Seagate Earnings Call: Nearline Capacity Already Locked Through 2028, Committed to 4%-6% CapEx Red Line, Stock Buybacks to Step Up in the March Quarter Next Year

Amid the AI wave reshaping the value of data retention, Seagate is proving to the market—with record profit margins and long-term agreements extending as far as 2030—its logic for navigating the storage cycle through "technological leaps rather than blind capacity expansion."

As mentioned by Wall Street CN, after the U.S. market close on October 27, Seagate Technology reported its fiscal 2027 first-quarter results for the period ended October 2, 2026, with revenue of $4.23 billion, up 61% year-over-year, and both earnings and next-quarter guidance comprehensively beating expectations. Thanks to cost control, gross margin jumped above 57%. Meanwhile, the company generated a record $1.5 billion in free cash flow, more than tripling year-over-year.

On the earnings call, Seagate CEO Dave Mosley said bluntly at the opening of the meeting:

Fiscal 2027 is off to an excellent start.

He noted that the company's visibility with customers now extends to 2030 and beyond, and that the vast majority of nearline storage capacity has been locked up through long-term supply agreements through 2028.

CFO Gianluca Romano said the substantial gross margin expansion came mainly from effective execution of the pricing strategy and product mix improvement driven by a higher proportion of Mozaic 4 products, enough to offset pressure from rising costs of externally purchased components. He expects the value-based pricing strategy and product mix optimization to continue supporting gradual gross margin expansion in the remaining quarters of fiscal 2027.

Gianluca Romano added that the recent acceleration in pricing also partly reflects the pass-through of rising costs for externally purchased components. He said the company's costs for core components such as internally produced wafers continue to decline as expected, but compared with a year ago, procurement costs for externally purchased components have risen significantly, partly offsetting the reduction in internal costs.

Where contracts are binding, this pass-through involves a time lag, but the company will gradually incorporate it into pricing when contracts are renewed, a trend already reflected in the new round of contract negotiations.

In the Q&A, management made clear that a capital expenditure target of 4% to 6% of revenue is sufficient to support compound annual nearline exabyte shipment growth of about 25%, and that driving exabyte growth through areal density improvement is a more efficient path than expanding the number of production units, with no need for a significant increase in capital investment.

On the demand outlook, Dave Mosley emphasized in his summary that the creation, storage and reuse of data are driving demand for high-capacity storage in a compounding manner, and that customers' strategic planning discussions even extend beyond 2030.

"Everything we can build beyond plan is already booked"

The market's biggest concern about the hard drive industry is whether elevated prices will cool demand. In response, Seagate CEO Dave Mosley gave the most direct answer on the call with order visibility:

For the vast majority of our nearline exabyte supply, we have already allocated through calendar 2028 through long-term supply agreements, and some cloud customers' agreements even extend to calendar 2030.

Mosley emphasized:

Everything we can build beyond plan is already booked.

The underlying logic of strong demand is changing. Mosley noted that the data sphere itself is expanding rapidly, and AI has become the core accelerator. As AI shifts from model training to inference and agentic applications, data retention and reuse become crucial.

Mosley said:

Over the next decade, billions of AI agents will be deployed globally, executing hundreds of billions of operations every day. At that scale, agents will constantly consume, generate and reuse data. I don't think any of us has ever lived in a world with such an efficient storage tier, and I do think this will drive a lot of future demand for us.

Pricing power transcends cost anxiety, external price increases written directly into new contracts

Of the 220 exabytes shipped this quarter, 90% went to data centers. Facing enormous demand, Seagate demonstrated strong pricing power.

Asked by analysts about the slowdown in per-TB cost reduction from the previous 15% to the mid-single digits, CFO Gianluca Romano acknowledged that this was because rising costs of external components offset the cost reductions achieved in internal media production.

But this did not erode profits; instead, it pushed up average selling prices. Romano stated the company's pass-through strategy bluntly:

When we have visibility into certain external cost increases, we try to pass them on to customers and factor them into our pricing.

Ultimately, the increase in pricing successfully covered and exceeded the rise in costs, thereby driving record gross margin expansion.

Mosley added that although there is a time lag in contract pass-through, the current price increases mainly come from rolling contract renewals. To reduce the total cost of ownership (TCO) of data centers, customers are pulling very hard on those more efficient new capacity-tier products.

Growth comes from "areal density," not making more hard drives

Facing increased capital spending by peers (such as Western Digital) and Toshiba's capacity expansion plans, Seagate has chosen a completely different long-term logic.

The company reiterated that it will keep capital expenditure strictly between 4% and 6% of revenue, not used to expand the physical number of hard drives produced.

Mosley stated clearly:

Advancing areal density is our goal. We expand drive capacity through areal density rather than relying on higher drive unit output. We believe this is the most effective way to help customers manage extreme data growth.

Facing competitors' capacity expansion, Mosley's response seemed composed, with a touch of pride in the technical barriers:

Bringing meaningful HDD capacity requires a great deal of R&D and technology investment. This is not just the idea of plugging in a few machines—I mean, that is orders of magnitude less than the actual difficulty.

Currently, Seagate's 44TB Mozaic 4 is ramping at two cloud service providers. Mosley revealed that the transition from 4TB per drive to 5TB is more optimistic than expected, and he expects it to extend to 6TB per drive fairly quickly.

More critically, Seagate insists on using a 10-platter platform and refuses to increase mechanical complexity and cost, thereby achieving a smooth transition for each generation of technology iteration.

Balance sheet repair, the 75% free cash flow model returns

Strong cash flow has allowed Seagate to completely shake off the debt shadow of the previous cycle.

During this quarter, Seagate repaid $1.2 billion of debt, and after the quarter it repaid another $750 million, bringing total debt down to about $1.6 billion and net leverage down to 0.2x. It has successfully returned to investment grade and is expected to turn net cash positive before the end of this year.

Based on this, the company's focus has officially shifted to capital returns. Mosley gave clear guidance:

Our model is to return 75% (of free cash flow to shareholders), and we should be able to get back to that model over time.

Romano also confirmed that, with the debt restructuring completed, the company will significantly step up share repurchases starting in the March quarter of calendar year 2027.

Full transcript of Seagate Technology's Q1 fiscal quarter earnings call (AI-assisted translation):

Welcome to Seagate Technology's fiscal year 2027 first quarter earnings conference call. All participants will be in listen-only mode. (Operator instructions) After today's presentation, there will be an opportunity to ask questions. (Operator instructions) Please note that this conference is being recorded.

I will now turn the conference over to Ms. Shanye Hudson, Senior Vice President of Investor Relations. Please go ahead.

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

Thank you. Hello, everyone, and welcome to today's conference call.

Joining me are Dave Mosley, Seagate's Chairman and Chief Executive Officer, and Gianluca Romano, Chief Financial Officer. We have posted a press release and detailed supplemental information for the September quarter results in the Investor section of the company's website. During today's call, we will refer to GAAP and non-GAAP financial measures. Reconciliations of the two are included in the earnings press release and Form 8-K posted on the website. For some non-GAAP outlook measures, reconciliations to GAAP measures are not provided because important items that may affect these measures are outside our control or cannot be reasonably predicted, and the corresponding GAAP reconciliation data cannot be provided without unreasonable effort.

Before we begin, please note that today's conference call contains forward-looking statements that reflect management's current views and assumptions based on information available as of today and should not be relied upon as of any future date. Actual results may differ materially from those contained in or implied by these forward-looking statements because they are subject to risks and uncertainties related to our business. For further information on the risks, uncertainties and other factors that could affect future business performance, please refer to today's press release and our filings with the SEC, including the most recent 10-K annual report, 10-Q quarterly report and supplemental information, all of which are available in the Investor section of our website.

After the prepared remarks, we will open the call for questions. To give as many analysts as possible an opportunity to participate, please limit your questions to one main question and one brief follow-up. I will now turn the call over to Dave.

William David Mosley (Chairman and Chief Executive Officer): Thank you, Shanye, and hello, everyone.

Fiscal year 2027 is off to an outstanding start. September quarter revenue grew more than 60% year over year, and non-GAAP earnings per share nearly tripled, reaching a record high of $7.68. We also achieved record gross margin and operating margin, fully reflecting the company's earnings power and the continued strong demand in the data storage market. Both the data center and edge IoT markets delivered double-digit sequential revenue growth, up 18% and 13%, respectively, reflecting continued demand and pricing advantages.

These trends support our expectation of continued strong sequential revenue growth and gross margin expansion for the full fiscal year 2027. Our confidence comes from an extremely strong demand environment—with visibility extending beyond 2030—and the growth opportunities presented by our technology roadmap driven by areal density improvements.

In the September quarter, we shipped a record 198 exabytes (EB) of nearline capacity to data center customers, and we expect a meaningful sequential step-up in the December quarter, supported by the continued ramp of Mozaic 4. As we phase in the new generation of Mozaic products and ship to a broader customer base, quarterly exabyte growth may fluctuate. At the same time, we expect the technology roadmap to support nearline exabyte supply growth at a mid-teens compound annual growth rate of about 25%.

Overall, we once again delivered an outstanding quarterly result, with record free cash flow of nearly $1.5 billion, driven by durable market demand, continued technological innovation and disciplined operational execution. In addition, we significantly strengthened the balance sheet, achieved our major debt reduction targets and regained an investment-grade rating.

With the above objectives largely achieved, we are shifting our strategic focus toward capital returns, primarily through share repurchases and supplemented by dividend distributions. This month, the board approved an increase in the quarterly dividend to $0.76 per share. Importantly, this capital allocation strategy reflects our confidence in the company's cash flow potential and the multi-year demand visibility afforded by customer agreements.

Strong demand continues to be driven by data center customers, who account for 90% of our shipped capacity. Within the data center business, cloud nearline products achieved their 12th consecutive quarter of revenue growth, and enterprise OEM revenue reached its second-highest quarterly level in a decade. Data growth is taking hold profoundly across applications, underpinned by the market's growing recognition of the value of data—value that extends far beyond its original use case.

In a recent conversation with Seagate, a leading hyperscale cloud service provider observed that its customers are continually discovering new ways to extract value from stored data, further reinforcing the incentive to retain data for the long term, a trend that AI innovation is amplifying. As AI applications expand from model training to inference and agentic applications, persistent data becomes increasingly important. These systems rely on massive historical data to make correct decisions and take effective actions, while continuously generating new output data that must be managed, retained and reused.

It is estimated that billions of AI agents will be deployed globally over the next decade, executing hundreds of billions of operations daily. At this scale, agents will continuously consume, generate and reuse data. We believe that future storage demand will increasingly be tied to this new data lifecycle and will compound further as physical AI applications become widespread. As the scale of persistent data expands, storage demand can extend far beyond the initial infrastructure buildout phase.

The positive demand dynamics described above align closely with the advantages of hard disk drives—HDDs provide a scalable, reliable and cost-effective foundation for data retention. Hyperscale cloud service providers have long recognized these advantages and continue to advance higher-capacity storage architectures. Our engineering teams work closely with leading cloud service providers to align product roadmaps with future data storage needs and to simplify the adoption of higher-capacity drives.

A recent example is Microsoft's certification of a joint Seagate and Broadcom solution that combines HAMR-based Mozaic drives (configured with SMR technology) with Broadcom's interconnect infrastructure. Microsoft is already deploying HAMR drives, and this certification validates the feasibility of SMR-enabled solutions in hyperscale environments, allowing customers to benefit from the additional capacity gains that SMR provides. However, due to the need for significant architectural and software changes, broad adoption of SMR on higher-capacity drives had previously been somewhat limited. This joint solution provides a replicable blueprint for implementing SMR storage on the HAMR-based Mozaic platform and unlocking additional capacity gains.

Beyond hyperscale cloud service providers and CSPs, demand is expanding to a broader base of enterprise OEM customers that manage increasingly large datasets. We are working more deeply and directly with many such customers and developing reference architectures that combine proven compute and storage hardware with customers' software of choice. These solutions offer a viable path to scaling persistent data capacity, improving storage economics and enhancing platform efficiency.

The demand environment continues to strengthen, extending customer planning horizons, which is also reflected in our existing supply agreements. The vast majority of our nearline exabyte supply has been allocated through long-term supply agreements through 2028, with some cloud customer agreements extending to 2030 and strategic planning discussions extending even further into the future. We are working closely with customers to meet their growing storage needs over this timeframe by executing the Mozaic product roadmap.

As we transition to HAMR-based Mozaic products, we are investing in additional tooling and technology to offset the impact of longer manufacturing cycles and maintain stable unit capacity. For Seagate, increasing capacity per disk is precisely the core path to driving exabyte growth. Our build-to-order contracts establish specific configuration and pricing terms for nearline shipments in 2027. Over the next few quarters, we expect to begin finalizing configuration and pricing terms with customers for exabyte supply already allocated for 2028.

Pricing continues to improve, reflecting the effectiveness of our execution under the value-based pricing framework as well as rising costs of externally sourced components. We expect the stronger demand environment reflected in customers' multi-year commitments to continue supporting this healthy pricing trend. Overall, these agreements provide customers with greater supply certainty while improving visibility for both parties, and they reflect customers' confidence in long-term demand growth and the increasingly important strategic role of hard disk storage in the modern data ecosystem.

Supporting this demand growth requires storage solutions that unify scale, efficiency and economics, and this is precisely the foundation of our technology strategy. As one major hyperscale cloud service provider put it, increasing storage density within the same data center footprint is the most cost-effective way to maximize bytes per square foot. Our HAMR-enabled roadmap is designed with this goal in mind. Increasing areal density is at the core of our strategy.

We are expanding hard drive capacity by increasing areal recording density rather than relying on higher hard drive unit volumes. We believe this is the most effective way to help customers address extreme data growth and retention needs, and it likewise underpins Seagate's profitable exabyte growth.

We are making solid progress on executing the milestones in our product roadmap. We continue to expect that HAMR will account for approximately 50% of nearline exabyte shipment run rate by the end of 2026, with Mozaic 4 accounting for about half of HAMR shipments. Mozaic 4 offers up to 44TB of capacity, is currently ramping at two leading CSP customers, and is expected to complete additional qualifications with multiple global CSP and enterprise OEM customers over the next few months.

Development of our third-generation product, Mozaic 5, is progressing well; it will offer more than 50TB of capacity and makes full use of our efficient 10-platter platform, and customer qualification shipments are expected to begin by the end of 2027.

With continued advances in photonics, we recently demonstrated 8TB per platter in the lab, further proving that HAMR technology and the Mozaic platform can meet customers' growing capacity needs, and reinforcing our conviction that increasing exabyte supply by raising areal recording density is the right long-term strategy for both customers and Seagate.

In summary, our results reflect both the durability of demand and the effectiveness of our strategy. The creation, retention and reuse of data are combining to drive demand for high-capacity storage. Based on the long-term visibility we have with our customers, we believe we are still in the early stages of a multi-year growth cycle. Our technology roadmap, disciplined supply management, value-based pricing strategy and the operating leverage in our business give us confidence to continue delivering strong profitability, cash generation and shareholder returns.

I want to especially thank our global teams for their outstanding execution in delivering a record-best quarter and a strong start to fiscal 2027, and also thank our customers, suppliers and shareholders for their continued trust and support. Now, I will hand the call over to Gianluca.

Gianluca Romano (Executive Vice President and Chief Financial Officer):

Thank you, Dave. Seagate delivered very strong results in the September quarter, with revenue and earnings per share both exceeding the high end of our guidance range and profitability records continuing to be set, ultimately delivering the highest free cash flow in our history.

September quarter revenue was $4.2 billion, up 17% sequentially and up 61% year over year. Non-GAAP gross margin was 57.8%, up 510 basis points sequentially. Non-GAAP operating margin rose 610 basis points sequentially to 50.7%. Non-GAAP earnings per share were $7.68, up 35% sequentially and up 194% year over year.

Continued strong data center demand drove the company's outstanding performance. In the September quarter, we shipped a total of 220EB, up 21% year over year, with data center accounting for 90% of the total. Data center revenue was $3.4 billion, up 18% sequentially and up 63% year over year, representing 81% of total revenue. Data center shipments were 198EB, up 24% year over year, accounting for 90% of the company's total exabytes.

As Dave mentioned, we are staging inventory for the Mozaic 4 product ahead of an expected customer qualification pace, and we expect capacity shipments to increase meaningfully sequentially in the December quarter. Global cloud customers account for the vast majority of data center revenue and exabyte demand, and this trend is expected to continue as Mozaic 4 ramps. At the same time, demand in the enterprise OEM data center market is also continuing to strengthen. As AI applications accelerate their shift toward inference and agentic workloads, customers are seeking scalable high-capacity storage solutions across hybrid cloud data center environments. In the September quarter, revenue from these markets grew for the sixth consecutive quarter, with double-digit growth both sequentially and year over year.

Alongside the data center business, the edge IoT market also delivered solid revenue growth, with revenue totaling $784 million, or 19% of total revenue, up 13% sequentially and up 52% year over year.

In the rest of the income statement, non-GAAP gross profit grew significantly to $2.4 billion, up 28% sequentially and more than double the $1.1 billion in the prior-year period. Non-GAAP gross margin expanded to 57.8%, up from 52.7% in the previous quarter, reflecting the effectiveness of pricing execution and the product mix improvement from the Mozaic 4 ramp, factors sufficient to offset cost pressures related to certain externally sourced components.

Looking ahead, we expect to continue benefiting from our value-based pricing strategy and product mix optimization to support sequential gross margin expansion in the remaining quarters of fiscal 2027.

Non-GAAP operating expenses were $300 million, or about 7% of revenue. The strong demand environment combined with disciplined expense control drove significant operating leverage, with non-GAAP operating income up 33% sequentially to $2.1 billion, or 50.7% of revenue.

In the September quarter, other income and expense totaled $38 million. Following the completion of debt reduction in early October, other income and expense is expected to decline further to approximately $25 million in the December quarter, benefiting from lower interest expense.

Non-GAAP net income grew to $1.8 billion, corresponding to non-GAAP earnings per share of $7.68, with income tax expense of $328 million and approximately 232 million diluted shares.

In terms of cash flow and balance sheet, September quarter operating cash flow was $1.7 billion, and capital expenditures were $211 million, or 5% of revenue. For fiscal 2027, we continue to expect capital expenditures to remain within our target range of 4% to 6% of revenue to support the ongoing transition to HAMR technology. The combination of high profitability and moderate capital expenditures generated $1.5 billion in free cash flow, up 32% sequentially and more than tripled year over year. We expect cash generation to continue improving throughout fiscal 2027, driven by sustained demand, operational efficiency gains, and capital expenditure discipline.

In the September quarter, we repaid $1.2 billion of debt, including the remaining convertible notes and approximately $1 billion of high-yield debt. At quarter end, total debt was approximately $2.4 billion, with a net leverage ratio of 0.2x. After the end of the September quarter, we repaid an additional $750 million of high-yield senior notes, reducing principal debt to approximately $1.6 billion. Based on these actions, we expect to achieve a net cash positive position by the end of this year.

We have achieved our goal of strengthening the balance sheet, and our focus is now shifting to returning more free cash flow to shareholders. In the September quarter, we returned $568 million to shareholders through dividends and share repurchases, approximately double the amount returned in the June quarter. We also raised our quarterly dividend by approximately 3% to $0.76 per share, reflecting our confidence in the sustainability of strong cash generation.

At the end of the September quarter, $4.4 billion remained available under our existing share repurchase authorization, and we expect to significantly increase share repurchases starting in 2027. At the end of the September quarter, cash and cash equivalents were $1.3 billion, and total liquidity including our revolving credit facility was $2.6 billion.

Turning to our December quarter outlook, we expect another quarter of strong sequential growth, supported by continued demand momentum, a significant step-up in exabyte shipments, and continued execution of our value-based pricing strategy.

We expect December quarter revenue of $4.8 billion, plus or minus $100 million, with the midpoint representing approximately 70% year-over-year growth. Non-GAAP operating expenses are expected to remain unchanged at approximately $300 million. Based on the midpoint of our revenue guidance, non-GAAP operating margin is expected to move toward the 55% range. We expect non-GAAP earnings per share of $9.20, plus or minus $0.20, based on a tax rate of approximately 16% and approximately 233 million non-GAAP diluted shares.

Our September quarter results and December quarter outlook together confirm our expectation that full-year revenue growth will significantly exceed fiscal 2026. Durable demand, continued penetration of the Mozaic family of products, and healthy operating leverage are together supporting continued revenue growth, margin expansion, and strong cash generation. Combined with our increasing focus on capital returns, we have strong confidence in continuing to enhance long-term shareholder value.

Our first question comes from CJ Muse of Cantor Fitzgerald. Please go ahead.

CJ Muse:

Okay, good afternoon, and thanks for taking my question.

My first question is about the slowdown in exabyte growth in the September quarter. I noticed that your inventory days rose from 83 to 97. Is this related to building inventory ahead of an acceleration in shipments in the December quarter? Also, considering the Mozaic ramp cadence, should we expect growth to remain above 30% in 2027, or will it return to the 25% compound growth target at some point?

William David Mosley:

CJ, thanks for your question. To recap: the June quarter had a fairly significant step-up, the September quarter was relatively flat, and the current December quarter will see another step-up. We are on this growth trajectory, and 25% is a very reasonable reference number. When driving product transitions, we have to plan far in advance, making sure we lock in the required products and arrival times with customers, and coordinate with all the other components they need to build data centers. Overall, we are very pleased with the progress, and we continue to push hard on areal density gains and product transition technology to achieve higher exabyte levels.

Gianluca Romano:

CJ, we have several customers that will likely complete qualification next quarter, so we are building inventory ahead of those orders and the volumes we can ship to them in the December quarter and beyond.

CJ Muse:

Okay. Gianluca, regarding the operating margin guidance on the slide, "moving toward the 55% range," should we model 55%, or are you implying something else?

Gianluca Romano:

I think 55% is a good reference. We are pointing to somewhere between 50% and 55%—a further improvement from the over 50% performance this quarter. As you can see, revenue continues to grow, gross margin continues to improve, and operating expenses remain stable, so operating margin is showing strong sequential improvement, and we are approaching the higher level indicated by our December quarter guidance. As we said on previous calls, we expect further improvement over the remainder of this fiscal year.

Our next question comes from Erik Woodring of Morgan Stanley. Please go ahead.

Erik Woodring:

Okay, thank you for taking the question. Pricing performance this quarter was very strong, and I was hoping you could elaborate further on the outlook for price per terabyte and the trend of cost declines per terabyte. Over the past four quarters, cost declined roughly 15% year over year, while this quarter it was only mid-single digits. Are there temporary factors related to the Mozaic transition? When will that metric reaccelerate? Thank you, I have one follow-up.

William David Mosley:

Thank you, Erik. That's a complicated question. On pricing, I have always believed that pricing is highly dependent on demand, and current demand is not only very strong this quarter, but from the perspective of the next two, three, or four quarters, customers are likewise continuing to ask us to increase exabyte supply. As a result, we have built good long-term partnerships with customers, enabling us to advance the product transition in an orderly manner and accelerate technology progress on the planned track, and I do not think that will change. In the past, we sometimes saw situations such as product replacements and temporary order cancellations, but now there are none at all—every bit of output we can produce beyond plan has already been booked in advance.

On cost, we have full control over the manufacturing efficiency of key technologies, which is the most important driver of cost. During platform transitions, the decline in cost per terabyte is most pronounced. But during the transition period, some initial costs—such as scrap rates—will rise somewhat, and this will not shake our determination to push the transition forward; we will continue working to bring these costs down. At present, the outlook for future transitions is even brighter than what I could have foreseen 90 days ago, and I am very optimistic about it.

Gianluca Romano:

Erik Woodring:

Okay, thank you very much. Going back to CJ's question, I just want to confirm the product staging situation for the September quarter—I want to confirm whether there are any yield issues, data center build delays, or other tail risks that need attention, or whether this is purely a slowdown in sequential exabyte growth caused by the product transition, rather than other concerning factors?

William David Mosley:

There are no issues at all. The large jump in the June quarter moderated somewhat in the September quarter, purely a matter of timing, and the December quarter will see another large jump, with exabytes continuing to grow as the product transition advances.

Our next question comes from Amit Daryanani of Evercore. Please go ahead.

Amit Daryanani:

Okay, good afternoon, thank you for taking the question.

My first question is: the company reiterated its framework of capital expenditures at 4% to 6% of revenue for fiscal 2027. Can this framework continue to support the long-term mid-20s exabyte growth rate beyond fiscal 2027? Especially considering that you mentioned the additional tooling investment needed to offset HAMR's longer manufacturing cycle. What would be a reasonable framework over the long term? When additional head or media capacity is needed, how does the company choose between building in-house and acquiring?

William David Mosley:

First, HAMR, this leading-edge technology, cannot be acquired through acquisition in any case; it must be developed in-house, and there is no doubt about that. The 4% to 6% capex model is entirely sufficient for us to continue growing as planned. In fact, the new equipment recently purchased is quite helpful in driving areal density improvements, because the capability of this equipment may exceed that of the older equipment we replaced, and this is one reason for optimism. We are also using some external legacy technologies on a case-by-case basis to help us transition some manufacturing processes to HAMR. I firmly believe that 25% is our exabyte growth target, and it can mainly be achieved through the areal density transition. The processing time for some components within the factory will be somewhat longer, so output plans need to be adjusted accordingly, but all of this can be done within the 4% to 6% capex window.

Amit Daryanani:

Understood, very helpful. As HAMR continues to ramp, especially as Mozaic 4 accounts for a growing share of exabytes, what would be a reasonable long-term rate of cost decline per terabyte?

Gianluca Romano:

As I said earlier, for the portion we produce in-house, costs continue to decline—upgrading from 3TB per platter to 4TB per platter has a very significant impact on reducing cost per terabyte. Of course, there is also cost pressure on externally sourced components, so it is necessary to distinguish two levels: first, cost declines driven by internal efficiency gains and technology progress; second, overall cost per terabyte, which is also affected by the external supply chain and the cost of externally sourced components. Cost declines have been good over the past few quarters, and narrowed slightly in the September quarter. I think different components need to be analyzed separately, because we source a wide variety of components externally. But over the longer term, technology remains the core driver of cost per terabyte, and continuously increasing terabytes per platter is precisely the right path for us to reduce cost per terabyte and improve profitability.

Our next question comes from Krish Sankar of TD Cowen. Please go ahead.

Krish Sankar:

Okay, thank you for the question. I'd like to follow up on the earlier question. From a macro perspective, by the end of the year about 50% of exabytes will use HAMR, which has a positive impact on gross margins; unlike competitors, your company is sticking with the 10-platter platform rather than moving to 12 or 14 platters, which in theory could reduce costs. In that case, why hasn't the cost decline been more pronounced? Also, would your company consider breaking through the 10-platter limit? Are there technical reasons not to do so?

William David Mosley:

Let me answer the last question first—there is no technical reason preventing us from going beyond 10 platters. I think we like this platform; we can get cost leverage from one product generation to the next without changing mechanical components or paying for new tooling. We know this platform inside and out and will continue to stick with it, but technically there is no obstacle to adding platters. From a qualification standpoint, sticking with the 10-platter platform is also simpler for customers—they don't have to take on new risks from changes in head and platter counts, and only need to focus on the transition of the technology itself. In addition, from one HAMR generation to the next, the cost increase is not significant, and the decline in cost per terabyte can roughly be calculated based on the platter capacity upgrade, for example from 4TB per platter to 5TB, and we are currently working very hard to advance 5TB.

Amit Daryanani:

Okay, a quick follow-up: I understand your company is maintaining a 4% to 6% capex intensity, but competitors are talking about capex reaching about 8% in the coming years, while a third vendor is talking about adding capacity in Japan. Does 4% to 6% still apply for the next few years? Is there a risk of market share erosion? Or is demand large enough and supply relatively insufficient, making this issue less important?

William David Mosley:

I won't speculate on competitors' plans; as for ourselves, 4% to 6% is completely fine. I have great respect for all our peers in the industry, but their technology approaches may differ from ours, and that difference will gradually become apparent over the next few years. From our own perspective, demand remains very strong; from a supply perspective, we continue to believe that bringing meaningful HDD capacity to market is an extremely complex process requiring substantial R&D and technology investment, with intricate supply chain management—it is by no means as simple as installing a few pieces of equipment. As mentioned in the prepared remarks, nearly all of our nearline exabyte supply has been allocated through 2028, and longer-term strategic planning discussions are also underway. We have full confidence in our customers' long-term demand and believe the supply-demand balance for our products will remain relatively tight during this period. Therefore, we will focus only on our own technology roadmap and work to launch and mass-produce the products our customers need on time, without worrying too much about other aspects.

Our next question comes from Asiya Merchant of Citi. Please go ahead.

Asiya Merchant:

Okay, thank you for taking the question. You mentioned the contribution of KV cache adoption to demand; how do you view its impact on unconstrained demand and the resulting boost to exabyte demand? Thank you.

William David Mosley:

Thank you. Indeed, we are observing a trend of a large number of new technologies rapidly increasing the value of data. The growth of the data sphere itself is very rapid—video on the internet alone, or video analytics in factories and other scenarios, is growing very fast; and AI further amplifies this dynamic. The ability to move data down from the application layer to the storage layer and then promote data from the storage layer back to the application layer has now reached an unprecedented level of system efficiency, thanks to software-level optimization and computing technology that is much faster than before. From an architectural perspective, KV cache embedded between these two layers further accelerates this dynamic. I think we have never lived in an era with such high system efficiency above the storage layer, and this will certainly bring us a great deal of future demand.

Gianluca Romano:

Yes, we see storage demand growing rapidly at all levels in the cloud, even slightly faster than we previously expected. As just discussed, our demand is getting stronger, and the supply-demand gap may still be widening further. But what we are truly focused on is the technology transition; we will continue to ramp 40TB drives over the next several quarters, and that is our core path to addressing demand.

Asiya Merchant:

William David Mosley:

I would say it is not yet directly reflected, but we are very excited about it. We have had long-term communication with autonomous vehicle companies and participants in the data circulation space. What is interesting to us about physical AI is not only the data storage demand for training, but also the data storage demand to ensure the correctness of decisions, and that kind of storage may be closer to where the data is actually generated, that is, at the edge. Therefore, some new products may come to the fore in the future. It is still at a very early stage, but I think there are many innovative companies actively exploring value-added solutions at the edge, and we are watching closely. I think this could become another incremental driver of storage demand that we have not yet fully considered.

Our next question comes from Mark Newman of Bernstein. Please go ahead.

Mark Newman:

Thank you for taking the question, and congratulations on the quarter's results.

I'd like to dig deeper into the impact of price and cost on gross margin. Gross margin improved significantly this quarter, and that was reflected in the guidance as well. Looking at the data, the per-terabyte price increase seems to have accelerated significantly from mid-single digits in the prior few quarters to roughly mid-teens percent this quarter; and on the cost side, you mentioned some component cost increases, but it looks like it may have been up sequentially. Besides component costs, are there product mix or other factors that may have boosted pricing or had a temporary impact on costs this quarter? I have one follow-up.

William David Mosley:

Thanks Mark. First, I'm very pleased with the final profit metrics—both operating profit and free cash flow performed very well. At the gross margin level, there are indeed some dynamics related to product transitions within the quarter. I mentioned scrap rates earlier—when pushing hard on product transitions, there will inevitably be some scrap cost, as well as what I call "manufacturing loss," because yields during the transition may fall short of expectations, and it usually takes one to two quarters to bring them back to the yield levels of the old products, during which some capacity is lost. From a pricing perspective, the fundamental driver of pricing dynamics is long-term demand rather than single-quarter demand. We are having good, in-depth discussions with customers on how to phase the technology transition to ensure that both our systems and theirs are ready to take on higher-capacity drives. We will be very careful about timing—not building inventory too early, but striving for precise synchronization. The supply chain is very large, and to meet customers' current, near-term, and future needs, we must precisely coordinate inventory levels, and we are doing everything we can on that front—all of which is reflected in the pricing and cost dynamics you mentioned.

Gianluca Romano:

Yes, pricing and cost dynamics are always somewhat correlated. When we have visibility into higher externally sourced costs, we try to pass them through to customers via pricing, although sometimes due to contractual constraints the timing of the pass-through is not immediate, but over time that extra cost is passed through to customers. That is also one of the reasons why the current magnitude of price increases is slightly higher than in the past—it includes coverage of the extra costs. As I said earlier, there is nothing unusual on the internal production side; magnetic media costs are declining as expected; the extra costs come from externally sourced components. The reason gross margin improvement is accelerating is precisely that price increases are more than covering cost increases. So I think we are handling the rise in externally sourced component costs in the right way, and it is actually accelerating the improvement in the company's profitability.

Mark Newman:

Thank you very much. A follow-up on pricing: given how large the recent price increases have been, should we expect per-terabyte prices to continue growing sequentially at this mid-teens percent rate, or is this more of a one-time thing? I understand strong pricing will continue, but the number just printed is indeed very strong, and I want to understand whether this pace is sustainable.

William David Mosley:

As I said on the supply side, as new contracts continue to be renewed, there will be periodic price increases. I mentioned in my prepared remarks that we are seeing no demand destruction at all—if anything, we are seeing more demand creation—quarter after quarter, we forecast the trajectory for the next three to four quarters, then negotiate with customers over the exabytes allocated to them, lock in configurations, and then lock in pricing, and at present I don't see any major change in this trend.

Gianluca Romano:

Of course, every quarter is different, and all of this is included in our guidance—you can see strong revenue upside, part of which comes from exabyte growth and part from pricing, and I think you can model another gross margin improvement accordingly, and at this stage it is mainly pricing-driven, because we discussed some offset on the cost side from externally sourced component costs.

Our next question comes from Wamsi Mohan of Bank of America. Please go ahead.

Wamsi Mohan:

Thank you. I'd also like to learn more about the pricing issue. Could you specify what proportion of the price increases achieved this quarter came from contractually locked-in prices versus floating prices? And what are the respective shares for hyperscalers, OEMs, and the edge market? Or by capacity tier? Please provide any incremental information, because the magnitude of pricing this quarter is truly notable. I have one follow-up.

William David Mosley:

I think most of the price increase comes from rolling contract renewals rather than from additional deliveries of more exabytes. We run the business very steadily and in an orderly way at the operational level, and pricing upside usually shows up two to three quarters later, because we work to improve factory efficiency, squeeze out a bit of extra output, and then see who needs that output.

Gianluca Romano:

We have not changed our pricing strategy, but as I said earlier, when we have visibility into higher externally sourced costs, we must pass them through and incorporate them into new pricing. So when negotiating new contracts, we also take into account the current state of external supply chain costs and adjust pricing accordingly. But apart from that, the strategy is exactly the same as the framework we have used for the past three years.

Wamsi Mohan:

Okay, a follow-up: on exabyte growth, I understand there will be another meaningful step-up next quarter. For the full fiscal year, should we expect exabyte growth to improve sequentially as the product transition issues gradually fade and, as you still say, supply remains significantly below demand?

William David Mosley:

I don't think there are any issues with the product transition; it is all within plan. Because wafer processing cycles are long, we have a very precise forecast of exabyte output. We can indeed expect continued ramping of Mozaic 4, and after that we will begin pushing Mozaic 5; the 25% growth target makes me very satisfied, and we will keep doing our best to drive it forward.

The next question comes from Ben Reitzes of Melius. Please go ahead.

Ben Reitzes:

Thank you, Dave and Gianluca. I want to talk about the pace of buybacks and cash returns—you said you will step up buybacks starting in the March quarter, and from what I understand the next debt maturity is June 2029. On that estimate, free cash flow at that point starts at roughly $2 billion, so how large will the buyback be? Will the March quarter use 100% of free cash flow for buybacks? Can that pace be sustained before that debt is paid? Roughly what percentage of free cash flow will be returned? Thank you, I have a follow-up.

William David Mosley:

Thank you, Ben. We are pleased to have completed the debt-handling phase and to be back on our own track. Our model is 75% of free cash flow returned to shareholders, and we should be able to return to that ratio over time; that is exciting. Beyond that, it is opportunistic—when we believe there are no better uses, we will look at free cash flow above the 75% level.

Gianluca Romano:

Yes, exactly. Earlier this month we just completed the final debt repayment, and this quarter we are also actively buying back stock in the market. The reason we say we will step up starting next quarter is that there will be no other debt activity planned at that point, and you will see the share repurchase program clearly accelerate starting in the March quarter.

Ben Reitzes:

Okay, thank you. Your customer base is mainly large hyperscalers; have you heard anything about power or siting delays, or to some extent does your shipment pace depend on when customers get chips or resolve power and siting issues? How do you manage that risk, and how would you describe the current situation?

William David Mosley:

Ben, that is a very interesting question. The answer is that we have not encountered problems in this area, but we are very careful not to let our products pile up anywhere. So it is important not to overproduce and to precisely meet the demand we judge. Demand for exabytes will continue to strengthen—more exabytes mean more efficient data centers, and customers know this and want it. Overall, the storage layer uses little power, takes up little space, and is not costly compared with the compute layer; all of this can be calculated precisely, but we simply do not want product flowing into a channel where other supporting components are not yet in place. We want to allocate as evenly as possible, and I think we have done a good job—not only giving customers predictability for next quarter but also a clear plan for years ahead, so they know what they will need to buy and what their data center capacity will be, while also clarifying their data needs; we work to align all these timelines.

The next question comes from Karl Ackerman of BNP Paribas. Please go ahead.

Karl Ackerman:

Thank you. Hyperscaler demand is clearly very strong, and you also mentioned near-record sales for on-premises enterprise. I understand CPU vendors say traditional server demand accounts for about 25% of the agentic CPU opportunity. Have you already seen this demand? As these CPU racks roll out over the next 12 months in hyperscale cloud and on-premises deployments, how is the penetration of high-capacity HDDs changing in the wave of agentic CPU demand? Thank you.

William David Mosley:

That is an interesting question. Typically, enterprise and OEM customers lag considerably in adopting the highest-capacity products, but that lag is narrowing—the storage layer has higher data density, and the capacities being adopted are larger than ever. One implication behind your question may be: is this purely simple on-premises deployment (perhaps only 1PB scale), or does it involve customers served through these channels with greater scaling potential? I think both cases exist, and there is demand for both types of products—both pure small on-premises enterprise scenarios and larger-scale scenarios serving sovereign clouds and other deployments through these channels.

The next question comes from Joe Quatrochi of Wells Fargo. Please go ahead.

Joe Quatrochi:

Thanks for taking the question.

Could you quantify the impact of externally sourced components on this quarter's gross margin? Has that impact been fully offset and reflected in the December quarter guidance?

Gianluca Romano:

This is already included in the December quarter guidance. As we said before, the cost decline on our internally produced portions remains strong; while the cost of externally sourced components is clearly higher than a year ago, which partially offsets the internal cost decline. But all of this is already included in the guidance, and the guidance shows strong improvement in revenue, gross margin, operating margin, and earnings per share. So the trend of continuous improvement is consistent with the past, and we have done our utmost to manage the additional external sourcing costs while still achieving strong improvement.

Joe Quatrochi:

One follow-up: sorry to follow up again, I'd like to understand how much of the price-per-terabyte increase this quarter comes from the mix effect of a higher proportion of HAMR products, and how much comes from price increases on like-for-like products?

William David Mosley:

If the products are aimed at hyperscalers, they are constantly pursuing new products at higher capacity tiers, which are more cost-effective for their data centers' total cost of ownership, and we benefit from that. In terms of price per terabyte, this is reflected fairly evenly across the overall product mix. Some hyperscaler contracts are like rolling four-quarter frameworks, while others have slightly shorter cycles. I think it is relatively difficult to break this down by different markets, but we do prioritize supply for the highest capacity tiers to ensure these large blocks of demand remain predictable, thereby making factory production more stable and efficient.

Operator:

The next question comes from Joseph Cardoso of JPMorgan. Please go ahead.

Joseph Cardoso:

Good afternoon, thanks for the question.

You previously hinted at the target proportion for HAMR by the end of fiscal 2027. Is there any update to your latest thinking? On the path to achieving that target, are there customer qualification cycles, manufacturing cycles, or other variables to watch? Also, one follow-up, thank you.

William David Mosley:

Thank you, Joseph. All progress on 4TB per platter is on plan—we are pleased with the qualification progress, and the initial volumes shipped to customers are performing satisfactorily in the field; everything is on track. On 5TB per platter, we are actually more optimistic than we were last quarter and believe we can move this transition forward faster than originally planned; we will discuss this in detail when we get to fiscal 2028. We will push as aggressively as possible because this is another important step up. I also see 5TB per platter extending fairly quickly to 6TB per platter; I am very bullish on this platform, technology development is progressing smoothly, I am very optimistic, and we will continue to push full speed ahead.

Gianluca Romano:

There is no change to the nearline exabyte share targets for the end of 2026 and fiscal 2027 that we discussed in previous earnings calls.

Joseph Cardoso:

Understood, thank you. I also want to follow up on the point mentioned in the prepared remarks about agreements extending to 2030—could you say how the terms of the 2030 agreements differ or change from the nearer-term 2028 agreements? From the perspective of locked-in exabyte volumes and pricing, how do these agreements work? And how do they affect your capacity planning? Thank you.

Gianluca Romano:

Our process has not changed: we provide customers with exabyte growth forecasts, lock in the configurations we will produce in our factories roughly when entering the 12-month window, and then lock in pricing—this is what we call our build-to-order process. Over time, if demand remains strong, some contracts may be renewed at higher prices, which is good; if customers do not pull volume as planned, we can detect that quickly and adjust in time, but at present we see no sign of that at all.

I think we are in a multi-year data growth cycle, for a simple reason—looking back five years, quarterly exabyte shipments of data storage products were only about half of what they are now, followed by a significant downturn, and the world is making up for lost time, with data growth everywhere and extremely rapid. I think the next five years will be very strong from this perspective, and as various accelerated applications emerge, the value of the data itself is also rising substantially, which I am very excited about. Customers know what scale of capacity they are planning and preparing to install, and we will move forward together.

The Q&A session is now over. I will now hand the meeting over to Dave Mosley for closing remarks.

William David Mosley (Chairman and Chief Executive Officer):

Thank you, Gary, and thank you all again for joining. We enter fiscal 2027 with strong momentum, and we believe mass-capacity storage is entering a multi-year growth cycle. The strategy we are executing positions Seagate to capture this opportunity—through continuous technological innovation and disciplined operational execution, with relentless focus on delivering profitable growth and value for our customers and shareholders. Thank you, and see you next quarter.

Operator:

This concludes the conference call. Thank you for participating in today's presentation; you may now disconnect. Risk Disclosure and Disclaimer

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