Spinning disks generating massive revenue for Seagate

Customers scrambled to buy Seagate’s nearline disk drives as it reported massive third quarter earnings driven by pricier mass-capacity drives.

Its revenues of $3.11 billion beat its high-end $3 billion guidance and were up 44 percent year/year, with a $748 million GAAP profit, 120 percent higher than a year ago. It used its cash in the quarter to retired approximately $641 million in debt and return $191 million to shareholders through dividends and share repurchases.

Dave Mosley, Seagate’s chair and CEO, said in the earnings call: “Seagate delivered a very strong March quarter. underscoring both the durability of demand and the leverage in our model. We grew revenue 44 percent year-over-year, achieved record gross margins, more than doubled non-GAAP operating income and generated one of our highest ever levels of free cash flow at close to $1 billion.” 

Financial Summary

• Gross margin: a record 46.5 percent vs 41.6 percent on the prior quarter
• Operating cash flow: $1.1 billion vs $723 million in previous quarter
• Free cash flow: $953 million vs $607 million n prior quarter
• Cash and cash equivalents: $1.1 billion vs $1 billion
• Gross debt: $3.863 billion vs $4.499 billion in prior quarter
• Diluted EPS: $3.27 vs $2.60 in prior quarter

 He sees a change in Seagate’s market position: “We believe Seagate is entering a new era of structural growth as AI applications amplify data creation and support sustained storage demand.” And then said this: “The progress we have made gives us confidence to significantly increase our annual revenue growth target from the low to mid-teens, to a minimum of 20 percent over the next few years.”

Disk drive revenues aren’t being eaten by SSDs; they’re spinning higher and higher. Mosley said: “Using Remaining Performance Obligations, or RPO, as a proxy for future revenue potential, the top 3 global CSPs alone have nearly doubled their RPO to staggering $1.1 trillion, a clear indicator of sustained growth ahead. …We have exabyte scale supply agreements in place with nearly all major cloud and hyperscale customers, with nearline capacity almost fully allocated through calendar 2027. … we are finalizing build-to-order contracts with these customers through the end of fiscal 2027, which defines specific configuration and pricing.”

There’s more: “We are actively engaged in strategic planning discussions now reaching into calendar 2028 and beyond.” And:” We have started to see interest from sovereign and neo cloud data centers for our enterprise nearline drives and system solutions.”

These market conditions are fantastic for Seagate, it now being able to sell every mass-capacity nearline drive it can build. 

Mosley reckons it’s all down to AI: “Today, AI sits at the center of nearly all customer demand conversations. We are in the midst of an inference inflection where compute infrastructure is shifting from periodic training to becoming engines that continually generate mass capacity data.” 

Generative AI chatbots are in wide use and agentic AI ,which needs historical data to reason, is coming, as is robot AI:” We believe demand will further accelerate as AI applications move beyond the data center into the physical world, powering manufacturing systems, autonomous vehicles and robotics.”

In contrast to WD which has a strategy to increase IO bandwidth per drive as well as capacity, Seagate is pretty much all-in on capacity increases. Mosley said: “Our customers want more capacity per spindle and that's our highest priority.” Discussions are taking place about higher bandwidth (multi-actuator drives) but: “while those discussions are happening, the biggest driver for us is get more capacity per drive.”

Seagate shipped 199 exabytes of capacity, up 39 percent Y/Y, with more than 90 percent of it going to data center customers, indicating how little presence the consumer and PC markets now have in its business.

CFO Gianluca Romano said: ”The data center market accounted for 88 percent of exabyte shipments and 80 percent of revenue, with strong demand contribution from both global cloud and enterprise customers.”

A chart tracking EB shipped numbers and GAAP profit per EB shows how Seagate’s pricing strategy, against a background of high demand, has generated more dollars per exabyte in recent quarters.

Seagate's transition to Mozaic HAMR tech drives is progressing well, with drives to shipping to ~75 percent of leading global cloud customers, and the two remaining customer qualifications set to complete in the June quarter. The Mozaic 4+ (to 4.4TB/platter) tech is now qualified with two largest CSPs and expected to be the majority of Seagate’s HAMR shipments by the end of calendar 2026. Qualification of Mozaic 5+ (5TB/platter) is set to begin in late calendar 2027.

Will the good times continue? Romano said: “We are confident in saying that we have a good opportunity to increase our profit and our revenue sequentially through the fiscal ’27."

Seagate’s revenue outlook for the next quarter is $3.45 billion +/- 100 million which will be a record at the mid-point, eclipsing its fiscal 2022 second quarter’s $3.12 billion. 

The auguries are looking good for Western Digital as well. It reports its results in the evening of April 30.