Seagate Know-how Plc (STX) Q2 2025 Earnings Name Transcript

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Earlier than we start, I would wish to remind you that at present’s name comprises forward-looking statements that replicate administration’s present views and assumptions primarily based on info accessible to us as of at present and shouldn’t be relied upon as of any subsequent date. Precise outcomes might differ materially from these contained in or implied by these forward-looking statements and are topic to dangers and uncertainties related to our enterprise. To study extra concerning the dangers, uncertainties, and different components that will affect our future enterprise outcomes, please consult with the press launch issued at present and our SEC filings, together with our most up-to-date annual report on Type 10-Okay and quarterly report on Type 10-Q in addition to the supplemental info, all of which can be discovered on the Traders part of our web site. Following our ready remarks, we’ll open the decision up for questions.

With the intention to present all analysts with the chance to take part, we thanks upfront for asking one major query after which reentering the queue. With that, I am going to now hand the decision over to you, Dave.

William David Mosley — Chief Govt Officer

Thanks, Shanye, and good day, everybody. Seagate closed out calendar 2024 on a powerful be aware, driving 7% sequential income development within the December quarter. Our non-GAAP gross margin expanded by greater than 200 foundation factors and non-GAAP earnings per share exceeded $2 for the primary time in 12 quarters, underscoring our continued deal with profitability. Our efficiency was supported by elevated demand throughout almost all markets we serve with essentially the most vital development within the cloud sector.

This broad-based demand from world cloud prospects led to an nearly doubling of nearline product income within the December quarter on a year-on-year foundation and near 60% nearline income development for your complete calendar yr. We’re experiencing robust momentum with our aerial density-driven street map, which positions us properly to supply compelling storage options to our prospects and in addition helps our expectation for vital worthwhile income development for fiscal 2025 and past. We proceed to advance our product street map and have achieved a number of key milestones associated to our HAMR-based Mosaic platform within the December quarter. We accomplished qualification and began to ramp HAMR-based merchandise to our preliminary CSP buyer.

Earlier at present, we additionally introduced sampling of Mosaic drives with capacities of as much as 36 terabytes. Total, Seagate is in an excellent aggressive and expertise place in a strengthening demand surroundings. Previous to discussing the top market surroundings, I am going to briefly tackle the manufacturing challenge that we disclosed final month, which has led to produce constraints for the March quarter. Gianluca will present particulars on our fiscal Q3 outlook.

Nonetheless, I can verify that this challenge has been resolved, we’re in a position to meet our build-to-order commitments to main prospects, and we anticipate the income affect to be restricted to the March quarter. Now, turning to the mass capability markets. Cloud stays the first demand driver. The surge in nearline product demand that I referenced earlier aligns with an almost 50% enhance in cloud capital investments made by our prospects in 2024, with their capex anticipated to proceed rising in calendar 2025.

We consider hyperscale prospects are persevering with to handle their stock ranges properly whereas making infrastructure investments to help rising demand for conventional providers, promoting, and e-commerce in addition to rising GenAI functions. These functions will likely be prolific creators of information. And given {that a} substantial quantity of the info will likely be saved on HDDs, we anticipate GenAI to drive future mass capability storage development. That is notably true of data-rich imagery and video content material created by GenAI fashions, which is projected to broaden almost 170 instances from 2024 by 2028.

In the present day, HDDs play an important position in housing the huge information units required for coaching AI fashions, serving as central repositories when these information units will not be actively being processed by GPUs. These mass storage information lakes kind the spine of reliable AAI by storing checkpoints or snapshots of AI mannequin information units, making certain that information is each retained and accessible sooner or later for steady mannequin refinement. A current survey of over 1,000 enterprise leaders and AI decision-makers underscores the crucial significance of information retention and checkpoints in enhancing the standard of AI outcomes. These insights will not be solely relevant for the cloud, but in addition the sting the place the overwhelming majority of information is generated.

The enterprise markets fall underneath this edge umbrella. We anticipate enterprises to duplicate and retailer extra information domestically on the edge as AI computing and inferencing strikes nearer to the supply of information technology. VIA is one other opportunity-rich market on the edge. For a while now, we have spoken concerning the elevated adoption of AI analytics inside the VIA markets, which assist kind actionable insights from information for functions corresponding to sensible cities and sensible factories.

Within the December quarter, common drive capacities for VIA merchandise set a document, reflective of accelerating use of video analytics in addition to longer information retention durations. Total, we consider mass capability storage stays each an enabler and a beneficiary of those rising information tendencies. Seagate is in an important place to deal with the ensuing demand development by our aerial density-driven product street map. As we have shared previously, we’re sustaining a disciplined strategy in planning our manufacturing capability.

We’ll leverage expertise transitions to help exabyte development. relatively than including new head and media unit capability. Taking a look at our long-term street map, our Mozaic-based expertise supplies Seagate with a extremely capital-efficient means to fulfill rising exabyte demand, to ship a powerful TCO worth proposition for our prospects, and broaden profitability over the long run for the corporate. In the present day, we’ve got continued to ramp our 24, 28-terabyte PMR platform which has quickly turn into our prime product platform when it comes to each income and exabyte shipments.

At 30 terabytes are greater, our Mosaic HAMR expertise delivers main capacities and is gaining momentum throughout our buyer base. There aren’t any a number of prospects certified on this platform throughout every of the mass capability finish markets. At present, we’re ramping quantity to our lead CSP buyer whereas progressing on {qualifications} at extra cloud and hyperscale prospects. These {qualifications} will set the muse for the subsequent section of our Mosaic quantity ramp beginning within the second half of calendar 2025.

We’re assured that our Mozaic digicam expertise supplies a powerful and sustainable aggressive benefit at scale for mass capability storage and underpins a cost-efficient street map to construct on these benefits. In keeping with suggestions we have acquired from many cloud prospects, AWS highlighted at their current Reinvent convention that adopting the best capability laborious disk drives permits their storage system structure to decrease prices, preserve flooring house, and cut back energy consumption. Information heart architects will proceed to undertake each laborious disk drive storage and compute-oriented reminiscence applied sciences corresponding to NAND flash to help the breadth of their workloads. NAND is finest fitted to excessive throughput, low latency duties, whereas laborious disk drives stay the popular storage answer for the majority of information storage wanted within the Cloud.

We don’t see these dynamics altering over the foreseeable future resulting from a number of benefits that HDDs maintain over NAND. HDDs provide prospects not less than 6x decrease price per terabyte of storage capability. They possess a considerably smaller embodied carbon footprint and supply manufacturing scale that’s extremely capital-efficient. Wrapping up, Seagate is in place to ship additional enhancements in income and profitability in fiscal 2025.

Looking additional, it is a sexy setup for Seagate, with our steadfast deal with provide self-discipline in a good demand surroundings, a number one expertise street map, and the tailwind of AI’s huge information storage necessities. I am going to flip it over to Gianluca now.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Thanks, Dave. Seagate’s robust December quarter outcomes have been highlighted by 50% development in income and a fourfold enhance in non-GAAP working earnings on a year-over-year foundation. We delivered December quarter income of $2.33 billion, up 7% sequentially. We elevated non-GAAP working earnings 22% sequentially to $538 million, translating to non-GAAP working margin of 23.1% of income.

And our non-GAAP EPS was $2.03 on the excessive finish of our steerage vary, reflecting robust adoption of our excessive capability nearline drive, together with ongoing worth adjustment and price self-discipline. Inside our laborious disk drive enterprise, income elevated 8% and to $2.2 billion with quantity shipments of 151 exabytes, up from 138 exabytes within the September quarter. Mass capability income grew for the sixth consecutive quarter, reflecting continued energy in nearline cloud demand, together with anticipated enchancment within the enterprise and OEM markets and seasonal uplift from VIA prospects. Mass capability income and exabyte shipments each elevated 9% sequentially and totaled $1.9 billion and 140 exabytes, respectively.

Beginning this quarter, we’re together with nearline exabyte shipped to VIA prospects inside our total nearline exabyte reporting. Many VIA prospects are adopting nearline drives, in keeping with the shift towards extra cloud-like answer that we had highlighted final quarter. Consequently, we consider this reporting change extra precisely replicate our prospects are using with drives and aligns with trade reporting requirements. With this modification to all durations offered, Seagate’s complete new nearline shipments have been 126 exabytes within the December quarter, up from 114 exabytes within the prior interval.

Our efficiency displays robust demand for our 24 and 28 terabytes PMR merchandise, notably amongst cloud prospects in addition to continued enchancment in enterprise marked by document excessive common drive capability for the second consecutive quarter, extending the development for a better storage content material per server unit. Gross sales of our legacy merchandise totaled $275 million, up 2% sequentially, supported by greater seasonal demand within the shopper market. Lastly, for our different enterprise, which embrace methods, SSD, and refurbished drives, income was $156 million, down barely from final quarter as decrease SSD income was partially offset by improved system demand. Shifting on to the remainder of the earnings assertion.

Non-GAAP gross revenue elevated 14% sequentially within the December quarter to $825 million. This enhance displays continued income development of mass capability merchandise, rising combine of recent high-capacity drives, ongoing worth adjustment, and price efficiencies. Our ensuing non-GAAP gross margin expanded by 220 foundation factors to 35.5% on the firm degree, marking our seventh consecutive quarter of sequential gross margin enchancment. Non-GAAP gross margin for the HDD enterprise remained considerably greater than the company common.

Non-GAAP working bills totaled $287 million, in keeping with our plans and up 2% quarter over quarter. Different earnings and expense was steady at $86 million and are anticipated to be comparatively flat within the March quarter. Adjusted EBITDA elevated 19% sequentially within the December quarter to $591 million. Non-GAAP internet earnings elevated to $433 million, leading to non-GAAP EPS of $2.03 per share primarily based on a diluted share depend of roughly 213 million shares.

Shifting on to money circulate and the stability sheet. We proceed to deal with driving free money circulate technology, which elevated to $150 million within the December quarter in contrast with $27 million within the prior interval. We proceed to anticipate free money circulate technology to enhance sequentially by the remainder of the fiscal yr. Capital expenditures for the quarter have been $71 million.

For fiscal ’25, we are going to keep capital self-discipline and proceed to anticipate capex to be on the low finish of the long-term goal vary of 4% to six% of income. We returned $148 million to shareholders by the quarterly dividend and closed the December quarter with $2.7 billion in accessible liquidity, together with our undrawn revolving credit score facility. Stock elevated barely to $1.5 billion primarily to help the ramp of recent high-capacity merchandise. Our debt stability was $5.7 billion on the finish of December quarter.

In keeping with our intent to scale back debt, we retired roughly $479 million of notes as they mature in early January. Because of this, we’ve got no debt obligation till late fiscal 2027. We exited the December quarter with a internet leverage ratio of two.5 instances and anticipate to see additional discount within the coming quarters. Turning now to our March quarter outlook.

We anticipate ongoing demand energy from cloud prospects to partially offset seasonal decline within the VIA and legacy markets, together with the provision constraints that we’ve got already mentioned. We nonetheless anticipate to fulfill our build-to-order commitments, however our capacity to reply to in-quarter quantity upside alternatives will likely be restricted. Consequently, embedded in our steerage is roughly $200 million of income affect from these provide constraints. With higher context, March quarter income is predicted to be within the vary of $2.1 billion, plus or minus $150 million as a midpoint, which displays greater than 25% year-over-year enchancment.

Regardless of provide limitation within the March quarter, ongoing demand for our newest technology nearline merchandise, together with Mozaic, affords the potential for sequential enchancment in gross margin efficiency. We anticipate non-GAAP working bills to be within the vary of $290 million and on the midpoint of our income steerage, we anticipate non-GAAP working margin to stay within the 20% vary. We anticipate non-GAAP EPS to be $1.70, plus or minus $0.20 primarily based on a diluted share depend of roughly 214 million shares and non-GAAP tax expense of roughly $20 million. In abstract, Seagate’s robust December quarter monetary efficiency underscores our continued deal with enhancing profitability, optimizing money technology, and driving development.

As we deal with capturing the numerous alternatives forward, we are going to stay diligent in supporting a wholesome provide and demand surroundings, which we consider positions Seagate to ship additional enchancment in income and enhanced profitability this fiscal yr and past. I’ll now flip the decision again to Dave for closing feedback.

William David Mosley — Chief Govt Officer

Thanks, Gianluca. As information worth continues to extend, so too does the strategic relevance of mass capability storage, notably within the period of AI. Towards this backdrop, Seagate is executing a powerful product and expertise street map to ship a compelling worth proposition for our prospects. In brief, we’re responding with expertise to retailer the world’s information.

We have crossed an thrilling inflection level with our Mosaic digicam platform now ramping quantity to deal with buyer demand at exabyte scale. The Mosaic platform supplies a capital-efficient answer for Seagate to maintain aerial density management and successfully tackle the rising demand for mass storage. This paves the best way for Seagate to supply vital financial benefits each to our prospects and the corporate. These achievements are solely potential by the laborious work of Seagate’s world workforce.

I prolong my because of them in addition to acknowledge our suppliers, prospects, and shareholders for his or her ongoing help. Operator, let’s now open up the decision for questions.

Questions & Solutions:

Operator

We’ll now start the question-and-answer session. [Operator instructions] Our first query is from Erik Woodring with Morgan Stanley. Please go forward.

Erik Woodring — Analyst

Hey, guys, thanks a lot for taking my query. Dave, perhaps simply to begin, if I look to previous June quarters, I do know we’re getting forward of ourselves right here, however we have seen sequential development traditionally. And in gentle of your optimistic demand feedback and the truth that March quarter provide points can be transitory, how do you concentrate on that incremental $200 million of shortfall within the March quarter? What precisely occurs there? Does it get pushed to June? Does it get pushed to a number of quarters sooner or later? Are you able to simply assist us perceive type of the magnitude and timing of while you anticipate to name that again? Thanks a lot.

William David Mosley — Chief Govt Officer

Yeah. Thanks, Erik. As you understand, we have tried actually laborious to get predictable within the final couple of years, particularly with the downturn. And so, as we come out of it, we have actually valued that predictability.

This short-term challenge that we’re coping with restricted to this quarter solely. I feel as we glance out additional and additional, particularly by a number of the product transitions which might be coming, we’ve got confidence within the predictability. And so, I feel exabytes are going to proceed to develop, demand goes to proceed to develop. We’re assured in that, and we’ll get by these product transitions as properly, which permits us to develop our margin profile as properly.

So, I do assume it is a very short-term challenge.

Operator

The subsequent query is from Wamsi Mohan with Financial institution of America. Please go forward.

Wamsi Mohan — Analyst

Hello. Sure. Thanks. I simply wished to make clear the remark concerning the transitory nature of this $200 million.

So, whether it is transitory, ought to we predict that the true baseline for March was $2.3 billion, after which June must be sequentially up from that? That is only a clarification, should you may make clear that. And my fundamental query is basically round the truth that you’ve got seen six quarters of actually robust nearline and mass capability exabyte cargo will increase. Traditionally, these have been one-and-a-half to two-year cycles, after which there is a interval of a pause. Are you able to maybe perhaps, Dave, share your view on the place we’re within the cycle and something that you just see that would trigger the cycle to show in 2025? Thanks a lot.

William David Mosley — Chief Govt Officer

Yeah. Wamsi, I feel we’re nonetheless fairly early in calling this a cycle as a result of the overbuild in the beginning of the pandemic was most likely substantial. After which the previous couple of years, the exabyte shipments has been actually low. So, it is a very profound cycle in comparison with these earlier ones that we had seen earlier than.

That stated, these build-to-order the construct order self-discipline that we’ve got is giving us good predictability and folks proceed to ask for, with that predictability, extra certainty of the build-outs they’re doing, the info facilities that they constructed want inhabitants, the refreshes that they are doing of outdated gear. The wholesale change total information facilities to uplift their capability. I feel the entire trade and provide chain is getting extra predictable and I am fairly completely satisfied about that. So, that provides us confidence by this calendar yr.

Relative to type of like Erik’s query, identical one you requested relative to this challenge that we’ve got this quarter, it is actually laborious to inform in that predictable habits that we’re doing for say, a yr in a build-to-order or visibility that is even going past a yr, whether or not or not this quarter impact is a pull-in or is a push out. That is actually laborious. However I am assured within the monetary expectations that we’ve got, and I am additionally assured in these product transitions that we’ve got, that that is constructing worth for our prospects, and we’re going to have the ability to execute them. So, that is how I give it some thought.

Gianluca, did you need to add one thing?

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. Associated to the a part of the query on the affect to the March quarter, the quick reply is sure, we may have been greater. Now, demand is there. Sadly, for the quick time period, we do not have the quantity to fulfill the demand.

So, we may have, after all, obtain a better degree of income. However as they stated, we see additional enchancment to the calendar yr. So, it isn’t going to affect our total outcomes.

Wamsi Mohan — Analyst

Thanks a lot.

Operator

The subsequent query is from Krish Sankar with TD Cowen. Please go forward.

Krish Sankar — Analyst

Yeah, thanks for taking my query. Gianluca, once I have a look at your steerage, it looks as if your March quarter gross margin is about 36%, give or take. And also you stated HAMR is clearly going to be accretive to numbers. And each you and Dave appear fairly optimistic on nearline for the remainder of the yr.

So, is it honest to imagine because the close to line grows, the gross margin ought to enhance quarter over quarter by the remainder of calendar ’25 half of the 36% baseline in March? Thanks.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. We see good alternative to proceed the development that began like six quarters in the past to enhance our gross margin sequentially, half is combine, after all, now transferring increasingly into the high-capacity drives, give us alternative to enhance gross margin. And naturally, there’s at all times our technique when it comes to steady, constant worth enhance quarter after quarter. Price effectivity HAMR will assist us, particularly within the second a part of the calendar yr after we can ramp a lot greater quantity.

So, no, proper now, we’re very assured that our profitability will proceed to enhance.

Krish Sankar — Analyst

Thanks.

Operator

The subsequent query is from Amit Daryanani with Evercore. Please go forward.

Amit Daryanani — Analyst

Thanks for taking my query. I suppose, Dave, I hoped you might simply discuss a bit of bit about there’s at all times this concern while you hear about HDD corporations including capability. What does that actually imply for the trade? So, are you able to simply speak about, are you actually including internet new capability attempting to get again to some baseline degree? And what do you assume type of Seagate’s complete exabyte capability could possibly be as soon as these additions are finished? Are you able to simply contact on that half? After which perhaps alongside that theme, I am considerably shocked that your gross margins are anticipated to go up in March regardless of revenues coming down and regardless of the capability addition. So, simply speak about what is going on properly or what’s offsetting what I feel are headwinds sequentially in March quarter that is enabling gross margins enlargement? Thanks.

William David Mosley — Chief Govt Officer

Thanks, Amit. If it helps, should you assume again three quarters or 4 quarters in the past, when issues have been — when demand was loads decrease, we have been on older product generations, and we had buffers of these product generations. As a result of demand’s picked up, these have blown by largely. After which we had this challenge — this manufacturing challenge on a number of the new product generations.

Nevertheless it’s actually — the reply to your query is all about combine. So, as we combine to greater and better capability factors, we consider that that is a compelling worth proposition for our prospects. We additionally consider that we’re giving predictable economics for them and for ourselves as properly, and that is what’s constructing the margin construction in.

Operator

The subsequent query is from Timothy Arcuri with UBS. Please go forward.

Timothy Arcuri — Analyst

Hello. Thanks. I simply wished to ask about this $200 million impact into June once more as a result of I am undecided I perceive what the message is. I feel, Dave, within the remarks, you stated that the affect will likely be utterly restricted to the March quarter.

So, it sounds such as you assume that June, you get your complete $200 million again, however you appear to be you are probably not keen to make clear that. So, are you able to make clear precisely what you meant by the whole thing of the affect is being felt in March?

William David Mosley — Chief Govt Officer

Yeah. Bear in mind, that is — thanks, Tim. This can be a provide challenge, not a requirement challenge. So, from our perspective, we’re speaking this and we began after the convention in December there, we began speaking to the shoppers precisely what is going on on.

We are able to keep all of the build-to-order commitments that we’ve got this quarter, subsequent quarters — subsequent quarter. We’re recovering from the difficulty as rapidly as we will. However once more, it isn’t a requirement compression. It is solely our capacity to hit the provision.

Gianluca, did you need to add one thing?

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Principally, as we defined in December, we didn’t begin sufficient materials in a sure time frame as a result of we did not put again the gear that have been essential to provide that supplies. So, we do not have that degree of provide that would have been essential to match demand within the March quarter. So, that $200 million shouldn’t be coming again. It is not materials, we weren’t in a position to begin.

And so, we missed that chance within the March quarter, after which we return to June with the correct degree of provide that can match the June demand. However after all, the one that’s in March might be going away.

William David Mosley — Chief Govt Officer

And as we mentioned in December, that is but one more reason you see the lengthy lead instances that we’ve got in a few of this wafer gear, which is why we’d like the build-to-order predictability for our prospects and for ourselves. This drawback began manifesting itself late summer season, after which we realized that we had it in late November. And it is nonetheless flowing by the system. We’ll attempt our greatest to recuperate as a lot as we will, however we all know that — and so I suppose the backdrop of a really steep ramp.

So, it isn’t like a gap that goes away. It is a ramp that we’re on, that is very steep. It is simply, there’s an affect this quarter as these components do not circulate by that we wished to on the degree of it, after which we fastened the issue now. So, we’re satisfied that we will get again and fulfill demand subsequent quarter and past.

Operator

The subsequent query is from Asiya Service provider with Citi. Please go forward.

Asiya Service provider — Analyst

Nice. Thanks for taking my query. You sound very assured about much more upside to gross margin, particularly as HAMR ramps right here and also you’re shifting your combine to even these greater capability drives. Perhaps should you can shed some gentle on what do you concentrate on the suitable margin for Seagate as you go ahead, given you are executing properly above your goal vary at this level? Thanks.

William David Mosley — Chief Govt Officer

Yeah. I feel that relies upon largely on the demand image. We predict the demand image is strengthening, and we predict we’ve got an excellent portfolio towards it. Folks will purchase the brand new drives, greater and better capacities as a result of they are going to run these in information facilities for a very long time, and so they see an important worth proposition for these.

And to the extent that we will be extra predictable with these build-to-order negotiations, and we all know what we’re constructing anyway, so we will exit and have these negotiations and say, we’ll construct it for you if all of us comply with this. And so, I feel that is served the trade very well, served our provide base very well, serving to us recuperate from the scenario we have been in a yr or two in the past.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Yeah. And that concentrate on vary that you’re referring to, we gave a goal, and we clearly stated this isn’t together with HAMR. So, after all, in future, we have been already anticipating a better profitability, and we are going to ramp HAMR in not simply two or three quarters from now. We’ll talk about perhaps extra at our Analyst Day sooner or later what will likely be our subsequent mannequin.

However I’d say I’d not deal with that outdated gross margin vary that we have been discussing previously.

William David Mosley — Chief Govt Officer

Yeah. One of many issues I would say about margins, gross margins, and working margins is that even on the income ranges that we’re at proper now, we’ve got to proceed to fund the R&D so as to maintain driving the street map for 4 terabytes, 5 terabytes that we’ve got to fund capex, so on and so forth. And from my perspective, these issues present such a compelling worth proposition to our finish prospects, they need us to as properly. So, we’ll want the correct mixture of margin and income to have the ability to proceed to drive the street map for the top person worth propositions.

I feel everybody’s type of understood that as although the — these undulations in provide and demand that we went by within the pandemic have been so painful, however I feel we’re beginning to come out of it and folks perceive the monetary affect of these much more and permits us to be much more predictable.

Operator

The subsequent query is from Steven Fox with Fox Advisors. Please go forward.

Steven Fox — Analyst

Hey, good afternoon, everybody. Dave, I used to be simply questioning as we take into consideration the longer-term affect of transitioning to HAMR, you progress versus the — by the preliminary ramps of recent expertise. Does the client combine or the way you ramp turn into sooner, slower, extra broad? Like I am simply — you talked about like going from one cloud man to having a second and third. However as you go towards 36 terabytes, what modifications in how this expertise hits the market?

William David Mosley — Chief Govt Officer

I would say our first ramp was more durable than we anticipated, even proper up towards it. We had nice outcomes out of the labs and the primary experiments. After which we bumped into some issues in productization. We do not precisely see any of these issues in future productization so it ought to shorten the cycle.

The pressure on all the opposite subsystems, not simply the recording subsystem, however all the opposite subsystems as we go from 30 terabytes to 40 terabytes to 50 terabytes continues to be nice, however we’ve got confidence, and we have advised those who primarily based on what we see proper now, we must always — we’ll drive as aggressively as we will by all these transitions. And that is why the announcement of drives — transport drives already as much as 36 terabytes, that is already occurred, by the best way. So, from my perspective, onward and upward, that is what this trade will get paid for is aerial density. And so, we carry worth on the planet, and that is what we’re persevering with to drive.

Steven Fox — Analyst

Nice. That is useful. Thanks.

Operator

The subsequent query is from Thomas O’Malley with Barclays. Please go forward.

Tom O’Malley — Analyst

Hey, guys, thanks for taking my query. I simply need to get a greater image to your mixture of enterprise. I feel you want to speak in exabytes which might be transferring towards HAMR. You guys had initially talked a few unit forecast, you’ve got adjusted that over time.

However perhaps as we glance out into the calendar yr ’25 you might speak about how a lot of what you are promoting when it comes to combine is HAMR at present and perhaps how a lot you assume exiting the yr? Clearly, you had sufficient to affect gross margins within the close to time period. So, perhaps should you may measurement that for us, that might be actually useful.

William David Mosley — Chief Govt Officer

OK. Thanks, Tom. We did discuss concerning the success of the 24, 28 platforms. So, that is rising at a really, very quick ramp, very excessive quantity.

There’s lots of frequent components with that in HAMR. So, we will ramp HAMR rapidly as properly, and we’re targeted on doing that, getting by the {qualifications} and ramping. Final yr, we have been pushing by these transitions as laborious as we may simply to inject some margin again within the enterprise. This yr, the demand image is kind of totally different.

And the response of individuals and what they — the place they’re in {qualifications} may be very totally different. So, we’ll be a bit of bit extra cautious. Bear in mind, HAMR continues to be accretive to margins, and we nonetheless need to drive it, and we nonetheless have components which might be coming. However we’ll simply be a bit of bit extra cautious and ensure we work with the shoppers on precisely what they want.

I feel as we get to and better capability factors is such an excellent compelling worth proposition for our finish prospects, they’re pulling very laborious. So, perhaps even to a number of the earlier questions, I do assume that there is going to be an acceleration primarily based on the truth that we’re already on the curve. Productization-wise, we’ve got all these learnings. So, the opposite particular person does not need to study those self same classes and there’s this compelling worth proposition that folks find out about.

Operator

The subsequent query is from Aaron Rakers with Wells Fargo. Please go forward.

Aaron Rakers — Analyst

Yeah, thanks for taking the query. I’ll stick to the gross margin narrative right here a bit of bit. Gianluca, if I try to make some changes to your non-HDD gross margin, I suppose what I would be left to consider is that your laborious disk drive gross margin might be within the 37% plus or minus vary. I suppose the query is that might you say even at present as you are initially ramping HAMR that your HAMR gross margin is accretive to the laborious disk drive-only gross margin? And is there something structurally that retains you from considering, hey, gross margin may have a 4 in entrance of it simply structurally as we glance ahead and pricing continues to progress, and so forth., and so forth.? Simply curious on what your ideas are.

William David Mosley — Chief Govt Officer

Yeah, Aaron. Thanks. I’d say that — and you understand our historical past very well. I am fairly completely satisfied the place we’re proper now.

So, as we’re searching into the longer term, we’re signing up for enterprise that is good enterprise and better capability factors by these transitions. So, that is what permits me to construct confidence. Is there a theoretical most? I feel lots of that depends upon the demand image that in the end comes. And we’ll maintain you knowledgeable on that as time goes on.

However I feel we have finished a very good job getting the margin construction again into the trade and even, in some circumstances, to all-time highs. The income continues to be not again, and the output continues to be not again, frankly. I imply, we may do some extra output. However we need to do it in a really predictable manner and defend what we have needed to rebuild.

We nonetheless have some provide chain points that we’ve got to deal with as properly, and that is going to be happening for the subsequent few quarters. So, we’re type of in that transitionary interval to future mannequin versus proceed to simply execute as laborious as we will to rebuild. And we’re fairly pleased with the progress.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

And Aaron, a part of the arrogance we’ve got in enhancing gross margin even within the March quarter the place as you understand the income is decrease, is coming from the elevated quantity of HAMR. So, basically, the combo transferring to greater capability drives has at all times helped us to enhance margins and HAMR will enhance loads the capability per unit. So, it is a good contributor to the improved gross margin.

Aaron Rakers — Analyst

Thanks.

Operator

The subsequent query is from Karl Ackerman with BNP Paribas. Please go forward.

Karl Ackerman — Analyst

Sure. Thanks. As we take into consideration the sustainability of the cycle, are your nearline and hyperscale prospects supplying you with extra visibility at present, which I feel was six months or longer final quarter, since you’ve got skilled these manufacturing capability constraints? And for my clarification query, does the manufacturing capability tackle particularly HAMR drives? Or have been these instruments used for standard nearline drives as properly? Thanks.

William David Mosley — Chief Govt Officer

Thanks, Karl. Yeah, the second query first, the manufacturing capability challenge affected non-HAMR drives, not the HAMR drives. So, it was the ramp of the 24, 28. Consider it this manner.

We have really certified that again in even some outdated packages, however it’s the non-HAMR product being affected. So, stepping out a bit of bit extra into the longer term. I feel that the HAMR transition is definitely — we’ll drive it increasingly aggressively simply because we get the additional capability factors like Gianluca was speaking about. Increased capability factors, after which we will additionally refresh decrease capability factors as properly.

So, that is what helps to construct margin into your complete portfolio, not simply the best capability level.

Karl Ackerman — Analyst

Sure. Thanks. I hoped you talked concerning the visibility you are receiving from hyperscale prospects at present since these capability constraints. Thanks.

William David Mosley — Chief Govt Officer

Yeah. So, the build-to-order fashions that we’re developing with have given us good visibility. Perhaps as we get by the provision constraint challenge that we’ve got this quarter, we stated we’re defending all of the build-to-order commitments that we’ve got. So, on an account-by-account-by-account foundation, then I feel it is nearly — that exact challenge is nearly irrelevant for them, proper? So, we’re speaking about This autumn is This autumn, Q3 is Q3.

Q1 subsequent yr is Q1 subsequent yr. So, they’re serving to us with that visibility and this short-term challenge is irrelevant in that BTO mannequin.

Operator

The subsequent query is from Vijay Rakesh with Mizuho. Please go forward.

Vijay Rakesh — Analyst

Yeah. Hello. David, Gianluca, simply wanting on the HAMR. If you have a look at your 150-exabyte quarter shipments or the 126-exabyte nearline, do you anticipate HAMR to get to love 10% to twenty% of that blend by like first half calendar, to illustrate, ’26?

William David Mosley — Chief Govt Officer

Effectively, we definitely anticipate to make it — to ramp it actually laborious, sure. We’re not going to say a particular quantity. We’re in a really totally different house than we have been a yr in the past, proper? However we’re not going to say a really particular quantity. However we anticipate it to ramp very laborious.

The purchasers are pulling out of laborious due to the worth proposition that they see. So, it must be accretive as properly. We have stated that for some quarters now, however we’re assured that it’s. So, sure, we’ll drive it laborious and drive the volumes very quickly.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Sure, Vijay. We could have enchancment each quarter. In fact, that should observe the {qualifications} with the totally different prospects. And as we stated, we anticipate a number of qualification between December final yr and mid of calendar ’25.

So, we nonetheless anticipate the vast majority of the ramp to occur within the second a part of calendar ’25, and that might be one other enchancment for our enterprise and our efficiency in only a few quarters from now.

Vijay Rakesh — Analyst

Obtained it. Thanks. After which when it comes to capability, as you ramp HAMR, do you anticipate — do that you must add extra capability within the again half? Or how do you see the accessible capability and the ramp of HAMR with that? Thanks.

William David Mosley — Chief Govt Officer

No. A lot of the instruments or nearly all of the instruments that we’re utilizing for our non-HAMR merchandise are convertible to the HAMR product. So, there’s actually no added instruments that we have to carry on. We deliberate this transition for fairly a while.

And we have stated within the ready remarks we’d not add head and media unit capability. The capability provides that we get are by advantage of driving the aerial density. So, we will go to prospects and say, hey, as an alternative of transport a 24-terabyte drive, I am going to ship you a 32-terabyte drive. Hopefully, sometime, we’ll ship you a 40-terabyte drive, and that provides us extra exabyte capability and extra relative energy, extra TCO proposition for them, advantages to their — for his or her worth, and extra energy for us to go enhance our margin image, that plan is working.

Vijay Rakesh — Analyst

Thanks.

Operator

The subsequent query is from C.J. Muse with Cantor Fitzgerald. Please go forward.

C.J. Muse — Analyst

Thanks for taking the query. I suppose first query, a clarification. On the $200 million for March, is that utterly traded away? Or are you anticipating partial — a part of that enterprise within the June quarter? After which for my fundamental query, in your ready remarks, you talked about rising deal with imagery and video as a part of Generative AI. I am curious should you’ve finished any work when it comes to sizing what which may imply.

It seems to be like meta is basically the massive driver at present, however curious should you’ve sized it in any respect and the way you concentrate on the incremental demand to your total enterprise. Thanks.

William David Mosley — Chief Govt Officer

Yeah. So, the $200 million, I feel we answered this a bit of bit earlier, C.J. So, the best way I give it some thought is the construct to orders or all these commitments are being made. So, if there was stuff on prime of it, does it transact this quarter or subsequent quarter? I imply, we’ll get into that.

However so far as the key accounts which might be collaborating in build-to-order, it is actually not an affect. It is a provide gap, keep in mind, it isn’t a requirement gap. So, the demand continues to be pretty robust. Once we speak about video and imaging, we’re normally speaking about what is going on on on the edge, sensible cities, sensible factories.

The information that is really being created on the edge and at last making it to the cloud. However there are video functions as properly which might be ranging within the cloud. I imply, a few of using video on a number of the main media properties and issues, they’re rising — the movies themselves are rising in size, in quantity, in — the lengthy tail is getting big as extra hour-long documentaries. After which the creation instruments with AI are coming that enables folks to create video, be extra creative on that.

So, I feel the inventive professionals which might be on the market creating content material. So, all these tendencies are very useful for us. And sure, a number of the first movers that we noticed on this resurgence as demand began coming again have been these people who find themselves servicing these fashions. Video is creating lots of demand within the cloud.

C.J. Muse — Analyst

Sure. Thanks.

Operator

Subsequent query is from Ananda Baruah with Loop Capital. Please go forward.

Ananda Baruah — Analyst

Yeah. Thanks, guys, for taking the query. So, perhaps — I would like to listen to perhaps from each of you guys. That is simply type of HAMR transition query.

So, I might need missed this. However Gianluca, are we — are you speaking that the HAMR margin — I suppose at what level are the HAMR margins accretive? After which, Dave, I suppose for you in that query, I used to be going to ask like how to consider the pacing of quantity of HAMR given the richness of the legacy tech margins proper now? And I suppose I used to be considering you is perhaps extra selective with rolling them out given the margins, however you additionally simply made a remark about driving HAMR into the market with some vitality. So, I suppose simply type of — these are actually the questions. I respect it.

Thanks.

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Hey, Ananda. Sure. No, HAMR is high-capacity drive and which means producing a better degree of gross margin than, after all, different drives. As I stated earlier than, it is going to be extra seen later throughout the calendar yr after we can ramp extra quantity.

And we want to have extra quantity at present, however we have to undergo a sure variety of name earlier than we will actually ramp up in a a lot greater amount. However as all of the high-capacity drives, we anticipate superb profitability from this product and this expertise.

William David Mosley — Chief Govt Officer

Proper. After which if this helps, you return a yr in the past when our gross margins have been considerately decrease. In fact, we have been saying HAMR is accretive to the gross margin. Now, the gross margins are significantly greater on a number of the legacy merchandise such as you talked about, a number of the 24, 28 PR platform, BMR SMR platforms.

HAMR continues to be accretive. And the extra we will drive by these transitions that we’re speaking about, not solely will we enhance the highest line capability, if you’ll, which supplies such a compelling worth proposition that we will really receives a commission for it, but in addition, we will begin to refresh a number of the decrease platform drives, decrease capability factors with fewer and fewer elements inside and due to this fact, you get margin uplift that manner. So, we’re nonetheless driving the HAMR transition, if that helps.

Ananda Baruah — Analyst

I received it. No, that is nice. So, you are going to ship as a lot HAMR as you’ll be able to and as rapidly as you’ll be able to, and it will be accretive.

William David Mosley — Chief Govt Officer

Yeah. And we simply need to get the {qualifications} finished after which we’ll make the correct resolution primarily based on the specifics of what the shoppers need on the time.

Ananda Baruah — Analyst

Thanks. Admire it.

Operator

The subsequent query is a follow-up from Wamsi Mohan with Financial institution of America. Please go forward.

Wamsi Mohan — Analyst

Hello. Sure, thanks for taking the follow-up. I suppose, a fast query on HAMR. The sampling of the 36 terabyte drives that you just introduced, is that with the identical main CSP that you just certified the sooner HAMR drives? And any coloration that you might share on HAMR items? Initially, your expectation was transport 1 million within the first half of final yr.

Clearly, now with this ramp being way more considerably underway, would you say that it must be orders of magnitude greater than that within the second half of this yr? Thanks a lot.

William David Mosley — Chief Govt Officer

Yeah. Thanks, Wamsi. So, it is way more broad-based. We’re transport pattern items to multiple particular person, let me say it that manner, to not only one.

We’ll simply remark particularly on anyone buyer, after all. After which relative to the dimensions of the ramp, sure, we have got prospects which might be latched fairly properly proper now on the 24, 28 product. And we talked about factories being full with the ramp being actually excessive. We’ll supplant a few of that product with HAMR product.

We’ll do it in a measured manner primarily based on when the qualification is full, what these prospects precisely need. A few of them, you at all times have to bear in mind, they need to get their methods prepared. A few of these — a number of the transitions that they are going by is silicon transition of software program functionality versus a few of their fleet administration options. They will say, I am going to try this on the next-generation product.

So, there’s lots of — it isn’t as straightforward as us simply ramping HAMR after which transport extra HAMR. We’ve to undergo these qualification cycles. However that is ongoing, and we’ll drive as areas we will as a result of we predict it is so accretive.

Wamsi Mohan — Analyst

Thanks.

Operator

And the subsequent query is a follow-up from Krish Sankar with TD Cowen. Please go forward.

Krish Sankar — Analyst

Yeah. Hello. Thanks for taking the follow-up. Gianluca, a fast query.

Of the 126 exabyte nearline is shipped in December, how a lot went to surveillance? You began to do a comparability since you did 109 in September, however that’s in your conventional nearline definition. So, I am simply attempting to determine to 126, how a lot is surveillance versus historically nearline?

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Typically, in several quarters about 4, 5 exabytes.

William David Mosley — Chief Govt Officer

And our supplemental will present the historical past for the final 5 quarters so that you’ve got like-for-like over the prior-year interval.

Krish Sankar — Analyst

Thanks.

Operator

This concludes our question-and-answer session. I want to flip the convention again over to administration for any closing remarks.

William David Mosley — Chief Govt Officer

Thanks, everybody. I want everybody a Pleased New Yr. Pleased Lunar New Yr. Actually respect all of the efforts of our workers and our suppliers in serving to the restoration, which continues to be ongoing, and looking out ahead to speaking to everybody this quarter or subsequent quarter’s name.

Take care.

Operator

[Operator signoff]

Length: 0 minutes

Name members:

Shanye Hudson — Senior Vice President, Investor Relations and Treasury

William David Mosley — Chief Govt Officer

Gianluca Romano — Govt Vice President, Chief Monetary Officer

Dave Mosley — Chief Govt Officer

Erik Woodring — Analyst

Wamsi Mohan — Analyst

Krish Sankar — Analyst

Amit Daryanani — Analyst

Timothy Arcuri — Analyst

Asiya Service provider — Analyst

Steven Fox — Analyst

Tom O’Malley — Analyst

Aaron Rakers — Analyst

Karl Ackerman — Analyst

Vijay Rakesh — Analyst

C.J. Muse — Analyst

Ananda Baruah — Analyst

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