Seagate Technology plc (STX) Q4 2021 Earnings Call Transcript

Seagate Technology plc  (NASDAQ: STX) Q4 2021 earnings call dated Jul. 21, 2021

Corporate Participants:

Shanye Hudson — Senior Vice President of Investor Relations and Treasury

Dave Mosley — Chief Executive Officer

Gianluca Romano — Executive Vice President and Chief Financial Officer

Analysts:

Lenny — Cowen and Company — Analyst

Katy Huberty — Morgan Stanley — Analyst

Sidney Ho — Deutsche Bank — Analyst

Wamsi Mohan — Bank of America — Analyst

Thomas O’Malley — Barclays — Analyst

Steven Fox — Fox Advisors LLC — Analyst

Ananda Baruah — Loop Capital — Analyst

Tyler — SIG — Analyst

Kevin Cassidy — Rosenblatt Securities — Analyst

Aaron Rakers — Wells Fargo — Analyst

Patrick Ho — Stifel — Analyst

Shannon Cross — Cross Research — Analyst

Presentation:

Operator

Good morning and welcome to the Seagate Technology Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. My name is Tabitha and I’ll be your coordinator for today. [Operator Instructions]

At this time, I would like to turn the call over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye.

Shanye Hudson — Senior Vice President of Investor Relations and Treasury

Thank you. Good afternoon, everyone and welcome to today’s call. Joining me are Dave Mosley, Seagate’s Chief Executive Officer and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our June quarter and fiscal year 2021 on 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 8-K that was filed with the SEC. 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 a reconciliation to the corresponding GAAP measures is not available without unreasonable efforts.

As a reminder, this call contains forward-looking statements including our September quarter financial outlook and expectations about our financial performance. Market demand industry growth trends planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions. These statements are based on management’s current views and assumptions and information available to us as of today should not be relied upon as of any subsequent date. Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K and 10-Q filed with the SEC, our Form 8-K filed with the SEC today and the supplemental information posted on the Investors section of our website. As always, following our prepared remarks, we’ll open the call for questions.

I’ll now turn the call over to you, Dave.

Dave Mosley — Chief Executive Officer

Thank you, Shanye and a warm welcome to everyone joining us today. Seagate ended fiscal 2021 on a strong note, delivering outstanding June quarter performance and fiscal year revenue that exceeded expectations. These results reflect broad-based demand across the mass capacity end markets and incredible execution by our global team, which together, but the faster than anticipated progress toward our long-term financial targets. In the June quarter, revenue topped the $3 billion mark for the first time in six years. And we delivered non-GAAP EPS of $2 per share, which was at the top most end of the upwardly revised guidance range that we provided in early June. Additionally, we expanded non-GAAP gross margin to 29.6% and expect to be inside our long-term target range of 30% to 33% ahead of schedule. The demand strength and favorable mix has accelerated the timeframe to achieve better supply demand equilibrium which is supporting firmer pricing conditions.

We are reporting these exceptional results of time of optimism in parts of the world as vaccinations for grants and economies begin to reopen. In fact, we are hosting today’s call from Dublin for the first time in six quarters. While the pandemic remains a difficult reality for many parts of the world and we remain vigilant and continue to manage the business through this period, it is clear the macro level that recovery is underway in the markets that we serve. Seagate is entering this recovery period in a very strong position helped by the fact that we executed incredibly well throughout the crisis. For fiscal year ’21, we generated nearly 2% year-over-year revenue growth exceeding our expectations. We grew operating profit faster than sales and achieved operating margin of 15.4% for the year showing the leverage in the business. And we returned substantial amount of capital to shareholders, including $2.7 billion in dividends and share repurchase, retiring more than 13% of our outstanding shares in fiscal 2021.

In addition to recording strong financial results, our innovation engine has not slowed down. We extended our HDD technology leadership as evidenced by Seagate being the first company to commercialize HAMR technology and the first to deliver dual actuator performance drives, which we’re now shipping in high volume to support multiple customers. We leveraged our areal density gains to streamline our product road map making us better able to meet changing customer demand requirements, while maintaining an attractive cost profile. We also leveraged the strength of our common mass capacity platform to execute our 18 terabyte RAM plans to meet customer demand. We expect to begin shipping 20 terabyte PMR drives in the second half of this calendar year.

Finally, we expanded our product and service offerings with the launch of Lyve edge to cloud platforms and remain on track with the buildout of our four Lyve cloud metro edge locations by calendar year end. A year ago when the business challenges posed by the pandemic were very acute, I made the statement that Seagate would emerge from the crisis stronger than ever. With the financial performance and innovations that I’ve just highlighted, I believe that our team has delivered on that claim. And I think it is stronger than ever. We are continuing to focus on unlocking more value for our customers and shareholders. For example, last month, we introduce CORVAULT to our family of cost efficient high density sources. CORVAULT combines Seagate’s internally designed storage systems ASICs with our intelligent self-healing software and data security technologies, which results in a high reliability storage solution at petabyte scale, ideal for private cloud and macro edge datacenters.

We are also working directly with customers to unlock value. Many of our hyperscale customers already employing AI and machine learning to reduce the amount of human intervention necessary to maintain and repair that are logically the storage price. We recently teamed with Google Cloud to take data intelligence one step further. Together, we developed models that help predict drive failures before they occur. These model comes to lower operational costs and prevent potential problems to their end users, a clear win-win.

Let’s turn now to the current market environment, starting with an area that has garnered significant interest in recent weeks. Storage-centric blockchain such as those used by Filecoin for decentralized storage applications with Chia cryptocurrency which is considered an environmentally friendly alternative to other blockchains that utilize energy intensive computational power to validate transactions have significant interest. During the June quarter, we saw meaningful increase in HDD demand due in part to the initial buildout of the Chia net space which is comprised of both new and repurposed HDDs. By our estimation, new Chia demand represented at most a mid-single digit percentage of total industry exabyte shipments during the quarter, primarily into the distribution channel. This incremental demand served to tighten HDD supply dynamics and an increase in the robust demand environment.

While the future growth outlook in this space remains unclear, we are excited by the potential applications associated with innovations and decentralized file storage. For Seagate, strong growth in the traditional mass capacity market remains the primary driver of HDD demand. In the June quarter, mass capacity represented close to 70% of Seagate’s HDD revenue supported by broad-based demand for our nearline drives and the third consecutive quarter of sales growth in the both cloud and enterprise customers. Cloud datacenter demand has remained healthy and steady for the last 18 months and current indicators suggest that that trend will continue.

While it’s clear that the pandemic played a big role in accelerating digital transformation, hyperscale industry leaders expected digital adoption curve to continue accelerating even as COVID recedes. At the same time businesses are preparing for employees to return to the workplace which is reinvigorating On-Prem IT infrastructure investments and supporting ongoing recovery in the enterprise markets.

We also experienced stronger than anticipated recovery in the VIA markets during the quarter due in part to tighter supply conditions. We currently foresee relatively stable demand through the second half of the calendar year. Looking ahead, secular demand for mass capacity data combined with signs of macro recovery represent significant opportunities for Seagate and set the stage for continued strong financial performance and cash flow generation. These factors combined with our broad product portfolio underpin our forecast to grow revenue in the high single-digit percentage range or more in fiscal 2022 which is well above our long-term financial model range.

I’ll now hand the call over to Gianluca to cover the financial results.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Thank you, Dave. Seagate executed extremely well in the June quarter, delivering very strong top and bottom line growth that was fueled by accelerating demand in the mass capacity market and distribution channel. Revenue was $3.01 billion, up 10% sequentially and 20% year-over-year. Non-GAAP operating margin expanded to an 18.1% in the upper end of our long-term target range of 15% to 20% of revenue. And non-GAAP EPS was $2 per share, up 35% sequentially and 67% year-over-year.

Ongoing demand momentum for our mass capacity product supported a third consecutive quarter of record hard disk drive capacity shipments for totaling 152 exabytes, up 9% sequentially and 20% year-on-year. More than 80% of total exabyte were shipped into the mass capacity market, which include Nearline, VIA and NAS products. Mass capacity shipment hit the record 123 exabyte in the June quarter, up 11% sequentially and 36% year-over-year. We are continuing to leverage our manufacturing agility and drive operational efficiencies to meet our customers’ timing. Mass capacity now represents close to 70% of total HDD revenue, further demand for our nearline drive, a strong recovery in the VIA market of record mass capacity revenue of $1.9 billion, up 16% sequentially and up 29% compared with the prior year period. Sales of our Nearline product grew strongly quarter-over-quarter reflecting the rapid uptick in demand from store-centric blockchain layered on top of healthy cloud datacenter demand and improving enterprise OEM customer TAM [Phonetic] as we discussed last quarter.

We attribute incremental sales of our mid to high capacity Nearline products in distribution channels to Chia partners, while our cloud and OEM customers consumed a majority of our high-capacity supply including our 18 terabyte drives which are shipping in high volume. Overall nearline shipment increased to 101 exabyte, up 6% sequentially and 28% year-on-year from record levels in each of the comparable quarters. Stronger-than-expected demand in the VIA market lead to a sharp sequential increase in revenue. Extended project got underway and customers invested to supporting future demand.

Looking ahead, we expect relatively stable demand into the second half of the calendar year. The legacy market end up well in the June quarter with revenue of $854 million compared with $864 million in both the prior quarter and the prior year period. Exabyte shipments remained flat quarter-over-quarter as roughly 29 exabyte. Ongoing demand for our mission-critical drive and better than expected sales of our consumer products partially offset the anticipated decline for PC drives. We expect relatively stable demand for both mission critical and customer drives over the next couple of quarters which would result in more moderate year-over-year revenue decline for the overall industry market.

Finally, turning to our non-HDD business, revenue increased 16% sequentially and 42% year-over-year to a record $276 million. We continue to drive momentum in our system business which help a simple and scalable petabyte solutions targeted for enterprise and private cloud customers. In the June quarter non-GAAP gross profit increased to $892 million compared with $749 million in the March quarter and $686 million in the prior year period. We incurred $32 million of COVID related cost during the quarter. Calendar year-to-date, the vast majority of these costs are attributed to validated state charges which we expect to persist through fiscal 2022. However given the uncertainty around when or if these costs will abate, starting in fiscal Q1, we plan to stop calling them out.

Our resulting non-GAAP gross margin expanded by 219 basis points to 29.6% including slightly more than 1% headwind from COVID related costs. Total HDD margin really inside our targeted range of 30% to 33% and we now expect total company non-GAAP gross margin to be at the low end of the range in the September quarter reflecting better alignment in supply and demand and the transitions to mass capacity project that has taken place. Non-GAAP operating expenses came in at $346 million, up 5% sequentially reflecting higher variable compensation associated with a strong performance. We are tightly managing expenses and expect to maintain opex at approximately the same level for the next few quarters.

The combination of higher sales and margin expansion resulted in non-GAAP operating income of $546 million, up 30% sequentially and over 46% year-over-year. Non-GAAP operating margin was 18.1%, up 274 basis points sequentially and 330 basis points year-over-year. And solidly inside our long-term target range of 15% to 20% of revenue. Based on the little share count of approximately 233 million share, non-GAAP EPS for the June quarter was $2 per share, the highest level since fiscal ’12. Capital expenditures were $124 million in the June quarter and just under $500 million for the fiscal year which represent 4.7% of our revenue [Phonetic] in line with our long-term target range.

Through strong expense discipline and efforts to improve manufacturing efficiencies we reduced capex by about 15% in fiscal 2021 exiting the year with better supply demand balance. Inventory was $1.2 billion, down 6% sequentially with days inventory outstanding declining for the third consecutive quarter to 51 days. Our teams have done an outstanding job of working with our suppliers and partners to manage strategic inventory levels and mitigate supply chain disruption including the recent COVID-related restrictions in Asia, which we compare to closely monitoring.

In the June quarter, we increased free cash flow to $354 million up 29% both quarter-over-quarter and year-over-year. Our focus on optimizing profitability and cash generation provides flexibility to reinvest in the business and total capital to our shareholders. We use $154 million to fund the quarterly dividend and $228 million to repurchase 2.6 million ordinary shares, exiting the quarter was 227 million shares outstanding and approximately $4.2 billion remaining in our authorization. We retired 34 million shares during fiscal year 2021 and returned, a total of $2.7 billion for dividend and share repurchases. Based on our current outlook, we expect to maintain a robust capital return program in fiscal 2022 while maintaining a strong balance sheet and liquidity profile.

Cash and cash equivalents remain relatively stable at $1.2 billion and total liquidity was approximately $3 billion, including our revolving credit facility. These levels are more than adequate to support our operations and business needs. As we entered the fiscal 2022, the demand environment remained strong and we continue to execute our product and technology roadmap to deliver on our customer requirements while driving value for Seagate.

Looking ahead to our outlook for the September quarter, we expect revenue to be in the range of $3.1 billion plus or minus $150 million. We expect non-GAAP operating profit to grow faster than sales resulting in non-GAAP operating margin as the upper end of our long-term range of 15% to 20% of revenue, and we expect non-GAAP EPS to be in the range of $2.20 per share, plus or minus $0.15 representing a sequential growth of 10% at the midpoint.

In summary, we continue to achieve outstanding results supported by our unwavering focus on operational and strength of our product and technology portfolio. We are already demonstrating performance consistent with our financial target and then for fiscal ’22 well positioned for top and bottom line growth.

I’ll now turn the call to Dave for final comments.

Dave Mosley — Chief Executive Officer

Thanks, Gianluca. Seagate is executing well delivering financial performance at or above our commitments, maintaining relentless focus on total customer experience and deploying capital to enhance value for all stakeholders. We kept fiscal ’21 with our strongest performance of the year and we expect that positive momentum to continue moving forward. We’ve demonstrated strong leverage in our business model to grow operating profits faster than revenue and in turn drive free cash flow generation.

Our ability to consistently generate free cash flow provides the flexibility to fund future growth and employee robust shareholder return program as well. Based on the current outlook, we expect to grow free cash flow appreciably in fiscal 2022. Our employees have been crucial to Seagate’s current success and key to driving our future. Over our 40-year history, Seagate has transitioned many times to address the evolving storage industry landscape. For example, we’ve recently pivoted in our factories and technology to deliver mass capacity solutions and have emerged a leader.

Now, we are focused on addressing the next mass data challenge with our live product platform. To keep pace with these changes, we are investing to re-skill and redeploy Seagate employees as needed to support our future growth and respond to the changing demands of the business. For example, we launched a tool called career discovery earlier this year, which has already helped Seagate to establish networking and mentor connections as well as redeployment opportunities for hundreds of employees. Seagate has a broad bench of talent with decades of hardware and software experience, formidable supply chain management manufacturing skills, deep knowledge of chip design and data analytics. This expertise and strong customer relationships allow Seagate to understand the global mass capacity ecosystem and its architecture is better than anyone.

Tools such as Career Discovery are helping us deploy our diverse resources to support our future needs while enabling Seagate to maintain opex efficiencies. We are confident that this focus on people will put us in a firm footing for continued growth and success. As we close, I want to thank both Seagate’s employees and those in our supply chain whose efforts enable our ongoing leadership in mass data solutions. Our customers and our shareholders are equally deserving a thanks for their ongoing trust and support at Seagate.

Gianluca and I are now happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Karl Ackerman with Cowen and Company. Karl, your line is open.

Lenny — Cowen and Company — Analyst

Hi, can you hear me okay? My first question — this is Lenny [Phonetic] on for Karl Ackerman. I have two questions. My first question, what sort of feedback have you received from current hyperscale that will qualify your 20 terabyte nearline drive asking because you have previously indicated, it is not a cost effective note, yet, this is a critical step function until you reach the 24 [Phonetic] terabyte HAMR. When should we expect 20 terabyte HAMR to reach the customer for nearline shipment? Is that something that could occur in fiscal ’22?

Dave Mosley — Chief Executive Officer

Yeah, so, thanks, Lenny. I don’t think we ever said that 20 terabytes would be a crossover point for HAMR to your point. So, we have a number of different 20 terabyte platforms coming, PMR, SMR, HAMR, there is a lot of different flavors of them and they’re targeted different customers, so different qualification schedules for each. We’re very aggressive with the 20 terabyte qualification, because the heads of media for the PMR version that we referenced in the prepared remarks is already in the high volume manufacturing for 18 terabytes and end the capacity points below as well, 16 and so on. So we’re very confident in that. And we’re ramping aggressively with customers, giving them samples getting through qualifications and fairly optimistic about that for the back half of the year.

Lenny — Cowen and Company — Analyst

Thank you. And — yes, thank you, and just one more follow-up if I may. On demand outlook in capex, how are you thinking about adding incremental heads in disk capacity relative to your fiscal ’22 outlook? Chia [Phonetic] currency has clearly led to a supply shortage of mid and high capacity drives, datacenters, yet, the postponement of the Jedi contract by the Department of Defense appears to meet capex the demands for the next few quarters. I’m hoping, will they address your yield capacity of the outlook for datacenter to expand over the next few quarters.

Dave Mosley — Chief Executive Officer

Yeah. I’d say within the — within the head factory, for example, which is the longest lead time part, we have well over 100 million heads per quarter going out. So we have the ability to mix — to change the mix as we see failures. So some of the demand changes that we saw are fairly easy use inside of our portfolio which has been really trimmed down, made very efficient, especially with the common platform, we have the ability to change from one to the other. We are always bringing on more capacity by putting new tools online to hit the new technology nodes, that’s within our capex envelope all the time and we’ll just continue to watch this. I think we can continue to grow more exabyte supply with technology transitions, more exabytes with areal density, so to speak. And we’ll continue to watch and be nimble in the markets as well. Gianluca, you want to add something.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah, we discussed in the last few quarters about the need to realize supply and demand, and we’re going to get closer and closer every quarter. For the overall capex fiscal ’22, we think we will have the same target of fiscal ’21 between 4% and 6% of revenue. So we will add capacity, but we will also be looking at — keeping this alignment between supply and demand.

Operator

Your next question comes from the line of Katy Huberty with Morgan Stanley.

Katy Huberty — Morgan Stanley — Analyst

Yes, thank you. As you walk through the various segments, nearline via mission critical, consumer, you talked about stable trends across the board. Yet the full year revenue growth guidance assumes that there will be a revenue run rate reduction from the $3.1 billion September guide. Can you just talk about what will drive lower revenue as you move through the year and maybe what sort of the first half versus second half looks like? And then I have a follow-up.

Dave Mosley — Chief Executive Officer

Thanks, Katy. Yeah, I think we are — we are chasing the demand right now, obviously. And so we think the front half is a little stronger. In the back half there will be a more muted seasonality, normally accustomed, we do — there is also, that’s three quarters away, there may be some variability there. So we do have good relationships with all of our customers across all these product sets now and they give us pretty strong sense of what their demand profile is going to be through the year. So I would characterize as muted seasonality for now, but significantly, like we said at least high single digits in revenue growth year-over-year. So it’s still significantly up and we’re still chasing it.

Gianluca Romano — Executive Vice President and Chief Financial Officer

We think we will have now a very strong second part of calendar ’21. Last quarter, I think we said at least 10% increase year-over-year. Right now, we think, we’ll be at least 15%. So for sure another couple of quarter, very strong. And then as usual we have in our plan some seasonality for the legacy market and some of the mass capacity like NAS [Phonetic], but could be different as we have seen last year for example.

Dave Mosley — Chief Executive Officer

I think the other thing is we — we’re running to the earlier question, we’re running in the high volume. The heads in media that we already need to make more ’18s or ’20s or whatever sort of cloud markets were to take up above our plan, we can stretch there, I think in the back half of the year as well.

Katy Huberty — Morgan Stanley — Analyst

Okay. And then the pricing environment as you said has firmed up faster than you expected. What will determine whether those prices can hold and what are you assuming for price change in that full year guidance for high-single-digit growth?

Dave Mosley — Chief Executive Officer

Across the whole portfolio, it’s really the balance of supply and demand. So it’s not just about the exabytes at the highest capacity points, it’s — there’s strong demand in the gear markets, there is strong demand for entire, like families. This quarter, strong demand for even some of the heightened desktop products. So I think we’re trying to balance all these things for the customers. They’re are giving us predictability and they need predictability in the time of disruptive supply chain, everybody is trying to get the complete kits to attack all these market opportunities that they have. So that’s really what’s affirming it up. And I’ll let Gianluca kind of quantify it through the course of the fiscal year.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah. Now, for the time being, I’ll stay in the plan, we have a fairly strong pricing environment, especially for the mass capacity, the legacy is still expected to decline little bit. But in general as we were discussing before, it will depend from this alignment between supply and demand, but right now it’s fairly good. We want to give it at this level.

Katy Huberty — Morgan Stanley — Analyst

Thank you. And congrats on the quarter.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Sidney Ho — Deutsche Bank — Analyst

Great. Thanks — and thanks for taking my question. My first question is on the nearline drives. Given, how strong Nearline’s exabyte shipment had been in the past two quarters, I think, is up 40% in the past two quarters. I know crypto is a factor, but you also mentioned cloud is strong as well. Are you concerned that we’ll see an inventory digestion phase soon or maybe ask slightly differently. Do you have a sense as to how much inventories build in the channel or have your customers especially crowded in the price guide at this time.

Dave Mosley — Chief Executive Officer

Yeah, thanks, Sidney. I don’t think there’s too much inventory out there by any stretch and imagination, it’s a little bit different if you look at the enterprise channels. They’re relatively lower inventory and we did see growth in the enterprise, quite a bit quarter-over-quarter as far as the cloud is — goes worldwide, I think it’s fairly healthy demand, it’s fairly well distributed. This is what we’ve been talking about for the last couple of years. We’ve always wanted to a lot of different customers pulling at these levels, and we’ve seen that. So we’re fairly happy with the demand outlook and what we’ve got into build plan right now for the next couple of quarters, because the lead time is so long as we — as we’ve said before. That’s really what builds our confidence is these great conversations, we’re having with customers worldwide.

Sidney Ho — Deutsche Bank — Analyst

Great. Maybe a follow-up question, on the gross margin side, you talked about gross margin to be within the long term target range of 30% to 33% in September quarter. Curious if you have — if you have to unpack the gross margin guidance, what are the some of the key components for this margin uplift? What is like — like pricing product mix, yield improvements and whatnot and how should we think about those factors that are playing out beyond in September quarter? Thanks.

Dave Mosley — Chief Executive Officer

Yeah, thanks. And I’ll let Gianluca chime in here too. The first thing I would say is that, there were a lot of swaps during the quarter from maybe some of the things we have planned into things that we’re actually moving faster. And like I said when you have demand everywhere, those swaps, actually reflect a better supply and demand balance than what we forecast. And that’s probably the biggest — the biggest thing, inventories came down, factories are very full, the heads and media factories of course are being staged for the next couple of quarters as well. So all that benefits us financially. There is — there is a mix up as well and we’re going to more cost off — most drives in the next few quarters as well. So we’ve started into the family of 18s that we’ve talked about, we like the cost on. We have a lower capacity Nearline drive, that’s actually mixing in as well that we’ve launched.

So those are all the positives. There are still lot of headwinds from freight — freight logistics around the world. It’s still — it’s still there. It’s still an overhang and there’s obviously complement prices in various sectors that are — that are happening because of shortages worldwide that are affecting us a little bit to the headwinds.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah, we had a very good quarter, next, Q4 and now we are already guiding Q1 is higher level. I would say one of the major reason is this pricing environment that is improving. The second reason is the mix that is shifting more and more to the mass capacity. In fiscal Q4, 70% of the revenue was already on mass capacity and we expect that to continue to increase. The other major reason that you will see throughout fiscal year ’22 is increase of our cost optimized drive. So the drives that are based on 2 terabytes on disk, and that will stay with us through the fourth quarter and will continue to bring improvement to our gross margin.

Sidney Ho — Deutsche Bank — Analyst

Thank you.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America.

Wamsi Mohan — Bank of America — Analyst

Yes, thank you. Dave, you said mid-single-digit percent of HDD exabyte demand from Chia in the June quarter for the industry, so if I map up to Seagate, it looks like Chia contributed maybe 60% of the incremental sequential exabytes. So if you see this demand flatten out, how comfortable are you that supply demand will continue to be tight enough to keep pricing favorable? Then I have a follow-up.

Dave Mosley — Chief Executive Officer

Yeah, thanks, Wamsi. It’s really hard to forecast exactly what’s going on in Chia, and not just because of Chia itself, because they are fairly transparent with their numbers, but because of the entire space that’s developing. We did say that, on the growth of the NAS space that we’ve seen to date, there’s probably a fair amount of refurbished drives or drives that have been purchased one or two quarters ago, so it’s a relatively small contribution as of yet to Seagate’s overall revenue. And even in the exabyte growth perspective, I don’t think it’s very big. So we said maybe mid-single digits like you referenced.

I think it’s a space to watch. We love it because it’s very innovative, not just in Chia and those applications, but also in the IDFS applications that we talked about last quarter. The big takeaway is, if it continues to grow and fast, it will have to grow with more new build, so that’s something for us to watch. But we’re not really forecasting very much of that into our guide right now, because its — we’re going to wait and see a little bit, and we’ll react to customers who are trying to drive more demand in the channel as it happens. Mass capacity is still our business — that’s what I would take away, and that’s how we plan our exabytes and that’s how we have our customer relationships across the breadth of our portfolio. So I don’t think Chia was that impactful from that respect in the last quarter, and looking forward we’re not really forecasting it very much, we’ll just react to it.

Wamsi Mohan — Bank of America — Analyst

Okay, that’s helpful. And then as a follow-up, you’ve added gross margins for next quarter within your long term range. What would need to happen for you to fall out of that range as you go through the course of the year?

Dave Mosley — Chief Executive Officer

Yeah. I think that would be all about cost and maybe some kind of disruption to the overall supply demand picture that we’ve been working on. If you go back six quarters, eight quarters, when we decided to make some of the investments that we did for the mass capacity platform on 16s and then transitioning to 18s and everything else, we put on capacity for that, we pivoted our lines for that. And that’s when the pandemic hit and the supply chain was so disrupted, that’s the thing that really hurt us.

What’s allowed us to climb back into the model is the exabyte demand is prone. I think we’d be a lot more resilient this time at this higher level, but that would still be the watch item. We don’t forecast that by the way, we think that the exabyte curve is still going up and over the next few years, you know our thesis, it’s going to grow very big, and so we’re still fairly bullish on exabyte growth without this thing taking a backseat or a u-turn. But in these environments we’re — everybody is careful, so that’s the way I’d characterize it.

Wamsi Mohan — Bank of America — Analyst

Okay, thank you so much.

Operator

Your next question comes from the line of Thomas O’Malley with Barclays.

Thomas O’Malley — Barclays — Analyst

Hey guys, thanks for taking my question. I just wanted to follow up on Katy’s earlier question talking about the seasonality for the year. Gianluca, I believe you said that the second half of the calendar year would be very strong. And I think you mentioned like 15% year-over-year. That would imply a down December. Can you talk about what you’re seeing into the December quarter that’s weakening or can you clarify that 15% year-over-year comment?

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah, I said at least 15%, so I don’t think it’s implying really a decrease in the December at this time [Phonetic] would be probably fairly close. I would say the seasonality that is expected is more into the March and June quarter as it was the case in the last few years with the exception in fiscal ’21. We think in general, because the mix of mass capacity is continuing to improve, the seasonality will be more muted in the future maybe in this calendar year, but there’s a little bit less visibility for us when we go into the March and June quarter.

Thomas O’Malley — Barclays — Analyst

That’s helpful. My follow-up is around Nearline. I know that you guys don’t like to talk about share, but clearly you’re in a really nice leadership position here. Can you talk about that leadership position, how you feel like you’re maintaining that lead, and for the remainder of the year, do you think that from a competitive perspective, you’re going to see any change in that market? Thank you.

Dave Mosley — Chief Executive Officer

Thanks, Tom. We actually — well, we don’t manage for market share, we’ve been talking about that for quite some time. We’re very happy with this platform, 16s going to 18s going to 20s, and going beyond as well, and obviously that’s allowed us to be very flexible, so when people come in for a few more units — they want to swap something in their plan, they want to get on upside, we can actually get it done out of the factories and that’s probably the biggest reason for why we’ve done really well. I think back on the 16s, we had that leadership just in total capacity available.

As far as I’m concerned, we’re executing the plan, so we’re out talking to customers. We tell them what do you need, we plan that way in advance. We talked about this last quarter, that if you want an 18 in December, you better tell me now because I’m starting the units for it now. That is, I think, really resonating with customers right now — we can be predictable like this, so that’s the way we’re planning the business and we’re fairly happy with the portfolio. Again, not driving really for market share or anything like that. I think that’s how our customers are managing us as well, which is be predictable for me and — because these are massive investments that they have to make as well, so they need to know that the product’s coming.

Thomas O’Malley — Barclays — Analyst

Thank you.

Operator

Your next question comes from the line of Steven Fox with Fox Advisors LLC.

Steven Fox — Fox Advisors LLC — Analyst

Thanks, good morning. Just to follow up on those last comments, Dave, can you maybe talk about with now basically supply-demand balance, how you engage differently with some of those customers? What would be the incrementals that get you to add capacity going forward? Then I have a follow-up.

Dave Mosley — Chief Executive Officer

Yeah, I’ll tell you it’s kind of more of the same, really, because if you think about it, if you were buying 16s before and now you want to ramp to 18s or 20s, we’re still having the same discussion, it’s just a different drive. We’re confident in our yields and throughput and our ability to go hit those high volumes. There’s not much legacy business to take heads of media out of anymore, to your point, but there’s still, I said well over 100 million heads per quarter to be able to do some swaps. The issue is just lead time, so if the swaps are in the last two or three weeks of the quarter, there’s no way, right, so that’s what’s changing, I think, in the market.

I don’t think we’ll go back into a point where we put over-capacity in for that. I think we just — we get into the — stay inside of our financial model, we’ll invest in the capex that we see for the demand, and then maybe if the demand goes even bigger than we can up our investment, we can do that one tool at a time. We don’t need to do it with a massive swings, I think.

Steven Fox — Fox Advisors LLC — Analyst

That’s helpful. And then just secondly on the Lyve platform, it sounds like you’re getting some more technology validation or at least proceeding like you expect it. Is it changing any of your thinking for ’22 in terms of the non-HDD business? Thanks.

Dave Mosley — Chief Executive Officer

No, I don’t think so, but the non-HDD business did grow, as we talked about in the prepared remarks, so we’re fairly happy with the breadth of our portfolio and how it’s growing. Relative to the Lyve business, the market is clearly out there. There are people who are struggling with the data that they have on the edge, being able to move that into the cloud, find those temporary resting spots like we’ve talked about a lot with Lyve such that they can move it to its final destination in some cloud service provider or multiple cloud service provider instances. So we — I’m really encouraged by all the customer engagements that we have. We have to learn this market really well and then it will grow, so I’m really pleased with what I see and I hope to share that at some point in the future with everyone.

Steven Fox — Fox Advisors LLC — Analyst

Great, thanks so much.

Operator

Your next question comes from the line of Ananda Baruah with Loop Capital.

Ananda Baruah — Loop Capital — Analyst

Hey, good morning, guys or good afternoon to you guys. Thanks for taking the questions. Hey, Dave, how would you sort of describe your thoughts around the length of this hyper scale cycle at this point? And I guess what’s sort of the personality of it as well? Then I have a quick follow-up.

Dave Mosley — Chief Executive Officer

Thanks, Ananda. It’s interesting, because I think the front end of this cycle, if you will, is not really about adding too much mass capacity. It was more about just all the digital transformation that was going on during the pandemic, so it was networking and it was compute and it was making sure the applications can run with much, much heavier workloads than they were certainly designed for or were contemplated six months earlier. It was a tremendous stress on people.

It’s been our thesis that the storage back end to that will come and it will come bigger, and I would say that even the signal we’ve seen that’s fairly steady growth of the cloud, I still think it’s going to grow even bigger, so it’s a very different cycle, to your point. It’s not a matter of putting on excess capacity and then learning some kind of way to use that capacity better out into the market. I think it’s a matter of making sure you focus all your investment dollars on those applications, satisfying everyone on the front end usually from a performance perspective, and then the data will grow. The back end of the cloud is clearly going to grow from here, and so we’re very excited about that and making sure we have our portfolio as clean as we can by the time that the really big numbers come.

Ananda Baruah — Loop Capital — Analyst

How do you want us to think about it as we get into the March-June quarters? Typically the brakes would come off a little bit. Is that the appropriate way to think about it this time?

Dave Mosley — Chief Executive Officer

Yeah, we’ve said that there would be a more muted seasonality than normal, right, because we’re not in the PC business or the legacy business anymore now that the cloud is a lot more steady. But we’ll let you know — I mean, if we start to see more recovery around the world, then the next cycle will be pulled in, exactly to your point, right?

Ananda Baruah — Loop Capital — Analyst

Got it, that’s helpful. Then just real quick on the capacity, you guys are saying supply-demand, and Gianluca, feel free to jump in here as well, supply-demand balance, but are you full capacity right now? What’s the right way in sort of traditional capacity vernacular to think about where you guys are, like in terms of full type [Phonetic]?

Dave Mosley — Chief Executive Officer

Yeah, thanks — much more full than we were, but last year was painful in July, of course. But I would say no, we’re not full, and we can still do more. We can certainly still do more exabytes. I think the more we have to do, the more predictable we need it to be, and this last quarter we were actually challenged operationally to make a lot of these swaps, because we saw upsides in many markets and we were moving materials from one market to another. Over the long haul, we could do more exabytes right now, but it’d have to be even more long term predictability, I think, in order to achieve the exabytes. We’re excited about it and we’re telling everyone that’s the way we’re thinking about it.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah, last quarter we shipped a record of 152 exabytes, so we are still growing, so this means we have capacity, some capacity still available. Based on our guidance, you can expect another increase in exabytes in FQ1, and as we discussed before, we are still planning to add some capex, so some capacity through the year.

Dave Mosley — Chief Executive Officer

And as we ramp to 18s and 20s and things like that, we’ll get more exabytes out obviously than the existing head media footprint that we have, so.

Ananda Baruah — Loop Capital — Analyst

That’s helpful, that’s great. Thanks a lot, guys.

Operator

Your next question comes from the line of Mehdi Hosseini with SIG.

Dave Mosley — Chief Executive Officer

Mehdi, can you hear us?

Operator

Mehdi, your line is open.

Tyler — SIG — Analyst

Hey, it’s Tyler on for Mehdi. Our question was answered, thank you.

Dave Mosley — Chief Executive Officer

Thanks, Tyler.

Operator

The next question comes from the line of Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy — Rosenblatt Securities — Analyst

Thanks for taking my question. Just around your discussions with your customers, are your long term agreements being expanded or are you adding more long term agreements? Maybe can you give us an idea of what visibility your customers are giving?

Dave Mosley — Chief Executive Officer

Yeah, I think the discussion around how things are going to go six months and nine months out are continuing, and it’s really good — I think everybody wants a certain amount of predictability right now. We certainly do, because we’ve got factories to run, parts to bring online, and things like that, but a lot of supply chains are tight and so people want to make sure that if they’re going to invest in those supply chains, they’re going to have the full kit together, so I think the entire industry is behaving quite well for this perspective right now. It’s helping us quite a bit to plan our business, Kevin.

Kevin Cassidy — Rosenblatt Securities — Analyst

Okay, great. Maybe just as a comparison of hyper scale to enterprise, is enterprise coming back stronger, or maybe just relative to hyper scale, how is it performing?

Dave Mosley — Chief Executive Officer

You know, we debate that a lot, and I would say it’s 50-50 — it’s always been kind of a toss-up. Sometimes one races ahead of the other. Right now, as we said in the prepared remarks, there’s clearly still growth in the cloud and then as people are coming back on prem, they’re realizing the investments that they want to make that perhaps they hadn’t made six or nine months ago, so they’re continuing those investments. I would say there’s growth in both and it’s not enough to knock it off the 50-50 split right now.

Kevin Cassidy — Rosenblatt Securities — Analyst

Thank you.

Operator

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Aaron Rakers — Wells Fargo — Analyst

Yeah, thanks for taking the questions. Congratulations on the quarter as well. I’m just curious, first of all, kind of a pointed question — do you still think that your Nearline capacity shift underpinning your fiscal ’22 expectations is still going to grow in that to 30% to 35% annual range?

Dave Mosley — Chief Executive Officer

Yes, Aaron, we do. Just as I answered Kevin’s question, two years ago it was 80%, so 35% last year was a little less, but we think 35% is a good model right now. The wildcard on the upside, of course, is if we get a little bit more cloud six months, nine months from now, and we’ll wait and see. We’ve got capacity for it, but — and we actually are going to build the parts, I think, anyways for that. I think 35% is a good number to model this year. Ananda asked this question — if the next cycle was actually pulled in a little bit, then it would grow pretty fast because we have 18s and 20s coming. Those are — that would like to go.

Gianluca Romano — Executive Vice President and Chief Financial Officer

We have lead — we have debate on the next two quarters, so to now give you exactly the growth for the entire year would be difficult. But as a model for the long term, we think that 35% CAGR is still very valid.

Dave Mosley — Chief Executive Officer

And it’s all the same heads and media parts, I guess is the point, so we can be flexible.

Aaron Rakers — Wells Fargo — Analyst

Right, right. Then the follow-up question is, Gianluca, when you talk about the model and we now talk about 30% to 33% gross margin and confidence around that, I’m curious as to how you’re thinking about operating expense investments. You talked about opex remaining at similar levels these next couple of quarters, but should we start thinking about that you’d let that drop through above that and drive an above-20% operating margin, or would you start to reinvest that and cap off margin at that long term high end of the target model?

Gianluca Romano — Executive Vice President and Chief Financial Officer

For the opex, we think the level of FQ4, we can maintain that level through the fiscal ’22. We are now — start targeting more, we are a little bit more marketing expenses. The performance is very good, so comparing to maybe prior year, we also have a little bit higher variable compensation. But this level, if we can keep it between $340 million, $345 million per quarter, I think we can do it.

Dave Mosley — Chief Executive Officer

But if we were to outstrip, I think Aaron, the top end of the range, then we’d look at investments because we have a number of different markets that are growing well right now, so we’d look at what investments we have to make. I think we said this in the script, actually — we have a lot of flexibility inside of $340 million, $350 million, right, so that’s — you know, the first thing we would do is redeploy people inside of that, and we could still tolerate a little bit more investment if we grew north of the top end of the range.

Gianluca Romano — Executive Vice President and Chief Financial Officer

Operating margin is already 18% right now, so when you model increasing revenue and this level of opex and the gross margin, you were mentioning before, you will see a very good result in terms of operating margin.

Aaron Rakers — Wells Fargo — Analyst

Right, thank you very much.

Dave Mosley — Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Patrick Ho with Stifel.

Patrick Ho — Stifel — Analyst

Thank you very much, and congrats on the nice quarter. Dave, maybe first off, in terms of the ramp of your 18 terabyte drive, can you just give a little color of when you expect to see the crossover from 16 to 18, where you’re shipping more exabytes from the 18 terabyte ramp?

Dave Mosley — Chief Executive Officer

I don’t think we’ve formally looked at it that way, so I don’t have an answer. But I think it’s pretty soon, it’s in the next few quarters. From my perspective, it’s the same product family, so the heads and media are already in the pipeline and some customers are asking for 16s, some customers are asking for 18s, but I think it’s very soon. And then the same heads and media will take us to 20 terabytes on that PMR platform that we talked about, so we may actually spend some of those heads and disks on 20s as well. But I do think we’re going significantly far north of 16 very, very soon.

Patrick Ho — Stifel — Analyst

Great, that’s helpful. Maybe as a follow-up for you, Gianluca or yourself, Dave, in terms of the Lyve platform, obviously we’ve seen now the rollout of several product iterations from that family. As it relates to opex, is a lot of that R&D spending done or are you continuing to invest in Lyve where we’ll see future product introductions? Is that part of the, I guess, help in terms of maintaining opex at current levels?

Gianluca Romano — Executive Vice President and Chief Financial Officer

Yeah, it’s part of the opex guidance we discussed before and we are investing more in Lyve. We think this is a bigger part of our future business. We are very positive on the possible outcomes from that business, so we will invest, but as I said, we will stay around that level of opex that we discussed before.

Patrick Ho — Stifel — Analyst

Great. Thank you.

Operator

And our last question will come from the line of Shannon Cross of Cross Research.

Shannon Cross — Cross Research — Analyst

Thank you very much. I was just wondering, can you talk about the materiality of the dual actuator drives? It looks like you’ve expanded access to certain other customers recently and I’m just wondering how we should think about it in terms of ASP and benefit as we look forward. And then I have a follow-up. Thank you.

Dave Mosley — Chief Executive Officer

Thanks, Shannon. It’s growing quite nicely, actually, growing volume in the factories. It’s not a small volume product anymore, it’s becoming a large volume product. We’ll be talking about it more and more over the quarters. It is a 14 terabyte drive right now, so if people are making trades for 18 terabytes, they may want to go to the single actuator, but it’s very specific to a few applications out in the cloud world that people need the dual actuator already. Remember, fundamentally we believe that by the time you get to 30 or 40 terabytes, you can’t have all that behind one actuator, you need to have dual actuator at least, and we have to solve all the power problems and all the interface problems with our customers and things like that, to make that happen. We’re quite excited about getting the learning on the technology. The fact that we have the platform continuing in development — you know, parallel drives that as we launch the new high capacity drive, we have the same capacity points on dual actuator.

Shannon Cross — Cross Research — Analyst

Okay, thanks. Then just a clarification — I think during the script, you mentioned strength in high end desktops, and I’m not sure if you’re mentioning — if that includes gaming but I’m wondering, are you seeing benefit from customers coming back to the office and needing to refresh desktops that perhaps are 18 months old now at this point in time? Thank you.

Dave Mosley — Chief Executive Officer

Yeah, I wouldn’t say it’s desktop PC anymore. There is gaming that’s happening, but I would say more it’s distribution channel around things like crypto applications and things like that. There are people who are looking just for the absolutely lowest cost per terabyte that they can find, and so that’s one of the reasons why the average drive capacity is mixing up. It’s going to — from 2 terabytes to 4 terabytes, last quarter we were over 5 terabytes, and I expect that trend will continue. So it’s happening certainly in consumer channels and things like that.

Shannon Cross — Cross Research — Analyst

Okay, great. Thanks for the clarification.

Dave Mosley — Chief Executive Officer

Thanks, Shannon.

Operator

And at this time, I’ll turn the call back over to management for closing remarks.

Dave Mosley — Chief Executive Officer

Okay. Thanks, Tabitha. Seagate is delivering strong performance, demonstrating financial results consistent with our long term targets and executing our product and technology road map to capture long term secular growth opportunities for mass data infrastructure. I’ll close by expressing my appreciation for our customers, suppliers, our employees and our shareholders for your ongoing support of Seagate. Thanks again for joining us today.

Operator

[Operator Closing Remarks]