Seagate Technology Holdings plc (STX) Earnings

Management highlights

- Overall Fiscal 2026 Performance - Seagate delivered a strong finish to fiscal 2026, with Q4 2026 results beating expectations for revenue and non-GAAP EPS, and extended non-GAAP gross margin expansion to 13 consecutive quarters. - Full year 2026 revenue grew 34% year-over-year, non-GAAP gross margin increased 10 percentage points, non-GAAP EPS grew more than 90%, and record annual free cash flow of $3.1 billion was generated. Q4 2026 free cash flow was over $1.1 billion, the strongest quarterly result in over a decade, with a 31% free cash flow margin. - The company ended fiscal 2026 with $1.7 billion in cash, $3 billion in total liquidity, gross debt of $3.6 billion (down $1.4 billion year-over-year), and a net leverage ratio of 0.4x. - Growth Pillars - Sustainable market demand: Mass capacity storage demand is strong and growing, driven by cloud customer demand amplified by AI application adoption. The vast majority of current nearline exabytes are allocated through calendar 2028, with many customers actively seeking to extend commitments through 2029 and beyond. - Differentiated technology roadmap: Anchored by HAMR-based Mozaic platform, which increases areal density to enable capital-efficient exabyte scaling. The company achieved its target of 40% of nearline exabytes from HAMR-based products by the end of fiscal 2026, and is on track to hit 50% of HAMR exabytes on the Mozaic 4 platform by the end of calendar 2026. Mozaic 3 is qualified across all major cloud customers; Mozaic 4 (supports up to 44TB per drive) is ramping with the top 2 global CSPs; Mozaic 5 (5+TB per disk platform) remains on track for qualification shipments in late calendar 2027. - Disciplined operational execution: The company executes a value-based pricing strategy, secures customer orders prior to production with defined contract terms through 2027, and maintains cost discipline. Non-GAAP operating expenses were $293 million (8% of revenue) in Q4 2026, and capital expenditures for full fiscal 2026 were 4.7% of revenue, within the 4-6% target range. - AI and Demand Trend Highlights - AI adoption is compounding data growth: Transition from AI model training to inference and agentic applications increases generated and retained data for context, compliance, and reuse. Tiered storage architectures (combining high-performance memory/SSDs with mass capacity hard drives) are optimal for these workloads, with hard drives specifically benefiting from growing KV cache storage demand for agentic AI. - Demand is broadening beyond large cloud data centers to enterprise and neocloud operators: Enterprise nearline revenue grew for the 5th consecutive quarter in Q4 2026, as enterprises adopt tiered storage architectures to manage growing unstructured data volumes. Longer-term, physical AI applications (robotics, autonomous vehicles) are expected to drive a step function increase in data creation and retention at the edge.

Guidance

- Fiscal 2027 overall: Management expects fiscal 2027 revenue growth to outpace fiscal 2026's 34% growth, with sequential margin expansion and free cash flow growth throughout the year. Capital expenditures for fiscal 2027 are expected to remain within the 4-6% of revenue target range. - Fiscal Q1 2027 (September quarter): Revenue is expected to be in the range of $4.0 billion to $4.2 billion (midpoint $4.1 billion), representing 56% year-over-year growth at the midpoint. Non-GAAP EPS is expected to be $7.30 ± $0.20. Non-GAAP operating expenses are expected to be ~$300 million, with non-GAAP operating margin expected to be ~50% at the revenue midpoint. Other income/expenses are expected to decrease to ~$45 million from $58 million in Q4 2026, driven by lower interest expense from continued debt reduction. - Long-term growth: The company reaffirms its target of mid-20% annual nearline exabyte growth over the next several years, supported by HAMR technology transitions.

Segment performance

For the June 2026 (Fiscal Q4 2026) quarter: - Data Center segment: Revenue of $2.9 billion, up 17% sequentially and 57% year-over-year. It accounted for 80.6% of total quarterly revenue (89% of total 218 exabytes shipped). 195 exabytes were shipped to the data center market, up 11% sequentially and 43% year-over-year, with global cloud customers driving the vast majority of demand, and enterprise OEM data center demand also showing strong double-digit year-over-year growth. - Edge IoT segment: Revenue of $697 million, up 14% sequentially and 20% year-over-year. It accounted for 19% of total quarterly revenue, with growth supported by tight NAND supply and increasing NAND pricing. Total company quarterly revenue was $3.6 billion, up 17% sequentially and 48% year-over-year. As of the end of fiscal 2026, HAMR-based products represented ~40% of Seagate's nearline exabyte shipment run rate, and data center demand overall represents approximately 90% of the company's total exabyte shipments.

Risks & headwinds

No new material risks were explicitly discussed in the call. Management referenced that all forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially, and directed investors to review risk factors in the company's SEC filings, including the most recent Form 10-K and Form 10-Q.

Analyst Q&A

• Q: With September quarter guidance implying much higher year-over-year price per exabyte growth than the prior mid-to-high single digit target, how should we think about pricing moving forward given strong demand? /

  A: The core value-based pricing strategy has not changed, but the gap between supply and demand is larger than it was a few quarters ago. Higher near-term output is being priced at stronger levels given current strong demand. Pricing is part of the expected sequential improvement in revenue and profitability through fiscal 2027, and the trend of stronger pricing will continue, though quarter-to-quarter results may vary.

• Q: Can you update on HAMR/Mozaic 4 ramp progress and whether cost declines will accelerate as HAMR adoption hits the steep part of the S-curve? /

  A: Seagate is on target for all published milestones: 40% of nearline exabytes from HAMR was achieved at the end of fiscal 2026, and 50% of HAMR exabytes on Mozaic 4 by the end of calendar 2026 remains on track. Mozaic 4 started low-volume shipment in the March quarter, ramped meaningfully in June, will be an even larger contributor in September, and will continue ramping through fiscal 2027. Cost declines are tied to yield improvement and product mix shifts to higher-density HAMR products, which are progressing as expected.

• Q: The company's strategy is to keep total drive unit count flat to grow exabytes via areal density. Can this strategy meet existing committed demand through 2028/2029, and how secure is the upstream component supply chain for scaling HAMR? /

  A: Seagate works closely with supply partners to orchestrate investments aligned with HAMR scaling, and the supply chain is well aligned. Management is very confident in long-term demand, and areal density gains will support planned growth. It is possible that areal density gains may not fully meet all potential unforeseen demand growth given the rapid expansion of new AI applications, but current transitions are on track to meet contracted demand.

• Q: What is the company's outlook for gross margin, and can it reach 80%? What is the current incremental margin for HAMR products? /

  A: Seagate has no specific target for peak gross margin, but has delivered strong sequential gross margin improvement for multiple quarters and will continue to improve through the rest of fiscal 2027. Incremental gross margin for HAMR products is currently well above 60%, and the September quarter guidance is already close to the 60% overall gross margin level.

• Q: What is the exposure to neocloud and foundational model companies relative to traditional hyperscalers in the current outlook? /

  A: Two years ago neoclouds were mostly compute-focused, but Seagate is now seeing growing demand from these customers as they accumulate large volumes of training and application data. Neocloud demand is not generally competitive with traditional hyperscaler demand, as it often serves application-specific use cases. Seagate is engaged in both system-level and direct drive discussions with these customers, who are increasingly seeking cutting-edge HAMR technology, though qualification cycles remain complex.