Seagate's 2026Q1 Earnings Call: Contradictions Emerge on Capacity Addition, Gross Margins, and HAMR Strategy

Date of Call: October 28, 2025

Financials Results

• Revenue: $2.63B, up 8% sequentially and up 21% year-over-year
• EPS: Non-GAAP EPS $2.61, exceeded the high end of guidance
• Gross Margin: 40.1% non-GAAP, up 220 basis points sequentially
• Operating Margin: 29% non-GAAP, expanded 280 basis points sequentially

Guidance:

• December quarter revenue expected $2.7B +/- $0.1B (midpoint ~+16% YOY)
• Non-GAAP operating expenses ~ $290M; non-GAAP operating margin ~30% at midpoint
• Non-GAAP EPS expected $2.75 +/- $0.20 (tax rate ~16%; diluted shares ~227M including ~10M from 2028 convert)
• Fiscal 2026 capex expected inside target range of 4%–6% of revenue; free cash flow expected to expand in December quarter

Business Commentary:

• Revenue and Profitability Growth:
• Seagate Technology Holdings plc reported revenue of $2.63 billion for fiscal Q1 2026, up 8% sequentially and 21% year-on-year.

• The growth was driven by strong demand for high-capacity hard drives in data centers and the transition to HAMR-based products.

• Data Center Demand and Market Share:

• Data center revenue represented 80% of Seagate's total revenue, contributing $2.1 billion, and grew by 13% sequentially and 34% year-on-year.

• This was driven by increased demand from global cloud service providers and enterprise customers, supported by Seagate's high-capacity nearline production.

• HAMR Technology and Product Development:

• Seagate achieved milestones in qualifying five global cloud service providers on its Mozaic 3+ terabyte per disk products and shipped over 1 million Mozaic drives in the September quarter.

• The success in HAMR adoption and transitions to higher capacity drives are attributed to Seagate's advancements in technology and customer demand for exabyte efficiency in data centers.

• Operational Efficiency and Cost Reduction:

• The company reported a non-GAAP operating margin of 29% and expanded non-GAAP gross margin to 40.1%.
• Improved operational efficiency resulted from increased adoption of higher-capacity products and execution of pricing strategies, reflecting the benefits of increased production yield and cost reduction.

Sentiment Analysis:

Overall Tone: Positive

• Management called it a "very strong start to fiscal 2026," highlighted a "record non-GAAP gross margin at 40.1%" and a non-GAAP operating margin of 29%, and announced a ~3% dividend increase, citing strong HAMR adoption and robust cloud demand.

Q&A:

• Question from Mark Newman (Sanford C. Bernstein & Co., LLC.): Plans to add capacity given tight supply, any supply-chain bottlenecks to alleviate; update on HAMR adoption and any upside/downside versus prior HAMR rollout projections?
  Response: Seagate is not adding unit capacity but increasing exabyte capacity via product transitions (HAMR); ramp and customer qualifications are on track, with focus on yields during transitions.

• Question from Erik Woodring (Morgan Stanley): Given recent 60%–70% incremental margins, should we expect incremental margins to stay higher than the 50% guide from Analyst Day?
  Response: Short term incremental margins are better than modeled driven by favorable mix (higher-capacity HAMR), but quarter-to-quarter variability remains and the long-term Analyst Day model still applies.

• Question from James Schneider (Goldman Sachs): Expectations for blended cost reduction in calendar 2026 and whether ramping HAMR could be better or worse than mid-teens cost-down; any unit-capacity benefits from parallel PMR/HAMR tracks?
  Response: Cost-per-terabyte improvement will come primarily from transitioning to higher-capacity HAMR drives (including upcoming 40TB qualifications); this should materially reduce cost/TB though timing will vary by quarter.

• Question from Asiya Merchant (Citigroup): Visibility on inferencing demand, applications giving confidence for demand through 2027, and how to think about seasonality (March quarter) given strong AI inferencing?
  Response: Inference and video-driven demand are proving durable but hard to predict short-term; with data center now ~80% of revenue, seasonality (e.g., March) is likely muted versus historical patterns.

• Question from Wamsi Mohan (BofA Securities): How is pricing being managed in a constrained environment, contractual lock-ins, intra-quarter flexibility, and why $/TB declined similarly to prior quarter despite strong demand?
  Response: Pricing policy is stable—contracts provide predictability and renegotiations show slight price increases; $/TB declines as customers migrate to higher-capacity HAMR (lower $/TB) while overall profitability improves.

• Question from Christopher Muse (Cantor Fitzgerald): If consumer seasonality occurs in March, can supply be pivoted to cloud; are customers switching to SSDs given HDD tightness and is there cannibalization risk?
  Response: Seagate can and is reprioritizing supply toward cloud as product transitions permit; management sees no meaningful SSD cannibalization or architecture change—demand remains HDD-driven.

• Question from Sreekrishnan Sankarnarayanan (TD Cowen): With cloud a larger portion of demand, are you rethinking HAMR pricing (can you increase it); and clarification on tighter revenue guide range (now ~$100M vs prior $150M)?
  Response: HAMR pricing adjustments will be gradual—early qualification volumes had some discounts for partners but pricing is normalizing; the tighter guide reflects improved build-to-order visibility with major customers.

• Question from Amit Daryanani (Evercore ISI): Are customers offering to co-invest CapEx to access more units; will areal density be enough or will additional capacity be needed; confirmation whether 1M+ Mozaic drives shipped implies ~30–36 exabytes from HAMR?
  Response: Seagate is not seeking customer-funded CapEx and prefers to maintain supply-demand balance; product transitions (areal density) drive exabyte supply; ~1M Mozaic shipments align with ~30–36 TB per unit characteristics.

• Question from Aaron Rakers (Wells Fargo): How to think about the systems business within data center and whether the mid-20% nearline CAGR outlook should be revised higher given current demand?
  Response: Systems are a small, integrated part of data center revenue and reported with it; the mid-20% CAGR framework remains under review but focus stays on areal-density (bigger drives) to deliver exabyte growth.

• Question from Thomas O'Malley (Barclays): Timing of crossover between Mozaic 3 and Mozaic 4 platforms and whether crossover could occur in early FY'27 with meaningful contribution (15%–20%)?
  Response: Mozaic 4 ramp should be faster than the first-gen transition, but the timing and contribution depend on yield ramps—management expects an accelerated but execution-dependent transition.

• Question from Karl Ackerman (BNP Paribas): Your longer-term agreements provide visibility into 2027—does that imply exabyte slowdown or acceleration versus the 25% exabyte growth assumption?
  Response: Long-term agreements provide visibility and as 4+ platform qualifications progress, supply (exabytes) should increase, supporting growth rather than implying a slowdown.

• Question from Timothy Arcuri (UBS): With 5 CSPs qualified and 3 more expected H1 next year, why won't exabyte crossover (>50%) happen within a year given strong demand?
  Response: Qualification doesn't instantly convert to volume—factory transitions, wafer starts and lead times mean ramping production and yields takes multiple quarters, delaying immediate crossover.

• Question from Steven Fox (Fox Advisors): Could HDD supply become a bottleneck for cloud expansion next year and what can cloud providers do to leverage existing capacity to stay on schedule?
  Response: Industry cannot add large supply quickly; cloud customers and Seagate are managing via predictable long-term plans and prioritizing allocations—timing mismatches are temporal, not architectural changes.

• Question from Ananda Baruah (Loop Capital): Will customers' velocity to migrate to higher-capacity points accelerate given shortages and HAMR's stair-step capacity gains; could mix-up inside HAMR be faster once normalized?
  Response: Customers are accelerating mix-up to 30–40TB and beyond because TCO gains are large; management expects faster adoption of higher-capacity HAMR as qualifications and ramps proceed.

• Question from Tristan Gerra (Robert W. Baird): Duration and pricing components of long-term HAMR agreements; what percent of revenue is under these agreements and how have they changed year-over-year? Also, will lead times expand as HAMR ramps?
  Response: Agreement terms vary by customer; the vast majority of nearline exabytes are committed through calendar 2026; lead times step up during HAMR transitions due to process content but should stabilize thereafter.

• Question from Mark Miller (The Benchmark Company): Are margins and yields on HAMR drives at parity with legacy PMR and when will parity occur?
  Response: Legacy PMR yields are strong; HAMR (notably 4TB/platter family) is still ramping and not yet at parity—management is prioritizing yield improvements this year.

• Question from Vijay Rakesh (Mizuho Securities): Given sequential margin improvement, can Seagate reach mid-45% gross margins exiting fiscal '26 and is there upside to the long-term 20%–25% exabyte growth from increased video traffic?
  Response: Gross margins have progressed faster than expected and could outperform short-term, but variability by quarter makes explicit mid-45% guidance uncertain; video/AI content generation could provide upside to long-term exabyte growth but remains under study.

Contradiction Point 1

Capacity Addition Strategy

It involves differing statements about the company's capacity addition strategy, which could impact production and supply chain management.

Do you plan to add capacity? Are supply chain bottlenecks expected to ease over time? - Mark Newman (Sanford C. Bernstein & Co., LLC., Research Division)

2026Q1: Our strategy for adding capacity is through product transitions, not unit capacity. We lose some capacity due to higher process content. We focus on exabyte capacity rather than unit capacity. - William Mosley(CEO & Director)

Are there plans to add capacity? Are there specific supply chain bottlenecks expected to ease over time? - Mark Newman (Sanford C. Bernstein & Co., LLC., Research Division)

2025Q4: We continue to optimize our manufacturing footprint, and we plan to add capacity, which we believe will allow us to support our customers' needs. - Gianluca Romano(Executive VP & CFO)

Contradiction Point 2

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

Your incremental margins are now 60%-70%, up from 50% at your Analyst Day. Why can't these higher margins continue? - Erik Woodring (Morgan Stanley, Research Division)

2026Q1: We're executing better than expected due to improved product mix, particularly with higher capacity drives. The pricing strategy is consistent, but the number of new negotiations varies quarterly. Our current short-term performance is better than long-term expectations. - Gianluca Romano(Executive VP & CFO)

Who is your primary customer? Are you breaking out gross margins for Rebecca, Excella, and Excella Plus? Can you disclose the 25% not covered by long-term agreements? - Steve Milunovich (UBS)

2025Q4: For the full fiscal year 2025, we expect a non-GAAP gross margin of approximately 31.5% to 32.5%. - Gianluca Romano(Executive VP & CFO)

Contradiction Point 3

Capacity Expansion Strategy

It involves the company's strategic approach to capacity expansion, which directly impacts production capabilities and could affect revenue projections and customer expectations.

Are there plans to expand capacity? Are there supply chain bottlenecks expected to ease over time? - Mark Newman (Sanford C. Bernstein & Co.)

2026Q1: Our strategy for adding capacity is through product transitions, not unit capacity. We lose some capacity due to higher process content. We focus on exabyte capacity rather than unit capacity. - William Mosley(CEO)

Are you increasing CapEx to expand capacity, and do you have plans to adjust due to tariff uncertainties? - Tristan Gerra (Baird)

2025Q3: We have no plans for additional CapEx as HAMR technology allows for efficiency gains. We maintain capital discipline based on demand predictability. - Dave Mosley(CEO)

Contradiction Point 4

HAMR Revenue Contribution and Ramp Expectations

It involves the revenue contribution and ramp expectations for HAMR products, which are crucial for understanding the company's product strategy and financial outlook.

Are you considering increasing HAMR pricing due to increased demand? - Sreekrishnan Sankarnarayanan (TD Cowen)

2026Q1: We believe that the hardest part of that HAMR transition is behind us, and we're getting more comfortable with the execution of that technology. - Gianluca Romano(CFO)

What's the current status of HAMR drive certifications, and what was HAMR's contribution to the March quarter results? - Asiya Merchant (Citi Group)

2025Q3: HAMR is ramping well, and we have a major CSP qualification almost complete. The revenue increase was mainly due to HAMR products. More details will be shared at our Analyst Day. - Dave Mosley(CEO)

Contradiction Point 5

HAMR Capacity and Supply Chain Management

It involves the company's strategy for capacity management and supply chain, which are critical for meeting customer demand and maintaining competitive edge.

Do you have plans to add capacity? Are there specific supply chain bottlenecks expected to ease over time? - Mark Newman (Sanford C. Bernstein & Co., LLC., Research Division)

2026Q1: Our strategy for adding capacity is through product transitions, not unit capacity. We lose some capacity due to higher process content. We focus on exabyte capacity rather than unit capacity. The demand that most hyperscalers feel is for more exabytes, driving our confidence in executing product transitions. - William Mosley(CEO & Director)

Is the March quarter's $200 million shortfall due to delayed growth typically seen in June or later? - Erik Woodring (Morgan Stanley, Research Division)

2025Q2: We do have capacity issues. We do have some supply issues that we have had to deal with in the quarter. A number of things are coming together here. Number one, there is a temporary production issue that we believe has been resolved. We hope it is resolved by the end of this quarter. - William Mosley(CEO)