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Seagate Expertise Plc (NASDAQ: STX)
Q3 2024 Earnings Name
Apr 23, 2024, 5:00 p.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Individuals
Ready Remarks:
Operator
Welcome to the Seagate Expertise Fiscal Third Quarter 2024 Convention Name. All members can be in listen-only mode. [Operator instructions] After immediately’s presentation, there can be a chance to ask questions. [Operator instructions] Please observe, this occasion is being recorded.
I might now like to show the convention over to Shanye Hudson, senior vp, investor relations. Please go forward.
Shanye Hudson — Senior Vice President, Investor Relations and Treasury
Thanks. Good day, everybody, and welcome to immediately’s name. Becoming a member of me are Dave Mosley, Seagate’s chief government officer, and Gianluca Romano, our chief monetary officer. We have posted our earnings press launch and the detailed supplemental info for our March quarter outcomes on the Buyers part of our web site.
Throughout immediately’s name, we’ll confer with GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures within the earnings press launch posted on our web site and included in our Kind 8-Ok. We have not reconciled sure non-GAAP outlook measures as a result of materials gadgets which will impression these measures are out of our management and/or can’t be moderately predicted. Due to this fact, a reconciliation to the corresponding GAAP measures will not be accessible with out unreasonable effort.
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Earlier than we start, I would wish to remind you that immediately’s name comprises forward-looking statements that mirror administration’s present views and assumptions based mostly on info accessible to us as of immediately and shouldn’t be relied upon as of any subsequent date. Precise outcomes could differ materially from these contained in or implied by these forward-looking statements as they’re topic to dangers and uncertainties related to our enterprise. To be taught extra concerning the dangers, uncertainties, and different components which will have an effect on our future enterprise outcomes, please confer with the press launch issued immediately and our SEC filings, together with our most up-to-date annual report on Kind 10-Ok and quarterly report on Kind 10-Q, in addition to the supplemental info, all of which can be discovered on the Buyers part of our web site. Following our ready remarks, we’ll open the decision up for questions.
As a way to present all analysts with the chance to take part, we thanks prematurely for asking one main query after which reentering the queue. I will now hand the decision over to you, Dave.
Dave Mosley — Chief Government Officer
Thanks, Shanye, and hiya, everybody. Seagate is delivering stable monetary leads to an enhancing demand surroundings. Within the March quarter, we grew income 6%, expanded non-GAAP gross revenue 18%, and greater than doubled non-GAAP earnings per share in contrast with the prior quarter. Our efficiency is a perform of each enhancing end-market demand and the decisive actions we applied all through the downturn to strengthen our monetary profile heading into the restoration.
Nearline cloud demand developments are more and more constructive throughout each US and China prospects, and we additionally noticed a sequential enchancment within the enterprise OEM markets within the March quarter. On the execution aspect, the quarter-on-quarter margin enlargement displays our pricing initiatives taking maintain, in addition to favorable combine, leading to income development within the quarter outpacing exabyte development. Pricing technique is only one key piece of our broader give attention to profitability, which additionally contains sustaining a wholesome provide demand steadiness, introducing new applied sciences to reinforce worth for our prospects, and sustaining tight expense controls with an emphasis on producing money. Trying on the near-term end-market dynamics, cloud continues to steer the demand restoration.
For a second consecutive quarter, we realized sturdy double-digit income development from gross sales to cloud prospects, with enchancment throughout each US and international cloud names. We consider the long-running cloud buyer stock correction is generally full and their finish demand can be enhancing. Based mostly on our buyer interactions, we presently anticipate wholesome nearline demand development to proceed by the remainder of calendar 2024. Throughout the enterprise OEM markets, demand stabilized within the second half of calendar 2023 and we noticed incremental enchancment within the March quarter.
Traditionally, enterprise nearline demand has correlated nicely with conventional server development, which is projected to modestly improve in calendar 2024. Because of this, we anticipate enterprise OEM income to enhance as server development resumes. Within the VIA markets, income was seasonally decrease within the March quarter and we anticipate demand to pattern greater by the calendar 12 months. Good cities stay the biggest end-market alternative for VIA merchandise.
Nevertheless, new functions proceed to emerge that use AI analytics to type actionable insights from information on the edge, the place an estimated 80% of knowledge resides. One such use case facilities on good vitality and utility administration that goals to make use of imaging information to drive vitality effectivity and conservation. Analysts place this among the many fastest-growing sectors for VIA functions worldwide. Inside China, the tempo and magnitude of demand enchancment in VIA and different HDD markets can be formed by financial restoration within the area.
We proceed to watch the federal government’s efforts to spur financial development, together with stimulus plans geared toward digital transformation and infrastructure spend. Latest financial indicators present indicators of progress. Nevertheless, it is going to take time for the advantages of those applications to take maintain. General, we consider these constructive market developments help regular income development all through the calendar 12 months.
Our capacity to ship that development is enhanced by our build-to-order initiative that’s now in place with nearly all of giant mass-capacity prospects. These plans afford Seagate higher demand visibility and better predictability for capability planning, whereas our prospects discover worth within the assurance of provide that meets their quantity and timing wants. Importantly, the enhancing general outlook for HDD demand is unfolding as we execute on our product and know-how roadmap. As we speak, we’re concurrently driving qualification and ramp plans for 2 high-capacity product households.
Our final PMR product delivering as much as 28 terabytes per drive, in addition to our first HAMR-based Mozaic product on three-plus terabytes per disk. That is uncommon for our {industry}, and I need to acknowledge our product groups at Seagate, who’re doing an outstanding job supporting prospects as we work collectively to advance our industry-leading merchandise and applied sciences by the varied buyer {qualifications}. These two product households share about 95% commonality in parts and leverage the identical meeting processes and check processes. This permits efficiencies throughout areas comparable to procurement, manufacturing, capital investments, and buyer {qualifications}.
The 24, 28-terabyte PMR drives are in qualification at most of our international cloud and enterprise prospects. We now have already accomplished qualification with one main enterprise buyer, some international Tier 2 prospects, and with our enterprise programs enterprise. We presently anticipate to start delivery important volumes within the first half of fiscal 2025. Relative to HAMR know-how, we proceed to progress towards finishing our first giant CSP buyer qualification, although we skilled a short lived slowdown in latest weeks.
We decided a mechanical element unrelated to the HAMR recording subsystem and a few of our drives was not performing as anticipated. We recognized and quickly applied the answer with full help from our prospects. Verification exams are underway and these exams ought to be accomplished within the June quarter. Each different side of the qualification course of has gone as anticipated.
With this shift in timing, we now anticipate to ship a couple of hundred thousand HAMR-based Mozaic drives within the June quarter and meet the rest of our buyer’s exabyte demand by different already certified merchandise. As we step by step ramp HAMR merchandise with our lead hyperscale buyer within the second half of the calendar 12 months, we stay centered on broadening the variety of prospects certified on Mozaic merchandise. Buyer suggestions reaffirms sturdy curiosity in HAMR know-how and that’s additional mirrored within the profitable completion of our first qualification with a high non-cloud buyer a couple of weeks in the past. We have laid out a Mozaic roadmap with a transparent path to at the least 50 terabyte drives that provide prospects TCO and sustainability advantages, together with decrease energy consumption and fewer required ground area on a per terabyte foundation.
We’re scaling drive capability by aerial density good points reasonably than including heads and disks. As we execute on our product roadmap to 50 terabytes and past, we anticipate to incur minimal adjustments to our invoice of fabric prices and preserve low capital depth of between 4% and 6% of income. Because of this, we consider HAMR supplies the trail for attaining margin efficiency past our present goal vary as manufacturing scales and in addition positions Seagate nicely to proceed capitalizing on megatrends like AI and machine-learning, which drive long-term demand for cost-efficient mass storage. As we have mentioned prior to now, the preliminary section of GenAI has centered on constructing out the compute-intensive infrastructure required to develop and prepare giant language fashions.
As growth shifts to the deployment section, enterprises will start to leverage these skilled AI fashions to rework information with value-enhancing functions and generate data-rich content material. Prospects anticipate HDD demand to extend as this section takes maintain. Over the following a number of years, the amount of AI-generated content material is anticipated to extend and in addition shift towards extra imagery and movies, which could be as much as 1,000 occasions bigger than textual content. These developments bode nicely for HDD demand over the long run, as HDDs stay probably the most cost-effective means to deal with and subsequently use mass capability information.
To summarize, the mixture of extra favorable demand developments, sturdy working self-discipline, and product and know-how management, present the inspiration for driving additional monetary efficiency good points. This mix reinforces our confidence in returning to our long-term goal margin ranges and probably exceed these ranges over time as HAMR-based merchandise proliferate within the market. With that, Gianluca will now cowl our monetary efficiency and outlook.
Gianluca Romano — Government Vice President, Chief Monetary Officer
Thanks, Dave. Seagate delivered stable monetary efficiency within the March quarter with sequential enchancment throughout each key monetary metric. Income was $1.66 billion, up 6% quarter over quarter. Non-GAAP working revenue was up 44% sequentially to $183 million, resulting in a non-GAAP working margin of 11% of income, increasing practically 300 foundation factors quarter over quarter, and our non-GAAP EPS was $0.33, rising $0.21 sequentially and above the midpoint of our steering vary, reflecting the enhancing demand developments and continued price self-discipline.
Inside our arduous disk drive enterprise, exabyte shipments grew 4% sequentially to 99-exabyte, whereas income elevated 7% to $1.5 billion. Income efficiency was primarily pushed by the anticipated enchancment within the nearline cloud market, in addition to favorable pricing actions. Throughout the mass capability market, income outpaced exabyte development, rising 11% sequentially to $1.2 billion with nearline cloud demand greater than offsetting the slight decline within the VIA market. Mass capability cargo totaled 89-exabyte in contrast with 83-exabyte within the December quarter.
Mass capability cargo as a proportion of complete HDD exabyte was 89%, reflecting the continued long-term secular development for mass capability demand. For nearline merchandise, cargo of 72 exabytes had been up quarter over quarter from 65 exabytes. We consider that stock amongst most CSP prospects has decreased and anticipate continued nearline demand enchancment within the June quarter and past. Within the VIA market, we consider the March quarter will show to be a low level of the calendar 12 months with demand returning to extra typical seasonal patterns transferring ahead.
Legacy product income was $297 million, down from $324 million within the prior quarter, primarily pushed by decrease seasonal demand within the client market. Lastly, income for our non-HDD enterprise was $178 million, basically flat quarter over quarter. We anticipate each the legacy and non-HDD market to stay at an identical stage within the June quarter. Transferring on to the remainder of the revenue assertion.
Non-GAAP gross revenue elevated sequentially by $65 million within the March quarter to $432 million. Non-GAAP gross margin improved for a fourth consecutive quarter to 26.1% and expanded roughly 250 foundation factors in comparison with the earlier quarter. Continued pricing adjustment and favorable combine shift towards mass capability merchandise offset margin headwinds from underutilization prices, which had been about $43 million. Non-GAAP gross margin for the HDD enterprise expanded a lot sooner than general firm gross margin.
Trying forward, we anticipate underutilization prices to lower within the June quarter and abate within the second half of the calendar 12 months as our general construct quantity improves to help incremental demand within the nearline market. We consider these components together with ongoing expense self-discipline and product execution help the return to the 30% minimal margin benchmark within the present calendar 12 months. Non-GAAP working bills totaled $249 million, up 4% quarter over quarter, however barely higher than our steering, reflecting the timing of sure R&D spending and continued price management efforts. Adjusted EBITDA continues to enhance and was up 29% sequentially within the March quarter to $278 million.
Non-GAAP web revenue was $71 million, practically tripling quarter over quarter, leading to non-GAAP EPS of $0.33 per share based mostly on diluted share rely of roughly 212 million shares and a tax expense of $27 million. Transferring on to money circulate and the steadiness sheet. Within the March quarter, we elevated free money circulate technology to $128 million. Capital expenditures had been down sequentially to $60 million as nearly all of deliberate capital expenditures had been accomplished within the first half of fiscal ’24.
We anticipate fiscal ’24 capex to be at or beneath the low finish of our long-term goal vary of 4% to six% of income. We returned $147 million to shareholders by the quarterly dividend, exiting the quarter with 210 million shares excellent. We closed the March quarter with $2.3 billion in accessible liquidity, together with our undrawn revolver credit score services. As we speak, we introduced that Broadcom has acquired our ASIC property, together with growth engineering and associated IP for $600 million in money.
The money inlay can be mirrored on our steadiness sheet within the June quarter and Seagate expects to make use of a portion of the online proceeds to help our provide chain as we start to ramp new product builds, in addition to pay down debt over time. Moreover, we anticipate to understand annualized opex financial savings of roughly $40 million beginning in fiscal 2025, however there isn’t any anticipated impression to income. Stock elevated to $1.2 billion as we staged materials to help the continued mass capability demand restoration, together with our concurrent ramp of our final PMR-based product and the preliminary Mozaic-based product ramp. Our debt steadiness was $5.7 billion on the finish of March quarter, with greater than 90% of our long-term debt obligation maturing past three years.
Curiosity expense had been $82 million and we challenge curiosity expense to be between $83 million and $85 million within the June quarter. Turning to our outlook, we anticipate continued enchancment in our mass capability markets, led by ongoing demand for our nearline cloud merchandise, in addition to modest enchancment in each the nearline enterprise and VIA markets. Legacy and non-HDD income are anticipated to stay comparatively flat sequentially. With that as context, June quarter income is anticipated to be within the vary of $1.85 billion, plus or minus $150 million, a rise of 12% sequentially and 16% 12 months on 12 months on the midpoint.
We’re planning non-GAAP working bills of roughly $260 million. On the midpoint of our income steering, we anticipate non-GAAP working margin to enhance into the low-teens proportion vary, together with underutilization price of roughly $20 million. We anticipate our non-GAAP EPS to be $0.70 plus or minus $0.20, based mostly on a diluted share rely of roughly 212 million shares and a non-GAAP tax expense of $25 million. Our sturdy expense administration and provide self-discipline are contributing to the year-over-year profitability enlargement that you’re seeing in our outcomes and outlook.
Our steadiness sheet and wholesome free money circulate technology place us nicely to proceed supporting our capital return commitments. I’ll now flip the decision again to Dave for ultimate feedback.
Dave Mosley — Chief Government Officer
Thanks, Gianluca. Seagate is demonstrating sturdy operational execution and provide self-discipline amid an enhancing demand surroundings, which units us up nicely to develop income and additional increase margins all through calendar 12 months 2024. Our product portfolio, anchored by industry-leading HAMR know-how, provides compelling economics for our prospects and for Seagate. As we proliferate these new merchandise, we anticipate to drive additional monetary leverage over time.
I am assured that our product technique provides prospects probably the most compelling TCO proposition and positions Seagate nicely to capitalize on long-term demand for cost-effective mass capability storage. We consider that the Mozaic platform delivers TCO benefits for information heart operators and helps their rising give attention to conserving energy and area. This week, Seagate printed our 18th Annual ESG Report outlining the progress we have made towards our personal sustainability targets, together with our product circularity program. We’re collaborating with prospects and recovering drives from our personal operations to increase these merchandise’ life cycles and preserve the planet’s restricted assets.
Since launching this program in 2020, we have recovered and shipped practically 4 million drives again into the market. Lastly, I need to thank our international crew members for his or her arduous work and dedication and acknowledge our suppliers, prospects, and shareholders on your ongoing help of Seagate. Gary, we’re able to open up the decision for questions.
Questions & Solutions:
Operator
We are going to now start the question-and-answer session. [Operator instructions] Our first query immediately is from Erik Woodring with Morgan Stanley. Please go forward.
Erik Woodring — Morgan Stanley — Analyst
Nice. Thanks a lot for taking my query. I will mix this right into a two-part query. So, Dave, I respect your feedback on HAMR within the ready remarks, actually simply wished to get clarification on two factors, if I’ll.
First is, have you ever changed the mechanical element that was providing you with a problem after which proceeded to do testing such that you just will not have any additional delays on HAMR and now you are simply going by sort of the ultimate testing section along with your lead CSP buyer? After which second, I consider you’ve got talked prior to now a couple of objective of onboarding the remaining giant CSPs by the top of calendar 12 months ’24. Does this hiccup impression that timing in any respect, or have you ever began the decision course of with these prospects? Simply any clarification on these two factors can be tremendous useful. And that is it from me. Thanks.
Dave Mosley — Chief Government Officer
Thanks, Erik. Yeah, respect the query. So, relative to the mechanical element in query, we do produce other sources and we had these different sources working in parallel, so we had been in a position to segregate the fabric after which get the check beds again up with the appropriate materials, I will say it that manner, and repopulate all these check beds and we recovered the schedule fairly rapidly due to that. So, we’re not completely happy that we had this problem, however clearly, I believe we will transfer on from right here and that is why we’re expressing the arrogance that we did within the script about finishing the qualification this quarter and delivery the items.
Relative to massive image of this system and these sorts of issues occur while you begin to combine high-volume from all of your suppliers, typically you see interactions that you just did not use and foresee, and long run, this is not going to sluggish us down in any respect and it should not impression the opposite {qualifications} both. To the second level of your query, we’re at all times reevaluating precisely the place we’re concerned however we need to additionally ramp HAMR as quick as we presumably can and get not solely the three terabytes per platter however 4 terabytes per platter as nicely. So, nonetheless very optimistic on that entrance.
Erik Woodring — Morgan Stanley — Analyst
Nice. Thanks a lot.
Operator
The following query is from Amit Daryanani with Evercore ISI. Please go forward.
Amit Daryanani — Evercore ISI — Analyst
Good afternoon. Thanks for taking my query. I assume, Dave, I simply need to give attention to the cloud restoration half. Up to now, I believe you’ve got talked about this being probably a bit extra gradual in nature, however actually taking a look at your March numbers and the June information, it could counsel maybe the restoration is a little more steeper.
So, I am hoping while you speak to — to get a way of while you speak to those cloud prospects, how do you concentrate on the tempo and the sturdiness of demand restoration on the cloud aspect? And associated to that, I believe you people shipped near 100 exabytes of capability this quarter, what’s the complete accessible capability that you’ve proper now? And what triggered the choice to probably add extra capability down the street? Thanks.
Dave Mosley — Chief Government Officer
Yeah, thanks, Amit. It has been a exceptional journey, I believe during the last 12 months and a half, two years as a result of the demand was so low relative to the provision that we had, that the {industry} had and all of us took, I believe, some provide offline, and we began this build-to-order in earnest at the least 9 months in the past, telling people who, hey, to ensure that us to truly set off the builds, we’ll — we’d like some predictability out of the enterprise and we’re fairly proud of how that is proceeded. What’s completely different within the subsequent 9 — within the final 90 days is that the demand actually is coming again. And so, after we see the exabyte development final quarter being outstripped by the income development after which we see much more exabyte development now, then we’re pretty optimistic about it.
We’re nonetheless not full although to your level. We nonetheless have underutilization fees, if you’ll, prices, and we even have manufacturing facility capability that is not totally utilized but. So, we’ll follow the plan I believe. The principle level for us is we do not need to overbuild or construct product based mostly on hypothesis.
We actually need predictability long-term monetary well being and so forth. We’re proud of the enhancements which have been made, however we’re not fairly there but, and so we’ll proceed to drive this.
Gianluca Romano — Government Vice President, Chief Monetary Officer
Yeah, let me add on the underutilization fees, we stated within the ready remarks we don’t anticipate underutilization fees within the fiscal 12 months ’25, so pretty quickly we won’t have that extra price.
Dave Mosley — Chief Government Officer
Thanks, Amit.
Operator
The following query is from Aaron Rakers with Wells Fargo. Please go forward.
Aaron Rakers — Wells Fargo Securities — Analyst
Yeah, thanks for taking the query. I do know, Gianluca, you simply sort of highlighted the underutilization prices, however I assume as we take into consideration the mannequin and you concentrate on the restoration that you just’re seeing, I am curious if we modify for underutilization, it seems to me such as you’re guiding perhaps a 70-basis level, once more ex-underutilization gross margin enlargement this quarter on the midpoint of the steering. How would you characterize the corporate’s capacity to cost up on this surroundings, particularly wanting on the outcomes, it seems like your mass capability greenback per terabyte was up about 5% sequentially. The place are you at in that journey and the way rather more do you suppose pricing might flip favorably for the corporate? And actually what I am getting at is the continued driver from pricing to gross margin.
Gianluca Romano — Government Vice President, Chief Monetary Officer
Sure. Effectively, I might say within the final a number of quarters, now we had some success in enhancing our pricing and we’re persevering with to do this, so a part of this improve in gross margin that you’re estimating for the June quarter is, after all coming from pricing. As , within the March quarter, we had been very excessive in combine for the mass capability, then after we undergo the remainder of the calendar 12 months, you could have different components of the enterprise that can develop. So, the combo won’t be perhaps pretty much as good as we had in March, however pricing goes up, and our price, after all, is at all times trending in the appropriate route.
After all, we’ve got a ramp of latest merchandise, however general, we’re very proud of the pricing motion and the place the combo is immediately. So, we see additional enchancment by the calendar 12 months.
Operator
The following query is from Wamsi Mohan with Financial institution of America. Please go forward.
Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst
Sure, thanks a lot. Dave, if I might simply return to the qualification, any colour you possibly can share on the variations between these two {qualifications} at your CSP and non-CSP buyer? And is there a significant distinction within the product itself between the CSP and non-CSP buyer? And if I might for Gianluca, with this Broadcom deal that you just additionally introduced, how ought to we take into consideration each the opex trajectory and would this impression your gross margins, so ought to we anticipate your gross margins to go down due to this barely after which opex additionally to go down, or what the dynamics — what dynamic ought to we anticipate? Thanks.
Dave Mosley — Chief Government Officer
Thanks, Wamsi. To your first query, there is no important distinction within the {hardware}. The qualification for cloud versus non-cloud, it is not often that a lot completely different. There could be some software program options relying on which cloud service supplier you are speaking about, that complicate the qualification, and particularly completely different prospects, whether or not it is cloud or non-cloud, is likely to be going by different forms of architectural transitions on the time, so we’ve got to ensure we get that proper.
However by and enormous, it is the identical drive. I believe that was your query.
Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst
Proper, sure.
Gianluca Romano — Government Vice President, Chief Monetary Officer
So, on the monetary impression for the transaction with Broadcom, the foremost distinction can be in opex the place we anticipate a decline of about $40 million for fiscal ’25. Now, we’ve got an excellent collaboration with our accomplice, so we do not anticipate principally every other change from the — from operations. So, it is primarily a discount in opex because of the switch of asset and folks to our accomplice.
Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst
OK, bought it. Thanks a lot.
Dave Mosley — Chief Government Officer
Thanks, Wamsi.
Operator
The following query is from Krish Sankar with TD Cowen. Please go forward.
Krish Sankar — TD Cowen — Analyst
Yeah, hello, thanks for taking my query. I’ve a query for Dave or Gianluca. A two-part HAMR query. Dave, you talked about you may ship a couple of hundred thousand items of HAMR this quarter, sort of curious how to consider the HAMR unit cargo within the second half of this 12 months or exiting 2024, what number of items do you suppose you possibly can ship? And simply as a follow-up to that’s, you talked about concerning the gross margin exceeding the vary longer-term, I am sort of curious, as HAMR drives develop into extra mainstream, say, a few years from now, do you suppose your gross margin could be over 40%? Thanks.
Dave Mosley — Chief Government Officer
Yeah, thanks. We are going to proceed to ship aggressively and undergo the HAMR transition largely as a result of we expect it supplies higher worth to our prospects. Larger and better capability factors, after which in the end over time it permits us to get parts out of the chain, which saves price towards these platforms as nicely. I imply, we’re in an fascinating place proper now as a result of, say, six months in the past, I believe provide was forward of demand and now provide is lagging demand, a few of that is simply lead occasions on the product.
So, balancing all these items is essential, I believe, in immediately’s market, however we’re nonetheless going to drive very aggressively by the transition and we do consider that that is the way in which to get extra margin into our enterprise as nicely. So, I will not go into particular numbers as we qualify prospects, as a result of proper now, prospects are looking for any sort of product that we will really make, which then we may very well flip — our turnover to some merchandise which can be already certified versus prior plans we had been driving, however I view that as factor as a result of now we even have demand that is serving to our factories that is getting us centered and so I am very optimistic about that. So, simply all of us are very clear, we’ll proceed to drive the transitions very aggressively.
Gianluca Romano — Government Vice President, Chief Monetary Officer
On the gross margin trajectory, we stated earlier than, we anticipate to be at 30% or greater throughout this calendar 12 months. And as , there may be solely part of the ramp of HAMR. So, for certain, after we transfer higher-volume of HAMR, we anticipate to be now within the excessive a part of the vary and even greater, we’ll see as a degree in that time of the ramp. However, sure, even with out HAMR we could be into the 30% to 33% vary that we mentioned as our goal prior to now.
Krish Sankar — TD Cowen — Analyst
Thanks.
Operator
The following query is from Steven Fox with Fox Advisors. Please go forward.
Steven Fox — Fox Advisors — Analyst
Hello, good afternoon. Dave, I used to be questioning if there’s any extra colour you possibly can present in your expertise with speaking to prospects about build-to-order plans for, say, the following 12, or 24 months. I imply, it sounds to me like you could have accelerating demand on the cloud aspect, Legacy, and VIA form of recovering on a seasonal sort of foundation, after which you could have channel companions which can be going to wish stock to be able to assist even issues out. So, how are you balancing all that? What’s going to be completely different do you suppose that we must always think about if we’re searching over the following few quarters with how you are going to be doing enterprise? Thanks.
Dave Mosley — Chief Government Officer
Yeah, Steven, I believe it is a actually good query as a result of I believe it goes again to what we have simply been by — residing by this downturn, one of many key classes was simply the sheer quantity of provide chain inertia that we had can create issues when the demand stops so rapidly, and so we have to be much more diligent. I imply, we will not have quantity shipments — exabyte quantity shipments that the place the revenues far under-running the exabytes. And I believe a part of what we will management is management the builds and ensure we do not overbuild and ensure we’re not attempting to push stuff into the market, particularly when the market’s tender. Now that it is a bit of bit stronger, precisely to your level, which is a pleasant pattern within the final 90 days that we’re actually inspired about, then we will return and say, OK, which of them will we really construct extra for and we’re having these conversations with the shoppers.
However once more, we need to come again to predictability because the overarching goal right here and we’ll additionally reward prospects who give us that predictability with the perfect monetary end result for themselves as nicely. So, having these negotiations is giving us fairly good visibility into what’s coming over the following three or 4 quarters, and I am proud of that.
Steven Fox — Fox Advisors — Analyst
That is useful. Thanks.
Operator
The following query is from Timothy Arcuri with UBS Securities. Please go forward.
Timothy Arcuri — UBS — Analyst
Thanks so much. I wished to ask about this million HAMR unit that you just had guided for the primary half of the 12 months, principally was going to be 30 key drives. So, you are going to make up, it appears like 700,000, 800,000 drives with different stuff past HAMR, however I had sort of two questions. One, you in all probability have to transform among the HAMR WIPs, so that will be a unfavourable, however it did look like HAMR was going to be dilutive initially.
So, is that each one sort of a web constructive commerce for June quarter gross margin? After which since you gave us this — sorry, go forward.
Dave Mosley — Chief Government Officer
No, you go forward and end your query, Tim.
Timothy Arcuri — UBS — Analyst
Yeah, so I simply was going to ask, because you gave us that million unit quantity, I am curious in case you can provide us some indication of what you suppose items can be within the again half of the 12 months for HAMR? Thanks.
Dave Mosley — Chief Government Officer
Yeah, there’s two elements of this. One is the completion of the time — the timing of the qualification after which the opposite is the entire quantity of fabric. And bear in mind, we stated we’ve got different sources for the actual element, so we do not have to segregate your complete WIP. There’s components of the WIP which can be nonetheless transferring, proper? However I believe the timing of the qualification is admittedly the problem there.
We’re not going to get into what number of we’re forecasting for the again half of the 12 months as a result of a variety of that can rely on specifics of demand from prospects and when the remainder of the {qualifications} time-out. However from my perspective, as soon as we get that materials segregated, yeah, is there some rework or scrap to do? Yeah, however I believe we will take that. And remember that all of those merchandise are widespread with each other. So, we’ve got properties for different merchandise — different supplies if we need to.
It may be pivoted from the 24 to twenty-eight household as much as the Mozaic household as nicely. So, I believe we’ve got a variety of flexibility there.
Gianluca Romano — Government Vice President, Chief Monetary Officer
And only a clarification, Tim, on the HAMR gross margin, we by no means stated that HAMR was dilutive to gross margin. We stated that HAMR gross margin will for certain enhance within the second a part of the ramp or the primary a part of the ramp as, after all, a bit of bit extra price, however we by no means stated it was dilutive to our general gross margin.
Timothy Arcuri — UBS — Analyst
Proper. OK. Thanks, Gianluca.
Operator
The following query is from Karl Ackerman with BNP Paribas. Please go forward.
Karl Ackerman — Exane BNP Paribas — Analyst
Yeah, thanks. I wished to get a greater understanding of the demand impression of each the ramp of 28-terabyte SMR and the simultaneous ramp of 32-terabyte HAMR, which is likely to be 34, 35-terabyte SMR. I am curious whether or not you see that as maybe considerably cannibalistic to your early deployments of HAMR. In case you might simply focus on that, that will be nice.
Thanks.
Dave Mosley — Chief Government Officer
Yeah, thanks, Karl. Totally different prospects have completely different necessities and completely different function units, how they use the drive, and so I do not suppose there is a one-to-one swap. I imply, the excellent news for us is we’ve got a variety of commonality and so we will react pretty rapidly as as to whether extra individuals need one household or the opposite. However we’re working with lots of people on, as I stated within the ready remarks, on two completely different {qualifications} on the similar time.
And so far as I am involved, the {qualifications} are going nicely. We’re staying very communicative with the shoppers. And towards a requirement surroundings that is enhancing, I believe that is why they need to worth our predictability much more as we present them what we’ve got and what we’re keen to construct.
Operator
The following query is from Ananda Baruah with Loop Capital. Please go forward.
Ananda Baruah — Loop Capital Markets — Analyst
Yeah, good afternoon, guys. Thanks for taking the query. I assume only one on gross margin. Up to now while you had dynamics just like these demand ramp and value will increase, after which Dave, provide demand tightness, there’s usually been 1 / 4 or so the place you will get fairly pronounced step-ups in gross margin.
And simply questioning if there may be something that can preclude this cycle sooner or later from having the identical sort of dynamics. After which simply to form of sneak one in there actual fast. Gianluca, any up to date metrics — you’ve got given metrics prior to now about income to gross margin, sort of scale ratios, do these nonetheless maintain those that you have been giving, or does the pricing dynamics right here change that in any respect? Thanks, guys.
Dave Mosley — Chief Government Officer
Thanks, Ananda. I will let Gianluca reply his half, however I assume what I would say, at a really excessive stage is that we’ll proceed to push aggressively by product transitions as a result of we expect that is one of the best ways to proceed so as to add worth to our prospects and margin for ourselves. A number of the margin uplift that we’re seeing proper now’s clearly due to the factories being — they’re filling up, they don’t seem to be fully full but, however they’re filling up and that is signal.
Gianluca Romano — Government Vice President, Chief Monetary Officer
Yeah, on the trajectory, particularly on the gross margin, however with the enterprise on the whole, each cycle is a bit completely different. We’re saying immediately we see restoration from the cloud a part of the enterprise. After all, it is not all of the enterprise rising in the identical manner. So, we nonetheless want to attend for different segments to begin having the identical sort of restoration earlier than we will see a powerful upcycle.
However, no, we’re very constructive. We stated earlier, we see that gross margin enhancing quarter over quarter and to be within the goal vary throughout this calendar 12 months. I might say, each quarter, we’ve got a bit of bit higher pricing, a bit of bit higher price. So, the chance for us to attain that concentrate on vary at a fair decrease stage of income is for certain a actuality.
Ananda Baruah — Loop Capital Markets — Analyst
Cool. That is tremendous useful. Thanks, guys.
Dave Mosley — Chief Government Officer
Thanks, Ananda.
Operator
The following query is from Mehdi Hosseini with SIG. Please go forward.
Mehdi Hosseini — Susquehanna Worldwide Group — Analyst
Sure, a few follow-ups for me. I used to be underneath the impression that for many of your parts, you could have gone in-source, so what’s it with HAMR that has made you depend on exterior distributors, and the way you are switching these distributors? And one follow-up for Dave. What’s your most up to date exabyte — general exabyte development wanting ahead because the cycle good points momentum? Thanks.
Dave Mosley — Chief Government Officer
Yeah, Thanks, Mehdi. For our important parts, we’re largely in-sourced, however once more this can be a mechanical piece half that isn’t one thing that we make ourselves, it is one thing that we supply from the skin and it is quite common in all product households, so only for that clarification. And, Gianluca, you need to take the second half?
Gianluca Romano — Government Vice President, Chief Monetary Officer
No, I used to be simply fascinated by the parts, however there are various parts that we supply externally, really now the adverts and media, after all, we produce internally. These are probably the most important parts, however there are various different parts that we get from exterior suppliers. And on that exact element, we’ve got a number of sources, so we will change from one to the opposite.
Dave Mosley — Chief Government Officer
Yeah, after which on exabyte development, Mehdi, I believe it is a good query as a result of we come out of unfavourable and we all know that that is not actual. The unfavourable was the primary time within the historical past of the {industry} that we have ever seen one thing like that. So, I do anticipate issues to begin increasing. We get into this dialogue about whether or not we like 35% or 25%, we again right down to 25%, perhaps near-term we’ll see one thing a bit of bit extra expansive.
It is nonetheless early on this demand cycle, however we’re pretty inspired by what we’re seeing. And I believe additionally our capacity to go reply that with these new merchandise, which offer extra exabytes may very well drive much more exabyte enlargement. The important thing level proper now’s we need to be sure that we reestablish the monetary predictability of our {industry} as a result of the {industry} has been so broken of late, I believe as we develop again, we’ve got to ensure we’re not giving these items away that we’re doing it in a manner that is very measured, and the one manner we will do this proper now and it is the one manner that makes any monetary sense too is to ensure we management provide very tightly.
Mehdi Hosseini — Susquehanna Worldwide Group — Analyst
Thanks.
Operator
The following query is from C.J. Muse with Cantor Fitzgerald. Please go forward.
C.J. Muse — Cantor Fitzgerald — Analyst
Yeah, good afternoon. Thanks for taking the query. I do know you talked concerning the qualification simply being a three-month delay in {qualifications} elsewhere on monitor, but when issues do push out a bit, how do you, I assume, anticipate to perhaps impression your deliberate utilization elsewhere, your ideas round pricing and blend, and what sort of impression might which have? I might suppose positively on gross margin within the again half, would love your ideas there.
Dave Mosley — Chief Government Officer
Yeah, thanks, C.J. The fascinating factor is, as demand comes again, we’ve got rather more flexibility than we did, say, six months or a 12 months in the past. On this build-to-order course of, we have principally advised individuals what we’ll construct after which they’ve stated, OK, I perceive the economics, as extra demand comes, we will now have a brand new dialogue with them and say, which product is certified, which one do you need to hurry up and qualify, and so I believe we’ve got a variety of choices there. I imply, we have been centered on working revenue and free money circulate and we’re lastly again in double-digits on working revenue and ROIC is lastly turning again up.
So, all of that is simply reinforcing the technique to preserve working the enterprise for long-term predictability. This build-to-order factor is working and I believe we’ll keep on it.
C.J. Muse — Cantor Fitzgerald — Analyst
Thanks.
Operator
The following query is from Toshiya Hari with Goldman Sachs. Please go forward.
Toshiya Hari — Goldman Sachs — Analyst
Hello, thanks for taking the query. Dave, in your ready remarks, you talked a bit of bit about AI. I notice you do not have excellent visibility into what’s driving buyer demand, however I am curious based mostly in your conversations along with your prospects, to what extent is AI having impression on what you are promoting? I do know it is nascent, however in case you can touch upon that, that will be nice. After which associated to that, I hoped you might opine in your capacity and the broader ACD {industry}’s capacity to compete with Flash in AI.
I believe based mostly on latest conversations, among the issues that buyers appear to have is that arduous disk drives, you are very cost-competitive, however while you consider issues like read-write functionality, area, and energy consumption, it is likely to be a bit of bit extra aggressive vis-a-vis what you are delivery immediately. So, curious in case you can opine on that. Thanks.
Dave Mosley — Chief Government Officer
Thanks, Toshiya. So, yeah, AI is a giant query and I do know it is complicated for lots of people as a result of there’s a lot advertising and marketing round it. I do suppose that the cloud service suppliers, even the enterprise OEM prospects that we’ve got, they’ve many several types of functions, and a few of these utility areas proceed to develop. A few of these functions are being dramatically remodeled proper now by the brand new compute capabilities that folks have and so forth.
And what I might say on the whole, is that there are functions which can be positively, I will name it, chilly storage, colder storage, or massive information functions which can be coming, video functions, for instance, that we’re very inspired by, and we’re seeing buy orders now from cloud service suppliers and so forth that truly say AI on them, which is — it wasn’t true six months in the past, however given all of the creativity on this utility area, I am actually enthusiastic about it. I believe there’s a variety of alternative there for us. Relative to our capacity to sort of pivot for the place we have to go, I believe we’ll preserve driving mass capability for certain. We’re working a bit of bit on efficiency in our tiers, after which Flash, I will say, I often do not opine on this very a lot, however I haven’t got very a lot unhealthy to say about Flash.
I believe it is a fantastic know-how. I believe it is going to be important for Flash to execute of their layers to allow their utility. A few of these functions could don’t have anything to do with mass capability, however this concept of mass capability being in battle with Flash, I do not suppose is true. I do not suppose that is the way in which architects give it some thought in information facilities.
I do not suppose that economically it is smart. And even while you get into issues like energy and area, I believe arduous drives are going to remain very, very aggressive on the workloads that they provide. So, from my perspective, the brand new utility area is exploding is an efficient, good factor and it ought to profit a variety of {hardware} suppliers over time. We have all been by a fairly tough patch of late and we have got to be sure that we watch our provide into it as a result of we will not tolerate one other dramatic downturn like we simply noticed.
So, we have got to be very cautious.
Toshiya Hari — Goldman Sachs — Analyst
Thanks.
Operator
The following query is from Thomas O’Malley with Barclays. Please go forward.
Thomas O’Malley — Barclays — Analyst
Hey, guys. Thanks for taking my query. I simply need to perceive the ramp along with your largest buyer in HAMR. You talked about this subcomponent and also you had been changing that subcomponent, is that — you are saying a number of distributors are getting certified on the similar time, so in case you take a look at what a step again historically takes when it comes to having a buyer qualify a product, is that a number of weeks? Is that a number of months? I assume, what provides you the arrogance that with this setback that you can not solely qualify however then ship these drives inside the quarter? Thanks.
Dave Mosley — Chief Government Officer
Yeah, so Tom, we already stated that there is a number of sources for this, and so we segregate the components that had been affected after which we push the opposite ones on their merry manner. We have already repopulated these check beds which can be working nicely, in order that’s why we’ve got confidence.
Thomas O’Malley — Barclays — Analyst
OK. So, sooner or later, you’ll simply not use that provider anymore otherwise you would simply rely extra closely on the others?
Dave Mosley — Chief Government Officer
No, no, no, I would not say it like that. I imply, we’ll go work with all people. Everyone has bought a tricky problem. They’ve points and we’ll go work with them, yeah.
Thomas O’Malley — Barclays — Analyst
Useful. Thanks.
Dave Mosley — Chief Government Officer
Thanks.
Operator
This concludes our question-and-answer session. I want to flip the convention again over to administration for any closing remarks.
Dave Mosley — Chief Government Officer
Thanks, Gary. As you heard immediately, Seagate is well-positioned to drive improved monetary efficiency in a recovering demand surroundings by ongoing working self-discipline, eager give attention to provide demand steadiness, which is a giant deal, and ramping our newest CMR, SMR, and HAMR-based merchandise. I am assured in our product technique. I believe it is serving us nicely, and in our HAMR know-how, which positions Seagate nicely to capitalize on long-term demand for cost-effective mass capability storage.
I’d simply shut by thanking our stakeholders for his or her ongoing help. Thanks for becoming a member of us immediately, and we look ahead to talking with you through the quarter.
Operator
[Operator signoff]
Length: 0 minutes
Name members:
Shanye Hudson — Senior Vice President, Investor Relations and Treasury
Dave Mosley — Chief Government Officer
Gianluca Romano — Government Vice President, Chief Monetary Officer
Erik Woodring — Morgan Stanley — Analyst
Amit Daryanani — Evercore ISI — Analyst
Aaron Rakers — Wells Fargo Securities — Analyst
Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst
Krish Sankar — TD Cowen — Analyst
Steven Fox — Fox Advisors — Analyst
Timothy Arcuri — UBS — Analyst
Karl Ackerman — Exane BNP Paribas — Analyst
Ananda Baruah — Loop Capital Markets — Analyst
Mehdi Hosseini — Susquehanna Worldwide Group — Analyst
C.J. Muse — Cantor Fitzgerald — Analyst
Toshiya Hari — Goldman Sachs — Analyst
Thomas O’Malley — Barclays — Analyst
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