from Ananda Baruah with Loop Capital. Please go forward.

Ananda Baruah — Loop Capital Markets — Analyst

Yeah. Good afternoon, guys. Thanks for taking the query. Actually respect it.

I suppose for Dave, and Gianluca can bounce in right here, too. The hyperscalers are type of having some dialog about knowledge middle redesign over the approaching years, a variety of that is round GPU compute. However they’re referring to it as knowledge middle redesign extra usually and broadly. And I suppose would there — if that happens, do you’ve any opinion on if there could be incremental alternative for nearline drive that may, I suppose, substantively be like along with no matter knowledge development is occurring? So, I simply needed any ideas on that in any context.

And that is it. Thanks.

Dave Mosley — Chief Govt Officer

Yeah. Ananda, it is an actual complicated subject. What I’d say is that the compute infrastructure is altering dramatically, and the reminiscence architectures will change to assist that pc structure very dramatically as properly. So, there’s a variety of redesign dialogue happening.

there are various kinds of purposes and issues which might be being branded AI, there’s stuff that is very targeted on textual content or giant language fashions. After which there’s picture recognition and video creation. And so, there’s a variety of various kinds of purposes which might be propagating. And I believe that is simply regular utility improvement that is been happening for years and years and years.

However I do suppose there’s various kinds of {hardware}. So, I believe there are some now AI knowledge facilities being mentioned which might be largely compute. I additionally suppose that a few of these purposes are spinning off a variety of knowledge they usually’re requiring knowledge to be saved for a sure time frame after which introduced again as much as the upper ranges to be reprocessed. And so, that is simply regular knowledge development as properly.

So, I believe the web of it’s there’s a variety of architectural redesign happening, most likely not affecting the tiers that we’re in. If something, and we made reference to this within the ready remarks, there’s value energy and area or at a premium. There’s many AI purposes from what I am listening to that there is simply not sufficient energy for and our infrastructure goes to be essential. However to the extent that you are able to do your half to purchase transitioning to greater capability drives that net-net provides you a similar exabyte capability with much less energy.

I believe that is an excellent factor. It might be a possibility for us.

Ananda Baruah — Loop Capital Markets — Analyst

So, that may be along with just like the 25% form of knowledge run charge pushed — that type of energy is a catalyst, Dave?

Dave Mosley — Chief Govt Officer

It is exhausting to say. It depends upon the payments and the way a lot persons are having to pay for it. Once more, I believe within the AI purposes which might be actually exploding proper now, energy goes to turn out to be one of many limiting elements. And so, to the extent that there could also be a very good payoff in not solely value financial savings, area financial savings, and so forth but additionally simply liberating up that energy infrastructure to go to different issues.

I imply, that may truly assist us get above the 25%.

Ananda Baruah — Loop Capital Markets — Analyst

Thanks loads. Admire it.

Operator

Thanks. And our subsequent query comes from Mark Miller of the Benchmark Firm. Please go forward.

Mark Miller — The Benchmark Firm — Analyst

Thanks for the query, and congratulations on the launch of Mozaic. I am simply questioning, you talked about it briefly. What sort of traction are you seeing from AI-related alternatives? And what do you — how do you see that ramping all year long?

Dave Mosley — Chief Govt Officer

Yeah. Mark, me, I am fairly cynical typically on these items, and I am on the lookout for POs that truly say AI on them. And they’re beginning to occur, nevertheless it’s nonetheless pretty small. And once more, I will return to my earlier feedback, these are actually purposes which have been growing on a variety of fronts over a few years anyway.

So, say, for instance, picture recognition, whether or not it is on the edge or within the cloud, that utility area has been growing over time fairly a bit. After we get into particular issues like giant language fashions the place individuals discuss, I believe the info infrastructure affect piece continues to be secondary to the compute piece even at this level. So, in some unspecified time in the future, there can be compute enabling all these actually cool purposes and efficiencies that individuals and companies like ours had been benefiting from after which the info will proceed to develop on the again facet of that, however we’re nonetheless early innings on that.

Mark Miller — The Benchmark Firm — Analyst

So, that is extra 2025, you suppose?

Dave Mosley — Chief Govt Officer

For big language fashions, I might say possibly. I do not know precisely.

Mark Miller — The Benchmark Firm — Analyst

Thanks.

Operator

Thanks. And women and gents, this concludes our question-and-answer session. I might like to show the convention again over to administration for any closing remarks.

Dave Mosley — Chief Govt Officer

Thanks, Marco. Seagate is targeted on executing our product highway map, leveraging the superior applied sciences in our Mozaic platform, which we imagine positions us properly to reinforce profitability over the close to time period and seize long-term alternatives for mass capability storage. I might like to shut by, as soon as once more, thanking all of our stakeholders for his or her ongoing assist of Seagate. Thanks for becoming a member of us in the present day, and we sit up for talking with you in the course of the quarter.

Operator

[Operator signoff]

Period: 0 minutes

Name contributors:

Shanye Hudson — Senior Vice President, Investor Relations and Treasury

Dave Mosley — Chief Govt Officer

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

Erik Woodring — Morgan Stanley — Analyst

Aaron Rakers — Wells Fargo Securities — Analyst

Unknown speaker

Thomas OMalley — Barclays — Analyst

Karl Ackerman — Exane BNP Paribas — Analyst

Kevin Cassidy — Rosenblatt Securities — Analyst

Steven Bryant Fox — Fox Advisors — Analyst

Vijay Rakesh — Mizuho Securities — Analyst

Ananda Baruah — Loop Capital Markets — Analyst

Mark Miller — The Benchmark Firm — Analyst

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