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On September 5, 2024
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Seagate Technology Holdings plc (STX) Citi's 2024 Global TMT Conference (Transcript)
Gianluca Romano - Chief Financial Officer Shanye Hudson - Investor Relations All right. Good morning, everyone or early afternoon. Welcome to Citi's 2024 Global TMT Conference. My name is Asiya Merchant. I'm part of Citi's Technology, hardware and tech supply chain coverage. Very pleased to have Gianluca Romano from Seagate here. He's the CFO there. This session is obviously only for Citi clients. We have a set of questions that we're going to go through. Before that, I'd like to turn it over to see if there's some opening remarks from Seagate managed here, and we'll jump right into it. We also have members of the IR team here, Shanye Hudson is right here in the audience as well. Thank you. Gianluca Romano Well, thank you for inviting us. And before we start, let me remind everyone that I will be making forward-looking statements today, and you can learn more about the risk associated with those statements on our website. All right. Welcome. Thank you again. We've been asking all our companies, how they're thinking about end demand here. You guys are sitting in calendar third quarter after the holidays. Maybe you can just remind us how end demand is looking for you guys for calendar 3Q? Gianluca Romano Yes. Of course, no, we are in a good part of the up cycle, especially for the Cloud segment. I will say we are pleased with how the current quarter is shaping up. We guided revenue sequentially up more than 10% at this point in the quarter. Now we are fairly comfortable with this guidance and maybe it will be better. More importantly for us is profitability. We guided the quarter sequentially no way higher from $1.05 to $1.40 as a midpoint. I think we can be in the high part of the range, so better than the midpoint that we guided. This is coming mainly from the mix moving more into the 48-terabyte CMR 28-terabyte SMR and pricing is also a little bit better than what we were expecting. On the revenue side, the sequential improvement is coming from two major segments. Number 1 is cloud. As I said before, it's continue to improve, every quarter since September last year. And finally, for the first time, I'll say, after the down cycle in the current quarter, we see enterprise OEM segment starting to improve. So I would say the enterprise OEM and then the video image application possibly in the next few quarters, we'll probably complete this up cycle right now in the last four or five quarters, up cycle has been driven mainly by cloud. So a good up cycle, but still limited to one market segment. Now we're starting to see other market segments to starting to improve and join the upside. Asiya Merchant Just as you talk about the key demand drivers here across your various end markets, is it just normalizing post the downtick? Or are there actual incremental demand drivers that you're seeing that takes you beyond just mean reversion to [Technical Difficulty] normal trend line? Gianluca Romano Yes, it's always difficult to define what is normal, I would say this a storage business, but it's not normal. Data is going to grow every year, sequentially every year. Data storage will continue to grow. This is driven by many applications. Of course, AI is one of those applications, but it's not the only one, but are mainly reason why data will continue to grow many applications that will drive growth in the creation of data and then in the storage of data. So I would not say that what the level we had a couple of years ago was normal. It was just part of a cycle as we understand now some of that volume went to -- into our customer inventory. And this is something that, of course, we need to try to limit in order to reduce the impact of the down cycle. And to do this, we need to be very disciplined with capacity. So our focus is on profitability in long-term demand is not in taking short-term volume upside. And capacity, of course, will be always kept very well under control. I think if the industry moves continue move in this direction, even if you will always have some cycles in the industry because new technology, you always have some up cycle and some down cycle, but you can limit the impact of the down cycle. Asiya Merchant Okay. And maybe just -- you talked about AI, Gianluca, do you see AI as an incremental demand driver for HDDs in particular? Gianluca Romano It will be. I would say right now, it's still fairly limited. I would say this fourth part of the up cycle is more driven by what we call traditional demand, but no, AI is very important. I will see AI in two phases. The first phase is the buildup of the infrastructure to use AI. And to do that, you need to create an infrastructure with not a lot of GPUs and HBM and DRAM and NAND, so to run the compute analytics part of AI. This is important because you need to create data with AI. So this enables the creation of data. Storage. The benefit to storage come from two things. One is AI needs a lot of data to give you a variable results. And therefore, the retention period of data is no longer. So people, businesses, government will not delete data because they want to give the data to use AI. So this is the first benefit. The second benefit is when AI start to access the data and generate valuable data to you as an individual or as a business, you want to save that data. And that data is saved mainly in the cloud or on-prem data center and is on our hard disk. So this second benefit is just starting now, just starting. So you will see much more of that benefit in the next several quarters and years. We think now AI is not a two or three quarters event, will be with us for many, many years. And then you will have new applications. Every couple of years, we have a new very important application that will drive the creation of more data and humanity is now used to have more data in every one life, and this is very important because, finally, all the data end up in hard disk. Asiya Merchant Yes. Okay. Your other competitor earlier today commented about how they're so pleased about the structural changes that are happening in the HDD industry. And you guys are also talking about build to order for your cloud customers, which are one of your largest customer base. Maybe if you can just talk about this visibility, what's changed and why your cloud customers are open to sharing may perhaps increase visibility into their demand. Gianluca Romano For sure, there is a change in the industry. In my opinion, this change happened already before the down cycle. If you look at the trend of the HDD industry in calendar '21 and the fourth part of calendar '22 was actually fairly similar to what is happening today. The gross margin is for Seagate. In maybe four quarters move from mid-20% into 32%, 33%, so a great improvement. The industry was any signal even for competitors was fairly similar. I think the industry moved the focus from volume market share into profitability. So in this industry, you can have a little bit better market share when you have a little bit better product in terms mainly on capacity products. But after a quarter or two, things get realigned. So really fighting on market share was not the best solution, I think, for the industry after the big consolidations that happened in the prior years. Right now, the focus is on profitability and try to keep those cycles as smooth as possible. So discipline on capacity, focus on profitability, focus on getting the best possible product to market and time to market. But as I said, I think that happened already before the down cycle. Then during the down cycle, that was a bit surprising in terms of timing and how deep it was. Of course, now the industry had some inventory already produced, so we had to move that inventory. That had a little bit of an impact on the pricing situation. But as I said before, already a year ago, even if demand at that point was still weak, but the inventory on our side was clean, we're starting to increase pricing. And we -- of course, we didn't produce any drive that didn't have an order, and so we move to this build to order. So customers that say if they want to get units from us, they need to give us an order well in advance, and we produce what is ordered. We don't produce speculating what they will need for the quarter and then try to move the volume. That, of course, has a negative impact to pricing. So this is not happening anymore. Even during the deep part of the down cycle, we were not doing it, and we will not do in the future. So it's a change. Customers, I hope now understand how this industry wants to operate, and I think it's fair. Now if you have a demand, you need to give a demand on time, the cycle time to produce a hard disk is very long. So it's difficult for us to anticipate the cash flow and produce a product, if you're not sure you're going to sell that product at a price that has been agreed. So I say this is a big change in the industry. And hopefully, we can continue to go in this direction. Asiya Merchant Okay. And if you can just remind investors where you are with your visibility right now with your cloud customers? Gianluca Romano Yes. I think at the earnings release, we said we have already a certain number of quarters in certain markets that we don't have more volume anymore. So we can create more volume through mix change with the same units if you produce -- if you move your mix to IR capacity drives, no, you can have more exabytes. And finally, what we sell is exabyte. We don't really sell units, we sell exabytes. So mix is what we'll continue to bring some increase in exabyte quarter-after-quarter. The number of units right now, I would say, are probably already fairly well optimized. Asiya Merchant Yes. Okay. Given -- one of the questions is, given that there is stretched lead times, if you may, and you do have visibility, how do you make sure that your -- that as it relates to your cloud of customers, they're not over ordering because they realize it takes, I don't know, nine months or whatever to produce an HDD part, so how do you make sure these cloud customers are not over ordering from you or your peers? Gianluca Romano Well, this is very difficult, right? I always try to understand if demand is demand for a real short-term needs or is their demand for inventory to make some safety stock. Especially hard disk is even more complicated because when there is a new data center and all the hard disks are installed in the new data center, at day 1, utilization rate is 0, but there is no storage for web building, inside their location, where it's no storage yet. It's a preparation for future storage. So that is always a certain number of hard disks that really have a very low utilization. And you need to wait with the time that location will start to increase storage leveling and get to a certain level when they need to refresh the location in terms of getting more capacity in the same location or build a new data center. But there is always part of the hard disk that have low utilization rate. So it's not easy to keep this, let's say, inventory under control. I would say the best way is not to increase capacity until nobody is a very strong visibility of a very long-term change in demand. And I would say the industry is able to increase exabyte capacity through the product transition that we have seen through the history of this industry, how the industry moved from 1 terabyte hard disk drive to the 24 terabyte hard disk drive. So -- but it's always that opportunity, but not increasing the number of heads on the number of disks, so what we produce, we think is probably the best way to keep this possible additional inventory under control. Asiya Merchant Okay. Maybe switching to -- I'll get to your product and technology road map. I know there's lots of questions around that. But before we do, maybe just -- on the enterprise side, you said you seem to see some green shoots there and demand there. Just if you can remind investors where you are with those enterprise OEMs, what's driving the demand there? Is it again normalization or do you see incremental demand from other applications there? Gianluca Romano At this point, I think is more traditional demand, but is an increase in server demand. I would say AI will be also a part of on-prem data center demand increase in the future. But right now, it's still fairly low. It will be a great opportunity for the next several quarters. But right now, it's more traditional demand. Enterprise OEM during the down cycle, I would say, they reduced their volume less than cloud, but it took longer to start to increase again. So it's just a different shape of the cycle. But now in the current quarter, we start to see the increase. And of course, our expectation is that that increase will continue. And I said before, even other parts of the mass capacity business will start to increase. This is why we are fairly confident in the next few quarters. We discussed about December during our earnings release. And I would say despite the September quarter is coming out a little bit better than what we were expecting, especially in profitability, we still believe December will be another sequential improvement both in revenue and EPS. So I think we are going in the right direction. Asiya Merchant Okay. When it comes to switching back to cloud customers, I think there is some concern just given when we look at what you guys are producing in terms of revenues, EBs compared to your competitor out there. There is always this question I get from investors about Seagate's market share. And what gives you confidence that you're not losing marquee applications or marquee workloads and not losing share to your -- in this very important market for you? Gianluca Romano Well, I said before, we don't really focus on market share. We think market share is driven by the product that you have in the market. As you know, we were very focused on the fourth part of the HAMR call during our March and June quarter. So we were maybe a little bit late with our 28-terabyte SMR and the 24-terabyte CMR. So we were not forced to market with those two important products. So for a couple of quarters, possibly we lost some market share in the near line space. We qualified a lot of customers during the June quarter. We are selling the product this quarter. We will ramp even more volume in the December quarter and in the following quarter. So my opinion was very temporary. And again, as when we move to HAMR, I think we will have the opposite situation where we will have the better product in the market with the highest capacity and that will maybe bring some more volume to us. But again, it's not our focus. I think the industry, has a certain level of capacity and I seeing that capacity will be sold. Asiya Merchant Okay. HAMR. You brought it up already. Remind us where you are with your HAMR qualifications with your lead customer. We'll start with that from first yes. Gianluca Romano So HAMR. We qualified the fourth customer in March, as you may remember, that was -- is a customer in the read and image application market segment. Just yesterday, we completed another call in the enterprise OEM segment, so on-prem data center. I think this is a very important step to move up in another market segment. And as you know, we are still working with our cloud partners to get a call into the cloud segment. Of course, the cloud segment put more -- especially in the core environment put a lot of stress on the product. So it's a call that takes a little bit longer. It's a bit more difficult. But now, we are making good progress every week. No, we have a review. I would say there are still some few adjustments, fine-tunings to the product, but the product is progressing well in terms of call. I think the timing could extend into the next quarter for the cloud space. But I think it's very important that we have achieved this other call in the on-prem data center because that is also a segment that you will consume a lot of units, especially when AI demand will be increasing the volume into the on-prem data center in the next several quarters. Asiya Merchant Okay. And then outside of this key cloud customer, maybe if you can talk about what's the reception been to qualifying at these other cloud customers outside of this one. Gianluca Romano Our confidence in the product is very, very high. We already discussed at our earnings release. We are starting multiple cloud customer call in the current quarter. So we have decided because this fourth cloud qualification is taking a little bit longer than what we were expecting, but our confidence is very high. So we are starting the call with almost all the cloud customers in U.S. and outside U.S., now mainly our Chinese cloud customers. It will probably take about three quarters to get the qualification complete, and then we will ramp volume. So as we said at our earnings release, we expect volume to start significantly increase around mid-calendar 2025. That is when you will start to see an impact to our P&L. Until that time, we will have HAMR volume that now has accretive gross margin that is positive to the company, but it's still limited in volume. So you need to have a certain number of customers and a certain volume to really see the change into the P&L. Asiya Merchant And outside of these cloud customers, you talked a little bit about the video applications as well as the enterprise OEM for HAMR. If you can talk about qualifications with a broader set of group outside of cloud, yes. Gianluca Romano Yes. What we will do in the future will be to expand the volume of HAMR into different market segments as a beginning because the volume will not be enough for all the segments. The focus will be mainly on cloud and some of the enterprise OEM customers. But in general, we already announced our 4 terabyte per disk. So at high capacity will be a 40 terabyte through the end of calendar 2025. At that point, you can start producing lower capacity drive like 20-terabyte, 24-terabyte drive with only 5 or 6 disks and 10 or 12 heads. That is a major change in the bill of material compared to the current 20-terabyte or 24 terabytes. So you can really extract good profitability entering into those kind of market segments with products with lower bill of material and so lower cost per terabyte and generating good profit. As I said before, of course, we need to have enough volume to satisfy the cloud demand and also moving into those other segments. Asiya Merchant Just talking about cost per terabyte, maybe you can remind investors like where are we excluding HAMR, how does HAMR influence that cost of terabyte decline? Gianluca Romano Yes. The cost per terabyte in the industry has always declined fairly strongly, mainly because the mix was moving from legacy products, 1 to 4 terabytes per drive into a bad time was 16, 18 and now is 24, 28 terabyte, so a big change in capacity. But to increase capacity, we also had to increase bill of material. So a 2 terabyte per drive, as one disk, and two heads a 24 terabyte as 10 disks and 20 heads. So there is more cost. But because the capacity was, of course, increasing a lot, you always show some decline in cost per terabyte. HAMR will be even better because HAMR will not need to increase the bill of material to growing capacity. All the capacity growth is coming from aerial density. So a 30-terabyte ML drive as 10 disks and 20 heads. So very similar to what we have for a 20-terabyte PMR or 24-terabyte PMR. When we move to the 40 terabyte HAMR is still based on 10 disks and 20 heads. So the increase of the capacity is all coming from higher density in each disk. So instead of 3 terabyte per disk, you will have a 4 terabyte per disk -- and then you will have a 5 terabyte per disk and our R&D is already working on much higher capacity. So this is where the cost per terabyte decline will be even better than in the past because it's basically, it's the same unit cost as same below material, but much higher capacity. Asiya Merchant Okay. The initial HAMRs, which are more in the 30 terabytes, those do have higher costs still relative to the PMR. Gianluca Romano I would say they have the same number of disks, the same number of heads. Of course, there is an increased cost of the laser. So each has one additional laser. I would say, the substrate, the glass substrate is still glass. Now we started to use glass from our 16-terabyte drive so many years ago. But this substrate is a different glass, so it's a bit more expensive. But again, you move from 20 terabyte to 30 terabytes. So there is a cost decline. We always said we think our HAMR drive even a fourth generation of HAMR drive will be accretive to gross margin. And of course, when you then move from 30 to the mid-30s to the 40 terabytes to the 50 terabyte that we continue to show a lower cost per terabyte. Now of course, the other part is always what is the price. So assuming we are still in this kind of environment where over a certain level of price, of course, we will have a much higher profitability from those drives. Asiya Merchant Okay. All right. We just open it up to investors here. If you do have a question, please raise your hand, so we can bring the mic. Any questions from the audience? Okay, we have one here. Can we bring the mic, please? Unidentified Analyst Can you just more color on incorporating HAMR in your production? Like how long does it take to upgrade the production line? And how many months in advance before you start executing HAMR capacity expansion? Gianluca Romano Yes. For manufacturing, the tools that we are using for PMR are generally saying that we were using for HAMR. So what is a lot of compatibility between the two technologies? Of course, there are some tools that are only for HAMR. But in general, I would say, no, we don't need to have a specific line for HAMR and a specific line for PMR. In many cases, it's the same line where we produce the two different technologies. So not a lot of complications from a capacity standpoint. You don't need to separate the two lines in terms of how much volume you need to produce on HAMR and bring all the tools for that capacity and then do a different estimate on PMR. Now you can estimate the total and then you have more or less the same tools to produce the full volume that you need. We have capacity. As you know, we actually reduced capacity during the down cycle. As I said before, we can increase exabyte capacity, not number of heads and number of media, but exabytes, just moving the mix to higher capacity drives. And this is what we are doing every quarter. Now right now is more on the PMR side, now moving from 18, 20 terabytes into 24 and 28. And in the near future, will be increasing the volume of HAMR at the beginning with 30 terabyte and then moving to the 40 terabytes. But I would say manufacturing, now we don't see a lot of problems in defining one capacity versus other capacity. In fact, right now, we are able to move the mix between HAMR and PMR as we needed during the quarter. Asiya Merchant Okay. Just when you look at mass capacity HDD exabyte growth, I think people industry generally kind of peg it at 25% CAGR. How do you think about the ability to act for the suppliers, yourself and your peers to meet that demand, given you already talked about mix? Obviously, HAMR comes in there as well. In other words, are we at a point where we -- industry needs to raise capacity? Or there is enough from that mixture that can still meet the demand? Gianluca Romano I would say the mix shift will take a big part of that growth. I also think the 25% CAGR is probably not including the full impact of AI like we will see in the next quarters and years. So I think in the max capacity, especially in the near line space could be higher. And if that really happens, we will see what is the real volume that is needed. But we are not looking at increasing capacity in terms of units, in terms of heads, in terms of disk. We focus a lot on optimizing our production and bringing to the market higher capacity tax. Asiya Merchant Right. So is the market -- if it's undersupplied, is there a point in your forecast, whether it's in the next 12 months, you see the market being more balanced and not tight? And then within that context, how should we think about gross margins? Gianluca Romano Right now, we don't really see a change. And in fact, we don't want to modify our current strategy that is quarter-after-quarter or whenever you renegotiate a long-term contract with a customer is to increase a little bit our pricing. I would say our strategy has been very consistent every time we discussed a new contract for every quarter depending on which segment we are working on. Now we increased our pricing, fairly low percentage, but very consistently. So we don't have a strategy that is very disruptive, I think, to our customers, I think, is very predictable. And as I said before, it's not a huge change from one quarter to the next. So they can, I think, predict what is happening and put that in their plan in their forecast. We have very big customers. I think that level of price increase is not at all disruptive to them. It's very different from what other components in the cloud have done. But the benefit for us is, I think you can keep this for much longer. Asiya Merchant Okay. Great. Any other questions from the audience here? We have one more here. Unidentified Analyst [Indiscernible] the big cloud customer. You've said that the technology is still in changeable with some of the PMR drives. So just not getting specific [indiscernible] delay, are they just -- is it very easy just to replace it with other products? Or do some of those market share dynamic you spoke about earlier coming to play a little bit? Gianluca Romano Yes, absolutely. No. As you have seen, even over the last quarter or the current quarter, we have achieved even going to be better of what we guided just because we can switch from HAMR to PMR. And as I said before, we have some customers that get qualified. Now it's an enterprise OEM space. So there is some volume that will go, HAMR volume that will go into that space. The cloud, if it takes a little bit longer, we will sell more PMR products. We are just ramping our 24-terabyte CMR, 20-terabyte SMR version, so we can run that more. And until now, the call is there, and we can start moving more HAMR. But I said no, I said before, I think December will be another improvement in terms of revenue and also in terms of profitability, in terms of EPS growth. Asiya Merchant Okay. SSD cannibalization. That's something that investors talk about a lot. And I'm piqued -- my interest is piqued because you talked about enterprise OEMs showing interest in the HAMR drive and so we hear a lot about QLC NAND and SSDs more actually on the enterprise side as well. So just how you guys think about SSD cannibalization across your various end markets? Gianluca Romano Yes. I would say in the cloud is not existent. Now the cloud and even the big on-prem data center are structured in a way where storage is on hard disk, but you need a lot of NAND also to do the compute and analytics part of the application. So you move data from hard disk to NAND, you perform the part of the application that you want to perform. And then when you say the result of that goes back to hard disk. So with the transfer of data, but all the storage, 90% of the storage is done on hard disk. We have -- you can see that even during the down cycle, when the NAND price was very, very low, it didn't change the structure of the cloud. It didn't change the structure of the on-prem data center. And when the NAND price went much higher because the increase -- the quarterly increase of NAND were way higher than what we did in the hard disk industry, still the architecture of the cloud did not change. So those are two components of a big infrastructure. When you go to low capacity drive, it's different, even in the enterprise space. Now if you look at mission critical, those are drives of 1, 2 terabyte and then the clients so desktop, laptop, some of the consumer. So low capacity drive, those are moving more into the NAND space. And I think now this has been evident for the last many, many years. Even if in the last few quarters, our legacy business, where we now include mission-critical and client and consumer has been fairly stable. I guess that in the future to see some reduction, and that volume will move into NAND. But today, 90% of our exabytes are sold into mass capacity. Those legacy is only 10% of the volume. So it's less material to the Seagate business. The gross margin is actually lower than what we get in mass capacity. We are -- no, we are still serving these markets, mainly because of free cash flow. Even if the gross margin is lower, there is basically no CapEx that is basically no OpEx. So free cash flow is fairly good. So we are happy to serve that volume until it's there, but it's becoming less and less material to us. Asiya Merchant Right. And again, is that a volume pretty fungible to the higher capacity drives? Gianluca Romano Yes, we can. We have -- no, we have done that for many years. If you -- now in probably 10 years ago, legacy was 80% of the volume. Now it's 10% and the mass capacity was very small and continue to grow. So of course, we have transitioned that capacity from legacy into high-capacity drives. I would say this is also the reason why the industry is different now. Through that transition, we always had oversupply available because the legacy business was a big business was declining. So we had that oversupply always available. Now that 90% of the exabytes are sold are produced and then sold into mass capacity segment, you don't have that oversupply. We start from a very different point. The industry is not chasing volume because supply is available. Now supply is actually all consumed, and so it's a very different situation. And there's a lot of consolidation also, set up any things. Asiya Merchant Maybe just as we wrap up here, we have one minute to go, Gianluca. Just a little bit about your capital allocation. You guys are now in an MBS position generating free cash flow, how you guys think about your balance sheet and just return to shareholders. Gianluca Romano Yes. Well, first of all, even during the deep part of the down cycle, we have always protected our dividend, so that is a priority for the company is a big part of our shareholder return strategy. In the past, we have also done a lot of share buyback. I would say in the short-term, we will be more focused on reducing our debt. We enter into the down cycle with about $6.2 billion of debt. We are now at $5.7 billion. So we've already reduced a good part of the debt, but we want to go over. I think I discussed in the earnings release, I want to go to about $5 billion. And after that, we'll probably restart the share buyback as our normal practice of maximizing shareholder return. Asiya Merchant Okay. Great. And then as we wrap it up -- we're actually out for time already. [Indiscernible] that. All right. Thank you very much.
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Dell Technologies Inc. (DELL) Citi 2024 Global TMT Conference Call (Transcript)
Well, look, it's a great pleasure to warmly welcome all of you to our Citi Global Tech Media Telecom Conference 2024. My name is Philip Drury, I'm the Global Head of TMT Investment Banking at Citi. This is the first time we're bringing together both corporates and investors from across the broader sector. So, technology, media and telecom in one single event. I also think that's illustrative of the amount of convergence that we're currently seeing across the industry. That means that this year's conference is our largest ever. We've got 250 corporations registered and present and over 1,600 investors in attendance. That does mean that we can't find space in New York City for everybody. So very appreciative of everyone's patience as we try and get through the number of meetings that we have. Over the next three days, we have thousands of attendees who are going to come through and listen to a combination of panel discussions, keynotes and very valuable one-on-one meetings. At Citi, we take pride in bringing our clients together, establishing new connections and opportunities for growth. As the world's most global bank, our reach allows us to offer a breadth of connectivity that few others can match. And I hope that you will have the benefit to experience that here today and over the next two days. Our next guest needs very little introduction, and as Founder, Chairman and CEO of Dell Technologies, it's a great pleasure to invite Michael to join us here on stage. With over $100 billion of revenue in its last fiscal year, Dell Technologies is one of the world's largest technology companies. Michael's Company serves the needs of the largest global corporations and governments as well as small business and also consumers. Dell delivers essential infrastructure for organizations to build their digital futures, harness the powers of artificial intelligence and protect their most important information. I would also say that Michael takes great pride in Dell's commitment to ethics and privacy. Dell is world renowned as one of the most ethical companies. Beyond Dell Technologies, Michael has also established a foundation to accelerate opportunity for children growing in urban poverty. And among his roles, he's an honorably member of the Foundation Board of the World Economic Forum and Executive Committee member of the International Business Council and a member of the Technology CEO Council and the Business Roundtable. With Michael today on the panel stage, we have Asiya Merchant, our research analyst covering the technology hardware and tech supply chain sector. Asiya is a great partner, been with Citi for 20 years and is a regular feature of the institutional investor ranked teams since 2008. So, with that, it's my great pleasure to warmly welcome both Michael and Asiya. Thank you, everybody. Asiya Merchant Thank you, Philip. I have been asked by Dell to just read some safe harbor statements. So, before we get started, I'm just going to do that. Statements in this presentation that relate to future results and events are forward-looking statements and are based on Dell Technologies' current expectations. In some cases, you can identify these statements by such forward-looking words as anticipate, believe, could, estimate, expect, intend, confidence, made plan, potential, should, will and would or similar expressions, actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in Dell Technologies' periodic reports filed with the SEC. Dell Technologies assumes no obligation to update its forward-looking statements. All right. Welcome again, Michael. It's a true honor to have you here. I'm going to get asking with sort of the first thing -- Dell just reported last week. For those maybe somebody would be on holidays, et cetera. How would you characterize how Dell performed relative just to the broader macro backdrop that you guys are operating in? Michael Dell Well, first of all, thanks for having me. Great to be here. If you look at the broader backdrop, IT spending this year is growing about 6% to 7%, which is pretty good. Our core CSG and ISG businesses grew 12% in the second quarter. ISG specifically grew 38% and on the back of the incredible interest and momentum in AI servers and networking grew 80% year-over-year. And we continue to see a great deal of momentum there. The PC refresh has been pushed out a bit, but we think it's coming. There's a large installed base, and customers are certainly looking forward to all the new capabilities that an AI PC can bring as they're planning their refreshes. And -- the AI opportunity has expanded the TAM, and we're starting to see more adoption and interest in enterprise. It's early in the cycle of progression there, but we believe that's coming. In our storage business, we had double-digit demand order growth in our Dell core storage IP and PowerMax, PowerScale, PowerStore and our PowerProtect data domain included in that. And we feel very good about the momentum going into the second half and next year. At the end of the day, we're in the business of data and compute and storage and networking and memory and those are all things that are in great demand with everything that's going on in the world. Asiya Merchant And Michael, you've led the company through a lot of change, whether that's cloud computing, obviously, the advent of PCs, the cloud computing. Maybe if you can talk about how you think about AI and -- just how do you think about where Dell operates and how it is just relative to your overall market that you're participating in? Michael Dell I do think it's a very significant opportunity, and it's not unlike what happened with the Internet, except that it's happening much faster. And this is all built on the foundation layers that have been in place already. And as I said earlier, we are kind of in the businesses that are the inputs into AI. And it's a dramatic opportunity for productivity and efficiency inside the existing organizations. It unlocks kind of human intelligence and the upside demand for that is pretty hard to get your head around. Nobody really knows how big it is. But if every person inside an organization can become more productive and more effective, if innovation can be accelerated in every industry and every part of society that's something pretty amazing. The GPT 4.0 model from Open AI is probably the most or one of the most powerful models out there. It was trained on one petabyte of data. A company like Citibank or others would have hundreds of petabytes of data. We, as Dell will sell our customers this year and last year, about 120,000 petabytes of data. So, these algorithms today are the worst they'll ever be. So, if you fast forward 5 years from now, where you've got multimodal AIs and agents, and now you're training and inferencing on all the data in the world, that's going to be a very, very different future, and it's a future that I'm very excited about. It will create a ton of opportunities for our company. And it's one we're aggressively and boldly embracing inside our own business. In enterprise, it's early, right? It takes time for customers to organize their data to figure out what are the things that they most care about. What I am seeing is it's an expansion of the TAM for sure. It tends to be driven from the CEO, driven from the business line executives, they're identifying the sort of one or three key processes that are central to their organization's success, and they're seeing how AI can improve that. So last night, I had a dinner with about 15 of the largest companies in the New York area. And this is what I'm hearing. There -- the CEO is saying, this is a historic opportunity for us to get better at what we do. If you're an insurance company that's underwriting, can you use data and AI to make your underwriting more effective? Absolutely. They don't want to miss that opportunity. It's driven from the Board. And we think it will be an enormous wave of adoption. And it will ultimately end up like electricity or the Internet where it's just everywhere and everything. Asiya Merchant Fair enough. So, one of the pushbacks that we get from investors were maybe a little bit skeptical here, talk about the primary growth of AI, the inputs that are going into AI being supported by ODMs in Taiwan, maybe similar to what happened with cloud computing. In response to that, if you can talk about Dell's competitive advantage position, is there an opportunity to have your share expand in the AI TAM versus, let's say, the overall other mainstream general-purpose infrastructure TAM? Michael Dell In Enterprise, that's less of where the ODMs tend to show up. They tend to show up in the hyperscalers. We're in a business where we want to get paid for our engineering value add for our services, for our differentiation. And then we have a financing arm that's also very helpful with a lot of the customers that are building out these enormous systems. We're careful on the credit side to make sure they could pay us back. But as the opportunity expands from -- we've shipped about $6 billion of our XE9680 and almost $5 billion of that is just in the first half of this year. And yes, the Tier 2 CSPs are a big part of the demand, but we've seen every quarter more and more enterprise customers in value and a number beginning their adoption cycle. And I think ultimately, that will be the far larger business for us, and the margins and profitability of that are higher. They're more like the CPU server business that we're already in, which, by the way, has had five quarters of sequential growth because it's also getting a lift as people we look at their workloads and again, 80% overall growth year-over-year in that whole space is the fastest growth we've had in that and record levels fastest growth since the '90s. Asiya Merchant Right. Okay. Talking about customer concentration, you talked a little bit about expanding in the enterprise and enterprise is starting to come on board. Just if you can talk to us about how your customer composition is today as it relates to AI, how you see that? When do you see that enterprise inflection happening? And even if you can talk a little bit about the enterprise use cases, where do you see traction there? What are these customers coming to you for? Where do you see the greatest benefit of AI, maybe in the enterprise space? Michael Dell I think because we're early in the cycle here, it is still pretty concentrated. And if we can profitably win business with those concentrated customers, that's what we're doing. And we are winning quite a bit. So, the order growth has been substantial, and the pipeline of opportunities is many multiples of the backlog, which is $3.8 billion this last quarter. So, tons of opportunity there. I think it is starting to broaden out. And for enterprise customers, typically, what they're doing is they're finding a couple of big opportunities in their core processes. So, in our internal case, more than a few because we're using it as an opportunity to remake and modernize the company. But certainly, coding assistance, services, in our case, we have this next best action tool that our services people use, and if you're a first-level service person, now all of a sudden, you've got the superpower that makes you with third-level service person and we're able to solve problems faster. So, our time to resolution goes down, our customer satisfaction goes up and our cost to serve goes down as well. There's tons of use cases in sales assistance, in marketing and content, in finance, processes, legal, HR, documentation. And I'd say the larger companies are typically focused on [indiscernible] our processes that are right at the center of what they do as a company. And the productivity opportunity here is on the order of 10% to 20%. In some cases, it's 20%, and so that's kind of too big to ignore. And you really cannot find a company that's not wanting to go after this. Our customers that come and meet with us at our briefing center, we ask them what do you want to talk about. AI is always on the list and it's usually the first and most important thing. Unprompted customers ask us about this all the time. They're very interested, how do you do it? Where do you do it? How do you organize the data, which tools should we use? What's going on with open source. We're doing a lot with Meta, with the Lama models, but other open source models as well. Some are using close source model. Some are using small models. So, there's a lot going on here, and they need a lot of help. And ultimately, it drives a ton of infrastructure business for us, not just servers, but also storage like our PowerScale. We're seeing more of that attach in enterprise, particularly with the improvements we've made to create parallelism with a client-side driver. So, we have a new update to our NFS, which powers PowerScale and networking as well because the plot is how do you connect all these things together. So, providing a rack-scale solution, we can get paid for that engineering for the services we provide and helping them deliver a total solution. Asiya Merchant Yes. When you compare your AI sales, perhaps your enterprises right now versus the more traditional general-purpose infrastructure. Is there a difference between the attach rate to the other non-compute-based solutions? Is there a difference in attach rates between the two? Michael Dell In enterprise, it's a lot closer to the CPU business. In CSPs, it's a little bit different, and we're working to obviously attach as much as we can. Generally, customers in the CSP space are with their second order, the third order, they're buying more from us because they're finding they need more help. And we can solve more of the problems for them. And also, we're getting better engineering solutions that solve that problem. These weren't problems we were focused on 3 years ago. And now this is a new use case. And so, we're pivoting our engineering resources to build the stores and networking that customers acquire in these spaces. Asiya Merchant Fair enough. Margins on top of mind for everyone as it relates to AI. Can you talk to us about the margin trajectory for your AI business? And what should investors be looking for as you guys scale that AI business -- and maybe as enterprises come on board and you talked about more value-added attach to that AI business? Michael Dell So, as it elludes to enterprise, that will be helpful to us. In the second quarter, we had 11% operating income for all of ISG. AI servers are margin rate dilutive, but their operating income dollar accretive. And -- so there are trade-offs there in terms of how much of this we sell, but we're more focused on the dollars. Another thing that's going on in ISG is we've been able to increase storage margins. We think those can continue to increase, particularly as we move to more of our own core Dell storage IP, and we're able to get value for the engineering and differentiation that we put inside our storage IP. So, the direction of travel generally for ISG margins has been positive. We think that will continue. Asiya Merchant Okay. Great. People are also concerned about all the dollars being spent on AI that it continues to curb the demand or spending on non-AI general purpose. I mean I know some of that was probably through last year as we were going through some digestion. But as you just kind of look ahead, do you think that AI spending would continue to pressure non-AI spending? Or given the server growth that you saw in this particular quarter that you reported, that we've now kind of turned the corner? Michael Dell I think with most customers, the AI budget is outside of the IT budget, and it's driven from the CEO. So, go back to 1 of the customers I met with last night, a large insurance company, what's the number 1 thing they do. They do underwrite. And can they do that better? What does it work to them? They do it a little bit better, that's driven from the CEO, and it's driven from the Board. And the spending that is required for that, that's going to happen. And we're seeing similar kinds of things with a couple of key projects inside these major companies. Sometimes serving for the CEO, sometimes the business line executives, but the IT budget, and we don't see a lot of companies that are saying, well, we're going to do this AI, so we're not going to do that. Maybe that will happen, but the increment of improvement in efficiency here is so dramatic. I think you kind of have to be asleep at the switch to not go after it. Asiya Merchant Right. A little bit about privacy, security and compliance. And have you seen how perhaps your customers are thinking about public cloud? Has the pendulum continue to shift towards public cloud? Are you seeing a little bit more optimization and maybe shifting back to on-prem as it relates to obviously Dell's infrastructure business? Michael Dell I think this started some time ago. It's sort of been moving more toward multi-cloud and it kind of started with virtualization and software-defined data center, then public cloud and everything in the public cloud, [indiscernible] everything is in public cloud, too expensive. We need multi-cloud, we have on-prem, we have color. Now we have FinOps. What's the best place for any given workload. The answer isn't everything in the public cloud. So, customers have sort of figured that out. So, they are more mature buyers, and they're going to put the AI where the data is. 83% of their most critical data is still on-prem and color. And so, the AI is going to follow the data. And there definitely have been some more rationalization of where these workloads belong. I think that helps explain the growth in our traditional server workloads, and you see more and more customers sort of figuring out that everybody loves a public cloud until they get the bill. Asiya Merchant All right. Thinking about VMware spin that has now in the past, how do you think about Dell's ISG offerings now that the spin is behind you? Michael Dell Well, 38% revenue growth in ISG, we feel pretty good about the trajectory for ISG, the organic innovation engine in AI, servers and storage and networking and complete rack scale solutions and data management and all the thesis around that. We certainly created a lot of value with our organic business and the VMware spin for those who didn't sell their shares when they were distributed to them as a dividend. That worked out very well and continues to -- and since the inception of our capital return program, now our coverage ratio is 1.4 times, we returned $9 billion to shareholders, we've reduced the share count by 62 million shares, and we've committed to continuing to deliver 80% plus of free cash flow to shareholders in the form of share repurchase and dividends. I don't really see a lot of reason to change that at the moment. And again, I think the organic innovation engine, along with alliances and partnerships, we can continue to grow ISG at a healthy rate. Asiya Merchant Yes. Anything that investors should look out for? I think I do get some pushback on storage offerings; hyper-converged offerings post the VMware spin and any other partnerships that maybe we should kind of think about what those are doing? Michael Dell There's a headwind with VxRail, and that comes from Broadcom sort of changing their approach on licensing and you've got to bring your own license and admitted more challenging, let's say. And so, we've been creating our own IP with PowerFlex, which is doing very well. There will be customers who continue to want VxRail and we'll provide that. We also have partnerships with Nutanix and with Red Hat and with Azure on-prem for customers who want those solutions. But mostly, we're emphasizing our own IP with our 3-tier storage platform with PowerStore, with PowerScale, with PowerFlex and continuing to emphasize our own leadership there. We're number 1 in storage, largely the number 2, number 3, number 4, all combined together. Again, double-digit order growth in the core, we feel very good about. But there is this sort of run-off of the pass-through revenue that you see, but we're becoming more profitable. Asiya Merchant Okay. Fair enough. Maybe just talk a little bit about PC, right? Investors are generally kind of skeptical if AI is a demand driver for the PC TAM, maybe on the units, maybe on the revenue side, how do you think about the PC market with respect to AI? Michael Dell It's -- the refresh has been delayed for sure, but it's coming, and it's going to be even bigger because it was delayed, right? So first of all, we have a date certain with Windows 10 end of life and we're almost within a 1-year window of that. And as you get in that 1-year window, the enterprise IT people start screwing around and saying, "Oh, we better do something about this." So, we've sold 200 million systems in the last 4 years. And there's going to be a big refresh. When you get your new PC inside your company, if it doesn't have AI-enabled, you're going to really wonder what happened, right? Everybody's going to want that. Every piece of software that you're going to use is going to have an AI assistant. You're already starting to see this. And most of those AI cycles are going to run locally on the PC. And this is just another piece of a long cycle has been going on for a long time where you want your PC to do more for you than it did before. That's why you replace it. And -- so I think this is going to definitely play to our strength in commercial and enterprise, where we're #1 in revenue, number 1 in profit with our services attached and often direct engagement with the customer. And so, we're definitely confident that the refresh is coming and PC business has been a great business for us, generated a ton of cash flow over time, and we'll continue to do so. Asiya Merchant The same thing demanding or AI infrastructure. Are you seeing them also come and say, Michael, we need this on the PC side as well? Are we at that point where enterprises realize that, okay, the next refresh of PCs should be an AI PC? Michael Dell I have not met any customers who have said, we're planning a refresh, but we don't want an AI-enabled PC. It's sort of a question of what is it cost? What does it come? Where is the software, but the hardware always comes before the software? And so, you see the whole industry gearing up, right? The new Qualcomm Snapdragon lead processors, we introduced the largest line of Snapdragon lead systems, 5 of them. AMD's got some great new processors. Intel has -- just yesterday showed the new core Ultra 2 with our Dell XPS 13 preorders, I think, started yesterday. So, you get your order. And all these systems have not just the CPU to GPU, but now they have the NPUs that are capable of running Microsoft CoPilot Plus and all innovations from ServiceNow at Salesforce and Adobe and anybody else who's writing software that this is going to [indiscernible]. Asiya Merchant Talking a little bit about capital allocation, maybe acquisitions. One of your large competitors is doubling down on the networking opportunity with a pretty sizable acquisition. Maybe you can just talk about how do you see Dell's position evolve and more and more of the TAM perhaps that you guys can serve? Michael Dell I continue to believe that we can grow organically. It's not that we're opposed to acquisitions, but we just don't see a lot of great opportunities. There may be some actual hires. We've done a couple of those on occasion. But we've been very disciplined in our capital allocation strategy, and it's been working well. Just don't see the need or the environment in terms of valuations and regulation, et cetera. So, we're very happy to deliver the vast majority of our free cash flow back to shareholders in the form of dividends and share repurchase. Asiya Merchant Anything on the landscape that you think could result in more consolidation in certain end markets that you guys participate in? Just given how AI is shifting the landscape. Michael Dell Well, the sort of long-term trajectory over the last 5 years to 10 years, which has been very favorable for Dell Technologies is enterprise and commercial customers, which are the vast majority of our business, they don't want to have more providers. They want to have fewer. And so, they want to do more with fewer providers. And so, as we are positioned to provide everything from the edge to the AI systems to their traditional infrastructure, servers and storage to data management and data protection platforms to the PC and as-a-service capabilities around all of that, that's the consolidation play that we're continuing to be on. Asiya Merchant Okay. Last few minutes here, Michael, maybe you can talk to investors about why they should be doubling up on Dell shares? Michael Dell Well, look, I've leading the company for 40 years. We've had a very consistent and reliable strategy of delivering free cash flow and evolving the company and I think the company is incredibly well positioned for this next stage to grow organically and to continue to deliver great returns back to our shareholders. And we're unique. We have a leading position in almost all the businesses that we're in, and there are great tailwinds against those businesses, both in ISG and in CSG. Asiya Merchant Great. I would like to take this time to thank Michael Dell again. Thank you very much.
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Seagate Technology and Dell Technologies executives share insights on AI, data storage, and market dynamics at Citi's 2024 Global TMT Conference. Both companies highlight the impact of AI on their businesses and future strategies.
At Citi's 2024 Global TMT Conference, Seagate Technology Holdings plc (NASDAQ:STX) executives provided insights into the company's position in the evolving data storage landscape. Gianluca Romano, CFO, and Shanye Hudson, SVP of Investor Relations and Treasury, represented Seagate at the event 1.
Romano highlighted the significant impact of AI on the storage industry, noting that AI applications are driving demand for high-capacity drives. He stated, "AI is requiring a lot of data, a lot of storage capacity," emphasizing the growing need for mass capacity storage solutions [1].
Seagate's executives discussed the company's focus on mass capacity drives, particularly those 16 terabytes and above. They reported seeing improvements in the nearline market, with expectations of further growth in the coming quarters. Romano mentioned, "We see the market improving. We see our customers more optimistic," indicating a positive outlook for the storage industry [1].
The company also addressed its cost reduction efforts and improving gross margins, with expectations to reach their long-term financial model targets in the near future.
In a separate session at the same conference, Dell Technologies Inc (NYSE:DELL) was represented by Yvonne McGill, Co-Chief Financial Officer and Senior Vice President 2.
McGill emphasized Dell's strategic positioning in the AI market, stating, "We're really well positioned to capitalize on the AI opportunity." She highlighted Dell's comprehensive portfolio of AI-optimized servers, storage, and data management solutions [2].
Dell reported strong demand for its AI-optimized infrastructure, including PowerEdge servers with NVIDIA GPUs. McGill noted, "We've seen a 3x quarter-over-quarter growth in our AI-optimized servers," underscoring the rapid adoption of AI technologies across various industries [2].
The company also discussed its focus on edge computing and the potential for AI applications at the edge, presenting additional growth opportunities for Dell's technology solutions.
Both Seagate and Dell emphasized the transformative impact of AI on their respective businesses and the broader technology sector. The increasing demand for data storage and processing power driven by AI applications is creating new opportunities and challenges for hardware manufacturers.
Seagate's Romano commented on the data-intensive nature of AI, stating, "The amount of data that is needed to train these large language models is enormous," highlighting the critical role of storage solutions in supporting AI advancements [1].
Similarly, Dell's McGill emphasized the company's readiness to meet the growing demand for AI infrastructure, noting, "We're engaging with customers across all industries on their AI journey" [2].
As the AI revolution continues to unfold, both Seagate and Dell are positioning themselves as key players in providing the necessary hardware and infrastructure to support the next generation of AI-driven technologies and applications.
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