Seagate Earnings Call Signals Strength Amid Tight Supply

Seagate Technology ((STX)) has held its Q2 earnings call. Read on for the main highlights of the call.

Seagate Technology Earnings Call Signals Strong Momentum Amid Capacity Constraints

Seagate Technology’s latest earnings call painted a notably upbeat picture, with management emphasizing record revenue, margins and exabyte shipments, alongside robust cash generation and a clear technology roadmap. While executives acknowledged risks around supply tightness, pricing beyond 2026, customer concentration and the execution of new technologies, the tone remained confident. The message to investors was that demand for Seagate’s high-capacity drives is outstripping supply, and the company is well positioned to convert that demand into strong profitability over the next several years.

Record Financial Performance Underscores Operating Leverage

Seagate reported December-quarter revenue of $2.83 billion, up 7% sequentially and 22% year over year, marking a clear rebound in demand. Profitability scaled sharply with volume: non-GAAP gross margin reached 42.2%, up 210 basis points from the prior quarter, while non-GAAP operating margin climbed to 31.9%, up 290 basis points. Non-GAAP EPS increased 19% quarter over quarter to $3.11. The company highlighted that it set new records for exabyte shipments, gross margin, operating margin and non-GAAP EPS, underscoring the high operating leverage in its model when cloud and data center spending accelerates.

Data Center Demand Drives Record Exabyte Shipments

The company shipped 190 exabytes in the quarter, up 26% year over year, with data center customers providing most of the growth. Shipments to data centers reached 165 exabytes, up 4% sequentially and 31% from a year earlier. These data center customers accounted for 87% of Seagate’s shipment volume and generated roughly $2.2 billion of revenue, up 5% quarter over quarter and 28% year over year. Management framed this as evidence that AI workloads and cloud storage growth are translating directly into higher demand for nearline hard drives, reinforcing the central role of HDDs in large-scale storage architectures.

HAMR Technology Ramp Strengthens Long-Term Roadmap

Seagate continued its rollout of HAMR (heat-assisted magnetic recording) technology, which underpins its next generation of high-capacity drives. Quarterly HAMR shipments exceeded 1.5 million units, and the company shipped 3 terabyte-per-disk Mozaic-based HAMR products to its first large cloud customer. Mozaic 3 is now qualified with all major U.S. cloud service providers, and Mozaic 4 qualifications are reportedly tracking to plan, with a ramp expected later in the current quarter. The roadmap targets up to 10 TB per disk early next decade, with a recent lab demonstration showing 7 TB per disk capability. Management positioned the HAMR ramp as a key competitive advantage, enabling higher capacities and better cost per terabyte over time.

Capacity per Drive Climbs While Pricing Holds Steady

Average nearline drive capacity rose roughly 22% year over year to about 23 TB per drive, with cloud-focused nearline drives averaging nearly 26 TB. Despite this rapid increase in capacity, Seagate noted that revenue per terabyte remained relatively stable, suggesting it has been able to maintain pricing discipline even as drives become denser. For investors, this combination—higher capacity per unit and stable dollars per terabyte—supports margin expansion and validates the company’s pricing strategy in a tight supply environment.

Free Cash Flow and Deleveraging Enhance Financial Flexibility

The December quarter was also strong from a balance sheet and cash flow perspective. Seagate generated $607 million of free cash flow, its highest level in eight years and up 42% from the prior quarter. The company used this strength to retire about $500 million of gross debt, leaving total gross debt at approximately $4.5 billion. Cash and equivalents stood just over $1 billion, with total liquidity of $2.3 billion. Based on adjusted EBITDA of $962 million in the quarter, Seagate’s net leverage ratio improved to around 1.1x, giving the company more room to navigate industry cycles and invest in its technology roadmap.

Cost Discipline and Lean Capital Spending Support Margins

Seagate’s operational efficiency remained a key focus. Non-GAAP gross profit rose to about $1.2 billion, up 14% sequentially and 44% year over year. Non-GAAP operating expenses were essentially flat at around $290 million, representing roughly 10.3% of revenue and trending toward the company’s long-term operating expense target of about 10% of revenue. Capital expenditures were tightly managed at $116 million, or roughly 4% of revenue, with guidance indicating that CapEx should remain in the 4%–6% range of revenue for fiscal 2026. This cost discipline is helping to translate revenue growth directly into margin and earnings expansion.

Near-Term Guidance Points to Continued Growth

For the March quarter, Seagate guided revenue to $2.9 billion plus or minus $100 million, implying year-over-year growth of about 34% at the midpoint. Non-GAAP EPS is expected at $3.40 plus or minus $0.20, with a non-GAAP operating margin approaching the mid-30% range and operating expenses around $290 million. Management said it expects sequential improvement in both revenue and earnings through calendar 2026, supported by strong demand, tighter supply conditions and the ongoing HAMR ramp. The company also expects free cash flow to expand further from the already strong December quarter level, with capital spending remaining relatively modest as a percentage of sales.

Supply Constraints Limit Upside but Support Pricing

One of the most notable themes was supply tightness. Seagate’s nearline capacity is fully allocated through calendar 2026, meaning it has limited ability to take on additional new orders until early 2027. While this constrains near-term unit growth, management suggested that tight industry supply helps underpin healthy pricing and margins. The company plans to begin accepting orders for the first half of 2027 soon, coinciding with the ramp of Mozaic 4 and further expansion of HAMR-based capacity.

Uncertain Pricing Beyond 2026

Despite current strength, Seagate acknowledged that pricing beyond 2026 remains uncertain. Historically, revenue per exabyte has fluctuated from double-digit declines to high single-digit declines, and the company exited the quarter with revenue per exabyte down about 4% year over year. Long-term agreements and pricing for calendar 2027 are not yet fixed, leaving open the question of how pricing will evolve as capacity expands and HAMR becomes more widespread. Management indicated that a flat-to-up pricing environment is possible, but investors will be watching future contract announcements closely.

Customer Concentration Remains a Structural Risk

The company’s success is increasingly tied to a relatively small group of cloud and hyperscale customers. With data center and cloud buyers accounting for 87% of shipment volume and the bulk of revenue, Seagate faces heightened exposure to changes in spending patterns, contract terms or technology preferences among these large customers. While this concentration reflects where storage demand is strongest, it also means that a slowdown or shift in buying behavior from just a few major players could materially affect Seagate’s results.

Debt and Potential Dilution in Focus

While Seagate has made progress reducing leverage, its gross debt remains sizable at about $4.5 billion. The company’s guidance also assumes dilution from its 2028 convertible notes, adding roughly 7.6 million shares to the diluted share count. If these notes are ultimately converted, existing shareholders could see some dilution to EPS. Management emphasized the improved net leverage ratio and strong cash flow, but investors will need to balance these positives against the potential long-term dilution and ongoing debt service commitments.

Non-GAAP Metrics and Transition Risks Temper Transparency

Management noted that some non-GAAP outlook measures were not reconciled to GAAP because certain items are outside its control or not reasonably predictable. This reduces near-term transparency around the full GAAP impact of the company’s guidance. At the same time, Seagate is executing aggressive technology transitions, such as moving from 3 to 4 TB-per-platter and then to future nodes. These shifts add manufacturing complexity and require robust execution in yields, supply chain and customer qualifications. While management said progress is on plan, any hiccups could impact exabyte supply, cost curves and the timing of new product ramps.

Guidance Signals Ongoing Strength Through 2026

Looking ahead, Seagate’s guidance points to continued strength in both growth and profitability. The March-quarter outlook calls for roughly one-third year-over-year revenue growth at the midpoint, operating margins approaching the mid-30% range and EPS rising further. Management expects sequential improvements in revenue and earnings throughout calendar 2026, supported by strong cloud storage demand, HAMR-driven capacity increases and stable-to-supportive pricing in a tight supply environment. Free cash flow is expected to grow beyond the $607 million delivered in the December quarter, while capital expenditures are projected to remain in the 4%–6% of revenue range. With liquidity of $2.3 billion and net leverage around 1.1x, Seagate believes it has the balance sheet strength to execute on its roadmap even as it navigates capacity constraints and evolving customer demand.

In summary, Seagate’s earnings call pointed to a company operating near full throttle, with record financial results, solid demand from cloud and data center customers, and a high-confidence technology roadmap anchored by HAMR. Tight supply and customer concentration introduce risks, and pricing beyond 2026 is not yet locked in, but management’s guidance for sustained improvement through 2026 and strong cash generation offers a compelling narrative for investors focused on the storage and AI infrastructure themes. For now, Seagate appears to be benefiting from a favorable combination of technology leadership and market tightness that is driving both growth and profitability.