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Seagate Technology Plc (NASDAQ: STX)
Q1 2025 Earnings Call
Oct 22, 2024, 5:00 p.m. ET
Seagate Technology Reports Strong Q1 2025 Earnings: Revenue Up Nearly 50%
Key Highlights and Financials
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Seagate Technology fiscal first quarter 2025 conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Shanye Hudson, senior vice president of investor relations. Please proceed.
Shanye Hudson — Senior Vice President, Investor Relations and Treasury
Thank you. Hello, everyone, and welcome to today’s call. Joining me are Dave Mosley, Seagate’s CEO, and Gianluca Romano, our CFO. Our earnings press release and detailed information about our September quarter results are published on the Investors section of our website.
During today’s call, we will refer to both GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release available on our website, as well as in our Form 8-K. We have not reconciled certain non-GAAP outlook measures due to material items that may affect these metrics but are beyond our control or cannot be accurately predicted. Consequently, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.
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Before we proceed, I want to highlight that today’s call may contain forward-looking statements reflecting management’s current views and assumptions based on available information. These statements should not be relied upon after today, as actual results may vary due to risks and uncertainties. For more details on these factors, please refer to our press release and SEC filings, including our recent annual report on Form 10-K and quarterly report on Form 10-Q, all available on our website. After our prepared remarks, we will open the floor for questions.
To ensure all analysts have a chance to participate, we ask that you limit yourself to one primary question before reentering the queue. Now, I’ll hand the call over to Dave.
William David Mosley — Chief Executive Officer
Thank you, Shanye, and hello, everyone. Seagate had a strong start to fiscal 2025, with revenue rising nearly 50% and non-GAAP gross profit soaring over 150% compared to last year. These impressive results highlight our ability to maintain profitable growth due to strict supply discipline and strategic efficiencies in our operations. Revenue for the first quarter reached $2.17 billion, and our non-GAAP EPS came in at $1.58, both exceeding the midpoint of our guidance range. This positive performance benefitted from an unexpected higher demand for mass-capacity products and an improving pricing landscape.
Demand in the cloud sector remains strong, driving growth along with improvements in the enterprise and OEM markets, which contribute to our increasing profitability. The company’s non-GAAP gross margin climbed by 240 basis points sequentially to 33.3%, marking the highest level in over a decade, largely due to our HDD business now operating within the mid-30% margin range. With stable industry supply and demand conditions, we expect opportunities for further margin expansion as we introduce high-capacity nearline drives, including our Mozaic-based HAMR products, which I will elaborate on shortly.
The improved business environment and our advanced technology roadmap bolster our confidence in Seagate’s future prospects. Reflecting this optimism, we are raising our quarterly dividend by nearly 3%. We anticipate significant revenue growth for fiscal 2025, accounting for the usual seasonal fluctuations expected for the March quarter.
We are committed to maintaining supply discipline and addressing near-term exabyte demand growth by utilizing our existing capacity efficiently. Looking ahead, we are positioned well for increased demand primarily through technological advancements with HAMR as we complete qualifications and ramp up shipments. Analyzing mass capacity market trends, the demand for our nearline drives remains strong in the cloud sector, and we believe our customers are managing their inventory effectively.
In the September quarter, growth was primarily driven by U.S. cloud providers, but we are also observing encouraging demand trends globally. A notable point is the increasing utilization of video content on e-commerce and social media platforms, with data showing video as the most engaging format for digital audiences.
Additionally, research indicates that personalizing longer video content through AI can substantially boost revenue for our customers. Such trends favor our mass capacity HDDs, which are optimal for storing large volumes of data-intensive video content, accounting for close to 90% of data stored in public cloud settings. We believe this proportion will remain stable for the foreseeable future. Among enterprise and OEM customers, we detected a significant uptick in nearline demand after multiple quarters of stability, reflecting a rebound in traditional server needs and greater storage consumption.
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Seagate Celebrates Record HDD Capacity In September Quarter Earnings Report
The September financial results reveal a significant leap in Seagate’s hard disk drive (HDD) capacity, with the average enterprise drive reaching new heights. While sales in the VIA markets remained steady and even exceeded expectations, a noticeable trend is emerging: the shift towards cloud storage solutions that leverage these higher-capacity drives. Factors such as longer data retention needs and the rise of video analytics are driving this transition.
Seagate’s HDD solutions, including Mozaic camera products, not only offer significant cost savings but also scalable options for customers in the VIA sector. These benefits extend to generative AI applications, positioning GenAI as a critical element for driving mass capacity storage due to its overwhelming data creation demands. HDDs stand out as a reliable, cost-effective, and secure platform for storing data essential for AI functions, ensuring the flow of information back into AI training models.
As data center architects gear up for widespread adoption of GenAI, they are facing several challenges, including cost, scale, and power usage. Seagate’s roadmap is strategically aligned to tackle these issues. When compared to NAND-based storage options, Seagate’s HDD solutions boast around six times lower costs per terabyte and achieve nearly nine times greater capital efficiency. Such advantages will be vital in meeting the anticipated surge in data demand.
In terms of environmental impact, cloud customers report that HDDs have ten times lower embodied carbon per terabyte compared to NAND alternatives, significantly reducing the carbon footprint associated with the expanding global data center landscape. This leads seamlessly into our primary focus areas for fiscal 2025: enhancing the last PMR platform, boosting Mozaic adoption, and executing a strategic roadmap for Mozaic products to meet evolving mass capacity storage requirements.
Consistent with our strategic objectives, we have actively increased production of our final PMR platform, which now supports capacities of up to 28 terabytes. Our customer adoption rate has been encouraging; these drives have rapidly become our second-highest revenue product. During the December quarter, we aim to continue this momentum, expanding our customer base while increasing volume. Additionally, we are advancing qualifications for our Mozaic HAMR-based platform, which focuses on drives exceeding three terabytes, with successful testing already achieved in various market segments.
Our lead cloud service provider customer is progressing well through an exhaustive testing phase. The insights gained thus far are being integrated into future product generations and customer qualifications. As it stands, HAMR technology qualifications are in progress with multiple global cloud and enterprise customers, and we expect shipment and revenue growth to ramp up by mid-calendar 2025.
Confidence in our HAMR technology remains robust, bolstered by customer feedback that highlights the Mozaic platform’s capabilities to meet high-capacity storage needs at a competitive total cost of ownership. The next milestone in our HAMR roadmap involves increasing disk capacity to four terabytes, a feat accomplished solely through aerial density enhancements, contributing to a decrease in costs per terabyte and improved margins for Seagate.
To conclude, Seagate is navigating an improving demand landscape successfully, supported by positive industry supply dynamics. We are at a pivotal moment, driven by foundational changes in our business strategy and a promising technology roadmap. These initiatives underpin our ambition for sustained growth and continued value creation for our customers and stakeholders. Thank you now, I’ll turn the floor over to Gianluca.
Gianluca Romano — Executive Vice President, Chief Financial Officer
Thank you, Dave. As we kick off fiscal 2025, Seagate reports strong revenue and profitability growth for the fourth consecutive quarter. Our September quarter revenue hit $2.17 billion, marking a 15% sequential increase and a remarkable 49% year-on-year rise. Non-GAAP operating income rose 35% sequentially to $442 million, resulting in a non-GAAP operating margin of 20.4%. Moreover, our non-GAAP EPS was $1.58, within our guidance range and indicative of strengthening demand trends, ongoing price adjustments, and disciplined cost management.
Within the HDD segment, exabyte shipments increased by 20% sequentially, reaching 138 exabytes, while revenue surged by 16% to $2 billion. For the fifth consecutive quarter, mass capacity revenue rose, offsetting declines in legacy products, totaling $1.7 billion—an increase of 21% driven by robust nearline cloud demand and a notable rise in nearline enterprise sales. Mass capacity shipments reached 128 exabytes, up 23% from 104 exabytes in June.
Mass capacity products now account for 93% of total HDD exabytes, illustrating the sustained demand for cost-efficient, scalable storage solutions. As anticipated, we have begun ramping production of our 24 and 28-terabyte PMR drives, which bolstered Seagate’s nearline shipments to 109 exabytes in the quarter, rising from 84 exabytes prior. Customer feedback for these products has been overwhelmingly positive, contributing over 20% of our nearline revenue in the September quarter. We foresee continued nearline demand improvement in December as we broaden our shipments of the latest high-capacity offerings to global cloud service providers and enterprise clients.
Additionally, demand for VIA products has remained stable in the September quarter, and we expect similar revenue in the upcoming quarter. Smart city initiatives are driving demand for VIA offerings, although regional economic factors significantly influence project budgets. The uncertain economic situation in China has created challenges for the VIA business, but we are hopeful that the recently announced stimulus plan will boost demand in that market in the long run.
Sales from legacy products totaled $270 million, representing around 12% of total revenue, while revenues from other businesses, including systems, SSDs, and refurbished drives, stabilized at $164 million, reflecting a 25% year-on-year growth in this segment, especially in the refurbished drives under security programs. Now, let’s shift focus to the details of our income statement.
In the September quarter, non-GAAP gross profit increased by 24% sequentially to $723 million, driven by a favorable product mix towards mass capacity, price adjustments, and ongoing cost efficiency efforts amid a favorable demand landscape. Consequently, our non-GAAP gross margin stood at 33.3% at the company level. Overall gross margin expanded by 240 basis points compared to the previous quarter, slightly exceeding our original expectations.
For the HDD segment, non-GAAP gross margins, particularly for mass capacity, remain significantly above the corporate average. Non-GAAP operating expenses reached $281 million, reflecting a 10% increase quarter over quarter.
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Seagate Reports Strong Financial Performance Amid Increased Demand
Quarterly Highlights and Profit Growth
For the September quarter, Seagate Technology Holdings PLC outperformed expectations with adjusted EBITDA rising by 23% to $498 million. Non-GAAP net income increased to $337 million, leading to a non-GAAP earnings per share (EPS) of $1.58 based on around 213 million diluted shares.
Seagate generated $27 million in free cash flow as it began to normalize working capital to meet rising capacity demands. The company expects cash flow improvements in the December quarter. Capital expenditures were recorded at $68 million for fiscal ’25, staying within the long-term target range of 4% to 6% of revenue. Additionally, Seagate returned $147 million to shareholders with a quarterly dividend increase to $0.72 per share, reflecting confidence in long-term strategies. As of the September quarter’s end, the company had $2.7 billion in liquidity and approximately $1.4 billion in inventory.
Debt Management and Financial Outlook
At the end of the September quarter, Seagate’s debt stood at $5.7 billion, with a majority maturing in fiscal ’27 and beyond. The company noted a net leverage ratio of 3. Two times, with expectations of further reductions. Looking ahead, revenues for the December quarter are projected to range between $2.3 billion, reflecting a 6% sequential increase and a remarkable 48% year-over-year growth.
Market Demand and Future Projections
Seagate continues to see growing demand for its high-capacity nearline drives, fueled by global cloud customer needs and an improvement in enterprise markets. This demand is set to outweigh potential declines in legacy markets. With non-GAAP operating expenses expected at approximately $285 million, the company anticipates an expansion in operating margins as it executes on its growth strategy.
CEO’s Closing Remarks
William David Mosley — Chief Executive Officer
In conclusion, Seagate is positioned for significant profitability growth in a favorable market. Our ongoing structural enhancements and advanced technology will meet the evolving needs of our customers, especially in the realm of high-capacity drives required for growing data demands from GenAI applications. Our strong business model and dedicated global team reinforce our confidence in delivering value to shareholders.
Questions & Answers:
Operator
We will now begin the question-and-answer session. Please limit yourself to one question to allow for more participants. Now, let’s take our first question from Wamsi Mohan with Bank of America.
Wamsi Mohan — Analyst
Hi, thank you. Dave, could you elaborate on the build-to-order model and how it affects demand expectations for the March quarter? Additionally, how does Seagate plan to compete with competitors offering higher capacities?
William David Mosley — Chief Executive Officer
Certainly, Wamsi. Our build-to-order model was implemented for predictability, which has proven effective as we navigate the current landscape. Although there is seasonality to consider, we feel optimistic about our cloud and mass capacity forecasts. Regarding competition, we are proud to lead the market in higher capacity offerings and have a robust technology portfolio to support our customers’ needs.
Operator
Our next question comes from Krish Sankar with TD Cowen. Please go ahead.
Krish Sankar — Analyst
Hi, thanks for the insight. Dave, can you discuss your market share dynamics, which have shifted from the mid-40% range to around 30%? Is this due to temporary shifts from competitive products or customer-specific trends? Also, what is your outlook for industry pricing in the upcoming calendar year, considering the current rational pricing environment?
Seagate’s Market Strategy and Financial Outlook: A Conversation with Executives
William David Mosley — Chief Executive Officer
Thank you, Krish. As I have mentioned several times, market share results from executing our plan effectively. Addressing Wamsi’s question, we shifted our approach last year to focus on build-to-order systems. Our goal is to enhance predictability and extend our time horizon instead of just producing mass quantities and hoping for sales.
During the trough of the demand cycle, market share loses significance compared to ensuring predictable cash flow. Now that we are seeing improved margins, we will be able to capture more demand. Consequently, I believe the market share will find a new balance soon.
From an exabyte share standpoint, we are on solid ground. As our customers aim for higher total cost of ownership (TCO) with increasing capacity needs, we believe we will thrive. Regarding pricing, I’ll let Gianluca tackle that issue.
Gianluca Romano — Executive Vice President, Chief Financial Officer
Thank you, Dave. Indeed, the pricing environment remains favorable for the industry, which has consistently shown slight improvement each quarter. This positive trend is boosting our gross margins incrementally.
As you may know, we carried some unused capacity during the June quarter. Fortunately, we’ve eliminated those extra costs in the September quarter, which provided additional support for our gross margins. Looking ahead to December, we forecast further enhancements in both gross and operating margins, driven by the ramp-up of our latest PMR product.
We also expect some volume from HAMR in December, along with an ongoing positive pricing trend. Overall, we maintain a good balance between supply and demand for Seagate and the industry, which is aligned with our long-term strategy.
Krish Sankar — Analyst
Thank you, Dave, and Gianluca.
Operator
Next, we have a question from Amit Daryanani with Evercore. Please proceed.
Amit Daryanani — Analyst
Good afternoon, and thank you for taking my question. Dave, there is ongoing concern that the HDD industry, especially Seagate, might be at a cyclical peak. How can you assure investors that your current exabyte shipments are finding their way to customers rather than lingering in inventory? Also, given the cyclical concerns, you seem to believe there is upside potential for gross margins. What do you perceive as Seagate’s appropriate margin target moving forward?
William David Mosley — Chief Executive Officer
Thanks for your question, Amit. We have seen cyclicality in our industry for many years. However, the landscape has evolved significantly, particularly post-pandemic, which created an unusual spike followed by a downturn. To gauge customer demand accurately, we’ve refined our processes to better track inventory levels and deployments.
Our current build-to-order strategy is also assisting us in avoiding overproduction. As for gross margin potential, we believe enhancing capacity through greater aerial density is the key. We must continue to manage costs effectively while delivering larger capacity drives. It’s essential to provide our customers with a TCO advantage as they expand data centers. We are optimistic about gross margins and recognize the importance of maintaining a balance between supply and demand.
Operator
Next, we have Erik Woodring with Morgan Stanley. Please go ahead.
Erik Woodring — Analyst
Gianluca, staying on the topic of gross margins, your guidance for the December quarter indicates an approximate 34% gross margin, a 70 basis point increase sequentially. You’ve typically experienced a 2-4 point gross margin growth each quarter over the last year. Given the ongoing favorable pricing environment and positive comments from Dave regarding margins, could you clarify why we might not see greater growth in gross margins for this upcoming quarter compared to previous ones?
Gianluca Romano — Executive Vice President, Chief Financial Officer
Certainly, Erik. As I previously mentioned, the September quarter benefitted from an improved cost structure due to higher capacity and the elimination of underutilization charges, which contributed about 100 basis points to our gross margin. In December, we won’t see that same boost since those charges are gone. Nevertheless, we are progressing with our pricing strategy, successfully ramping our latest PMR product, and will also see volume from HAMR.
We forecast our results based on initial quarter predictions and adapt as necessary. Our aim is consistent improvement rather than drastic increases, allowing us to sustain this positive trajectory for the long term.
Operator
Now we have Toshiya Hari from Goldman Sachs. Please continue.
Toshiya Hari — Analyst
Thank you for taking my question. I have multiple inquiries regarding HAMR. In your last conference call, you mentioned expectations for customer qualification in Q3. Has this process shifted to Q4 or early ’25? Also, Dave, you mentioned that additional cloud customers have products to qualify. Should we anticipate that qualification will proceed more smoothly with these clients given the challenges you’ve faced over the past year?
William David Mosley — Chief Executive Officer
Thanks, Toshiya. To address your inquiries, we have adjusted our expectations on the qualification timeline for our lead customer. As for additional cloud customers, we indeed expect the process to be more streamlined based on the lessons learned during our previous experiences.
Exciting Developments in Data Storage: Company Ramps Up Production and Confidence
Recent updates show that the team has overcome initial challenges and is now prepared for a productive spring and summer. The focus on improving processes has led to significant advancements in operations.
Confidence in Product Performance Remains Strong
During the last earnings call, the CEO expressed confidence based on ongoing tests designed to identify failure modes in their products. As the company progresses, they have introduced more drives and configurations, running additional tests without encountering previous failure issues. This positive trend has bolstered the team’s assurance in their products as they strive to demonstrate reliability to customers.
The qualifications phase is in good shape, touching on various aspects like interoperability and data center applications. The CEO highlighted that the only remaining concern is a specific issue related to previous performance inconsistencies. However, they believe it is resolved, and no similar problems are expected to arise for other clients as volume production increases. Some non-cloud customers have already qualified the product and begun receiving shipments, indicating confidence in the product’s robustness.
Insights from Analysts on Financial Impact of New Product Launch
Analyst Asiya Merchant from Citigroup raised a question regarding how the ramp-up of HAMR (Heat-Assisted Magnetic Recording) technology might impact gross margins in the short term. CEO William David Mosley acknowledged the trade-offs involved, noting that long-term benefits are anticipated once the technology is fully implemented. The main challenge lies in balancing supply and demand while ensuring that production costs align with profitability. The outlook remains optimistic for HAMR to contribute positively to gross margins as production stabilizes.
Chief Financial Officer Gianluca Romano added that, even though operating expenses were slightly higher this quarter, this was due to an increase in variable compensation rather than new hires. He projected operating expenses to normalize around $280 to $285 million going forward, emphasizing the importance of managing costs prudently.
Managing Debt and Future Capital Strategies
An analyst asked about the impending maturity of $480 million in debt and potential share repurchase plans. Romano replied that they plan to address this debt with cash reserves, aiming to further reduce their debt load before considering share buybacks. The company’s priority will be on increasing dividends, followed by focusing on reducing debt obligations, and then evaluating share repurchase options.
Expanding Capacity and Future Growth Prospects
As discussions moved to capacity outlooks, CEO Mosley pointed out that the company aims to increase storage capacity by transitioning to new product offerings rather than expanding physical capacity. By moving from 20 terabytes to higher capacities in the future, the company can maximize storage efficiency and maintain competitive margins.
Analysts have noted good visibility for growth into fiscal 2025, with firm bookings extending up to nine months ahead. This visibility stems from a build-to-order model that allows for predictable costs and consistent output, essential for catering to customer demands.
This period of transformation and product enhancement reinforces the company’s strategic initiatives towards maintaining market leadership in the data storage industry. A measured approach to growth, cost management, and operational excellence positions the company for success as it reaches new capacity milestones.
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Steady Demand and Capacity Strategy Highlighted by Industry Leaders
In a recent discussion, executives indicated that while there is a demand for technology, the current total demand aligns closely with historical levels. There is no sign of inventory buildup, suggesting a stable market rather than a cyclical downturn. Visibility into future trends is expected to improve as the year progresses.
Gianluca Romano — Executive Vice President, Chief Financial Officer
Regarding seasonal trends, the majority of fluctuations tend to occur within the legacy business segment. Specifically, the March quarter typically sees lower activity, while demand in the surveillance segment remains weak until June, with a resurgence expected in September and December. This seasonal pattern is essential to consider when forecasting calendar year 2025 performance.
Operator
Our next question comes from Steven Fox with Fox Advisors LLC. Please go ahead.
Steven Fox — Analyst
Thank you for the opportunity to ask a question. I would like to follow up on your capacity. I understand how you increase capacity by moving from three terabytes to four terabytes per platter. Can you provide more details on how you envision managing and satisfying customer needs over the next year? I’m interested in your debottlenecking efforts and how they might impact capacity moving forward.
William David Mosley — Chief Executive Officer
This is a pertinent inquiry about growth potential. If the edge technology, including GenAI, starts to gain traction, it could significantly change demand dynamics. However, we are approaching any capacity changes with caution. Additional supply takes considerable lead time, meaning we may need longer to address any uptick in demand. We currently allocate 4% of our revenue to capital expenditure, which will facilitate enhancements in technology transition, allowing for small capacity increases.
Steven Fox — Analyst
That clarification helps! Thank you!
Operator
Our next question comes from Ananda Baruah with Loop Capital. Please proceed.
Ananda Baruah — Analyst
Good afternoon, and thank you for taking my question. Staying on the topic of capacity, can you elaborate on what the process of ramping up capacity looks like as you anticipate advances with HAMR and various data applications? Given that you mentioned long lead times, what are the key steps involved?
William David Mosley — Chief Executive Officer
The focus in our industry is often on achieving maximum capacity. However, as we explore growth in new markets, we anticipate working with smaller capacities. Enhancements in aerial density enable us to reduce component usage, allowing us to produce more drives with less material. This efficiency positions us to enter new markets effectively while still maintaining profit margins.
Ananda Baruah — Analyst
Your insights are valuable. In a robust scenario with HAMR, do you feel confident about your ability to meet the industry’s exabyte shipping demands over an extended period, likely measured in years?
Gianluca Romano — Executive Vice President, Chief Financial Officer
The answer depends on our supply plan relative to demand. If demand significantly surpasses our supply capabilities, we may experience some imbalance, but our emphasis remains on the technology transition rather than increasing unit volumes. This strategy is expected to be the most profitable path forward for the industry in the near term. We’ll have a clearer understanding of supply and demand in the coming quarters.
Operator
Next, we have Vijay Rakesh with Mizuho. Please proceed.
Vijay Rakesh — Analyst
Hi, I have a question about potential unit shipments for calendar year 2025. Additionally, Gianluca, have you made any plans regarding reactivating any idle capacity as you gradually increase production?
William David Mosley — Chief Executive Officer
Currently, we haven’t provided specific figures for unit shipments or ramp-up speeds. However, we anticipate mass qualification will be completed by mid-2025. Factories are operating at near capacity, and as we finalize customer requirements, we will make necessary adjustments. It’s worth noting that the components used in previous and new technologies are closely aligned. This similarity allows us to shift production strategies efficiently without a major overhaul.
Gianluca Romano — Executive Vice President, Chief Financial Officer
At this point, we no longer have much idle capacity to bring back into use.
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Tech Transition Sparks Growth: Insights from Industry Leaders
In a recent discussion, industry executives highlighted their commitment to increasing technological capabilities and aligning with market demand. The latest PMR products are witnessing aggressive ramp-up in production during the September and December quarters, while the move to HAMR technology is expected to yield extra exabytes of data storage to meet rising demand.
Vijay Rakesh — Analyst
All right. Thank you.
Operator
Next, we have Thomas O’Malley from Barclays. Please proceed.
Tom O’Malley — Analyst
Hey, everyone, thanks for having me. Dave, can you help clarify something? It seems you are operating at full capacity now, and this technology transition is driving growth, which is great. You’ve reported strong results recently.
As we look towards fiscal year ’26, you’re anticipating more volume from HAMR technology mid-next calendar year. If there were to be additional delays with HAMR, given your full capacity, how would you navigate that? What are your plans if technology transitions can’t keep pace?
While this isn’t your strategy, we have seen some product qualifications slip, so I’m interested in your contingency plans.
William David Mosley — Chief Executive Officer
I’m not particularly concerned about delays, for the reasons you mentioned. We’re closely monitoring how test sets and qualifications are progressing, and I’m confident we can adapt quickly.
As I noted earlier, we can smoothly transition from our last generation PMR to HAMR technology, which remains a solid product with attractive margins. If there were small delays—like one quarter—we could easily shift back based on customer preferences.
Tom O’Malley — Analyst
That’s helpful. Regarding your outlook on AI, you’ve mentioned it’s still developing. When do you foresee seeing contributions from initial customer engagement? Is this something that could materialize as early as next fiscal year?
William David Mosley — Chief Executive Officer
Thanks, Tom. This is a complex area, as many new workloads are labeled as AI. We’ve received purchase orders tied to groundbreaking workloads, such as predictive AI and GenAI applications.
Currently, we’re seeing a rise in demand related to video applications, which we’ve emphasized in previous comments. This trend influences how our customers enhance their business models, leading to a steady influx of demand. I wouldn’t characterize this as a fleeting trend but rather a competitive value proposition that enhances video as a core asset for our clients.
Operator
Now we turn to Mark Miller from The Benchmark Company. Please go ahead.
Mark Miller — Analyst
Congratulations on your solid results and guidance. I want to revisit AI—do you think PCs equipped with AI chips will trigger a substantial upgrade cycle? If so, would you expect this in the second half of next year?
William David Mosley — Chief Executive Officer
Mark, I have limited visibility on that, but I regularly discuss this with various industry contacts. The PC market has been slow to embrace new applications but is on the verge of change, though how quickly remains uncertain.
Key factors will include not just new hardware specifications but also innovative applications—primarily in video, which will allow creators and professionals to produce content more efficiently. As demand grows at the edge, it could affect data service dynamics in cloud computing. While predictions around AI PCs remain tentative, I believe the growing application developments hold promise and could impact us soon.
Mark Miller — Analyst
Finally, could you share the factory utilization rates for your hidden media fabs? Are they over 85%?
William David Mosley — Chief Executive Officer
Utilization is quite high, above 90%. As we shift to HAMR, some previously allocated experimental spaces are transitioning back into production. Maintaining this high rate is essential to avoid cost implications and ensure efficiency in our operations.
Mark Miller — Analyst
So, both head and media fabs are running at over 90% utilization, correct?
William David Mosley — Chief Executive Officer
That’s correct.
Operator
Next, we have a question from Karl Ackerman at BNP Paribas. Please proceed.
Karl Ackerman — Analyst
Thank you. Can you discuss your build-to-order visibility? Is it based on take-or-pay contracts, or should we view it as strong interest as you and customers plan storage capacity for the upcoming quarters? Additionally, can you elaborate on the present mix of SMR and its expected trajectory as we approach December and 2025?
William David — CEO
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Seagate Discusses Strategic Advancements and Customer Commitments During Earnings Call
Focus on Storage Technology
William David Mosley — Chief Executive Officer
Thank you, Karl. I’ll let Gianluca address the build-to-order inquiries. Regarding the shingled magnetic recording (SMR) technology, I’ve repeated that only a few cloud clients truly utilize SMR. There are also some client-server customers that adopt it. In essence, we supply SMR across various markets.
When weighing SMR against conventional magnetic recording (CMR), I view it simply as “drives.” It’s essential to consider how customers require them, and we can tailor solutions based on specific needs, regardless of the scale. From my standpoint, our technology is robust and versatile. Our aim is to keep production levels high while optimizing resource use. That sums up my view on the SMR distribution.
Commitment to Customer Orders
Gianluca Romano — Executive Vice President, Chief Financial Officer
On the topic of build-to-order, we maintain various agreements with our customers. However, a significant majority consist of fully committed orders scheduled for future delivery.
Conclusion of Q&A Session
Karl Ackerman — Analyst
Thank you.
Operator
This wraps up our question-and-answer segment. I’ll hand it back to Dave Mosley for any final thoughts.
Closing Remarks by CEO
William David Mosley — Chief Executive Officer
Thanks, Nick. Our ongoing enhancements in technology align us well to adapt to our customers’ evolving needs and foster future growth. We are dedicated to delivering scalable storage solutions that provide real value to our clients. I want to express my gratitude to our committed team, supply chain partners, and shareholders for your ongoing support.
Thank you. We look forward to connecting next quarter.
Call Participants
Shanye Hudson — Senior Vice President, Investor Relations and Treasury
William David Mosley — Chief Executive Officer
Gianluca Romano — Executive Vice President, Chief Financial Officer
Dave Mosley — Chief Executive Officer
Wamsi Mohan — Analyst
Krish Sankar — Analyst
Amit Daryanani — Analyst
Erik Woodring — Analyst
Toshiya Hari — Analyst
Asiya Merchant — Citi — Analyst
Aaron Rakers — Analyst
Timothy Arcuri — Analyst
C.J. Muse — Analyst
Steven Fox — Analyst
Ananda Baruah — Analyst
Vijay Rakesh — Analyst
Tom O’Malley — Analyst
Thomas O’Malley — Analyst
Mark Miller — The Benchmark Company — Analyst
Karl Ackerman — Analyst
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