Seagate Technology (STX) Q1 FY2026 Earnings Call Transcript

Date: October 28, 2025 | Source: Motley Fool (fool.com) full conference call transcript

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Shanye Hudson (Investor Relations): Thank you, operator. Good afternoon, everyone. Welcome to Seagate Technology's fiscal first quarter 2026 earnings call. Joining me on the call today are Dave Mosley, Seagate's Chair and Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We have posted our earnings press release and detailed supplemental information for our September results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included on our Form 8-Ks.

Before we begin, I would like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Following our prepared remarks, we will open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. With that, I will hand the call over to Dave.

William (Dave) Mosley (Chair and CEO, Seagate Technology): Thanks, Shanye, and hello, everyone. Seagate Technology Holdings plc delivered a very strong start to fiscal 2026. Revenue grew 21% year over year. Non-GAAP gross margin set a new company record at 40.1%, and non-GAAP operating margin climbed to 29%, a level last seen in fiscal 2012. Non-GAAP EPS exceeded the high end of our guidance range, underscoring our focus on expanding profitability. Today, we announced an increase to our quarterly dividend of approximately 3%, reflecting confidence in our execution and ongoing sustainability of our cash flow generation capabilities as we leverage our leading HAMR technology in a strengthening demand environment for high-capacity hard drives.

We are seeing exceptional demand for high-capacity drives from global cloud service providers, supported by long-term build-to-order contracts through calendar 2026. In fact, our high-capacity nearline production is largely committed under build-to-order contracts through calendar 2026, and we have longer-term agreements providing clear visibility through calendar 2027. This demand is being driven by the rapid growth of AI, including AI video and inferencing workloads, which are creating unprecedented unstructured data that translates directly into expanding market requirements for large-scale storage solutions.

We are seeing accelerating adoption of HAMR technology. In September, we shipped over 1,000,000 Mozaic HAMR drives, and nearly 80% of our nearline volume is now at or above 24 terabytes per drive. Five global CSPs are now qualified on our Mozaic HAMR drives, with plans to qualify the remaining three within calendar 2026. Our Mozaic 3+ terabyte-per-disk products deliver up to 36 terabytes per drive, and we expect the volume ramp of our 4+ terabyte-per-disk products, which deliver up to 44 terabytes per drive, to begin in the first half of the next calendar year. Our areal density road map extends to 10 terabytes per disk, which we expect to deliver early in the next decade.

The demand backdrop is supported by the fact that data center demand continues to outpace available supply, and we believe tightness is likely to persist, as only higher-capacity product transitions — not additional unit output — will materially add exabyte capacity. Data creation is accelerating, driven by both traditional workloads and emerging AI applications, and hard drives anchor the mass-capacity data tier. With that, I'll turn the call over to Gianluca to cover our results in greater detail.

Gianluca Romano (CFO, Seagate Technology): Thank you, Dave, and good afternoon, everyone. Seagate delivered a very strong start to fiscal 2026, with revenue of $2.63 billion in the September quarter, up 21% year over year and 8% sequentially. We achieved non-GAAP gross margin of 40.1%, up 220 basis points sequentially and a new company record, and we expanded non-GAAP operating margin by 280 basis points sequentially to 29%. Our resulting non-GAAP EPS was $2.61, exceeding the high end of our guidance.

In the September quarter, we shipped 182 exabytes, and we delivered 159 exabytes to data center customers, compared to 137 exabytes in the prior period. Data center revenue was $2.1 billion, or 80% of total revenue, up 13% sequentially. Edge IoT revenue was $515 million, representing 20% of total revenue, with sequential declines noted but anticipated seasonal improvement in December. Free cash flow was $427 million, with expected expansion next quarter. We increased our quarterly dividend by approximately 3% to $0.74 per share, and we repurchased $29 million of shares at an average price of $187 per share.

Liquidity totaled $2.4 billion as of September, including $1.3 billion in undrawn revolving credit facilities. We ended the September quarter with approximately $5 billion in gross debt and a net leverage ratio of 1.5x. Capital expenditures for the September quarter were $105 million, or approximately 4% of revenue, and we expect CapEx to remain within our target range of 4% to 6% of revenue for fiscal 2026.

Turning now to the December quarter outlook. The demand environment remains strong, and we expect December quarter revenue to be in the range of $2.7 billion, plus or minus $100 million, with non-GAAP EPS guided to $2.75, plus or minus $0.20. We expect non-GAAP operating margin to reach approximately 30% in the December quarter. Operator, let's open the call up for questions.

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Questions & Answers

Analyst (Q1): Given the strong demand environment, can you help frame the gross margin trajectory and the potential for pricing to move higher given the tightness in supply?

William (Dave) Mosley (Chair and CEO): The pricing will be dictated by the demand, and right now the demand is really strong. As we roll through into '26 and '27, as we bring more exabytes online through aggressive product transitions, flat to slightly up pricing is certainly possible, and that's the way we're managing it as we talk to our customers. The value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong.

Gianluca Romano (CFO): On the gross margin, we are executing very well. The models cover over a longer period of time now — 2, 3 years, not 2 or 3 quarters — and I'm positive we are continuing to progress in the right direction. We expect the December quarter gross margin to continue improving, supported by the mix of higher-capacity and HAMR-enabled drives.

Analyst (Q2): Can you give us an update on HAMR qualification progress and the cost-reduction trajectory as you ramp Mozaic 4?

William (Dave) Mosley (Chair and CEO): We are planning to transition to 4 terabytes per platter fairly aggressively, but we were fairly tight all throughout manufacturing, so it will be a fairly prescriptive ramp. It won't be as fast as maybe some ramps we've done in the past, but it will be very profitable. I'm very optimistic that the 4-terabyte-per-platter product is very strong and will start to replace legacy products.

Gianluca Romano (CFO): We qualified the last big cloud service provider in the U.S. and have qualified six out of eight of the top cloud service providers. The transition from PMR to HAMR is progressing very well, and we are now qualifying the new 4-terabyte-per-disk product, up to 40 terabytes per drive. This will drive a fairly important reduction in cost per terabyte compared to current HAMR and be a good contributor to further increase our gross margin.

Analyst (Q3): How should we think about exabyte growth versus the long-term targets you've laid out, given demand is clearly outpacing supply?

William (Dave) Mosley (Chair and CEO): We are not guiding calendar '26, but in our financial model we expect nearline exabytes to grow in the mid-20s. We have done a little bit better over the last few quarters, and we always try to extract as many exabytes as we can from our manufacturing. Moving from 2.4 to 3 to 4 terabytes per platter, we're on the trajectory you describe, and we'll continue to execute that plan.

Analyst (Q4): Can you clarify what portion of your LTAs has fixed or multi-quarter pricing, and as these roll off through 2026, will new agreements be priced higher?

William (Dave) Mosley (Chair and CEO): As we roll off one long-term agreement into the next year, we've satisfied our existing supply commitments, people are looking at the new products, we have constrained supply of those new products, and we look at what the demand is and dictate where our pricing is. As I said, it could be flat to up a little bit, but it all depends on what the demand is, and demand continues very strong.

Analyst (Q5): On the OpEx side, OpEx as a percentage of revenue is down to near the 10% long-term target. Should we expect further declines?

Gianluca Romano (CFO): We are getting closer and closer to our long-term target of 10% of revenue for OpEx. We are almost there, and we should be there actually in the March quarter. We will continue to keep our cost control, and as revenue increases, we can probably do a bit better.

William (Dave) Mosley (Chair and CEO): Now that we've kind of cleared the HAMR transition, we can see the future fairly well. The clouds are parting, if you will, and we can see areal density opportunities in front of us. We will take that money and reinvest in ourselves so that we can continue to drive the areal density.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

William (Dave) Mosley (Chair and CEO): Thank you, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets, advancing our areal density roadmap, and successfully qualifying customers on our HAMR-based Mozaic products to address the sustained and growing demand for data storage. I'd like to thank our employees, customers, suppliers, and shareholders for their continued support. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.