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Seagate Technology Q1 FY2026 earnings conference call

Key Takeaways (AI-Generated)

Financial Performance

- Revenue grew 21% year-over-year to $2.63 billion, up 8% sequentially

- Non-GAAP gross margin reached company record 40.1%, up 220 basis points sequentially

- Non-GAAP operating margin expanded to 29%, up 280 basis points sequentially

- Non-GAAP EPS of $2.61 exceeded high end of guidance range

Business Highlights

- Achieved 5 global CSPs qualified on Mosaic 3+ TB products up to 36TB

- Shipped over 1 million Mosaic drives in September quarter with strong performance

- Started qualification with second major CSP on Mosaic 4+ TB platform up to 44TB

- Production committed under build-to-order contracts through calendar 2026 with visibility through 2027

Financial Guidance

- December quarter revenue expected $2.7 billion plus or minus $100 million (16% year-over-year)

- Non-GAAP operating expenses expected flat at approximately $290 million

- Non-GAAP operating margin expected around 30%

- Non-GAAP EPS expected $2.75 plus or minus $0.20

Opportunities

- AI inferencing driving explosive unstructured data growth with 50-fold token consumption increase

- Advancing aerial density roadmap to 10 terabytes per disk using silicon photonics

- Higher capacity Hammer products improving cost per TB and customer TCO

- AI-generated video content creating massive storage demand across platforms

Full Transcript (AI-Generated)

Operator

Welcome to the Seagate. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question, you may press * then one on your telephone keypad. To withdraw your question, please press * then two. Please note this event is being recorded. I would now like to turn the conference over to Shaney Hudson, Senior Vice President, Investor Relations. Please go ahead.

Shaney Hudson

Thank you. Hello everyone and welcome to today's call. Joining me are Dave Mosley, Seagate's Chair and Chief Executive Officer and John Luca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our September quarter results from 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 in our Form 8K.

We've not reconciled certain non GAAP outlook measures because material items that may impact these measures are out of our control and or cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd 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.

Actual results may differ materially from those contained in or implied by these forward-looking statements as they're subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10K and quarterly report on Form 10Q, as well as the supplemental information, all of which may be found on the Investors section of our website.

Following our prepared remarks, we'll 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 re entering the queue. With that, I'll hand the call over to Dave.

Dave Mosley

Thanks, Shaney and hello everyone. Seagate 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 Hammer technology in a strengthening demand environment for high capacity hard drives. Demand strength was led by global cloud service providers and we also saw meaningful sequential revenue growth from enterprise customers.

In the September quarter. The data center end market, which is comprised of nearline sales in the cloud, enterprise and via customers represented 80% of overall revenue. Amid this improving demand backdrop, our high capacity nearline production is largely committed under build to order contracts through calendar 2026. Additionally, longer term agreements that we have with our global data center customers provide clear visibility through calendar 2027, reinforcing our view that these favorable demand conditions will persist.

We remain focused on executing our hammer based product road map to support our customers growing exabyte needs and continue working with them to transition to higher capacity drives. There is no question that AI is reshaping hard drive demand by elevating the economic value of data and data storage. This is evident by the growing demand for our high capacity and nearline drives as customers continue to ramp investments in AI applications.

AI inferencing is set to inflect and scale rapidly, further increasing data's value. Inferencing consumes and generates large volumes of data, which is then stored, monitored, validated and reintegrated into an infinite training loop. We are already seeing the positive impact of this trend as global CSPS deploy large scale inferencing applications that rely on multimodal. Input such as text, audio and video.

Using monthly token consumption as a proxy for inferencing adoption, one major hyperscaler reported A50 fold increase in the span of a year. This explosive growth is driving a sharp increase in unstructured data generation that creates demand for hard drive storage. Video content is a major contributor of unstructured data and is driving considerable demand for hard drives today.

From social media platforms to content delivery networks and online marketing, AI generated videos promised to further fuel demand growth. There are already numerous text to video tools that democratize creativity by letting anyone generate professional quality videos from text, images or sketches. We see this trend already taking hold. For example, Google reports over 275,000,000 videos were generated on its Bo platform within the first five months, with a one minute AI video being up to 20,000 times larger than a 1000 word text file. The data storage implications are clear.

The rapid adoption and growing capability of these tools are already having a positive impact on the demand for storage. Beyond the application space, we've discussed new storage use cases from emerging trends around hybrid cloud environments that enhance data security and compliance with data sovereignty regulations. Recently, CA partnered with a global CSP to develop a sovereign cloud solution for managing massive volumes of sensitive telemetry and sensor data collected from a fleet of autonomous vehicles.

These type of data sets are subject to strict requirements and stipulate such data must be processed, stored and managed locally. As in any other data center. Hard drives provide the ideal solution by meeting customer requirements for throughput, durability and cost efficient long term data retention. As data generation explodes and new use cases emerge, Seagate is answering the call with a clear long term road map to capture demand.

Momentum continues to build for our hammer based Mosaic platforms and we achieved several important milestones in the quarter. Consistent with what we discussed during our analyst event, we now have 5 global CSPS qualified on Mosaic 3 plus TB per disk products, which can deliver capacities up to 36 terabytes per drive. We remain on track to qualify the remaining 3 global CSPS within the first half of calendar 2026.

Additionally, we shipped over 1,000,000 Mosaic drives in the September quarter. These products are performing well in live production environments and we are on pace to achieve 50% exabyte crossover on nearline hammer drives in the second-half of calendar 2026. And we started qualification with a second major CSP on the Mosaic 4 plus TB per disk platform with initial volume ramp starting in the first half of next calendar year. This platform will offer capacities of up to 44 terabytes.

Advancing aerial density is a key competitive advantage not just for Seagate, but for the hard drive industry overall. We are leveraging our manufacturing expertise and advancements in technologies, including silicon photonics to pave the path to 10 terabytes per disk. Our aerial density road map delivers a superior and sustainable TCO advantage for hard drives compared to alternative technologies well into the future.

Customers clearly see the value of transitioning to higher capacity hammer products as the most efficient way to support their rapidly expanding data storage needs in an AI driven world. Wrapping up, the Seagate team continues to execute at an exceptional level. We are delivering on our target financial framework supported by a structurally improved business and a strong sustainable demand environment.

We are advancing our hammer LED technology road map which creates significant value for our customers and positions Seagate for long term success. With the strength of our technology road map and the transformative impact of AI, we believe the best years are still ahead of us. I am proud of how our teams are rising to meet the opportunities ahead as we remain focused on delivering profitable revenue growth and expanding cash flow generation in fiscal 26 and beyond.

I'd like to thank our employees, supply partners and customers for their many contributions to our performance and to Seagate's ongoing success. Let me now turn the call over to John Luca.

John Luca Romano

Thank you, Dave. Our September quarter performance demonstrates strong operational execution and underscores the enhanced structural economics of our business model. We delivered revenue of 2.63 billion, up 8% sequentially and up 21% year over year. We achieve a record non GAAP gross margin of 40.1%, up 220 basis points sequentially and we expanded non GAAP operating margin by 280 basis points to 29% sequentially.

Our resulting non GAAP. EPS was $2.61, exceeding the high end. Of our guided range, we have continued to execute our technology road map to support ongoing demand momentum for our higher capacity products. In September quarter we shipped 182 exabytes, up 32% year over year with the vast majority of VET volume delivered to global data center customers.

As we shared last quarter, we will be discussing the business across two key markets. Data center which is comprised of nearline products and system that are sold into cloud, enterprise and via customers and edge IoT which includes consumer and client centric markets along with network attached storage. In the September quarter, data center revenue. Presented 80% of our total revenue at $2.1 billion, up 13% sequentially and 34% year on year.

Demand from global cloud customers continue to grow and we also saw a notable improvement in the enterprise OEM markets. We project these positive trends to continue with cloud growth expected to outpace enterprise demand. Whether data is stored in public cloud, private cloud, or on premises, the shift from AI model training to inferencing is driving the need for large capacity hard drive storage.

This includes everything from saving checkpoints to maintain model accuracy and integrity to storing the vast data sets required for effective inference results. In the September quarter, we shipped 159 exabyte into data center customers, up from 137 exabytes in the prior. Cloud exabytes demand increased for the 9th consecutive quarter, resulting in close to 80% of nearline volume on drive capacity at or above 24 terabytes as customers continue to mix up to higher capacity drives.

Over the past year, average nearline Dr. capacity have increased by 26%, which is a primary contributor to our exabyte volume growth. Amid the tight supply condition. We are partnering closely with data center customers to support and where possible accelerate their qualification timeline on our high capacity Mosaic products.

As Dave highlighted earlier, a majority of the largest cloud customers in the world are now qualified on our hammer based mosaic drives and we are continuing to ramp these products to support customer demand. The strong data center growth that I just described more than offset lower sequential sales in the edge IoT market, which made-up the remaining 20% of revenue at $515 million. We're expecting some seasonal improvement in Siot revenue in the December 4th. From both VIH and consumer products.

Moving on to the rest of the income statement, non GAAP gross profit increased to 1.1 billion, up 14% quarter over quarter and 40.6% compared with the prior year. We are spending. GAAP gross margin to 40.1%, which represent an increment. Margin of nearly 70%. This margin growth reflects the benefit of increased adoption of our latest generation products and ongoing execution of our pricing strategy.

Non GAAP operating expenses were $291,000,000, up 2% quarter over quarter and in line with our expectations. The combination of strong top line growth and significant financial leverage drove a 19% improvement in operating profit to $763 million. Other income and expense we're $74,000,000 and we are currently projecting OINE to be essentially flat. In the December quarter, we grew non GAAP net income to $583,000,000 with corresponding non GAAP EPS of $2.61 per share based on tax expenses of $106 million and the diluted Share Account of approximately 223 million shares, including the net impact of our 2028 convertible notes of approximately 7 million shares.

Turning now to cash flow and the balance sheet, we invested $105,000,000 in capital expenditures for the September quarter or roughly 4% of revenue for fiscal 20. We anticipate capital expenditures to be inside our target range. Of four to 6% of revenue while we continue maintaining capital discipline, free cash flow generation was flat quarter over quarter at $427,000,000, including the substantial variable compensation payout we discussed on our July earnings call.

Looking ahead, we expect free cash flow generation to expand in the December quarter. We returned $153,000,000 to shareholders through the. Dividend and as Dave noted earlier, we are increasing our quarterly dividend by approximately 3% to $0.74 per share. We deployed $29,000,000 to repurchase shares of our common stock at an average price of $187.00 per share.

We will continue to optimistically repurchase shares and anticipate share repurchase activities to vary from quarter to quarter. We remain committed to returning at least 75% of free cash flow to shareholders over time. Cash and cash equivalents increased 25% sequentially to close the September quarter with ample liquidity of $2.4 billion, including our undrawn revolving credit facility of $1.3 billion.

We exited the quarter with gross debt of approximately $5 billion and net leverage ratio of 1.5 times based on Adjusted EBITDA of $831 million for the September quarter, up 19% quarter over quarter and up 67% year on year. We are pleased that our strong execution is being recognized with S&P upgrading our credit rating earlier this month.

Looking ahead, we expect net leverage ratio will continue to trend lower as profitability increases in the coming quarters. Additionally, we're exploring opportunities to further reduce debt, supporting the positive leverage ratio trajectory. Turning now to the December quarter outlook, the demand environment remains strong, particularly among global cloud data centers.

We expect to increase revenue and expand margins as these customers continue to shift to our next generation storage solutions to support their increasing demand. We expect December quarter revenue to be in a range of two. Point $7 billion, plus Romano's $100 million, which? Represent a 16% year over year improvement as a midpoint.

Non GAAP operating expenses are expected to remain relatively flat. At approximately $290 million, based on the midpoint of our revenue guidance, non GAAP operating margin is expected to. To around 30% from GAAP EPS. Is expected to be $2.75 plus or. $0.20 with a tax rate of about 16% and. GAAP diluted share count of 127,000,000 shares, including estimated dilution from our 2028 convertible nodes. Of 10 million shares as demonstrated by our.

September quarter results. Seagate is delivering on our financial commitments reinforcing our track record of operational execution. Our performance is undertinned by a strong further road map that offer enterprise exabyte scale storage solutions, enabling them to maximize the potential of their data. We strength position Seagate to drive meaningful value for both customers and shareholders. Operator, let's open the call up for questions.

Operator

We will now begin the question and answer session. To ask a question, you may press * then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then two. In the interest of time, we ask that you limit yourself to one question. If you have further questions, you may re enter the question queue. Once again that was star then one to ask a question. At this time we will pause momentarily to assemble our roster. Our first question today is from Mark Newman with Bernstein. Please go ahead.

Mark Newman

All right, thanks very much taking the question and Congrats on a great quarter. The question was really if you look at you commented at the beginning at the strong orders and seems like you have order backlog through to I think you mentioned through to 2027 and the supply seems to be quite tight in the market. I just wonder if there is any plans to add capacity, if there's any specific supply chain bottlenecks that may alleviate over time.

You know, obviously there's pros and cons to that. So just just just like to see how you're thinking about the whole supply demand balance and if you're adding any capacity that would be great if you could comment on that. And then and then a follow up on Hammer mix. Congrats on the 5th Hyperscaler being qualified. Solid execution on Hammer so far. I just wondered what you're hearing from customers so far in terms of adoption for Hammer. Is there any any upside or downside to the previous projections he provided for Hammer roll out going forwards? Thanks very much.

Dave Mosley

Thanks. Mark, your two questions kind of go hand in glove. What I would say is that our strategy for adding capacity if you will is to go through product transitions. We're not really adding unit capacity through some of these product transitions. We actually lose a little bit capacity because the the process content is a little higher as we as we go through, but we add exabyte capacity.

And to your question about Hammer, a lot of the reason that customers are engaging with us on these long term agreements is because we have visibility into higher and higher capacity points. So the demand that that most of the hyperscalers certainly are feeling is for more exabytes, more efficient exabytes in their data center allows their space and power and all their other metrics to get the best return. So PCO, if you will, and that's what we're really trying to answer the call for.

We're very focused on going through the product transitions, getting our yields up on the product transitions and then ultimately transitioning to the point where we get 40s and 50s and so on and add exabyte capacity that way.

Mark Newman

Any update on the ammo rollout side?

Dave Mosley

Nothing more than what we said in the script. I think you know, the qualification you you made reference to, you know, the, the ramp continues on. And then part of this is our is that predictability of those transitions that we're going through. We we have to make sure we're staged for that so that we give the customers what they need.

John Luca Romano

Yeah, we are ready to have achieve another call during the quarter. So now we have 5 customers qualified on five big customers, cloud customers qualified on Hammer. Of course, we see they're contributing to our delivery in the quarter and how we guided December quarter. So we are achieving those level of revenue and profitability a little bit faster than what we were thinking. And of course, this is related to the transition of the mix to other capacity drives, mainly to Mr.

Mark Newman

Thanks very much. Appreciate it.

Dave Mosley

Thanks, Mark.

Operator

The next question is from Eric Woodring with Morgan Stanley. Please go ahead.

Eric Woodring

Great, thank you guys for taking my question and and Congrats on your results tonight. John Luca, you know since you're my Analyst Day, you've you've reported two quarters where your incremental margins have been, you know 60 to 70%. Is it fair to say that, you know, in the new demand environment that we're in and and the need for higher capacity drives, we should be thinking about your incremental margins just being higher, you know, consistently higher than that 50% incremental margin you outlined at your Analyst day?

Or why would we not see these level of incremental margins sustained? I realize not literally every quarter, but but generally speaking, why would we not see 60 to 70% incremental margins sustained from here? Thank you.

John Luca Romano

Thank you, Eric. Well, you're right. No, we are executing a little bit better than what we were expecting. And as I said before, which is mainly due to the move to better mix in term of profitability, not every quarter is the same. So of course now that we are qualifying more customer and moving more customers to the Emerald drives, we have a little bit of a higher support in term of profitability.

I'll say no, this will be different every quarter. Even the pricing strategy that we have always very consistent, but not every quarter we have the same number of new negotiations going on. So it's not it's not easy to estimate exactly what will be the profitability and the mix of a specific quarter. I think in the short term, we are delivering very good results. Longer term, I think the model that we presented as the Analyst Day is a is a strong model, but you're writing the short term, we are doing it a bit better and you're seeing how we got in December. It basically implies a higher margin than the 50% incremental from from September.

Operator

The next question is from Jim Schneider with Goldman Sachs. Please go ahead.

Jim Schneider

Good evening. Thanks for taking my question. I was wondering if you can maybe address the level of cost reduction you expect to achieve on a blended basis as we look out into calendar 2026. Is there anything that would kind of prevent you from achieving that kind of mid teens cost down on a blended basis even as you ramp hammer more aggressively? Could that actually be better than that or is there a reason it would be worse than that?

And then just to clarify the the prior statement you made on not adding unit capacity, is there any kind of benefit you get in terms of sort of dual capacity tracking hammer versus conventional technologies that would add a little bit of unit capacity into the overall mix or is that just an overall dilutive event to overall units? Thank you.

Dave Mosley

I'll take the second part first and then I'll let John Lucas answer the cost question. So the way I think about it is, and I think I understood your question this way, there's some of our PMR technologies which are in high volume. And as we transition to Hammer and the new, the newer products, 30-40 terabytes of BMI, then we're going to have to pivot pretty substantially.

You know, we don't really think about it as going back and building more of the PMR technology. We think about it as freeing up the PMR technology that ultimately go through the pivot. And that's, that's how we're going to add exabyte capacity. As far as unit capacity that a lot of that comes down to customers that are asking or qualified and what we've planned with them. So those plans are taking a long time to develop. And, and but John Lucas said earlier, if we get any upside, marginal upside, that's because we're pulling in the a little bit. So you want to answer the question on cost?

John Luca Romano

Yeah, on, on the cost, of course, we don't guide cost for calendar 26. I would say the the good improvement in our cost per TB is coming from the. Position to wire capacity drives. So the mix is very important and every quarter is different. I would say you will see more and more transition to AMER. We have two customers that are qualifying 40 terabyte drive that will for sure will be a good boost to our reduction of cost per TB during calendar 26.

Jim Schneider

Thank you.

Operator

Thank you. The next question is from Asia Merchant with Citi. Please go ahead.

Asia Merchant

Great. Good evening. Thank you for taking my question. Give this commentary early about inference demand. If you could talk a little bit about the visibility of that demand, what gives you? Confidence that you know this one continues to grow maybe in terms of applications that you're seeing and that's kind of giving you the confidence of demand through. Year 27 and how should we think about seasonality here? Typically more. You know, does have a seasonal drop. How should we think about that given AI inferencing demand is pretty strong here? Thank you.

Dave Mosley

Yes, yes, it's actually very interesting for all of us to watch. You know, most of what I think has driven our demand over the last couple of years is this move to video, where short form or long form video, like over 80% of the Internet traffic right now is on is, is video content. And there's just literally 10s to hundreds of millions of videos being uploaded every day.

I think exactly to your question, the more people can generate access those videos via inferencing, the faster that happens, the better it probably is for our storage. And so do we see, you know, how is that going to progress in the next nine months or 12 months? It's a little hard to, to, to tell, but you know, we're pretty, as we see new applications coming online that allow people to generate the video videos, the videos are longer, longer in format, they're richer in content, they've got more embedded videos, so on and so forth. But it's, but it is really hard to predict and I think our customers were struggling with this a little bit as well, which is one of the reasons the demand is strong.

John Luca Romano

Yeah, on the on the season 19 March quarter of course is a bit early to discuss about March we just got in December, I would say. Considering that data center revenue is 80% of our. Revenue, the impact of seasonality is probably lower than what you're seeing in the past. I think every year will be a little bit lower. But of course, we are not guiding March, but we expect a good quarter.

Asia Merchant

Thank you.

Operator

The next question is. From Wamsi Mohan with Bank of America. Please go ahead.

Wamsi Mohan

Yes, thank you so much. Can you talk a little bit about how you're managing pricing in this very constrained environment? How much is contractually locked in going into a quarter? How much flexibility do you have in intra quarter basis? And when we look at just the reported quarter, right, like the dollars per TB decline was consistent with the prior quarter, but obviously the demand environment is very strong.

So hoping you could unpack that a little bit. Is there a differential there between hammer and non hammer that's contributing to that or what's causing that dollar per TB to be declined to be relatively consistent given, given just like this very strong demand background? Thank you so much.

Dave Mosley

Yeah, I think Wamsi, it's so there's a lot of what we're doing right now is very predictable to our earlier comments. You know if we can execute a little bit better than plan, we can take cost out or we can pull in products that as they get qualified faster. But you know, we are supply limited from that perspective and and contractually we are, you know, giving our customers that predictable economics as well over time.

If we, you know, go through these transitions a little bit faster than the next contract come up, so the next contract comes up, we can actually, you know, make sure we get the the right economic returns for what the market needs. And I think that's, that's the the long term strategy right now. But you know, kind of near term everything's happening according to plan to to being slightly shifted left.

John Luca Romano

Yeah. Our pricing strategy is the same since about 10 consecutive quarters. So when we renegotiate a contract now, we increase slightly increase pricing for the same product and then when customers move to other capacity products, they can get a little bit of a lower price per TB. That's why with the, you know, major transition of customers to AMER product. Capacity you can see a slight decrease in the average price per. But you see in the profitability the impact of the like for like price increase and of the cost per TB decrease due to the mix.

Wamsi Mohan

OK, thank you so much.

Operator

The next question is from CJ Muse with Cantor Fitzgerald. Please go ahead.

CJ Muse

Yeah, good afternoon. Thank you for taking the question. I wanted to clarify the March seasonality question earlier. Curious you know if you were to assume that consumer via were seasonal, could you pivot supply more to the cloud? And then I guess is the the main question, you know your customers are turning to SSDs given that you know tremendous tightness on the HDD side. Curious your thoughts around that cannibal and I guess what would maybe change your mind in terms of, you know, the vision for this sustainably higher demand and then potentially add capacity to support that? Thanks so much.

Dave Mosley

Yeah, thanks, CJ. So I, I don't think that customers are really changing their architectures because of what they're seeing right now. What what everybody's driving us to do is getting more predictable over time and and if anything be more aggressive on the product transition. So I don't really think there's any quote UN quote cannibalization. As a matter of fact, I don't think it's in anybody's economic benefit to do so. And the architectures are pretty well set, you know, going out for a couple of years, yes.

John Luca Romano

No, we see. We actually demand the the gap between supply and demand getting. To be bigger every quarter that means demand is shifting more into the future is not taken by any other technology. And then your comment on seasonality is kind of interesting to think about there. In some of the edge IoT markets there is seasonality indeed we have been taking slowly. We've been taking some supply out of edge IoT products and putting it into cloud as as we can pivot demand.

Some of that's happening naturally as a part of these product transitions which we've been talking about. It's not something we can do very quickly until we get to some of the products like the four terabyte per platter where we have commonality all the way through the platforms. But but we will think that so even the even though the edge IoT is the revenue is going down a little bit, the profitability is actually greater because you know those products are are being prioritized a totally different way than if there was a ton of supply on the market. I do think that'll mean a little bit muted seasonality because that market is still fairly strong. I think it was over a half a billion dollars last quarter, the hedge IFT.

Operator

The next question, The next question is Krish Sankar with TD Cowan. Please go ahead.

Krish Sankar

Yeah, thanks for taking my question. I had a question and a clarification. Dave or John Luca, you know, in the past you spoke about sharing the cost benefit of Hammer with your customers. But now with cloud becoming a bigger portion in the AI tailwind, I'm wondering if you're rethinking your pricing strategy for Hammer, IE can increase it further. And then the clarification, John Luca, historically your revenue guide had a range of 150,000,000. Now it's more like 100 million. So is that because better visibility built to order helping you tighten that range? Thank you.

Dave Mosley

Yeah, thanks, Chris. So I think what you said is very true. We, we are, as we go through these product transitions, we're being as predictable as we can with the customers. But they did some of the contracts are quite long as well. And so the market is a demand goes up, the market will adjust. Remember that most of the benefit that the customers are seeing is in that TCO proposition of a higher capacity drive.

So the the pricing is a factor in that, but also this benefit that they see in their TCO is a factor as well. And so it'll, it'll adjust very slowly over time as as the market develops.

John Luca Romano

I won't say on the hammer pricing, you know, in the past we discussed only with one customer to giving them a slightly lower price. But of this customer of course help us with a force qualification of the product. And so for a certain volume they they have a lower price than than other customers. But of course, this is transitioning away fairly quickly, just a matter of, you know, a few more quarters.

Krish Sankar

Thanks, folks.

Dave Mosley

Thanks, Chris.

Operator

The next question is from Amit Daryanani with Evercore ISI. Please go ahead.

Amit Daryanani

Thanks a lot. Good afternoon, Dave. You know, as you see an uptick in media creation, you've been talking about this, but you know, with offerings like Open AI Sora and given your kneeling, kneeling capacity is fairly committed to Calendar 26. Are you seeing customers looking to potentially fund or Co invest CapEx dollars for Seagate to get access to more units and is that something you would be open to?

I would love to just understand like if this really keeps playing out the way you're outlined, I is aerial density going to be enough or would you or your customers have to eventually ask them capacity to get more units? I'd love to understand if you'd be open to that Co investing angle and then if you just qualify, qualify this a little bit. But when you talk about talked about shipping a million plus Mosaic drives this quarter, does that imply that about 36 exabytes of the total units were hammer driven this quarter? Is that fair? Thank you.

Dave Mosley

I'll let John Luke answer the question on Exabus because he'll go calculate it, but but you're not far off. I mean what what we the way we think about it is going through those transitions opens up all these higher capacity points. Yes, from from customer perspective, I think I think I mentioned earlier there isn't great visibility in what some of these new tools are going to unlock.

But I think there's a lot of optimism around demand, especially in the video properties that exist in the world. And so therefore, you know, nobody wants to be too late to these. I don't think that there's any significant changes to architecture, but I do think what is what we see driving or what's driving us is really stability. So it's customers showing up and saying let's be very predictable as far as what I'm going to get some of the.

The numbers about how much demand there is above and beyond what our supply is it that those numbers are compacted by someone else? I don't think it's, that's the way necessarily each customer looks at it. What customers are starting to see is a temporal shift. So saying hey, can I pull this in a little bit because I'm, we know they know we're gaining exabyte capacity over time, especially through the product transitions. That's what you saw contribute a little bit more to last quarter.

And as we go as hard as we possibly can through the product transitions, we'll be bringing on more and more exabytes. So you know, getting these qualifications done, getting us up the ramp, it's all priority for the customers as well. That's the way they're going to add capacity.

John Luca Romano

Yes. No, first of all, I think it's very important that we keep the the current balance between supply and demand and and not taking action to oversupply in the future of the the industry in terms of exabyte is a nice question. I would say, you know that our MRI product is between 30 and 36 exabyte, sorry, terabytes per unit. So with 1,000,000 units sold in the quarter, we are into that range.

Amit Daryanani

Perfect. Thank you.

Operator

The next question is from Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Rakers

Yeah, thanks for taking the question. Yeah, I guess first on housekeeping side, I know that, you know, new disclosures. I'm curious of how or if there's any way we should think about the systems business within within. I guess it's in the data centerpiece of it that we kind of just think about what it was over the past many quarters and, and kind of think about that, that kind of level of going forward.

And then, you know, on a on a nearline demand perspective, given the growth that we're seeing, looking back at the Analyst Day, I know you outlined kind of a mid 20% CAGR. Has your thoughts at all changed whether or not that that's structurally just, you know, looking forward just higher relative to what you initially thought back a few months ago? Thanks, Erin

Dave Mosley

from the systems business, you know, we, we obviously we package the drives into the racks to save some customers, some work. It's a fairly limited number of customers. They're great customers and and we don't really see the the landscape changing too much on that. You know, there's the customers that are buying bare drives today don't and having someone else do the integration aren't necessarily pivoting to the systems could happen, but you know, so I think it's steady as she goes on that front relative to nearline.

We're all watching demand and and the mid 20 number, you know, something we continue to to to grapple with. And that's thus, you know, most of the questions we've been asked today about how much supply is there again, I'll, you know, I'll just say it. The the way we bring them more exabyte supplies to get the bigger drives out. And so that's what we're all focused on.

John Luca Romano

Yes, Aaron, and we report system as part of data center and this is very similar to what the rest of the industry is doing. So we try to align so it's easier to look at the different players in the same way.

Aaron Rakers

Yeah, thank you.

Operator

The next question is from Thomas O'Malley with Barclays. Please go ahead.

Thomas O'Malley

Hey, guys. Thanks for taking my question. I wanted to understand the timing of the crossover between the Mosaic 3 platform. The Mosaic 4 platform, I think you guys have historically talked about the first generation is what takes a long time. That's what you know was the struggle with your first big customer. But now you're really seeing that adoption kind of accelerated across other global CSP.

So at at Mosaic 4, it sounds like it's starting to rampant volume in the second-half fiscal year 26 could could you get to a crossover point in the first half 27? Like should we be thinking about 15 or 20% contribution? I'm just trying to understand how much supply you can actually add to the industry with that transition in the short period of time. Thank you.

Dave Mosley

Thanks Tom. Yeah, it's a question we're asking as well because as we go up the ramp then you know, yields and scrap and everything else on the new product is, is what dictates that we we understand the old product pretty well. There is a lot of commonality in these parts between the two technologies between the two. So it's not, this is not a complete unknown on on the ramp.

But you know from my perspective it will be a little bit faster ramp. You know, we have to go execute and that's what the team is going to be focused on. The qualifications are running well so far. So there's no reason to be disappointed at this point. And you know, I'll be continuing to, you know, implore the teams to get the yields up as quickly as we possibly can to accelerate the transition.

Operator

The next question is from Carl Ackerman with BNP Paribas. Please go ahead.

Carl Ackerman

Yes, thank you. Dave, you spoke about longer term agreements. Offering visibility into 2027, presumably that visibility is on exabytes or hammer drives. But since you didn't specify what that visibility is, does exabytes slow down in the context of that 25% exabyte growth over time or do you think exabyte demand actually accelerates into 27 from what you see today? Thank you.

Dave Mosley

Well, I think that's a, so there's a supply question and a demand question. I, you know, I think yes, the, the supply would go up quite a bit because if we go transitioning to, to the earlier question Tom asked the as we transition to the four plus product family, we get a lot more exabytes out of it. So just we'll drive that as hard as we possibly can. We are working with customers, major hyperscalers and everything else on the five that we've qualified on three plus. Now we get as many qualified on 4 plus over the course of the next year and we get significantly more exabytes out. That's that's what we're driving.

Carl Ackerman

Thank you.

Operator

The next question is from Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri

Thanks a lot. I also had a question about the Hammer crossover. So five of the CSPS are qualified now and the other three are going to get qualified in the first step of next year. It sounds like it's about high teens of exabytes now, you know, maybe pushing 20%. I would have thought you could get to exabyte crossover before this, before a year from now. If if you know, more than half the CSPS are called now and everyone's pushing to get these higher, you know, cap drives. So why why would it take another year to go from 15 to 20% of exabytes to more than half of exabytes?

Dave Mosley

Yeah, thanks, Steph. There's so there's there's a lag in the supply chain. Obviously you know, we have, we've started wafers for various products. We will sell those various products. Just pulling in the qualification does not necessarily mean we turn a light switch from the old product to the new product. We have to actually you know go through that transition ourselves in our own factories. We're going to do that as aggressively as we can.

And, and I, I think I asked this back in or answered this back in Tom's question. There is some commonality between. So we can pivot a little bit, but not as hard as we'd all like. I think some of this will be dictated by our, our yield ramp and and so on, on the new products. But things are going well. So we're going to be as aggressive as we can.

John Luca Romano

Yeah, it takes time for ramp. Now, as you know, the cycle time for, for Hamlet is not short. So we need to qualify first and then to ramp the product. So it takes a certain number of quarters to really go up in, in capacity.

Timothy Arcuri

So I guess that's why you'd be buying heads from GDK basically from the outside, right?

Dave Mosley

No, we're not. We're not buying heads today from TDK. And I would say TDK is a great partner, has been for a long time. We talked to them about technology all the time, but they don't have hammer technology. So you know, the way what we're focused on is how do we get transitioned to the hammer exabytes as quickly as possible.

Timothy Arcuri

Yeah, I meant PMI help, but thanks.

Dave Mosley

OK.

Operator

The next question is from Steven Fox with Fox Advisors. Please go ahead.

Steven Fox

Hi, just listening to all the questions and thinking back to the presentation in May where you lined lined up sort of the road map and the time it takes. It seems like hard disk drives is going to become more of a bottleneck to some of the expansion, you know plans for the cloud guys as we get into next year. How, how? How legitimate is that of a concern and what else could be done at the cloud? Guys to just sort of leverage existing capacity to to sort of. And get through that. And keep you guys on track.

Dave Mosley

Yes, Steve, I, I don't look at it as something that's, you know, immediate or you know, going to be solved in a period of three months. You know, the industry is not going to bring on more supply in three months. It's not. So really what this what's coming out of all of this is customers are getting very predictable on long term plans and that's what they need to do and that's what that we need them to do as well because we've got long cycle times as we've been saying.

So, you know, it's, it's building industry health and, and that's good. I we can't react with supply, you know, to everyone's wish list. And there's probably wish list that aren't real at some point. But the customers that we're working with are being very predictable for us, telling us exactly what they're going to need. And we're, we're answering the call to the extent that we can.

And, and if they need more exabytes, usually we're off. It's a timing problem, temporal problem. We're off by a few months or six months or something like that. And so ultimately as we go through these transitions, we're going to bring on more, more exabyte capacity and they're going to be happy with it. Again, we don't see any evidence that architecture is changing or anything like that

Steven Fox

understood. And the advanced algebra on how you're upsiding is just different every single quarter depending on you mentioned like half a dozen variables between how many exabytes you got out this quarter versus last quarter and next quarter.

Dave Mosley

Yeah, I mean we're, we're, we're executing well as we said in the script and, and we're pulling as hard as we possibly can, but we're pulling, executing the plan that we have and pulling in as much as we can as, as qualifications complete. And we'll continue to do so to the extent that our factories will will let us. I mean we're it's a, it's a fairly long supply chain.

Steven Fox

Great. Thanks for that color.

Operator

The next question is from Ananda Baruah with Loop Capital. Please go ahead.

Ananda Baruah

Hey guys. Thanks for the question. Appreciate it. Dave, how, how should we think about well, what's the, what's the most useful way to think about velocity? I guess the pace at which customers going forward will look to mix up the higher capacity points given the given the shortages and given the aerial density is, is what's going to bring new exabytes to market. Do you think that we'll see folks look to mix up faster?

Than historical and and part of this I get is obvious because when you make. To switch to Hammer, there's like a fair step up in capacity. But even as Hammer normalizes, let's say once you get past crossover, say 12 months from now, once Hammer normalizes, do you think we could see an even faster than typical mix up inside a hammer? And it's not like what would be the gating factors to that? Appreciate it. Thanks.

Dave Mosley

Thanks Ananda. It, it doesn't seem like that long ago that we were talking about sixteens going to eighteens or eighteens going to 20s, you know, diminishing returns. I, I would say on, on PMR products. And then as we've gone 30 to 40, we see an immense pull for 40s. And then I, and I think that will be true as with 50s as well as we try to drive that part of the transition because the TCO proposition is so much better if you're building a data center and then you want those products.

So I, I do think that that's, that's reflective in, in the customer's behaviors. Exactly. To your point, you know, back in, in the day when we were moving from 16 to 18 or 18 to 20, we just weren't seeing that much push. Now on the demand side, on the true, you know, in demand side, I think it's also because of what's going on in the world with, you know, we pointed out video in the script, Some of the video properties are just exploding right now and the capability to create and diversify the video in the world is is great and people are monetizing it.

That's great as well. So human creativity is what's fundamentally driving all of this stuff and and I don't see it slowing down.

Ananda Baruah

Appreciate it. Thanks. Appreciate it.

Operator

The next question is from Tristan Guerra with Baird. Please go ahead.

Tristan Guerra

Hi, good afternoon. Could you elaborate on the duration of the long term agreements for Hammer? Is there a pricing component to it and what percentage of total revenue is currently based on those agreements and how does that compare with what the mix of those agreements was last year?

John Luca Romano

Well, every customer has a different. FDA or built to order. So the duration is different, the volume is different, the mix is different. But what we said in the prepared remark, the vast, vast majority of our nearline extramite have already. Being committed for the entire calendar 26, so we have a fairly long. In place,

Tristan Guerra

OK. And then as you look at at the ramp of Hammer and and you're not ramping capacity, you're migrating to higher densities. Is your expectation on the basis of that tramp and what you see in terms of demand that lead times are going to remain similar to what they are today or or would you expect lead times to expand further despite? The ramp and migration to higher density hammer.

Dave Mosley

Yeah, I, I, it's a good question, Tristan. I, I think they'll remain like they are today getting through the hammer transition. You have to add a significant amount of content to wafer in particular, which is one of the longest lead times. But the next generation and the next generation after that, you don't have to go through that amount of transition again.

So, you know, I do think it's a step up in lead times. We'll work it to get it back down as quickly as we can, but I think there's a substantial amount of process content. So we've gone through that step up at least on those products and then you know after that we don't have to to get to 4 terabytes flatter, 5 terabytes flatter and so on.

Tristan Guerra

Great, thank you very much.

Operator

The next question is from Mark Miller with the Benchmark Company. Please go ahead.

Mark Miller

Congratulations on another good quarter. I'm just wondering, are your margins and yields on your hammer drives at parity with the legacy PMR drives? If not when you expect that to occur?

Dave Mosley

Yeah, Mark, I would say we don't have VPMR. So you know we have our last generation PMR drive is a great drive, it's fantastic. It's got great yields, but I'm very happy with it. You we're always going to be working the next generation and the next generation as hard as we possibly can. The four terabyte per platter, which is what we're all focused on right now is you know, where we need to get the yields up and it's still early and it's lifetime. So we'll continue to put as much muscle as we have in Seagate to get that done this year.

Mark Miller

Thank you.

Operator

The next, the next question is from Vijay Rakesh with Mizuho. Please go ahead.

Vijay Rakesh

Yeah, Hey, Dave and Jen Lucas. So just I saw good, you know, good. Gross margin side up very nicely sequentially. Just wondering that the drop through. On Hammer, would you expect to hit the mid 4545% margin exiting fiscal 26 or how should we look at that margin progression? And a follow up,

John Luca Romano

yeah, as I said before from Eric's question, we are very pleased with the progression in gross margin and also with increasing revenue. So we have achieved the $2.6 billion in revenue and the 40% gross margin a little bit earlier than than what we were thinking. And we have guided December with an incremental margin that is higher than the 50% that we discussed in our financial model.

Every quarter is a little bit different now. Right now we have a fairly quick transition from the PMR drive to Hammer drive and with higher capacity drive we get better. So in the short term we are we are progressing well and as I said every quarter will be little bit different. I, I think the model that we presented in May or is, is a strong model for the next three years, but doesn't mean we cannot execute even better, right Vijay?

Dave Mosley

And as I reflect on a lot of the questions today, it's about, you know, how, how well do we don't know the demand further out and some of it's predictable, but the demand may keep on coming based on you know what we see in some of the the end applications. And then our ability to continue to work the yield issues around the new four terabyte per platter and get through that transition as quickly as we can. And that will help the cost side. So that and supply side from the next by perspective. So that's what we're all focused on. Appreciate the question.

Vijay Rakesh

Got it. And Dave, just on the on your follow up on the video side with the increased traffic, do you the longer term exabyte growth that you guys had laid out on the 2025%, do you see upside to that now given this significant increase in video traffic and storage?

Dave Mosley

Well, this is what this is what we're all still studying. I think you know that we've seen especially with some of the new AI generation, AI content generation which we talked about in the prepared remarks, we're studying how fast the uptake there is for the some of these new creative. Capabilities that people have.

Vijay Rakesh

Got it. Thanks.

Operator

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

Dave Mosley

Thanks, Gary, and thanks everyone for joining us today. As you can see, fiscal 2026 is off to a great start. It's marked by strong operational execution and outstanding financial results. I want to once again express my gratitude to our employees, our suppliers, our customers and our shareholders for their contributions to Seagate's ongoing success. Together, we are advancing innovation and to serve growing data storage demand and position Seagate for long term value creation. Thanks for your continuing support. We look forward to the significant opportunities ahead.

Operator

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

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