Seagate Technology Holdings plc (STX) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal strong financial metrics, optimistic guidance, and strategic product developments. Management highlighted strong demand, improved gross margins, and successful HAMR transitions, which are likely to enhance profitability. The strategic focus on cloud growth and innovative products supports positive market sentiment. Despite some uncertainties in specific metrics, the overall outlook is positive, with expectations of sequential revenue and profitability improvements, suggesting a stock price increase in the near term.
Key Financial Performance
Revenue December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year-over-year. The increase was driven by strong demand in the data center market and the adoption of higher capacity drives.
Non-GAAP Gross Margin Achieved non-GAAP gross margin of 42.2%, up 210 basis points sequentially. This improvement reflects the execution of pricing strategy and the growing adoption of high-capacity products.
Non-GAAP Operating Margin Expanded non-GAAP operating margin by 290 basis points sequentially to 31.9%. This was driven by strong top-line growth and significant financial leverage.
Non-GAAP EPS Non-GAAP EPS was $3.11, up 19% quarter-over-quarter. This reflects strong financial performance and operational efficiency.
Exabyte Shipments Shipped 190 exabytes in the December quarter, up 26% year-over-year, with the data center market accounting for 87% of shipment volume. This growth was supported by demand momentum from global cloud customers.
Data Center Revenue Data center revenue totaled $2.2 billion for the quarter, up 5% sequentially and 28% year-over-year. This was driven by the transition to higher capacity drives and strong demand from cloud and enterprise customers.
Free Cash Flow Generated over $600 million in free cash flow, marking the highest level in 8 years. This was supported by sustained demand trends, operational efficiency, and capital discipline.
Gross Debt Balance Retired $500 million in gross debt, reducing the balance to approximately $4.5 billion. This was part of efforts to optimize cash deployment and reduce leverage.
Net Leverage Ratio Improved net leverage ratio to 1.1x based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter-over-quarter and 63% year-over-year. This improvement reflects increased profitability and cash generation.
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Operating Highlights
HAMR technology: 2025 solidified HAMR technology as a long-term enabler of mass capacity storage. Seagate shipped 3 terabyte per disk Mozaic-based HAMR products to its first CSP customer, with quarterly shipments exceeding 1.5 million units. Mozaic 3 HAMR drives are now qualified with all major U.S. CSP customers, and qualifications for second-generation Mozaic 4 terabyte per disk products are progressing well.
Mozaic 4 HAMR products: Expected to begin ramping later this quarter, with multiple CSPs qualified in the coming months.
Areal density advancements: Seagate demonstrated 7 terabytes per disk capability in labs, with a roadmap extending to 10 terabytes per disk early in the next decade.
Data center demand: Strong demand growth for high-capacity nearline drives across global cloud data centers. Nearline capacity is fully allocated through 2026, with orders for 2027 starting soon. Long-term agreements with major cloud customers extend through 2027, with discussions for 2028 demand growth projections ongoing.
AI-driven video applications: Emerging AI-driven video applications are fueling demand for hard drives, with platforms like YouTube witnessing significant growth in video uploads.
Revenue growth: 2025 revenue increased by over 25%, with December quarter revenue at $2.83 billion, up 22% year-over-year.
Profitability: Non-GAAP gross margin expanded to 42.2%, and operating margin reached 31.9%. Free cash flow generation was $607 million, the highest in 8 years.
Debt reduction: Retired $500 million in gross debt, improving the net leverage ratio to 1.1x.
Supply discipline: Seagate plans to meet demand growth through areal density advancements without increasing unit production volume.
Focus on AI and edge workloads: Seagate is positioning itself to support AI-driven applications and edge workloads, emphasizing the strategic value of data.
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Risk or Challenges
Market Conditions: The company operates in a strong demand environment, particularly within the data center end markets. However, there is a reliance on sustained demand growth for high-capacity nearline drives, which could be impacted by any downturn in global cloud data center demand or economic uncertainties.
Supply Chain: The company’s nearline capacity is fully allocated through calendar year 2026, and it is beginning to accept orders for 2027. Any disruptions in the supply chain or production could impact its ability to meet demand.
Technological Advancements: The company is heavily reliant on the successful ramp and adoption of HAMR technology. Any delays or issues in the qualification or production of Mozaic 3 and Mozaic 4 products could impact its competitive position and financial performance.
Competitive Pressures: Seagate faces competition in the data storage market, particularly in the adoption of new technologies like HAMR. Failure to maintain its technological edge could result in loss of market share.
Regulatory and Economic Risks: The company acknowledges risks and uncertainties associated with its business, including regulatory changes and economic conditions, which could materially impact its operations and financial results.
Debt and Financial Leverage: While the company has reduced its debt, it still carries a gross debt balance of approximately $4.5 billion. Any adverse changes in interest rates or financial markets could impact its financial stability.
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Guidance & Outlook
Demand Trends: Seagate anticipates continued strong demand for high-capacity nearline drives, particularly within global cloud data centers. Nearline capacity is fully allocated through calendar year 2026, and orders for the first half of 2027 will begin soon. Demand visibility is strengthening for 2027 and beyond, with discussions already underway for 2028 demand growth projections.
HAMR Technology Roadmap: Seagate plans to ramp up its second-generation Mozaic 4 terabyte per disk HAMR products later this quarter, with multiple CSPs expected to qualify in the coming months. The company is on track to deliver 10 terabytes per disk early in the next decade, aligning with its long-term areal density roadmap.
Revenue and Profitability Outlook: For the March quarter, Seagate projects revenue of $2.9 billion, plus or minus $100 million, representing a 34% year-over-year improvement at the midpoint. Non-GAAP operating margin is expected to approach the mid-30% range, and non-GAAP EPS is projected at $3.40, plus or minus $0.20.
Capital Expenditures: Capital expenditures for fiscal year 2026 are expected to remain within the target range of 4% to 6% of revenue, supporting the transition and ramp-up of HAMR technology.
Free Cash Flow and Debt Management: Seagate expects free cash flow generation to expand further in the March quarter, supported by strong demand trends, operational efficiency, and capital discipline. The company aims to continue reducing its net leverage ratio through profitability and cash generation.
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Shareholder Return Plan
Dividends: During the December quarter, Seagate returned $154 million to shareholders through dividends.
Share Repurchase: Seagate retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from business and optimized cash deployed for future share repurchases.
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Key Q&A
Q:Given the supply-demand dynamics, is there a framework to think about incremental gross margins and the possibility of average pricing per exabyte moving positive year-over-year?
A:Management stated that pricing will be dictated by demand, which is currently strong. They anticipate flat to slightly up pricing as they bring more exabytes online through aggressive product transitions. They are executing better than their Investor Day model, which projected a 50% incremental margin above $2.6 billion in revenue.
Q:Can you help bridge the drivers between mix and price for the strong incremental quarter-on-quarter gross margins in the guide?
A:Management attributed the strong gross margins to persistent demand and better planning by customers. They expect revenue and profitability to improve sequentially for the rest of the calendar year.
Q:Where do you think supply growth can land this calendar year, and will the pace of exabyte growth accelerate as you approach the HAMR crossover point?
A:Management plans to transition to 4 terabytes per platter aggressively but noted that manufacturing is tight. They expect a prescriptive ramp for the 4 terabytes per platter product, which will replace legacy products and provide a better value proposition.
Q:What is the upside to achieving HAMR rollout targets and the impact on blended cost reductions?
A:Management is happy with the HAMR transition, having qualified 6 out of 8 top cloud service providers. They are qualifying a 4 terabyte per disk product, which will reduce costs per terabyte and contribute to gross margin improvement.
Q:What portion of LTAs for nearline HDD capacity has fixed or multi-quarter pricing agreements, and how will new agreements be priced as they roll off in 2026?
A:Management stated that LTAs for 2026 are fairly booked with predictable pricing and volume. New agreements will be based on demand and supply dynamics, with potential for higher pricing as new products are introduced.
Q:Can you provide directional guidance on exabyte shipments for calendar '26 versus '25?
A:Management did not provide specific guidance for calendar '26 but reiterated their financial model of mid-20% exabyte growth CAGR. They aim to extract as many exabytes as possible from manufacturing.
Q:What is driving the sizable uptick in gross margins for the March quarter guide?
A:The uptick is driven by pricing strategy, mix, and ramping HAMR volumes. The systems business is not a significant contributor.
Q:Is there an opportunity for significant price increases in LTAs as they roll off, and what is the update on HAMR mix?
A:Management indicated that pricing could be flat to slightly up, depending on demand. They are prioritizing the 4 terabyte per platter product for better mix and profitability.
Q:How much was HAMR as a percentage of exabyte shipment last year, and how much is expected this year?
A:Management did not provide specific percentages but emphasized that the HAMR mix is improving with the transition to higher capacity products.
Q:What is the activity in the warm tier of storage, and how does it impact HDD and flash storage?
A:Management stated that big data storage in data centers will likely remain HDD-dominated due to economics and architecture. HDDs are optimized for performance and are used extensively in data centers.
Q:How should we think about the cost down curve with the 4 terabyte per platter HAMR drive?
A:Management expects the 4 terabyte per platter product to significantly reduce costs and improve profitability. They plan a major transition to this product over the coming years.
Q:Is pricing locked in for all of '26, and what agreements are in place for '27?
A:Pricing and volume are locked in for 2026. For 2027, discussions with customers are ongoing, with agreements on volumes but not fixed pricing yet.
Q:How should we think about depreciation given the increase in CapEx?
A:Depreciation will follow CapEx, which is aligned with the target of 4% to 6% of revenue. Depreciation is calculated on a 10-year useful life.
Q:What is the impact of HAMR ramp on gross margins, and how will margins improve as HAMR scales?
A:The HAMR ramp is included in the guidance for improved gross margins. Management expects continued sequential improvement in revenue and profitability as HAMR products scale.
Q:What is the outlook for OpEx as a percentage of revenue?
A:Management aims to maintain OpEx at 10% of revenue, with potential for further improvement as revenue increases.
Q:Review of Unclear Management Responses
A:Management avoided providing specific percentages for HAMR as a percentage of exabyte shipment and did not give numerical guidance for exabyte shipments in calendar '26. They also did not detail the exact impact of pricing, mix, and cost on gross margins, stating they are interrelated.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI agent
CSP
CSPs
Form
HAMR technology
Seagate HAMR
Seagate calendar
application
architecture
calendar demand
center
cloud
density road
drive
edge
efficiency
engineering
exabyte
information
margin
measure
model integrity
nearline
pace
press release
profitability
qualification generation
road map
shipment
supply discipline
terabyte disk
uploads
use case
video
website
workload
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The earnings call summary indicates significant declines in key financial metrics, including a 17% drop in revenue and a substantial decrease in EPS. The gross margin also fell, and cash flow from operations decreased by 25%. These negative financial trends suggest a negative market reaction, particularly given the lack of positive strategic or operational updates to offset these declines.
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