Seagate Technology plc (STX) Q2 2026 Earnings Call Transcript

Seagate Technology plc (NASDAQ: STX) Q2 2026 Earnings Call dated Jan. 27, 2026

Corporate Participants:

Shanye Hudson — Senior Vice President of Investor Relations & Treasury

Dave Mosley — Chairman and Chief Executive Officer

Gianluca Romano — Executive Vice President and Chief Financial Officer

Analysts:

Christopher Muse — Analyst

Wamsi Mohan — Analyst

Erik Woodring — Analyst

Asiya Merchant — Analyst

Karl Ackerman — Analyst

James Schneider — Analyst

Amit Daryanani — Analyst

Mark Newman — Analyst

Sreekrishnan Sankarnarayanan — Analyst

Steven Fox — Analyst

Aaron Rakers — Analyst

Timothy Arcuri — Analyst

Mehdi Hosseini — Analyst

Ananda Baruah — Analyst

Vijay Rakesh — Analyst

Presentation:

operator

Welcome to the Seagate Technology fiscal second quarter 2026 conference call. All participants will be in a listen only mode. Should you need assistance, please 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 star then one on a Touchstone phone. To withdraw your question, please press Star 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.

Shanye Hudson — Senior Vice President of Investor Relations & Treasury

Thank you and hello everyone. Welcome to Today’s Call. Joining me are Dave Mosley, Seagate’s Chair and Chief Executive Officer, and Gianluca Romano, our Chief Financial Officer. We’ve posted our earnings press release and detailed supplemental information for our December quarter results on the Investors section of our website. During today’s call, we’ll 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 and included on 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 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 and 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 are subject to risks and uncertainties associated with our business. To learn more about these 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 reentering the queue. With that, I’ll turn the call over to you, Dave.

Dave Mosley — Chairman and Chief Executive Officer

Thanks, Cheney. And hello everyone. Seagate closed out calendar 2025 with a record breaking quarter driven by sequential revenue growth across nearly all end markets. December quarter financial results exceeded both top and bottom line expectations and set new company records for exabyte shipments, gross margin, operating margin and non GAAP earnings per share. We expanded non GAAP Gross margin above 42% Supported by the execution of our pricing strategy along with an improving mix of our high capacity drives as Hammer shipments ramp Looking at the entire calendar year, 2025 marked a transformational period for Seagate both financially and operationally.

Over the calendar year we increased revenue by over 25%, improved gross margins by nearly 740 basis points and and expanded operating margins by an even greater amount demonstrating the profitability leverage in our financial model. 2025 also solidified HAMR technology as the long term enabler of mass capacity storage. We entered the year shipping 3 terabyte per disk mosaic based hammer products to our first CSP customer and by year’s end quarterly hammer shipments exceeded 1.5 million units and have continued to ramp. Mosaic three hammer drives are now qualified with all of the major USCSP customers and qualifications for our second generation Mosaic 4 terabyte per disk products are tracking well.

To plan. These developments align with our long term aerial density roadmap that extends to 10 terabytes per disk which we expect to deliver early in the next decade. I want to thank our Seagate teams around the world for exceeding our performance expectations and delivering outstanding value to our global customers. We continue to operate in an exceptionally strong demand environment particularly within the data center end markets. In the December quarter we saw sustained demand growth for our high capacity nearline drives across global cloud data centers as well as continued improvement from the enterprise edge based on our built to order pipeline.

We anticipate these positive demand trends will continue for some time. Our nearline capacity is fully allocated through calendar year 2026 and we expect to begin accepting orders for the first half of calendar year 2027 in the coming months. Further out, demand visibility is strengthening based on the long term agreements in place with major cloud customers through calendar 27. Additionally, multiple cloud customers are discussing their demand growth projections for calendar 28, underscoring that supply assurance remains their highest priority. We will continue to meet strengthening demand through our strategy to maintain supply discipline and satisfy exabyte growth through aerial density advancements and without increasing unit production volume.

In the December quarter our our average near line drive capacities rose by 22% year over year approaching 23 terabytes per drive with those sold to cloud customers averaging significantly higher. This trend underscores the strong adoption of our higher capacity drives to support demand growth. At the same time, revenue per terabyte sold has remained relatively stable reflecting the effectiveness of our pricing strategy. TGET is well positioned to continue benefiting from the combination of powerful secular tailwinds and supply discipline. Video applications continue to drive significant demand for hard drives, with platforms like YouTube witnessing 20 million video uploads daily, up from just 2 million three years ago.

This staggering pace of growth extends to other cloud video platforms and doesn’t yet include the full surge in content generation expected from emerging AI driven video applications. These applications are not only fueling social media uploads, they’re also transforming how organizations turn their data into tangible value, enabling personalized marketing, interactive education and advanced simulations capable of training manufacturing, engineering, healthcare and other professionals. The strategic value of data is further underscored as new applications and use cases emerge across cloud and edge workloads. Among the most promising of these is agentic AI, which relies on persistent access to large volumes of historic data to enable effective planning, reasoning and independent decision making.

Adoption is already gaining momentum, with one recent survey conducted by a leading cloud service provider reporting more than half of participating customers were actively using AI agents. Early adopters are already realizing measurable returns with benefits ranging from lower cost to increase revenue opportunities. With the deployment of AI agents at the edge where untapped data often resides, we believe the stage is set for a sustained and meaningful increase in data generated and stored that will support inferencing, continuous training and also maintain model integrity. Modern data centers have evolved to address the complexity and scale that massive workloads bring through sophisticated data tiering architectures, ensuring that the right data is available at the right time and place.

Hard drives are essential to these architectures, anchoring the mass capacity data tier that stores the vast majority of exabytes. From storing the checkpoint data sets used to train and maintain model integrity to supporting vector databases that provide the context necessary for accurate and inference results and agentic AI performance. By leveraging hard drives, data center operators, whether in the cloud or on prem, can achieve the optimal balance of performance capacity and cost efficiency at scale. Against this transformational backdrop, Seagate’s HAMR Technology roadmap positions us to meet growing demand and deliver ongoing TCO improvement for our customers.

Hammer is a proven technology with large volumes of drives running in cloud production environments for more than three quarters now and performing well across a broad spectrum of use cases. We are systematically ramping our Mosaic 3 Hamr products to qualified customers while maintaining focus on optimizing the profitability of our available supply. As noted earlier, Mosaic 3 is now qualified with with all major USCSP customers and remains on track to have all global CSPs qualified within the first half of calendar 2026. Additionally, qualifications of our second generation Mosaic IV products are progressing well. We expect to begin the ramp of Mosaic 4 later this quarter and have multiple CSPs qualified in the coming months.

In line with our plans, we continue to set the pace for the industry, recently demonstrating 7 terabytes per disk capability in our labs as one of our largest CSP customers recently aptly described Hard drives are engineering marvels, a sentiment that we obviously share. Our deep expertise across mechanical engineering, material science, nanoscale fabrication and now advanced photonics not only enable Seagate to deliver on the Hammer roadmap, but also creates a durable competitive moat for hard drive technology well into the Future. Wrapping up 2025 was a milestone year for Seagate in every respect financial performance, operational execution and technology leadership.

We are carrying this momentum into calendar 2026 supported by a powerful demand backdrop. As new AI applications start to complement traditional workloads, we will remain highly disciplined and focus on expanding profitability through our higher capacity product mix. Underpinned by the strong economics of Hammer, our aerial density roadmap positions Seagate to sustain the core TCO and efficiency advantages of hard drives. As data creation and storage requirements accelerate in the AI era, we believe this foundation creates a compelling long term value proposition for the company, our customers and our shareholders. I’ll now turn the call over to Gianluca to cover our results in greater detail.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Thank you Dave Cget delivered another quarter of strong year over year revenue growth and set new record profitability metrics in the December quarter, underscoring the durability of data center demand trends. Additionally, we strengthened our financial position by by retiring $500 million in gross debt and generating over $600 million in free cash flow, marking the highest level in eight years. December quarter revenue came in at $2.83 billion, up 7% sequentially and up 22% year over year. We achieved non GAAP gross margin of 42.2% and 210 basis points sequentially and we expanded non GAAP operating margin by 290 basis points sequentially to 31.9%.

Our resulting non GAAP EPS was $3.11, up 19% quarter over quarter. These strong financial results demonstrate our ability to execute our strategic objectives, including leveraging our technology roadmap to support demand growth to the end. We shipped 190 exabytes in the December quarter, up 26% year over year while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud, customer and sequential growth across enterprise OEM markets. We shipped 165 exabytes in the data center markets, up 4% sequentially and 31% year on year.

Data center revenue grew at roughly the same pace totaling $2.2 billion for the quarter, up 5% sequentially and 28% year on year. Against this strong demand backdrop, both cloud and enterprise customers are transitioning to higher capacity drives. Average cloud nearline capacity increased to nearly 26 terabytes in the December quarter and will continue to grow with the ramp of Hammer based Mosaic products. As Dave highlighted, Mosaic drives are running very well in production environment and meeting all performance, reliability and and integration expectations. In the enterprise OEM market we are benefiting from slight improvement in traditional server units along with increasing demand for storage servers driven in large part by the adoption of AI applications and need to store data as enterprise Edge.

The Edge IoT market made up the remaining 21% of revenue at $601 million, supported by anticipated seasonal improvement for consumer products in the VIA client market. We project the broader VIA market to grow over time with a larger growth contribution coming from via airline products that are captured as part of our data center end market. Moving on to the rest of the income statement, non GAAP gross profit increased to $1.2 billion up 13% quarter over quarter and 44% compared with the prior year period, significantly outpacing revenue growth. Non GAAP gross margin expanded to 42.2% in the December quarter up from 40.1% in the prior period.

This improvement reflects the ongoing execution of our pricing strategy and the growing adoption of our latest generation high capacity products which collectively drove a modest sequential increase in revenue per terabyte, a trend we expect to continue into the March quarter. Non GAAP operating expenses were $290 million, relatively flat quarter over quarter and in line with our expectations. Operating expense as a percent of revenue declined to 10.3%, rapidly trending towards our long term target of 10%. The combination of strong top line growth and significant financial leverage drove an 18% sequential improvement in non GAAP operating profit to $901 million, almost 32% of revenue.

Other income and expenses were $70 million, reflecting slightly lower interest expenses on the reduced outstanding debt balance. We currently project other income expenses to remain relatively flat. In the March quarter we grew non GAAP net income to $702 million with corresponding non GAAP EPS of $3.11 per share based on tax expenses of $129 million and a diluted share count of approximately 226 million shares, including the net impact of our 2028 convertible notes. Turning now to cash flow and the balance sheet, we invested $116 million in capital expenditures for the December quarter, or roughly 4% of revenue.

We are maintaining capital discipline while we continue to Transition and RAMP Mr. Technology to support these objectives. We anticipate capital expenditures for fiscal year 2026 to be inside our target range of 4 to 6% of revenue. Free cash flow generation was strong at $607 million, up 42% from the prior quarter. Looking ahead, we expect free cash flow generation to further expand in the March quarter, supported by sustained demand trends, operational efficiency and capital discipline. These factors position us well for durable long term cash flow generation. Cash and cash equivalent totaled just over $1 billion at the end of December quarter, with ample liquidity of $2.3 billion, including our undrawn revolving credit facility.

During the December quarter, we returned $154 million to shareholders through dividends. We retired approximately $500 million of exchangeable senior notes due 2028, which serves to limit further dilutive impact from these notes and optimize cash deployed for future share repurchases. Our resulting gross debt balance was approximately $4.5 billion exiting the quarter. Net leverage ratio improved to 1.1x based on adjusted EBITDA of $962 million for the December quarter, up 16% quarter over quarter and up 63% year on year. We expect the net leverage ratio will trend lower as profitability and cash generation increase while we continue to evaluate opportunities to further reduce debt.

Turning now to the March quarter outlook, the demand environment remains strong, particularly among global cloud customers. As a result, we expect data center demand will more than offset typical March quarter seasonality in the edge IoT markets. We expect March quarter revenue to be in a range of $2.9 billion plus or minus $100 million, which represents a 34% year over year improvement. As a midpoint, non GAAP operating expenses are expected to be approximately $290 million based on the midpoint of our revenue guidance. Non GAAP operating margin is expected to approach the mid 30th percent RA. Non GAAP EPS is expected to be $3.40 plus or minus $0.20 based on a tax rate of about 16% and non GAAP diluted share count of 230 million shares, including estimated dilution from our 2028 convertible notes of approximately 7.6 million shares.

Biggest Strong December quarter performance and March Quarter guidance underscore our continued focus on driving growth, enhancing profitability, and optimizing cash generation. Based on our current outlook, we expect to deliver sequential improvement to both the top and bottom line throughout calendar 2026 and remain in a strong position to enhance value for both customers and shareholders to over the long term. Operator. Let’s open the call up for questions.

Questions and Answers:

operator

Thank you. We will now begin the question and answer session. To ask question, you may press Star 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 Star 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. And the first question today will come from CJ Muse with Cantor Fitzgerald.

Please go ahead.

Christopher Muse

Yeah, good afternoon. Thank you for taking the question. You know, given the supply demand dynamics, you’re obviously in the catbird seat and wanted to really try to get some more detail on gross margins going forward. Your philosophy historically has been to share the gains, you know, both your customers and yourselves. But at the same time, you know, given this tight environment you are raising, like, for, like, pricing. So curious, you know, is there a framework to think about in terms of the incremental gross margins that we should model from here? And then I guess, maybe bigger picture as you think about overall average pricing for Exabyte, you know, we’ve gone from kind of down double digits to high single digits, and I think we just exited the quarter down 4% year on year.

You know, do you see a world where, you know, pricing, you know, could flat or even move positive year over year? Thanks so much.

Dave Mosley

Yeah, thanks, C.J. i’ll let John Luca chime in here as well. But the pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into 27 and 28, we look at how much capacity we’re having, we’re bringing online. By virtue of the fact that we’re making all these aggressive product transitions, we’ll bring more Exabytes to bear. And then, you know, people go out there and renegotiate for those, I think flat to slightly up is certainly possible.

And that’s the way we’re really managing it as we talk to our customers. The value proposition of the new drives as they go up 5, 10 terabytes at a time is pretty strong.

Gianluca Romano

ACJ. So on the gross margin we are executing very well, but executing a little bit better than what we discussed at our investor day where we presented a model with a 50% incremental margin above a $2.6 billion of revenue. We have done better every quarter, of course. Is our objective to continue to optimize what we produce, what we sell and finally the profitability that we can get from the product. So the model cover a longer period of time now, two, three years, not two or three quarters. But I’m positive we are continuing to progress in the right direction.

Christopher Muse

Thank you.

operator

The next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Wamsi Mohan

Yes, thank you. Similar type of question. I guess the gross margins in the guide and the incremental quarter on quarter gross margins in the guide are very strong. Can you maybe help bridge the drivers. Between mix and price?

Dave Mosley

Obviously you’ve got better mix of data center revenue next quarter quarter, but just wondering if you can dimensionalize that and the opportunity for pricing. David just said sort of flat top as possible. But as we think about the pricing that might be getting embedded within these LTA’s and sort of beyond 26, why can’t that be a lot higher just given the tightness in the supply demand environment. Thank you. Yeah, I think this gets into how persistent is the demand going to be? Wamsey, you know we talk about two or three years from now. The one behavior change that I really like in the last year is that people are starting to say if I can’t get it now, I’ll plan next year better and the following year better.

So we’re having great dialogues on that front. You know, of course supply has risen quite a bit in the last year. Supply of exit from the industry, the industry has reacted pretty well, but I think demand is still pretty strong. And my, my perspective on this is I think demand will stay strong for quite some time. So, so in that kind of world we’re having great discussions with customers further out in time. And the biggest part that helps us in our planning is through these product transitions. They know that’s how they get more exedites.

Gianluca Romano

And once we are saying in the script today that for the rest of the calendar year we expect revenue and profitability to continue to improve sequentially every quarter. So we are not implying in any way that this trend is changing, is actually now getting better somehow.

Wamsi Mohan

Thank you.

operator

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

Erik Woodring

Great. Good afternoon guys. Thank you for taking my question and Congrats on these results. Incredible. David, your analyst day last year, you kind of pointed to a mid 20% exabyte growth CAGR. I’m just wondering where you think that supply growth can land this calendar year. And as you get closer to that Hammer crossover point later this year, does. Does that pace of exabyte growth accelerate? And I’m just asking this because demand is clearly outpacing supply. So can you maybe just help us try to better understand the shape of your exabyte supply growth? Because obviously it’ll dictate kind of exabyte shipments for the year.

Thank you very much.

Dave Mosley

Yeah, thanks, Eric. So we are planning to transition to 4 terabytes of platter and, you know, fairly aggressively. But I think what people have to keep in mind is that we. We’re fairly tight all throughout manufacturing. So we have products that are in the pipeline already that are committed to customers and so on. We don’t just move very quickly to three or four terabytes of platter as things come. And it’s a good problem to have. Actually, you know, we’re running manufacturing quite, quite tight right now. So I think it’ll be a fairly prescriptive ramp, to your point.

It won’t be, you know, as fast as maybe we’ve done some ramps in the past, but it’ll be very profitable. And that’s the way we look at it as we go further out in time. I’m very optimistic that the 4 terabyte per platter is a very strong product. It’ll start to replace some of the other legacy products, I’ll say that way, because it has so much better value proposition in a lot of those markets. And then when that happens, then we see more opportunity.

Erik Woodring

Great. Thank you, guys and best of luck.

operator

The next question will come from Ashia Merchant with Citi. Please go ahead.

Asiya Merchant

Great. Thank you for taking my questions. And great results here. Just a couple that are related to the prior question. You know, you guys get some projections on Hammer not just for fiscal year 26, but even into fiscal 27. So if you could talk about, you know, upside to achieving those targets for the Hammer rollout and related to that, how we should think about the blended cost reductions. You know, pretty impressive again, margins here and guiding for improved profitability. So if you could talk to us a little bit about the cost reductions going forward, especially as you ramp Hammer here with the mosaic 4, that would be great.

Thank you.

Gianluca Romano

Yes. Asia. So I would say, first of all, we are very happy with the transition to Hammer. Now we qualified the last big cloud service provider in us and we have qualified six out of eight of the top cloud service providers. So the transition from EMR technology to ML technology, it’s progressing very well. And we are qualifying the new product, the 4 terabyte per disk, so a 40 terabyte per drive. Of course this will help with the increase in exabyte. In terms of mix, we gave a good indication, I think at our investor day and we want to be aligned to that.

And the cost will be favorably impacted, especially when we start ramping high volume of the 40 terabyte drive. Of course that will drive a fairly important reduction in cost per terabyte compared to the current hammer and of course will be a good contributor to further increase our gross margin.

operator

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

Karl Ackerman

Thank you. John Wick and Dave, I was hoping you could clarify what portion of your LTA’s or overall nearline AGV capacity has fixed or multi quarter pricing agreements. I ask because as these LTA’s roll off throughout 2026, any new agreements will be locked in at higher values reflective of not only the main use case, but also widening price per terabyte gap between enterprise hard drives. Hcz. Thank you.

Shanye Hudson

And Carl, the second part of your question was a little fuzzy, so we captured the first part, but might ask you for clarity on that second.

Karl Ackerman

Sure, yes. Alicia, I’ll just repeat if I could. As these LTA’s roll off throughout 2026, I would imagine those new LTA’s will be priced at perhaps a higher value or higher order value, particularly given the widening gap between hard drives and SSDs. See if we can comment on the mix of LTA’s and how you think that progresses throughout 26 would be great. Thank you.

Dave Mosley

Yeah, thanks Carl. So as we roll off, say for example, somebody might have been qualified on a 2.0 terabyte per platter product or something and then they might be qualifying a 3.2 or even a 4 terabyte per platter as we roll forward.

So you know, we change based on the demand that we see. We change and our available supply. We change the pricing dynamic there. I think that’s one of the biggest things you’re pointing out. I’ll say that 26 is fairly booked. We talked about that in the call that to the extent that we can out execute our plan, it’ll be marginal like you saw last quarter. You know, we get the qualifications done a little faster, we ship A few more drives, that’s how we can do better than planned. But other than that, it’s fairly predictable in 26 and we’re looking to start 27 the same way.

Karl Ackerman

Thank you.

operator

The next question will come from Jim Schneider with Glenn Goldman Sachs. Please go ahead.

James Schneider

Good afternoon. Thanks for taking my question. I was wondering if you could maybe address, given everything you just said about demand and about the mix effect from Hammer this year, maybe can you give us any kind of directional guidance about where you might expect exabyte shipments to end up on a calendar 26 versus calendar 25 basis relative to the sort of long term targets you’ve laid out previously? It seems like you could do materially better than that. But I just wanted to confirm what your expectations were if you could give us the numerical range. Thank you.

Gianluca Romano

Hey Jim. Now we are now guiding calendar 26, but we said in our financial model, we said that we expect exabyte, nearline exabyte to grow in the mid 20%. We have done it a bit better if you look the last few quarters. And we always, as Dave said before, we always try to extract as many extra bytes we can from our manufacturing. So we are continuing this trend. But we don’t guide calendar 26, but.

Dave Mosley

Moving from 2.4 per platter to 3 per platter to 4 per platter. You can see that, you know, we’re on a trajectory like you describe it. When it gets down to the individual customer level, obviously we have to be very predictable because they need what they need and what they’ve, what we’ve committed to in order to build out that data center. So. So we’ll continue to execute that plan and maybe we can do a little bit better as we transition to 4 terabytes per platter.

operator

The next question will come from Amit Dharyanani with Evercore. Please go ahead.

Amit Daryanani

Good afternoon everyone. Thanks for being my question, I guess. Jean Luca, I’m hoping you can talk. A little bit about the March quarter guide because it seems to be a really sizable uptick in gross margins. I think it’s up like 250 basis points or 100% plus incrementals. Could you just. Is there any you would call out in March quarter that’s unique, that’s helping drive that kind of margin expansion? And is this really all coming from the core HDD business or is there a potential benefit from the old systems business helping you as well? Thank you.

Gianluca Romano

Hamish. Well, I would say we expect to be a very good quarter. I don’t think it’s different than what we had done before. No, it’s always based on the pricing strategy and the mix. As you know we qualified another customer on Emmer so we will ramp a little bit more volume on Emmer. This is helping us to get better margin but fundamentally is not really different in how we think we are going to execute the quarter. And it’s good. I think the incremental margin looks very good. Yeah.

Dave Mosley

And it’s not the systems business. The systems business is doing well but it’s fairly small scale in comparison.

Amit Daryanani

Got it.

operator

The next question will come from Mark Newman with Bernstein. Please go ahead.

Mark Newman

Great. Hi, thanks for taking my question and congrats on big numbers today. Just want to touch again on this the LTA’s and pricing arrangements you have. Just curious, do you think there’s an opportunity here for more significant price increases? You know in NAND flash we’re hearing things like 40 to 100% up Q on Q for some contracts. I appreciate hard disdrives, you have very long term agreements but I think there’s a lot of questions I’d like to just touch on this as well. A lot of as the LTA’s roll off is an opportunity for some of those to be repriced at a more significant, more significantly higher price to change the trajectory.

Certainly numbers are great you’re printing. We’re just trying to figure out could you start to see more significant price increases rather than at the moment you’re seeing kind of flattish down a little bit, up a little bit. But overall your, your average prices are flat which I understand is a mixture of likes to like slightly up offset by new products coming in at lower price. Just wondered if that may change and then if it’s just a quick update on Hammer Mix. If there’s any update on the trajectory of the Hammer Mix that you’ve outlined before.

Thank you very much.

Dave Mosley

Thanks Mark. A couple of points. On the Hammer Mix we necessarily constrained ourselves on the 3 terabyte per platter because the factories were fairly full and we knew we would be going to the 4 terabyte per platter product. So we’ve been leaning harder on that, making sure it gets through the development and qualification phases. As time goes on then we’ll move up and onto the 4 terabyte per platter very aggressively. So that helps you on the mix side. And the other thing about Hammer Mix is it’ll be necessarily mixed up. I think the demand for those products will be at the high capacity points, not necessarily the lower capacity points just yet.

And then relative to pricing, I think I said before, as we, as one long term agreement rolls into the next year or the next year, we’ve satisfied our existing supply commitments and people are looking at the new products, we have constrained supply of those new products. Then we look at what the demand is and we dictate where our pricing is. And you know, one of the very first questions I said it could be flat to up a little bit. You know, that’s the way I think about it right now. But it all depends on what the demand is.

The demand continues very strong. That’s great. And again what we’re seeing is people who can’t get what they need today. They’re saying, okay, I need to be able to plan my data center procurement out in the future. Let’s get more predictable in the future, has given us better visibility, helps us run our factories for better costs and so on. So that’s great.

Mark Newman

Thanks so much.

operator

The next question will come from Krish Sankar with TD Cowan. Please go ahead.

Sreekrishnan Sankarnarayanan

Thank you for my question. I had a question. I just want to put it in two parts. One is how much was your hammer as a percentage of your exabyte shipment last year? How much do you expect it to be this year? The genesis of the question is, I’m just trying to figure out obviously a lot of questions on the very strong gross margins. If there’s a way to put it in three buckets, like how much of the gross margin upside is driven by pricing, how much is driven by product mix, how much is driven by cost reduction by offshoring manufacturing.

Thank you.

Dave Mosley

Yeah, there’s really no offshoring manufacturing or anything like that involved. Our manufacturing operations around the world are, are doing quite well and quite full. So that’s helping from a cost perspective, but really no change in any manufacturing strategy to speak of relative. I would say a lot of what the benefits we’re seeing is mix and mix. Not just because we’re actually transitioning better products over time, but also because the demand for those products is quite high. You think about it, if you’re building a data center with a three terabyte per platter versus a four terabyte per platter, you’re going to be running that data center for a long time.

You want the higher capacity point. And to the extent that we can do that as predictably as possible, that mix is what’s driving the stability out in the market for us and helping us plan.

Gianluca Romano

Yes. We don’t give specific details on the impact of pricing, mix and cost, but they are somehow interrelated. The change in mix is helping with the cost reduction and the supply demand situation is of course supporting our pricing strategy. So they are all very good contributor to the increasing gross margin. And as we said before, this is going to continue through the calendar year.

Sreekrishnan Sankarnarayanan

How much of Hammer is the first?

Gianluca Romano

Well, Dave gave an indication of the unit that we shipped in last quarter, so I think you can fairly easily calculate that.

Sreekrishnan Sankarnarayanan

Thank you very much. Thank you.

Gianluca Romano

Thank you.

operator

The next question will come from Steven Fox with the Fox Advisors llc. Please go ahead.

Steven Fox

Thanks. Good afternoon. I guess I was just wondering on this, on your mix question, looking at your average capacity per drive being up 22%, like how much of that? Like obviously the supply demand environment has tightened over the last year and in reaction to that, are you taking steps to accelerate, you know, that mix up as the customers pushed you that way. Like I’m just curious how much you can control going forward now that we’re here on even tighter supply to sort of help your customers in terms of absolute pet advice you’re delivering.

Dave Mosley

Thanks, Steve.

So yeah, we are the lead time out of the way for FAB is quite long. So you know, we have to be predictable for our customers, say six months, nine months later, so on and so forth. That’s one of the reasons why we talk kind of a year at a time inside of these LTAs. So we start wafers based on what we know we’re going to be able to deliver so that we’re as predictable as we can be for our customers as we’re, if we’re deploying manufacturing, you know, engineering resources, we’re trying to get through these product transitions.

That’s what gets us the most exabytes after that. And so you know, going mixing up is kind of our goal. So that, you know, if that helps clarify what our strategy is.

Steven Fox

It does. Dave, I just wonder like when you had your analyst meeting, you set it at sort of a pretty well defined timeline for node transitions. Maybe just can you give yourself a report card on how you’re doing on some of those timelines? If we look out now versus the next year or longer term.

Dave Mosley

Y eah, I think that’s good. We’re, we’re on the plan or slightly ahead. And again most of that’s under our control. We can actually. We execute well. We’ve been executing well, some of it’s under our customers control as well. And the behavioral changes we’ve seen in the customer I made reference to earlier, they’re really Pulling hard because they need more exabytes and so that helps get the quals done quickly.

You know it helps roadmap alignment and then supply specific supply alignment which helps our factory.

Steven Fox

So Great, that’s helpful. Thank you.

operator

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

Aaron Rakers

Yeah, thanks for taking a question. Also congrats on the results. I want to go back to gross margin. I know you talked a lot about the pricing dynamics and the visibility you have, but you know the thing that stands out to me is you’ve been executing on like a cost per terabyte, you know of like a mid teens year on year decline these last several quarters as we roll out the 4 terabyte per platter mosaic drives. How do I think about that cost down curve? Is it mid single digit? Can you sustain a double digit? And would not, wouldn’t we expect the 4 terabyte per platter hammer drives to actually maybe accelerate the cost down given the ability to bring that into lower end other outside of nearline platforms.

I’m just curious how you think about that cost down curve.

Gianluca Romano

Yeah, we are very positive on the 4 terabytes per disk in terms of impact on the cost. As we discussed before, the unit cost tend to be fairly similar. But of course we are adding a lot of content per unit. So that will be a good help to reducing the cost and improving profitability. As you know we are qualifying two major customers on this new product. So the time to finalize the call and then ramp probably through the end of the calendar year and for sure well into the. The impact will be strong I think in the next calendar year too.

Dave Mosley

And you know we plan on making a big transition to 4 TB per platter over the coming few years and then getting to 5 terabytes for flutter as well. We do add complexity as we make those transitions. But you know I take a first order. The things that dictate the speed of the ramp are our ability to go work scrap and yields all through our supply chain and so on. And we’re working very hard on that. I like the product so I think provide for a bright and stable future for us. We just need to stay focused on it.

Aaron Rakers

Thank you.

operator

The next question will come from Timothy Arcuri with ubs. Please go ahead.

Timothy Arcuri

Thanks a lot. I want to ask about LTSAs. I think you said nearline capacity is allocated through 2026. So it sounds like both pricing and exabytes are locked in this year. But for 27 I think you said something that I. That I took that exabyte and pricing. Is not locked in, but you have. Some sort of agreement. So I guess I had two questions. First of all, is it right to assume that pricing is also locked in for all 26 and what sort of agreement are you referring to for 2027 if, if, if you know, volume and pricing is not locked in Next year. Thanks.

Gianluca Romano

Yes, for this calendar year now we said basically we have PO in place for. For all the quarters. So volume and pricing is well defined. As Dave said before, if in a quarter we can produce a little bit more, of course we will sell those exabyte in the open market at a good profitability. But I would say we have the vast, vast majority of the volume is already allocated. Calendar 27, we will start working on that fairly soon. Of course we have very good indication and agreement on volume, but we have not fixed the price yet.

Dave Mosley

Yes, and Tim, if this helps. So we haven’t really started the longest lead time parts, but we will very soon for the start of 27 and we need to start having those discussions with our customers. Which quals are we going to get through together with, you know, what exactly is the plan? Because a lot of them need predictability as well. So we’ll have to build in our factories. What? How? Based upon how hard they want to pull on those new products.

Timothy Arcuri

Okay, thanks.

operator

The next question will come from Mehdi Hosseini with Susquehanna Financial Group. Please go ahead.

Mehdi Hosseini

Yes, just a quick housekeeping item. Gianluca, your capex has been increasing on a Q over Q basis. How should I think about depreciation, especially since it did dip in the December quarter? Any color here will be great looking forward.

Gianluca Romano

Yeah, no, our, our CapEx is aligned to our target of 4 to 6% of revenue. I know we are actually at the bottom of that range. So it’s not increasing in terms of what we want to achieve or what we said. Of course, comparing to a period where we were more into the down cycle in terms of dollars, of course is higher. We are supporting our hammer transition and hammer rent. So our saver is nothing different than what we said.

Dave Mosley

Yeah, I think that’s what I think about it. Well, as well, Mehdi, is that if you go back two years ago and you use that as a baseline, you know, we were still significantly lower revenue, but also, you know, we were challenged on the supply and demand balance. Right now we’re in a totally different environment, of course, so we’ll probably stay well within the 4 to 6% range. But you know, as the revenue goes up, we’ll spend a little bit more and probably the first priority is maintenance tools and the things that we weren’t doing a couple of years ago.

Mehdi Hosseini

I apologize, I may have confused. I was focusing more on depreciation. Given these several quarters of increasing capex, should I expect a step up in depreciation? Looking forward.

Gianluca Romano

D epreciation will follow the capex. So you have your, I guess you have your model on the revenue so you can calculate the 4 to 6% of capex and then depreciation for us is only 10 years useful life. So you can probably model in that way.

Dave Mosley

It’s not like some other fabs. It’s not necessarily the huge part of the cost drivers. There’s a lot of other pieces of the cost that we can go manage. So gotcha.

Mehdi Hosseini

Thank you.

operator

The next question will come from Ananda Baruha with Loop Capital. Please go ahead.

Ananda Baruah

Yeah guys, good afternoon. Thanks for taking the question. Dave, while we have you, a little bit of a technical one. Are you, what kind of activity are you seeing? You know it’s sort of the so called warm tier of storage. It’s a question that comes up a bunch in our conversations. We’ve heard that it’s obviously growing. It’s growing. Both hard drive and flash storage is. Participating nicely but would love to get your input on it because I think there’s still. First of all we’d love to know if what we’re hearing is accurate but secondarily I think there’s a lot of people that are assuming that that’s really like it’s becoming a NAND tier, largely a NAND tier in a genai world and anyway, just love to get any. Context there that you have. Thanks.

Dave Mosley

Yeah, I think you have to be a little bit careful Ananda. So there are applications that are very memory dependent that are attached to compute and some of these applications are neat. I like them. When you get, when you start talking about big data storage, if you will in data centers, the tiering architecture is fairly well set and probably won’t change based on economics. And also architectures that are well known people know how to play. So if the concept is that drives aren’t working hard, they’re, you know, in the background just storing data, that’s not the way a good way to think about it.

That’s not the way hard drives are being used right now. They’re working 24 7. A lot of times they’re optimized for performance themselves, largely streaming performance, not random small block workloads. That’s more of a memory thing. And so, you know, if you had an application that’s random, small block, it’s probably memory. If you have big data, it’s probably a little bit of memory on the front end and a lot of hard drive on the back end. And we think that there are applications across the entire spectrum, of course, but we think that in the future when we start to talk about the concepts in their enormity, about checkpoints and physical AI and video and things like that, it’s large, large data.

So that the architectural tier that stores the data will probably remain constant for the next decade.

Ananda Baruah

That’s super helpful. I’ll keep it there. Thanks a lot.

Gianluca Romano

That’s great.

operator

The next question will come from Vijay Rakesh with Mizuho. Please go ahead.

Vijay Rakesh

Yeah, hi. Thanks, Dave. And just a quick question on Hammer. I know you’re ramping it faster in the March quarter. Should that drive a much better gross margin profile? I guess. And any thoughts on how we should see the margins improve? I guess as Hammer starts to ramp and I follow up.

Gianluca Romano

Abhijai, if you are referring to the March quarter, of course the ramp of Hammer is included in our guidance and our guidance is indicating a fairly good improvement in gross margin again. And then I said for the rest of the calendar year we expect both revenue and profitability to improve sequentially. And of course part of that is coming from additional Mr. Products.

Dave Mosley

We think demand will be strong for the 4 terabyte per platter, of course. And so that’s one of the reasons why we’re making that a priority in the transition that we go through this calendar year and in the next.

Vijay Rakesh

Got it. Very helpful. And just a quick question also on the OPEX side, you know, very nice OPEX, same time last year somewhere in the 14% range. Now it’s down to 10%. I know, Jenka, you said probably that’s. A long term target. But looks like as Dave mentioned, with. Top Line ramping up with all the design, looks like OPEX could go down again. Is that fair? As a percent of mix,

Gianluca Romano

I would say no. We are getting closer and closer to our fourth target of 10% of revenue for OPEX. We are almost there. We should be there actually in the March quarter. And then of course now that we relax our cost control, we will continue to keep our cost control and revenue supposed to increase. So we can probably do it a bit better.

Dave Mosley

Yeah, I’m glad you asked that, Vijay, because you know, obviously a few years ago the tough times that we went through we weren’t investing in ourselves to the rate that I’d like. And of course, it’s with the hammer transition in front of us, that was a lot of work. Now that we’ve kind of cleared that hammer transition, we can see the future fairly well. It’s, you know, the clouds are parting, if you will, and we can see aerial density opportunities in front of us. And we will take that, the money, such as it is, even staying within our same model, and we’ll take that money and reinvest in ourselves so that we can continue to drive the aerial density.

Vijay Rakesh

Got it. Great. Thanks a lot.

Dave Mosley

Appreciate it.

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

Thank you, Nick, and thanks to everyone for joining us on the call. The Seagate team is executing very well, delivering on our financial targets and advancing aerial density roadmaps and successfully qualifying customers on our hammer based mosaic products to address the sustained and growing demand for data storage. As data creation accelerates, driven by both traditional workloads and these emerging AI applications, Seagate’s transformational technology positions us well to capture the significant demand opportunities ahead. I’d like to thank our employees for their dedication and innovation and our customers and suppliers for their trust and collaboration, and our shareholders as well for their continued support.

Together, we’re driving Seagate’s ongoing success. Thank you.

operator

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