Executive Summary / Key Takeaways

• Seagate Technology ($STX) is executing a strategic transformation, prioritizing profitability and cash generation through supply discipline and a build-to-order model, moving past recent industry downturns.
• The company's core investment thesis is underpinned by secular growth in mass capacity data storage, fueled by cloud expansion and emerging AI applications, where HDDs remain critical for cost-efficient, scalable storage.
• Seagate's differentiated HAMR (Heat-Assisted Magnetic Recording) technology, branded Mozaic, is a key competitive advantage, enabling significant increases in areal density and driving future exabyte growth through innovation rather than just manufacturing scale.
• Recent financial performance demonstrates the success of this strategy, with strong year-over-year revenue growth, significant gross and operating margin expansion, and improved free cash flow generation.
• The outlook remains positive, with management guiding for continued sequential and year-over-year improvement, supported by robust demand for high-capacity drives, ongoing pricing actions, and the ramp of new technologies, despite temporary past supply constraints.

Setting the Scene: Data's Foundation and Seagate's Strategic Pivot

Seagate Technology Holdings plc stands as a foundational pillar in the digital infrastructure landscape, primarily known for its hard disk drives (HDDs), the workhorses of mass data storage. While also offering solid state drives (SSDs), storage subsystems, and the edge-to-cloud Lyve platform, HDDs remain central to Seagate's identity and market position. The company operates in a dynamic, intensely competitive environment, vying for market share against formidable rivals like Western Digital Corporation (WDC), which competes across HDDs and flash, and specialized players in enterprise storage solutions such as NetApp Inc. (NTAP) and all-flash array provider Pure Storage Inc. (PSTG).

Historically, the data storage industry has been characterized by cyclical demand, rapid technological change, and fierce price competition. Seagate's journey has seen it navigate these cycles, adapting its product portfolio and manufacturing footprint. In recent years, the company faced significant headwinds from macroeconomic uncertainty and customer inventory adjustments, leading to a period of reduced demand and operational challenges.

In response, Seagate has undertaken a strategic transformation, shifting its focus from simply maximizing unit shipments to prioritizing profitability and cash flow generation. A key element of this pivot is the implementation of a build-to-order (BTO) strategy, designed to enhance supply discipline and provide greater predictability in a volatile market. This strategic response, informed by the painful lessons of recent downturns, aims to create a more resilient and profitable business model.

Central to Seagate's competitive positioning and future growth strategy is its differentiated technology roadmap, particularly in increasing the areal density of HDDs. This focus on technological innovation is critical in a market where the demand for storing ever-increasing volumes of data is relentless, driven by the expansion of cloud computing and the burgeoning requirements of artificial intelligence (AI).

Technological Edge: The Mozaic Platform and Areal Density Leadership

Seagate's primary technological differentiator is its Heat-Assisted Magnetic Recording (HAMR) technology, commercialized under the Mozaic platform. HAMR is designed to overcome the physical limits of traditional perpendicular magnetic recording (PMR) by using a small laser to heat a tiny spot on the disk, making it temporarily easier to write data at much higher densities.

The tangible benefits of Mozaic technology are significant and quantifiable. Seagate's Mozaic drives represent the industry's only 3 terabyte per disk products currently ramping. This enables the company to offer higher capacity drives, such as sampling up to 36TB and planning for a 4+ terabyte per disk platform. The strategic goal is to achieve step-function increases in capacity primarily through these areal density gains, with minimal changes to the overall bill of materials compared to prior generations.

For customers, particularly large data center operators, this translates directly into a compelling total cost of ownership (TCO) advantage. Higher capacity drives mean fewer drives are needed to store the same amount of data, leading to reduced power consumption, less rack space required, and simpler management. Seagate highlights that a data center slot loaded with a Mozaic 3+ drive offers approximately three times the storage capacity relative to the average capacity of nearline drives in the installed base and consumes about 70% less power per terabyte.

The "so what" for investors is clear: This technological leadership provides Seagate with a competitive moat. While competitors like WDC are also developing HAMR, Seagate's current position with the only 3TB/disk product gives it an early lead in delivering the highest capacity points, which are most in demand by hyperscale customers. This differentiation supports Seagate's ability to command better pricing, improve its gross and operating margins, and capture market share in the most profitable segments. The ability to increase exabyte output through technology transitions, rather than solely through capital-intensive manufacturing expansion, also aligns with the company's focus on capital discipline and free cash flow generation.

Performance Reflecting Strategy: Margin Expansion and Demand Recovery

Seagate's recent financial performance underscores the positive impact of its strategic pivot and the improving market dynamics. For the three months ended March 28, 2025 (Q3 FY25), the company reported revenue of $2.16 billion. While this represented a sequential decrease of 7% due to temporary supply constraints, it marked a significant 31% increase compared to the same period in the prior year. The nine months ended March 28, 2025, saw revenue reach $6.653 billion, a substantial increase from $4.664 billion in the prior year period.

Profitability has seen even more dramatic improvement. Non-GAAP gross margin expanded sequentially by 70 basis points in Q3 FY25 to 36.2%, marking the eighth consecutive quarter of sequential gross margin improvement. Year-over-year, the Q3 FY25 non-GAAP gross margin saw a remarkable expansion of over 10 percentage points, driven by favorable product mix (specifically the ramp of higher-capacity drives), strategic pricing actions, and the absence of significant factory underutilization charges that impacted the prior year. The nine-month FY25 non-GAAP gross margin reached 34%, up significantly from 20% in the prior year period, benefiting from similar factors as well as lower supply-related cancellation fees.

Operating expenses have been managed with discipline, although variable compensation tied to improved profitability led to some increases year-over-year. Non-GAAP operating margin reached 23.5% in Q3 FY25, contributing to the third highest operating margin in the company's history. Non-GAAP EPS for Q3 FY25 was $1.90, landing at the top end of the company's guidance range and representing substantial year-over-year growth. For the nine months ended March 28, 2025, non-GAAP EPS was $4.52, a significant improvement from $0.85 in the prior year period.

Operational metrics further illustrate the recovery and strategic focus. Mass capacity revenue in Q3 FY25 was $1.711 billion, up 48% year-over-year, driven by a 50% year-over-year increase in mass capacity exabytes shipped to 133 EB. Nearline exabytes, a key indicator of cloud and enterprise demand, reached 120 EB in Q3 FY25, up 55% year-over-year. The company's 24TB and 28TB PMR platforms are ramping aggressively, with exabyte shipments increasing roughly 60% quarter-over-quarter in Q3 FY25, quickly becoming the highest revenue and exabyte volume product family.

Liquidity and balance sheet management are also key priorities. Seagate generated $259 million in operating cash flow in Q3 FY25 and $216 million in free cash flow. For the nine months ended March 28, 2025, operating cash flow was $575 million.

The company is actively working to reduce its debt burden, having retired approximately $536 million of debt in Q3 FY25, including the repayment of the $479 million 2025 Notes. The net leverage ratio stood at 2.1 times at the end of Q3 FY25, with further reduction expected.

The company maintains ample liquidity, including $814 million in cash and cash equivalents and an undrawn $1.3 billion revolving credit facility. While capital expenditures are expected to be higher in FY25 than FY24 to support technology transitions, the company remains disciplined.

Outlook and Growth Drivers: Cloud, AI, and HAMR Ramp

Seagate's outlook reflects confidence in the sustainability of the demand recovery and the continued benefits of its strategic execution and technology roadmap. Management guided for June quarter (Q4 FY25) revenue in the range of $2.4 billion, plus or minus $150 million. At the midpoint, this represents an 11% sequential increase and a 27% year-over-year improvement. Non-GAAP EPS is projected to be $2.40, plus or minus $0.20, with non-GAAP operating margin expected to expand into the mid-20s percentage range. Non-GAAP operating expenses are guided at approximately $285 million.

The underlying assumptions for this positive outlook are rooted in robust demand for high-capacity nearline products, particularly from global cloud customers. Management sees nearline exabyte demand looking strong through calendar 2025, with visibility extending into the first half of calendar 2026 through build-to-order agreements. This demand is driven by ongoing cloud CapEx investments and the build-out of data center infrastructure to support both traditional workloads and the increasing data requirements of AI.

AI is viewed as a significant long-term tailwind for mass capacity storage. AI workloads require massive datasets for training and inference, and generate valuable content that needs to be retained. Hard drives are crucial for storing this data due to their cost-effectiveness and scalability. Emerging applications like text-to-video are expected to further boost storage demand. Seagate's high-capacity HDDs are well-positioned to serve as the foundation for these AI data lakes, storing training data, model checkpoints, and generated content.

The ramp of HAMR-based Mozaic drives is a critical component of the future outlook. Seagate is ramping volume with its first hyperscale customer and is nearing the conclusion of qualification with a second major CSP. Shipments to a broader range of cloud customers are expected to begin in the second half of calendar 2025, leading to an appreciable increase in HAMR product shipments over the coming quarters. The company plans to fulfill build-to-order commitments through a blend of HAMR and PMR products, leveraging the capital efficiency of the HAMR technology to meet exabyte growth demands.

Looking further ahead, the company estimates a non-GAAP tax rate in the mid-teens starting in fiscal 2026, reflecting the adoption of Pillar Two global minimum tax in various jurisdictions. The strategic focus on debt reduction is expected to continue, further strengthening the balance sheet.

Risks and Challenges

Despite the positive momentum, Seagate faces several risks and challenges. The macroeconomic environment remains dynamic, with potential impacts from shifts in trade policies, geopolitical tensions, and fluctuating customer spending. While the direct financial impact from tariffs is currently expected to be minimal, the company is monitoring for secondary effects and evaluating mitigation strategies, including potential geographic shifts in manufacturing.

Temporary supply constraints, such as those experienced in Q3 FY25 due to production-related issues on non-HAMR drives, can impact the ability to fully meet demand in the short term, although the company stated these issues were resolved. The complexity of manufacturing advanced HDDs and transitioning to new technologies like HAMR carries inherent risks related to development, qualification, and production yields. Delays in customer qualifications for new products could impact the timing of revenue ramps.

Competition remains intense across all markets, with pressure from both HDD rivals like WDC and alternative technologies like SSDs, particularly in legacy markets. While HDDs maintain a significant TCO advantage for mass capacity, continued advancements in NAND flash could increase competitive pressure.

Seagate is also subject to various legal and regulatory risks, including ongoing litigation (patent infringement, antitrust, securities) and compliance obligations such as the BIS settlement, which requires ongoing payments and audits. Failure to comply with the settlement terms could result in significant penalties. Supply chain risks, including reliance on sole or limited suppliers for critical components, could lead to shortages or cost increases.

Conclusion

Seagate Technology is navigating a pivotal phase, marked by a strategic transformation towards profitable growth and a favorable demand environment for mass capacity storage. The company's focus on supply discipline, operational efficiency, and a build-to-order model is yielding tangible results, demonstrated by consistent margin expansion, robust year-over-year revenue growth, and improved cash flow generation.

At the heart of Seagate's long-term investment thesis is its technological leadership in areal density, particularly with the HAMR-based Mozaic platform. This technology is crucial for meeting the escalating demand for cost-efficient, scalable storage driven by cloud expansion and the data-intensive requirements of AI. As HAMR qualifications conclude and volumes ramp, Seagate is well-positioned to capitalize on these secular tailwinds, delivering higher capacity drives that offer compelling TCO advantages to customers and support a structurally improved margin profile for the company.

While macroeconomic uncertainties, competitive pressures, and operational risks persist, Seagate's recent performance and forward-looking guidance signal a company executing effectively on its strategic priorities. The commitment to debt reduction further strengthens the financial foundation. For investors, Seagate represents an opportunity to participate in the foundational growth of the digital economy, underpinned by technological innovation and a disciplined approach to profitability in the essential market for mass data storage.