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.

Shanye Hudson - Senior Vice President of Investor Relations and Treasury

Thank you. Good afternoon, everyone, and welcome to [Technical Issues] During today's call, we will 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 efforts.

Before we begin, I would 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.

Dave Mosley - Chief Executive Officer

Thank you, Shanye, and hello to everyone joining us on today's call. Seagate had 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 of 35% year-over-year and 3% above a very strong June quarter. Non-GAAP gross margin expenses of 31%, well inside of our multi-year 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 of 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 impacting critical end product assemblies for certain customers. Notwithstanding these obstacles, underlying demand remained 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 markets and Seagate's revenue growth. Ongoing investments to build and equip new data centers have translated into stable healthy demand for multiple quarters now and we expect this trend to continue. Over the past five years, the number of hyperscale data centers has more than doubled to nearly 600 worldwide, with approximately 200 more on the way. Many of these planned data centers are being built by large cloud customers, but the timing of their investments and infrastructure build out is not synchronized, which supports a more stable long-term growth outlook for hyperscale investment. Seagate's high capacity drives are sensible to the world's largest data centers. We have very close relationships with our cloud customers to ensure our manufacturing and technology roadmaps continue to enable their investment plans and performance requirements at a favorable total cost of ownership.

In the enterprise and OEM markets, we achieved a fourth consecutive quarter of sales growth, supported by increasing IT hardware spending. Over the near term, the broader supply constraints that are highlighted may delay some of our customers' new product builds due to non-HDD shortages. However, based on customer conversations, we believe any pause will be temporary until shortages are alleviated. Demand for video and image applications increased significantly during the quarter, supported in part by a broadening in use cases that extend beyond traditional security and surveillance applications. The combination of high-definition cameras and data analytics enabling productivity gains, cost savings and revenue generation opportunities are actually driving adoption by a wide range of industries, including retail, manufacturing and healthcare.

High capacity HDDs play a crucial role in helping businesses economically manage and extract value from an ever-increasing growth in data across the more distributed enterprise. Without question, the HDD industry is being driven by long-term secular demand for mass capacity storage, a market that we expect to more than double by calendar 2026 to $26 billion, and Seagate is well equipped to answer the call. We continue to leverage our strong arsenal of innovative technologies, manufacturing agility and industry expertise to deliver attractive total cost of ownership solutions aligned with our customers' roadmap. Our common platform approach illustrates these point well. We've been able to seamlessly transition from 16 to 18 terabyte drive and are now offering multiple varieties of 20 terabyte drives to meet the breadth of customer demand.

We began ramping 20 terabyte products in the September quarter and I'm thrilled with the strong customer interest. I'm equally excited by customer reception for our MACH.2 dual actuator drives, which are now shipping at large scale. As we were anticipating a few months ago, we are seeing greater adoption of our MACH.2 drives for core and edge applications that benefits from the recent [Phonetic] right performance gains that we deliver with these products. We expect dual actuator to become more mainstream as capacities increase beyond 30 terabytes, this for both cost and performance requirements. I'm also confident in achieving 30 terabyte capacities and beyond.

We continue to execute our research and development roadmaps and have recently achieved great HAMR test results and staging areal density growth that supports future product launches. Based on these demonstrations, our product development plans are on track. But our product introduction strategy is [Technical Issues] we will leverage HAMRs areal density gains to offer customer step function, capacity increases to deliver a strong TCO proposition and enhance value for both our customers and Seagate. Our focus on total customer experience is top of mind for the live cloud business. Our simple secure and cost efficient mass data storage as a service platform is resonating well among customers, particularly for backup solution. Today, live cloud is certified with a majority of the vendors identified by Gartner's Magic Quadrant Leaders for enterprise backup and recovery software. This quarter, we announced a multi-year deal with a leading video communications provider. I am excited by this partnership and recognize the trust that all of our live customers are placing in Seagate. We will continue to be deliberate in scaling infrastructure and developing an ecosystem to ensure that we delight our customers.

Wrapping up, Seagate continues to deliver consistent financial results, underpinned by strong operational discipline, focus on profitability and growing demand for mass capacity storage. We believe these trends reflect a healthy structural changes that have taken place in the industry in recent years. Seagate is poised to benefit with our technology leadership position and strong track record of execution.

I'll now hand the call to Gianluca to cover the financial results.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Thank you, Dave. Our September quarter results highlight solid growth across nearly all financial metrics and demonstrate Seagate's [Indecipherable] execution and ongoing focus on dragging 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 34% year-over-year. HDD capacity shipments increased 4% sequentially to 159% exabyte, 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 markets increased to $2 billion, supported by growth across each of the underlying end market, which include Nearline, VIA and NAS products. Mass capacity revenue was up 8% sequentially and 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 by shipment to remain strong in the December quarter with under year '21 annual growth likely above our long-term target forecast [Phonetic] 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 shipment totaled 106 exabyte, up 5% sequentially and 65% year-on-year [Indecipherable] demand for our high-capacity brand, strong growth for dual actuator drive and ongoing market momentum, while our common platform product spending 16 to 20 terabyte drive.

Robust demand in the VIA market led to sequential revenue growth that was above the average for the mass capacity market and we expect solid demand to continue in the December quarter. The legacy market made up the remaining 29% of HDD revenue, holding relatively stable at $831 million, down 3% sequentially and up 5% year-over-year, improving enterprise demand, boosted sales for mission critical drive, which partially offset in decline in consumer drives, following a strong June quarter. We're starting to see a moderation in the face of our revenue decline following the significant market disruption brought down by the pandemic. While we could see some fluctuation in a given quarter, we believe the most pronounced impact are behind us.

Finally, turning to our non-HDD business. Revenue came in at $251 million, down 9% sequentially of June quarter level. Our system business has been partially impacted by some of the supply constraints that Dave discussed. We're working closely with our suppliers to mitigate risk and we continue to gain new customer wins for longer-term growth in the business. Overall, strong demand trend combined with positive industry dynamics led to a non-GAAP gross profit over than $956 million in the September quarter, up 8% sequentially and 57% year-over-year. Cost relating to freight and logistics are continuing to increment high. While we will continue to take steps to reduce the impact of these costs, we believe that we remain a headwind to the business through the fiscal year.

Our resulting non-GAAP gross margin expanded by about 140 basis points to 31%, well inside our long-term target range of 30% to 33%, including higher freight and logistics cost and component prices. HDD margins and now in the upper half of the range, reflecting better alignment in supply and demand and the transition to higher capacity drive. We anticipate continued solid gross margin performance with opportunity to increment higher as we have ramp our cost optimized product. Additionally, as COVID cost headwinds abate, we would expect margin to expand into the upper end of our target range over time. Non-GAAP operating expenses decreased to $339 million, reflecting less than one-time savings. [Indecipherable] management combined with higher revenue and margin expansion resulted in non-GAAP operating income of $627 million, up 16% sequentially and more than doubled the year-ago period.

Non-GAAP operating margin expanded to 20.1%, which is the top end of our long-term target range of 15% to 20% of revenue. Importantly, the September performance demonstrated our ability to grow profits faster than revenue, supporting our strategy of long-term value creation. Based on the little share count of approximately 221 million share, non-GAAP EPS for the September quarter was $2.35, the highest level in close to a decade. Where inventory relatively said, we have days inventory outstanding at 50 days. We are working with suppliers and managing strategic inventory levels for meeting entities for the business, while we continue to monitor this dynamic situation.

Capital expenditures were $117 million for the quarter. We currently expect fiscal year capex to be at the low end of our long-term target range of 4% to 6% of revenue, which is sufficient to support our future products roadmap, while maintaining expense discipline. Free cash flow generation increased to $379 million, up 7% quarter-over-quarter and more than double year-over-year. We delivered strong performance in the September quarter and expect improved free cash flow generation through the fiscal year, enabling us to fund our growth opportunities and return capital to our shareholders.

We used $153 million to fund the quarterly dividend and $425 million to repurchase 4.9 million ordinary shares, exiting the quarter with 225 million shares outstanding and approximately $3.8 billion remaining in our authorization. As Dave mentioned earlier, the Board approved a $0.03 increase to our quarterly dividend, raising the quarterly payout to $0.70 per share. We ended the September quarter with cash and cash equivalents of nearly $1 billion dollar and total liquidity was approximately $2.7 billion, including our revolving any facility. Adjusted EBITDA was $724 million for the quarter and $2.4 billion for the 12-month period ending in September. Total debt balance at the end of the quarter was $5.1 billion with a leverage ratio of 2.2 times.

In early October, we took advantage of the current attractive market environment to raise $725 million in capital, through a new $600 million fixed tenure term loan and upsized our existing term loan June 2026. These actions are consistent with our growing business and provide input to repay $230 million in debt and doing much. We reduced our average interest rate by 25 basis points and expect interest expenses for the December quarter to be approximately $56 million.

Looking ahead to our outlook for the December quarter, we anticipate a continuation of the strong demand environment that we experienced in the September quarter. We expect revenue to be in a range of $3.1 billion, plus or minus $150 million. We expect non-GAAP operating margin to remain around the top end of our long-term range of 15% to 20% of revenue, and we expect non-GAAP EPS to be in the range of $2.35, plus or minus $0.15. In summary, with an outstanding September, letting us [Indecipherable] to deliver strong top and bottom line growth in calendar year 2021 as well as fiscal 2022.

I will now turn the call back to Dave for final comments.

Dave Mosley - Chief Executive Officer

Thanks, Gianluca. Fiscal 2022 is off to a tremendous start and I feel positive about the current 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 roadmap put Seagate an 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 roadmaps. 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 two 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 in our facilities and Thailand, Seagate continues to put our commitment to the planet 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 the third consecutive year, Seagate is among the best companies for women according to social media platform [Indecipherable] 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.

Question & Answers

Operator

Thank you. [Operator Instructions] Your first question will come from Karl Ackerman from Cowen and Company. Please go ahead, your line is open.

Yes, thank you. I have two questions please, one for Dave and one for Gianluca. Dave, it's great to see that over two thirds of your business is now transitioned away from consumer toward enterprise, which tends the higher margin get influenced by data center capex. There have been some recent concern by investors that cloud spending will moderate after being robust for the last six 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 '22? Thank you.

Dave Mosley - Chief Executive Officer

Yeah, thanks for the question, Karl. If you have another one, you could follow-up with Gianluca as well.

Karl Ackerman - Cowen and Company - Analyst

Sure.

Dave Mosley - Chief Executive Officer

The way I look at it. Oh, certainly.

Karl Ackerman - Cowen and Company - Analyst

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

Dave Mosley - Chief Executive Officer

Okay, good. Yeah, thanks. So, Gianluca, catch that. Relative to cloud, the demand from study analysis [Phonetic] at the beginning of calendar '20. So you know as we've talked about in the prepared remarks, there is 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 to higher and higher capacity points which help 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 were all accelerated tremendously during the pandemic, work from home and all the other things that caused 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 two, three, four quarters out, and then we're asking them what exactly they need, and I think the economics play as happening now, well that way and I think that's why we're seeing the kinds 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 see exabyte growth and be able to turn that into revenue. Gianluca, you want to take that one.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yeah, 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 - we are happy with the performance, but of course we are always looking at opportunity for improvement as we were saying in the prepared remarks there are some cost that are increasing and 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 which as being - now when we have a good alignment between supply and demand, usually we come out with a good profitability. So we are happy with that - with the situation.

Karl Ackerman - Cowen and Company - Analyst

Thanks.

Operator

Your next question comes from Wamsi Mohan from Bank of America. Please go ahead, your line is open.

Wamsi Mohan - Bank of America - Analyst

Yes, thank you. Congrats on the strong results and outlook. I had two 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 - 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's cloud slowdown given regulatory pressures over there. Are you seeing any of that? And is that contemplated in your raised fiscal year guide? Thank you.

Dave Mosley - Chief Executive Officer

Thanks, Wamsi. I think it's part and parcel with Karl's question, there's both of the - your questions kind of tie back to that's been visibility that we have. So yes, we do have a longstanding track record of returning cash to shareholders and we remain committed to the dividend as not perfectly up through to the first time or for the third time in a row, third year in a row. That is really the confidence in our long-term free cash flow generation and that gets into our - like Gianluca was just saying are balancing supply and demand against the the growth in data that's out there in the world. So we will 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 source of the cash even in the tough times that happened in the pandemic. So I'm a 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 terabytes, 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 the memory and compute and networking and storage and - so you may - you may make one type of investment for a while and then - and then pivot to another type of investment against a overall strong investment thesis that's going on in the cloud. So I think that maybe - may explain why certain people see different things over the next two or three quarters. And we don't really - we don't see any inventory build up 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 than the customers being very predictable on it. So that kind of explains our confident. We don't really see the slowdown in exabyte growth at all.

Wamsi Mohan - Bank of America - Analyst

Thanks, Dave.

Dave Mosley - Chief Executive Officer

Yeah, thanks, Wamsi.

Operator

Do you have a follow-up Wamsi. Your next question comes from Timothy Arcuri from UBS. Please go ahead, your line is open.

Timothy Arcuri - UBS - Analyst

Hi, thanks a lot. 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 there could be pretty significant longer-term margin tailwinds and 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 applecart. So I'm wondering if you could talk about capex discipline? Thanks.

Dave Mosley - Chief Executive Officer

Yeah, thanks, Tim. I mean, it is good to reflect back on where we've come from. So I look at the peak of client server, the drive types that we are making typically had one disk and two heads and there were a lot of those drives at our factories. We're very focused on flexibility, back end capacity for notebook drives, for example. Now that we have mass capacity drives that have a lot of disk 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 enjoying as you can see from our numbers in heads and media investment and drive - not having overcapacity for drive anymore. So kind of interesting as we 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 point - we take the TAM of $26 billion five years from now. We are trying to balance 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 those smart investments, we should be able to keep supply and demand imbalance and you could read that as 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 and deploy like that. And we're working a lot with the customers on their specific needs, that's why I talked about the LTA's when Karl asked his question. So we know what roughly the build-outs are going to happen over time so we can do that very judiciously.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yeah, Tim, on the - on the capex now we have a - 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.

Timothy Arcuri - UBS - Analyst

Thanks a lot. 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? Thanks.

Dave Mosley - Chief Executive Officer

I think, simply put, the answer is no. So that 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 were focused on legacy products, but we love those legacy products. We love the customers there. We're not really investing there and so we make sure that that we keep those channel inventories properly balanced and the swings that we might have seen, say two quarters ago due to cryptocurrency or something like, that re-accrual operated very, very quickly. I mean, it doesn't impact the mass capacity channels at all.

So from my perspective, all the inventory levels that we have are quite good. 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 as their - that they're trying to build the final kits, right. That 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 of it.

Timothy Arcuri - UBS - Analyst

Thanks a lot.

Operator

The next question comes from Patrick Ho from Stifel. Please go ahead, your line is open.

Patrick Ho - Stifel - Analyst

Thank you very much and 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-actuator drive the MACH.2. I just wanted 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 do you believe the inflection point will be when customers transition over in the HAMR drives?

Dave Mosley - Chief Executive Officer

Yeah, I think. 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 fine projects anymore, this is product development, full borne 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 drives behave in their infrastructures and we're locked in with customers talking to them specifically about even the recent results that we have. 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.

And there is 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 work, the re-back process so HAMRs usually about writing, get the media right. HAMR enables - the HAMR actually starts from a new material set in the disk. The ability to write dense bits comes from the media technology since we'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 a 20 and 22 and 23 and 24 and thinks 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 raise to get there. I don't want to really announce any new products just yet, but we'll let you know when they come.

Patrick Ho - Stifel - Analyst

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?

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yeah, I will say it. Now first of all thank you for the congratulation. I think the quarter actually came out a little bit better than how we guided at the beginning, but in term of revenues very well aligned and the profitability of that is a bit better. I would say in term of the legacy part of the business, right now we are seeing a better trend compared to maybe a year ago, two years ago. Of course, not all the segments are the same inside legacy. In the last quarter, sequentially consumer was little bit down compared to the June, but June was an extraordinary quarter for the consumer business. Now we see consumer coming back fairly strong in December. But at the same time, we see compute a little bit weak. So, it's - now it's always difficult to look 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 adoption and then a good stabilization of the business. And Dave, you want to add something.

Dave Mosley - Chief Executive Officer

Yeah. Patrick, just your comment about supply chains 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. 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.

Patrick Ho - Stifel - Analyst

Thank you.

Dave Mosley - Chief Executive Officer

Thanks, Patrick.

Operator

Your next question comes from Katy Huberty from Morgan Stanley. Please go ahead, your line is open.

Katy Huberty - Morgan Stanley - Analyst

Thank you. 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.

Dave Mosley - Chief Executive Officer

Yeah, thanks, Katy. I don't know that I know the number on the top of my head. Actually, we - so the common platform being 16, 18s and 20, there are some 14s and things like that in that as well. We also have the mid cap nearline drives that are very strong performers right now and we just done a the 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.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yes, Katy. We said was 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.

Katy Huberty - Morgan Stanley - Analyst

Okay, great. And Gianluca, is three 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 we've said 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 - 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? Thank you.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yes. I would say probably compared to what we were discussing three months ago or six 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, now demand is maybe 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 give this good alignment within supply and demand, I'm fairly confident we can do further improvement in the gross margin as we were all discussing. And, now every quarter is a bit different, so it is difficult to be very precise for the next few quarters. But we are confident we can do some more progress in the margin ahead.

Dave Mosley - Chief Executive Officer

Yeah, I think, Katy, the demand is obviously the main driver of what's happening and we see that persisting out with a 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 three weeks at the end of the quarter 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 demand is the front end driver for us and 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, that there is a little - some lows 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 are confident.

Katy Huberty - Morgan Stanley - Analyst

Great, thank you. Congrats on the quarter.

Dave Mosley - Chief Executive Officer

Thanks, Katy.

Operator

Your next question comes from Toshiya Hari from Goldman Sachs. Please go ahead, your line is open.

Toshiya Hari - Goldman Sachs - Analyst

Hi, good morning. Thank you for taking the question and 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. I'm 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.

Dave Mosley - Chief Executive Officer

Yeah, thanks, Toshiya. So, I think if you go back to last quarter would have been seasonality and it would have been more biased for 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 that's particularly at the top end of the mass capacity markets. So that kind of explains what's changed I think in the last three months.

Gianluca Romano - Executive Vice President and Chief Financial Officer

We see the nearlines did very strong and, of course, now every quarter we will update on our visibility on the fiscal year.

Toshiya Hari - Goldman Sachs - Analyst

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 eight months since you - since you announced the update and I certainly wouldn't expect you to update your long-term every six to nine 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 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 of reversion over the coming quarters? Thank you so much.

Dave Mosley - Chief Executive Officer

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's it all is predicated upon supply demand balance and demand continues to be strong. When you look back that eight months or nine months or whatever, we were still kind of at the front end of the pandemic. There were a lot of - lot of challenges that we're going on, then 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, 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, and also we'll keep you posted.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yeah, I will just add that we are in quarter supplies [Phonetic] the gross margin level that we generate in our mass capacity part of the business and then we need to see obviously we continue to develop in the next quarter and then in the next fiscal year. But so far we are very confident.

Toshiya Hari - Goldman Sachs - Analyst

Very helpful, thank you.

Operator

Your next question comes from Ananda Baruah from Loop Capital. Please go ahead, your line is open.

Ananda Baruah - Loop Capital Markets - Analyst

Hey, guys. Yes, thanks for taking taking the questions. I have two, if I could. I guess the first is that you had mentioned in one of your remarks a little earlier about seeing seeing demand sort of strength into fiscal year '23. And so I guess really what 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 it on and do you see it extending into kind of second half of calendar '22, first first half of calendar '23? And then I have a follow-up as well, thanks.

Dave Mosley - Chief Executive Officer

Yeah, I think the fundamental trends for the secular growth, especially in mass capacity cloud are not changing from my perspective. If you think about another 20 terabyte drives next year, late in the year versus - but 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 build is so big and the replacement cycle is still big, that capacity point does matter. There is also other feature sets that are coming with these new drives that allow people to manage their data centers in 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're having those kinds of discussions with customers worldwide, so that's what a builds strengthen our and our visibility.

On the VIA markets as well, I think the application space of the edge is just propagating really quickly. So there's things like retail, consumer behavior, there's healthcare, which we all see and can kind of feel for what - how important mass capacity data is there. So there is a lot of edge applications that are just growing year-over-year as well. So that's - 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.

Ananda Baruah - Loop Capital Markets - Analyst

That's great context and super helpful. And then I guess just one on. You guys have talked 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 some point you implies there and I think in the spring, you we're saying December, kind of six months like that. And so we'd love to get just an update on what the lead times look like? How long it's taking you get these high cap drives out the door? And then along with that pricing question - like when you guys take orders and the pricing that you guys end up selling the drives that, is that at the point of order taking or is it where the price would be say six months from now when you ship it? Would love context around this. That's it from me. Thanks.

Dave Mosley - Chief Executive Officer

There is some the 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 nine months ago, roughly, which was, Dave, 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 something we're roughly we're going to be able to build in that timeframe. It's just makes our plans are in line. It's not just about capacity points. So 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 the data center that intercepts that architecture, and so it's a big planning exercise for our customers inside their supply chain.

If you wanted one drive, then yes, we have one 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, So if that helps you.

Ananda Baruah - Loop Capital Markets - Analyst

Yes, it's very helpful. I appreciate it. Thanks a lot, guys.

Operator

Your next question comes from Tom O'Malley from Barclays. Please go ahead, your line is open.

Thomas O'Malley - Barclays - Analyst

Good morning, guys, and congrats on the nice results. Dave, I want 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 as to that growth rate? What do you see that kind of growing this fiscal year?

Dave Mosley - Chief Executive Officer

Yeah, Tom, thanks. It's - the non-HDD business has been a little choppy. I mean, there is 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 to the HDD business. That's where supply chain stuff gets really tough and then those systems themselves are very large, right. So shipping, freight and 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 this 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.

Gianluca Romano - Executive Vice President and Chief Financial Officer

Yeah, I would say from a financial standpoint if we reach the non-HDD business at a lower gross margin, it is a very good contributor for our free cash flow. So we we are actually now keeping the effort on that non drive business.

Thomas O'Malley - Barclays - Analyst

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 product study? Obviously, these are big complex machines that you're selling here - I mean, systems that you're selling here. Where are the - where are the constraints? Where are you seeing that supply chain hold up? Any kind of particular examples would be helpful.

Dave Mosley - Chief Executive Officer

Yeah, I think all things silicon, all things power, all things kind of the things that we don't 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, to be finally consumed for us and 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.

Thomas O'Malley - Barclays - Analyst

Thanks. Congrats, again.

Operator

Your next question comes from Sidney Ho from Deutsche Bank. Please go ahead, your line is open.

Sidney Ho - Deutsche Bank - Analyst

Great, thanks for taking my questions. I have two 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 where - 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?

Gianluca Romano - Executive Vice President and Chief Financial Officer

For the pricing, I would say that the pricing environment is still very favorable, similar to the prior quarter I would say and now we expect this to last even now in the current quarter and hopefully even in the future. Passing 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 passing specific cost to our customers.

Sidney Ho - Deutsche Bank - Analyst

Okay, that's fair. Maybe my follow-up question is on the technology roadmap a little bit. Obviously, you're starting to ramp up the 20 terabyte now, but with HAMR not likely being a high volume until it sounds like a later, maybe 30 terabytes, 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 timeframe you talked about?

Dave Mosley - Chief Executive Officer

Yeah, thanks, Sidney. So a couple of things. It's not only is 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 know - then you fundamentally have more capacity that you don't have to install with capex, right, because you 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 - there are a lot of opportunities that they can go back and sell 16 terabytes with fewer heads and disks and that's probably the way to think about the march that were 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 is one disk and two heads, you needed huge jump scenario density to make - make these cost jumps. When you have eight or nine discs in a box and you can take one out and hit the same capacity point, two out or three out that hit same capacity points, that's a lot of cost relatively and it's easier to transition through. So if that helps you think about it.

Sidney Ho - Deutsche Bank - Analyst

Yeah that's helpful, thanks.

Operator

Your next question comes from Aaron Rakers from Wells Fargo. Please go ahead, your line is open.

Aaron Rakers - Wells Fargo Securities - Analyst

Yeah, thanks for letting me ask the questions and 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, we've passed several quarters. But we have seen a net debt position continue to decline. So I guess the question is, if you look - how do we think about the appropriate level of either liquidity or cash on the balance sheet as we gauge or continued propensity to be active on share repurchase?

Gianluca Romano - Executive Vice President and Chief Financial Officer

I think we discussed 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 include of course our great third quarter. So we are still well above that level and so we have [Indecipherable] 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 further return to our shareholders.

Dave Mosley - Chief Executive Officer

And I think, Aaron, there is 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.

Aaron Rakers - Wells Fargo Securities - Analyst

Yeah. And then the 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 shipped and maybe even more concentrated in the competitive dynamics in that vertical. It used to be sort of a kind of like a 10%, maybe 15% price per annum kind of declining, 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 flattening out price curve for hard disk drives as we think about the long-term model implications?

Dave Mosley - Chief Executive Officer

I think it's drives of change 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 can still have demand shocks like we saw at the front end of the pandemic and 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 the mass capacity drive in the front end of it is really - has a lot of long lead times and very complex part. So I think that's what's changing the behavior rather than anything else.

Aaron Rakers - Wells Fargo Securities - Analyst

Yeah, thank you very much.

Dave Mosley - Chief Executive Officer

Thanks, Aaron.

Operator

Your last question will come from Jim Suva from Citigroup. Please go ahead, your line is open.

Jim Suva - Citigroup - Analyst

Thank you. 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 servers, switches, compute products out there? Thank you.

Dave Mosley - Chief Executive Officer

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 insight individual customers they have multiple applications. I do think like in 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 can fulfill their service level agreements with their end customers who were pushing into the cloud, and that may be - that 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, so these are difficult problems I'm sure that the people - we'll 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 then it's not to say that there aren't changes in strategies and opportunities as they see ways to go gain more efficiency 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 more consistent like we talked about.

Jim Suva - Citigroup - Analyst

Thank you so much for the details.

Dave Mosley - Chief Executive Officer

Thanks, Jim.

Operator

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

Dave Mosley - Chief Executive Officer

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.

Operator

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SEAGATE TECHNOLOGY HOLDINGS PLC

Q1 2022

Earnings Transcript

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