Seagate revenue jumps 61% as price and product mix outpace volume

Exabytes shipped rose 21% while revenue rose 61%. Seagate kept 87 cents of every extra revenue dollar from a year earlier as gross profit, and the shares fell about 6% after hours anyway.

Pricing drove Seagate's record quarter. The December exabyte count will show whether those prices hold. Its release shows revenue of $4.23 billion, up 61% from a year earlier, and free cash flow of $1.48 billion.

Each exabyte (the unit of storage Seagate sells) now earns a third more than a year ago. Volume explains less than half of the revenue gain. Price and product mix explain the rest, and customers' contracts hold that price in place for now.

The shares fell anyway. The stock closed at $667.85 on 27 October, up 3.7% before the report. At 7:09 PM New York time, Google Finance showed $628.54, down 5.9% after hours.

That leaves the stock about 45% below its 52-week high of $1,145. The close was about 42% below it.

Price and mix drive the increase

Seagate shipped 220 exabytes in the quarter ended 2 October, against 182 a year earlier. Revenue per exabyte, which blends price and product mix, drove most of the growth.

Seagate earned $19.24 million per exabyte, 33% more than a year ago, by the supplemental slides. The five quarter path ran 14.45, 14.87, 15.64, 16.65 and 19.24. The last step was the biggest.

The gap from the prior quarter is the cleanest proof. Exabytes rose only from 218 to 220, yet revenue rose $604 million. Price and product mix explain that increase, with little change in volume.

Chief executive Dave Mosley called the flat quarter timing: "Big step up in the June quarter, tapered off a little bit in the September quarter." On the Benzinga transcript, asked where the price gains came from, he answered: "I think most of it's on the ... rolling re-upping of the contract ... It's not because we're getting more exabytes out."

Cloud buyers account for much of the gain. Data centre customers took $3.45 billion of revenue, 81% of the total and 63% more than a year ago. Edge and IoT revenue rose to $784 million from $515 million.

The contracts lock the price in. The supplemental says the vast majority of data centre nearline supply, the high capacity drives cloud customers buy, is allocated through calendar 2028. On the call, Seagate said some cloud agreements extend through 2030.

Almost every extra dollar reached profit. Against a year earlier, gross profit rose $1.39 billion on $1.60 billion of extra revenue, so Seagate kept about 87 cents of each added dollar.

Costs did not eat the gain. Adjusted operating expenses were $300 million against $291 million, so adjusted operating margin reached 50.7% from 29.0%. GAAP gross margin rose to 57.3% from 39.4%.

Component costs explain little. Since the June quarter, cost of revenue rose $75 million while revenue rose $604 million. The chief financial officer expects value based pricing and product mix to keep lifting margins through the fiscal year. He says pricing partly reflects higher external component costs, and the rest is contract repricing and mix.

Cash flow and shareholder returns

The cash is going to the balance sheet and shareholders. Free cash flow was 35% of revenue, and the last four quarters total $4.16 billion, a 2.7% yield on the $153 billion market cap. Capex stayed at 5% of revenue, inside the 4% to 6% range management has kept.

Seagate retired $1.2 billion of debt in the quarter and a further $750 million afterwards. It regained investment grade and expects to be net cash positive exiting calendar 2026. Net leverage is 0.2 times against 1.5 times a year ago.

Returns are rising next. The board raised the quarterly dividend 3% to $0.76. The CFO said buybacks will rise significantly from calendar 2027. Seagate returned $568 million this quarter and holds $4.4 billion of authorisation.

Demand is real, but price outran it. Nearline exabytes grew 24%, and Mosley says the gap between supply and demand is probably growing. Nearline revenue per exabyte still grew 31%, from $13.30 million to $17.42 million.

HAMR and the December volume test

Seagate sets its own supply pace. It adds capacity through areal density, meaning more terabytes on each disk, rather than building more drives. It guides nearline exabyte growth to the mid 20% range a year.

HAMR, the heat assisted recording technology behind Seagate's Mozaic drives, will determine the next stage of growth. More terabytes per disk lowers cost per terabyte without adding drives. Management expects HAMR to reach roughly half of nearline exabyte shipments exiting calendar 2026, with Mozaic 4 about half of those. Mosley said Seagate must build its HAMR capacity itself, since the technology cannot be bought, yet capex stays within the 4% to 6% window.

Mozaic 4 drives of up to 44 terabytes are ramping at two cloud customers, with more qualifications due over the next couple of months. Mozaic 5, at upwards of 50 terabytes, ships for qualification towards the end of calendar 2027.

Further growth now depends on shipping more storage. Mosley promised a meaningful step up in exabytes in the December quarter, though he said quarterly growth may vary as Seagate stages new Mozaic generations. The CFO said a few more customers qualify Mozaic 4 next quarter, and manufacturing is being prepared for that volume.

The guide shows why. Seagate expects fiscal second quarter revenue of $4.8 billion, plus or minus $100 million, and adjusted earnings of $9.20 a share. It guides an operating margin heading towards the mid 50s percent, and revenue 70% above a year ago.

The stock looks cheaper than the headline suggests. At the $667.85 close it trades at 18 times the $9.20 guide annualised, against 32 times trailing adjusted earnings of $20.60.

Buyers hold one lever, the calendar 2028 contract. Seagate expects to finalise 2028 configuration and pricing over the next few quarters. Mosley expects step-ups as contracts renew, so customers that wait pay the next step.

The December quarter ends 1 January 2027, and its report is the test. At the $4.8 billion guide, revenue per exabyte stays at or above $19.24 million only if Seagate ships fewer than about 249 exabytes, 13% above this quarter's 220. A bigger step up that leaves revenue near the guide would mean the price per exabyte has started to fall.