Good morning, and welcome to the Seagate Technology Fiscal First Quarter 2022 Financial Results Conference Call. My name is Julianne, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Shanye Hudson, Senior Vice President, Investor Relations and Treasury. Please proceed, Shanye.

Thank you. Good afternoon, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earning press release and detailed supplemental information for our September quarter fiscal 2022 on the Investors section of our website. During today's call, we'll refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K that was filed with the SEC. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements, including our December quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities, possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic and general market conditions. These statements are based on management's current views and assumptions and information available to us as of today and should not be relied upon as of any subsequent date. Actual results may vary materially from today's statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K and 10-Q filed with the SEC, our Form 8-K filed with the SEC today and the supplemental information posted on the Investors section of our website. As always, following our prepared remarks, we'll open the call for questions. Let me turn the call over to Dave for opening remarks.

Thank you, Shanye, and hello to everyone joining us on today's call. Seagate has an outstanding start to fiscal 2022, underscored by our September quarter results. Revenue of $3.1 billion was spot on with our expectations and reflects robust growth, up 35% year-over-year and 3% above a very strong June quarter. Non-GAAP gross margin expense to 31%, well inside of our multiyear target range and non-GAAP operating margin increased to 20.1%, the company's highest level in nearly a decade. Overall, our results reflect record demand for our industry-leading mass capacity products and solid execution on cost reduction plans and our ongoing focus on balancing supply with demand. We are confident in our ability to deliver excellent results for the fiscal year. And based on our current view, we are raising our fiscal 2022 revenue growth outlook from the high single-digit percentage range to the low double-digit range. Further, reflecting on our long-term confidence in the business, I'm delighted to announce that our Board has once again approved an increase to the quarterly dividend by 4.5%. I've been very proud of our team's ability to post consistent financial results through an industry environment that remains very dynamic. We are seeing a confluence of factors creating inflationary pressures and acute supply chain disruption. These include semiconductor component shortages and freight logistics challenges that are creating cost pressures and the impact in critical end product assemblies for certain customers. Notwithstanding these obstacles, underlying demand remains solid for Seagate's products, particularly in the mass capacity market, which is why we maintain a high level of confidence in our fiscal year growth outlook. Revenue from the mass capacity markets exceeded $2 billion for the first time, reflecting broad-based growth across each of the end markets. The cloud is the strongest contributor to the mass capacity…

Thank you, Dave. Our September quarter results highlight solid growth across nearly all financial metrics and demonstrate site disciplined execution and ongoing focus on running profitability and free cash flow generation. Revenue was $3.12 billion, up 3% sequentially. Non-GAAP operating margin expanded to 20.1% of revenue, up 200 basis points quarter-over-quarter, and non-GAAP EPS was $2.35, up 18% sequentially and at the high end of our guidance range. We grew total hard disk drive revenue to $2.9 billion, up 5% sequentially and 24% year-over-year. HDD capacity shipments increased 4% sequentially to 159 exabytes, up 39% relative to the prior year period. Growth was driven by increasing demand for our mass capacity product, which contributed 71% of total HDD revenue and 83% of HDD exabyte shipments. Revenue from the mass capacity market increased to $2 billion, supported by growth across each of the underlying end markets, which include nearline, VIA and NAND products. Mass capacity revenue was up 8% sequentially and up 51% compared with the prior year period, while capacity shipments into this market were up 7% sequentially and 53% year-over-year. Based on our current outlook, we expect mass capacity exabyte shipments to remain strong in the December quarter, with financial year '21 annual growth slightly above our long-term CAGR forecast of about 35%. In the September quarter, nearline revenue demand was driven by improving enterprise spending and healthy growth from cloud data center customers. Nearline shipments totaled 106 exabytes, up 5% sequentially and 65% year-on-year, reflecting demand for our high capacity price, strong growth for dual actuator drive and ongoing market momentum for our common platform products spanning 16 through 20-terabyte price. Robust demand in the bear market led to sequential revenue growth that was above the average for the mass capacity market, and we expect solid demand to…

Thanks, Gianluca. Fiscal 2022 is off to a tremendous start, and I feel positive about the current and healthy demand environment, which is reflected in our increased revenue growth outlook for the fiscal year. I'm equally bullish on Seagate's longer-term growth opportunities supported by secular demand for mass capacity storage. Our mass capacity innovation road map puts Seagate in excellent position to thrive in this environment and continue to deliver revenue growth beyond fiscal 2022, in line with our long-term target of 3% to 6%. We are in the right place with the right technology and innovative customers with whom we are partnering closely to enable their road maps. Further, our robust capital returns program, including today's dividend increase, round out what we believe is a compelling investment story. With the UN Climate Change Conference scheduled to begin in less than 2 weeks, I wanted to highlight Seagate's commitment to ESG. Starting in fiscal 2022, we have incorporated sustainability into our executives' long-term compensation plan based on the achievement of specific quantitative environmental and social targets. Our environmental goal is linked with established plans to reduce the company's carbon footprint in support of achieving our science-based targets. From harnessing renewables at our California and Northern Ireland campuses to installing solar capacity at our facilities in Thailand, Seagate continues to put our commitment to the plan and into action. We have also incorporated an executive compensation goal to increase gender diversity in our leadership as we strive to cultivate a more diverse, equitable and inclusive workplace. For a third consecutive year, Seagate is among best companies for women according to social media platform, Ferrygodboss as well as one of the best places to work for LGBTQ plus equality by the Human Rights Campaign. In closing, I'd like to thank the Seagate team for their tireless efforts, our customers and suppliers for their continued support and our shareholders for placing their trust in Seagate. Gianluca and I are now happy to take your questions.

[Operator Instructions] Your first question will come from Karl Ackerman from Cowen and Company.

I have 2 questions, please, 1 for Dave and 1 for Gianluca. Dave, it's great. It's great to say that over 2/3 of your business has now transitioned away from consumer towards enterprise. As you know, which tends to be higher margin, yet influenced by data center CapEx. There have been some recent concerns by investors that cloud spending will moderate after being robust in the last 6 quarters. So I was hoping you could discuss how you see the demand trajectory playing out for nearline, both in the December quarter and also into the second half of your fiscal 2022?

Yes. Thanks for the question, Karl. And I think if you -- if you have another one you could follow up with Gianluca Romano as well. The way I look at it -- sorry, go ahead.

Sorry, I was going to say for my second one then, Dave, the improvement in your profitability has been impressive. And our own checks indicate you have been successful in passing along these rising input costs. Some investors have been fearing that margins might moderate as enterprise is also moderate. But I was hoping you might discuss why that might not be the case for some high-capacity offerings and what initiatives you have at your disposal to support profitability regardless of demand.

Okay. Good. Yes. Thanks. So Gianluca will catch that. Relative to cloud, the demand has been steady now since the beginning of calendar '20. So as we talked about in the prepared remarks, there's a broadening of the customers base, not just a few hyperscalers that's actually benefiting us tremendously as well as the transition -- the product transitions that we've talked about, the higher and higher capacity points, which have a better TCO proposition for the end customer as well. I think these macro trends, whether it's digitization, AI, multi-cloud, the move to the cloud, we're all accelerated tremendously during the pandemic, work from home and all the other things that cause people to push into the cloud. Not all these cloud customers are all synced up, but we think the demand picture right now is an aggregate of all of that behavior. And we, at the same time, we've had longer product cycles. So we have great visibility. We have strategic long-term agreements. We're showing people what we can do 2, 3, 4 quarters out, and then we're asking them what exactly they need. And I think the economics play is happening now well that way. And I think that's why we're seeing the kind of stabilization that we are and why we can reinforce the fact that the back half of this fiscal year and even into the next fiscal year, we'll continue to expedite growth and will turn that into revenue. Gianluca, do you want to...

Yes. On the profitability question, I would say we are executing well on our plan. We discussed few quarters ago how we could improve our profitability quarter-after-quarter. Even in the last quarter, we improved our gross margin by 140 basis points, and we are at the top of the operating margin range. So we are happy with the performance. But of course, we are always looking at the opportunity for improvement. As we were saying in the prepared remarks, there are some costs that are increasing, and we are looking into that, how to moderate that impact and continue to improve our gross margin and operating margin in the next few quarters. So we are positive, that we continue that trajectory, and demand is strong. So this is helping. When we have a good alignment between supply and demand, usually, we come out with a good profitability. So we are happy with the situation.

Your next question comes from Wamsi Mohan from Bank of America.

Congrats on the strong results and outlook. I had 2 as well. You're returning cash well above 100% of free cash flow, and you just raised your dividend as well. I know you spoke about very strong capital return program at your Analyst Day earlier. Just wondering, as you're thinking about the outlook here, anything that has changed in the market that from a pricing or demand standpoint, that is sort of bolstering the confidence. And secondly, last night, Intel spoke about China Cloud slowdown given regulatory pressures over there. Are you seeing any of that? And is that contemplated in your raised fiscal year guide?

I think it's part and parcel with Karl's question, there's -- both of the your questions kind of tie back to that same visibility that we have. So yes, we do have a long-standing track record of returning cash to shareholders. And we remain committed to the dividend as a matter of fact we opted for the first time -- or for the third time in a row -- third year in a row. That is really confidence in our long-term free cash flow generation and that gets into our -- like Gianluca was just saying, our balancing supply and demand against the growth of data that's out there in the world. So we'll continue to be opportunistic on share buybacks. And you can look at the track record over the last 10 years or the last 10 quarters of the company, you can see who we are relative to returns. We continue to budget. So we'll look at investing in ourselves. We'll focus on optimizing the use of our capital to generate the best value we can over the long term. And we've been pretty good stewards of cash even in the tough times that happened in the pandemic. So I'm pretty confident in that. Relative to China and the cloud slowdown. I would say there's a couple of things. We have good customer relationships, and therefore, we get out in front of the 16s and 18s and 10 to 20 terabytes that they're going to need. And that's the same kind of question that Karl asked. I think also that the way I see it is not all infrastructure investments, that people are making, sync up necessarily when it comes to memory and compute and networking and storage. And so you may make one type of investment for a while and then pivot to another type of investment against an overall strong investment thesis that's going on in the cloud. So I think that may explain why certain people see different things over the next 2 or 3 quarters. And we don't really -- we don't see any inventory buildup substantial. We see that people when they need the disk drives to actually populate the data centers and get those -- that mass capacity storage online, we see that trend quite far out and the customers are being very predictable on it. So that kind of explains our confident. We don't really see the slowdown in exabyte growth at all.

Do you have follow-up, Wamsi?

Your next question comes from Timothy Arcuri from UBS.

I had a question about CapEx discipline and supply-demand balance. There's been a lot of structural changes in the industry that seem like they could be pretty significant longer-term margin tailwinds in some ways, maybe similar to what's happened in DRAM. And I guess my question is, as we sort of enter a new cycle of CapEx, how do you ensure CapEx discipline? And how do you think about that in the context of overall supply-demand balance? I mean the old axiom is that it only takes one supplier to sort of tip the apple cart. So I'm wondering if you can talk about CapEx discipline.

Yes. I mean it is good to reflect back on where we've come from. So if I look at the peak of client server, the drive types that we're making typically had 1 disk and 2 heads in them, and there were a lot of those drives. So our factories, we're very focused on flexibility, back-end capacity for notebook drives, for example. And now that we have mass capacity drives that have a lot of disks and a lot of heads in them. So it's much more like a semiconductor process. I mean, there's significant differences in the processes themselves, but the lead times for wafer quite long, quite specialized for us. And that's where a lot of the CapEx is actually being deployed now. That pivot has happened over the last 10 years. We're now fully enjoyed, as you can see from our numbers in heads and media investment land not in drive -- not having overcapacity for drive anymore. So kind of interesting as we've made that pivot. We talked about strong secular demand for mass capacity storage going all the way through '26. It will keep going after that, of course, we pegged the TAM at $26 billion, 5 years from now. We are trying to balance supply and demand against that. And I think exactly to your question, the governors are the lead times for wafer and also the lead times for the capital equipment to actually increase. And so as long as we continue to make the smart investments, we should be able to keep supply and demand in balance. And you could read that as a form of our CapEx discipline. Obviously, if we see, for example, on the HAMR transition, we want to accelerate it at all, we can invest a little bit more. We have a lot of cash to be able to do that. But we'll continue to really watch that supply and demand balance well and deployed like that. And we're working a lot with the customers on their specific needs. That's why I talked about the LTAs when Karl asked his question. So we know what roughly the build-outs are going to happen over time so we can we can do that very judiciously.

Yes, Tim, on the CapEx, no, we have a guidance range of 4% to 6% of revenue. We have also said that for this year, we will be probably in the low part of that range. We are fairly happy with the supply and demand alignment at this point and the utilization of our factories. And of course, we want to keep this good alignment for the future.

I guess as my follow-up, can you talk about channel inventory? Where does channel stand at this point? And did your pricing in your mass capacity segment, did that benefit at all from channel refill in the third quarter, calendar third quarter?

I think simply put, the answer is no. So we have multiple channels. Of course, in this case, we're talking about distribution channel, largely for legacy products. There's some small channel for mass capacity. But I think a lot of people are focused on legacy products. And we love those legacy products. We love the customers there. But we're not really investing there. And so we make sure that we keep those channel inventories properly balanced. And the swings that we might have seen, say, 2 quarters ago due to cryptocurrency or something like that, that reequilibrated very, very quickly. And it doesn't impact the mass capacity channels at all. So from my perspective, all the inventory levels that we have are quite good. From -- inside Seagate, our inventory actually went down quite a bit, and that's a function of kind of how tough it is to manage supply and demand right now because the end customers are having trouble getting the right parts. And what we want to make sure we do is don't push too much into some of those temporary problems that they might have that they're trying to build the final kits, right? That it doesn't help us, I think, to your point of long-term economics and industry structure and things like that. So we have to make sure that we balance our supply and demand even tactically really well, and I think we're doing a good job with it.

Your next question comes from Patrick Ho from Stifel.

Congrats on the nice quarter and outlook. Dave, maybe first, a big picture question. it was really encouraging to hear about the efforts on the multi actuated run like the MACH.2. I was just wondering to get a little more color on the HAMR side of things. You mentioned the progress there that continues to be on track. But can you talk about, I guess, customer discussions and when you believe the inflection point will be when customers transition over the HAMR drives?

Yes. Thanks for the question, Patrick. I think -- I'm glad you took away the optimism. The team is definitely feeling it with the results that we have. These are not just science projects anymore, this is product development, full boom product development now. And we've talked a lot about HAMR in the past. We've built a lot of parts. We've given drives to customers. They can see how those drivers behave in their infrastructures. And we're locked in with customers talking to them specifically about even the recent results that we have. But just to be super clear, HAMR is really the pathway to get to 30 terabytes and beyond, and we are very confident about that right now, and we expressed that in the prepared remarks. There's a lot of things we have to get together on so that you've got the manufacturing capability. There's other parts of the recording chain that we have to make worth the readback process, HAMR is usually about writing, get the media right, HAMR enabled to -- HAMR actually starts from a new material set in the disc, the ability to write dense bids comes from the media technologies that you're actually using. So we have to get all that right as well. But we're super encouraged by the results. And I think the best way to say this, I think the industry probably hasn't done a great job of making things really clear. But I think the best way to say it is that we are feeling confident in capacity points, not only at 20 and 22 and 23 and 24 or things like that, but significantly higher than that based on what we're seeing right now. And we are working really hard to make sure we get that done. Our customers know it. They've seen samples of that, and we're going to continue to race to get there. I don't want to really announce any new products just yet, but we'll let you know when they come.

Great. That's helpful. And maybe as my follow-up for Gianluca. Obviously, your results highlighted strong execution. And given the supply constraints that are in the industry, today, again, the results were really strong. I was just wondering in terms of your Malaysia operations and just some of the labor constraints. Are you seeing that abating right now? And how did you manage through that -- how did you manage through the September quarter, given that there were some issues on that front in the country itself with COVID? What efforts did you take -- continue to deliver the strong results you delivered in September and the outlook for December?

Yes. I would say, no, first of all, thank you for the congratulations. I think the same quarter actually came a little bit better than how we guided at the beginning. But in terms of revenue it's very well aligned. And the profitability is a bit better. I would say in terms of the legacy part of the business, right now, we are seeing a better trend compared to maybe a year ago, 2 years ago. Of course, not all the segments are the same inside legacy in the last quarter. Sequentially, consumer was a little bit down compared to June, but June was an extraordinary quarter for the consumer business. Now we see consumers coming back fairly strong in December. But at the same time, we see compute a little bit weak. So it's always difficult to look in towards the details. But again, we see a better trend. And also when you look at the volume, not only the revenue, we think in the future, you will see maybe some more reduction and then a good stabilization of the business. And Dave, you want to add something?

Yes, Patrick, just to your comment about supply chains and being disrupted, people -- supply chains are all about people after all. It's about making people safe, safe to come to work, safe at home, the neighborhood around. We've been working very hard on that with our employees and our suppliers and customers. And I think everyone has the right perspective on this up through the supply chain. And there have been challenges, indeed, like you said. But I think we're managing through them pretty well. I mean people want their factories to run as well. There's -- they have an economic incentive to do that. So we all have to stay in touch with each other, treat each other right and make sure we're managing for the long haul, certainly at the scale at which we need out of our supply chain.

Your next question comes from Katy Huberty from Morgan Stanley.

Dave, just given it's such an important driver of gross margins. Can you talk about what percentage of mass capacity is now coming from the common platform drives? And where you think that revenue mix might exit the year and how the margins differ for the common platform drives versus the rest of the mass capacity portfolio? Then I have a follow-up.

Yes. Thanks, Katy. I don't know that I know the number off the top of my head. Actually, we -- to the common platform being 16, 18s and 20, there are some 14s and things like that in there as well. We also have the mid-cap nearline drives that are very strong performers right now, and we've just done a product refresh on, which is actually going to help us as well. So what I would say is that we continue to take cost out of the common platform, right? So even as we transition from 18s to 20s, there are ways that we can take cost out of component -- new components that are in there, and we continue to amortize over the tooling set for what we've already installed. So the -- all those things are serving us really well from a margin perspective.

Yesterday, I -- we said that 83% of the exabyte volume is in mass capacity right now. And I would say the majority of that volume is from the common platform.

Okay. Great. And Gianluca, 3 months ago, you talked about gross margins improving every quarter of this year, even with some expected seasonality as you go into the back half of fiscal '22. Can you just talk about how, if at all, those assumptions have changed? Obviously, you're coming from a very impressive gross margin performance in September. So you're starting from a higher base. But just any update as to whether we should be modeling gross margin improvement every quarter and how you're thinking about revenue seasonality as you go into the March and June quarter?

Yes. I would say probably compared to what we were discussing 3 months ago or 6 months ago, I see the COVID cost a little bit higher than what we were expecting, in particular, for freight and logistics. At the same time, demand is maybe a little bit stronger. So our utilization rate is really good. This is helping our unit cost to decrease quarter after quarter. So until we can keep this good alignment between supply and demand, I'm fairly confident we can do further improvement in the gross margin as we were discussing. And every quarter is a bit different. So it's difficult to be very precise for the next few quarters, but we are confident we can do some more progress in the marginality.

Yes. I think, Katy, the demand is obviously the main driver of what's happening, and we see that persisting with well through the back half of this fiscal year and even into the next fiscal year, the exabyte trends continue really well. I think, tactically, what's going on with some of the costs or freight logistics things, even if a customer said, I want to do a swap in 3 weeks at the end of the quarter, it might be really hard to get them the product, given where we are. But none of that's really going to contribute to any demand destruction. So if demand is a front-end driver for us, then we think that's the story we want. And the other thing I would say is that we believe that right now that as we get out into Q3, there's a little -- some lulls at the end of the year and Chinese New Year and things we typically see that should allow some people to start rebuilding their positions in supply chain. So that's yet another reason why we're confident.

Congrats on the quarter.

Your next question comes from Toshiya Hari from Goldman Sachs.

Congrats on the strong execution. I wanted to follow up on your fiscal '22 revenue guide, I guess, now low double-digit growth relative to fiscal '21. If we take that and your December quarter guide, I think it's pretty clear that implicitly, you're assuming a down quarter sequentially in March and/or June. Just curious what's embedded there? Is it seasonality in your legacy business? Is it something in nearline, conservatism, supply chain, all of the above? Any context, any color there would be helpful? And then I've got a quick follow-up.

Yes. Thanks, Toshiya. So I think if you go back to last quarter, it would have been seasonality and it would have been more biased towards the legacy business. Obviously, the VIA markets are seasonal as well. And I would say now it's even more muted seasonality and some of the strength in the exabyte growth that we see in the cloud, particularly at the top end of the mass capacity markets. So that kind of explains what's changed, I think, in the last 3 months.

Yes, we see the nearline still very strong. And of course, every quarter, we will update on our visibility on the fiscal year.

Got it. That's helpful. And then my follow-up is on the long-term model, guys, and I realize it's only been, what is it, 8 months since you announced the update, and I certainly wouldn't expect you to update your long-term model every 6 to 9 months. But it does look like, from a gross margin perspective, from an operating margin perspective, gross margins despite all the challenges, you're comfortably in that range. Operating margins, you're guiding to the second consecutive quarter of you guys being at the high end of that range. So I guess my question is, should we be thinking about a positive bias to what you presented earlier this year? Or is this as kind of as good as it gets and we should expect some sort of normalization or reversion over the coming quarters?

Thanks. Yes, we've been looking at exactly what you're talking about. I don't think we're prepared to say anything about it today. Although, I will say that it's all -- it all is predicated upon supply/demand balance and demand continues to be strong. When you look back at 8 months or 9 months or whatever, we were still kind of at the front end of the pandemic. There were a lot of challenges that were going on then, that we didn't have great visibility into. So I think the further time marches along, and we see how much data move to the cloud, and we see how much the edge is growing and all these new business models and things like that, we can look at demand versus our supply picture and see whether we update those models also. We'll keep you posted.

Yes. I would just add that we are encouraged by the gross margin level that we generate in our mass capacity part of the business. And no, we need to see how this will continue to develop in the next quarters and in the next fiscal year. But so far, we are very confident.

Your next question comes from Ananda Baruah from Loop Capital.

Yes, I have 2, if I could. I guess the first is, Dave, you had mentioned in one of your remarks a little earlier about seeing demand sort of strength into fiscal year '23. And so I guess really where I'd love to -- well, I think we all would love to get from you is how are you guys thinking and how would you like us to think about sort of the context of this cycle? Does it need to fall off like past cycles have at times. And do you see it extending into kind of the second half of calendar '22, first half of calendar '23? And then I have a follow-up as well.

Yes. I think that the fundamental trends for the secular growth, especially in mass capacity cloud are not changing from my perspective. If you think about it on a 20-terabyte drives next year, late in the year versus what people are buying 16 terabytes or 14 terabytes or whatever they were a couple of years ago. The TCO proposition for that and new data center built is still big and the replacement cycle is still big. That capacity point does matter. There's also other feature sets that are coming with these new drives that allow people to manage their data centers in a different way, more efficiently for power and reliability and all these other things, too. So it's a package that says that these investments that people are making will be a lot more programmatic. And we were having those kinds of discussions with customers worldwide. So that's what builds strength in our visibility. On the VIA markets as well, I think the application space at the edge is just propagating really quickly. So there's things like retail, consumer behavior, there's health care, which we all see and can kind of feel what -- how important mass capacity data is there. So there's a lot of edge applications that are just growing year-over-year as well. So that's why we continue to feel strength. And that's why we put out to the earlier question that Toshiya asked, we included that kind of revenue growth in our long-term models.

That's great context and super helpful. And then I guess just one on -- you guys have talked on sort of lead times. You guys have talked in the past on these calls about sort of what lead times have looked like to get sort of the highest capacity of the nearline drives. I think at some point, the implied event. I think in the spring, you were saying December, so kind of 6 months like that. And so would love to get just an update on what the lead times look like? How long it's taking to get those high cap drives out the door? And then along with that, a pricing question, is the -- like when you guys take orders in, the pricing that you guys end up selling the drives at, is it at the point of order taking? Or is it where the price would be, say, 6 months from now when you ship it? Would love context around those 2. And that's it for me.

There's so many different types of customers that I don't think I'll comment on the pricing, but I will say that -- your first question was really about how do you know these long-term agreements. And some of it is exactly you remember the comment I made 9 months ago roughly, which was, a, if you want something for Christmas, you better tell me now. I mean that's the kind of lead time we're talking about. We're doing starts in our wafer factory right now for capacity points that are out there in time and we're saying to people this is how we were -- roughly we're going to be able to build in that time frame. Let's just make sure our plans are aligned. It's not just about capacity points, though, it's also about all the other things architecturally that they're changing to make sure that we have the best value prop to put into their data center that intercepts that architecture. And so it's a big planning exercise for our customers inside their supply chain. If you wanted 1 drive, then yes, we have 1 extra drive laying around. But if you want hundreds of thousands or millions or something, then we need to be talking with a lot of lead time. And that's -- I think that's what's bringing the stability to the business so that -- if that helps you.

Your next question comes from Tom O'Malley from Barclays.

Congrats on the nice results. Dave, I wanted to kind of double-click into the non-HDD business. Obviously, you're raising the full year guide here. Can you talk about the contribution of the non-HDD business has to that growth rate, what do you see that kind of growing this fiscal year?

Yes. Tom, thanks. The non-HDD business has been a little choppy. I mean, there's certain places where we can use our brand for continued strength. But there's opportunities and we take advantage of them. And sometimes those opportunities wax and wane a little bit. I think relative to the profitability of the non-HDD business, it's actually climbing. So we believe we're using our brand appropriately to get some more revenue and it's not so dilutive as it used to be in the past. And especially on the systems business, you have to be a little bit careful because there are so many more components in such lower volumes than we're accustomed to dealing with in the HDD business that, that's where supply chain stuff gets really tough, and then those systems themselves are very large, right? So shipping freight logistics are a big challenge. And we still want to bring the same brand proposition to the customers, the same predictability that I just talked about on Ananda's question. So from -- but -- from a revenue perspective, I think there's more opportunity for us out there, but it's actually challenging to run some of those businesses as well, given the supply chain challenges.

Yes, I would say from a financial standpoint, even if the non-HDD business had a lower gross margin, it is a very good contributor for our free cash flow. So we are in keeping the effort on the non-HDD drive business.

That's helpful. And then, Dave, to your point earlier, I just had a follow-up on the systems business. You called it out in your preamble as particularly being impacted by supply chain, and I think you just reiterated that. Could you talk about what products that is? Obviously, these are big complex machines that you're selling here -- the systems that you're selling here. Where are the constraints? Where are you seeing that supply chain hold up? Any kind of particular examples would be helpful.

Yes. I think all things silicon, all things power, all things kind of the things that we typically don't control very much are tight. And I would say it's not only a matter of being able to actually procure something. It's also a matter of getting it through all of the factories that it needs to get to be finally consumed for us that's been the complexity. So we have tried really hard with our systems business over the years to reduce the complexity of our offerings so we can go a little longer on inventory positions and be more flexible for our customers, but it is a challenge right now, as you can well imagine.

Your next question comes from Sidney Ho from Deutsche Bank.

Great. I have 2 questions, too. The first one is on pricing. How would you characterize the current pricing environment? Maybe you can parse out the crypto impact. Also interested in whether you're able to pass on the high cost to your customers? How much of a tailwind is that to your gross margin forecast over the next few quarters?

For the pricing, I would say that the pricing environment is still very favorable, similar to the prior quarter, I would say. And no, we expect this to last even in the current quarter and hopefully even in the future. Parsing the cost, I don't think it's so automatic. We negotiate pricing based on demand and the alignment between supply and demand and not too much on parsing specific costs to our customers.

Okay. That's fair. Maybe my follow-up question is on the technology road map a little bit. Obviously, you're starting to ramp up the 20-terabyte right now. But with HAMR, not likely being a high volume until it sounds like later, maybe 30-terabyte. How confident are you that you can accomplish the cost reduction improvement you talked about at your Analyst Day, not just the magnitude, but also within the time frame you talked about?

Yes. Thanks, Sidney. So a couple of things. It's not only about the highest capacity point. If you think about it, we get to a point where we can take heads and disks out of the lower capacity points. That's a way to introduce margin back into the system as well. And then you fundamentally have more capacity that you don't have to install with CapEx, right, because you're being more efficient inside your own factories as well. So I know a lot -- we do a lot of focus on 30-terabyte capacity points, but there are a lot of opportunities to go back and sell 16 terabytes with fewer heads and disks. And that's probably the way to think about the march that we're on towards higher capacity points. It introduces that kind of cost oxygen back into the system for efficiency. If you compare ourselves, again, back to the ancient history of the peak of client server, when there's 1 disk and 2 heads you needed huge jump scenario density to make these cost jumps when you have 8 or 9 disks in a box and you can take 1 out and you hit the same capacity point or 2 out or 3 out to hit the same capacity points, that's a lot of cost oxygen relatively. And it's easier to transition through. So if that helps you think about it.

Your next question comes from Aaron Rakers from Wells Fargo.

Congrats on the quarter. My first question is back to kind of the capital return strategy. The company has done a phenomenal job returning capital over these past several quarters. But we have seen the net debt position continue to decline. So I guess the question is, do you look -- how do you think about the appropriate level of either liquidity or cash on the balance sheet as we gauge your continued propensity to be -- after 1 share repurchase?

I think we discussed this a little bit at our last Analyst Day, and we said no, we are comfortable with the liquidity level at least of $2 billion, and this includes, of course, our great revolver. So we are still well above that level. And so we have great opportunities. First of all, because we generate very strong free cash flow. We were talking about that before. The last quarter was very good, almost $380 million. We expect free cash flow to continue to improve during the fiscal year. So this will give us opportunity for a further return to our shareholders.

And I think, Aaron, there's a lot of other levers that we have at our disposal. You see us managing our working capital really well. If you look at our inventory positions against what our final objectives are, that's part of how we get done what we need to get done to maintain the liquidity, flexibility that we want.

Yes. And then as a quick follow-up, just kind of back on the pricing discussion. Maybe a longer-term way of asking it is, the HDD industry is not just kind of concentrated from a competitive landscape, but also now 65%-plus nearline capacity shift and maybe even more concentrated in the competitive dynamics in that vertical. It used to be thought of as kind of like a 10%, maybe 15% price per annum kind of decline -- price per gig decline in hard disk drive. Do you think we should think differently about that? Do you think we should think about a much more disciplined and flattening out price curve for hard disk drives as we think about the long-term model implications?

I think as drives have changed towards content-rich heads and media, then I think the lead times of your investment are going to be longer. And so therefore, I think that you'll see less fluctuation in supply-demand misalignment. Now you could still have demand shocks like we saw at the front end of the pandemic. And then there may be other supply shocks as well. But from my perspective, the industry is doing a good job of managing supply-demand balance because the process content that's required to make a drive as a mass capacity drive at the front end of it is really has a lot of long lead times and very complex parts. So I think that's what's changing the behavior rather than anything else.

Your last question will come from Jim Suva from Citigroup.

And I just have one question, and that is on your cloud business that you're seeing. Some suppliers to the cloud customers see very, very lumpy business, a really strong quarter then a couple of quarters of digestion. I'm wondering now that you're seeing such strong strength in cloud. Is it something that you anticipate some lumpiness or with the visibility you mentioned that they're kind of installing and using and ordering what their needs be? Is there just less lumpiness for your products compared to some other server switches compute products out there?

It's interesting, Jim. I'll give you my perspective. I think we have to be very careful in the cloud of calling one size fits all because obviously, there are so many different types of business models and different application spaces, even inside individual customers, they have multiple applications. I do think like at the front end of the pandemic when everything shifted to the cloud and work from home and these kinds of things. We are seeing massive investment that was happening in what I would call transactional architecture. So very compute-intensive, very memory-intensive and so on. I think as -- that did not mean that mass capacity was not growing, but what it did mean was that the priority immediately for some of those type of customers was to make sure they could fulfill their service level agreements what their end customers who were pushing into the cloud. And that's maybe why as people look back over the last year, they start to talk about lumpiness, just getting it all right can be hard, right? And you may invest for one architecture or application and then see opportunities somewhere else and pivot over there. And so these are difficult problems, I'm sure that the people who have to build cloud data infrastructure and application layers are grappling with. Relative to mass capacity, I think the build-out has been much more thoughtful, frankly, over time. And it's not to say that there aren't changes in strategies and opportunities as they see ways to go gain more efficiency at other places. But I think the market is now diversified sufficiently and our predictability with customers has matured to a point where I'm comfortable and that we're seeing a stronger demand picture that's more consistent like we talked about.

We have no further questions. I'd like to turn the call back over to presenters for closing remarks.

Thanks very much, everyone. I want to thank you for participating in this call and really thank our employees for all their hard work up and down the supply chain and the suppliers and customers. Many thanks from the Seagate team as well. And again, thank our shareholders for their continued support in Seagate. We'll talk to you next quarter.

This concludes today's conference call. You may now disconnect.