Seagate Technology (STX.US) FY2027 Q1 Conference Call: Short-term demand can be seen until 2030. Mosaic 4 volume and price increases will drive a record profit

The Zhitong Finance App learned that Seagate Technology (STX.US) announced financial results for the first quarter of fiscal year 2027 on Tuesday EST. Seagate's revenue for the September fiscal quarter increased by more than 60% year over year, and non-GAAP earnings per share reached a record high of $7.68.

The company pointed out during the earnings call that demand in the data center and edge IoT markets is strong, and it is expected that revenue will continue to grow and profit margins will expand steadily throughout the 2027 fiscal year. Seagate's near-line storage capacity shipments reached a record high of 198 exabytes this quarter; with the continued increase in Mosaic 4 products, the scale of shipments is expected to rise further in the December fiscal quarter.

Additionally, the company recorded a record free cash flow of nearly $1.5 billion, a sharp drop in debt size, and plans to increase capital returns to shareholders through share repurchases and dividends. Seagate's strategic plan includes long-term customer supply agreements valid until 2030, while focusing on technological innovation, focusing on HAMR heat-assisted magnetic recording products to continue to meet growing storage needs.

Full summary content

chairpersons

Welcome to the Seagate Technology Holdings first quarter earnings conference call for the 2027 fiscal year. By default, all participants are in listen-only mode. If you need assistance, press the star key + 0 to call the conference specialist. After the official presentation, a questioning session will open. Press the asterisk +1 button on the phone to submit the question, and press the asterisk + 2 to cancel the question. The entire conference was recorded. Next, I will leave the conference to Shanye Hudson, Senior Vice President of Investor Relations and Finance, and I would like to ask you to speak.

Shanye Hudson (Senior Vice President, Investor Relations and Finance)

Thank you all and welcome to the conference. Also attending today were Seagate Chairman and CEO Dave Mosley and Chief Financial Officer Gianluca Romano. We have published a press release and detailed supplementary information on the September financial quarter in the Investors section of our official website. In this conference call, we will also mention GAAP and non-GAAP financial indicators. The reconciliation table for non-GAAP indicators and GAAP indicators will be uploaded to the official website simultaneously with the financial report press release and included in the 8-K file. Some non-GAAP performance guidelines do not provide adjusted data because significant matters affecting these indicators are not within our control and cannot be reasonably predicted, so we are unable to provide corresponding GAAP adjusted data without incurring unreasonable costs.

Before the beginning of the meeting, I would like to remind everyone that this call contains forward-looking statements, which only represent management's judgments and assumptions based on existing information as of today, and cannot be quoted at a later point in time. Actual results may differ materially from forward-looking statements, and related statements are affected by business risk and uncertainty. To understand the risks, uncertainties and other factors affecting future results, please check today's financial press release, SEC filings, including the latest 10-K Annual Report, 10-Q Quarterly Report, and supporting supplementary materials. All documents can be found in the investor section of the official website.

After the management statement is over, we will be open for Q&A. To give more analysts a chance to ask questions, please limit each person to 1 main question + short question. Leave it to Dave.

Dave Mosley (CEO)

Thank you, Shanye, and hello everyone. The 2027 fiscal year started off with a strong start. Revenue for the September fiscal quarter increased by more than 60% year over year, and non-GAAP earnings per share nearly tripled to a record high of $7.68. The gross profit margin and operating profit margin also set historical records, confirming the company's profitability and continued high demand for data storage. The two major sectors of data center and edge IoT achieved double-digit revenue growth over the previous month, rising 18% and 13% respectively, while demand and product pricing remained strong.

Based on the above trends, we judge that revenue continued to improve month-on-month and gross margin expanded steadily throughout the 2027 fiscal year. Our confidence comes from a strong demand environment, and demand visibility has extended beyond 2030; at the same time, we are able to handle this round of growth based on a technology roadmap with increased surface density. In the September fiscal quarter, the company delivered a record 198 exabytes of near-line storage capacity to data center customers; as Mosaic 4 continues to be released, shipments are expected to increase significantly in the December fiscal quarter.

As next-generation Mosaic products are put into production and delivered to more customers, the growth rate of Exabyte shipments will fluctuate in a single quarter. In the long run, our technology route can support near-line storage exabyte shipments to maintain a compound growth rate of about 25%. Overall, the quarter's performance was strong: stable demand, continuous technological innovation, and rigorous implementation of operations jointly drove free cash flow to a new high of nearly $1.5 billion. In addition, we have greatly optimized our balance sheet, achieved our main debt reduction goals, and regained our investment-grade credit rating. After the core debt reduction target was basically implemented, the company's focus changed to shareholders' capital returns, using stock repurchases as the main method, with cash dividends. This month, the board approved an increase in the quarterly dividend to $0.76 per share. This capital allocation strategy reflects management's confidence in cash flow potential and multi-year demand certainty brought about by long-term customer supply agreements.

Data center customers are still the main demand, accounting for 90% of this total shipment capacity. Within the data center business, revenue from cloud near-line products continued to grow for 12 consecutive quarters; corporate OEM business revenue reached the second-highest single-quarter level in more than ten years.

The scale of data has exploded in various application scenarios. The market is coming to a consensus: the value of data goes far beyond initial use cases. Recently, when we talked with leading hyperscale cloud vendors, the other party mentioned that more and more customers continue to explore new value after data has been initially stored, and their willingness to retain data continues to grow; the AI wave has further amplified this trend. AI applications are no longer limited to model training; they are gradually spreading to inference and intelligent applications, and the importance of persistent data continues to rise. Such systems require massive amounts of historical data to support decision-making and execution, continuously generate new data, and require unified management, retention, and reuse.

The agency predicts that over the next ten years, the world will deploy billions of AI agents and perform hundreds of billions of operations every day. At this scale, agents continuously read, generate, and reuse data. We believe that future storage demand will be deeply tied to this new data lifecycle; with the popularity of physical AI applications, storage demand will continue to grow with compound interest. The volume of persistent data continues to expand, and storage requirements will not stop at the initial construction of infrastructure.

This strong demand environment fits the core advantage of hard drives — providing a scalable, highly reliable, and cost-effective foundation for long-term data retention. Hyperscale customers have long recognized the value of hard drives and continue to promote the implementation of high-capacity storage architectures. Our engineering team works closely with leading cloud vendors to align product routes to match future storage needs and lower the landing threshold for high-capacity hard drives.

A typical example recently: Microsoft completed joint program certification between Seagate and Broadcom. This solution is equipped with Seagate's HAMR-based Mosaic hard drive, using SMR tiled magnetic recording technology, and Broadcom's connectivity infrastructure. Microsoft has already deployed HAMR hard drives, and this certification verifies the viability of the SMR solution. For hyperscale cloud vendors, SMR technology can provide additional capacity gains. However, large-scale implementation at the level of high-capacity hard drives has always been limited due to the high cost of changes to the supporting architecture and software.

This joint solution provides a model for implementing SMR storage in the industry and further explores capacity potential on the HAMR architecture's Mosaic platform. In addition to hyperscale cloud vendors and cloud service providers, more and more enterprise OEM customers need to manage massive data sets, and demand continues to expand. We are deepening our connection with such customers, developing reference architectures, and combining mature computing power, storage hardware, and flexible software solutions selected by customers. This type of solution can help customers expand persistent storage on a large scale, optimize storage costs, and improve platform efficiency. Strong demand has lengthened the customer's planning cycle, which is directly reflected in the supply agreements we have signed. Currently, the vast majority of near-line storage exabytes are locked in long-term agreements until 2028, and some cloud customer agreements continue until 2030.

Our strategic planning takes a step further. Relying on the Mosaic product line, we continue to collaborate with customers to meet storage expansion needs for many years to come. In the process of switching to HAMR based Mosaic products, we continue to invest in new equipment and technology to offset the impact of longer manufacturing cycles and ensure stable output. For Seagate, increasing single disk capacity is the core path driving the growth of Exabyte shipments. Our build-to-order contract locks in the configuration and pricing terms for nearline storage products during 2027. Over the next few quarters, we will gradually finalize the configuration and pricing of the 2028 reserved supply capacity with our customers.

The pricing environment continues to improve. On the one hand, it stems from the implementation of our value pricing strategy, and on the other hand, the rise in external component costs is also transmitted to the pricing side. The strong demand reflected in customer orders over the years is expected to continue to support a healthy pricing trend. These long-term agreements not only guarantee stable customer supply, but also enhance the business visibility of both parties; at the same time, they reflect customer recognition of long-term growth in demand and the increasingly critical strategic position of hard disk storage in the modern data ecosystem.

As demand grows, storage solutions must balance scale, efficiency, and cost. These three points are the foundation of our technology strategy. As one leading hyperscale manufacturer said, increasing storage density within existing computer room space is the most cost-effective way to increase storage capacity per unit space; our HAMR route is designed to achieve this goal. Improving surface density is our constant core direction.

We rely on increasing the capacity of a single drive to expand the capacity of hard drives, rather than simply increasing the number of hard drives shipped. We believe this is the most efficient way to help customers cope with massive data growth, retain data for a long time, and also enable Seagate to achieve profitable Exabyte growth. We are steadily advancing every node on our product roadmap. We maintain our previous judgment: at the end of 2026, HAMR products accounted for about 50% of near-line storage exabyte shipments, of which Mosaic 4 accounted for about half of HAMR shipments. Mosaic 4, which has a maximum capacity of 44TB, is being sold by two leading cloud service providers, and will be certified by many global cloud vendors and enterprise OEM customers over the next few months.

The third-generation Mosaic 5 product development schedule is in line with expectations. The maximum capacity of a single disk can reach 50TB, and is based on the efficient Tendis platform. Customer certification sample delivery is expected to commence by the end of 2027. In terms of photonic technology research and development, we recently achieved a surface density of 8TB in a single disk in the laboratory, further proving that the HAMR+Mosaic platform can meet the continuous expansion needs of customers, and also confirms our judgment: relying on increased surface density to drive the supply of Exabytes is the right long-term strategy for customers and Seagate.

In summary, this quarter's results prove the resilience of demand and the effectiveness of our strategy. The generation, retention, and reuse of data continues to drive demand for large-capacity storage; combined with long-term customer order visibility, we believe the industry is still in the early stages of a multi-year growth cycle. A clear technical route, sound supply management, and value pricing strategies, combined with the company's internal operational grippers, give us confidence to continue to deliver profits, cash flow, and shareholder returns.

Thank you to the global team for delivering record quarterly results and a good start to the 2027 fiscal year; we also thank our customers, suppliers, and shareholders for their trust and support. Leave it to Gianluca below.

Gianluca Romano (Chief Financial Officer, Executive Vice President of Finance)

Thank you, Dave. Seagate's performance for the September fiscal quarter was impressive. Revenue and earnings per share exceeded the guideline limits, profit indicators reached new highs, and free cash flow reached a record high. Revenue for the September fiscal quarter was $4.2 billion, +17% month-on-month and +61% year-over-year; non-GAAP gross margin was 57.8%, up 510 basis points from month to month. Non-GAAP operating margin increased 610 basis points month-on-month to 50.7%; non-GAAP earnings per share were $7.68, +35% month-on-month and +194% year-over-year. Continued high demand for data centers is a core driver of the company's performance. Total shipments for the September fiscal quarter were 220 exabytes, +21% year over year, with data centers accounting for 90%. The data center segment generated revenue of $3.4 billion, +18% month-on-month and +63% year-on-year, accounting for 81% of total revenue. The data center shipped 198 exabytes, +24% year over year, accounting for 90% of the company's total exabytes shipped. As Dave said, we are preparing Mosaic 4 in advance for customer certification, and we expect capacity shipments to increase significantly during the December fiscal quarter. Global cloud customers contribute the vast majority of data center revenue and capacity requirements, and this trend is expected to continue during the Mosaic scaling phase. At the same time, as AI workloads shift to inference and intelligent tasks, demand for enterprise OEM data centers continues to strengthen, and customers seek scalable high-capacity storage solutions in hybrid cloud environments. The segment's revenue continued to grow for 6 consecutive quarters, maintaining double-digit growth both month-on-month and year-over-year. In addition to data centers, the edge IoT business also grew steadily, with revenue of US$784 million, accounting for 19% of total revenue, +13% month-on-month and +52% year-on-year.

Other items in the income statement: Non-GAAP gross profit rose sharply to $2.4 billion, + 28% month-on-month, doubling from $1.1 billion in the same period last year. Non-GAAP gross margin rose to 57.8% (52.7% in the previous quarter), benefiting from the implementation of pricing strategies and product structure optimization brought about by Mosaic 4 volume. The above benefits fully hedged the upward pressure on external component costs. Looking ahead, value pricing strategies and product structure optimization will continue to support the continued expansion of gross margin for the remaining quarter of the 2027 fiscal year. Non-GAAP operating expenses of $300 million account for approximately 7% of revenue. Strong demand combined with cost control brought significant operating leverage; non-GAAP operating profit was +33% month-on-month to $2.1 billion, accounting for 50.7% of revenue. Other net income and expenditure for the quarter was $38 million. After completing a debt repayment round in early October, the rest of the balance for the December fiscal quarter is expected to fall to approximately $25 million. The decline in interest expenses led to non-GAAP net profit rising to $1.8 billion, corresponding to EPS of $7.68 million; current income tax of $328 million, and about 232 million diluted shares.

Cash flow and balance sheet: Operating cash flow for the September fiscal quarter was $1.7 billion, capital expenditure of $211 million, or 5% of revenue. Capital expenditure remained within the target range of 4%-6% of revenue for the full year of fiscal year 2027, supporting the shift of the business to higher profit levels. Under capital expenditure control, free cash flow was $1.5 billion, +32% month-on-month, and more than tripled year over year. We expect continued improvement in cash flow throughout FY2027, based on stable demand, operational efficiency improvements, and capital expenditure discipline. The September fiscal quarter repaid $1.2 billion in debt, including remaining convertible bonds and approximately $1 billion in high-interest bonds. Total debt at the end of the quarter was approximately $2.4 billion, with a net leverage ratio of 0.2 times. After the quarter ended, the company paid back another $750 million in high-interest senior notes, and the principal amount of debt fell to about $1.6 billion. Based on the current pace of debt repayment, net cash is expected to be positive by the end of the year.

The goal of optimizing the balance sheet has been achieved; the next focus is to return more free cash flow to shareholders. A total of US$568 million was returned to shareholders through dividends+repurchases in the September fiscal quarter, about double that of the June fiscal quarter. At the same time, the quarterly dividend was raised by approximately 3% to $0.76 per share, reflecting our confidence in the sustainability of cash flow. At the end of the September fiscal quarter, the remaining share repurchase authorization amount was US$4.4 billion; it is planned to significantly increase repurchase efforts starting in 2027. Cash and cash equivalents at the end of the quarter were $1.3 billion, with overall liquidity of $2.6 billion (including unused revolving credit lines).

December fiscal quarter guidance: Demand momentum continues, capacity shipments rise sharply, value pricing strategies continue to be implemented, and revenue is expected to continue to increase month-on-month. The revenue guidance range was $4.8 billion ± $100 million, and the pivot value increased 70% year over year. Non-GAAP operating expenses remained around $300 million. Based on the revenue guidance hub, the non-GAAP operating margin is expected to approach 55%; non-GAAP earnings per share are estimated at $9.20 ± $0.20, assuming a tax rate of about 16%, diluting 233 million shares. The September fiscal quarter results + December guidance confirm that this fiscal year's revenue growth rate will be significantly higher than the 2026 fiscal year. Demand resilience, increased Mosaic penetration, and continued release of operating leverage will jointly drive revenue, profit margin, and cash flow growth. Combined with increased capital return, the company is in a position to continue to increase long-term shareholder value. Moderator, questions and answers are now open.

Q & A session

chairpersons

The question-and-answer session has officially begun. Press the star + 1 key to submit a question; for hands-free calls, please pick up the handset first; asterisk + 2 to cancel the question. To control time, each person is limited to 1 main question+1 question, and you can re-queue if you need more questions. Reminder again: asterisks + 1 to ask questions. First question: Cantor Fitzgerald, CJ Muse, please speak.

CJ Muse (Cantor Fitzgerald)

Good afternoon and thanks for the question. First question: The growth rate of Exabyte shipments slowed in the September fiscal quarter, and the number of inventory turnover days increased from 83 days to 97 days. Did they prepare for the acceleration of shipments in December? In addition, as previously mentioned, the short-term growth rate in 2027 is in the 30% + range, and the long-term guideline is to maintain a compound growth rate of 25%. As Mosaic grows, can we expect to maintain a growth rate of more than 30% for some time, or fall back to a long-term compound growth rate within 2027?

Dave Mosley

CJ, Thanks for the question. Looking back, there was a clear jump in shipments in the June fiscal quarter, and shipments in the September fiscal quarter were relatively flat, as you can observe; next, the December fiscal quarter will rise again. The overall trend is in line with expectations, and 25% is a reasonable long-term center. We are promoting product iteration. We need to schedule production and preparation in advance, and lock delivery nodes with customers to match the customer's computer room construction support process. We are satisfied with the current progress and continue to promote the launch of high-density, next-generation products to support higher volume shipments.

Gianluca Romano

We will complete Mosaic 4 certification for many customers next quarter, so we are scheduling production ahead of schedule to guarantee delivery for the December fiscal quarter and beyond.

CJ Muse

OK, let me ask: The operating margin guide in the presentation materials is closer to the 55% range. Are we modelling at 50% or 55%?

Gianluca Romano

The target is 55%, which is the upper edge of the 50%-55% range. It has surpassed 50% this quarter and will continue to improve in December. Increased revenue, rising gross margin, and stable operating expenses have jointly promoted a month-on-month strengthening of operating profit margins, which will continue to be optimized in the subsequent quarters of this fiscal year.

CJ Muse

Clear, thanks.

chairpersons

Next question: Morgan Stanley, Eric Woodring, please speak.

Eric Woodring

Thank you. The pricing performance was strong this quarter. I would like to ask two questions: one is how to view the subsequent trend in the unit price per TB; the second is the cost per TB drop in the past four quarters. The year-on-year drop was about 15% in previous years, and recently fell to the middle single digits. May I ask if this is a phased disruption caused by the Mosaic product switch? When will the reduction in costs pick up again? One more question.

Dave Mosley

This is a complicated question. On the pricing side, the core depends on demand. Demand is currently booming beyond this quarter, and customers will continue to add capacity orders for the next 2-4 quarters. We have been cooperating with customers for a long time, and the pace of product iteration is controllable. Currently, we have not seen customers cut orders or delay purchases. Production capacity exceeding the plan was all booked by the customer. On the cost side, the manufacturing efficiency of self-developed core processes is the biggest cost variable. The platform switch itself will lead to cost optimization per TB, but in the early stages of the switch, yield loss and scrapping will increase, which will drag down costs in stages. But we won't slow down iteration as a result and continue to improve yield. The prospects for subsequent product iterations are more optimistic than 90 days ago, and I'm very confident about that.

Gianluca Romano

The cost reduction of self-developed disc media is still very strong, and we are satisfied with this. However, the cost of external components increased markedly year over year, partially offsetting the results of internal cost reduction. The price trend of external components still needs to be observed; our controllable self-development process is progressing well in reducing costs. When we anticipate an increase in external costs, it will gradually be transmitted in the pricing of new contracts. This is also the reason why the price increase was higher this quarter. However, price fluctuations in the supply chain are difficult to predict, and it takes time for pricing to be transmitted.

Eric Woodring

Understood. Q: Back to the CJ question just now, confirm that the slowdown in shipments in the September fiscal quarter is simply a rhythm of product switching and production schedules. There are no negative tail risks such as yield risks or data center landing barriers?

Dave Mosley

There is no risk. The sharp rise in June and the phased level in September are just a matter of time and pace; the volume will be increased again in December. After the product switch was completed, the growth rate of Exabyte shipments returned to the right track.

Eric Woodring

Received, thank you.

chairpersons

Next question: Evercore ISI, Amit Daryanani, please speak.

Amit Daryanani

Good afternoon. Management reiterated that FY2027 capital expenditure represented 4%-6% of revenue. I want to ask: Can this capital expenditure framework still support long-term growth of about 25% of Exabyte shipments after fiscal year 2027? In particular, HAMR has a longer manufacturing cycle and requires additional equipment investment. How is the long-term capital expenditure framework understood? If disk production capacity needs to be expanded, how to balance self-development and production expansion and mergers and acquisitions?

Dave Mosley

First, cutting-edge HAMR technology cannot be obtained through mergers and acquisitions; it can only be developed independently. The 4%-6% capital expenditure range is sufficient to support our growth plans. The newly purchased production equipment has stronger performance, which directly helps increase surface density, which is a positive sign. We will introduce some mature external technology as needed to assist in the transformation of the production line to HAMR. The target of 25% exabyte growth remains unchanged, and is mainly achieved through iterative surface density. The production cycle for some components is lengthened, and we will adjust the output pace accordingly, but all can be completed within the 4%-6% capital expenditure range.

Amit Daryanani

Understood. Q: As the share of HAMR and Mosaic 4 continues to increase, how should we view the cost per bit reduction curve? What is the expected reduction in cost per bit under long-term stability?

Gianluca Romano

The cost of self-developed components continues to decline. Increasing the capacity of a single disk from 3 TB to 4 TB will bring significant cost optimization per TB. However, the cost of external components will disrupt the overall cost of a single TB. It is necessary to distinguish between endogenous cost reduction brought about by self-developed technology and fluctuations in external supply chain costs. The decline in the previous quarter was impressive, and it subsided in the September fiscal quarter. In the long run, technological iteration is the core driving force behind the decline in the cost of a single TB; continuing to increase single disk capacity is our main line of reducing costs and increasing profits.

Amit Daryanani

Thank you.

chairpersons

Next question: TD Cowen, Krish Sankar, please speak.

Krish Sankar

Hello. Addressing the previous cost problem: HAMR accounted for 50% at the end of this year, and HAMR itself is a gross margin incremental item. Your peers are moving towards the 12-disc and 14-disc plans, while Seagate sticks to the 10-disc plan. You mentioned that the multi-disc plan would raise costs. I want to ask: Why is there still plenty of room for cost reduction in the future? Are there any plans to break through the 10-disc architecture in the future? Are there any technical bottlenecks? There are also questions.

Dave Mosley

Let's start with the conclusion: it's not that we can't do more discs technically. We chose to continue using the existing 10-disc platform because iterations on the same platform can continue to get cost leverage without having to replace a large number of mechanical structures or re-invest in equipment. Customer certification is also simpler; it only needs to adapt to HAMR technology, and there is no need to change the entire hardware architecture of the magnetic head or disc. Additionally, HAMR has limited cost growth between generations. The capacity of a single disk has been increased from 4TB to 5TB, and the reduction in the cost of a single TB can be clearly estimated. We are making every effort to advance the development and implementation of 5TB/disk.

Krish Sankar

OK. Q: Capital expenditure remains at 4%-6%, while peer guidance is rising to the 8% range in the next few years, and some manufacturers are planning to expand production in Japan. Will the 4%-6% benchmark still apply in the next few years? Will there be a risk of losing shares? Or is demand far greater than supply, and supply constraints aren't the main contradiction?

Dave Mosley

I'm not commenting on competitors' plans. For us, 4%-6% is completely sufficient. I respect my peers in the industry, but each company has a different technology route. The demand level continues to be strong; on the supply side, the implementation of high-capacity hard drive production capacity is very complicated, requiring a large amount of R&D and technical investment. Supply chain collaboration is extremely difficult, and production can be expanded without simply adding equipment. As mentioned before, the vast majority of near-line capacity has been locked in until 2028, and forward order communication continues to advance. We are confident that customer demand is stable and supply will continue to be tight for some time to come. We focus on implementing technical routes, matching customer needs, and don't worry about share issues.

Krish Sankar

Thanks Dave.

chairpersons

Next question: Citi, Asia Merchant, please speak.

Asia Merchant

Thank you. Management mentioned many times that KV cache drives storage requirements. How can we understand the unconstrained demand under the KV cache trend and the corresponding increase in exabyte demand?

Dave Mosley

We're seeing a lot of new technology rapidly amplifying the value of data. The AI concept is broad and easy to confuse. Essentially, the volume of data itself is exploding, such as Internet video and video analysis. Data within factories is also growing rapidly, and AI is an accelerator. The efficiency of software and hardware architectures has now been greatly improved, and data can be efficiently transferred between application layers and storage layers; architectures such as KV caching further accelerate data retrieval. Systems above the storage layer have reached unprecedented levels of efficiency, and will continue to generate new storage requirements.

Gianluca Romano

Demand for storage in different parts of the cloud is growing rapidly, even exceeding expectations.

Dave Mosley

Yes, demand is stronger than expected, and the gap between supply and demand is likely to widen. Our focus is on product iteration, and we will continue to add 40TB hard drives over the next few quarters to meet demand. Also, physical AI is a direction worth paying attention to, and it is still in its early stages. Scenarios such as autonomous driving require not only storing training data, but also retaining data for decision traceability. Such data storage will migrate to the edge side. New products may be created in the future. Many innovative companies are developing edge value-added solutions. We continue to track. This will be another growth curve for storage demand.

chairpersons

Next question: Bernstein, Mark Newman, please speak.

Mark Newman

Thanks and congratulations on the results. I want to thoroughly disassemble prices, costs, and gross profit margins. Gross profit margin rose sharply again this quarter, which is also included in the guidelines. However, looking at ASP, the month-on-month increase rose from the previous middle single digit to the middle double digits this quarter; at the same time, the cost side appeared to be rising month-on-month, and management mentioned the increase in external component prices. Other than component costs, are there any product structure or other one-time factors driving up pricing or phased cost increases? There are also questions.

Dave Mosley

First, we are very satisfied with the final profit and free cash flow performance. At the level of gross profit margin and pricing, there will be quarterly disruptions during the product switching phase, including loss of yield, increased scrapping, and phased loss of part of production capacity. We generally need 1-2 quarters to restore yield to the original level. The core of the pricing logic is long-term demand, not short-term supply and demand in a single quarter. We and the customer plan the pace of technology implementation in advance, and the customer also needs to simultaneously modify the architecture to adapt to high-capacity hard drives. The supply chain is huge. We need to accurately match the short-term, medium and long-term needs of customers, and the production schedule needs to be strictly aligned. These factors all influence pricing and costs.

Gianluca Romano

Pricing and cost themselves go hand in hand. When we anticipate an increase in external costs, it will be transmitted in the new contract. We are only bound by the existing contract, and there is a time lag in transmission. In the long run, rising supply chain costs will eventually be transmitted to customers, which is the reason for the recent increase in prices. The cost of self-developed discs declined as planned, and the disturbance came from external components. The increase in pricing exceeds the increase in external costs, so the improvement in gross margin is still accelerating. We are properly dealing with rising external costs, and profitability continues to increase.

Mark Newman

Understood. Q: This round of price increases have been huge. Can this medium double-digit quarterly ASP growth rate continue, or is it a phased phenomenon? We acknowledge that pricing remains strong, but this increase has been significant and we want to confirm continuity.

Dave Mosley

On the supply side, if new contracts are renewed one after another, prices will rise in a step-wise manner. Currently, there is no disruption in demand; on the contrary, demand continues to expand. We anticipated demand for the next 3-4 quarters and negotiated reserved capacity, locked configurations, and prices with customers, and there was no significant change in current trends.

Gianluca Romano

The situation is different every quarter, and all variables have been included in the guidelines. Part of the revenue increase comes from volume shipments and part from pricing. There is still room for further increase in gross margin. The increase in gross profit at this stage mainly comes from pricing to hedge the cost pressure of external components.

Mark Newman

Thank you.

chairpersons

Next question: Bank of America, Wamsi Mohan, please speak.

Wamsi Mohan

I'd also like to inquire about pricing. Of the price increases this quarter, what percentage comes from stock contract price adjustments, and what percentage are new floating pricing contracts? Are there any divisions: hyperscale customers, OEMs, edge businesses, or structures with different capacity tiers? Another question.

Dave Mosley

The price increase is mainly due to new contracts being renewed on a rolling basis; it was not brought about by short-term surprise additional shipments. Our production schedule is steady; most of the increase in pricing comes from securing forward capacity ahead of time, increasing factory efficiency and releasing additional production capacity, and then renegotiating prices with customers.

Gianluca Romano

The pricing strategy hasn't changed. It's just that when we anticipate an increase in external costs, the signing of a new contract will include this part of the cost in the pricing. Other than this cost driver, the pricing strategy is consistent with the past three years.

Wamsi Mohan

Understood. Question about Exabyte's shipments: A guide to a marked acceleration in shipments in the next quarter. For the rest of the fiscal year, as product switching disturbances subsided, while supply fell significantly below demand, did that mean that the growth rate of Exabyte shipments increased quarterly?

Dave Mosley

The product changeover was not an unexpected issue; everything was planned in advance. The wafer manufacturing cycle is long, and we know the shipping pace very early on. Mosaic 4 continues to expand, and after Mosaic 5 gradually relays, we maintain our long-term growth target of 25% and make every effort to advance.

Wamsi Mohan

Thanks Dave.

chairpersons

Next question: Melius Research, Ben Reitzes, please speak.

Ben Reitzes

I want to talk about the pace of buybacks and shareholder returns. Management said it will increase buybacks from the March fiscal quarter; the company's debt will mature as early as June 2029. Free cash flow is expected to remain around $2 billion for some time to come. What is the pace of repurchases? Will 100% of the current free cash flow be repurchased until subsequent debts are due? What is the free cash flow return ratio target? There are also questions.

Dave Mosley

Thanks Ben. The debt reduction phase is over. We are returning to a normalized capital return framework. The goal is to return 75% of free cash flow to shareholders, and we will gradually return to this ratio. Exceeding 75% of surplus cash flow, it can be increased flexibly according to the opportunity.

Gianluca Romano

That's right. The last debt repurchase was completed just this month, and the buyback is already being carried out this quarter; starting next quarter, there are no large debt repayment plans, and repurchases will increase markedly, and significant changes have been seen since the March fiscal quarter.

Ben Reitzes

Understood. Q: Customers are mainly hyperscale cloud vendors. Have they heard about their restrictions on computer room land, electricity, and infrastructure cabinets? Will it be limited by the progress of chip and computer room infrastructure? How can Seagate cooperate and manage this rhythm?

Dave Mosley

There are currently no customer payment fulfillment issues. However, we strictly control inventory to avoid overproduction, and we don't want hard drives to sit idle in the channel. Large-capacity hard drives can improve computer room storage efficiency, and customers themselves are also highly motivated to land. Compared to the computing power layer, the storage layer consumes less power, space, and capital expenses. However, we will not blindly oversupply to prevent customers from not being able to keep up with their supporting computing power and infrastructure. We provide customers with supply certainty across quarters and years, so they can plan computing power and computer room facilities in advance, and we align the overall implementation pace.

chairpersons

Next question: BNP Paribas, Carl Ackerman, please speak.

Carl Ackerman

Hyperscale demand is strong, while local businesses store shipments close to records. The CPU manufacturer mentioned that the local server carries 25% of the computing power requirements of the Agent agent. I want to ask: has Seagate seen this part of the demand fulfilled so far? In the next 12 months, with the launch of a large number of smart CPU racks, how will the penetration rate of high-capacity hard drives change in local computer rooms and cloud vendors?

Dave Mosley

For traditional enterprise OEM customers, the pace of implementation of high-capacity hard drives was slow in the past, but now this gap is narrowing. The data density of the storage layer continues to increase, and the hard disk capacity continues to rise. There are two types of scenarios: one is a small-scale local computer room; the other is a large-scale scenario that relies on OEM channels and faces a sovereign cloud. Demand for both types of products is growing, and both types of products have corresponding market space.

Carl Ackerman

Thank you.

chairpersons

Next question: Wells Fargo, Joe Quattrochi, please speak.

Joe Quattrochi

Can the impact of external component costs on gross margin be quantified? Has the December fiscal quarter guidance fully absorbed this part of the cost pressure?

Gianluca Romano

External cost impacts have been fully incorporated into the guidelines. The cost of self-developed media declined according to the plan, and the price of external components increased year-on-year, partially offsetting internal cost reductions. However, the guidelines still show continued improvements in revenue, gross profit margin, operating profit margin, and EPS. We tried our best to absorb external cost shocks, and the profit trend did not change.

Joe Quattrochi

ASP: How much of the increase in the unit price per TB is due to the HAMR product structure upgrade, and how much is a direct price increase for products of the same specification?

Dave Mosley

We benefit from the fact that hyperscale customers prioritize purchasing new hard drives with higher capacity and better TCO. The price for a single TB is a weighted average of the entire product line. Some cloud vendor contracts are four-quarter rolling pricing, while others have shorter customer cycles. We prioritize high-volume orders to ensure stable factory production schedules and smooth demand fluctuations.

chairpersons

Next question: J.P. Morgan, Joseph Cardoso, please speak.

Joseph Cardoso

The management previously gave HAMR penetration guidelines for the end of the 2027 fiscal year. I would like to update it: Due to customer certification, magnetic head wafer cycle, etc., has the target share of near-line storage HAMR changed? There are also questions.

Dave Mosley

The progress of the 4TB/disk solution was in line with expectations, and customer certification and on-site delivery were smooth. The progress of 5TB/disk is more optimistic than in the previous quarter, and the pace of switching is expected to be faster than initially planned. We will communicate in detail in the 2028 fiscal year. There is still an opportunity for the 5TB route to evolve to 6TB per disk in the future. This platform has great potential, and R&D is progressing smoothly.

Gianluca Romano

The target share of HAMR in near-line Exabytes for the end of 2026 and FY2027 is in line with the previous quarter's guidance and has not been adjusted.

Joseph Cardoso

Understood. Q: What are the differences in capacity locking and pricing rules between long-term agreements valid until 2030 and agreements up to 2028? How does this kind of long-term agreement affect production capacity planning?

Dave Mosley

The contract process remains the same: we first give the customer a long-term supply forecast for Exabytes; it is about 12 months until delivery, lock in the hard drive configuration, and then finalize the pricing, which is a made-to-order production model. Demand continues to strengthen, and forward contract pricing is likely to rise; we also have a mechanism. If the customer's delivery falls short of expectations, we can adjust supply. Currently, we have not seen such signals. We are in a multi-year data growth cycle. Five years ago, the shipping capacity in a single quarter was only about half of what it is now. The industry experienced a round of downturn, and now it is compounded by new growth. In the next five years, data demand will be booming, and AI applications will amplify the value of data. Customers know their own expansion plans, and we work together to match production capacity.

Joseph Cardoso

Thanks for sharing.

chairpersons

This concludes the question and answer session. Dave Mosley was returned to the conference for his concluding remarks.

Dave Mosley

Thank you to the host and thank you all for attending the conference. With a strong start to the 2027 fiscal year, we judge that the high-capacity storage industry has entered a multi-year growth cycle. Seagate continues to implement technological innovation, strictly implement business strategies, seize industry dividends, focus on profit growth, and create value for customers and shareholders. Thank you all, and we'll see you next quarter.

chairpersons

This is the end of this conference call. Thank you for attending, you can hang up.