Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fourth-quarter revenue increased 18% year on year, supported by strengthening global cloud demand.
- Achieved non-GAAP gross margin of nearly 31%, supported by HDD gross margins above that level.
- Non-GAAP EPS of $1.05, far exceeding the high end of the guidance range.
- Expanded non-GAAP operating profit by 64% for fiscal 2024.
- Grew free cash flow sequentially every quarter of the fiscal year, maintaining healthy liquidity levels.
Negative Points
- Visibility in enterprise OEM markets is not as strong as with CSPs, leading to uncertainty in demand sustainability.
- Underutilization costs, although decreasing, still impacted the financials in the previous quarters.
- Legacy product revenue and non-HDD business revenue both declined sequentially.
- Concerns about potential market share loss to competitors like Western Digital during HAMR qualification delays.
- Ongoing global macro uncertainty affecting near-term budget visibility for smart city projects.
Q & A Highlights
Q: Dave, you mentioned that nearline capacity is committed through the end of calendar '24. How should we think about the market coming more in supply-demand balance? And when do you think that would happen? Or maybe asking it the other way, how long would it take for you to add incremental capacity? And how do we square that with the low end of CapEx for fiscal '25 comments from Gianluca? Thank you.
A: Thanks, Wamsi. Yes. We are being very careful with adding more capacity. It's good news seeing the demand come back to the extent that it has, but it's still not back to the levels it was a couple of years ago. And if you'll recall, we took something like 25% of the capacity offline and we let a bunch of people go. And so, we've been hiring a lot of the people back, but we're still pretty far away from the supply capabilities that we had years ago. What we're doing right now is trying to get predictable. So making sure that with the supply that we do have, we're getting it booked, and that's why we have the confidence through the end of the calendar year. And then we're trying to drive product transitions, which helps us answer the call for exabyte demand with the new products, and making sure we get that booked so that people are committed to the qualifications and then can have access to that technology as well, which obviously helps us rebuild the industry and the margins that we have. We can share that with suppliers as well. So just that predictability is our priority right now, not adding more capacity.
Q: The guidance talked about improving enterprise storage demand from your enterprise OEM customers. How much visibility is there, and how do you feel about the sustainability of that demand as the quarters progress? Thank you.
A: Thanks, Asiya. I would say that the visibility is not as good as what we have from the CSPs today, but it's been a fairly sharp downturn in on-prem enterprise as well over the last year. So talking to the customers, they see some of that coming back, maybe not as early, but probably into FY25 later in the year. So that's what we're targeting right now. And again, trying to get the new products qualified there so we can answer it with exabytes. We think that over time, on-prem is going to grow because a lot of the cool applications that people are talking about, read AI applications, will need on-prem storage as well for various reasons, snapshotting and checkpointing of the data and just making sure you feed all the AI engines with mass data at the edge. So we think there's opportunity there, but it's definitely lagging with what we're seeing in CSPs right now.
Q: Dave, I don't know if you provided an update on HAMR timing tonight. Those comments are obviously helpful in understanding the ramp. I guess I want to provide some assurance for the market on timing. And that is just, [if we're at from] 1 to 10, 10 being highest conviction, how much conviction do you have that HAMR will qualify for your first-maker cloud customer in the September quarter and why? Thanks so much.
A: Well, yeah, we're pretty convicted from our comments in the prepared remarks, of course. In short, Erik, we're looking at the data. And we have thousands of drives running in our shop. We have at the customer sites as well. They're running under a variety of workloads. And we're mindful of the fact that we have to prove the long-term performance. We had some supplier issues during the course of this summer when we went to high volume. But we see the fixes, and we see how they're responding in the test beds that we've got. So we're very optimistic about getting through these things. Our industry has really upped its game. As the drives -- they have to last for five, six, seven years in the data center. It takes a little time to prove that kind of performance. We can't just fix that in a week. We have to actually prove it ourselves. So the bar is pretty high, but we'll get over the bar really soon. And that's why we're optimistic about it.
Q: In your guide of the gross margin improvement, as you've gone through the last few quarters, you've been seeing material step function changes in your gross margin as some of these underutilization charges have gone away on these higher revenues. As you think about this quarter on quarter into September and beyond, it seems that the gross margin improvement is sort of asymptoting. And I'm wondering, is that more because of the ramp and qualification around HAMR and sort of where those volumes are this year? Or is it -- and should we think that we won't get as much leverage on gross margins over the next few quarters? How should we be thinking about that? Thank you so much.
A: Thank you, Wamsi. Well, I would say, first of all, we are very satisfied with the trend in our gross margin. This quarter, I mean, the June quarter was even a little bit higher than what we were expecting. So we went a little bit faster on both the pricing actions and the reduction in our internal cost. This is going on. We expect this to happen again in the September quarter. It's always difficult to perfectly estimate how much will be the impact for the full quarter. As you know, volume is going up, so the underutilization charges will decline even more in September, and we don't really expect this cost to be impacting the company through fiscal '25. And then, of course, because of the supply-demand balance now is a bit different than what was in the past, we still expect some improvement on the pricing action. So everything is reflected in our guidance, and the trend is continuing and is going the right direction.
Q: Dave, when you talk about these HAMR volumes happening in mid-2025, so the push out you've seen, there's always this fear that as people, as investors, as customers wait for HAMR ramp, Western Dig will pick up more incremental share versus Seagate. So can you just talk about what are customers probably doing as they're waiting for these HAMR qualifications to happen? And what gives you comfort that perhaps the market share doesn't go away from you as these qualifications happen over the next few quarters? Thank you.
A: Well, I think we have products all the way from 20 to 32 terabytes, and we're going to go to 40 terabytes, and we're just asking customers exactly what they want to fill their exabyte demand. So I think we have a lot of options, and we're making sure we're as predictable as we possibly can be. So market share is an outcome, and what we've said many, many times is we're going to go build to order. We're going to communicate with the customers exactly what's going on. So I'm not really worried about market share. It's more how do we predictably run our factories, long lead times on the
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
