Tech Giants Report Strong Q3 Results, Highlight AI and Cloud Growth

Earnings call: Fiverr reports steady growth amid macroeconomic challenges By Investing.com

Fiverr International Ltd . (NYSE: NYSE:FVRR) has reported an 8% year-over-year increase in revenue for the third quarter of 2024, with revenue reaching $99.6 million and adjusted EBITDA of $19.7 million, reflecting a 19.7% margin. In the earnings call on October 30, 2024, CEO Micha Kaufman emphasized the company's shift towards targeting higher-quality buyers and expanding value-added services. Despite a challenging macroeconomic environment, Fiverr is evolving into a comprehensive work platform, with new AI tools like Dynamic Matching and Neo to improve user experience and attract larger projects. CFO Ofer Katz announced an increase in full-year guidance, with projected 2024 revenue between $388 million and $390 million and adjusted EBITDA of $73 million to $75 million. Fiverr's management remains optimistic about the company's future growth, citing stable top-of-funnel performance and a strong pipeline for value-added services. They also emphasized the strategic shift towards offering more comprehensive tools and services beyond the traditional talent marketplace. The company executed share buybacks to enhance shareholder value and maintains sufficient cash reserves to address future obligations. Fiverr International Ltd. is committed to innovating for freelancers and users while focusing on delivering shareholder value in the long term. Fiverr International Ltd. (NYSE: FVRR) continues to show resilience in a challenging market, as evidenced by its recent financial performance and strategic initiatives. InvestingPro data reveals that Fiverr's revenue for the last twelve months as of Q2 2024 reached $372.22 million, with a growth rate of 8.52%. This aligns with the company's reported Q3 revenue increase and supports the management's optimistic outlook for full-year 2024 revenue. The company's gross profit margin stands at an impressive 83.34%, reflecting Fiverr's ability to maintain high profitability on its services. This robust margin supports the company's ability to invest in new AI tools and expand its service offerings, as mentioned in the earnings call. InvestingPro Tips highlight that Fiverr holds more cash than debt on its balance sheet, which is crucial for the company's ability to navigate economic uncertainties and invest in growth initiatives. This strong financial position aligns with management's comments on having sufficient cash reserves to address future obligations. Another relevant InvestingPro Tip indicates that management has been aggressively buying back shares, which corroborates the information in the article about Fiverr executing share buybacks to enhance shareholder value. It's worth noting that Fiverr's stock has shown a significant return over the last week, with InvestingPro data showing a 1-week price total return of 11.77%. This recent performance may reflect positive market reception to the company's Q3 results and raised guidance. For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Fiverr, providing a deeper understanding of the company's financial health and market position. Operator: Good day, and thank you for standing by. Welcome to Fiverr Third Quarter 2024 Earnings Conference Call. All this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Jinjin Qian, EVP, Strategic Finance. Please go ahead. Jinjin Qian: Thank you, operator, and good morning everyone. Thank you for joining us on Fiverr's earnings conference call for the third quarter that ended September 30, 2024. Joining me on the call today are Micha Kaufman, Founder and CEO; and Ofer Katz, President and CFO. Before we start, I would like to remind you that during this call we may make forward-looking statements and that these statements are based on our current expectations and assumptions as of today and Fiverr assumes no obligation to update or revise them. A discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statements can be found under the Risk Factors section in Fiverr's most recent Form 20-F and other filings with the SEC. During this call, we'll be referring to some key performance metrics and non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. Further explanation and a reconciliation of each of the non-GAAP financial measures to the most directly comparable GAAP measures is provided in the earnings release, we issued today and our shareholder letter, each of which is available on our website at investors.fiverr.com. And now, I will turn the call over to Micha. Micha Kaufman: Thank you, Jinjin. Good morning everyone, and thank you for joining us. We delivered a tremendous third quarter with both revenue and adjusted EBITDA exceeding the high end of our guidance range. By successfully executing our strategy to go upmarket, expand value added services, and deliver innovative AI-powered experience, we are able to grow a higher quality buyer base, drive robust growth in spend per buyer, and strong expansion in take rate. All of these efforts are clearly paying-off, allowing us to accelerate our revenue growth this quarter. This is not an easy task, considering that the entire professional staffing industry is down double-digit year-over-year, and overall SMB sentiment still lingers around historically low levels. The fact that we are able to accelerate our growth under such macro conditions underscores the strength of our vision and strategy, and our impeccable ability to execute them. We also continued to deliver steady improvement in adjusted EBITDA and strong cash flow generation. Last quarter, we laid out a three-year target plan for adjusted EBITDA and free cash flow. With strong execution in Q3, I'm confident that we are well on track to deliver these targets. Our strong financial position allows us to aggressively invest in products and technology to drive growth while at the same time returning capital to shareholders and driving shareholder value. Fiverr's strategy has always been to relentlessly focus on creating customer value and building the most beautiful, innovative, and simple-to-use products to transform the way people work. One thing that became clearer to me in the last year is that with the emergence of GenAI and the promise of AGI, the next generation of products we build must empower our community to fully leverage artificial intelligence. It also became clear to me that in the future, the best work will be done by humans and AI technology together, not humans alone or AI alone. With that in mind, the role of Fiverr must broaden from a talent marketplace to a comprehensive work platform, where incredible work happens. This means that every business that comes to Fiverr will have a world-class AI assistant to help them get things done, from ideation, scoping and briefing to project management and workflow automation. It means that they can seamlessly leverage both human talent and machine intelligence to create the most beautiful results. Fiverr has a long history of pioneering the industry with innovative products, and this is what we will do with AI as well. We are already starting to put a few pieces together to build towards this long-term vision. On the buyer side, we are building a new search experience that not only includes more dynamic catalogs but also incorporates Neo, an AI-powered smart matching tool, to help customers match with more contextual information. We launched Dynamic Matching to allow buyers to put together comprehensive briefs with a powerful AI assistant and then get matched with the most relevant freelancer with a tailored proposal. These products allow businesses to fulfill much more complex projects on Fiverr without losing the speed, simplicity and convenience that they love Fiverr for. Even in the few weeks since we launched these products, we have already seen an enthusiastic reception from our community and promising performance. The projects that come through these products are several times larger than a typical project on Fiverr, and we believe it has a lot more potential down the road, as the awareness and trust of these products grow on the platform. On the talent side, we are building the infrastructure to allow us to more efficiently distribute software tools that integrate with the work that's done on the platform. Some of the tools are built in-house, such as Promoted Gigs and Seller Plus. Some of these tools are through acquisition such as AutoDS, and we believe there will be a lot of opportunities down the road to expand these value-added services through partnerships as well. Lastly, I want to say a few words about Fiverr Pro. As you know, Fiverr Pro is a premium offering we launched to grow our penetration into larger businesses with larger freelancing budgets. We started by providing businesses with collaboration tools, white-glove services and a fully vetted catalog in order to drive better conversion, engagement and retention among buyers with the highest lifetime value. Now, with our product expansion into Professions, Dynamic Matching, and Hourly Contracts and services such as project management, we are further leaning into these buyers to capture their budgets on long-term freelancer engagement. Many of you have asked us what our right to win is in this segment of the addressable market. I want to point you to two things. First, we have a very large top-of-the-funnel, which allows us to acquire enterprise customers in a super-efficient manner. Most Fortune 500 companies already have employees who are on Fiverr and using our services. This bottom-up approach allows us to scale with very light sales and accounts teams. Second is our technology stack. The speed, simplicity and convenience of Fiverr is fundamentally different from a typical staffing solution. From onboarding to compliance to payments and reporting, Fiverr is so much easier compared to a self-serve solution, and so much more cost-effective compared to a managed solution. And as I mentioned before, it is going to get even better as we implement AI capabilities further into our platform. To close, I'm super excited about the many opportunities that are ahead of us. With the strong results in Q3, we are looking forward to wrapping up 2024 on a high note and can't wait to kick-off another year of growth and innovation. With that, I'll turn the call over to Ofer, who will share some financial highlights. Ofer Katz: Thank you, Micha, and good morning everyone. I'm pleased to report an exceptional quarter with both top and bottom-lines exceeding expectations. Revenue for the third quarter was $99.6 million, up 8% year-over-year, representing an acceleration from 6% year-over-year growth in Q2. Adjusted EBITDA for Q3 was $19.7 million, representing an adjusted EBITDA margin of 19.7%, an improvement of 180 basis points from a year earlier. We continue to demonstrate our ability to deliver both growth and profitability improvement despite the macro uncertainty and our commitment to execute with the highest level of consistency, efficiency and focus. Unpacking the strong results for Q3, we continue to see our efforts of going upmarket and expanding value-added products work well. Spend per buyer was $296 in Q3, representing year-over-year growth of 9%. More buyers are coming to Fiverr for larger and more complex projects. While the active buyer growth was muted, we see continued growth in buyers who spend over $10,000 annually. On the macro level, we have seen some level of stabilization in trends since the volatility we experienced in June and July, however, the overall SMB sentiment remains weak, and the overall hiring environment continues to be challenging. We expect GMV will still take some time to recover, in the meantime, we believe our strategy to lean into products to drive wallet expansion, and our work to unlock new addressable markets continues to be the right strategy to generate growth catalysts. Take rate for Q3 was 33.9%, representing a year-over-year improvement of 260 basis points. The continued strength of Promoted Gigs, the growth of Seller Plus programs with the newly launched Kickstart Program, as well as the strong growth momentum at AutoDS, all contributed to the take rate upside this quarter. As a reminder, Fiverr's take rate consists of two distinctive components: first, is marketplace commission of approximately 26% and second is value-added services of an additional approximate 8% take rate. The marketplace commission is directly tied with GMV on the marketplace and has been relatively stable over the years. The expansion of value-added products has driven the vast majority of our take rate expansion. As Micha mentioned, Fiverr is increasingly building towards a comprehensive work platform that provides not only access to talent but also a suite of software and AI tools. Take rate expansion continues to be an important growth catalyst for us as we further expand our value-added product portfolio. The strong Q3 results also translated into strong cash flow generation. Free cash flow was $10.6 million. Free cash flow excluding one-time escrow payment for contingent consideration was $22.7 million, representing 22.8% of revenue. Together with a balance sheet of over $650 million, we have ample cash to continue investing in product and growth, while supporting other capital allocation priorities including optimizing capital structure, buyback and M&A. With regard to the outstanding $460 million convertible note, our objective is to preserve maximum flexibility in this dynamic economic environment. We are confident in managing that [liability] (ph) through our strong balance sheet, but we will make that decision as we get closer to maturity. Given the strong execution of Q3, we are raising our full-year guidance for both revenue and adjusted EBITDA. For the full year 2024, we now expect revenue to be in the range of $388 million to $390 million, representing year-over-year growth of 7% to 8%. In terms of underlying drivers, we expect spend per buyer to continue growing at a robust pace, offset by the decline in active buyers. We now expect the take rate to increase by approximately 330 basis points year-over-year, higher than we had previously anticipated. For adjusted EBITDA, we expect full year 2024 to be in the range of $73 million to 75 million, representing an adjusted EBITDA margin of 19% at the midpoint. The updated full-year guidance implies Q4 revenue guidance to be in the range of $100.2 million to $102.2 million, representing year-over-year growth of 9% to 12%. Adjusted EBITDA for Q4 is expected to be $19.5 million to 21.5 million, representing adjusted EBITDA margin of 20.2% at the midpoint. I'm very proud of the exceptional results we delivered in Q3, and believe the strong momentum in Q3 will largely carry forward into Q4. I'm even more excited about what's yet to come in 2025, including an action-packed Winter Release that's coming up shortly, as well as many pipeline projects that Micha has alluded to in his remarks. With that, we'll now turn the call over to the operator for questions. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We'll take our first question from the line of Ron Josey from Citi. Please ask your question, Ron. Ronald Josey: Great. Thanks for taking the question. Hi, Micha. Hi, Ofer. I wanted to follow-up on two things. First is, in the letter you talked about demand trends stabilizing here, but then obviously the broader macro continues to have some challenges. And I think you highlighted hiring and SMB sort of challenges. So just talk to us a little bit more about what you meant by stabilization, Micha. I was wondering if maybe that's a newer thing post rates coming down or just any insights on stabilization. And then maybe a bigger question on the buyer base. I was wondering with all these new products like new professions catalog, dynamic matching that just launched hourly contracts that as we attract these newer buyers, wanted to hear more about the product strategy to keep those buyers, call it on the platform and how you think about your product catalog to continue driving greater overall higher quality buyers in the platform? Thank you, guys. Micha Kaufman: Thank you, Ron. Good morning. Thanks for the question. As to the first question, if you recall, in previous earnings, we've mentioned that we've seen some specific volatility around June, July, August. And I think what we're calling right now is that we've seen September and the beginning of October to be slightly more stable. So, there has been some improvement at the top of funnel, but nothing we can call a trend at this point. And just a reminder, we're just a few days away from election. There's a lot of seasonality coming in, things that might create fluctuations in trends. So I wouldn't say that this we're not calling a new trend. We just called out the fact that after June, July and August, we've seen some more stabilization and slightly better top of funnel or not? Second question was about the buyer base and the products that we're building. Look, I think -- when we think about the types of things that we want to address as we're moving up market and we're entertaining larger customers with higher budgets for freelancing, we know that the things that they usually enjoy is mostly working with agencies offline. And we know that there is even though the fact that there is people are accustomed to doing it, they're used to working offline, there are a lot of weak points in doing so. Speed is one, convenience is another, clarity of pricing, of delivery, of the project itself. So everything that we're building right now are really tools that are eliminating all the things that customers dislike about working with freelancers or agencies offline and simplifying them and building beautifully simple products for our customers. And if you look at that strategy and how this has been working out for us in the past year or two, you see that those customers are growing. They are growing faster than the overall customer. They're spending more with us. They're sticking for a longer period of time. Their retention is better. Their spend is better. Their frequency is better. And that is why we're investing in these products. And don't forget, I mean, we are one of the -- if not the first company that has done a very aggressive move into AI, not just on the catalog side of opening tens of different categories, but how we integrated AI in making our products much more or much easier to use and much more robust to do a lot of the work that was previously had to do manually. So I think that with the removal of all of these frictions, our anticipation is that part -- that portion of the business will continue to grow very nicely as it has been growing in recent quarters. Operator: Thank you. Our next question comes from the line of Bernie MacTiernan from Needham and Company. Please ask your question, Bernie. Bernie McTernan: Great. Good morning. Thanks for taking the questions. Two for me. First is with the guidance for revenue accelerate 4Q, how should -- the puts and takes between take rate and GMV both and is auto having an impact on the revenue acceleration? And then secondly just on dynamic matching, I know it's only been launched for a few weeks, but can you talk about the metrics that you're using to gauge success of the product? And does it have any impact on [advertising or platform] (ph)? Micha Kaufman: Good morning, Bernie. You were cutting off a little bit, but I think I got most of the questions. So in terms of guidance acceleration, look, macro hasn't changed, which means that we're working against a very negative market. If you look at the measures of or the trends of SMB sentiment or you look at professional staffing market, they're down double digit percentage. So, we're already offsetting in our profile, we are offsetting pretty massively on the macro conditions. Our view on GMV, we've reiterated it, we've talked about this. I think that within this market, other than just offsetting on these negative trends, we're improving our product and building new products that are creating value for our customers and those products are working extremely well. Customers are retained and happy to pay for these products because they're adding value for them. And so, when you look at the makeup of what allowed us to grow, it's a combination of somewhat better top of funnel. It's the tools that we either introduced in the past like promoted gigs and seller tools, it's new tools like the addition of AutoDS and it is higher spend per buyer because of all of our going up market products. So we feel that as long as the macro would not significantly change, what we're doing now with the offset, is the right thing. Obviously, we're pushing ourselves to even perform better and I think we are and I think the numbers show it. But the strategy remains very stable, very consistent, we're not zigzagging, we're delivering on the same things that we said we're going to do and I'm happy to see that those developments are actually paying off for us. Bernie McTernan: On dynamic matching, I know it's only been a few weeks, but can you just talk about some of the metrics you're using to gauge [success product] (ph)? And then does it have any impact on advertising or take rate? Just really want to know if it could be take rate dilutive if there's less of a need to advertise if all the sellers are fully matched? Micha Kaufman: Right. It's a good question. So first as you said, it's very early. What we're seeing from early signs are extremely positive signs. I think that the beauty about this product is it allows customers to be more nuanced, specific and detailed about the types of projects that they need. And it allows them to actually come up and voice much more complex projects within this product. And we're using AI technology to help them create more extensive briefs and then get matched with very, very specific type of talent, which saves them the trouble of actually going through and filtering talent and get tailored proposals. Now, I don't think that because of the nature of these products, I don't foresee definitely not an immediate impact on advertising. And the reality is we haven't seen that. I think that this product by itself is a little bit more relevant for very, very customized types of projects whereas our catalog allows our customers to have a ready-made offering that they can just click and buy. So, I don't see this influencing and the reality is that the promoted gigs continues to grow and we're very happy with it. Bernie McTernan: That's great. Thank you. Operator: Thank you. Our next question comes from the line of Doug Anmuth from JPMorgan (NYSE:JPM). Please go ahead, Doug. Douglas Anmuth: Great. Thanks for taking the questions. Could you guys talk about what you're seeing early on with AutoDS and just how we should think about contribution there? And then also if you could talk a little bit more on the business rewards program, how that's increasing spending among some of your larger buyers and then any impact that you're seeing thus far on loyalty as well? Thanks. Micha Kaufman: So on AutoDS, I mean, we're very happy with the acquisition. I think as I mentioned, it is contributing to the take rate component. And actually they had a better quarter than anticipated. Look, it's still a small business. So in contribution to the larger picture of Fiverr, it's still small which is why we're not reporting it separately. But we're happy with the performance and it's a great addition to the already in-house tools that we build. I've mentioned them. I mentioned Promoted Listings. I've mentioned Seller Plus. Our loyalty programs are really tied in from both sides, from sellers and buyers into a place where we're enabling more engagement both for our sellers and our buyers in a way that pays off. And we know that the repeat and sometimes working with same seller, same buyer, is a very is a highly common thing on Fiverr. And these are the types of things that we want to encourage. So we're very happy to see how these programs are shaping up because it's actually rewarding those who are doing it and mostly influencing engagement, which is really important. So retention and engagement are the two metrics of how we measure the success of these programs. Douglas Anmuth: Okay, thanks Micha. Operator: Thanks. Our next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead Jason. Jason Helfstein: Thanks. Good afternoon, everybody. I guess good morning, depending on where you are. Can you talk about where you see take rates going long-term? Obviously, it's quite strong. The main driver really is, I guess mix shift. It's not like this is all headline increases. But just I guess, where do you see long-term take rates playing out based on where you kind of see the mix of the business over time? Thank you. Ofer Katz: Hey, Jason. So this is Ofer. I think that I'm kind of thinking how to address this question because on one hand, we are very satisfied with the growth, the pattern of take rate over the last few years, starting with the basic 26% on the transaction, growing all the way up to 30-plus percent with value added services. But in reality, we do see more room to expand, both on existing product. We just launched the Kickstart subscription program for new seller, which is going really well. But there is more in the pipe. So I think that during this period of the volatility and macro headwind, take rate expansion is a key driver for growth. I think that in the future, as we believe, where the market is open and macro turnaround is starting to expand, I think that the contribution of take rate is still going to be massive, but percentagewise, it's going to be slower. But for the time being, again with the existing program expansion, but also new program in the pipe, I think there is a good reason to believe that take rate is going to go higher and modestly over the next few quarters. Jason Helfstein: Thank you. Operator: Thank you. Our next question comes from the line of Brad Erickson from RBC Capital Markets. Please go ahead, Brad. Brad Erickson: Hi. Thanks, guys. Good to chat. First question is, you mentioned the stabilization at the top of the funnel, but clearly some crosscurrents going on with SMBs and hiring trends and everything. What do you guys need to sort of see to put marketing dollars back to work in the model? Like do you need to see kind of overt improvement in the macro? Or is there anything that's maybe a bit more like in your control that might cause you to lean in on the marketing spend? And then I have a follow-up. Micha Kaufman: Good morning, Brad. Thanks for the question. So essentially the macro is putting more pressure on SMBs than it is on [larger] (ph) businesses. And therefore acquiring SMBs is mostly a function of macro. Because right now with the current situation from LTV to CAC, it doesn't make much more sense to continue investing more than we are. At the same time, when you look at larger businesses, midsize businesses to enterprise businesses and you see the improvement that we've done both on the going up market, but also on their spend on the platform, it does make sense to invest more and we are. And we are -- and we focused our efforts there on high value buyers. And so I think the good news on our end is -- and I think I've said that before and it continues to be the case. The top of our funnel contains every type of customer that we need. Yes, there is a little bit of a lesser demand or traffic coming from very small businesses because they're not having the best time of their lives right now as a business. But we contain everything from small businesses all the way to enterprise businesses, which is good news because it means we don't need to massively invest in having a sales force or having account management to entertain those customers. I think that when that sentiment is going to change, I've called out two sentiments. One is the SMB sentiment which is not looking well and the other is professional staffing. And both of these indexes are going down. Offsetting these indexes by just pouring money into the market from our experience is not the most effective, which is why we're not doing it. I think that if we have signs, even the smallest signs that this is changing the way we do marketing, the marketing automation, the sophistication of our marketing would allow us to respond to it extremely fast. But I think that I've outlined those, these are the main components for when we can spend more. Brad Erickson: Yes, that's great. That makes sense. And then just a housekeeping question, but one that we are getting from investors. Just curious if you can quantify how much you paid for AutoDS? I look at the balance sheet, see goodwill and intangibles ticked up pretty a bit. I guess, I wonder if that's maybe a good way to think about it or any other color you can give there? Thanks. Ofer Katz: I think that we're not disclosing this deal. We've probably seen, but there are some items on the financial statement that indicates, so that there is some cash flow component. Bear in mind that we did purchase some -- we did some [acqui-hire] (ph) earlier this year, so the amount is kind of compounded of those two deals. So, I think it's a few [thousands of millions] (ph) of dollars. So, you can see that in the financial statement. Operator: Thank you. Our next question comes from the line of Marvin Fong from BTIG. Please go ahead, Marvin. Marvin Fong: Hi, good morning. Thanks for taking my questions and congrats on the quarter. Two questions for me. So I would like to just drill down a little bit deeper on, the going up market. You mentioned in the shareholder letter things like dynamic matching professions and hourly contracts. Just wondering if you could give us some sense of which of those items you feel is having the most impact. I'm especially interested in hourly contracts, it seems like unlocking a major portion of the market. Could you provide any color on what you're seeing in terms of early start on how much of your mix is going to hourly contracts? And then I have a follow-up. Micha Kaufman: All right. Hey, Marvin. Thanks for the question. So essentially, I think you mentioned yourself, these are extremely new products. And as I've said, what we're seeing there gives us very high confidence that these are going to be very successful products. And the reason is they're dealing with very specific types of needs that Fiverr didn't deal with before. And it was important because as I've said, most customers work with agencies or freelancers offline and they are used to work in a certain way. And I think that some of these behaviors we didn't capture well. So as an example, if you think about the market based model where there is predefined, prepackaged, pre-priced services that are very easy to purchase, if you have a very long ongoing relationship with a freelancer where it's mostly open ended because there is it's not like a project that has an A to Z that is very clear, a start and an end, but it's mostly on an ongoing basis. This is where our remodels come in and this gives the additional flexibility. Again, these products are super new. What we're seeing there is -- they're really catering to the types of products and services that are selling for many thousands of dollars, okay. And are by definition longer in duration, so it's doing exactly what they were designed to do, while they're not competing with the other offerings that we have because we're tailoring each of our offering into a specific use case so that for the customers it's very easy to understand which of our solutions is the best one for them. Marvin Fong: Got you. And totally understand these are very new products. Appreciate that answer. My second question is just on the guidance and I think you mentioned earlier, this is a pretty seasonal quarter. Correct me if I'm wrong, but typically a pretty seasonally strong quarter, the Q4. So as we stand here at the end of October, do you feel like you have that visibility into that seasonal ramp? Or is it still too early to say and still waiting on seeing that develop? And how that kind of plays into your guidance? Thanks a lot. Ofer Katz: I would make the question more interesting by adding the election at the US. That makes this quarter even more interesting. So that despite of or on top of the seasonality and the fear with the last two weeks, are -- kind of shy in terms of buyer attendance and priorities, I would say that we feel we have enough confidence to guide and beyond. We actually improved guidance for the quarter, and this is based on the exit point of last quarter together with stability of the top of funnel and the strong pipeline under value-added services. So to address it, the simple question is yes. We feel we have been not confident to guide against those trends. Marvin Fong: That's great to hear Ofer. Thank you so much guys. Operator: Thank you. Our next question comes from the line of Rohit Kulkarni from ROTH Capital Partners. Please go ahead, Rohit. Rohit Kulkarni: Hi. Thank you. Couple of questions. One is just on kind of the cost side of the equation. Can you talk about what your hiring plans look like? How have they trended over the last six months? And any color that you can provide in terms of what end-markets you're feeling about and how that translates into your hiring plans? And then second is just I know take rate is something that investors kind of want to get their arms around. But over the last six months, there seems to be like a nice step up in how take rate has expanded. Perhaps talk about there are some coincidental factors in terms of how you have expanded upmarket and that has been successful. To the extent you can provide any more color around what may have led to that kind of slight step up in the expansion and how sustainable that is? Perhaps it's about going upmarket, perhaps it's AI or anything else that would be helpful? Thanks. Micha Kaufman: Good morning, Rohit. Thanks for the question. On the cost side, what I would say is hiring as done in a very disciplined manner and we've been very disciplined on cost. But we are not shy from hiring where we have needs to further invest in product and in growth. I think we've done it in a very responsible manner. The other question about take rate, so I would say there aren't any surprises here. And again, I'm very proud of the fact that as management, this company has been very consistent in the way in which we build the business. And actually look -- if you look at 2024, it's a pretty impressive year. But despite the fact that we had very, very high pressure on the macro side, SMBs and professional hiring, we've been able to offset a lot of it and continue growing. We've been growing the bottom-line, our profitability profile even faster than we said we will because we had the opportunity. We've done buyback to increase and give more value to our shareholders. We built products that allowed us to go upmarket very efficiently, which we have, and they're driving the platform higher. We were very fast to respond to the opportunity of AI and made it a net positive for us, and a force of growth and ability to continue investing in great products. And we've offered great products and solutions to both our sellers and buyers and they love them and this is why they embrace them more, which allows us to increase the volume of people that are using these tools and also increase the exposure of these offerings across our products. There is no magic. It's just consistent, hard-work that pays off. So to your question, do we think that there is anything coincidental? Or if we think that there is any reason to think that this would not be the trend moving forward, the answer is no. Because as I've said, it's a result of very methodical hard and consistent work. Operator: Thank you. Do you have any follow-up questions, Rohit? Rohit Kulkarni: If I could squeak in a couple one more in terms of capital allocations and debt and buybacks, any latest excuse me, any updates on the convertible notes, as well as the status of any additional share buyback authorization? Ofer Katz: I will start by saying that we are lucky or smart to have sufficient cash to fulfill all obligation, including the convertible note, if time comes by the end of next year. We have the flexibility to decide throughout this period until we act to market condition and any opportunity. But again, we have sufficient cash to stand against those liability. I think in terms of [share-back authorization] (ph), we did some share-back this year. I think we are on top of this topic to make sure that we do our best and prioritize the shareholders' value on the long-term. So there's nothing to update as of now. But I recommend that you guys stay tuned to see how we react again against the shareholders' value. Rohit Kulkarni: Great. Thank you. Operator: Thank you. We'll take our last question today from Josh Chan of UBS. Please go ahead, Josh. Josh Chan: Hi, good afternoon. Thanks for taking my questions and congrats on a good quarter. I've got two questions. One is on the take rate guidance going up. I guess, could you talk about what factors drove you to be able to raise your take rate guidance and what kind of surprised you in that regard? And then secondly, just on AutoDS, does that business happen to have a very seasonal dynamic in Q4 with the holidays? I'm just wondering whether revenue contribution is stronger in Q4 than other quarters? Thank you. Micha Kaufman: Good morning, Josh. Thanks for the question. Take rate guidance again, not massive surprises. It's just working and it's maybe -- it's working a little bit better. I called out the fact that AutoDS had a better quarter than initially anticipated, which had some contribution. The same goes for our other take rate driving products. So that is why we have the confidence and that's why we guided the way we did. In terms of AutoDS, look every business including Fiverr has seasonality factor. And there is a seasonality factor in Q4 for Fiverr as well in Q1. And the same goes for any other of our businesses. We're not guiding specifically to any one of our businesses. Again, it's a small contributor at this point. We're happy with how it's growing and it gives us nice contribution, but it's still small. We're not guiding specifically. It's a SaaS business, right which is in many ways different than a lot of our businesses, which is one of the reasons why we like it and it allows us to extend and proliferate our different offerings. And as Ofer said, it's just we're guiding based on how we're seeing the previous quarter ending, this one starting and that's it. I don't have that much more color to add. Josh Chan: Okay, great. Thanks for the color and the time. Congrats on the good quarter. Micha Kaufman: Thank you. Operator: Thank you. We have another question from Andrew Boone from JMP Securities. Please ask your question, Andrew. Andrew Boone: Thanks so much and good morning. Micha, in the prepared remarks, you talked about the vision of expanding Fiverr beyond the marketplace and adding more tools for freelancers and I guess users of the platform overall. Can you just expound upon the vision of what you might be willing to offer? What does that start to look like? And then in the letter, new cohorts were called out as outperforming COVID cohorts. Can you guys just help us understand kind of COVID cohorts given their size and the importance of what that's been historically for the business, kind of how those are trending? Are you guys seeing stabilization there as we continue to move away from COVID or is macro kind of overwhelming that? Thanks so much. Micha Kaufman: Yes. I think Andrew, thanks for the question. There isn't that much more I can talk about the vision and this is because of competitive reasons and because of the fact that we do want to keep some nice surprises for our community and for the market. But I think I've alluded enough in where we make our investments and how we think about our product and how we think about this combined opportunity for intelligent machines to work with extremely talented people. In I think that around that space, there is a lot to do and we are and I'm super excited and I'm not going to jump the gun and talk about this more, but I will say that we'll be happy to share news as soon as we have some interesting things to demonstrate. In terms of COVID cohorts, yes, I mean yes, they're larger in size obviously and we know that. These cohorts are pretty stable at this point. There are a few years into maturity now. And I think it's worth calling out that the efforts that we're doing to focus on high value buyers. We do see that cohorts of the last two years are performing better than COVID cohorts. So it's not just the fact that there is a maturation phase into these COVID cohorts, it's the fact that newer cohorts are different in quality, because we focused more on high value, which also is something that you see on the spend per buyer that is growing very nicely. Andrew Boone: Thank you. Operator: Right. Thank you. We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to Micha for closing comments. Micha Kaufman: Thank you, Amber. You've been wonderful in running this call. I appreciate that. And I appreciate everyone for dialing in and giving us some great questions. Looking forward to talking to you very soon. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Earnings call: Criteo's strong Q3 results amid CEO's retirement announcement By Investing.com

Criteo (CRTO), the global technology company specializing in digital advertising, reported a solid performance in the third quarter of 2024, with CEO Megan Clarken announcing her upcoming retirement. The company showcased revenue of $459 million and a 9% year-over-year growth in Contribution ex-TAC at constant currency. Retail Media revenue increased by 23%, reaching $61 million, while Performance Media grew by 5%. Criteo doubled its brand count to 3,100 and activated media spend to $1.5 billion over the past two years. The company is confident in its growth strategy, focusing on AI-driven performance and expanding partnerships, including a strategic collaboration with Microsoft (NASDAQ:MSFT) Advertising. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Criteo's strong performance in Q3 2024, coupled with its strategic initiatives and partnerships, positions the company favorably in the digital advertising space. The upcoming Retail Media investor update on November 18, 2024, is set to provide further insights into the company's growth trajectory and strategy. With the CEO's retirement on the horizon, Criteo demonstrates confidence in its future and its ability to navigate the evolving market landscape. InvestingPro Insights Criteo's solid performance in Q3 2024 is further supported by key financial metrics and insights from InvestingPro. The company's market capitalization stands at $2.39 billion, reflecting its significant presence in the digital advertising space. InvestingPro Data reveals that Criteo's revenue for the last twelve months as of Q2 2024 was $1.96 billion, with a modest growth of 1.64%. This aligns with the company's reported Q3 2024 revenue of $459 million and underscores the consistent performance across segments, particularly the 23% growth in Retail Media revenue. An InvestingPro Tip highlights that Criteo's management has been aggressively buying back shares, which is consistent with the company's commitment to return capital to shareholders. This is evidenced by the $157 million in stock repurchased and the additional $180 million planned for 2024, as mentioned in the company outlook. Another valuable InvestingPro Tip indicates that Criteo holds more cash than debt on its balance sheet. This strong financial position supports the company's ability to invest in AI-driven innovations and strategic partnerships, such as the collaboration with Microsoft Advertising, which are crucial for its growth strategy. The company's profitability is underscored by an InvestingPro Tip stating that Criteo has been profitable over the last twelve months. This is reflected in the reported adjusted EBITDA margin projection of 32%-33% for 2024 and the expected free cash flow conversion rate of approximately 45% of adjusted EBITDA. For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 12 more InvestingPro Tips available for Criteo, providing a deeper understanding of the company's financial health and market position. Full transcript - Criteo Sa (CRTO) Q3 2024: Operator: Good morning, and welcome to Criteo's Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Dambre, Vice President of Investor Relations. Please go ahead. Melanie Dambre: Good morning, everyone, and welcome to Criteo's third quarter 2024 earnings call. Joining us on the call today is Chief Executive Officer, Megan Clarken; and Chief Financial Officer, Sarah Glickman, are going to share some prepared remarks. Todd Parsons (NYSE:PSN), our Chief Product Officer, will join us for the Q&A session. As usual, you will find our investor presentation on our IR website now as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements which reflect critical judgments, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to the Risk Factors discussed in our earnings release as well as our most recent forms 10-K and 10-Q filed with the SEC. We will also discuss non-GAAP measures of our performance. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. With that, let me now hand it over to Megan. Megan Clarken: Thanks, Melanie, and good morning, everyone. Thank you all for joining us today. Two months ago, I announced my plan to retire from my role as CEO of Criteo. This was a tough decision for me, especially given the positive momentum of our journey and the enjoyment that I find in being part of this winning Criteo team serving our clients, shareholders and the industry. The new CEO will inherit a transformed, strong and vibrant company with the biggest and brightest future ahead. The board is conducting a thorough search which is progressing well and meanwhile I'm fired up and ready to bring you this quarter's update and results. Our ongoing momentum is a testament to our team's hard work, organizational alignment to the plan and the trust that our clients place in us. I couldn't be prouder of our senior leadership team who continues to be the driving force behind the successful execution of our strategy. Together, we've turned Criteo into a Commerce Media powerhouse with Retail Media at the core and cemented our position as a global leader in AdTech. Looking back on our company's transformation over the past five years, we've strategically repositioned ourselves for sustainable growth and margin expansion. We're set to achieve new heights as we're on track to deliver our third consecutive year of double-digit growth. Over the years and throughout our transformation, we've demonstrated strong resilience and maintained a high say/do ratio. We no longer plan our business around the demise of third-party cookies. We've brought our Commerce Media Platform vision to life and we're now positioned at the forefront of the changes in our industry capitalizing on the next wave of digital advertising. We are the leading independent AdTech company for Commerce Media and the platform of choice for the buying and selling of Commerce Media, the fastest growing sector of advertising. We came into this sector foreseeing the seismic shift in the digital landscape and the rise of Commerce Media overtaking Linear TV and now taking share from search and social media. The most recent quarterly Skai data showed growth surging to 28% in Retail Media in Q3 while paid search growth slowed to 3% and social growth slowed to 5%. The future of Commerce Media is incredibly exciting. It's fueled by several key trends, the global growth of e-commerce and consumers engaging with more content and devices than ever before as they shop from discovery through the purchase and beyond. Retailers are looking to capitalize on this by selling advertising on their digital stores while advertisers are focused on optimizing their spend to increase sales. Today, Criteo operates two growing global segments, Retail Media and Performance Media. Retail Media facilitates the targeting of high-intent shoppers by brands primarily on retailer sites and extending reach across the open web. Performance Media focuses on targeting high-intent shoppers for direct-to-consumer brands primarily on the open web and social platforms. In other words, our solutions have a hyper focus on addressing or advertising to consumers who are on their buyer journey. Our Commerce Media Platform represents the convergence of these opportunities that Criteo is uniquely positioned to address. With 19 years of commerce driven AI and rich data from our supply and demand side relationships, we predict outcomes and deliver targeted ads throughout the buyer journey, from discovery to purchase. Our vision and platform innovation center around a unified commerce experience. Our goal is to empower advertisers to build full-funnel strategies more efficiently, targeting commerce audiences with multi-channel reach, AI-driven optimization and seamless first-party data integration to enhance personalization and improve ad performance. As our platform matures, we introduce capabilities that enhance efficiency and create growth opportunities. One such example is our latest work in automation tools and streamlined workflows to make client setup easier, enhance performance, and improve efficiency. We refer to this as Commerce GO! Our next generation tool set allows advertisers to create and launch an optimally configured campaign in as few as five clicks. Clients have reported that setting up campaigns on other services can take ten times longer than using Criteo's Commerce GO! Our advanced AI streamlines campaign creation and management, and automates decisions around audiences, targeting and ad formats to maximize results. Our recently completed beta testing has shown lower cost to serve, lower client churn and, most importantly, an increase in activated media spend with stronger performance. For example, fashion brand Xirena achieved a 23% increase in ROAS at comparable spending while also benefiting from streamlined campaign setup and activation through Commerce GO! We're excited to keep moving on this path. Now, turning to our Q3 results. I'm pleased to report that we delivered a strong quarter with robust top line growth, despite tougher year-over-year comparisons showing our ability to achieve operating leverage as we grow. Starting with Retail Media, we delivered strong growth in the third quarter and continued to gain market share. We've successfully doubled both our brand count and activated media spend over the past two years. Our brands have increased to 3,100 and our activated media spend reached $1.5 billion on a trailing 12-month basis. We're seeing continued adoption of Commerce Max by our agencies. As a reminder, this is our Commerce Media Demand Side Platform. We achieved another record quarter with over $130 million in agency spend going through Commerce Max in the U.S. Holdco agency spend growth accelerated in Q3 compared to Q2, exceeding 60%, with three Holdcos experiencing triple-digit growth in the U.S. This continued increase in demand from brands and agencies remains a critical element of the Criteo flywheel, and we're confident in maintaining this growth momentum. We recently secured significant new retailer partnerships worldwide. In the U.S., we're thrilled to team up with large retailers like JCPenney expanding our footprint in fashion department stores. We're also thrilled to welcome Office Depot and ODP Business Solutions, broadening our presence in the office supply category. In Europe, we're proud to work with Metro AG, Flaschenpost and Rohlik, and we added two new retailers in the APAC region. These retailers chose Criteo for our global reach, rapid scalability, comprehensive offering, AI-powered performance, and unparalleled sales and product expertise. We're also expanding our lead in the Commerce Media more broadly. We're excited to partner with United Airlines who chose Criteo to help power and scale its offsite monetization. Our Commerce Grid SSP allows Kinective Media by United Airlines to curate its first-party audiences and make them available for broad access through any DSP. Costco (NASDAQ:COST) is another client partnering with Criteo for offsite monetization. Costco has recently deepened its partnership with us, enabling Criteo to leverage its data to reach existing and potential consumers across the open web. While this tactic has been slow in gaining traction in the U.S., it's still very early days and we do see more offsite interest ahead and in other markets. We almost doubled our Retail Media offsite campaigns in APAC where we're seeing top brand expansion and significant growth in retailers in India. More broadly, our existing retailers continue to trust Criteo with more ad formats and first-party data than ever before. Among others, we've more than doubled our number of retailers leveraging our onsite Display offering in North America compared to a year ago. Using Criteo's Display format, these retailers are attracting strong demand, as brands typically see a 30% average lift in share of sales within two weeks of starting onsite Display. Incrementality results show a revenue lift per user of 135% from our onsite Display campaigns. We're obsessively focused on performance, and we increasingly leverage in-store data to enrich our Retail Media strategies. We've seen a five-fold increase in retailers sharing their in-store sales data with us. We match offline customer conversion data with the customer behavior and ad exposure that we see online. This contributes to more relevant targeting, better campaign performance, and a seamless shopping experience. And we see this move as an important catalyst to the growth of Commerce Media, bringing alignment between online and in-store advertising performance with closed loop measurement. We also equip brands to fully leverage our measurement and insights to boost sales growth. For instance, in partnership with Flywheel, Danone (LON:0KFX)'s Oikos brand achieved a 21% increase in product page visits, an 18% boost in daily sales, and a 13% overall sales lift on Albertsons (NYSE:ACI). Turning to Microsoft. We continue to map out our exciting strategic collaboration with Microsoft Advertising, which we'll talk about during our Retail Media investor update on November 18th. We already expect to transition several retailers to our stack in 2025 across regions, and RFPs for other Microsoft Advertising Retail Media clients are well underway. The design of our demand integration and AI collaboration are all progressing and more to come. Lastly, we're proud of our work, and that our leadership in Retail Media continues to be recognized, including the most recently by market intelligence firm IDC which has named us as a Leader in worldwide Retail Media network service providers. Turning to Performance Media, our momentum remains driven by Commerce Audiences, up 30%, as we leverage our large-scale commerce data and AI-powered audience modelling technology to find in-market shoppers. Today, 80% of our media spend is from clients using both Commerce Audiences and Retargeting to reach consumers across the entire buyer journey. Our AI innovation is driving our growth and setting the stage for future success. We've unlocked additional budgets across our entire portfolio thanks to our continuous AI-driven performance enhancements. We're also leveraging GenAI creative technology to enhance product images with AI-generated backgrounds and tests are showing promising increases in click-through-rates. Our advertisers are also seeing benefits when they plan, buy, and optimize across multiple channels, including open web and social. For example, Electrolux achieved a close to three-fold increase in revenue when including Facebook (NASDAQ:META) and Instagram for their Retargeting campaigns. They saw a 100% plus increase in click-through-rates and were able to lower their cost of sales by 17% within only a month after the activation. For us, this is just the beginning and part of our strategy to bring commerce recommendations into any environment where consumers are. To that end, we plan to integrate with more social environments and to continuously make sure that our supply sources are providing access to relevant in-market consumers. This comes at a time when we continue to move full steam ahead to shape the future of digital advertising. We believe our AI optimizes across several addressability solutions and the many signals we have access to along the buyer journey. As part of our transformation, our focus has shifted from people-based signals to unlocking the full potential of commerce and product-related data. Commerce and shopping experiences are truly everywhere, across every environment and format, and we believe we're able to recognize shopping intent without relying on identity. Our deep learning models are taking advantage of product intent signals to recognize patterns across shopper types, shopping journeys, and touchpoints. This approach sets us apart and is more relevant than ever before to drive superior performance in any environment. To conclude, we are confident in continuing our positive momentum, and we remain laser focused on the execution of our strategy to create the world's leading Commerce Media Platform and drive shareholder value. With that, I'll hand the call over to Sarah, who will provide more details on our financial results and our outlook. Sarah Glickman: Thank you, Megan, and good morning, everyone. We delivered strong Q3 results with operating leverage enabled by top-line growth and disciplined cost management again this quarter. Revenue was $459 million, and Contribution ex-TAC increased to $266 million, including year-over-year headwinds from foreign currencies of $1 million. At constant currency, Q3 Contribution ex-TAC grew by 9%, on top of 8% organic growth in Q3 2023. This was driven by strong performance in Retail Media, up 23%, and continued growth in Performance Media, up 5%. During the back-to-school season, we observed a year-over-year increase in advertising spend across all categories. Notably, there was significant growth in an unconventional back-to-school category: animals and pet supplies increased by over 200% year-over-year, followed by strong gains in apparel, and health and beauty. Overall, we continue to shift and rebalance our top line mix with our new solutions representing 53% of our business in Q3. Starting with Retail Media, revenue was $61 million, and Contribution ex-TAC grew 23% at constant currency to $60 million, on top of 29% in Q3 last year. Our Q3 growth was primarily driven by our client base in the U.S., Germany and the UK. Growth from existing clients remains strong with same retailer Contribution ex-TAC retention at 120%, and we benefited from the ramp-up of newly signed retailers. As previously communicated, our Q3 results also include the expected transition of our largest retailer client to their direct sales model. On the supply side, we have global scale, strong client retention, and we continue to expand our footprint. We are on track to start transitioning some Microsoft Advertising onsite retailers to our monetization technology stack in early 2025. On the demand side, we now partner with 3,100 global brands after onboarding about 200 new brands this quarter. In the third quarter, our activated media spend grew 29% year-over-year worldwide, outpacing the market. We saw strong growth from our agency partners and robust brand bookings, mainly in CPG, as Retail Media continues to gain share from other channels. In Performance Media, revenue was $398 million, and Contribution ex-TAC was $207 million, up 5% at constant currency. We continue to see strong growth in Commerce Audiences targeting, up 30% year-on-year, on top of 31% growth in the same quarter last year. Retargeting grew for the third consecutive quarter, up 2%. We are pleased to see that the combination of multiple tactics typically drives better performance and larger budgets. Our latest AI-driven performance optimization also drove a Contribution ex-TAC uplift in the double-digit million range again this quarter. This is despite lapping the benefits of our initial AI-driven performance enhancements from the integration of our deep learning algorithms and advanced vector database technology into our recommendation engine a year ago. Strong growth in Commerce Audiences and increased demand for Retargeting were partially offset by lower AdTech services and supply, down 16%, primarily due to lower spend from one large AdTech client in our media trading marketplace. We exited the quarter with stabilized trends. Travel remains our fastest growing vertical, up 31%, followed by Classified and Retail. We saw lower spend in fashion and department stores in the U.S. late in the quarter, notably from two U.S. enterprise clients reframing their business strategies and reducing their marketing budgets. We have a broad and diversified client base, and client retention remains high at close to 90%. In recent months, we have intentionally expanded our roster of Performance Media reseller partners in select small regions to combine local market knowledge with operational efficiencies. This resulted in a lower client count. We delivered adjusted EBITDA of $82 million in Q3 2024, up 20% year-over-year, resulting in adjusted EBITDA margin of 31%, up 300 basis points year-over-year. Our top-line growth resulted in strong operating leverage. We also benefited from some hiring shifts from Q3 to Q4 and lower bad debt expense. Non-GAAP operating expenses increased 7% year-over-year, reflecting planned, targeted growth investments partially offset by continued rigor on resource allocation. As we have said before, we are driving our transformation by investing in growth areas and optimizing our operating model for scalability and efficiency. We are also enhancing our operational effectiveness with streamlined processes and the deployment of AI-powered productivity tools. Moving down to P&L, Depreciation and Amortization was $26 million in Q3 2024. Share-based compensation expense was $35 million, including $16 million related to shares granted to Iponweb's founder as part of the acquisition. Our income from operations was $10 million and our net income amounted to $6 million in Q3 2024. Our weighted average diluted share count was 58.4 million, which resulted in diluted earnings per share of $0.11 per share. Our adjusted diluted EPS was $0.96 in Q3 2024, up 35% year-over-year. We continue to benefit from a strong financial position and robust balance sheet with solid cash generation and no long-term debt. We had $711 million in total liquidity at the end of September, which gives us significant financial flexibility to execute our growth strategy and disciplined and balanced capital allocation. Operating cash flow was $58 million and free cash flow was $39 million in Q3, reflecting seasonality and planned CapEx investments. We are confident in our strategy and financial strength. Our key priority is to continue to invest in our Commerce Media Platform to enable sustainable organic growth alongside value-enhancing acquisitions, and to continue to return capital to shareholders via our share buy-back program. We have a longstanding record of returning significant capital to our shareholders, and we have already repurchased $157 million of stock in the first nine months of 2024, including $55 million deployed in Q3. We now intend to repurchase about $180 million in 2024, underscoring our conviction in the long-term of opportunities ahead, and our commitment to delivering shareholder value. At the end of September, we had $111 million remaining in our Board share buyback authorization. Turning to our financial outlook, which reflects our expectations as of today, October 30, 2024. Despite the macro-economic uncertainties, we enter the holiday season with confidence to deliver double-digit growth and margin expansion for this year. For 2024, we tightened our guidance range, and we now expect Contribution ex-TAC to grow 10% to 11% year-over-year at constant currency with growth in both segments. This is a meaningful acceleration compared to our organic growth of 4% in 2023. In Retail Media, given our year-to-date performance and ongoing strong momentum, we are now confident in our ability to grow Contribution ex-TAC towards the high-end of our 20% to 22% range at constant currency in 2024. And as a reminder, we have tough comparisons in Q4, which is our largest quarter. In Performance Media, we now expect to grow mid to high single digits in 2024. Our projected adjusted EBITDA margin for 2024 has been increased to a range of 32% to 33%. This reflects our confidence in operating leverage from top-line growth, strong expense discipline, and the transformation of our operating model as we continue to invest in areas of growth. For 2024, we expect a normalized tax rate of 25% to 30%. Our overall CapEx is now expected to be between $80 million and $100 million as we continue to invest and optimize our leading AI infrastructure. Lastly, we expect a free cash flow conversion rate of approximately 45% of adjusted EBITDA before any non-recurring items. For Q4 2024, our last and largest quarter of the year, we expect Contribution ex-TAC of $327 million to $333 million, growing by 3% to 5% at constant currency, as we continue to drive superior performance for advertisers across our product portfolio. As you know, we have tougher comparisons in Q4, and we have a shorter holiday season this year. It is also important to note that, Criteo, as a Commerce Media Platform, has no political advertising spend. Our team is ready for our clients to deliver during Cyber week and the holiday season. We estimate FOREX changes to have a minimal year-over-year impact on Contribution ex-TAC in Q4. We expect adjusted EBITDA between $114 million and $120 million. This includes planned investments and the timing shift of certain hires from the third quarter to the fourth quarter. In closing, we have strong conviction in our strategy and a resilient business model. We are well- positioned for continued success, and we are committed to maximizing shareholder value. We look forward to our Retail Media investor update on November 18th and meeting with many of you on the road and at conferences this quarter. And with that, I'll turn it over to the operator to begin the Q&A session. Operator: Thank you. [Operator Instructions] And your first question comes from the line of Mark Zgutowicz with Benchmark Company. Please go ahead. Mark Zgutowicz: Thanks much. I have questions just around Microsoft progression. I know you're going to talk about that a bit more on your Retail Media Update. But just curious if there's any incremental OpEx that you're incurring there as you sort of get yourself set up to address that demand. And then a separate question on Retail Media. Nice Retail Media take rate, certainly above our expectations in 3Q. Just curious if you could maybe talk about variables here next 12 months, particularly as you anniversary your largest clients transition to in-house demand. I believe you'll anniversary that in 1Q. So, sort of what we can expect for take rate following that transition? Thanks much. Megan Clarken: I'll take the Microsoft [indiscernible] Mark. Good to hear from you. We don't anticipate any significant operating expenses as we move clients across. I'm sure the team who are doing it would cringe if I say lift and shift, but really if you stand back and take a look at the fact that they are a client who's looking for or there are a set of clients who are looking for the types of services that we provide as a replacement to what they have been getting from Microsoft. It is about moving them onto the platform. And we have all of the platforms in place for the delivery or acceptance of the demand coming through from the Microsoft Advertising demand side of things as well. So, we have the platform built. We don't anticipate there being any kind of heavy operating expenses involved with this work. Sarah Glickman: Yes, I can take Retail Media. Yes, Retail Media is doing really well for us. So, 29% increase in the activated media spend and all clients contributing. So, we're seeing a lot of traction there. In terms of the - our largest client and we of course, continue to work very closely with them and they are having a good year and that will, as you say, transition more into Q1 2025. That was a slower transition at the beginning of the year, now starting to kind of move ahead at the pace we would expect coming into Q3 and Q4. In terms of take rates for 2025 we're not giving guidance for '25, but we have renegotiated most of our contracts and we have continued to retain and bring in new contracts as well. My anticipation is that as we continue to scale, we will continue to see some move down of the take rate with the scale and that would be expected and has always been expected. But we are expecting to continue to scale year on, year on, year in Retail Media and to have the take rate that reflects the performance that we're delivering. And we're very excited to talk more in the coming weeks. So, we look forward to chatting with you all on November 18th at our Retail Media Day. Operator: Your next question comes from the line of Mark Kelley with Stifel. Please go ahead. Mark Kelley: Great. Thank you very much. Good morning, everyone. Can you maybe expand on the AdTech services comments a bit? I think you said one client in particular drove that down 16%. I guess, can you maybe help us with the moving pieces there? And I think you said it started to stabilized, I guess, what does that look like from here? And then the second question is another quarter of growth and retargeting in your comp in Q3 was significantly tougher than the first half of the year, I guess. Is that something that we can maybe expect going forward? And I guess what are your conversations with clients just around retargeting as a strategy at this point? Thank you. Megan Clarken: Let me just start with the AdTech services question and then I will pass it across to Sarah. Within AdTech services, there is a couple of products and a couple of those products we brought across from Iponweb when we made that acquisition. And you will remember, or may remember, when we made that acquisition, we were primarily after two or three of their biggest capabilities. But of course, we brought on board all of Iponweb. So, it centers now around this one product which is in the Iponweb mix, which is not strategic to Criteo. And we have a plan in place to make sure that we can bring it in line, that we can normalize the or take away the issues that we're seeing with it. In particular, its susceptibility to one client. And so that's what we're doing and that's the explanation of the particular miss there in AdTech services. I'll pass across to Sarah for more details. Sarah Glickman: Yes, I mean, just a couple of specifics. So, we did talk about this, I think, in the Q2 call because we started to see lower spend from our largest AdTech partner and that has continued to impact us, as you can see, quite significantly in Q3. I would agree that's isolated to that last partner and we did exit coming out with a stronger trend. In addition to that, we did have one SSP partner. Also, I think we've discussed in prior calls that has an impact on AdTech services and supply in that we're not getting revenue related to that SSP anymore. In terms of retargeting, just a reminder that we were at 4% increase in Q2, so coming into Q3 at 2%. Feel very good about that. But I think Todd is probably the best person to talk about the retargeting as a strategy. Todd Parsons: Yes. Hi, Mark. The story here is a good one. Retargeting is resilient. Obviously, our addressability strategy enables our customers to continue to use it as part of their overall marketing mix. And you heard Megan talk about the initial success we've had with commerce go and our beta, which exposes customers to an easier way to get at that tactic. And more obviously commerce audiences being a headliner there. And we're seeing some really interesting early signs of success in the beta on organic growth, on not just the retargeting tactic, but also in audience acquisition, which is a part of customer acquisition, which is a really important sign for us as we progress the business. So, a mix of tactics with retargeting being resilient at the core. Mark Kelley: Great. Thank you very much. I appreciate it. Operator: Our next question comes from the line of Ygal Arounian with Citigroup. Please go ahead. Ygal Arounian: Hey, good morning everyone. Just first on the guidance. I think that's where a lot of the focus from investors is this morning. If you look at the guidance for 4Q, it does imply a little bit of a step down in the contribution ex-TAC. You did lower the high end of the full year guidance by a little bit. I know, Sarah, you called out certain things like shorter holiday season, no political spending, and I'm not sure exactly how much impact the Iponweb revenue has with that single customer. Can you unpack the guidance what you're seeing in the macro? What's driving that kind of sequentially lower growth rate 4Q? Sarah Glickman: Yes, absolutely. I mean, first of all, just a reminder that we have very tough comps in Q4 2023. So, last year we were up significantly on Retail Media and commerce audience comps in particular, plus we are lapping the AI enhancements from Q4 last year. But just to unpack, I would say the tightening of the range, it does come back to the isolated impact of ad tech and services. That's definitely the key reason. And we saw that experience in Q3 more significantly and Q4 is by far the largest quarter in that area. So, that's the key reason. I think the point on the political spend is an important one, because what we are seeing is, I would say, some crowding out on supply right now and we're seeing retailers waiting until the political cycle is over, which I think, is not surprising. But as we said, the team are ready to go for the holiday season. Macy's (NYSE:M) has their REITs out already, so we're really expecting to just do a terrific job during the holiday season. But those are the key reasons why we heightened the range. The other piece which we talked about was America has a couple of larger enterprise U.S. clients in the news that have gone through changes in their own structures, including CEO changes. And it's just we expect that to rebound, but there are some temporary, I would say, change in marketing strategies as they go through those transitions. So, all in, feel really good about the future, feel really good about Q4 and very excited also for the uplift not only in the Retail Media to the top end of the range, but also in the adjusted EBITDA range as well. So, we're exciting to continue to close this year out strong. Ygal Arounian: Okay, thanks. And then maybe on Retail Media again, like others I know we're going to get a lot more color in a few weeks here. On site, as you called out, has driven so much of the growth. Megan's comments called out Costco and off-site partnership with United Airlines. I feel like maybe a little bit more than you have in the past and can you just help us frame what the offsite opportunity could be, how it drives growth and how you think about the growth and offsite overall. Thanks. Megan Clarken: Ygal, let me start by saying that a 39% growth in Q3 for the U.S. is very encouraging for us. It's very encouraging. And speaking to the fact that we're winning in this space and when the prize is as large as it is against the spend that's going into search and social and the share that's moving across into Commerce Media, we're right where we were hoping we would be. In fact, we're probably a little bit ahead. So very, very excited about the progress there. Within Commerce Media and in particular in Retail Media, there are a lot of use cases to bring to life. There are a lot that we do already, some that we've just started to roll out and some that have been available for some time. But our clients are just seeing the benefits of them as they move to them and off-site is one of them. Off-site we've had capabilities for a while as you know and we're starting to see some very big clients come across and utilize that as part of their strategy, their whole Retail Media strategy. So, we're excited about that move. We also are excited about what we're seeing in display. So today we dominate in sponsored ads and display is another format if you like on retailers' pages that we're starting to see some good traction, so more to come there. And then there is other elements of taking retail - sorry brand data and producing better results for them on site and off site that we spelt out here today as well. So, just a lot of use cases still to unpack and which speaks to growth opportunities for us. Bryan Smilek: Great. Thanks for taking my questions. It's Bryan Smilek on for Doug. Just to start, I think, you guys had mentioned AI driven performance enhancements have drove a contribution ex-TAC increase to in the double digit million range within Performance Media in 3Q. So, can you just talk about the monetization curve of AI? And I guess as we enter 2025 which investments are critical to continue to drive a compelling and differentiated product as other competitors lean into their AI strategies. Todd Parsons: Yes. You want me to jump in? Megan Clarken: Yes, Todd. Sorry, Todd. Yes, I was just thinking through the answer, but I'll give it to Todd. Todd Parsons: That's great. And there are a few different really important factors in our investment strategy on AI. And one goes to targeting and activation across a very fragmented space and using deep learning as a way to do that more effectively to drive performance for the company. Obviously, we sell performance. We don't just sell any one of these tactics, whether retargeting or on site. And AI sits at the center of doing that with efficiency. In spite of the fragmented space that we're operating in, the addressability challenges that we all talk about. So that's the core of our investing. Beyond that, there are a couple of other really important dimensions. One is making sure that the experiences that we deliver to, to consumers that are buying advertising or exposed to advertising, rather on site with Retail Media or off site on the open web, are optimized for that experience so that ultimately a commerce outcome is achieved. That goes to AI generated creatives, it goes to dynamically changing those creatives to be respondent to the stage a person is in their buying journey as they're discovering or researching or on site, choosing between brands. So, they are two very important things. And the third one is really how we operate as a company internally changing the way that we get to strategies for clients more quickly, respond to their request for service more quickly. Indeed, the way we build our products itself, from a coding perspective, are all impacted by our investments in AI. Those are the three key dimensions. Megan Clarken: Yes. And just in terms of, I would say, if we're thinking as well on dollars of investments, our team is already established, it's well established, it's at the core of our platform. We've gone through our data center transitions over the last couple of years and invested heavily in kind of more, well, I wouldn't say heavily compared to our peers, but we've invested smartly in terms of our infrastructure to ensure that we're optimized. We will continue to optimize our structure. But ultimately, I would say the investments you would expect would continue to be incremental, to do everything that Todd just spoke about from an incredibly solid and very talented base of AI engineers. Alec Brondolo: Hey, thanks so much. Appreciate the feedback on the supply side of the Microsoft relationship. I would love to ask about the demand side. I think it's pretty exciting that being in Xandr customers might end up purchasing Criteo Retail Media inventory sometime in 2025. Could you maybe just give us an update on the timeline and functionally how that's going to work at least as best as you know, today? Thanks. Megan Clarken: So, this is Megan, thanks for the. Thanks for the question. We don't want to kill joy. I hope you're coming to our Investor Day. We'll take you through more detail about that on November 18. So, I don't want to get ahead of that. But the team are working pretty hard with Microsoft to establish that connection between their demand type clients and our DSP or other channels into our Retail Media supply. It's an exciting opportunity in as much as there are half a million advertisers across there and the opportunity to bring that demand onto our Retail Media stack is a critical part of the Criteo flywheel. I talked about that during the prepared comments. But demand to us is so critical to the network of retailers that we have. And so, the retailers are excited by the prospects of more demand coming their way. And it will come their way because the returns from Retail Media spend for an advertiser speak for themselves. And so, this sort of flywheel is going to come in motion as soon as we start to get things rolling with Microsoft. The implementation I'm looking at, Todd, all things implementation. Todd Parsons: Implementation is underway. I should say implementation is being carefully thought through and underway. Megan Clarken: Yes. Todd Parsons: So that's about architecture and design. To Megan's point, we want to make sure that we're matching those 500,000 advertisers from the Microsoft side, which represent about $10 billion of demand, into not just our whole Retail Media footprint, but also in places where there are unsold opportunities. So, there are different considerations in the design that we're going through to make sure that's as seamless as possible and we want to get it right. That's very actively being done right now with an eye to getting it right and starting to roll it out in 2025. Megan Clarken: Just to finish that point is that, as we've started to express in the dialogue, there is a slew of opportunities, there is an end-to-end shopper capability that we have that we will make available to those demand side advertisers as well. Not just to get access to supply on Retail Media on retailer sites, but also to use everything that we have to get advertising in front of shoppers on their buyer journey. So, this is a big deal. Alec Brondolo: Perfect. Thank you. Operator: Your next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz: Thank you. Maybe some additional color on verticals. We are hearing some broader category softness in consumer discretionary, whether it's tech, entertainment, retail, CPG, although kind of offset by stronger lower funnel. Are you seeing this, maybe any broader thoughts on CPG and retail specifically into Q4 and 2025 and then separately? Maybe a quick update on Albertsons. How is that scaling and when do you think it should be a meaningful contributor to your earnings? Thanks. Sarah Glickman: Yes, thanks for the question, Brian. I would say it's a bit early to tell on the consumer categories for Q4. We definitely have seen some wait and see, which I spoke about earlier. That being said, we're having terrific discussions with all our retailers and we would expect to see a good holiday season. So, I would say no additional color, but I'm paying very, very close attention to the brands as they continue to post their earnings and of course, the retailers coming in next quarter. There is obviously some, I would say, broader angst related to Q4 consumer sentiment and I think we'll keep track of that closely. But to your point, we're in two key areas. One in Retail Media where we know we have a strong, strong perspective for Q4. And then in Performance Media, where that's really - we continue to see a strong spend, especially during holiday season, going into ensuring that they convert to a sale. Just a quick reminder as well that we announced a couple of new verticals this quarter. So, Office Depot, it's a terrific new add, and then also United Airlines. So, as we move away, kind of, or I would say expand out from Retail Media to Commerce Media, we're seeing terrific traction across multiple verticals and we expect that to continue going into 2025. On Albertsons in particular, I mean, I would say it's as expected, terrific relationship, strong, they definitely were contributor to our growth. And I think more to come there. We'll take that question and address that maybe in the Retail Media Day. Brian Pitz: Great, thank you. Operator: Our next question comes from the line of Tim Nollen with Macquarie. Please go ahead. Tim Nollen: Hi everyone. Thanks. I'd like to come back to the topic of retargeting, which I think, has now grown at least three quarters in a row. And we have almost gotten through this call without talking about cookies. I don't know if you've got an update, you'd be willing to give us today on impact from cookies next year. I know it's probably very difficult to give. My question really is how dependent is your retargeting business on cookies at this point? Or is it almost not relevant anymore because you're using so much first party data? Thanks. Megan Clarken: Yes, look, I said in the opening remarks we no longer run our business based on the demise of cookies. We've moved on. That's not to say we don't continue to work with Google (NASDAQ:GOOGL) as they work through their Privacy Sandbox, because we think that works important. But our strategy, our multi-pronged approach dealing with a signal loss has all but gone away - sorry - has all but come to life, I should say, through the work of Todd and his team, our R&D team and our product teams to make that front and center in the way in which we find consumers on their buyer journey. But I'll pass across the Todd. Todd Parsons: Yes, so there is a couple of things that are pretty encouraging there to Megan's point about Privacy Sandbox, you may have seen recently that Google actually came around to addressing a couple of our key requests of them to make Privacy Sandbox itself function better. So, just knowing that that product actually being improved so as part of our overall addressability strategy, its functions is very encouraging. Further, we have been working towards influencing Google as a partner and the CMA on the upcoming user choice implementation that is anticipated this next year, all for the purposes of making sure that consumers have a better view of what keeping a cookie means to a personalized advertising experience. In the net more cookies around is a good thing to our strategy, but our strategy doesn't tie to it directly anymore. As Megan said, it's part of a bigger picture of addressability. And importantly, it's not just for retargeting, it's for the entire buyer journey that Megan was laying out that we're able to address consumers. And this is very important, because retargeting is still just one tactic in the mix that our advertisers are using to reach consumers and to drive commerce outcomes. Tim Nollen: Okay, thanks. You had previously given a number for the impact of cookie deprecation next year, which I think last call you basically pulled back and said it won't be that much. I'm just wondering if there's any update to that number. Megan Clarken: I mean, I think we don't know what Google's latest plan is and so I think, ultimately, we were not giving 2025 guidance now. But to Todd's point, we feel confident in our overall strategy. And of course, as and when we get updates on exactly what they're doing, we'll update our assumptions in our model and in our guidance. Tim Nollen: Okay, great, thanks. Operator: Next question comes from the line of Tom White with D.A. Davidson. Please go ahead. Tom White, your line is open. Tom White: Okay, quick one on Commerce Max, you guys mentioned some of the growth that you're seeing at some of the holdcos. Curious whether you guys think you're kind of displacing any existing DSP tools at those agencies with Commerce Max or whether the spend is may be coming from different budgets. And can you maybe just talk about over the next, say three, four quarters, what's the main driver of growth at Commerce Max? Is it just kind of deeper penetration of these big holdcos that are using it now, is it adding more agencies? Any color there? Thank you. Megan Clarken: Yes, a couple of things. Firstly, it's incredibly encouraging. Getting demand come through agencies is a very big part of the flywheel and that is going as well as possibly could be at this point in time. This is very new for agencies and they've been asking for it for a long time, which is a good thing. We're giving, delivering to them what they're looking for. It's now a matter of momentum and we are building momentum incredibly well at 60% this quarter. I think for agencies, they have got a shift to make which is to see Commerce Media spend and Retail Media spend on a network of retailers, a viable proposition, in fact, a better performing proposition for their advertisers so that they move more and more dollars across into retail media. And they have a couple of choices. They can go to Amazon (NASDAQ:AMZN), they can go to Walmart (NYSE:WMT), or they can go to Criteo. And Criteo has a network of most of the other top retailers sitting there waiting with really strong demand sorry, supply proposition for those advertisers. So it is about momentum, Tom, just building that momentum, making sure the tools are doing everything that encourages an agency buyer to use them, and produce the results and the data that they need to show that it's an effective buy. You want to add? Todd Parsons: Yes, Tom, I just add something to what Megan said. Obviously, we're building on a very strong moat here. And what is important to spur the momentum that Megan talked about with agencies that we have relationships with and partnerships already built from a product perspective is making sure that budgets are easy to plan and allocate across the retail media mix that we sit on top of. So, you can imagine it's a little bit more challenging to get that done, which plays to our advantage because we're looking across 225 plus retailers rather than just Walmart or Amazon. So, you can imagine if you make it easier for allocations and activations to happen for holdcos across those 225 and growing, then those budgets will ultimately come into the space through Commerce Max. Sarah Glickman: And I would just close by encouraging everyone to listen to the Retail Media Investor Day on November 18. I think we have one more question. Operator: Question comes from the line of Justin Patterson with Keybanc. Please go ahead. Justin Patterson: Great, thank you very much. Good morning. This is more of a theoretical question around Google and regulation. If Google's forced to divest Ad Ex and or double click for publishers, how do you think that could access or change your access to supply and winning bids in the market? Thank you. Megan Clarken: Yes, it's a good question Justin. I'll start and maybe Todd can weigh in as well. Firstly, it's just incredibly hard to speculate as to what could happen here. The options are endless. The timeline to actually get any kind of resolution here, if a resolution comes is way out into the future in which the landscape could have changed considerably. So, we tend to - firstly, we do support a level playing field so we do support anything that makes sure that the industry remains strong and that the ecosystem is a vibrant one which is not dominated by one or two players. And of course, if there are changes to some of the ad tech properties that are owned by Google, then it will be interesting to see what happens from there. Todd, if you've got any kind of speculation, we'll be careful but for the fun of it. Todd Parsons: Yes, I think I'll hold back on the speculation. What we are doing is continuing to work more deeply with the different parts of Google. I think we all know that Google is a very strong partner of ours. So, whether there is a breakup or not, that we're well prepared for what's on the other side of that. But I do think you can say that while the speculation rages about what might happen, more attention from our customers is coming back to us and that's really helpful. It's blue sky for Criteo while people are confused about what might happen elsewhere. So just an observation, not an empirical one but one that's really important because as these changes happen and as the market seems to be equalizing, there is great opportunity for this company. Todd Parsons: Great question. All good questions. Thank you very much everybody. Melanie Dambre: Thank you, Megan, Sarah and Todd. This now concludes our call for today. Thanks everyone for joining. The Investor Relations team is available for any additional questions. We wish you all a great day. Operator: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Western Digital (WDC) Q1 2025 Earnings Call Transcript | The Motley Fool

Good afternoon, and thank you for standing by. Welcome to Western Digital's fiscal first quarter 2025 conference call. Presently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this call is being recorded. Now, I will turn the call over to Mr. Peter Andrew, vice president, financial planning and analysis, and investor relations. You may begin. T. Peter Andrew -- Vice President, Financial Planning and Analysis and Investor Relations Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, chief executive officer; and Wissam Jabre, chief financial officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on management's current assumptions and expectations and, as such, does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, the separation of our Flash and HDD businesses, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to David for introductory remarks. David V. Goeckeler -- Chief Executive Officer Thanks, Peter. Good afternoon, everyone, and thank you for joining the call to discuss our first quarter fiscal year 2025 performance. Western Digital delivered revenue of $4.1 billion, non-GAAP gross margin of 38.5%, and non-GAAP earnings per share of $1.78. Our dedication to lasting quality and reliability through our industry-leading innovation and diversified portfolio have allowed us to proactively mix bits into the most profitable end markets, resulting in sequential revenue growth and margin improvement across both Flash and HDD. These growth opportunities are bolstered by the AI data cycle substantially increasing the long-term need for storage across both our Flash and HDD markets. In Flash, the proactive measures we took during the downturn along with our disciplined capital investment strategy have significantly enhanced Western Digital's business agility and structural margin potential. Combined with our flexibility and bit allocation and continued progress in bringing highly compelling enterprise SSDs to market, we mitigated headwinds in certain core end markets, achieving sequential and year-over-year revenue growth and improving flash gross margin beyond our through-cycle target. In HDD, the strength of our portfolio lies in our UltraSMR technology, which empowers us to deliver the industry's highest-capacity hard drives while ensuring unmatched reliability, quality, and performance. Western Digital has achieved record HDD gross margin in the highest revenue levels in 11 quarters, driven by the growing adoption of our UltraSMR drives to meet the demand for scalable and cost-effective storage solutions. This technology is a key driver of our continued gross margin improvement with wide adoption of two cloud customers and a third expected to ramp shortly. We anticipate Ultra SMR will continue to grow across the U.S. and beyond, solidifying our leadership in the market over time. Now, I would like to provide an update on our business separation plans. We are on track with the separation of our Flash and HDD businesses. At the start of the fiscal second quarter, we completed our soft spin phase. Through meticulous planning and project management, this massive initiative has been executed exceptionally well and the businesses have hit the ground running, thanks to the dedicated efforts of numerous teams over the past year. In the fiscal second quarter, we continue to execute our soft spin stage and are working diligently on the critical work streams needed as we make significant progress on the regulatory filings required in connection with the spin. Financing activities are anticipated to start soon, which will set the stage for us to execute the separation, which we expect will occur once we close the second quarter. I'll now turn to business updates. Starting with Flash, revenue reached its highest level in nine quarters. Sequentially, revenue growth was driven by continued recovery in data center fueled by strong demand for our enterprise SSD applications, which grew 76% sequentially, reaching the highest revenue level since fiscal fourth quarter of 2022. The cloud tailwind in the quarter was offset by ongoing weakness in consumer and in client with PC OEMs working down inventory and pushing out the refresh purchase cycle. On the technology front, we made significant progress with several hyperscaler and storage OEM qualifications, including developments with PCI Gen 5 data center enterprise SSD and our 30- and 60-terabyte high-capacity offerings. In addition, we continue to enhance our premium SanDisk brand by delivering on our leadership blueprint and core devices road map, expanding our platform capabilities with product partnerships developing robustly. I'll now turn to our flash outlook. As we look ahead to the fiscal second quarter, we expect the continued ramp of our new enterprise SSD offerings to supplement seasonal strength in our consumer end market. Within client, we expect PC OEM demand to stabilize while gaming declines as we have successfully met the demand for the holiday season. We anticipate a recovery in our consumer and client end markets as we move through calendar year 2025. Furthermore, we are seeing high demand for our enterprise SSD product offering and anticipate it to serve as the primary driver for revenue growth for the full fiscal year. With qualifications doubling since the start of the fiscal fourth quarter 2024, we now expect our enterprise SSD mix to comprise over 15% on of our overall portfolio shipments in fiscal year 2025, growing at a pace significantly faster than previously anticipated. Our overall view of the flash market remains positive as we maintain supply and demand balance by remaining committed to disciplined capital spending and improving profitability through a proactive bid allocation across our most high-value end markets, increasing our exposure to enterprise SSDs. Turning to HDD. In the fiscal first quarter, we achieved record revenue in data center, reflecting the strength of our nearline portfolio and our ongoing efforts to capitalize on market tailwinds. We are operating in an environment where demand for our products exceeds supply. To address this, we are working with our customers to improve our visibility into their future needs with our largest customers on a two- to six-quarter agreement cycle, aligning seamlessly with our proactive supply management strategy that supports predictable business operations and sustainable profitable growth. This long-term visibility allows us to not only better serve our customers but also mitigate volatility while structurally improving our through-cycle profitability. On the technology front, we see increasing adoption of our Ultra SMR technology, showcasing strong confidence in our products' capabilities and benefits. In the fiscal second quarter, we launched our 32-terabyte UltraSMR and 26-terabyte CMR drives, marking the world's first commercially available hard drives with 11 disks. Developed with our time-tested and reliable ePMR and UltraSMR technologies, we expect these products to complete customer qualifications and ramp in the coming quarters delivering a compelling TCO to our customers and improving portfolio profitability. Turning to the HDD outlook. As we head into the fiscal second quarter, we anticipate continued momentum in data center to drive growth across our nearline portfolio. Adoption of our UltraSMR product line is expanding particularly among cloud customers. The HDD business continues to undergo a positive structural transformation. Our thoughtful approach to commercializing our product line, especially our UltraSMR technologies, has enabled us to drive record revenue in the midst of AI's emergence as another pivotal growth driver for the industry. And with improved visibility into future demand, a focus on operational excellence, efficient cost structure, and a strong commitment to maintaining a balanced supply demand dynamic, we are well-positioned to continue delivering the most profitable and innovative product portfolio while establishing long-term industry leadership through our earnings potential. Let me now turn the call over to Wissam, who will discuss our fiscal first-quarter results. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer Thank you, David, and good afternoon, everyone. In the fiscal first quarter, Western Digital delivered great results with gross margin and earnings per share above the midpoint of the guidance range. Total revenue for the quarter was $4.1 billion, up 9% sequentially and 49% year over year. Non-GAAP earnings per share was $1.78. Looking at end markets, Cloud represented 54% of total revenue at $2.2 billion, up 17% sequentially and more than doubling year over year. On a sequential and year-over-year basis, the increases were driven by higher nearline shipments in HDD and enterprise SSD bit shipments to data center customers. Client represented 29% of total revenue at $1.2 billion, flat sequentially and up 5% year over year. Compared to last quarter, Flash bit shipment growth in gaming and mobile was offset by a decline in PC OEM, while HDD revenue was flat. Year over year, an increase in Flash revenue was primarily due to higher ASPs as bit shipments declined and was partially offset by lower HDD revenue. Consumer represented 17% of revenue at $0.7 billion flat sequentially and down 7% year over year. Sequentially, a slight growth in HDD offset a decline in Flash driven by softer consumer demand. Year over year, the decrease was due to lower flash and HDD bit shipments, partially offset by improved pricing in both flash and HDD. Turning now to revenue by segment. In the fiscal first quarter, Flash revenue was $1.9 billion, up 7% from last quarter and 21% year over year. Continued recovery in data center drove strong demand for enterprise SSD products. Sequentially, Flash ASPs increased 4% on a like-for-like basis and decreased 6% on a blended basis. Bit shipments were up 14% from the previous quarter and down 12% compared to last year. HDD revenue was $2.2 billion, up 10% sequentially and 85% year over year. Sequentially, Strong performance in the nearline portfolio led to a 14% increase in HDD exabyte shipments. On a year-over-year basis, total HDD exabyte shipments increased 107% and average price per unit increased 46% to $164. Nearline bit shipments were at a record level of 141 exabytes, up 12% from the previous quarter and 157% compared to the fiscal first quarter of 2024. Moving to the rest of the income statement. Please note my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal first quarter was 38.5%, which was at the higher end of the guidance range. Gross margin increased 220 basis points sequentially due to improved mix, better pricing, and continued focus on cost reduction. Flash gross margin was 38.9%, up 240 basis points sequentially, driven by a higher mix of enterprise SSD bits improvement in like-for-like pricing and continued cost reduction. In HDD, strong demand for nearline drives as well as efficient manufacturing operations and cost structure, have driven continued margin expansion, resulting in gross margin of 38.1%, up 200 basis points sequentially. We have structurally changed the way we operate our businesses. Combined with our strong product portfolio, this has enabled us to generate gross margins above our long-term target ranges in both Flash and HDD. Operating expenses were down sequentially to $691 million, including the synergies of $8 million. These results demonstrate continued focus on cost discipline while making progress on the execution of the business separation plans. Operating income was $884 million, up 33% sequentially, driven by better gross margins and disciplined spending. Operating margin was 21.6%, up 390 basis points sequentially, which is the highest in five years and was previously achieved at a higher revenue level. Income tax expense was $124 million, and effective tax rate was 16.1%. Earnings per share was $1.78. Operating cash flow for the fiscal first quarter was $34 million, and free cash flow was an outflow of $14 million. Operating and free cash flows included payments of $418 million for the company's repatriation, tax installment along with IRS settlement payments. Cash capital expenditures, which include the purchase of property, plant and equipment, and activity related to flash joint ventures on the cash flow statement, represented a cash outflow of $48 million. Fiscal first quarter inventory increased sequentially to $3.4 billion, with days of inventory declining by five days to 121 days. A decrease in HDD inventory was more than offset by an increase in Flash inventory. Gross debt outstanding was $7.5 billion at the end of the fiscal first quarter. Cash and cash equivalents were $1.7 billion, and total liquidity was $3.9 billion, including undrawn revolver capacity of $2.2 billion. After the close of fiscal first quarter, we completed the previously announced sale of 80% of equity interest in SanDisk Semiconductor Shanghai to JCET. Thereby forming a joint venture between SanDisk China and JCET. Proceeds from the sale will be reflected in the fiscal second quarter's cash flow. I'll now turn to the fiscal second quarter non-GAAP guidance. We anticipate both Flash and HDD revenue to grow on a sequential basis. In Flash, we expect the ramp of enterprise SSD products and seasonality of consumer demand to drive bit shipment increases in the mid-single-digit percentage points. In HDD, we expect continued growth momentum in the nearline product portfolio. We anticipate revenue to be in the range of $4.2 billion to $4.4 billion. Gross margin is expected to be between 37% and 39%. We expect operating expenses to increase slightly to a range of $695 million to $715 million, including the synergy costs of $25 million to $35 million as we continue to make progress executing on the business separation plans. Interest and other expenses are anticipated to be approximately $110 million. Tax rate is expected to be between 15% and 17%. We expect EPS of $1.75 to $2.05 based on approximately 357 million shares outstanding. As shown in our guidance, we remain committed to executing our business, driving higher profitability and cost discipline while making great progress toward the completion of our business separation plans. Thanks, Wissam. Let me wrap up, and then we'll open up for questions. Our results this quarter are a testament to our efforts to optimize our business for the long term and execute on our strategic initiatives. We are confident in our product road map across both our Flash and HDD businesses. and are excited by the significant opportunities ahead that each present, especially with the continued proliferation of the AI data cycle. As we continue to work toward the completion of our business separation plans, we are confident in our ability to drive long-term shareholder value and deliver the most compelling and innovative products to our customers. Let's begin the Q&A. Operator Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. [Operator instructions] One moment please for the first question. And our first question today comes from C.J. Yeah. Good afternoon. Thank you for taking the question. I guess, first question, you raised your enterprise SSD as part of the mix of 15%, which I think is a pretty important inflection. So, I was hoping you could speak to the qualifications that you've seen. And in particular, would love to hear more around the recently announced qualification with NVIDIA's GB200 NVL72 rack system. If there's any way to kind of quantify how to think about the ramp and magnitude of incremental dollars to your business would be great. David V. Goeckeler -- Chief Executive Officer Hey, C.J., thanks for the question. Yeah, we feel really good about where the portfolio as we've talked, I think, for a quarter or so now about this, our compute-focused PCIe Gen 5 product. That's what was qualified by NVIDIA in their reference architecture that allows us to go to all the folks that are building those products for customers and be in a good position to have those conversations as we drive that product more broadly in the market. We also have a very deep engagement with one -- well, a couple of large hyperscalers on that product as well. So, to your point, we've got more confidence in the growth of the portfolio. It's a very good demand environment. That's -- I don't think that's new news for enterprise SSDs. And it's nice to have the portfolio where we can play into that. And as you said, we expect our mix of bits when we add it all up at the end of the fiscal year, last quarter when we were having this conversation, we thought it would be around 10%, and now we're more in the 15% to 20% range. So, demand keep going up, the number of qualifications we doubled in the last quarter. So, the traction with the portfolio is it's good. It's all aligned well with the AI data cycle we put out there, both for the compute-focused SSDs and then the high-capacity data lake-focused SSDs, 30 and 60 terabytes. And again, the traditional products that we were selling to the hyperscalers are also doing well. So, just I think that portfolio is something we've been working on for quite some time. As you know, we got qualified before the downturn, we came out of it with a better portfolio. I think we really did a good job. Teams did a great job throughout the downturn of staying focused on building those products and building a stronger portfolio and now we're seeing the results of that. C.J. Muse -- Analyst Very helpful. Thank you. And I guess as a quick follow-up, you talked around the ongoing transformation of the HDD industry and now two to six quarters of customer visibility, would love to hear kind of how perhaps pricing negotiation is evolving. And within that construct, do you have visibility today for pricing beyond one quarter in the Drive business? Thank you. David V. Goeckeler -- Chief Executive Officer Sure. I think as you said, we've gotten to the point where I think we have better supply demand balance in this industry for the first time. Well, let's just talk about our business and our business for a very, very long time based on the actions we took coming out of the downturn, that matched against a fantastic portfolio that continues to get traction. We talked a lot about it in the script. Our UltraSMR technology is really getting very good traction with the customers that have adopted it at quite a bit of scale. I mean, once you go to the work to implement that technology, you get that additional 10% of capacity on every drive every drive you deploy. So, it gives customers a very good reason to keep deploying those drives, and we just had the third hyperscaler, get the official qualification very recently, and we expect them to ramp pretty quickly now over the next several quarters. So, both of those things allow us to get more visibility into the business. More visibility, more predictability is always great on a business where we're vertically integrated. And it does give us also -- I've said it for many years now, pricing is all about TCO. It's about delivering a better product. We deliver a better product that drives the TCO down for our customers, we get to participate in that equation and monetize that R&D that we developed. And we just launched a 26-terabyte CMR, 32-terabyte UltraSMR drive. So, we expect that to ramp as we go through '25. And as we do that, that will bring better pricing and margin dynamics to the business. Thank you. And our next question today comes from Joe Moore of Morgan Stanley. Please go ahead. Joe Moore -- Analyst Great. Thank you. I just want to make sure I understand the steps toward separating the companies. You talked about having kind of prepared to soft spin. So, you're going to report, you'll have two separate sets of numbers for the December quarter. And assuming that that goes well, you'll be able to file the Form 10 at some point during the March quarter. Is that the plan? And kind of what are the -- anything that could cause that to come later? David V. Goeckeler -- Chief Executive Officer Yeah. Let me walk through that, Joe, because it's a little different than you described. So, we will -- we're in the soft spin stage, which means we're still running the company as Western Digital, right? There's one company. But behind the scenes, we've separated all the systems into basically two stacks of systems. So, for example, if customers want to send us orders now, they have to send us two different orders for HDD and Flash because they go into two different sets of systems. They have a different vendor ID for those, all of those kinds of issues. Our own teams as they go to the process to build those products, ship those products are logging into different systems to manage the flow of that business through the enterprise. Now, in -- so what we're doing is we're running Western Digital. We're doing this behind the scenes. That's called the soft spin, were actually -- essentially do both. And what we'll do is we will execute in this mode for a full quarter because we want to go through a full quarter of all the financial things we do on a monthly and quarterly basis to give ourselves confidence that both of those systems work great, and then we'll go do the spin. So, what we expect to do now is -- we will execute the business in this form for the full second quarter. We will close the December quarter as Western Digital. We only issue one set of numbers for Western Digital. We only did one guide for Western Digital this time. But behind the scenes, we're doing all that work to build confidence we could do it as two separate companies. Sometime in the next, I would say, a couple of months, we'll make -- we'll flip the Form 10 to public. We're going through the final phases of that with appropriate authorities. Once we get that done, we'll make it public so we can start financing activities for both businesses to basically get all the financing in place so that we -- once we close the books, and we get confidence in that, then we could then move on with the actual distribution. So, that's the way it will work. So, cut through all that, we got a lot of work to do. It's on track. You should think about this happening around the time we would do an earnings call for the December quarter. Joe Moore -- Analyst Great. Thank you so much for that. And I guess I get a lot of questions from more event-driven types of investors about the resolve to do this in the wake of things that are happening with our JV partner, and things like that. So, just maybe if you could just kind of state how focused you are not getting this done, any impediments? Any chance that this doesn't happen from -- out of your discretion? David V. Goeckeler -- Chief Executive Officer Well, we're very focused on getting this, John -- Joe. As you know, we went through a thorough strategic review that we announced the outcome of October 30 of last year, and we started down this path. We knew it was a big thing to do. But we're not -- the results of the strategic review is this is the right answer for our shareholders. We're not trying to time the cycle or anything else. So, we plan to move forward with this when we're ready. And it's all about building confidence in the ability to execute to independent companies, and that's what we're driving to. I can't predict everything that will happen in the future, but that's -- from our perspective, we're driving to get this done as expeditiously as we can. Thank you. Our next question comes from Karl Ackerman of BNP Paribas. Please go ahead. Karl Ackerman -- Analyst Yes. Thank you. I have two if I may. First off, how much room do you have in your existing facilities to expand capacity of heads and media for hard disk drives? I asked if you just reported record exabytes and hard drives less about 180. And as you address that question, you spoke of a third hyperscaler that is qualified SMR, Dave, and it will ramp in the coming quarters. Is that for your 32 TB offering, or is that just a broad statement? Thank you. David V. Goeckeler -- Chief Executive Officer You know, I think there's a general -- without getting into specifics on any particular customer, I think in general, most customers want to go with the most dense drive they can once they start deploying. So, we expect that customers will move to the 32-terabyte drive pretty quickly. Again, I think this is -- the product strategy, I think, is really playing out well here. These drives can be qualified very quickly. Customers understand the technology. It's been their environment for quite some time. So, I'm talking about the base ePMR technology and the base architecture we have in these drives and now we can move capacity up quickly. So, in general, customers want to deploy the densest drive possible. So, we expect the 32s as they -- once they get through qualifications, we'll start being deployed, let's say, as we move through '25. On your first question on capacity for heads and media, I mean, we don't really talk about what our capacity is. We sized our infrastructure for a number of units we think is going to satisfy the market, and then we're going to increase exabytes by continuing to drive innovation and more density per unit. You're seeing that happen in real time as we just launched a new drive. And we've got the capacity all the way through head and media and test capacity and assembly to support that level of capacity. And that was really a big move in the downturn to get it right. And so, that we can get our -- make sure we keep our costs under control. And then, Karl, the real focus is to get more visibility from our customers and what their plans are and planning so that we can make sure we've got that capacity aligned what demand is and try and dampen some of the volatility of the typical we typically talk -- or maybe not anymore, hopefully not any more talk about big ingestion cycles, then big digestion cycles. We want a more predictable business than that, so we want to -- you know, the key to that is visibility into customer demand. And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers -- Analyst Yeah. Thanks for taking the questions. I'll stick to two as well. I guess the first question is going back to kind of operating the two entities separately now starting in this October period, can you just remind us again of how we should think about dissynergies? What may be factored into your December quarter guide as clearly you're carrying two company cost structures? And then as kind of a follow-up to Karl's question, you are shipping nearline capacity 25% above your prior peak levels, if my math is close to being right, how much does it -- how quickly can you bring on new capacity? And is there any way to frame like I could appreciate technology and aerial density expansion is a key driver? But do you see a situation where you will be constrained over the foreseeable next couple of quarters? Or just -- I'd love to dig a little bit deeper into Karl's question there. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer So, let me start with the first part of the question, Aaron. I think your question was on dissynergies. So, in the first quarter that we announced, we had approximately $8 million of dissynergies in the operating expenses. And the guide, there is 25% to 35% roughly -- sorry, this is -- I take that back. There is $25 million to $35 million, not percent of opex assumed -- in the opex in the current guide. In other words, the 705 midpoint of opex includes approximately, let's say, midpoint $30 million. Basically, as we said last time, these synergies are assumed to be roughly split 50-50 between the two operating businesses. And so, this is what's in the guide. In terms of where we would be at the steady state, I would say, at this point, it hasn't changed from what we discussed last quarter and the steady state anticipate to be roughly in the, let's say, $40 million range divided equally by each of the businesses. So, that's how we should think of it beyond this quarter. But for this quarter, it's around $30 million, plus or minus $5 million. Maybe for the second part of your question, I don't know, David. Maybe I'll start making some comments and I'll ask David to chime in. With respect to the manufacturing capacity, our focus in the hard drive business, as we've said all along, is really on driving profitability. And maintaining that supply demand balance for our business. And so, as we -- from where we stand now, we think we have -- with the good visibility that we're getting from our customers and the implementation of build-to-order, we think we're in a good place from a capacity or from a manufacturing capacity perspective, and we don't see the need for us to expand our manufacturing capacity footprint. No, I think that's right, Aaron. I mean, look, I mean, at least the way I think about this capacity if you look at the units we've shipped in the last two or three quarters, it's all converged pretty closely. So, there's not a lot of variability in that number. It goes up and down some like less than 1 million units. But for an industry that shipped hundreds and hundreds of millions of units, not that long ago, that's a pretty tight window. I think the way we're thinking about this is what's demand going to be a year from now? It takes a year to build a hard drive once we start a wafer, no matter what our wafer capacity is for heads once we start a wafer, it's going to be a year before that shows up in a hard drive. So, what we really are working to understand is what demand is going to be a year from now and how our customers are thinking about that, and that's something new for them, right? And we're working through that process with them. And everything is going in the right direction. We talked about we have between two and six quarters of visibility, as we continue to get more visibility and develop conviction about what demand is going to look like over the next year plus, then we'll start looking at the capacity question and if it's different than what we planned, we'll think about capacity at that point. But we -- there's still more work to do to understand what capacity is going to look like in that kind of time frame before we start adding that cost back into the system. We don't want to -- I talked about in the script, better through cycle dynamics -- we don't want underutilization charges. We want more predictable flow of business in our supply chain wants that, too. So, that's just a little bit on how I'm thinking about it. Thank you. And ladies and gentlemen, we do ask that you please limit yourself to one question at a time in the queue. Our next question today comes from Timothy Arcuri with UBS. Please go ahead. Timothy Arcuri -- Analyst Thanks a lot. Can you just talk about bookings on the HDD side? I mean, they see pricing going higher. They see you and Seagate talking about not adding capacity. So, why would they not just place shadow orders to make sure they get what they need a year from now? I mean, that's often how it works in memory. I certainly understand that the cycle times here are much, much longer. But can you talk about that? And sort of what is this two- to six-quarter agreement cycle mean? Are these take-or-pay so that they can't just place shadow orders that they'd be on the hook to take the stuff when you build it? Can you talk about all that? Thanks. David V. Goeckeler -- Chief Executive Officer Yeah. Tim, I would say the industry is evolving, right? This is something new. I mean, this is an industry that wasn't that long ago while the business transacted every quarter. So, we're asking customers more visibility understanding what their demand is. They haven't particularly thought about this franchise that way and getting that much visibility into it. And they're big relationships, especially with the big hyperscalers, like very, very big relationships. Nobody wants to yank each other around unnecessarily. So, I think it's in all of our best interest to have as much visibility as possible so that we can supply the market. We don't want to short the market, but we also don't want to basically build capacity that we don't have visibility into how it's going to be used. So, at this point, it's not a take or pay. It's just about getting visibility into kind of how they're thinking about their infrastructure and what their demand is going to be. So, we know how much supply we're going to have the ability to produce from a unit perspective that we get that aligned with their demand. And I would say we're working through that process right now. And I mean, clearly, the more visibility people our customers and partners can give us, then we can allocate that future supply to them. And it's just kind of the process we're going through right now. So, it's -- we're kind of walking to this and changing the industry, we think, in a very positive way for everybody involved. Operator Thank you. And our next question today comes from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan -- Analyst Hi. Yes. Thank you so much. Your guidance just a slight tick down in gross margins at the midpoint sequentially. Can you just help us think through the drivers of that? And you obviously launched our 11th platter mass capacity drive, too. How should we think of margins with that scale higher as you go through the course of fiscal '25? Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. So, you got it right, Wamsi, that as we introduce new products, we have the opportunity to drive margin higher. We just launched a new product. It will just start qualification, so it's not going to start for deployment for another couple of quarters. So, in the HDD business, we're going to see margins basically flat Q to Q. Flash, we'll see a little bit down driven by some -- the cost in the next quarter are a little bit up from what they usually would be for what you guys model on a 15% down year over year. We're going to get a quarter we have a little cost increase just given the way the expenses are flowing. So, I think that should help you understand the way the margins are going to work. Operator Thank you. And our next question today comes from Harlan L. Sur with JPMorgan. Please go ahead. Harlan Sur -- Analyst Hey, good afternoon. Thanks for taking my question. So, on enterprise SSD, it's taken a while, but now there's clarity on the really strong tie-in, right, to these AI-accelerated compute clusters, can you give us your view on bit mix? But I think according to my calculations, I think June quarter, I think enterprise SSD was about 7%, 8% of your total Flash rev, it looks like in the September quarter, it stepped up to about 12%, 13% of your Flash revenues, is that about right? And then on some of the recent specs on your high-capacity 64-terabyte, 128-terabyte platforms targeted for AI. Looks like the team has really set up their competitiveness here. What have been the biggest drivers of that better performance? Is it controller technology? Is it firmware? Is it reliability, quality metrics? Like any color here would be great. Thank you. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer Yeah. Let me start with the first part of the question, Harlan. With respect to where we are from an enterprise SSD as a mix, we're basically with -- in the Q1, we've exceeded a little bit the 15% of that mix. And as David mentioned in his in his comments a bit earlier that we would expect for the year, the mix of enterprise SSD as a percent of total for the Flash business to be between 15% and 20%. David V. Goeckeler -- Chief Executive Officer So, Harlan, on the competitive part, I mean, you kind of -- you got it, right? I mean, it's about getting the controller technology right. And we -- as I said during the downturn, we stayed very focused on that. We've got the right controllers built. We've always had great underlying NAND technology. The BiCS road map is something we've talked about a lot. And we feel good about that now. And going forward, we still got all the BiCS8 in front of us and that two-terabit die that helps build higher-density enterprise SSDs as well because the lower number of die to get the density. We're not quite there yet, but we have that in our future. So, it's about getting it all of it aligned. And we stayed very focused over the last two, three years since I got here. This was a big focus of, again, going back to how we structured the company into kind of a business unit model, bringing in a general manager that can stay very focused on what should be built, stay on top of all the programs, and make sure we deliver the right products that drive the -- make the highest ROI investments and then make sure those products -- those projects deliver the right products to market. And I think we're -- we feel good about where we're at, we're hitting this AI data cycle with the right -- it's the right time for the portfolio to emerge. We still got some more work to do, but we feel good about where we're at and the trajectory. Operator Thank you. And our next question today comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar -- Analyst Yeah. Hi. Thanks for taking my question, and Dave, thanks for the color. You know, when I look at December quarter, you said flash revenue should grow, while bit shipment should be up mid-single digits. So, what does it mean for ASPs? The reason I'm asking is that while eSSD is strong, you keep hearing the non-eSSD data points are not good. So, that's why I'm wondering how to think about ASP. And if I may extrapolate, how do you think about March quarter for both Flash and hard drives, given there is some seasonality aspect for both those segments in March? Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. Krish, so you got -- I mean, again, I think you've got it in the way you framed your question. The Flash market is a big market. There's a lot of submarkets inside of it. The PC market is some inventory there, and those customers restocked and have not replenished inventory. They're just building to demand at this point same with smartphone, the consumer business has just been a little bit soft. So, you've got kind of that dynamic. And then on the other side of it, you've got very, very strong enterprise SSD. Now, we expect -- as we go through '25, we expect those smartphone and PC markets to recover as we go throughout the year and be stronger, we can talk about that in more detail, but I think that's a well-understood topic. And we expect enterprise SSD to stay very strong. But when you -- then you look at it on a sequential basis, you're looking at basically flat blended pricing and a little bit of cost headwind which is where you get a little bit of sequential decline in margins. Going -- it's a little early to talk about the March quarter. But again, you got it right on seasonality there. There might be some seasonality hit. I would some seasonality headwinds going into the March quarter. But we'll have more to say about that as we move through the quarter and especially get to this time next quarter, OK? Operator Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani -- Analyst Thanks for taking my question. I guess, David, if I just go back to this 100 -- the exabyte shipment of 163 on the HDD side, how do you get confidence that this is not sitting in inventory versus actually getting deployed by your customers? Is there any metrics you see internally that gives you confidence that -- this is actually getting used up and not piling up as inventory potentially? Anything on that front would be really helpful to understand. And then Wissam, you just touch on your capex expectations for HDD and the Flash for the rest of the year, that would be helpful. Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. We don't see a lot of inventory at the big players, right? We're coming off of -- we're still like in a cyclical recovery from the very deep, deep downturn we're coming out of. And we're very, very close to these customers, given the size of the relationship. So, we don't think that there is inventory -- excessive inventory being built here or double ordering or any of that happening. We think everybody is just trying to figure out what their future demand is so we can make sure we do the best we can to meet it, and they give us the best -- the highest integrity signal possible on what that demand is. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer Yeah. And with respect to the capex, Amit, the -- what we started doing last quarter is, as we're talking about capex for the quarter. So, for this quarter, I expect our gross capex to be more or less in line with the last few quarters, the average over the last few quarters. So, there's no real inflection. Operator Thank you. And our next question today comes from Thomas O'Malley with Barclays. Please go ahead. Tom O'Malley -- Analyst Hey, Dave and Wissam, thanks for taking the question. I just wanted to ask for you to help quantify the benefit on the eSSD side versus the traditional NAND portfolio. Obviously, you're saying that that grows from 15% today to 20%, so nice tailwind throughout the year. But just on a like-for-like basis, could you just try to help describe what that tailwind means? Obviously, you're not going to give an exact pricing away, but just give us a favor for how beneficial that is of the business. Yeah. It's accretive to the portfolio. Let's put it that way. And that's a good starting point. You probably knew that. It tends to be one of the better, if not the best price markets in the Flash business. So, it provides a nice tailwind to the portfolio. Operator Thank you. And our next question today comes from Srinivas Pajjuri with Raymond James. Please go ahead. Srini Pajjuri -- Analyst Yeah. Thank you. David, just to follow up to the previous question, I'm looking at your Flash ASPs being down 6% on a blended basis. But on a like-for-like basis, it's only down 4%. So, it seems somewhat counterintuitive because your SSD mix is growing, but the blended ASP is actually worse than like-for-like. So, just trying to understand those dynamics as to why that's the case. And as I guess, SSD grows, how should we think about the blended ASP going forward? Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. So, I think it's even a little different than what you said. I think you said down 4% on like-for-like. Like-for-like was up for blended it was down 6%. So, it's all mix-related. I think we said going into this quarter, we were mixing more into mobile. Clearly, as we mix in more enterprise SSD that helps. But that's an emerging story and an attendant story for us. Thank you. And our next question today comes from Asiya Merchant with Lupe Capital. I apologize. Our next question comes from Ananda Baruah with Loop Capital. No, I appreciate it. Thanks for taking the question. Hey, Dave. Yeah, I was just -- could you -- actually, what I wanted to ask is can you refresh our memory on what your conventional technology aerial density road map looks like kind of up until HAMR? I know you've talked about HAMR loosely kind of like next few years. But how should we think about the conventional tech aerial density road map up until then? That would be helpful. Thanks a lot. David V. Goeckeler -- Chief Executive Officer Well, that's a very interesting area to explore. One thing is, as it changes over time as you keep getting better. And I think a good example of that is we just introduced an 11 platter drive, I think for a long time, people thought 10 was probably the limit given the form factor, but advances in material science and things like that allow us to build thinner platters, and we can put an 11th in, and there you go, you get 10% more just by doing that. So, it's always an evolving story. But we clearly see the ability to drive our current platform to 40 terabytes to make that bridge from 30 to 40. We're driving through that now. And that's where we expect HAMR to be introduced to carry the portfolio from there. So, we've still got a generation or so here to go. We just announced one generation that just came into the market this quarter. Customers are excited about it. They have it in the labs. They're trying to get it qualified. They want to get it deployed. I'm not going to announce a new product here right now, but you can assume there's going to be another generation after that. So, we've got quite a bit of runway on the portfolio. And those drives are drives that customers really understand -- they're in their infrastructure now. They're -- it's a straightforward qualification process. They understand the performance, they understand the reliability, the quality of those drives. So, really feel good about the technology decisions we've made to kind of fuel this market, and now we have kind of these AI tailwinds behind it. I think the portfolio is just extraordinarily well positioned to continue to drive growth in the business and then continue to drive increased profitability. Operator Thank you. And our next question today comes from Asiya Merchant with Citigroup. Please go ahead. Asiya Merchant -- Citi -- Analyst Great. Thank you for taking the call -- taking the question. So, just in terms of HDDs, I understand that the strength here, continued strength here in the December quarter, we typically see some seasonality on the Flash side in the March quarter, just given strength you're seeing on the HDD side, should we expect some seasonality here in the March quarter on the HDD side as well, both in terms of bit shipments and then also on the ASP side. Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. I mean, it's a little early for March, but I don't think that's a bad assumption to make at this point from where we are to see that on the HDD side as well. Operator Thank you. And our next question today comes from Steven Fox of Fox Advisors. Please go ahead. Steven Fox -- Analyst Hi. Good afternoon. I was just wondering if you could provide a little bit more color into the manufacturing efficiencies you think you get on a regular basis out of the HDD business. I would imagine there's debottlenecking still going on. And also, as mix changes, it helps the utilization on the heads and platters side. So, I don't know if there's any rule of thumb we can think about. Or just maybe a little more color on that would be helpful. Thank you. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer I mean, the way to think of it is we typically have obviously many programs in terms of cost reductions, which would drive manufacturing efficiency as well as things like improving yields, etc., at various parts of the supply of our manufacturing sort of process. The typical -- I mean, I don't know if there's a typical, but the way to think of it is we will still be getting in the cost improvements and the probably mid- to high single-digit percentage on an annual basis. That will be probably a fair assumption. But of course, it varies, of course, with respect to how we move from one capacity point to another as well. Thank you. And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead. Vijay Rakesh -- Analyst Yeah. Thanks. Just a quick question on the UltraSMR terabyte. Are you -- with the 11th disk, are we able to still make it accretive on the margin it to your current portfolio? And also on the Flash side, just wondering what the capex looks like for next year. This year, I think you had like a 0.8 fairly low cash outlay on the capex side, but just wondering how it looks next year. Thanks. David V. Goeckeler -- Chief Executive Officer Yeah. I mean, the 32-terabyte UltraSMR drive is a perfect example of us delivering a drive to our customers. It drives our TCO down. So, as we drive their TCO down, it will drive our profitability up. And so, we're very anxious to get that drive deployed, just like our customers are, and we expect that will provide some profitability tailwinds to the business. Wissam G. Jabre -- Executive Vice President, Chief Financial Officer Yeah. And with respect to the flash capex, as I mentioned earlier, we're not providing sort of a longer-term view in terms of quantitatively, what I would say is we're continuing to be focused on the profitability of the business. And so, our focus is really to drive cost down, but when you look at capex, last fiscal year, our capex was very, very low. So, we'd expect it to be a little bit higher from there. Operator Thank you. And our final question today comes from Matt Bryson with Wedbush. Please go ahead. Matt Bryson -- Wedbush Securities -- Analyst Thanks for taking my question. What I was wondering is your hard drive pricing was relatively stable quarter over quarter. I would have thought with the greater shipments into the cloud as well as the mix-up toward higher capacity drives, you would have seen a little bit of a benefit there. And then just one more point. I know you've talked about there being production constraints. One of the things that I've heard as being a constraining factors test, Paradigm is telling us that they're not seeing any test orders, should we take that as a sign that the hard drive industry is adding in a more rational session than in the past? Thank you. David V. Goeckeler -- Chief Executive Officer Yeah. I mean, look, on the second part of the question, I think we've just been pretty clear. We've kind of set our manufacturing capacity for a certain number of units. We think that unit times what our product road map is, is going to satisfy the exabyte growth in the industry and we're good with where we're at. And again, if we get strong enough signals from our customers, that four- to six-quarter time frame, then we'll -- we can start talking about what that means for our production capacity, but we got a ways to go before we get something like that. On pricing, we did see a little bit of like-for-like pricing increase, very low single digits this quarter. It was a good quarter for margin improvement again in HDD, 38.1%, another record I think we've added over 15 points of margin in the last four quarters. So, it's been a good run. We'll take a little breather here maybe for a quarter. And then as new products get deployed, we'll see more tailwinds behind that. So, we just feel like this business is in a great spot. And quite frankly, that's because our technology is in a spot, and it's really being adopted strongly by our customers. They're very much voting with their dollars behind the architecture that we're driving. And then during the downturn, the teams just did an awesome job of really getting our costs in the right spot to support this business and get supply demand balance. So, we feel good about the business, and we look forward to driving it forward over the next several years. Operator Thank you. That concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. David V. Goeckeler -- Chief Executive Officer All right, everyone. Thanks for joining today. I really appreciate the interest in the business and all the great questions, and we look forward to talking to you throughout the quarter. Take care.

Earnings call: Seagate posts strong Q1 results, optimistic on HAMR tech By Investing.com

Seagate Technology (NASDAQ: NASDAQ:STX) reported a robust financial performance in its Fiscal First Quarter 2025, with significant increases in revenue and earnings per share. The company's revenue surged to $2.17 billion, marking a 49% year-over-year growth and a 15% rise from the previous quarter. Non-GAAP EPS also exceeded expectations at $1.58, thanks to an improved product mix and pricing. Seagate's gross margin reached a decade-high of 33.3%, with non-GAAP gross profit climbing 24% to $723 million. The company's outlook remains positive, driven by strong demand in the cloud and enterprise markets, especially for high-capacity nearline drives. In conclusion, Seagate Technology's Fiscal First Quarter 2025 results have been strong, with the company demonstrating confidence in its financial strategy, product mix, and technological innovation. The focus on high-capacity nearline drives and the transition to HAMR technology positions Seagate well for future growth, despite some uncertainties in the market. The company's management remains committed to delivering scalable storage solutions and maximizing shareholder value through dividends and prudent financial management. Seagate Technology's robust financial performance in its Fiscal First Quarter 2025 is further supported by real-time data from InvestingPro. The company's market capitalization stands at $22.13 billion, reflecting its significant presence in the Technology Hardware, Storage & Peripherals industry. InvestingPro data shows that Seagate's revenue for the last twelve months as of Q4 2024 was $6.551 billion, with a quarterly revenue growth of 17.79% in Q4 2024. This aligns with the company's reported 49% year-over-year revenue growth in the latest quarter, indicating a strong upward trend in sales. One of the InvestingPro Tips highlights that Seagate has maintained dividend payments for 14 consecutive years, which is consistent with the company's recent 3% increase in dividend to $0.72 per share. The current dividend yield is 2.49%, offering a steady income stream for investors. Another relevant InvestingPro Tip notes that Seagate is trading at a low P/E ratio relative to near-term earnings growth. This could be attractive for value investors, especially considering the company's positive outlook and projected growth in demand for high-capacity nearline drives. It is worth noting that Seagate's stock has shown a strong performance, with a 77.86% price total return over the past year and a 31.92% return over the last six months. This performance aligns with the company's improved financial results and positive future outlook. For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 13 more InvestingPro Tips available for Seagate Technology, providing a deeper understanding of the company's financial health and market position. Operator: Welcome to the Seagate Technology Fiscal First Quarter 2025 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson (NYSE:HUD), Senior Vice President, Investor Relations. Please go ahead. Shanye Hudson: Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our September quarter results on the Investors section of our website. 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. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today, should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. I'll now hand the call over to you, Dave. Dave Mosley: Thank you, Shanye, and hello, everyone. Seagate delivered a strong start to the fiscal year with revenue growing nearly 50% and non-GAAP gross profit increasing over 150% compared with the prior year period. These results demonstrate our ability to drive profitable growth, which is the outcome of sustained supply discipline and the strategic cost efficiencies that we have built into our operations. Fiscal first quarter revenue came in at $2.17 billion, and non-GAAP EPS was $1.58, both were above the midpoint of our guidance range, benefiting from a better-than-anticipated mass capacity product mix and an improved pricing environment. Continuing cloud demand strength coupled with improvement in the enterprise and OEM markets, drove top line growth and also contributed to enhanced profitability. Company non-GAAP gross margin expanded by 240 basis points sequentially to 33.3%, the highest level in over a decade. This impressive performance was driven by our HDD business, with non-GAAP gross margins now in the mid-30% range. Amid a healthy industry supply-demand environment, we anticipate further margin expansion opportunities as we ramp our portfolio of high capacity nearline drives, including our Mozaic based HAMR products, which I'll discuss shortly. The increasingly favorable business landscape combined with our industry-leading technology road map, lends growing confidence in Seagate's future opportunities. Reflecting this confidence, we are increasing our quarterly dividend by nearly 3%. Our optimism is reinforced by our build-to-order model, which provides us with good demand visibility over the next few quarters. We see the potential for significant revenue growth for fiscal 2025, inclusive of the seasonal demand fluctuation that is typical for the March quarter. We are maintaining supply discipline, and we'll address near-term exabyte demand growth by efficiently leveraging our available capacity. Beyond that, we are well positioned to support further demand growth, mainly through technology node transitions with HAMR playing a vital role, as we complete qualifications and ramp shipments. Turning to the mass capacity market trends. Cloud demand for our nearline drives remains robust, and we believe customers are managing their inventory levels well. In the September quarter, revenue growth was driven by U.S. cloud providers, though we continue to see positive demand trends globally. For instance, some customers have highlighted the growing use of video content on e-commerce and social media platforms. Data indicates that video is the most effective format for engaging digital audiences. Furthermore, research suggests that longer form video content and personalization through AI technology can significantly enhance revenue generation opportunities for our customers. These trends bode well for mass capacity HDDs, which are ideally suited for storing large and diverse data intensive video content. HDDs comprise close to 90% of bites stored in public cloud environments and we are confident that proportion will hold for the foreseeable future. Among the enterprise and OEM customers, we observed the first meaningful uptick in nearline demand following a multi-quarter period of stability. This increase reflects an improvement in traditional server demand, as well as higher storage content per unit, pushing the average capacity per enterprise drive to a new record high. In the VIA markets, sales remained stable in the September quarter and slightly ahead of our expectations. We are witnessing a shift towards more cloud like storage solutions that utilize higher capacity drives. This transition is due in part to longer data retention needs and increased video analytics. Our HDD solutions, including Mozaic HAMR products, provide cost efficiency and scalability to our VIA customers' evolving demands. These same advantages are also crucial for generative AI applications, which is why we continue to believe Gen AI will be a driver of mass capacity storage simply by being a powerful catalyst for data creation. HDDs provide a trusted, economical and secure platform to host data that feeds into AI engines and preserves the content produced by AI powered applications. This data is ultimately fed back into the AI training models in a continuous cycle. As data center architects prepare for GenAI to move into the widespread adoption phase, they continue to grapple with cost, scale and power challenges. Seagate's product road map is addressing each of these key challenges. Compared with NAND based storage alternatives, our HDD solutions offer approximately 6 times lower cost per terabyte. And HDDs are roughly 9 times more capital efficient, delivering the economies of scale necessary to support the anticipated surge in data demand. And according to cloud customers, HDDs have 10 times lower embodied carbon per terabyte relative to NAND, which can translate into a much lower carbon footprint, very important given the world's growing number of data centers. That provides a good segue into our product ramp and qualification plans. We have three primary areas of focus for fiscal 2025 aimed at driving profitable growth over the long term, and we're progressing on all of them. They include ramping the company's last PMR platform, expanding Mozaic adoption and executing our Mozaic product road map that will enable Seagate to address the breadth of customers' mass capacity storage needs. Consistent with our plans, we began to aggressively ramp our final PMR platform in the September quarter, which is currently up to 28 terabytes in capacity. We are very pleased with the pace of customer adoption. These drives have quickly catapulted to our second highest revenue product, and we are continuing to both ramp volume and broaden our customer base in the December quarter. We have expanded customer qualifications on our three plus terabyte per disc Mozaic HAMR based platform with a few customer quals already completed spanning the enterprise nearline, VIA and mass market segments. The qualification with our lead CSP (LON:CSPC) customer is progressing well through what has been a very intensive and thorough testing process. The learnings that we have gained are already being leveraged into future customer qualifications and product generations. To that end, HAMR qualification drives are now in the hands of multiple global cloud and enterprise customers. Our expectation for shipment and revenue ramp timing across the broader customer base still points to mid-calendar 2025. Our confidence in HAMR technology remains strong and customer feedback has reinforced our value proposition that the Mozaic platform provides the foundational technologies required to satisfy high capacity storage requirements at the lowest total cost of ownership. We expect to extend our technology leadership as we deliver on the next stage of our HAMR road map, the 4+ terabyte for this platform. As a reminder, the step function capacity increase to 4 terabytes per disc is being achieved entirely through aerial density gains, supporting our cost per terabyte reduction path with additional benefit to both customer TCO and Seagate's structurally improved margin profile. In closing, Seagate is performing well amid an improving demand backdrop with healthy industry supply dynamics. We are at an exciting inflection point rooted in the structural changes we've made to our business and with our compelling technology road map. These factors underpin our ability to build on the last four quarters of strong sequential performance and drive future profitable growth to create long-term value for our customers and stakeholders. Thank you, and I'll now hand it off to Gianluca. Gianluca Romano: Thank you, Dave. Seagate started fiscal 2025, delivering strong revenue and profitability growth for a fourth consecutive quarter. September quarter revenue was $2.17 billion, up 15% sequentially and 49% year-over-year. We increased non-GAAP operating income 35% sequentially to $442 million, translating to a non-GAAP operating margin of 20.4% of revenue, and our non-GAAP EPS was $1.58 at the high end of our guidance range and reflecting improving demand trends, ongoing price adjustment, and continued cost discipline. Within our Hard Disk Drive business, exabyte shipments grew 20% sequentially to 128 exabytes and revenue increased 16% to $2 billion. Mass capacity revenue grew for the fifth consecutive quarter more than offsetting the expected decline in the legacy business. Mass capacity revenue was $1.7 billion, up 21% sequentially driven by continued strength in nearline cloud demand, along with a significant uptick in nearline enterprise sales. Mass capacity shipments totaled 128 exabytes compared with 104 exabytes in the June quarter, up 23% sequentially. Mass capacity shipments now represent a record 93% of total HDD exabyte, reflecting the continued long-term secular growth for cost efficient scalable storage. As planned, we began to ramp our 24 and 28 terabytes PMR, which helped to boost Seagate nearline shipment to 109 exabytes in the quarter, up from 84 exabytes in the prior period. As Dave highlighted earlier, customer reception for this product has been strong and represented more than 20% of our nearline revenue in the September quarter. We expect nearline demand will continue to improve in the December quarter as shipments for our latest high capacity products broadened across global CSP and enterprise customers. Demand for our VIA products remained relatively stable in the September quarter, and we currently project similar revenue in the December quarter. Smart City projects remain a key demand driver for VIA products worldwide and regional economic conditions play a key factor in budget decision for the new projects. The ongoing, economic uncertainties in China has been a headwind for the VIA business in that market. We are cautiously optimistic that recently announced stimulus plan in China would positively impact on VIA demand over time. Sales of our legacy products totaled $270 million, representing roughly 12% of total revenue. The remaining 8% of revenue was derived from our other businesses, which held steady at $164 million. The other businesses include system, SSD and refurbished drives, a business that has grown by about 25% year-over-year and includes drives under our circularity programs. Moving on to the rest of the income statement. Non-GAAP gross profit increased 24% sequentially in the September quarter to $723 million. With significant increase reflects a favorable mix shift to our mass capacity products, continued price adjustment and ongoing cost efficiency in improving demand environment. Our resulting non-GAAP gross margin was 33.3% at the company level. Overall non-GAAP gross margin expanded by 240 basis points quarter-over-quarter, which was slightly more than we had originally anticipated. Non-GAAP gross margin for the HDD business and mass capacity, in particular, remains significantly higher than the corporate average. Non-GAAP operating expenses totaled $281 million, up 10% quarter-over-quarter and above our original plan, largely due to higher variable compensation commensurate with improved profitability levels. Other income and expense were $86 million, and we project similar levels in the December quarter. Adjusted EBITDA continued to improve and was up 23% sequentially in the September quarter to $498 million. Non-GAAP net income increased to $337 million, resulting in non-GAAP EPS of $1.58 per share based on a diluted share count of approximately 213 million shares. Moving on to cash flow and the balance sheet. Free cash flow generation was $27 million, reflecting our initial steps to normalize working capital to support our supply chain, while at the same time, meeting increasing mass capacity demand. It will take a couple of more quarters for working capital to fully adjust, which will have some impact to free cash flow generation. Even so, we expect free cash flow to improve in the December quarter and through the rest of the fiscal year. Capital expenditures for the quarter were $68 million for fiscal '25. We will maintain capital discipline and continue to expect CapEx to be at the low end of the long-term target range of 4% to 6% of revenue. We returned $147 million to shareholders through the quarterly dividend exiting the quarter with 211 million shares outstanding. As Dave mentioned earlier, the company approved an increase to our quarterly dividend, raising the quarterly payout to $0.72 per share, and reflecting our long-term confidence in the business. We closed the September quarter with $2.7 billion in available liquidity, including our undrawn revolving credit facility. Inventory increased to $1.4 billion including material that we are staging in support of improving mass capacity demand. Our debt balance was $5.7 billion at the end of the September quarter, with more than 90% of our long-term debt obligation maturing in fiscal '27 and beyond. We exited the quarter with a net leverage ratio of 3.2 times and expect to see further reduction in the coming quarters. Turning now to our outlook. Mas capacity revenue continued to trend higher, with growth driven by global cloud customer demand for our high capacity nearline drives, along with ongoing improvement in the enterprise and OEM markets. With positive trends are expected to more than offset lower sales into the legacy and other markets. We anticipate profit to further expand from the richer mix of mass capacity revenue that I just described and ongoing pricing actions. With that as context, December quarter revenue is expected to be in the range of $2.3 billion, plus or minus $150 million. At the midpoint, this represents an increase of 6% sequentially and 48% year-over-year. Non-GAAP operating expenses are expected to be in the range of $285 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to expand into the low-20s percentage range. We expect our non-GAAP EPS to be $1.85 plus or minus $0.20, based on a diluted share count of approximately 214 million shares and a non-GAAP tax expense of about $20 million. I will now turn the call back to Dave for final comments. Dave Mosley: Thanks, Gianluca. In closing, Seagate is achieving significant profitability expansion in a favorable demand environment. I'm confident that the structural improvements we have implemented and our differentiated technology road map will further enhance that profitability and meet the evolving requirements of our customers. Demand for our high capacity nearline drives remained strong and we will build on that momentum to deliver scalable, cost efficient storage solutions to support the anticipated growth in data demand, including from GenAI applications. . Seagate's dedicated global team, strong business model and technology leadership form a winning combination that positions us well for future success and underscores our confidence in deploying capital and enhancing value for our shareholders. Operator, let's now open up the call for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Wamsi Mohan with Bank of America (NYSE:BAC). Please go ahead. Wamsi Mohan: Hi. Yes. Thank you so much. Dave, I was wondering, if you could flesh out a little bit your commentary around this build-to-order and very good demand visibility into this fiscal year. You noted significant demand growth, including some seasonality that you typically expect around March quarter. I was wondering, if you could maybe elaborate a bit on maybe some bookends around what you're thinking around demand growth as March quarter seasonality going to be different from what you've experienced before. And I'd be curious to also hear your thoughts around, if I could, how you're expecting to compete versus your competitors' products, which have slightly higher capacities currently as you're ramping HAMR. It sounds like HAMR gets there sort of mid-next year in volume. Thank you so much. Dave Mosley: Thanks, Wamsi. So a couple of things. If I go back at six months ago or a year ago, we instilled these build-to-order models largely to get predictability, and I think it's working well. As we look into the next year, we're confident that we booked those quarters pretty well. So I'm very happy the way we're running the business with given that predictability. And we're only going to build what we need to build. We're still not fully recovered as an industry from what we just went through a couple of years ago. So I'm quite pleased with how the build-to-order models have gone. There is some seasonality in some markets as you alluded to, and we'll watch that carefully. But I think everyone is a little cautious on next year. From a cloud perspective, I don't think inventory is built up any, I think the buffers are still low from my perspective. And so I think we are happy with the cloud predictability, the mass capacity predictability from here. On the second part, I think from a capacity point leadership perspective, we're shipping the leading products. From a CMR perspective, no one else is shipping over 30 terabytes for sure. And as we mentioned in the prepared remarks, there's capacity points even higher than that going up and if we put SMR on top of that, we can qual even higher. So I'm very comfortable with our positions there. So I'm not quite sure exactly what you're referring to on capacity leadership or lack of leadership. I mean, from our perspective, we've got to get all the quals and all the ramps done and so on. And then we get on to 4 terabytes of disk and so on. We're very comfortable with our technology portfolio that way. Wamsi Mohan: Thanks, Dave. Operator: Our next question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yeah. Hi. Thanks for taking my question. Dave, I had a question on your market share. Historically, you're more in the mid-40s, but last few quarters, it's kind of dipped down to 30% to high 30% range. Can you talk about the factors that are behind this low share? Is it potential disruption from HAMR causing temporary share loss? Is it customer specific where WLE (ph) customers are ordering more than yours? And along the same path, how to think about the industry pricing in calendar '25. It's been extremely rational in HDD, how to think about it in 2025? Thank you. Dave Mosley: Thanks, Krish. Yeah. For market share, I said a number of times, market share is an outcome of running your play. And exactly to Wamsi's question, we changed our place a year ago when we said we want these build-to-order. So we said I want predictability, a longer time horizon rather than we're building a bunch and then hoping to push it into a channel and going for market share or something like that. I think when we were at the bottom of the demand cycle, market share doesn't really matter. It's more of the predictability of the cash that you're generating and so on. As we get back into things, obviously, we're taking -- now that the margins are higher, we're getting rewarded for the money that we extend and the investments we've made and so on, then we'll clearly take more of that demand our way. And so I think the market share will re-equilibrate. From an exabyte share perspective, I think we'll be just fine because these customers want to continue to push the TCO proposition going to higher and higher capacity points, I think, we're going to be fine there. On the pricing side, I think I'll let Gianluca answer the question there. Gianluca Romano: Thank you, Dave. Yeah. I think the pricing environment continued to be positive for the industry. Every quarter, we have seen a little bit of improvement, and this is what is also driving our gross margin higher a little bit every quarter. As you know, on the cost side, we still had some unused capacity in the June quarter. And in September quarter, we don't have any of those extra costs. So we also had a little bit of that help in the gross margin. And going into December, if you look at how we guided, we expect further improvement in gross margin, further improvement in operating margin, which is, of course, very important to us, and that is coming from the mix, ramping more of our latest PMR product. Of course, we also have a certain volume of HAMR in our December quarter and the pricing action that is still ongoing and we have a good balance between supply and demand, in general, for Seagate and I think for the industry, and we are continuing for our long-term strategy. Krish Sankar: Thanks, Dave. Thanks, Gianluca. Operator: And our next question comes from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Good afternoon. Thanks for taking my question. I guess, the question really, Dave, is around there's always this fear that the HDD industry broadly, Seagate specifically are sitting at these cyclical peak levels. I'd love to get your perspective, as you look at the exabyte shipments that you have right now, how do you get confident that with your shipping is actually getting deployed by your customers versus perhaps, ending up in inventory for them? How do you kind of gain that confidence? And then really related to that cyclical fear, I would say, you focus on very confident that there's a lot more upside to gross margins versus where you are today, which is actually above your long-term target. What do you think is the appropriate margin frame of Seagate as you go forward now? Dave Mosley: Thanks, Amit. Yes. We have run a cyclical business over the many, many years. I think it's changed quite a bit as we came down from client server. There used to be a lot of seasonality in that market. And now as we're in the cloud, the cyclicality, I'm not sure, it's totally periodical, but the pandemic, in particular, caused a very big bubble and then a big crash on the back side of it. So I think that's kind of an anomaly there. How do we know what customers actually have. We have to triangulate ourselves and I think we've really improved our processes for being able to do that. But we're also not pushing in nearly as many drives, total units or exabyte points. And some of this the build-to-order model, actually, helps us with quite a bit. So that we know that we're not overbuilding if you were planning to overbuild. Exactly to your point on upsides to gross margin, I mean we believe that the way we bring on more capacity is to drive for more aerial density gains. And we have to go work the cost on those platforms, and that's what we're really focused on doing, making sure that we can introduce terabytes in the 20s and 30s and 40s with lower and lower costs to be able to serve the market. A good TCO proposition for our customers who are building data centers and want to support data centers for a long time is to put more capacity online because it's so much more efficient for them, but we need to be able to get that efficiency through our continued cost reduction also. So I do think there's significant upside to gross margin still, but it all starts, to your point with supply and demand, managing supply and demand properly. Operator: And our next question today comes from Erik Woodring with Morgan Stanley (NYSE:MS). Please go ahead. Erik Woodring: Great. Thank you, guys for taking my question. Gianluca, maybe if we just stay on the theme of gross margins here. I think your guidance for the December quarter implies about a 34% gross margin, up roughly 70 basis points sequentially. You've been growing gross margins by about 2 points to 4 points sequentially over the last four quarters. And so, I'm just wondering, if pricing and mix are still favorable. And obviously, Dave just made some positive comments on gross margins. Can you help me understand why we might not be seeing more gross margin expansion in the quarter, again, relative to the multiple points of gross margin expansion you've been able to drive over the last 12 months? Thanks so much. Gianluca Romano: Yes, Erik. Well, as I said before, in the September quarter, we also had the support from better cost structure because of higher capacity and the elimination of the underutilization charges, that was about 100 basis points in our gross margin improvement. We are not going to have that improvement in the December quarter because now we don't have any other utilization charges anymore. But we are still progressing with our pricing structure, and we are making a good ramp of our latest PMR product, and we will see some volume on HAMR, so all those are positive. And as you know, we guide based on forecast that we had at the beginning of the quarter and then we executed during the quarter as best as we can. And our focus is to keep improving quarter-after-quarter. We are not trying to increase too much at one time. We want to be consistent and keep this cycle up for as long as we can. . Operator: And our next question today comes from Toshiya Hari with Goldman Sachs (NYSE:GS). Please go ahead. Toshiya Hari: Hi. Thank you so much for taking the question. I had a multipart one on HAMR. I think on the last call or at a conference, you guys talked about your expectation around getting qualification at your lead customer in Q3, I believe. Is that now Q4? Is that early '25? Any thoughts on that would be helpful. And then, Dave, you talked about additional cloud companies or customers having qualification products on hand. Should we expect the qualification process at some of those customers to be smoother than your lead customer given sort of the debugging process that you've been through over the past year or so? Thank you. Dave Mosley: Yeah. Thanks, Toshiya. Yeah. The failure mode that slowed us down as we ramp to high volume this spring and summer is behind us. The team's worked really hard to make sure we get all the process improvements that we talked about last time in. I did speak on last earnings call about the our confidence was based on the test beds that we have running that are all designed to detect these fail modes with, intense stresses that are way beyond our spec. And here we are another quarter later, we have more drives, more configurations, running more models of tests, and we haven't seen hide nor error of the failure mode. So we're confident that it's behind us, that's that initial learning that we get relative to proving it, sometimes it takes a little bit of time with the customers to prove it, but I'm confident we're going to be able to prove it right now and those tests are ongoing. The customers know exactly where we are. When we think about qualifications, there's a lot of different facets or quals of interoperability and different data center applications and so on and so forth. No significant concerns there. It really does come down this one last issue. And that's why we have confidence that no one else is going to see it because as we ramp to high volume, those other customers -- we've got this problem fixed, I'd say, those other customers want. Some multiple non-cloud customers have already qualified the product and already -- we're already getting volume shipments there. They run tough quals themselves but may not have these same kinds of stresses. But now that we have the recipe, I think we're going to apply it every. Toshiya Hari: Thank you. Operator: And our next question today comes from Asiya Merchant with Citigroup. Please go ahead. Asiya Merchant: Great. Thank you very much. As you guys ramp HAMR and you start to see more qualifications and more shipments, let's say, you're at December and into the March, how -- is that a negative to gross margins, just given the shipment volumes are lower, there might be some ramp issues there. How should we think about overall impact to margins as HAMR ramps? And I get the sense that obviously, once you guys are much further along, that's a margin driver. But near term, how should we think about the impact to margins from HAMR ramping? Thank you. Dave Mosley: Thanks, Asiya. Near term, we don't want to give it away. Long term, we don't want to give it away. So we definitely want HAMR to be accretive to gross margin. And we think it does add benefit to our customers as well. So there's a trade-off. Do they want to increase the higher -- the capacity for the data center build-outs that they're doing. And then we have to say, you have to make sure you pay for it to replace the drives. As we said before, our factories are largely full. So to take drives out of those or take the supply out and turn it over to HAMR, we have to make sure we're getting paid for it. And I'm confident, we can do that in the near-term as well. It's just a matter of managing the supply and demand picture properly. Gianluca Romano: Yeah. I'll say on the cost side, a similar level of volume. HAMR cost per terabyte is below the PMR cost per terabyte. So for sure, there is an advantage on HAMR. And the pricing, of course, depends on the timing and where we are in the cycle. But at this point, in the short term, there's no reason why HAMR should not be accretive to our gross margin. Operator: And our next question today comes from Aaron Rakers with Wells Fargo (NYSE:WFC). Please go ahead. Aaron Rakers: Yeah. Thanks for taking the questions. A couple of just real quick model questions. It looks like your OpEx was a little bit higher than you expected in this quarter. I'm curious, relative to the $285 million guide, how do we think about the trajectory of operating expenses as we look out into the March quarter beyond any kind of framework of what kind of we could think about from a normalizing operating expense perspective? And then as the kind of quick follow-on. As you get the -- I think it's $480 million of debt maturing in January, from that level, how are you thinking about the possibility of reentering share repurchase activity going forward? Gianluca Romano: Yes. On the OpEx, the increase between June and September is only due to variable compensation. So we are not hiring more people. It's just a matter of -- last year, we didn't have variable comp. And this year, we have variable comp at a fairly good level. So from here, I would say, probably we stay fairly flat through the rest of the fiscal year, around 280 to 285, I think that the new range. The debt, as you said, is maturing in beginning of January. So as we said before, we are going to address that with cash on hand. So we start reducing our debt. We want to be even a little bit lower before we'll start share buybacks. So I'll say, as you know, we have increased dividend that is a top priority for the company, and then we want to take care of the debt. And then after that, we will look at share buyback, probably a little bit further in time. Operator: And our next question today will come from Timothy Arcuri with UBS. Please go ahead. Timothy Arcuri: Thanks a lot. I had a question about the capacity outlook now given that you're just kind of bumping up against your max today. So unless you decide to add more, you're -- I mean you're going to ship close to that 130 exabyte of nearline, probably not in December, but quite soon. So I mean you're growing nicely off the bottom on mix and on exabytes coming back. But if you're not going to expand capacity, should we think of things starting to flatten off from here? And I realize that pricing is going to go up. But it seems like you kind of lose a degree of freedom in the model unless you start to expand exabyte capacity. Thanks. Dave Mosley: Yeah, Tim. I think exactly to your point, we'll expand exabyte capacity by transitioning to new products. And so if you think about it, as I go to - from 20 terabytes-ish to 30 terabytes-ish to even 40 someday, we'll be able to expand exabyte capacity without adding significant capacity from a driver heads or media perspective. We'll just use it much more efficiently on an exabyte basis. And that's where we're confident that we'll be able to also take out cost at those higher capacity points, which is what builds into the margin proposition into the model. Operator: And our next question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse: Yeah. Good afternoon. Thank you for taking the question. Dave, in your prepared remarks, you talked about good visibility for growth in fiscal '25, notwithstanding seasonality for March. So I was hoping you could kind of speak to where your visibility is today for nearline? Is it three, six, nine months? And then based on that backdrop, how should we be thinking about, at least for mass capacity, what seasonality will look like into the March quarter? Dave Mosley: Yeah. I think mass capacity is pretty full, and it goes out that nine month period that you talked about, C.J. And that's a virtue of the build-to-order model that we've actually established on. I think customers understand that. They get predictable economics. And we're all going through these qualification processes so they get access to that technology as well, that's all serving as well. I think, right now, I would say the total demand is not significantly higher than historical demands. And I certainly don't think there's inventory buildup going in or anything. So I don't think there's a cycle coming. I think we're running a fairly predictable business. And we'll get better visibility as we get through, obviously, early next year. People are re-upping, if you will, the build-to-order configurations. But right now, I feel fairly confident certainly through the front half of the year and probably even into the back half of the year. Gianluca Romano: Yeah. On the seasonality, C.J., usually, the majority of the seasonality is on the legacy part of the business, where the March quarter is a lower quarter, slowest quarter in the year, but we also have part of mass capacity, in particular, VIA so the surveillance part of the business that is usually fairly weak in March and they start to grow in June and is fairly strong in September and December. So when you model your four quarters for calendar '25 or consider that there is seasonality not only in the legacy part, but also in some of the mass capacity products. Operator: And our next question today comes from Stephen Fox with Fox Advisors LLC. Please go ahead. Steven Fox: Thanks for taking my question. Good afternoon, guys. I guess just following up on the point on how much capacity you have available. I think I understand how you create capacity when you go from like 3 terabytes per platter to 4. But from here, going over, say, the next 12 months, I think last quarter, you talked about debottlenecking. There's a potential that maybe you do get a better cycle in enterprise and VIA next year. Like, how do we get comfortable with the idea that you can manage all that and still satisfy all your customer needs or any further color on that would be helpful. Dave Mosley: Yeah. I think that's an -- it's a question -- a good question about how big could things get. If the edge really turns on; if GenAI turns on, which I would say is still very, very early innings of that, if there's some kind of macro recovery in all the markets; and we're not there yet. We're still being very cautious on any supply. And any additional supply we would have to put on would be very long lead time. So we can satisfy more exabytes exactly as you described, and we've talked about earlier. But additional drive demand, if you will, I think we'd have to add supply, which would be longer - much longer lead time. As we spend 4% of our revenue on CapEx, we do add technology transition capacity, so you get some small capacity adds because of that. As you're buying new tools, they tend to be more efficient. But the growth would be necessarily slow, I think. Steven Fox: Okay. That's helpful. Thank you. Operator: And our next question today comes from Ananda Baruah with Loop Capital. Please go ahead. Ananda Baruah: Yeah. Good afternoon, guys. Thanks for taking the question. I guess, Dave, sort of sticking right there on the capacity question. If things progress as you anticipate with HAMR in the event that even with HAMR and areal density increases, sort of data increases, GenAI, video apps, etc., all of that were to put in a position where you want to be increasing capacity? What -- you just mentioned long lead times? What is that process? Can you give us some sense of what that process would look like? We've also heard about kind of the whole component change that you have also needs to be tended to, I guess, just what would be the ways that you guys could maybe get with that, that would be helpful? Thanks a lot. Dave Mosley: Yeah. Thanks, Ananda. I think that we fix it in our industry on the highest capacity point. And obviously, that's the -- max capacity gets a lot of attention. But when you get into the growth of some of these other markets, we would be talking about 20 terabytes or maybe even less than that. What's your value prop at that level. And by pushing forward in aerial density, we get to take components out of those capacity points. So we can actually hit much more aggressive price bands, if we want to and still maintain really good margins. And then those components that are freed up go -- you can make twice as many drives with half the components going -- being dedicated to each drive, right? So I think that's where if we saw resurgence aerial density helps solve a lot of problems because you can go address those markets that are half capacity, if you will, of the max capacity in a much more efficient way. Ananda Baruah: I got it. That's super helpful. And just to complete that, does that mean like even in like a strong case with HAMR, you guys feel pretty good when you sort of map out ability to hit exabyte ships for the industry for a good amount of time to come, I mean, measured in probably years, not months? Gianluca Romano: Well, it depends, right? We have our supply plan if demand is much higher than our supply plan. Of course, we will have a little bit of unbalance that we have time to address, but our focus is on technology transition, is not on more units. And we think this is the most profitable way for the industry to progress in this period of time, and this is what we want to do. So let's see where demand is in two or three quarters from now, but we know where our supply will be. Ananda Baruah: Thanks, guys. Operator: And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead. Vijay Rakesh: Yeah. Hi, Dave. On the -- I'm just wondering, if you give or size, what do you think the unit shipments could be for calendar '25. And Gianluca, I think in the past, you've talked about trying to bring on some of the idle capacity and headcount as you start to bring some capacity back on. Can you lay out how that road map looks like? Thanks. Dave Mosley: Thanks, Vijay. Yeah. We didn't speak specifically about how many units and how fast will push. We just -- we said that mass qualification will be done for all these customers that we just shipped to probably mid-2025. From my perspective, the factories are relatively full right now. And so, as we plan with those customers and they say, hey, I'd like the exabytes in this form rather than this form. We'll make the transition, but it will be probably less of a transition than we would have made, say, a year ago when we had empty factories, we would have ramped much more aggressively. This time, I think we'll make sure that we pivot accordingly and carefully. It's very important that -- to realize that the components that we use in our last generation of PMR product are very, very similar to the components we use in HAMR as well. So not the critical components ads (ph) and media, obviously, but all the other components. And so we feel very comfortable being able to pivot from one product to the other if we have to, the mechanics, the electronics, there's still much leverage there. So that's what allows us that flexibility. Gianluca Romano: Yeah. From an idle capacity standpoint, I would say, at this point, we don't have much idle capacity anymore. So what we are doing is, now moving faster into technology transition now with our latest PMR products that we are ramping very aggressively already in the September and December quarter. And then the transition to HAMR will generate a certain level of additional exabytes that will support the increasing demand. Thomas O'Malley: Hey, guys. Thanks for taking my question. Dave, if you would just humor me, as I try to clarify things too. But just in the back half, it sounds like you are fully at capacity and technology transitions are getting you some growth, and it sounds like that looks really good. It's obviously been a couple of really good quarters for you guys. But let's just say, we head out into fiscal year '26, you're talking about more volume per HAMR kind of coming in the middle of the next calendar year. And so you would imagine more substantially into the next fiscal year for you guys. If you guys were to see further delays on the HAMR side, what actions would you guys take just given the fact that you're at capacity and wouldn't -- from a factory perspective, you wouldn't see the technology transitions. Just walk me through what you would do in that instance, obviously, that's not ideal and you're not planning for that, but we've seen the qualification slip a couple of quarters with the largest guy. So I just want to understand how you guys think about things if it's further delayed? Dave Mosley: Yeah. I'm not really worried about it for exactly the reasons that you talked about. We see the how the test sets are running. We see how the qualifications are running, and we're very confident in being able to make the pivot. But exactly to the earlier question, I think it was Vijay's question, we can pivot from the last generation PMR to the HAMR technology very, very easily. And last generation PMR is a great product for us with really good margins that we're not fully ramped on yet either. So from that perspective, if it came out like one quarter of delay and some customers said, I want it like this rather than like this, we can very easily pivot back. Thomas O'Malley: Helpful. And then, in terms of just your outlook on AI, you obviously made some comments earlier on the call. You're saying it's still kind of on the come. In terms of initial conversations with customers, do you have a time frame of when you may start to see some contribution there? Is that something that would come as early as this next fiscal year? Dave Mosley: Yeah. Thanks, Tom. This is a really complex topic because I think there's a lot of different things that are called AI. Some of them are traditional workloads that we've seen for years and years, and some of them are brand new workloads. And we are seeing demand that's coupled to brand new workloads, right, with purchase orders that reference specifically things that people would identify as predictive AI or gen AI applications. What I would say is that the recent trends are really more towards video, which we talked about in our prepared remarks. And that's the biggest thing that we're seeing right now grow, and I'll call that AI for a while because I think it is a much more efficient way to drive our customers' business models and that's - we see that demand flowing through right now. I don't think that there's a bubble going on in there. I think there's a continued value competition happening in a bunch of different vectors, with new technologies, new applications coming that could continue to drive video as fundamental value store for our customers. So that's why we're excited about it. And I know some people call those traditional workloads, but I'll give credit to AI because I think they're being used in very interesting, creative new ways. Operator: And our next question today comes from Mark Miller with the Benchmark Co. Please go ahead. Mark Miller: Congratulations on your upside results and your good guidance. I just want to go back to AI and the opportunity there. Do you believe that PCs with AI chips will drive a major refresh cycle? And if so, when? Second half of next year? Dave Mosley: Yeah. Mark, I don't have a ton of visibility into that. Although, I do talk to some of these customers that I grew up with about that exact topic. Look, I think that the PC space has been relatively slow to adopt new applications of late, and I think that's about to change. How quickly it will change is still anybody's guess. And of course, it's not about spec-ing new hardware. It's about spec-ing new applications that come. And most of those applications are, to your point, they're video applications. So yes, I do think that when you can enable creative professionals certainly to do -- to create especially video, but audio counts as well and all kinds of other analytical tools that happen at the edge, you allow them to create much more aggressively. I think they'll spin off more data. Some of that data will be serviced by the cloud service providers that already are. And so we see those applications growing, but some of that may be closer to the edge, and we're really excited about that. It's still very early. And I can't really predict where AI PCs are going to be just yet. But I think from what I'm seeing from application development, I'm excited about it, and I think it is going to be a driver in the near future. Mark Miller: Okay. Just one other question. You mentioned there's a little idle capacity at the moment. What is the factory utilization in your hidden media fabs? Are they 85% or higher? Dave Mosley: Yes, fairly high in both. I think we do have capacity as we transition to HAMR, we can -- because we've dedicated a lot of that space to experiments, if you will, in the last few years. And so now some of that can become production instead of experimentation but I think very high over 90% utilization right now. And that's the way we want to keep it. We don't want to dip down because, as you know, that has a lot of cost implications back into the business, and we want to make sure we maintain those fabs running full. Mark Miller: So the greater 90% is both for ads (ph) and media fabs, is that correct? Karl Ackerman: Thank you. I was hoping you could discuss your build-to-order visibility and whether it's based on take-or-pay contracts or if it would be better characterized as strong indications of interest, as you and customers plan their storage capacity additions over the coming quarters? And secondarily, if I may sneak in another one. I was just hoping you could also discuss the mix of SMR today, and perhaps going forward as we think about the mix of these higher capacity products going into December and into 2025? Thank you. Dave Mosley: Yeah. Thanks, Karl. I'll let Gianluca do the build-to-order question. Just on the SMR, I said this many times, there's only a couple of cloud customers that really take SMR. There's a couple of client server customers that take SMR as well, so we ship it into multiple markets, but we talk about SMR versus CMR, but I just look at it as drives, drives, how does the customer need them, and we can configure them for those applications for those particular customers, whether it's one or two people accordingly. From my perspective, we have a great technology set that we can deploy every place, and we'll try to keep those factories as full as we possibly can and maximize it. So that's how I think about the SMR mix. Gianluca Romano: Yeah. On the build-to-order, we have different kind of agreements with different customers, but the vast majority are orders that are fully committed by customers out in time. Karl Ackerman: Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dave Mosley for any closing remarks. Dave Mosley: Thanks, Nick. Our strategic improvements in advanced technology road map position us well to meet evolving customer needs and drive future growth. We remain committed to delivering value and scalable storage solutions for our customers. I'd like to thank our dedicated team, our supply chain partners and our shareholders for your continued support. Thanks. Talk to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Earnings call: IBM reports robust growth in software, led by Red Hat By Investing.com

In the third quarter of 2024, International Business Machines Corporation (NYSE:IBM) showcased strong financial performance, with CEO Arvind Krishna reporting a significant revenue increase, particularly in the software segment. The earnings call, held on [insert date], revealed that IBM 's total revenue for the quarter was $15 billion, with software revenue up by 10% and Red Hat's performance growing by 14%. Despite flat consulting revenue due to macroeconomic uncertainties, IBM's hybrid cloud and AI initiatives, including a generative AI book of business worth over $3 billion, have positioned the company for an optimistic outlook heading into 2025. IBM, with its ticker symbol IBM, continues to leverage its expertise in hybrid cloud and AI to drive growth. The company's strategic focus and the introduction of innovative technologies like the cost-efficient Granite AI models underscore its commitment to meeting the evolving demands of the enterprise market. As IBM steers through the remainder of 2024, the market will be closely watching its performance and strategic moves, especially in the high-potential areas of generative AI and hybrid cloud solutions. IBM's strong financial performance in Q3 2024 is reflected in its market position and recent stock performance. According to InvestingPro data, IBM's market capitalization stands at an impressive $214.4 billion, underlining its status as a major player in the tech industry. The company's revenue for the last twelve months reached $62.36 billion, with a modest growth of 3.04%, aligning with the reported quarterly performance. InvestingPro Tips highlight IBM's consistent dividend history, having raised its dividend for 28 consecutive years and maintained payments for 54 years. This demonstrates the company's financial stability and commitment to shareholder returns, which is particularly noteworthy given the challenging macroeconomic conditions mentioned in the earnings call. The stock's recent performance has been robust, with IBM trading near its 52-week high and showing a strong return over the last three months. This aligns with the positive outlook provided by CEO Arvind Krishna for the upcoming quarters and into 2025. The company's P/E ratio of 25.3 suggests investors are willing to pay a premium for IBM's earnings, possibly due to its strong position in hybrid cloud and AI initiatives. It's worth noting that IBM's gross profit margin stands at a healthy 56.09%, indicating efficient cost management and potentially supporting the company's ability to invest in growth areas like generative AI and quantum computing. For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights, with 12 more tips available for IBM. These could provide valuable context for understanding IBM's market position and future prospects in the rapidly evolving tech landscape. Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin. Olympia McNerney: Thank you. I'd like to welcome you to IBM's Third Quarter 2024 Earnings Presentation. I'm Olympia McNerney. and I'm here today with Arvind Krishna, IBM's Chairman, President and Chief Executive Officer; and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind. Arvind Krishna: Thank you for joining us today. Let me start by discussing the quarter before I get into more detail on the execution of our strategy. We delivered double-digit revenue growth in software with the reacceleration in Red Hat and continued strength in transaction processing. Infrastructure reflects product cycle dynamics with z16 well ahead of prior cycles, highlighting customer adoption and continued reliance on the mainframe. In consulting, we continue to navigate an uncertain macro environment with results at the lower end of our expectations. We generated strong operating profitability and the highest levels of first-nine months cash generation in many years, while overall revenue performance was mixed. We continue to reposition our portfolio towards a higher growth, higher margin business that is well positioned to address client needs around hybrid cloud and artificial intelligence. I'll start with a few thoughts on the macroeconomic environment. Technology spending remains strong. Businesses view technology as a source of competitive advantage allowing them to scale operations, improve productivity and drive growth. However, a pause in discretionary spending is impacting our consulting business. This is due to economic uncertainty which stems from several temporary factors, including geopolitical issues, upcoming elections and the changing landscape of interest rates and inflation levels. The consulting market remains dynamic with significant opportunity as clients prepare for AI. Overall, we are confident in our business and our ability to capture these opportunities. Now turning to our performance. Software is nearly 45% of our total revenue, up from the high-20s in 2018, a testament to our focus on organic innovation and repositioning our portfolio. You can see this in our quarterly results as we delivered strong and accelerating software revenue growth of 10%, including Red Hat at 14%, 7 points of organic growth and strength across our key platforms. Software segment profit margin was about 30%. Our recurring revenue base, which is about 80% of annual software revenue, continues to deliver strong growth. ARR for hybrid platform and solutions now stands at $14.9 billion, up 11% year-over-year. This quarter marks the five year anniversary of our acquisition of Red Hat and I am proud of our accomplishments together. Since IBM announced the acquisition, Red Hat revenue has grown to approximately $6.5 billion, doubling in size and delivering a mid-teens CAGR. OpenShift scaled from about $100 million in ARR to $1.3 billion, expanding more than 10 times. Red Hat has also continued to diversify its global footprint expanding into many new countries since acquisition. We continue to drive innovation, announcing new capabilities, including Ansible 2.5, RHEL.ai and OpenShift AI. Red Hat was also named a leader for the second consecutive year in the 2024 Gartner (NYSE:IT) Magic Quadrant for Container Management. We continue to gain traction in enterprise AI. Our book of business related to generative AI is now over $3 billion inception to date, up more than $1 billion quarter-over-quarter. The mix is roughly one-fifth software and four-fifth consulting signings. This performance has placed us in an early leadership position, which is crucial at the onset of any technology shift. The AI portfolio we have built is designed to give clients a comprehensive set of tools to deploy AI within their enterprise. RHEL.ai and OpenShift AI allow clients to build a consistent AI foundation based on open source technology, while watsonx provides an AI middleware platform. Our assistants are designed to help clients become more productive using AI across a variety of business processes from code to HR, customer service and more. Consulting is helping clients design and execute AI strategies. We also continue to see our infrastructure segment play a larger role as clients bring AI to their data. Choosing the right AI model is top of mind for our clients. IBM's Granite family of AI models are fit for purpose. Earlier this year, we released code models with 8 billion to 34 billion parameters. This month, we updated Granite models, making them approximately 90% more cost efficient than larger models. These models can be trained in weeks instead of months and are easier to fine-tune for specific tasks. Granite models are available on watsonx and Red Hat and are also integrated into offerings from partners like AWS, Salesforce (NYSE:CRM), Qualcomm (NASDAQ:QCOM) and SAP. Globally, clients are turning to IBM to transform their operations with technology. This quarter, we announced new collaborations with NatWest (LON:NWG), Telefonica (NYSE:TEF), Samsung (KS:005930) SDS, Toyota (NYSE:TM) Systems and many others. At the U.S. Open, IBM delivered AI-generated match report summaries and we are collaborating with ESPN to enhance the sports coverage through advanced AI insights. We also continue to deepen our relationships with key technology partners, including Dell (NYSE:DELL), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), Salesforce, SAP and ServiceNow (NYSE:NOW). We remain focused on delivering innovations to the market. For example, this quarter, we announced Telum II, IBM's next-generation processor for Z and the Spyre Accelerator, which will significantly enhance IBM Z's AI capabilities and processing power for enterprise scale applications. Investment in emerging technologies also remains a focus for IBM. Earlier this month, we opened Europe's first IBM Quantum Data Center. This is the second IBM Quantum data center deployed globally, which will greatly advance our goal of expanding access to the world's most performant quantum computers. Before I conclude, let me touch on our outlook. The momentum in our software strategy can be seen in our year-to-date results. Our revenue guidance for the fourth quarter reflects this progress, balanced by macro dynamics in Consulting and Infrastructure product cycle dynamics. We remain confident in our free cash flow guidance which we raised in July, driven by continued strength in our operating margin performance. Overall, our portfolio is well positioned to deliver an upward inflection in growth in 2025. I'm excited about the opportunities ahead of us and will share more details with you in January. I will now hand over to Jim to walk you through the details of the quarter. Jim, over to you. James Kavanaugh: Thanks, Arvind. In the third quarter, we delivered $15 billion in revenue, $3.8 billion of adjusted EBITDA, $2.5 billion of operating pretax income, and $2.30 operating diluted earnings per share. And through the first-nine months, we generated $6.6 billion of free cash flow. We are pleased with the solid operating profitability and free cash flow generation of the business. Revenue growth, combined with 100 basis points of operating pretax margin expansion drove 8% operating pretax profit growth, and 5% operating diluted earnings per share growth. Our revenue growth for the quarter was up 2% at constant currency. Software growth accelerated to 10%, with strength across our key platforms of Red Hat, automation, data and AI and transaction processing. Consulting was flat and continue to be impacted by a dynamic market environment as clients reprioritized spending and infrastructure was down 7%, reflecting product cycle dynamics. Our portfolio mix, operating leverage and yield from productivity initiatives generated strong gross margin, operating profit and free cash flow performance. These results represent our highest third quarter levels of gross margin and free cash flow in many years. We expanded operating gross margin by 210 basis points and operating pretax margin by 100 basis points over last year. Year-to-date, operating pretax margin is up 150 basis points, well ahead of our guidance provided in July of over 50 basis points of improvement in 2024. In September, we closed on the Palo Alto (NASDAQ:PANW) QRadar transaction, generating a pretax gain of about $350 million in the quarter. As we previously discussed, this was substantially offset by the charges we took to address stranded costs and accelerate our productivity initiatives. These productivity initiatives allowed for continued investment to drive innovation, which you can see in our higher R&D expense up 10% year-to-date. Year-to-date, we generated $6.6 billion of free cash flow, up $1.5 billion year-over-year. The largest driver of this year-to-date growth comes from adjusted EBITDA, up about $800 million year-over-year. This quarter, we realized $500 million in proceeds from the Palo Alto QRadar transaction. As I mentioned last quarter, for the full year, we expect only a modest contribution of free cash flow given payouts from structural actions we have taken and foregone profit from the QRadar business. Through the first-nine months of the year, excluding the impact of the QRadar transaction, we are several points ahead of our two year average attainment levels. In terms of cash uses, year-to-date we returned $4.6 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a strong liquidity position with cash of about $14 billion. Our debt balance at the end of the third quarter was flat with year-end 2023 at $56.6 billion, including $10.4 billion from our financing business. Turning to the segments. Software revenue growth accelerated to 10%, with broad-based growth across the portfolio. This reflects the repositioning of software around key growth platforms: Hybrid cloud, automation, data and transaction processing, where we deliver a differentiated value proposition to address clients' most pressing needs. Growth this quarter was fueled by the same performance drivers we've highlighted throughout the year. Red Hat accelerated, contributing about 3.5 points of growth to software. The combination of innovation and recurring revenue contributed about 3.5 points to growth. And our focused M&A strategy contributed about 3 points of growth. Let me take you through some more details on each of these. Red Hat revenue growth accelerated to 14%, up 6 points sequentially. We gained market share across each of our key solutions, with OpenShift and Ansible growing more than 20% and RHEL growing in the double-digits. This strength reflects the demand for our hybrid cloud solutions as clients continue to prioritize application modernization on OpenShift containers and Ansible automation to optimize their IT spend and reduce operational complexity. We saw strong acceleration in Red Hat's subscription business, while the consumption-based services business stabilized as we expected. Looking at our revenue under contract over the next six months, this metric continues to grow in the mid-teens as our annual bookings grew double-digits in the third quarter. We are excited about the opportunities ahead of us, including generative AI, early client interest in our virtualization solution and after the deal completion, potential synergies with HashiCorp (NASDAQ:HCP). We delivered strong growth in our recurring revenue base and are seeing momentum from innovation across our software portfolio. Hybrid platform and solutions ARR was $14.9 billion, up 11% year-over-year, driven by strength across automation, data and AI and Red Hat. Transaction processing grew 9% in the quarter, growing capacity, solid renewal rates and continued customer interest in our new generative AI product, watsonx Code Assistant for Z contributed to growth. We continue to invest in bringing innovation to market, launching new offerings like RHEL.ai, Ansible 2.5 and updated capabilities to our family of assistance including the recently announced watsonx Code Assistant with advanced features for enterprise Java applications. Red Hat also announced a partnership with Dell that makes RHEL.ai the preferred platform for AI deployments on Dell PowerEdge servers. This innovation is driving organic growth acceleration with increasing contribution from our core watsonx Middleware in data and AI, watsonx Orchestrate and IBM concert in automation and our AI embed strategy across our software portfolio Revenue performance this quarter also benefited from recent software acquisitions. August marked the one year anniversary of the Apptio acquisition, and we're seeing strong synergies with our automation capabilities and broader software portfolio, driving continued acceleration in bookings and ARR growth since close. Additionally, the stream sets of web methods assets are now part of the software business. And we continue to expect the HashiCorp acquisition to close by the end of this year. Moving to software profit. We expanded gross margin and segment profit was up over 120 basis points from last year, as we continue to deliver operating leverage driven by our revenue performance. Consulting revenue was flat, which was at the lower end of our expectations. As we discussed throughout this year, we are operating in a challenging macroeconomic environment and see no change in client buying behavior. At the same time, clients are reprioritizing their IT budgets to prepare for generative AI. While demand for large digital transformations remain solid, our overall signings declined for the second consecutive quarter as we wrapped on record third quarter signings from last year. Despite the weak current demand environment, we are well positioned to capture growth from generative AI. We continue to build a solid generative AI book of business with about $1 billion of new bookings in the quarter, as we partner with our clients to design and scale AI solutions and develop new ways of working. This early momentum is important. Engaging with clients as they architect their AI strategies is establishing IBM Consulting as a strategic partner of choice. In the third quarter, our Red Hat practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment continue to grow at a double-digit rate, with this quarter being the largest single quarter of signings since the acquisition of Red Hat. Additionally, within our strategic partnerships, both our AWS and Azure practices continue to contribute robust revenue growth. Turning to our lines of business. Business Transformation revenue grew 2%, driven by strength in transformation projects for data, finance and supply chain. Both technology consulting and application operations declined in the quarter. While there was strength in cloud-based application services across modernization, development and management, we continue to see clients reprioritizing spending away from on-prem customized services. Looking at Consulting profit, we expanded gross profit margin almost 1 point and delivered segment profit margin of 11%, a sequential improvement of 2 points, reflecting yield from our productivity actions. Moving to the Infrastructure segment. revenue was down 7%, reflecting product cycle dynamics. Hybrid Infrastructure was down 9%, and infrastructure support declined 3%. Within hybrid infrastructure, IBM Z revenue declined 19% in what is now the tenth quarter of z16 availability. The z16 program continues to exceed prior cycles, delivering revenue growth in eight of the last 10 quarters and program to date installed MIPS are up over 30%. Our clients continue to face increasing demands for workloads given rapid business expansion, complex regulatory environments and increasing cybersecurity threats and attacks. IBM Z remains uniquely positioned to address these demands with the technologies that our latest program offers, embedded AI at scale, quantum safe security and cloud-native development for hybrid cloud. Distributed infrastructure revenue was down 3%, with product cycle dynamics impacting our Power business, while we saw solid growth in storage, which continues to take share. For Infrastructure profit, we expanded gross profit margin 120 basis points across the portfolio this quarter. At the same time, segment profit margin was down 110 basis points, driven by continued investments in innovation for our next generation of products. Now, let me bring it back to the IBM level to wrap up. Through the first-nine months of the year, we have grown revenue by 3%, expanded our operating pretax margin by 150 basis points and grown free cash flow by $1.5 billion. We have made solid progress in transitioning our portfolio to a higher growth, higher margin business that is well positioned as we head into next year. With nine months of the year behind us, let me now focus on the fourth quarter. We expect revenue growth in the fourth quarter to be consistent with the third quarter levels. Software revenue growth has accelerated throughout the year, and this should continue. We expect low double-digit fourth quarter revenue growth for software, led by Red Hat growth in the mid-teens and continued strength in transaction processing. This now represents strong high-single digit growth for the year. Consulting revenue is up 1% year-to-date, impacted by challenging macroeconomic environment. We expect fourth quarter revenue performance to be similar to the third quarter. This represents the weaker end of our prior expectations of low-single digit revenue growth for the year. And given we are at the end of a multiyear product cycle, we now expect the infrastructure to be about a 1 point impact to IBM for the full year. On currency, given the strengthening of the dollar, we now expect currency to be about a 0.5 point headwind to revenue growth in the quarter and about 1 point impact of revenue growth for the year. Now turning to profitability. For the full year, we are raising our expectation for operating pretax margin expansion to about 1 point year-to-year well above our model. The strength of this performance is driven by our revenue scale, portfolio mix and productivity initiatives, enabling operating leverage, while providing investment flexibility. Actions taken in the third quarter helped accelerate our productivity initiatives, and we now believe we can achieve approximately $3.5 billion in annual run rate savings by the end of 2024, up from $3 billion. Drilling down on segment margins. We expect Software segment profit margin to expand by well over 1 point for the year. Consulting segment profit margin is now expected to be flat, and we continue to see Infrastructure segment profit margin in the mid to high-teens. Consistent with last year, we are maintaining our full year view of operating tax rate in the mid-teens range. For free cash flow, given the strength of our performance year-to-date, we remain confident in delivering greater than $12 billion of free cash flow for the year, driven primarily by growth in adjusted EBITDA. We are on track to grow revenue, expand operating profit and grow free cash flow as we close out 2024. This positions us well as we look forward to 2025. We are confident in our portfolio and growth trajectory as we head into 2025, given the acceleration in software, the opportunities ahead of us in Red Hat, our new mainframe cycle and associated hardware and software stack, our generative AI positioning and contribution from acquisitions. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney: Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multipart questions. Operator, let's please open it up for questions. Operator: Thank you. At this time, we will begin the question-and-answer session of the conference. [Operator Instructions] Our first question comes from Amit Daryanani with Evercore ISI. Please state your question. Amit Daryanani: Good afternoon, everyone. Thanks for taking my question. I guess, Arvind you talked towards the end of your comments about how IBM portfolio is delivering [Technical Difficulty] organically in '25, I assume. And if I think about the segments, I think the interest on your side is somewhat easy to see with the Z17 cycle, but I'd love to hear your thoughts on how does that inflection pan out on soft print consulting especially consulting after a few quarters of muted growth? Thank you. Arvind Krishna: Hey. Thanks, Amit. First, thank you very much for picking up on that comment on upward inflection for '25. That is something which we have worked really hard to achieve and that I'm really proud of what the whole team has gotten there. To be specific on the parts that you just touched on, what about the upward inflection on Software and on Consulting. So if we look at Software, first of all, with Red Hat having just delivered 14%, us expecting similar performance for the next quarter. And given that we get at least six months to nine months' worth of a look ahead based on the CRPO of Red Hat, we expect that to carry on to next year, that could easily then provide a significant amount of lift to software, perhaps about 3 points of growth for Software overall. Two, we've got very good traction, both in our Gen AI products as well as in our automation suite. And we can look at our pipelines and expect that those will be maintained. Given we have also seen a lot of mainframe deployment, the MIPS underlying capacity there will power ahead the mainframe or the TPS software. You put that together with already announced M&A of HashiCorp and then planned M&A that we will have over the year, and that gives us a lot of confidence on software being at or likely above the model that we had laid out a few years ago. So I think that gives you the pieces in Software. Now on Consulting, I acknowledged in the call that there is some macro issues that will impact discretionary labor. So that is the piece that is there. But that is kind of baked in now to what we have been doing. But as we look forward, our bill-to-book ratio at 1.14 tells us that there is a lot of pent-up demand. As we see this Gen AI pipeline turn from signings into revenue, then we expect to see growth there. And we have a very healthy book of business with the hyperscalers and with our ISV partners, as Jim had talked about. We put all of that together, and we expect to see positive upticks on Consulting. You'll note, I'm not trying to quantify that as deeply as I did in Software, but it will be upwards. Put that together with what we'll see in infrastructure where we expect to see significant upticks starting likely around the end of the first half, and that gives us the confidence in 2025. Olympia McNerney: Operator, let's take the next question. Operator: Our next question comes from Toni Sacconaghi with Bernstein. Please state your question Toni Sacconaghi: Thank you for the question. I just wanted to follow up largely along those lines, Arvind. IBM is a portfolio of many different things. And some years, things go really well, like TPP this year and other things don't go very well like Consulting this year. But if I look back at the last four years, and maybe that's not the right timeframe, you may correct me, growth this year will be 3% or less, and growth has been 3% in three of the last four years. And so I understand that the setup for 2025 is good because of the mainframe cycle and acquisition. But why is -- why should that not be viewed as a one-off just like this year, maybe as a one-off and being below your 4% to 6% model of less than 3% growth? And specifically, for next year, do you think Consulting signings will inflect positively in Q4? Because they've been negative the last two quarters. So if they don't start to pick up, then the leading indicator for consulting actually does not point to growth necessarily for 2025? So if you can address those questions, that would be great. Thank you. Arvind Krishna: Toni, look, let me build on the comments I made in response to Amit's question and then address some of the points you made, Toni. So I'm not sure I would acknowledge that 3% of growth only, while that has been true in many of these years, 2022 was definitely far above that. But let me acknowledge that will also perhaps a one-off with the [indiscernible] revenue now being recognized as intercompany as opposed to intracompany. Now, despite that, we actually had higher revenue than that despite what we explicitly modeled out for the [indiscernible] piece. So -- but let me acknowledge at least in two of the last four years, it was around 3%. So what gives us confidence? So as I began to Amit's question, we've been really hard at work rebuilding our portfolio to be both sustainable and have a lot more value for our clients in terms of the innovation we are delivering them as well as our ability to manage the cost and complexity that they have, as they're all leveraging technology to drive a much larger part of their own businesses. That's kind of the macro. And under that, the fact that 7% of our Software growth this year was organic in this last quarter, not at all acquisitive, gives us confidence about how well that software is being used. 80% of our software is actually now on a recurring revenue basis, that is up significantly over the last few years. Those all tell us real demand in that part of the portfolio. If I turn around and say, it's 80% there, and it generated 10%, that gives us confidence on the organic base of software even going into next year. And as far as we can see, the mainframe software will maintain perhaps mid-single digit growth, not maybe high-single digit growth going into next year. But that gives us really good tailwinds for what we're trying to do there. And while I called out HashiCorp, which has sort of already been announced, we do expect, as we get through that deal, to do a lot more M&A even going into next year. And since our cash flows have gone up from four years ago, that gives us more ability to do M&A without any other actions to speak of. On your Consulting side, while the last year and if I go more than four years ago, have been flat or negative, the confidence we're getting there is from the quality of the signings and from the yields that we expect. The overall signings this year have been lower than last year. But if the signings didn't yield, then they don't mean very much. So it's the yields we worry about. And the backlog that we get that we worry about and we are seeing those begin to turn. Note, I'm muting the word begin to turn. I don't expect consulting to inflect like software and go into double-digits, but I do expect it to turn into a tailwind for us in terms of being positive growth as we are going. And that's why I believe this may be a tale of two halves. The Consulting may be very modest in the first half, but much better in the second half based on what we can see in terms of the signings, the offerings and as the Gen AI book of business turns into real revenue across all of our clients. I hope that, that gives you a sense. And I know we don't talk on Infrastructure and you acknowledge the mainframe cycle. But I also want to call out credit. Inside the Infrastructure business, there is also a recurring revenue business, which is our hardware maintenance business. And that is also a piece that has gone from being a headwind to potentially close to flat next year. So just in year-to-year, that could well be a 4, 5 point tailwind on that part of the business. Olympia McNerney: Operator, next question. Operator: Thank you. Our next question comes from Wamsi Mohan with Bank of America (NYSE:BAC). Please state your question Wamsi Mohan: Yes. Thank you so much. Jim, in your comments, you noted no change in client buying behavior and consulting. But if we look at what happened with your AI book of business, which is up meaningfully a meaningful part of that being in services, it would indicate that the underlying Consulting business ex, that kind of deteriorated. So I was wondering if you could reconcile that comment with what's happening in Consulting? And secondarily, you noted year-to-date PTI margin performance of 150 bps improvement, but the fiscal year has guided to about 100 basis points, but you also noted sort of realizing $3.5 million of annual run rate savings. So can you just talk about some of the profit dynamics in the fourth quarter? How we should think about some of the puts and takes over there? Thank you so much. James Kavanaugh: Sure, Wamsi. Thank you for the question overall. As Arvind and I said in the prepared remarks, we're obviously operating in a very dynamic, uncertain macroeconomic environment around the entire Consulting market overall. Yes, we posted flat revenue growth overall, by the way, up 1% year-to-date, so a slight deterioration. Underpinning that, I think there is multiple dynamics that are playing out. And let me try to unpack some of these. First, to your question about the opportunity statement. And yes, Gen AI, albeit we're very early in the cycle right now, we are very focused on ensuring we get an enterprise lead position in establishing Consulting as a strategic provider of choice. And we're building that book. If you look at our book of business right now, we exited 90 days ago, IBM above $2 billion, that was about 75% Consulting. Now we're north of $3 billion and about 80% Consulting. So underneath that, we are actually seeing the last two quarters about $1 billion book of business each quarter being generated. Now within that, those are mid to long-term digital transformation Gen AI-based deals. By definition, higher duration, lower revenue yield and I think we spent time last quarter talking about it, about 3 to 4 points less yield than traditional book of business overall. But it's important because it's building that backlog growth that Arvind just answered Toni's question on overall because we believe, albeit we're early, this is a long-term growth vector with a multiplier effect across our platforms, our software, our infrastructure that is an integral part of the integrated value thesis of Consulting here. Now mitigating some of that growth is the high yielding revenue short-term discretionary projects. Those yields are about 4 to 5 points above what we're seeing in Gen AI right now. So I think you're seeing the early cycle dynamics that will put pressure and has put pressure on our top line consulting revenue, but -- and that's why we guided fourth quarter consistent, but more importantly, I would look at the glass half full, we are becoming the strategic provider of choice, we're winning in the Gen AI space around consulting, and that's going to fuel a growth vector around fueling 2025. Now with regards to profit equation. We're very pleased with our fundamentals of our business and the underpinnings of that. We drive operating leverage in this business three different ways. One, high-value portfolio mix, that's why Software is an integral part of our model, approaching 45% of revenue, that growing 10% is a strong profit contributor overall. Two is, we get the high value leverage of a recurring revenue stream overall and productivity. And three, we get that $3.5 billion that we are looking for coming out. We're well ahead of that year-to-date, as you said. I think we're being very prudent on how we're guiding fourth quarter right now. And we'll talk 90 days from now, and we fully expect, by the way, that all drops to the quality in sustainability of free cash flow, we're going to be up well over $1 billion with north of $12 billion this year and will be set up very nicely for 2025. Olympia McNerney: Operator, let's take the next question. Operator: Our next question comes from Ben Reitzes with Melius Research. Please state your question Benjamin Reitzes: Yeah. Hey, thanks, guys. Jim, we previously spoken about high-single digit growth potential for free cash flow at this company. I was wondering, you've made a lot of comments about 2025, do you think that's possible still in 2025 given the Hashi acquisition? And I want to also see if you can address it. If Consulting were to remain flat, does the mix shift still support that. Thanks a lot. James Kavanaugh: Yes, Ben. Thanks very much for the question. A lot of interest, as you know quite well from our investors on this particular question of our model. I'm not going to get into the specifics as you would probably not expect me to about actual quantification. I think Arvind and I have both said, we feel very confident about our strategy, our portfolio and our growth opportunities heading forward into 2025. But let's take a step back, right? Three years ago, when we laid out our midterm model, Arvind transitioned this company from a no-growth company to a mid-single digit company, a company that was roughly about 10 points of pretax margin to a company that's going to exit this year in the high-teens, growing 700 to 800 basis points over three years and a company that was stagnant to declining free cash flow, and we'll probably grow free cash flow, by the way, exiting 2024, pretty much on top of the absolute number we set in 2022. So I think we made a lot of progress. Now when you talk about going forward, we talk about upward growth inflection. All of you understand the portfolio mix composition in this business, the productivity mindset of what we drive in this company and the competitive business model positioning which I would argue we still have a lot of headroom to continue to grow. Our model has always been to drive operating leverage that enables us to drive free cash flow faster than revenue. And I would fully expect that even with the Hashi dilution that we all acknowledge. We are very excited. We're hoping to close that still by the end of the year, but that transaction stands on its own, strategic value, the attractive financial model and the synergistic value we get across our portfolio of Software and Consulting. And we've got that embedded in our model, and we still feel very confident growing free cash flow faster than revenue. James Schneider: Thanks for taking my question. I was wondering, if you could maybe comment on the rate at which you're seeing consulting work and the consulting signings you do have translate into revenue and sort of the time to commence then. Is that what's giving you a bit of increased confidence on the inflection in Consulting or the slow improvement in Consulting going to next year? And then maybe just kind of separately, talk about, if you could, the types of M&A targets you're thinking about in Software and how that might be different than what you've done in the past? Are you thinking of things that are in any way different from the sort of open source in Infrastructure and DevOps type of deals that you've done in the past and how that might be changing? Thank you. James Kavanaugh: Great, Jim. Thank you. I'll take the first part of your question, and Arvind can handle the second part about the targeted areas around M&A. As we stated, we feel very good about the strong start in our Gen AI book of business around Consulting. Let's just put some numbers to it, right? IBM north of $3 billion, growing over $1 billion quarter-to-quarter, The Consulting book of business is approaching $2.5 billion. You put that in perspective against the last technological shift that we can see within our business, that being hybrid cloud and Red Hat, and we're about 2x that run rate, because we did about $1 billion in the first 12 months. So we're seeing a very nice acceleration, and we've talked enough about this being very early in the cycle. But that $2.5 billion book of business, that's up almost $1 billion quarter-to-quarter, and it's growing 35% plus. Now when you look at it, the underpinnings, as I said earlier, these are mid to long-term strategic digital transformation Gen AI deals, higher duration. Durations are probably approaching high 40 months overall compared to an average duration in Consulting, that's in the low 20s, point number one. Point number two, I talked about revenue yield being lower, about 3 to 4 points lower. Revenue yields kind of hovering around mid to high-single digit revenue yield. And again, that's about 3 to 4 points less than traditional. But I can't stress enough. I think these curves will inflect as we move into 2025, and -- because as we start wrapping around the short-term discretionary pullback that's impacting that traditional near-term revenue, we're going to start seeing this long-term growth vector pick up as we go forward, which then has multiplier effects of our software and our hardware going forward. Arvind Krishna: Thanks, Jim. So Jim, let me address the second part of your question. I've been very clear about our M&A strategy. It has to fit our existing strategy. And in this case, for Software, which you asked about, then the three areas would be what are we doing around hybrid cloud. I would say, Hashi's a great example or something in there. What are we doing around automation? Apptio was probably a great example there, but so were some others like Turbonomic and Instana. And then what are we doing around data and AI? Where I would tell you that portions of Software AG fell into that camp. The reason that I want to stick to the lanes we are in is because we get a massive amount of go-to-market synergy and distribution synergy with IBM, which is the second element of the strategy. There has to be synergy with IBM that the target could not have realized on their own. Otherwise, there isn't an economic return for our investors. So those two pieces are essential right now. Now, when we did Red Hat five years ago, and I think that, that was implicit in your question, we did open up a new lane of a big open source play and we have stuck to that through the Red Hat discipline and with that brand name. But not everything needs to be open source. So let me be clear on that. Apptio was not open source. Turbonomic was not open source. When we do find an open source property, that fits all our criteria, we would certainly look at it. But that is not our lens or our filter on looking at things. The filter and lens are looking at things for the three areas that I mentioned as being our strategic fit. Now, Jim made a comment about two questions ago about there being headroom. We see a lot of headroom on these topics and helping people manage their infrastructure better, take cost out, reduce the labor complexity, leverage your data are better, do AI at more cost-efficient methods than everything that we see today. As we go through all of this, once we begin to run out of headroom then we might add some areas, but I don't see that happening for some years at this point. Brent Thill: Thanks, Jim. Really good margin on software 30%, well above past Q3s. How sustainable is this 30% margin and any way to frame that going forward? Thanks. James Kavanaugh: Yeah, Brent. Thank you very much for the question. We're obviously very pleased with our software performance. Its core to our strategy overall. Software being about 45% of IBM's revenue composition, and two-thirds of our profit. And most importantly, to Arvind's last question here that he just answered, integral to our hybrid cloud and AI platform centric model. It's all built around software overall. By the way, you probably noticed, we did hit the Rule of 40 here in the third quarter. We feel confident that we continue to strategically reposition our business. And by the way, the margin inflection we've seen over the last three years in software has been both a combination of that revenue inflection and getting into more end markets with the strategic focus both organically and inorganically, that Arvind talked about, hybrid cloud, automation, data and by the way, the inflection of transaction processing, which I'll remind all of you, is a high margin, high profit contribution overall. So that, coupled with the productivity initiatives are enabling us with the financial flexibility to continue to invest in innovation while still generating margin and operating leverage going forward. So we feel pretty confident about that continuing. Similar to how I answered the earlier question, we see a lot of headroom in front of us on operating margin continuing both for IBM and for software. Erik Woodring: Great. Thank you very much for taking my question. Jim, I wanted to maybe ask the Consulting AI question maybe a different way, which was last quarter, you had noted that Consulting AI projects were largely cannibalizing other areas of Consulting spend. And I'm just curious at what stage do you think these long duration signings turn into recognized revenue and some materiality that, that could really impact the trajectory of the consulting business? And then second, in what situation or environment would we see AI consulting projects turn from cannibal, -- cannibalizing the traditional business to becoming incremental to traditional Consulting? Thanks so much. James Kavanaugh: Yeah. Great. And thanks, Erik, for the question overall. As we talked about, maturity of Gen AI were very early in the cycle. The key for us is to win this early leadership position to be the Gen AI strategic provider of choice. And I think we are carrying our own to say the least right now, given the $2.5 billion book of business. Now with that, higher duration, lower revenue yield, there is revenue yield in the quarter. I don't want to leave anyone without the impression. It's just about 3 to 4 points below what our traditional are because of the longer duration. If I just do some of the mathematics around it, very quick. First, we're going to start wrapping on the pullback when we started talking about the short-term pause in discretionary spending as clients are looking at cost productivity to fuel investment into Gen AI projects that have longer duration. We'll start wrapping on that as we kind of get through the first half of next year, that's point number one. Point number two, that inflection curve, when we just look at what we experienced historically with the Red Hat generation, because in every technological shift human capital and consulting-based business, you're always going to see reprioritization. We've seen it with cloud technology shift. We've seen it with the Internet. We've seen it with globalization. And we've seen it when we went through the hybrid cloud side on Red Hat. That kind of puts it in as Arvind and I have been talking here while we feel very confident in that upward growth inflection in '25. Consulting is going to be more of a second half '25 play as we move forward. And by the way, with that upward inflection, the key is backlog. We got to get the volume and demand here in the fourth quarter to Toni's question, and we got to still continue building that volume and demand in the first half because then that will build a multiplier effect that will be a nice, healthy consulting growth orientation like we were at about a year ago. Olympia McNerney: Operator, let's take one last question. Operator: Thank you. And the next question comes from Matt Swanson with RBC Capital. Please state your question Matthew Swanson: Yeah. Thanks for taking my question. Arvind, you talked about the latest addition of the Granite models being 90% more cost efficient, may be trained in weeks. You've taken a really pragmatic kind of ROI focused approach to Gen AI. Could you just talk a little bit about what you're hearing from enterprises and customers that are kind of supporting that direction of development? Arvind Krishna: Certainly, Matt, and thank you for that question, and for picking up on the Granite models. Look, as I started talking to customers on this topic about 1.5 years ago, there was a lot of excitement around Gen AI deployment inside the enterprise. But you could see some people beginning to do the math and say, hang on, if I really use this at full scale for all of the transactions that happen inside our enterprise, then the bill could easily become tens of millions a day, which very quickly becomes multiple billions a year and while that was advantageous to do it, they didn't see that kind of cost being affordable. So we sat back and said, how big do these models need to be, because the size of the model determines or did determine previously performance as well as the cost. And so the question became, could we do a model that had tens of billions of parameters and was as good, but for a more constrained set of tasks. I kind of be a little facetious. Look, if you're running a big consumer model and you have no idea, is the person going to ask you to summarize a document or a piece of X, which they do, or they're going to ask you to write a poem or a haiku or translate finish to French. Okay, You got to have a model that does all those things. But if we need a model that can summarize the business document, but at much higher quality, that allows us to bring a model with about in this case, to be precise, 8 billion to 30 billion parameters. That is as good as the biggest model for those tasks, but doesn't do all those other things. But for the enterprise, that does 100% of their use case and literally, in this case, could run with 97% more efficiency. Then giving it to people with the indemnity with the licensing that they can actually refine it and they don't owe the refinements or any improvements in the model back to us, we think is a winning hand as enterprises deploy more and more of generative AI. So with that, let me now wrap up the call. In the third quarter of '24, we accelerated our Software performance, including Red Hat. We are excited about the positioning of our portfolio and our growth prospects for 2025, and we look forward to sharing our progress with you as we close out the year. Thank you. Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.

Lam Research (LRCX) Q3 2024 Earnings Call Transcript | The Motley Fool

Good day, and welcome to the Lam Research September Q1 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Ram Ganesh, vice president of investor relations. Please go ahead, sir. Ram Ganesh -- Head of Investor Relations Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, president and chief executive officer; and Doug Bettinger, executive vice president and chief financial officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the September 2024 quarter and our outlook for the December 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Timothy M. Archer -- President, Chief Executive Officer, and Director Thank you, Ram, and good afternoon, everyone. Lam posted a strong September quarter, with revenues and earnings per share higher than the midpoint and profitability above the high end of the guided ranges. These results marked the fifth consecutive quarter of revenue growth for the company. When combined with our solid outlook for the December quarter, Lam's performance points to strong execution in an industry environment where NAND spending has yet to recover. Our view on calendar year 2024 WFE remains mostly unchanged. Spending is expected to be in the mid $90 billion range. We continue to see AI driving strong investments in leading-edge logic nodes as well as advanced packaging segments, including high bandwidth memory or HBM. We expect domestic China WFE will be down in the second half relative to the first half. with China's share of Lam's overall revenue normalizing to the 30% range in the December quarter. For our normal cadence, we will provide the full details of our 2025 WFE outlook on our January earnings call. However, at this point, our early view for next year is for WFE growth from 2024's mid-$90 billion range. More importantly, we see an outstanding opportunity for Lam to outperform overall WFE growth in 2025. This is due to the critical role that etch and deposition play as fundamental enablers of higher-performance, more scalable semiconductor device architectures. Lam is strongly positioned to benefit both from improvement in NAND spending and increased customer investments across multiple technology inflections. In NAND, we expect the spending recovery to be driven primarily by technology upgrades, which is a highly favorable dynamic for Lam given our industry-leading position in critical man processes. In foundry, logic, and DRAM, we are set to benefit from growing investment in gate-all-around backside power distribution, advanced packaging, and dry EUV RECIST processing. Each of these advancements is more etch and deposition-intensive, and we have talked about our progress in these areas over the past several quarters. We expect to see increase in adoption across all four inflections in 2025. First, on NAND. This segment has seen a prolonged cyclical downturn, but technology conversions to more advanced nodes will be critical to meeting the increased demand for high-speed, high-capacity enterprise SSDs as well as satisfying the need for low-cost high-capacity storage and client devices. Currently, over two-thirds of bits are still manufactured using older sub-200-layer technologies. We believe customers will continue converting this capacity to more advanced nodes in 2025. With the industry's largest installed base of 3D manned equipment, Lam should benefit disproportionately as these upgrades occur. Furthermore, NAND manufacturers must also address the growing challenge of Worldline resistance. This sets up an important materials migration from tungsten to molybdenum or moly, which offers superior thin film resistivity simplifies the process of minimizing leakage, and yields the lowest resistance. Lam has more than a decade of learning embedded in our metal atomic layer deposition or ALD applications with customer engagements on moly across NAND, DRAM, and foundry logic. We have production wins for the moly transition in NAND that will scale in 2025 with foundry logic and DRAM ramps to follow. Outside of NAND, we continue to build momentum in gate-all-around nodes with our selective etch tools, including recent wins and a large foundry logic customer. In advanced EUV patterning, our latest conductor etch tool with direct drive technology is gaining ground with broader adoption across key customers. In the evolution to backside power distribution in foundry logic, we see expansion of our served market and share in dielectric etch and copper plating in 2025 due to the introduction of additional via formation steps and new metal layers. Advanced packaging has been a highlight this year, driven by the performance needs of advanced AI devices. Lam established early technological leadership in deposition for advanced packaging. Our unmatched experience in copper-plating hardware design and process technology is enabling SABRE 3D to deliver best-in-class coplanarity uniformity and defectivity at high throughput. This has translated into significant market share gains in 2024 and strong momentum as we look ahead into 2025. Our Sabre 3D revenue has more than doubled this year. as both the number of 2.5D and 3D packages and the metal layer count per package has grown. As the complexity of advanced packaging continues to increase over time, more stringent performance requirements should play to Lam's strengths. Finally, in our Customer Support Business Group, or CSG, we are seeing strong customer pull for productivity enhancement, extendibility, and reuse of Lam's installed base of tools. In both DRAM and NAND, there is intense focus on lowering bid cost through efficient reuse of the installed base. This has led to recent market share wins were upgrades of existing Lam installed base systems provided better value than the new build alternatives offered by competitors. Similarly, our customers' focus on installed base productivity is driving greater adoption of Lam's equipment intelligence services. with an additional 500 process chambers subscribed in the past quarter. So, to wrap up, as we look at the changes ahead for every leading-edge device in every advanced package, we see more and more opportunity for Lam. The AI era is here. We have transformed our business and expanded our product portfolio to prepare for this next generation of semiconductor industry growth. Our investments are in the early stages of paying off. I'm looking forward to sharing more about why we believe the best is yet to come for Lam at our Investor Day on February 19 in New York City. Now, here's Doug. Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Excellent. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. Before I start, I want to remind everyone that on May 21, 2024, we announced a 10-for-one stock split, which was effective October 2, 2024. All references made to share or per share amounts in my remarks have been adjusted to now reflect the stock split. We delivered strong results in the September 2024 quarter. Our revenue and earnings per share came in above the midpoint of our guided range, while both gross margin and operating income percentage exceeded our guidance range. I'm pleased with the company's continued strong revenue and profitability execution as well as our solid generation of free cash flows for the quarter, which came in at $1.46 billion or 35% of revenue. Let's look at the details of our September quarter financial results. Revenue for the September quarter was $4.17 billion, which was an increase of 8% from the prior quarter. Our deferred revenue balance at the end of the quarter was $2.05 billion, an increase of $495 million from the June quarter. This grew mainly due to customer advanced payments. I believe our deferred revenue balance will trend lower into calendar year 2025, but you will likely continue to see fluctuation quarter to quarter. From a segment perspective, September quarter systems revenue in memory was 35%, roughly in line with the prior-quarter level of 36%. Within the Memory segment, though, DRAM increased, coming in at 24% of systems revenue versus 19% in the June quarter. DRAM spending was focused on technology upgrades to One alpha, on beta, and some initial ramp of one-gamma nodes to enable DDR5 and high-bandwidth memory. The nonvolatile memory segment represented 11% of our systems revenue, which was down from 17% in the prior quarter. This decline is driven by the timing of one customer's sequentially lower investment in specialty DRAM that we characterized as a nonvolatile investment because it has a nonvolatile component in the device. The NAND segment has experienced a prolonged downcycle compared to historical norms. However, we anticipate that spending will increase in calendar 2025, and as utilization rates improved to more normal levels and our customers begin to invest in conversions to 256- and 384-layer class devices. The Foundry segment represented 41% of systems revenue, a slight decrease from the percentage concentration in the June quarter of 43%. In dollar terms, spending was relatively unchanged in quarter to quarter. The Logic and Other segment was 24% of our systems revenue in the September quarter, up from the prior-quarter level of 21%. The increase was driven by an uptick in both leading-edge and specialty node logic devices. Now, I'll discuss the regional contribution of our total revenue. The China region accounted for 37%, down slightly from 39% in the prior quarter and a little bit stronger than we expected. Most of our China revenue continued to come from domestic Chinese customers. And as Tim mentioned, we expect spending from this region will decline in the December quarter. I think perhaps to approximately 30% of December's revenue. Our next largest geographic concentration was Korea at 18% of revenue in the September quarter, which was flat with the June quarter. And finally, Taiwan and the United States rounded up the remainder of the top four regions. Our Customer Support Business Group generated approximately $1.8 billion in revenue for the September quarter. up 4% from the June quarter and 25% higher than the same period in 2023. The sequential dollar growth was split evenly between Reliant Systems and all other components of CSPG. The spare parts component of CSBG continues to be the individual largest piece of this business unit's revenue. Let's turn to gross margin. The September quarter came in at 48.2%, which exceeded our guided range. Gross margin decreased a little sequentially, however, reflecting a decline in customer mix as well as an increase in incentive compensation. These factors were partially offset by improved factory utilization as we continue to make progress on our operational initiatives. Operating expenses for September were $722 million, up from the prior-quarter amount of $689 million. The increase was partly due to growth in program spending as well as higher incentive compensation tied to the company's increased profitability outlook. R&D accounted for 67% of the total spending. Operating margin for the current quarter was 30.9%, slightly above the June quarter level of 30.7% and above the high end of our guidance range, primarily because of the higher revenue, and continued strong gross margin performance. Our non-GAAP tax rate for the quarter was 13.8%, generally within the range of our expectations. Our estimate is for the tax rate to continue to be in the low to mid-teens range in the near term. Other income and expense for the September quarter came in at $13 million in income compared with $19 million in income in the June quarter. The decrease in OI&E was primarily due to foreign exchange fluctuations. OI&E will continue to be susceptible to market-related variations that could cause some level of volatility quarter to quarter. Let me pivot to the capital return side of things. We allocated approximately $1 billion to open market share repurchases, and we paid $261 million in dividends in the September quarter. I'd just highlight that in August, we announced a 15% growth in the dividend, in line with our plan to deliver an annual growth in the dividend. And I just mentioned, since paying our first dividend in 2014, we have now raised the dividend in 10 consecutive years. We have $9.8 billion remaining on our board-authorized share repurchase plan. And we continue to track toward our long-term capital return plans of returning 75% to 100% of our free cash flow. For the September quarter, diluted earnings per share was $0.86, above the midpoint of our guided range. The diluted share count was approximately 1.3 billion shares, which was a reduction from the June quarter. On the balance sheet, our cash and cash equivalents totaled $6.1 billion at the end of the September quarter, up from $5.9 billion at the end of the June quarter. The increase was largely due to cash from operating activities, offset by cash allocated to share buyback, dividend payments, and capital expenditures. This sales outstanding was 64 days in the September quarter, an increase from 59 days that we saw in the June quarter. Inventory at the end of the September quarter totaled $4.2 billion. Inventory turns improved to 2.1 times from the prior-quarter level of 1.9. We will continue to manage inventory levels to the best of our ability to align with customer demand. Our noncash expenses for the September quarter included approximately $80 million for equity compensation, $80 million in depreciation, and $14 million in amortization. Capital expenditures for the September quarter were $111 million, up $10 million from the June quarter. Capital spending was mainly centered on lab investments in the United States and Asia as well as manufacturing facilities supporting our global strategy to be close to both customers' development as well as manufacturing locations. We ended the September quarter with approximately 17,700 regular full-time employees, which is an increase of approximately 500 people from the prior quarter. Head count growth was predominantly in field and factory personnel to support increased tool installation as well as growing manufacturing activity levels. Let's now turn to our non-GAAP guidance for the December 2024 quarter. We're expecting revenue of $4.3 billion, plus or minus $300 million. Gross margin of 47%, plus or minus one percentage point. The gross margin guidance is reflective of a quarter-to-quarter headwind in customer mix, operating margins of 30%, plus or minus one percentage point. This reflects our continued commitment to managing our expense level as we prioritize critical R&D investment areas. And finally, earnings per share of $0.87, plus or minus $0.10, based on a share count of approximately 1.29 billion shares. So, let me wrap up. We continue to execute well in 2024. I believe that's reflected in our September results as well as guidance for the December quarter. We're on track to achieve modest improvement in our operating leverage for the full calendar year as we prioritize critical investments to extend our technology differentiation while carefully managing overall spending levels. The investments we're making position Lam well to benefit from the architectural and materials inflections we see ahead. We believe that we will continue to gain traction and outperform the overall growth in WFE in calendar year 2025. We continue to see 2025 as a growth year in both WFE and more importantly, Lam's top line. Operator, that concludes our prepared remarks. We would now like to open up the call for questions. Operator Certainly. We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble our roster. And our first question today comes from Tim Arcuri with UBS. Thanks a lot. Tim and Doug, I know that you don't want to project 2025 WFE, and I'm not asking you to give us a number, but can you just talk about the puts and takes? I guess, particularly around China, I mean, obviously, there's going to be some additions to the entity list, but it seems like even a bigger factor might be the consolidation of some of this legacy node stuff. It seems like there's a huge consolidation of a lot of these fabs that have been built that are ultimately connected to either Huawei or BYD. So, can you just talk sort of conceptually about the puts and takes and particularly about China? I mean, it's down about 10 points of your revenue. Sure. Thanks, Tim, and thanks for not pressing us on an early 2025 guide. We are trying to -- we are -- we realize there's a lot of questions, and we are trying to give some additional color where we can. We said that we believe year-on-year WFE overall would be up next year. Specifically, our view for China WFE next year would be that it is lower. For all -- you can pick all the variety of reasons that you may have just listed and that as a percent of Lam's total revenue, China would represent a lower percentage next year than this year. And so, I think that's about all we can say right now. Obviously, in January, we'll give a lot more color on the full market. Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer I'd just add a little bit, Tim. Outside of China, they'll think about everything else going on leading-edge foundry and logic continues to be quite good. DRAM continues to be pretty robust with DDR5 high-bandwidth memory. What the trailing edge specialty node stuff does outside of China, I think we'll, as an industry, work our way through the inventory positions we're in. So, trends are actually pretty good in most of the industries. I'd just remind you of that, and I know you know that. Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. And I think, Tim, that's -- maybe I think gets lost when we talk about percentages is we talked about a tremendous number of technology inflections and investments during my prepared remarks, none of which would actually be occurring in China as a result of the either restrictions already in place or the technology nodes that they're at or the fact that -- I mean, again, NAND, for instance, for us, those upgrades would be generally occurring outside of domestic China. Nodes like gate-all-around, obviously, are outside of domestic China. And so, when you think about percentages, the stronger those trends are for Lam and for the industry, then naturally, that's why we see China continuing to trend lower as a percent of our total revenue. Right. And then just like super quick, Doug, for you. So, CSBG was up. It was better deferred being up a lot. Yeah, a little bit. What you heard me say is the growth in CSBG was a combination of growth in Reliant and then everything else. So, Reliant was pretty strong again last quarter. So, yes, Tim, that's part of it. And our next question comes from Harlan Sur with JPMorgan. Please go ahead. Harlan Sur -- Analyst Yeah, good afternoon. Thanks for taking my question. You know, last call, you guys talked about NAND utilizations moving higher, driving growth in spares. Did you see that trend continue into the September quarter? And you've talked about confidence on NAND WFE growth outlook for next year. Is the confidence level as strong on WFE spending growth outlook relative to let's say, 90 days ago? And are you starting to get some order and forecast visibility to support that? Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah, Harlan. I think that what I'd like to point out on NAND is it's a combination of things. We continue to see utilization being strong for the capacity that's in place. But what I was talking about in my prepared remarks was this need for what we would consider to be higher quality bits, higher performance to meet the needs of enterprise SSDs and other applications are now tied to sort of this move in AI, and so when we think about it, this is going to drive -- even if you're not looking as an industry to add a lot more bit capacity itself, you're going to want to shift that two-third that is manufactured still in the 1xx-layer technologies you're going to shift that to nodes that are taking advantage of things like sell under array or be able to do QLC, the moly transition we talked about, all of those things allow and manufacturer to be a lot more competitive for the parts of the market that are seeing a lot of strength. And so, the reason that is so important for Lam is we play a really critical role, and we capture a very high percentage of all of those upgrades. And so, our anticipation is that the industry will be still in a recovery mode next year. But if most of the spending is directed toward technology upgrades and it's pulling in all of those things I just talked about, that's right where Lam's product portfolio plays. It's really our fleet spot. And so, that's why we're optimistic on NAND almost regardless of whether WFE itself like rises a tremendous amount. It's really spending will be in our favor. Harlan Sur -- Analyst Yes. No, I appreciate that. And then AI and accelerated compute dynamics continuing very strong, right? Obviously, that's pulling the need for more HBM memory, as you mentioned last call, you talked about driving more than $1 billion in HBM revenues this year. Is that number even higher now? And I'm wondering if you can maybe quantify the HBM outlook for this year. As we look into next year, although HBM bid supply is only going to represent 6%, 7% of total bit supply it's going to account for something like 20%, 25% of total DRAM wafer capacity, right? And that in and of itself is up 60%, 70% versus this year. How are you thinking about sort of the growth trajectory of your HPM and advanced packaging business next year and even over the next several years? Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. Sure, Harlan. I think we'll -- we're not probably going to give a new milestone number, but we did talk about this $1 billion achievement in our advanced packaging business, really driven by the strength in AI. What I would say is since the last call, that part of our business has continued to strengthen even beyond what we had originally thought. I highlighted some of that in my commentary around the SABRE 3D, the copper plating. It's just a very strong part of the business right now. And I think the companies that have good exposure to it, which primarily are companies like etch and deposition companies are seeing outsized benefit right now from that trend. I don't think advanced packaging slows down any time from my view and from my conversations with customers. It's an enabling technology that's allowing system-level performance. It's very hard to achieve through chips themselves. And I mean, it requires really this architectural change. So, we're very positive on advanced packaging next year. And when we get to January, we'll probably highlight a little bit more about what we see in terms of new numbers for that segment. And our next question comes from Toshiya Hari with Goldman Sachs. Please go ahead. Toshiya Hari -- Analyst Hi. Thanks so much for taking the question. I had two as well. First, Tim, you talked about the adoption of Moly and 3D NAND, and you also mentioned leading-edge foundry and logic and DRAM to follow in the out years. I was hoping you could help us sort of translate some of that, maybe not the specific numbers, but how we should be thinking about your ability to grow the business with Molly in '25 and beyond. Is it a net gain opportunity for you? Or because you're already quite strong in that space, is there an offset to the introduction of moly? Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. It's an area where we're quite strong already in the Tungsten, as you point out, especially in NAND, but it still turns out to be a net gain for us as Again, there is a certain benefit that comes from upgrades, and moving technology forward, and there's additional benefit if you're basically selling in new high value-add technologies for our customers. And so, again, the fact that it helps resolve some of the wordline resistance issues that exist and really is a major materials migration that then can sort of carry the industry forward for several nodes after that. It's a kind of step up for us in terms of business through that transition. And then as we see those same transitions occur in foundry logic and DRAM, I think it represents a gain opportunity for us there as well out into future years. Toshiya Hari -- Analyst Got it. Thank you. And then my follow-up is on leading-edge foundry logic. I both -- I think both you and Doug characterize that area as an area of strength. A peer of yours last week, they kind of lowered their '25 outlook based on some of the competitive dynamics going on in that space. I think there's one customer that's doing really well, maybe two others that are doing not so well. Is the net-net in your view as it pertains to the '25 outlook, is that unchanged relative to 90 days ago? Or have you seen any kind of shifts in the outlook when you think about overall leading-edge foundry and logic? Thank you. Timothy M. Archer -- President, Chief Executive Officer, and Director Well, I don't think it's really changed from our perspective in the last 90 days, but that's because generally, if I think about what's driving our business, it's a little less has to do with volume as much as technology inflections. And so, as you move forward from a node that wasn't gate-all-around to one that's gate-all-around, that creates opportunities for Lam that some companies that might actually be somewhat of a similar opportunity. But for Lam because we can now penetrate new tools like selective etch and ALD at rates that we had not been able to previously, we think that that may be why it hasn't changed as much for us. We see it as a positive opportunity. We also see -- again, we have put an exact timing on it, but we have said we believe in 2025, you start to see the introduction of what we would consider to be quite etch and depth-intensive inflections like the backside power distribution and further advanced packaging use in leading-edge logic foundry. And so, those are things that I think primarily benefited companies with portfolios that look like land sat that position is strong. And so, I don't know, I can't speak to everybody's outlook, but I know that the way we look at these technology transitions, they're quite favorable for our portfolio setup. And our next question comes from Vivek Arya with Bank of America Securities. Please go ahead. Vivek Arya -- Analyst Thanks for my question. For the first one, going back to China. So, it's indicated down about, I think, $250 million or so in calendar Q4. Does China stay at these levels for the next several quarters? Can it build off of it? Does it decline? What is sort of the broad assumption? And I think, Tim, in the last earnings call, you had suggested '25 could be a decent year for China, but that view seems to have changed somewhat. And I'm curious what changed, what markets, what are the signals? So just kind of China versus December levels and then what has changed in the overall China view for '25? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yeah, Vivek, maybe I'll take it. This is Doug. Yes, China is trending down a little bit right now, but let me be very, very clear. It's not going away. It's just trending lower as a percent of our overall revenue. That's partly due to the fact that, yes, we -- as we sit here today, we look at China WP is lower next year. But other things are strengthening at the same time. So, when you look at the percent of the total revenue, it's trending a little bit lower. Yeah. I think that was -- if I made the comment about China being a decent year next year, it's basically, I think it's the comment Doug just made, which is we always have expected it to normalize as Lam's business in our strongest markets like NAND. And now some of these new emerging areas like advanced packaging really come on even more strongly in 2025. And so, we've always expected, as a percentage of our total revenues, it would trend down. And so, I don't know if the outlook has changed dramatically in the last few months. Vivek Arya -- Analyst OK. And then for my follow-up, maybe one on gross margins. So, I think Q3, you beat quite nicely up -- so what drove that? And I think for calendar Q4, it's coming to 47%. So, as we look out, Doug, over the next several quarters, given that China mix will be lower. Should we assume that 47% is the baseline and then you get some leverage on top of it? Or just how should we conceptually think about calendar '25 gross margin versus calendar '24? Is there a scenario where you can keep gross margins flattish year-on-year calendar year? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Vivek, thanks for the question. Yeah. Listen, there's many, many things that can move gross margin around in the near term here, customer mix, product mix, operational efficiencies, and so forth. We've been trying to signal for a while that, hey, this customer mix stuff is going to be a little bit of a headwind as China percent of total begins to soften a little bit. And you're seeing that in the December guide. However, if you remember back when business turned down at the end of '22 into '23, we embarked on what we described as operational efficiency initiatives, trying to pivot the company, grow that footprint in the factories in the Asia region, which as business grows, will benefit from those operational efficiencies. So, you're beginning to see some of or maybe more than some, you're beginning to see that show up. If you remember before China ticked up as a percent of our revenue, we were at, I don't know, roughly 46%, and now you kind of see it at 47%. We've pivoted the company actually in a beneficial way from a cost standpoint, and you'll still see more of that as we go forward. But there's a lot of things that move gross margin around. I'm not going to get into guiding it specifically. But that's some of the steps you should be thinking about. And our next question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse -- Analyst Yeah. Good afternoon. Thank you for taking the question. I guess for the first question, I was hoping to focus on CSBG and Reliant. As you think about a world where China is slowing down, is that a piece that we should be thinking about at least as part of CSBG that would decline? And just for my education, as you think about slower China, is that better or worse in terms of CSBG revenue intensity for you guys? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yes. C.J., I mean, from a Reliance standpoint, when you think about investment in the specialty nodes or maybe the trailing edge nodes, that's where Reliant will ebb and flow. And obviously, you know where the restrictions sit in the China region mainly, that's what you've got going on in China. But there's other components of it as well, right, outside of China, there's a decent profile of investment there. But yes, as WFE perhaps reduces a little bit in China, that will be a bit of a headwind for the Reliant business unit. The other components of it, though, spare service upgrades will have a lot to do with what's going on globally in the overall capacity of every process node. Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. And I think, C.J., I would just add. I mean, I mentioned a couple of these -- a couple of things around the equipment intelligence and previous calls. We've talked about our cobot activity I think that as leading-edge devices continue to grow and also become more complex, the need for these types of data-driven troubleshooting and tool-matching capabilities and even sort of automated maintenance will become a bigger part of our CSBG revenue stream as well. And so, we look to that as an area where we can continue to keep moving forward. C.J. Muse -- Analyst Very helpful. And then I guess maybe on opex, you started the year, Doug, talking about the need to invest for projects that have real line of sight for growth. And opex will narrowly outgrow top line this year. Curious, are you at the stage where you are funding what you need to fund? And how should we think about operating leverage into calendar '25? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yeah. C.J., thanks for the question. Yeah, we funded pretty much everything, but as we came into the year, we expected that we needed to fund, in fact, maybe even a little bit more, right? Revenue turned out to be probably a little bit stronger. And in fact, remember, as we began the year, I was suggesting, we were suggesting that you wouldn't see leverage from us this year. And in fact, you actually have we've delivered over a full percentage point of operating margin leverage at the midpoint of the December guide. So, I think we all feel pretty good. And I feel pretty good about what we've been able to do. As we get into next year, depending on how WP grows, how our top line grows, I hope we'll be able to continue to deliver some leverage into next year as well. Our next question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar -- Analyst Yeah. Hi. Thanks for taking my question. First one, Tim, I understand, thanks for the early view on calendar '25 WFP, and you said that Lam revenue should outgrow or continue to outgrow WFE. Historically, outperformance happened during strong NAND years, and you do expect NAND WFE to grow. But I'm just wondering, is NAND still going to be the driver, especially with all this noise around Cryo etch, maybe to 2026 even not 2025? I'm just trying to figure out what are the drivers for outperformance for Lam in calendar '25. And then I have a follow-up. Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. Well, I think you probably did see the announcement from Lam in our Cryo 3.0 technology not too long ago. And so, I think that some of that noise is what Lam is creating around the benefits of new technology upgrades to our own systems. And so, I think the most important thing to think about with NAND is that the most efficient way to go from a certain layer count to a higher layer count and get the benefits of those new technologies is to upgrade the installed base you already have in your fab. And so, that's why we're talking about this high capture rate Lam has around NAND upgrades and how that's beneficial both for us and for our customers. And so, I think 2025, whatever the WFE spend is in NAND, it will be dominated by those technology upgrades and Lam is by far in the best position to deliver both the technology and the economic value to our customers. So, that's kind of the way I see the NAND market playing out next year. And it's a little too early for us to say exactly what the spending will be. But again, the requirements for those higher quality bids, I think, are being discussed and talked about in light of these new AI applications pretty publicly. Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer I think, Krish, it's everything else that we've been -- we've also been talking about for a while, right, advanced packaging, backside power, gate-all-around, dry photoresist, right? Tim talks about this every time in his script because we're going to outperform in those areas, too. So, when you layer these two things together, that is where our confidence comes from. Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. I think the -- I mentioned in the script this comment, which I assume people are picking up on, but it's the etch and depth intensity of the technology inflections that are coming. I think the technology landscape is changing somewhat, and it's beneficial to companies that are well positioned to help in the building of these three-dimensional architectures that exist, whether it's backside power distribution, which is effectively a three-dimension architecture on the backside of the wafer or the advanced packaging, 2.5D and 3D packages, those get built by etch and deposition equipment. And so, as those parts of the market are kind of the outperformers because of what they do for power consumption and high power, high computation devices, what they're doing in terms of enabling these multichip packages. I would expect etching depth to continue -- would actually outperform WFE with those as the underlying technology trends. Krish Sankar -- Analyst Got it. Got it. Very helpful. And then just a quick follow-up for Doug. The inventory level has been pretty -- like you've been managing it really well. You're talking about an upcycle next year. Historically, you kind of start building inventory maybe a quarter or two before. Kind of curious, is it more unclear of the shape of the recovery next year? Or is it more the inventory management has gotten -- has changed and is much more efficient than it's kind of more like just in time. Yeah. I mean, you got to actually peel the onion back on inventory one level beneath just what's the total number to understand this. So, a lot of the inventory, when you think back to when business turned down, a lot of it was in memory and specifically in NAND. And so, a lot of the inventory we have, just to build tools that go into the NAND segment. And so, you'll only really be able to move that inventory lower when NAND business ticks up, which obviously we think that will happen this year. So, that's a little bit of a -- you've got to wait for that. Offsetting that, though, other things are strengthening. Obviously, you saw the guide at 4.3. And so, you have to have components ready to build tools that go into those segments. So, those are the two things that you have to think about relative to the total balance. And our next question today comes from Srinivas Pajjuri with Raymond James. Please go ahead. Srini Pajjuri -- Analyst Thank you. A couple of follow-ups at this point. Tim, on your comment about WFE growing next year, I'm just curious, either by market segment or by product segment, where would you say you have the best visibility? And where do you think there is still some uncertainty out there? Timothy M. Archer -- President, Chief Executive Officer, and Director OK. Well, we'd start getting very close to giving a full 2025 outlook, if I go through all that detail. But I think that, obviously, some of our comments One is we believe NAND has been in a very prolonged down cycle. And so, it's not too much of a stretch to say that we would see NAND WFE higher. We're not going to quantify that. But again, higher and driven by these technology upgrades that I just talked a lot about. I think that we said that leading edge for logic, we continue to see quite strong. And with many of those investments targeted toward new technology pull-ins that help with performance and power consumption. And then finally, we think advanced packaging, I think it's not a stretch to say that we believe advanced packaging I made the comment, it's gotten stronger in just the last 90 days, and so I don't see what would prevent that from continuing to trend higher as we move through 2025. And then we said China to lower. And so, you're kind of like there's a third puts and takes. But in general, a lot of the things that are key to us, we think kind of higher. Srini Pajjuri -- Analyst Great. Thank you. That's helpful. And then another follow-up, Tim. I guess -- on the tech transitions that you talked about, there are a lot of questions on NAND, etc., but I look at your product -- I mean, your revenue mix, logic, and foundry is like 60% of your mix today quite different from what it used to be. So, you talked about things like backside Power GA, etc., increasing the intensity for you. I'm just curious, outside of just the deposition and etch intensity going up. How do you think about your market share? Because we hear about these tech transitions from some of your competitors as well. It looks like a lot of you are benefiting, but I'm just curious as to how you think about your market share. What is the implied market share assumption when you say you're going to outperform WFE next year? Timothy M. Archer -- President, Chief Executive Officer, and Director Sure. Well, I think that in some of these areas, I talked about specifically when you think about what foundry logic, leading-edge foundry logic is really doing is it is pulling in nodes like gate-all-around. For us, that allows us to gain -- expand SAM and gain share in markets where we didn't previously compete. So, every selective etch win for us is basically new market. ALD is expanding in new share market for us. So, we do have opportunities where, again, we've -- I talked about transforming our product portfolio, and we've expanded the product portfolio to address those markets. And so, for us, many of those are not only their new wins and their share gain. And for those who've already been participating in those markets at prior nodes and prior technologies, you'd probably see a lot more replacement revenue versus actual share gain. So, I think that is one thing that distinguishes Lam we're coming from a historically lower exposure to that particular segment. Advanced Packaging, again, very strong product portfolio for that. backside power, I think everybody knows we're extremely strong in terms of our positioning in copper plating. There's a lot more uses, you add more metal layers on to the backside of the wafer represents share gain of overall WFE when you see cases coming like that. So, I think you're right to say that a lot of people are going to benefit from continued technology advancements and general equipment intensity increases overall. But we do think that then net position increases faster than many of the other segments, and therefore, land has an opportunity to gain share. Our next question today comes from Stacy Rasgon with Bernstein Research. Please go ahead. Stacy Rasgon -- Analyst Hi, guys. Thanks for taking my questions. First, I wanted to drill again a bit more into the China gross margin trade-off. So, clearly, if WSC is growing and your share is going next year, but China is down, your China mix does get worse. And I know you don't want to guide gross margins, but do you think that the other drivers you have on gross margins can be enough to offset the negative mix from trend like mix went down to 25% of your revenue next year? Like, is there enough around the other drivers you have to try to offset that? I'm just -- I'm wondering if I should be thinking about gross margin as the floor is the trough and then growing from there with some of the other drivers. How do we think about that? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yes. Stacy, listen, some of the things I pointed to, you have to think through it holistically. And part of it will depend on revenue levels. And obviously, I'm not going to guide specificity into next year. But we have done a whole bunch relative to pivoting the footprint of the company to be closer to where the customers' fabs are lower cost structure, more affordable supply chain, shorter freight distances. I mean, those things are going to be beneficial as we get into a growing top line. offset by some of that customer mix. I'm not going to give you specifics yet because I'm not sure exactly what revenue is next year, but I feel pretty good about our ability to continue to drive the operational side of gross margin improvement. And then the customer mix will be one of the things we're working to overcome. But I'm not going to give you enough specificity that you want right now. But certainly, we'll do that as we get into next year on the next call. Stacy Rasgon -- Analyst OK. And at a minimum, I guess, you do see revenues up at least, so that should be a positive. Got it. Thanks. For my follow-up, I want to drill in a little of this NAND tech transition versus capacity. And I think I understand the idea that tech transitions are lower WFE, but you have a big installed base and your share is higher. From a dollar basis, what is better for you, a capacity-driven market or a technology transition market? I know you've said you're agnostic, but I don't -- I just don't see how that can be true. So, what am I missing? Timothy M. Archer -- President, Chief Executive Officer, and Director Well, I mean, I guess when we talk about outperformance of WFE, then there's no doubt that tech transition market is better for us. I think that there's been a lot of questions. I think what we've been trying to address is perhaps some of the skepticism about the desire and need for the market right now to invest in significant additional capacity. And so, whether that's true or not, that will be our customer's decision, but what we're saying is that regardless of within that, that's why we gave this two-thirds of bits to fill it sub-200 layers. We believe there is a need both technically and economically to move those forward to more advanced nodes. Stacy Rasgon -- Analyst I'm just asking if -- would your NAND dollars be higher in a capacity-driven market or an upgrade-driven market? That's what I'm trying to understand. Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Well, it depends on the overall level of investment, Stacy, it's not a straightforward question. We did a decently higher share of spend when it's a transition or an upgrade year. But the industry obviously spends less. But our relative outperformance in a situation like that, which is largely what we see next year, we're going to outperform more. Then the rest of it, you have to get into the specific numbers, which obviously, we're not going to do right now. And our next question today comes from Atif Malik with Citi. Please go ahead. Atif Malik -- Analyst Hi. Thank you for taking my questions. My first question is on China WFE. It sounds like you're expecting China WFE to come down, but not as much as your peer that reported last week, they're expecting the China sales to come down 30% next year. Are the dynamics between lithography and Depth Edge that will help explain why lithography could be coming down faster or maybe something to do with your alliance business or star parts or anything? If you have any thoughts on that. Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Obviously, it's extremely hard, if not impossible, for us to compare what someone else is thinking versus what we think because we don't know what they're thinking for sure, to be perfectly honest. I would observe, though, if you look at how much perhaps some of our peers' growth in that specific geography grew versus what we did, the numbers are very different, right? And the lead times are very different between different tool types. And so, something shipped sooner than others. And so, you can't make a direct comparison because, frankly, I don't know exactly what somebody else has seen. But others have grown a lot more in that region than we have, and so you have to kind of factor all this stuff in. I don't know, Tim, if you want to add anything. Timothy M. Archer -- President, Chief Executive Officer, and Director No, no. I think it's just -- it's very hard to make those comparisons for all the reasons that Doug just mentioned especially in terms of the rate at which people have been shipping at this point and lead times and so not much more we can say. Atif Malik -- Analyst Thank you. And then my follow-up, Tim, I was positively surprised to see that one of your large memory makers in Korea is adopting Dry Resist for their 1C DRAM 6 generation process in under impression that maybe drive this happens when the high NA to come out. Have there been any changes in terms of the adoption curve for Dry Resist? Timothy M. Archer -- President, Chief Executive Officer, and Director Well, we -- I don't know how Dry Resist ever got intricately tied to high NA other than what we've said is when you get to high NA, we had believed that there likely is no other choice. But clearly, we've been working hard. There are -- to answer earlier, based on all of the benefits we've talked about with Dry EUV and dry UV processing in general, which is multiple steps. It's the underlayer, it's the resist, it's the dry develop. And in those cases, there's economic benefits from having to be able to shorten exposure. We've talked about Pattern Fidelity benefits. There's benefits from using the dry developer versus a wet process in terms of defectivity. And so, I think that you just with each customer, you reach a point where they see enough of those benefits tipping over to where they make the change. And so, it's not necessarily tied to any particular node. And so, I think that I think that we'll see, over time, customers adopted different technology nodes. Our next question comes from Joe Moore with Morgan Stanley. Please go ahead. Joe Moore -- Analyst Great. Thank you, guys. Sorry to ask about China again. But as you make these comments about December and next year, how are you thinking about the Commerce Department export controls? Have you had -- and I'm asking what you think the decision will be. But have you had conversations where you have some kind of general sense of what the restrictions may be? Or are you kind of guessing like the rest of us? And if you're guessing, how are you making those guesses? Timothy M. Archer -- President, Chief Executive Officer, and Director Yeah. I think that the view we've given you contemplates our best understanding and our best estimate of what we think will happen. And so, I don't know if you call that a guess, an educated guess. I mean, I doubt all of you guys are just guessing you have sources of information. And so, I think that that's just -- that's our view. And the best we can say right now is what we've said about our -- how we see China WFE both through the next quarter as well as into next year. Joe Moore -- Analyst OK. That's helpful. Thank you. And then as you think about December, if China drops down to 30%, you've got double-digit growth ex China. And I mean -- first of all, am I going to literal and precise about that? But if you are going to grow double digits x China, kind of what gives you the confidence around that? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer I mean, Joe, it's the same thing we do every time we guide you with numbers. We understand what customers expect from us, what we think they're going to order what -- to the best of our ability every single region in the world is going to do every single customer, every single fab, and so forth, we put it together the same every single quarter, and that's what we've just done. The only thing we've done incrementally here because there's been so much chatter about China is give you a number on China, which normally we don't do any geographic stuff. But the $4.3 million we just guided you to, we've gone through the same process we do every single quarter to put data together to support that. Our next question today comes from Blayne Curtis with Jefferies. Please go ahead. Blayne Curtis -- Analyst Hey, thanks for squeezing me in. Now, I feel bad that Joe said one more on China because I had one more in China. But I'm just kind of curious, I think you come back to that to the beginning $250 million is the math that come out in December. I guess going into this, the expectation was that like the Chinese DRAM would be front-end loaded. And I guess you've seen. I think you recognize that is nonvolatile, that's come down. So, I'm assuming that's less of a headwind. So, I guess roundabout way of saying such CSBG be down in December, it would seem like that would be the bulk of the $250 million that comes out. Just can you dial us in a little bit as to where -- what segment that headwind is in? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Man, Blayne, I don't know if I can answer your question. Is it possible CSBG is down next quarter Sure. It's possible. The relying component does attach to the specialty node stuff, which is obviously correlated to a certain extent with China, not only but elsewhere also. But there's other stuff going on in there that ties to upgrade cycles and utilization and so forth. I don't know if I'm helping you. I'm just kind of rambling here a little bit. Blayne Curtis -- Analyst It's fine. I just want to ask you. Also, I think the messaging on NAND is a lot more positive. I think people have gotten incrementally more negative on timing of NAND. Just kind of curious the timing that you'll see those upgrades. Obviously, you've had this headwind from the Chinese customer. But do you expect that tailwind to be a tailwind kind of the rest of this calendar year? Or is it truly a '25 storyline? Timothy M. Archer -- President, Chief Executive Officer, and Director No. I mean, we were speaking about that primarily from a 2025 perspective, if don't give any timing within that particular year. It's just, again, predicated on this idea that the down cycle has been quite long and the -- which has put a number of -- quite a large portion of the capacity at technology nodes that we think can be significantly improved for current uses through technology upgrades. And those are the conversations we're having with customers will give more on the timing once we have a better view of it as we move into early next year. All right. Thanks, Blayne. Operator, we will take one more question. Operator Sure thing. And our final question today will come from Chris Caso with Wolfe Research. Please go ahead. Chris Caso -- Analyst Yes. Thank you. I guess a question on DRAM. And not a little discussion on that heading into next year. What's your view on the trends you're seeing there? And again, have the -- there's been a lot of mixed signals on that. Has that changed in the last 30 days -- last 90 days for you? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer No, Chris, it really hasn't changed in the last 90 days. You've got a product cycle in DRAM, DDR4, going to DDR5, you've got the high bandwidth memory that's going on there and that's through a need for incremental equipment, we believe that grows again next year. I don't think too much has changed relative to our outlook in DRAM. Chris Caso -- Analyst Yeah. OK. Thanks. Just as a follow-up, and there'll be one more close-it-out on one more China question. with what you said about China 30% of revenue exiting the year, is it safe to say by what always hold with the expectation for some of the other segments, Foundry Logic for NAND to grow next year that most likely that China comes in, if we look for the full year at below 30% -- below 30% of total revenue as we look in the whole year. Obviously, I know it depends upon what your total revenue looks like. But it feels like you're seeing growth elsewhere and probably not in China from the fourth quarterly level. Is that at least a rational way to think about it? Douglas R. Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Chris, it's not unreasonable to be thinking about it that way. And frankly, like I said, we're not guiding 25 numerically yet. It's possible that China trends down below 30% for sure. It's too soon for us to get numerically specific on next year, but we will certainly do that on the call next quarter. Yep. Thanks, Chris. Operator, that concludes the call here. Thanks, everybody, for joining, and I'm sure we'll be talking to most of you as the quarter progresses.

Seagate Technology Plc (STX) Q1 2025 Earnings Call Transcript | The Motley Fool

Welcome to the Seagate Technology fiscal first quarter 2025 conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, senior vice president, investor relations. Please go ahead. Shanye Hudson -- Senior Vice President, Investor Relations and Treasury Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's chief executive officer; and Gianluca Romano, our chief financial officer. We've posted our earnings press release and detailed supplemental information for our September quarter results on the Investors section of our website. 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. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. I'll now hand the call over to you, Dave. William David Mosley -- Chief Executive Officer Thank you, Shanye, and hello, everyone. Seagate delivered a strong start to the fiscal year with revenue growing nearly 50% and non-GAAP gross profit increasing over 150% compared with the prior-year period. These results demonstrate our ability to drive profitable growth, which is the outcome of sustained supply discipline and the strategic cost efficiencies that we have built into our operations. Fiscal first quarter revenue came in at $2.17 billion, and non-GAAP EPS was $1.58, both were above the midpoint of our guidance range, benefiting from a better-than-anticipated mass capacity product mix and an improved pricing environment. Continuing cloud demand strength, coupled with improvement in the enterprise and OEM markets, drove top-line growth and also contributed to enhanced profitability. Company non-GAAP gross margin expanded by 240 basis points sequentially to 33.3%, the highest level in over a decade. This impressive performance was driven by our HDD business, with non-GAAP gross margins now in the mid-30% range. Amid a healthy industry supply demand environment, we anticipate further margin expansion opportunities as we ramp our portfolio of high-capacity nearline drives, including our Mozaic-based HAMR products, which I'll discuss shortly. The increasingly favorable business landscape, combined with our industry-leading technology road map, lends growing confidence in Seagate's future opportunities. Reflecting this confidence, we are increasing our quarterly dividend by nearly 3%. Our optimism is reinforced by our build-to-order model, which provides us with good demand visibility over the next few quarters. We see the potential for significant revenue growth for fiscal 2025, inclusive of the seasonal demand fluctuation that is typical for the March quarter. We are maintaining supply discipline, and we'll address near-term exabyte demand growth by efficiently leveraging our available capacity. Beyond that, we are well positioned to support further demand growth, mainly through technology node transitions with HAMR playing a vital role as we complete qualifications and ramp shipments. Turning to the mass capacity market trends. Cloud demand for our nearline drives remains robust, and we believe customers are managing their inventory levels well. In the September quarter, revenue growth was driven by U.S. cloud providers, though we continue to see positive demand trends globally. For instance, some customers have highlighted the growing use of video content on e-commerce and social media platforms. Data indicates that video is the most effective format for engaging digital audiences. Furthermore, research suggests that longer-form video content and personalization through AI technology can significantly enhance revenue generation opportunities for our customers. These trends bode well for mass capacity HDDs, which are ideally suited for storing large and diverse, data-intensive video content. HDDs comprise close to 90% of bytes stored in public cloud environments and we are confident that proportion will hold for the foreseeable future. Among the enterprise and OEM customers, we observed the first meaningful uptick in nearline demand following a multi-quarter period of stability. This increase reflects an improvement in traditional server demand, as well as higher storage content per unit, pushing the average capacity per enterprise drive to a new record high. In the VIA markets, sales remained stable in the September quarter and slightly ahead of our expectations. We are witnessing a shift toward more cloud-like storage solutions that utilize higher-capacity drives. This transition is due in part to longer data retention needs and increased video analytics. Our HDD solutions, including Mozaic camera products, provide cost efficiency and scalability to our VIA customers' evolving demands. These same advantages are also crucial for generative AI applications, which is why we continue to believe GenAI will be a driver of mass capacity storage simply by being a powerful catalyst for data creation. HDDs provide a trusted, economical, and secure platform to host data that feeds into AI engines and preserves the content produced by AI-powered applications. This data is ultimately fed back into the AI training models in a continuous cycle. As data center architects prepare for GenAI to move into the widespread adoption phase, they continue to grapple with cost, scale, and power challenges. Seagate's product road map is addressing each of these key challenges. Compared with NAND-based storage alternatives, our HDD solutions offer approximately six times lower cost per terabyte. And HDDs are roughly nine times more capital efficient, delivering the economies of scale necessary to support the anticipated surge in data demand. And according to cloud customers, HDDs have ten times lower embodied carbon per terabyte relative to NAND, which can translate into a much lower carbon footprint, very important given the world's growing number of data centers. That provides a good segue into our product ramp and qualification plans. We have three primary areas of focus for fiscal 2025 aimed at driving profitable growth over the long term, and we're progressing on all of them. They include ramping the company's last PMR platform, expanding Mozaic adoption, and executing our Mozaic product road map that will enable Seagate to address the breadth of customers' mass capacity storage needs. Consistent with our plans, we began to aggressively ramp our final PMR platform in the September quarter, which is currently up to 28 terabytes in capacity. We are very pleased with the pace of customer adoption. These drives have quickly catapulted to our second highest revenue product, and we are continuing to both ramp volume and broaden our customer base in the December quarter. We have expanded customer qualifications on our three-plus terabyte per disc Mozaic HAMR-based platform with a few customer quals already completed spanning the enterprise nearline, VIA, and mass market segments. The qualification with our lead CSP customer is progressing well through what has been a very intensive and thorough testing process. The learnings that we have gained are already being leveraged into future customer qualifications and product generations. To that end, HAMR qualification drives are now in the hands of multiple global cloud and enterprise customers. Our expectation for shipment and revenue ramp timing across the broader customer base still points to mid-calendar 2025. Our confidence in HAMR technology remains strong, and customer feedback has reinforced our value proposition that the Mozaic platform provides the foundational technologies required to satisfy high-capacity storage requirements at the lowest total cost of ownership. We expect to extend our technology leadership as we deliver on the next stage of our HAMR road map, the four-plus terabyte per disc this platform. As a reminder, the step function capacity increase to four terabytes per disc is being achieved entirely through aerial density gains, supporting our cost per terabyte reduction path with additional benefit to both customer TCO and Seagate's structurally improved margin profile. In closing, Seagate is performing well amid an improving demand backdrop with healthy industry supply dynamics. We are at an exciting inflection point rooted in the structural changes we've made to our business and with our compelling technology road map. These factors underpin our ability to build on the last four quarters of strong sequential performance and drive future profitable growth to create long-term value for our customers and stakeholders. Thank you, and I'll now hand it off to Gianluca. Gianluca Romano -- Executive Vice President, Chief Financial Officer Thank you, Dave. Seagate started fiscal 2025, delivering strong revenue and profitability growth for a fourth consecutive quarter. September quarter revenue was $2.17 billion, up 15% sequentially and 49% year over year. We increased non-GAAP operating income 35% sequentially to $442 million, translating to a non-GAAP operating margin of 20.4% of revenue, and our non-GAAP EPS was $1.58 at the high end of our guidance range and reflecting improving demand trends, ongoing price adjustment and continued cost discipline. Within our hard disk drive business, exabyte shipments grew 20% sequentially to 138 exabytes and revenue increased 16% to $2 billion. Mass capacity revenue grew for the fifth consecutive quarter, more than offsetting the expected decline in the legacy business. Mass capacity revenue was $1.7 billion, up 21% sequentially driven by continued strength in nearline cloud demand, along with a significant uptick in nearline enterprise sales. Mass capacity shipments totaled 128 exabytes compared with 104 exabytes in the June quarter, up 23% sequentially. Mass capacity shipments now represent a record 93% of total HDD exabyte, reflecting the continued long-term secular growth for cost-efficient scalable storage. As planned, we began to ramp our 24 and 28-terabyte PMR which helped to boost Seagate's nearline shipment to 109 exabytes in the quarter, up from 84 exabytes in the prior period. As Dave highlighted earlier, customer reception for this product has been strong and represented more than 20% of our nearline revenue in the September quarter. We expect nearline demand will continue to improve in the December quarter as shipments for our latest high-capacity products broadened across global CSP and enterprise customers. Demand for our VIA products remained relatively stable in the September quarter, and we currently project similar revenue in the December quarter. Smart city projects remain a key demand driver for VIA products worldwide, and regional economic conditions play a key factor in budget decisions for the new projects. The ongoing economic uncertainties in China have been a headwind for the VIA business in that market. We are cautiously optimistic that recently announced stimulus plan in China would positively impact on VIA demand over time. Sales of our legacy products totaled $270 million, representing roughly 12% of total revenue. The remaining 8% of revenue was derived from our other businesses, which held steady at $164 million. The other businesses include system, SSD, and refurbished drives, a business that has grown by about 25% year over year, and in closed drives under our security programs. Moving on to the rest of the income statement. Non-GAAP gross profit increased 24% sequentially in the September quarter to $723 million. With significant increase reflects a favorable mix shift to our mass capacity products, continued price adjustment, and ongoing cost efficiency in improving demand environment. Our resulting non-GAAP gross margin was 33.3% at the company level. Overall non-GAAP gross margin expanded by 240 basis points quarter over quarter, which was slightly more than we had originally anticipated. Non-GAAP gross margin for the HDD business and mass capacity, in particular, remains significantly higher than the corporate average. Non-GAAP operating expenses totaled $281 million, up 10% quarter over quarter and above our original plan, largely due to higher variable compensation commensurate with improved profitability levels. Other income and expense were $86 million, and we project similar levels in the December quarter. Adjusted EBITDA continued to improve and was up 23% sequentially in the September quarter to $498 million. Non-GAAP net income increased to $337 million, resulting in non-GAAP EPS of $1.58 per share based on a diluted share count of approximately 213 million shares. Moving on to cash flow and the balance sheet. Free cash flow generation was $27 million, reflecting our initial steps to normalize working capital to support our supply chain while at the same time, meeting increasing mass capacity demand. It will take a couple of more quarters for working capital to fully adjust which will have some impact to free cash flow generation. Even so, we expect free cash flow to improve in the December quarter and through the rest of the fiscal year. Capital expenditures for the quarter were $68 million for fiscal '25. We will maintain capital discipline and continue to expect capex to be at the low end of the long-term target range of 4% to 6% of revenue. We returned $147 million to shareholders through the quarterly dividend exiting the quarter with 211 million shares outstanding. As Dave mentioned earlier, the company approved an increase to our quarterly dividend, raising the quarterly payout to $0.72 per share, reflecting our long-term confidence in the business. We closed the September quarter with $2.7 billion in available liquidity, including our undrawn revolving credit facility. Inventory increased to $1.4 billion, including material that we are staging in support of improving mass capacity demand. Our debt balance was $5.7 billion at the end of the September quarter, with more than 90% of our long-term debt obligation maturing in fiscal '27 and beyond. We exited the quarter with a net leverage ratio of 3. Two times and expect to see further reduction in the coming quarters. Turning now to our outlook. Mass capacity revenue continued to trend higher, with growth driven by global cloud customer demand for our high capacity nearline drives, along with ongoing improvement in the enterprise and OEM markets. These positive trends are expected to more than offset lower sales into the legacy and other markets. We anticipate profit to further expand from the richer mix of mass capacity revenue that I just described and ongoing pricing actions. With better context, December quarter revenue is expected to be in the range of $2.3 billion, plus or minus $150 million. At the midpoint, this represents an increase of 6% sequentially and 48% year over year. Non-GAAP operating expenses are expected to be in the range of $285 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to expand into the low 20s percentage range. We expect our non-GAAP EPS to be $1.85 plus or minus $0.20 based on a diluted share count of approximately 214 million shares and a non-GAAP tax expense of about $20 million. I will now turn the call back to Dave for final comments. William David Mosley -- Chief Executive Officer Thanks, Gianluca. In closing, Seagate is achieving significant profitability expansion in a favorable demand environment. I'm confident that the structural improvements we have implemented and our differentiated technology road map will further enhance that profitability and meet the evolving requirements of our customers. Demand for our high-capacity nearline drives remains strong and we will build on that momentum to deliver scalable, cost-efficient storage solutions to support the anticipated growth in data demand, including from GenAI applications. Seagate's dedicated global team, strong business model, and technology leadership form a winning combination that positions us well for future success and underscores our confidence in deploying capital and enhancing value for our shareholders. Operator let's now open up the call for questions. Operator We will now begin the question-and-answer session. [Operator instructions] In the interest of time, we ask that you limit yourself to one question. If you have further questions, you may reenter the question queue. [Operator instructions] At this time, we will pause momentarily to assemble our roster. And our first question today comes from Wamsi Mohan with Bank of America. Wamsi Mohan -- Analyst Hi, yes, thank you so much. Dave, I was wondering if you could flesh out a little bit your commentary around this build-to-order and very good demand visibility into this fiscal year. You noted significant demand growth, including some seasonality that you typically expect around March quarter. I was wondering if you could maybe elaborate a bit on maybe some bookends around what you're thinking around demand growth as March quarter seasonality going to be different from what you've experienced before. And I'd be curious to also hear your thoughts around, if I could, how you're expecting to compete versus your competitors' products, which have slightly higher capacities currently as you're ramping HAMR. It sounds like HAMR gets their sort of mid-next year in volume. Thank you so much. William David Mosley -- Chief Executive Officer Thanks, Wamsi. So, a couple of things. If I go back six months ago or a year ago, we instilled these build-to-order models largely to get predictability, and I think it's working well. As we look into the next year, we're confident that we booked those quarters pretty well. So, I'm very happy the way we're running the business given that predictability. And we're only going to build what we need to build. We're still not fully recovered as an industry from what we just went through a couple of years ago. So, I'm quite pleased with how the build-to-order models have gone. There is some seasonality in some markets, as you alluded to, and we'll watch that carefully. But I think everyone is a little cautious on next year. From a cloud perspective, I don't think inventory is built up any, I think the buffers are still low from my perspective. And so, I think we are happy with the cloud predictability, the mass capacity predictability from here. On the second part, I think from a capacity point leadership perspective, we're shipping the leading products. From a CMR perspective, no one else is shipping over 30 terabytes for sure. And as we mentioned in the prepared remarks, there's capacity points even higher, net going up. And then we put SMR on top of that, we can qual even higher. So, I'm very comfortable with our positions there. So, I'm not quite sure exactly what you're referring to on capacity leadership or lack of leadership. I mean, from our perspective, we've got to get all the quals and all the ramps done and so on. And then we get on to four terabytes of disk and so on. We're very comfortable with our technology portfolio that way. Thank you. Operator Our next question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar -- Analyst Yeah, hi, thanks for taking my question. Dave, I had a question on your market share. Historically, you're more in the mid-40s, but last few quarters, it's kind of dipped down to 30% to high 30% range. Can you talk about the factors that are behind this low share? Is it potential disruption from HAMR causing temporary share loss? Is it customer-specific where WD customers are ordering more than yours? And along the same path, how to think about the industry pricing in calendar '25? It's been extremely rational in HDD. Thanks, Krish. Yes, for market share, I said a number of times, market share is an outcome of running your play. And exactly to Wamsi's question, we changed our place a year ago when we said we want this build to order. So, we said, I want predictability, a longer time horizon rather than we're building a bunch and then hoping to push it into a channel and going for market share or something like that. I think when we were at the bottom of the demand cycle, market share doesn't really matter. It's more of the predictability of the cash that you're generating and so on. As we get back into things, obviously, we're taking, now that the margins are higher, we're getting rewarded for the money that we extend and the investments we've made and so on, then we'll clearly take more of that demand our way. And so, I think the market share will reequilibrate. From an exabyte share perspective, I think we'll be just fine because as customers want to continue to push the TCO proposition going to higher and higher capacity points, I think we're going to be fine there. On the pricing side, I think I'll let Gianluca answer the question there. Gianluca Romano -- Executive Vice President, Chief Financial Officer Thank you, Dave. Yes. I think the pricing environment continued to be positive for the industry. Every quarter, we have seen a little bit of improvement, and this is what is also driving our gross margin higher a little bit every quarter. As you know, on the cost side, we still had some unused capacity in the June quarter. And in September quarter, we don't have any of those extra costs. So, we also had a little bit of that help in the gross margin. And going into December, if you look at how we guided, we expect further improvement in gross margin, further improvement in operating margin, which is, of course, very important to us, and that is coming from the mix, ramping more of our latest PMR product. Of course, we also have a certain volume of HAMR in our December quarter, and the pricing action that is still ongoing. And we have a good balance between supply and demand in general for Seagate and I think for the industry, and we are continuing for our long-term strategy. And our next question comes from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani -- Analyst Yep, good afternoon. Thanks for taking my question. I guess, the question really, Dave, is that there's always this fear that the HDD industry broadly, Seagate specifically are sitting at these cyclical peak levels. I'd love to get your perspective, as you look at the exabyte shipments that you have right now, how do you get confident that with your shipping is actually getting deployed by your customers versus, perhaps, ending up in inventory for them? How do you kind of gain that confidence? And then really related to that cyclical fear, I would say, you folk are very confident that there's a lot more upside to gross margins versus where you are today, which is actually above your long-term target. What do you think is the appropriate margin frame of Seagate as you go forward now? William David Mosley -- Chief Executive Officer Thanks, Amit. Yes, we have run a cyclical business over the many, many years. I think it's changed quite a bit as we came down from client server. There used to be a lot of seasonality in that market. And now as we're in the cloud, the cyclicality, I'm not sure, it's totally periodical, but the pandemic, in particular, caused a very big bubble and then a big crash on the back side of it. So, I think that's kind of an anomaly there. How do we know what customers actually have. We have to triangulate ourselves, and I think we've really improved our processes for being able to do that. But we're also not pushing in nearly as many drives, units or exabyte points. And some of that the build-to-order model, actually, helps us with quite a bit. So that we know that we're not overbuilding if you were planning to overbuild. Exactly to your point on upsides to gross margin, I mean we believe that the way we bring on more capacity is to drive for more aerial density gains. And we have to go work the cost on those platforms, and that's what we're really focused on doing, making sure that we can introduce terabytes in the 20s and 30s and 40s with lower and lower costs to be able to serve the market. A good TCO proposition for our customers who are building data centers and want to support data centers for a long time is to put more capacity online because it's so much more efficient for them, but we need to be able to get that efficiency through our continued cost reduction also. So, I do think there's significant upside to gross margin still, but it all starts, to your point, with supply and demand, managing supply and demand properly. Operator And our next question today comes from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring -- Analyst Gianluca, maybe if we just stay on the theme of gross margins here. I think your guidance for the December quarter implies about a 34% gross margin, up roughly 70 basis points sequentially. You've been growing gross margins by about 2 to 4 points sequentially over the last four quarters. And so, I'm just wondering, if pricing and mix are still favorable, and obviously, Dave just made some positive comments on gross margins, can you help me understand why we might not be seeing more gross margin expansion in the quarter, again, relative to the multiple points of gross margin expansion you've been able to drive over the last 12 months? Thanks so much. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes, Erik, well, as I said before, in the September quarter, we also had the support from better cost structure because of higher capacity and the elimination of the underutilization charges. That was about 100 basis points in our gross margin improvement. We are not going to have that improvement in the December quarter because now we don't have any other utilization charges anymore. But we are still progressing with our pricing structure, and we are making a good ramp of our latest PMR product, and we will see some volume on HAMR. So, all those are positive. And as you know, we guide based on forecast that we had at the beginning of the quarter and then we executed during the quarter as best as we can. And our focus is to keep improving quarter after quarter. We are not trying to increase too much at one time. We want to be consistent and keep this cycle up for as long as we can. Operator And our next question today comes from Toshiya Hari with Goldman Sachs. Please go ahead. Toshiya Hari -- Analyst Hi, thank you so much for taking the question, I had a multipart one on HAMR. I think on the last call or at a conference, you guys talked about your expectations around getting qualification at your lead customer in Q3, I believe. Is that now Q4? Is that early '25? Any thoughts on that would be helpful. And then, Dave, you talked about additional cloud companies or customers having qualification products on hand. Should we expect the qualification process at some of those customers to be smoother than your lead customer given sort of the debugging process that you've been through over the past year or so? Thank you. William David Mosley -- Chief Executive Officer Thanks, Toshiya. Yes, the failure mode that slowed us down as we ramp to high volume this spring and summer is behind us. The team's worked really hard to make sure we get all the process improvements that we talked about last time in. I did speak on last earnings call about our confidence was based on the test beds that we have running that are all designed to detect these film modes with intense stresses that are way beyond our spec. And here we are another quarter later, we have more drives, more configurations, running more modes of tests, and we haven't seen hide nor hair of the failure mode. So, we're confident that it's behind us. That's that initial learning that we get relative to proving it, sometimes it takes a little bit of time with the customers to prove it, but I'm confident we're going to be able to prove it right now and those tests are ongoing. The customers know exactly where we are. When we think about qualifications, there's a lot of different facets of quals interoperability and different data center applications and so on and so forth. No significant concerns there. It really does come down this one last issue. And that's why we have confidence that no one else is going to see it because as we ramp to high volume, those other customers, we've got this problem fixed, I'd say, those other customers. Some multiple non-cloud customers have already qualified the product and already getting volume shipments there. They run tough quals themselves that may not have these same kinds of stresses. But now that we have the recipe, I think we're going to apply it everywhere. Operator Our next question today comes from Asiya Merchant with Citigroup. Please go ahead. Asiya Merchant -- Citi -- Analyst Great, thank you very much. As you guys ramp HAMR and you start to see more qualifications and more shipments, let's say, you're December and into the March, how is that a negative to gross margins, just given the shipment volumes are lower, there might be some ramp issues there. How should we think about overall impact to margins as HAMR ramps? And I get the sense that obviously, once you guys are much further along, that's a margin driver. But near term, how should we think about the impact to margins from HAMR ramping? Thank you. William David Mosley -- Chief Executive Officer Thanks. Yeah. Asiya, near term, we don't want to give it away. Long term, we don't want to give it away. So, we definitely want HAMR to be accretive to gross margin. And we think it does add benefit to our customers as well. So, there's a trade-off. Do they want to increase the higher capacity for the data center build-outs that they're doing? And then we have to say you have to make sure you pay for it to replace the drives. As we said before, our factories are largely full, so to take drives out of those or take the supply out and turn it over to HAMR, we have to make sure we're getting paid for it. And I'm confident we can do that in the near term as well. It's just a matter of managing the supply and demand picture properly. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. I'll say on the cost side, a similar level of volume. HAMR cost per terabyte is below the PMR cost per terabyte. So, for sure, there is an advantage on HAMR. And the pricing, of course, depends on the timing and where we are in the cycle. But at this point, in the short term, there's no reason why HAMR should not be accretive to our gross margin. Operator And our next question today comes from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers -- Analyst A couple of just real quick model questions. It looks like your opex was a little bit higher than you expected in this quarter. I'm curious, relative to the $285 million guide, how do we think about the trajectory of operating expenses as we look out into the March quarter beyond? Any kind of framework of what kind of we could think about from a normalizing operating expense perspective? And then as the kind of quick follow-on. As you get the, I think it's $480 million of debt maturing in January, from that level, how are you thinking about the possibility of reentering share repurchase activity going forward? Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. On the opex, the increase between June and September is only due to variable compensation. So, we are not hiring more people. It's just a matter of last year, we didn't have variable comp. And this year, we have variable comp at a fairly good level. So, from here, I would say, probably we stay fairly flat through the rest of the fiscal year, around 280 to 285, I think that is the new range. The debt, as you said, is maturing in beginning of January. So, as we said before, we are going to address that with cash on hand. So, we start reducing our debt. We want to be even a little bit lower before we'll start share buybacks. So, I'll say, as you know, we have increased dividend that is a top priority for the company, and then we want to take care of the debt. And then after that, we will look at share buyback, probably a little bit further in time. Our next question today will come from Timothy Arcuri with UBS. Please go ahead. I had a question about the capacity outlook now given that you're just kind of bumping up against your max today. So, unless you decide to add more, I mean, you're going to ship close to that 130 exabyte of nearline, probably not in December, but quite soon. So, I mean, you're growing nicely off the bottom on mix and on exabytes coming back. But if you're not going to expand capacity, should we think of things starting to flatten off from here? And I realize that pricing is going to go up. But it seems like you kind of lose a degree of freedom in the model unless you start to expand exabyte capacity. Thanks. William David Mosley -- Chief Executive Officer Yes, Tim, I think exactly to your point, we'll expand exabyte capacity by transitioning to new products. And so, if you think about it, as I go from 20 terabytes-ish to 30 terabytes-ish to even 40 someday, we'll be able to expand exabyte capacity without adding significant capacity from a driver heads or media perspective. We'll just use it much more efficiently on an exabyte basis. And that's where we're confident that we'll be able to also take out cost at those higher capacity points, which is what builds into the margin proposition into the model. Operator And our next question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse -- Analyst Dave, in your prepared remarks, you talked about good visibility for growth in fiscal '25, notwithstanding seasonality for March. So, I was hoping you could kind of speak to where your visibility is today for nearline. Is it three, six, nine months? And then based on that backdrop, how should we be thinking about, at least for mass capacity, what seasonality will look like into the March quarter? William David Mosley -- Chief Executive Officer Yes. I think mass capacity is pretty full, and it goes out that nine-month period that you talked about, C.J. And that's a virtue of the build-to-order model that we've actually established on. I think customers understand that. They get predictable economics. And we're all going through these qualification processes so they get access to that technology as well. That's all serving us well. I think right now, I would say the total demand is not significantly higher than historical demand. And I certainly don't think there's inventory buildup going in or anything. So, I don't think there's a cycle coming. I think we're running a fairly predictable business. And we'll get better visibility as we get through, obviously, early next year. People are reupping, if you will, the build-to-order configurations. But right now, I feel fairly confident certainly through the front half of the year and probably even into the back half of the year. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. On the seasonality, C.J., usually, the majority of the seasonality is on the legacy part of the business, where the March quarter is a lower quarter, slowest quarter in the year, but we also have part of mass capacity, in particular, VIA so the surveillance part of the business that is usually fairly weak in March and they start to grow in June and is fairly strong in September and December. So, when you model your four quarters for calendar '25 or consider that there is seasonality not only in the legacy part, but also in some of the mass capacity products. Operator And our next question today comes from Steven Fox with Fox Advisors LLC. Please go ahead. Steven Fox -- Analyst Thanks for taking my question. Good afternoon, guys. I guess, just following up on the point on how much capacity you have available. I think I understand how you create capacity when you go from like three terabytes per platter to four. But from here, going over, say, the next 12 months, I think last quarter, you talked about debottlenecking. There's a potential that maybe you do get a better cycle in enterprise and VIA next year. Like how do we get comfortable with the idea that you can manage all that and still satisfy all your customer needs? Or any further color on that would be helpful. William David Mosley -- Chief Executive Officer Yes. I think that's it's a question a good question about how big could things get. If the edge really turns on; if GenAI turns on, which I would say is still very, very early innings of that; if there's some kind of macro recovery in all the markets and we're not there yet. We're still being very cautious on any supply. And any additional supply we would have to put on would be very long lead time. So, we can satisfy more exabytes exactly as you described, and we've talked about earlier. But additional drive demand, if you will, I think we'd have to add supply, which would be longer, much longer lead time. As we spend 4% of our revenue on capex, we do add technology transition capacity, so you get some small capacity adds because of that. As you're buying new tools, they tend to be more efficient. But the growth would be necessarily slow, I think. Our next question today comes from Ananda Baruah with Loop Capital. Please go ahead. Ananda Baruah -- Analyst Yeah, good afternoon, guys. Thanks for taking the question I guess, Dave, sort of sticking right there on the capacity question. If things progress as you anticipate with HAMR in the event that even with HAMR and aerial density increases, sort of data increases, GenAI, video apps, et cetera, all of that were to put in a position where you want to be increasing capacity, what you just mentioned long lead times. What is that process? Can you give us some sense of what that process would look like? We've also heard about kind of the whole component change that you have also needs to be tended to. I guess, just what would be the ways that you guys can maybe get that? That would be helpful. Thanks a lot. William David Mosley -- Chief Executive Officer Yes. Thanks, Ananda. I think that we fix it in our industry on the highest capacity point. And obviously, that's the -- max capacity gets a lot of attention. But when you get into the growth of some of these other markets, we would be talking about 20 terabytes or maybe even less than that. What's your value prop at that level? And by pushing forward in aerial density, we get to take components out of those capacity points. So, we can actually hit much more aggressive price bands if we want to and still maintain really good margins. And then those components that are freed up, you can make twice as many drives with half the components being dedicated to each drive, right? So, I think that's where if we saw resurgence, aerial density helps solve a lot of problems because you can go address those markets that are half capacity, if you will, of the max capacity in a much more efficient way. Ananda Baruah -- Analyst I got it. That's super helpful. And just to complete that, does that mean like even in like a strong case with HAMR, you guys feel pretty good when you sort of map out ability to hit exabyte ships for the industry for a good amount of time to come? I mean, measured in probably years, not months? Gianluca Romano -- Executive Vice President, Chief Financial Officer Well, it depends, right? We have our supply plan if demand is much higher than our supply plan. Of course, we will have a little bit of unbalance that we have time to address, but our focus is on technology transition, is not on more units. And we think this is the most profitable way for the industry to progress in this period of time, and this is what we want to do. So, let's see where demand is in two or three quarters from now, but we know where our supply will be. Operator And our next question today comes from Vijay Rakesh with Mizuho. Please go ahead. Vijay Rakesh -- Analyst Yeah. Hi, Dave. I'm just wondering if you give a size, what do you think the unit shipments could be for calendar '25. And Gianluca, I think in the past, you've talked about trying to bring on some of the idled capacity and headcount as you start to bring some capacity back on. Can you lay out how that road map looks like? Thanks. William David Mosley -- Chief Executive Officer Thanks, Vijay. Yes, we didn't speak specifically about how many units and how fast we'll push. We said that mass qualification will be done for all these customers that we just shipped to probably mid-2025. From my perspective, the factories are relatively full right now. And so, as we plan with those customers and they say, hey, I'd like the exabytes in this form rather than this form, we'll make the transition, but it will be probably less of a transition than we would have made, say, a year ago when we had empty factories, we would have ramped much more aggressively. This time, I think we'll make sure that we pivot accordingly and carefully. It's very important to realize that the components that we use in our last generation of PMR product are very, very similar to the components we use in HAMR as well. So, not the critical components heads and media, obviously, but all the other components. And so, we feel very comfortable being able to pivot from one product to the other if we have to, the mechanics, the electronics, there's so much leverage there. So, that's what allows us that flexibility. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. From a idled capacity standpoint, I would say at this point, we don't have much idle capacity anymore. So, what we are doing is now moving faster into technology transition now with our latest PMR products that we are ramping very aggressively already in the September and December quarter. And then the transition to HAMR will generate a certain level of additional exabytes that will support the increasing demand. And our next question today comes from Thomas O'Malley with Barclays. Please go ahead. Tom O'Malley -- Analyst Hey, guys, thanks for taking my question. Dave, if you would just humor me as I try to clarify things, too. But just in the back half, it sounds like you are fully at capacity and technology transitions are getting you some growth, and it sounds like that looks really good. It's obviously been a couple of really good quarters for you guys. But let's just say we head out into fiscal year '26, you're talking about more volume per HAMR kind of coming in the middle of the next calendar year. And so, you would imagine more substantially into the next fiscal year for you guys. If you guys were to see further delays on the HAMR side, what actions would you guys take just given the fact that you're at capacity and wouldn't -- from a factory perspective, you wouldn't see the technology transitions. Just walk me through what you would do in that instance. Obviously, that's not ideal and you're not planning for that, but we've seen the qualification slip a couple of quarters with the largest guy. So, I just want to understand how you guys think about things if it's further delayed. William David Mosley -- Chief Executive Officer Yeah. I'm not really worried about it for exactly the reasons that you talked about. We see the -- how the test sets are running. We see how the qualifications are running, and we're very confident in being able to make the pivot. But exactly to the earlier question, I think it was Vijay's question, we can pivot from the last generation PMR to the HAMR technology very, very easily. And last generation PMR is a great product for us with really good margins that we're not fully ramped on yet either. So, from that perspective, if it came down to like one quarter of delay and some customers said, I want it like this rather than like this, we can very easily pivot back. Tom O'Malley -- Analyst Helpful. And then in terms of just your outlook on AI, you obviously made some comments earlier on the call. You're saying it's still kind of on the come. In terms of initial conversations with customers, do you have a time frame of when you may start to see some contribution there? Is that something that would come as early as this next fiscal year? William David Mosley -- Chief Executive Officer Yeah. Thanks, Tom. This is a really complex topic because I think there's a lot of different things that are called AI. Some of them are traditional workloads that we've seen for years and years, and some of them are brand-new workloads. And we are seeing demand that's coupled to brand new workloads, right, with purchase orders that reference specifically things that people would identify as predictive AI or GenAI applications. What I would say is that the recent trends are really more toward video, which we talked about in our prepared remarks. And that's the biggest thing that we're seeing right now grow, and I'll call that AI for a while because I think it is a much more efficient way to drive our customers' business models and that's -- we see that demand flowing through right now. I don't think that there's a bubble going on in there. I think there's a continued value competition happening in a bunch of different vectors, with new technologies, new applications coming that could continue to drive video as fundamental value store for our customers. So, that's why we're excited about it. And I know some people call those traditional workloads, but I'll give credit to AI because I think they're being used in very interesting, creative new ways. Operator Our next question today comes from Mark Miller with the Benchmark Co. Please go ahead. Mark Miller -- The Benchmark Company -- Analyst Congratulations on your upside results and your good guidance. I just want to go back to AI and the opportunity there. Do you believe that PCs with AI chips will drive a major refresh cycle? And if so, when? Second half of next year? William David Mosley -- Chief Executive Officer Yeah. Mark, I don't have a ton of visibility into that, although I do talk to some of these customers that I grew up with about that exact topic. Look, I think that the PC space has been relatively slow to adopt new applications of late, and I think that's about to change. How quickly it will change is still anybody's guess. And of course, it's not about spec-ing new hardware. It's about spec-ing new applications that come. And most of those applications are, to your point, they're video applications. So, yes, I do think that when you can enable creative professionals certainly to do -- to create especially video, but audio counts as well and all kinds of other analytical tools that happen at the edge, you allow them to create much more aggressively. I think they'll spin off more data. Some of that data will be serviced by the cloud service providers that already are. And so, we see those applications growing but someone that may be closer to the edge, and we're really excited about that. It's still very early. And I can't really predict where AI PCs are going to be just yet. But I think from what I'm seeing from application development, I'm excited about it, and I think it is going to be a driver in the near future. Mark Miller -- The Benchmark Company -- Analyst OK. Just one other question. You mentioned there's a little idle capacity at the moment. What is the factory utilization in your hidden media fabs? Are they 85% or higher? William David Mosley -- Chief Executive Officer Yeah, fairly high in both. I think we do have capacity as we transition to HAMR, we can -- because we've dedicated a lot of that space to experiments, if you will, in the last few years. And so, now some of that can become production instead of experimentation but I think very high, over 90% utilization right now. And that's the way we want to keep it. We don't want to dip down because, as you know, that has a lot of cost implications back into the business, and we want to make sure we maintain the staff running full. Mark Miller -- The Benchmark Company -- Analyst So, the greater 90% is both for head and media fabs, is that correct? And our next question comes from Karl Ackerman with BNP Paribas. Please go ahead. Karl Ackerman -- Analyst Thank you. I was hoping you could discuss your build-to-order visibility and whether it's based on take-or-pay contracts or if it would be better characterized as strong indications of interest, as you and customers plan their storage capacity additions over the coming quarters. And secondarily, if I may sneak in another one. I was just hoping you could also discuss the mix of SMR today, and perhaps going forward as we think about the mix of these higher-capacity products going into December and into 2025. Yeah. Thanks, Karl. I'll let Gianluca do the build-to-order question. Just on the SMR, I said this many times, there's only a couple of cloud customers that really take SMR. There's a couple of client-server customers that take SMR as well, so we ship it into multiple markets. But we talk about SMR versus CMR, but I just look at it as drives, drives, how does the customer need them, and we can configure them for those applications for those particular customers, whether it's one or two people accordingly. From my perspective, we have a great technology set that we can deploy every place, and we'll try to keep those factories as full as we possibly can and maximize it. So, that's how I think about the SMR mix. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yeah. On the build-to-order, we have different kind of agreements with different customers, but the vast majority are orders that are fully committed by customers out in time. This concludes our question-and-answer session. I would like to turn the conference back over to Dave Mosley for any closing remarks. William David Mosley -- Chief Executive Officer Thanks, Nick. Our strategic improvements in advanced technology road map position us well to meet evolving customer needs and drive future growth. We remain committed to delivering value and scalable storage solutions for our customers. I'd like to thank our dedicated team, our supply chain partners, and our shareholders for your continued support.

Earnings call: Weatherford reports steady Q3 growth, eyes margin expansion By Investing.com

Weatherford International (NASDAQ:WFRD) (WFT), a leading oilfield service company, reported its third-quarter earnings on November 1, 2024, with CEO Girish Saligram, CFO Arun Mitra, and Senior VP Luke Lemoine presenting. The company maintained an adjusted EBITDA margin of 25.2% and generated an adjusted free cash flow of $184 million. Revenue remained flat sequentially but increased 7% from the previous year, attributed to a 9% rise in international revenue. Weatherford announced a capital return program, including a quarterly dividend and share repurchases, and provided insights into strategic acquisitions and technology enhancements aimed at driving future growth and margin expansion. In summary, Weatherford International's third-quarter performance demonstrates stability and a strategic approach to growth despite a challenging market. The company's focus on margin expansion, cash flow efficiency, and strategic acquisitions positions it well for future value creation. Weatherford's leadership remains optimistic about their ability to navigate the market dynamics and improve profitability through technology, service offerings, and operational efficiency. The next update from the company is expected in February during the fourth-quarter earnings call. Weatherford International's (WFT) recent earnings report and strategic outlook can be further contextualized with real-time data from InvestingPro. The company's P/E ratio of 11.71 suggests that it's trading at a relatively low valuation compared to its earnings, which aligns with the InvestingPro Tip indicating that WFT is "Trading at a low P/E ratio relative to near-term earnings growth." This could be an attractive point for value investors, especially considering the company's strong financial performance and strategic initiatives outlined in the earnings call. The revenue growth of 13.55% over the last twelve months, as reported by InvestingPro, supports the company's narrative of consistent year-over-year international revenue growth. Additionally, the EBITDA growth of 25.67% over the same period exceeds the company's guidance for annual EBITDA growth of approximately 20%, indicating that Weatherford is outperforming its own projections. An InvestingPro Tip highlights that Weatherford's "Liquid assets exceed short term obligations," which reinforces the company's strong financial position and ability to fund its newly announced capital return program. This liquidity strength is particularly important given the company's plans to initiate a quarterly dividend and share repurchases. It's worth noting that InvestingPro offers 8 additional tips for Weatherford International, providing investors with a more comprehensive analysis of the company's financial health and market position. These insights can be valuable for those looking to make informed investment decisions based on both qualitative and quantitative data. Operator: Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford International Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] As a reminder this event is being recorded. I would now like to turn the conference over to Luke Lemoine, Senior Vice President, Corporate Development. Sir, you may begin. Luke Lemoine: Welcome, everyone, to the Weatherford International Third Quarter 2024 Earnings Conference Call. I'm joined today by Girish Saligram, President, CEO; and Arun Mitra, Executive Vice President and CFO. We'll start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today's call from our website's Investor Relations section. I want to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed here within. Please refer to our latest Securities and Exchange Commission filings for Risk Factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our third quarter's earnings press release, which will be found on our website. As a reminder, today's call is being webcast and a recorded version will be available on our website's Investor Relations section following the conclusion of the call. With that, I'd like to turn over the call to Girish. Girish Saligram: Thanks Luke, and thank you all for joining our call. I will kick-off our prepared remarks with an overview of our performance, an update on our capital return program, key highlights, and a brief market outlook. Arun will then cover cash flow, the balance sheet, liquidity, and guidance, and I will wrap up with some thoughts on our strategic direction and multi-year targets before opening for Q&A. As illustrated on Slide 3, we delivered strong margin and cash performance in a quarter where North America remained challenged, Latin America had delays, and schedules shifted in the Middle East and North Africa. We have observed a gradual softening in activity, particularly in short cycle oil projects and onshore programs. E&P operators are taking a measured, cautious approach, and we expect this trend to continue in the near-term. In the third quarter of 2024, despite the revenue headwinds, adjusted EBITDA margins came in as expected at 25.2%. While the margins were more normalized after MPD asset sales supported the second quarter, it is worthwhile noting that we had almost 200 basis points of margin expansion over the same period last year. We delivered adjusted free cash flow of $184 million for an adjusted free cash flow conversion of 52%. Third quarter revenue was flat sequentially and up 7% year-over-year, driven by international revenue growth of 9% year-over-year. Revenue came in at the lower end of expectations due to two main factors. Firstly, we experienced delays in activity in Latin America that were broadly felt across the sector. Secondly, there were scheduling shifts in the Middle East, North Africa region, driven by the more measured approach that I referenced earlier. While we did have opportunities to offset the revenue shortfall with transactional work, we remain firmly committed to pricing discipline and margin expansion to drive long-term value creation. While revenue came in at the lower end of expectations, I'm encouraged by a strong margin in cash flow performance, which reinforces our thesis on the ability to continue driving margin growth on an annual basis. From a regional standpoint, overall North America revenue was up 6% sequentially, primarily due to an activity increase in Canada due to favorable seasonality and increased activity in the Gulf of Mexico. Our international business was down 1% sequentially but up 9% year-over-year. The sequential impact was primarily a function of the previously mentioned factors. Despite the sequential delta, we have now achieved 14 consecutive quarters of year-over-year international revenue growth, with the Middle East, North Africa, Asia region driving the year-on-year results this quarter. The Kingdom of Saudi Arabia continues to show strength and has grown 29% year-to-date, and the broader Middle East, North Africa, Asia region has grown 25% year-to-date. Earlier this year, we discussed the expected modulation of our integrated project in Oman. This began in the third quarter and will continue into the fourth with normalization expected to resume in the first quarter of 2025. Our team's outstanding execution on this contract has led to significantly better performance than originally expected. However, as we have previously discussed, we needed to slow down to allow other customer activities to catch up. On the second quarter call, we expanded our capital allocation framework to include a quarterly dividend and a $500 million buyback. As shown on Slide 6, we paid our first ever quarterly dividend of $0.25 per share and repurchased approximately $50 million of shares during the third quarter. However, this amount may vary each quarter depending on market conditions. Our net leverage ratio is approximately 0.5 times and we remain committed to retiring additional debt while maintaining our top tier ROIC. We continue to pursue inorganic opportunities that align with our strategic filters. In addition to the three small acquisitions in February, we announced Datagration in September. I'm very pleased with the progress and execution of our team on the integration plans across all four of these businesses. Now turning to our segment overview on Slides 8 through 10, the operational and technical highlights showcase advancements in new market penetration, technology adoption, and continued innovation of our product and services portfolio. Aramco (TADAWUL:2222) awarded Weatherford a three-year corporate procurement agreement that includes Cementation, Completions, Liner Hangers, and Whipstocks, as well as complementary service agreements. Also in the Middle East, Weatherford deployed MPD solutions in two deep geothermal exploration wells. This innovative use of MPD technology mitigates risk from elevated geothermal gradients during exploration drilling. Furthermore, Weatherford was awarded a three-year frame contract for drilling services in Middle East unconventional resources. In digital, the acquisition of Datagration added the PetroVisor and EcoVisor platforms to Weatherford's digital solutions portfolio, enhancing the integration of customer data with ForeSite and Cygnet for improved real-time analysis and decision making. A few weeks ago at our 20th annual FWRD conference, we showcased the platform's capability and potential. It is extremely encouraging to see the strong customer response and immediate pipeline growth. Now for our market outlook. While the broader international market is still growing, growth has decelerated. We don't see a whipsaw in the market, but activity is moderating due to various reasons, including commodity prices, efficiencies, budget exhaustion, delays in several short cycle campaigns, and several scheduling changes. We have several noteworthy contracts listed in our press release. Despite the slowing growth, these showcase the tender and award activity are still proceeding and demonstrate that Weatherford is able to drive competitive advantage in several spaces. Importantly, our margin outlook of an annual increase of 25 basis point to 75 basis point improvement per year was predicated on flat revenues. While the market outlook is softer than three months ago, we're still comfortable with our ability to isolate growth opportunities in select pockets. Furthermore, we continue to believe that across all parts of the well lifecycle, there remains an emphasis on technologies that support predictable, cost-competitive production and supply security for our customers, which are areas that we excel in. We anticipate continued growth in parts of international land and offshore, mainly driven by portions of the Middle East and supported by pockets of growth in Sub-Saharan Africa and Asia. The bottom-line is that we believe we will have pockets of growth driven by differentiating technologies in key markets. Most importantly for this year, we continue to have confidence in delivering approximately 20% year-on-year adjusted EBITDA growth, slightly more than 25% adjusted EBITDA margins, and adjusted free cash flow of over $500 million. With that, I'd like to hand it over to Arun. Arun Mitra: Thank you, Girish. Good morning and thank you everyone for joining us on the call. Girish has already shared an overview of our third quarter performance and provided an update on our capital return program. For a more detailed breakdown of the third quarter results, please refer to our press release and accompanying slide deck. My comments today will center around cash flow, working capital, balance sheet, liquidity, and fourth quarter guidance. Turning to Slide 18 for cash flows and liquidity. In the third quarter, we generated adjusted free cash flow of $184 million, up $88 million from the second quarter levels of $96 million. Our net working capital showed significantly better efficiencies and only increased 70 basis points compared to the third quarter of 2023 in spite of a 730 basis points increase in revenues. As a result, net working capital is a percentage of the last 12 months revenue was 25.8%, which represented a year-on-year improvement of greater than 260 basis points. Irrespective of the stage of the cycle, the goal is to get net working capital as a percentage of revenue to be sustainably at 25% or better. For the last 12 months, CapEx was $266 million or 4.8% of revenues. Total cash was approximately $978 million, up $58 million sequentially. During the third quarter, we repurchased approximately $50 million of shares and paid a $0.25 quarterly dividend. While our liquidity is at $1.3 billion, we remain committed to retiring additional debt and reducing our interest expense with an intent to get gross leverage below 1x, while maintaining liquidity of approximately $1 billion to operate the business and manage event risk. To summarize, our balanced capital allocation approach to investing in technology, organic and inorganic growth, debt management, and shareholder returns underscores our focus on sustainable value creation. Turning to our fourth quarter and full year 2024 guidance on Slide 19. As Girish mentioned, there are a number of factors that have recently developed in the market with schedule shifts and several short cycle campaigns that have been delayed. As a result, we expect fourth quarter revenues to be flat to up low-single digits. Within this, we expect DRE revenues to be flat sequentially. WCC revenues to be flat to up low-single digits, and PRI revenues to be up low to mid-single digits. Adjusted EBITDA margins for the fourth quarter are expected to be approximately 25%. And we still expect full year margins to be slightly above 25%. Full year adjusted free cash flow is still expected to exceed $500 million. Thank you for your time today. I will now pass the call back to Girish for his closing comments. Girish Saligram: Thanks Arun. On the second quarter conference call, I laid out the vision for the future that requires the same rigor on operating intensity, but is fueled with the capability of more differentiating technology, world-class fulfillment, and larger scale. While the overall market is evolving and the cycle is maturing, we believe we have the opportunity to deliver EBITDA margins in the high-20s in the next three years in a flat to modestly up operating environment. We remain intensely focused on networking capital efficiency and with further reductions in our interest burden, we expect to achieve free cash flow conversion of around 50% during this period. Our internal investments aim to deliver top-tier return on invested capital. All of this will enable significant cash generation, providing an opportunity to return around 50% of that to shareholders through the framework we have outlined. This will leave sufficiently dry powder for selective inorganic place that will reinforce this entire thesis. So while we are entering a new phase of the cycle with low growth for the immediate future, our capability to deliver true value creation is significantly bolstered by the actions and focus of the past few years. And now operator, please open the call for questions. David Anderson: So you talked about kind of the last quarter call about kind of how you view kind of Weatherford in the future, and one part of that was scale. I just want to come back to the M&A discussion here. You've done four kind of smaller acquisitions during the year. I just want to first maybe - could you just talk a little bit about how those acquisitions have gone, kind of what are they bringing to the table. And then kind of really more secondarily, I'm curious as to kind of where you are thinking going forward. Are there any kind of must-haves you need? I kind of go back to that you said scales. Is it more than just scales? Are there certain technologies you are looking for? Just sort of a general M&A question please. Thanks. Girish Saligram: Sure, Dave. So look, let me start maybe a little bit more with the first, and then I'll walk into the first question. So look, from an M&A standpoint, let me start with the fact that we are very pleased, we're happy with the portfolio we've got today. We don't see any glaring gaps or significant holes that we absolutely have to go fill. So, as a result, as I pointed out in my prepared comments, M&A will be selective. We are not looking to grow scale for the sake of scale. That's absolutely not on the cards. We think we've got sufficient scale today. The company is operating really well. We're happy with the portfolio. But what we do have is a strategy within each of the product lines that we operate within that aim to further grow those product lines and to enhance value creation. We've also got some enterprise teams that we're trying to drive. So what we look at when we think about M&A is, any potential target here, does it fit that strategy? And if you look at the deals that we've done this year, they have been small, but they all fit into that strategy. So you know, as an example, you look at the acquisition of Probe in the wireline technology space. We were trying to pivot our wireline business and are doing that successfully to being a different kind of a wireline provider. We will have a wireline service in some critical countries, but we will also be a technology provider to other service companies in areas that we don't operate. To do that, we needed a broader suite, and that's what Probe gave us. So it's things like that. Ardyne has really helped fill out the portfolio in terms of a full capability with high degree of efficiency with innovative technology around plug and abandonment of slot recovery. So those are the kinds of things that we are getting after. I'm extremely pleased with the progress that we have made. As everyone knows, Weatherford's had a history of acquisitions, but what we have not done a great job in the past is integrating them. So we put a lot of emphasis before we consummated the deal around the integration planning with dedicated teams, a clear playbook on how we're going to go execute, and we're learning through that. But the teams have done a terrific job, and I'm excited about the ability to build out all of these platforms to be significant growth for us in the years to come. David Anderson: So, Girish, it sounds like you had mentioned a couple of times isolating growth pockets in sort of a flattish market. And is this kind of the idea that you can find these sort of technologies to go after these growth pockets? Girish Saligram: Absolutely. Look, you know, we still think there's, you know, reasonably good chances for solid activity. You know, while it might be stable, we've got an opportunity to not just increase our share position, but we've also got an opportunity to create some white space and move into that. So that's exactly what we mean by that and we think that will provide us the ability to grow the business while the overall market might be stable to slightly up. David Anderson: Great. And just one other thing, if I could just ask you, you had mentioned a couple of times about some scheduling shifts in the Middle East and North Africa. Could you expand on that a little bit? What do you mean by scheduling shifts? Are these temporary? Are these just kind of one project to the next? Just a little bit more color on that please. Thank you. Girish Saligram: Yes. I think without getting into customer specifics, what it really is, if some of the campaigns getting pushed out by a quarter or two. That's really what it comes down to. So it's not a permanent shift. It is not cancellations. But we are seeing, as I pointed out again in my prepared remarks, a bit more of a measured, a bit more of a cautious approach. And so things that can get delayed, we are seeing customers push that out a little bit to see how the overall macroeconomic situation unfolds. Operator: Thank you. And our next question comes from James West at Evercore. Please go ahead. James West: So, Girish, you've talked about, you know, a stable market environment, and I know you just discussed a little bit about the M&A that you've done so far this year. So I'm curious how you see whether for evolving and growing in this stable environment, can you outpace the kind of modest growth environment? And if so, by how much? And then if so, in what areas do you see your biggest strength? Girish Saligram: Yeah, so James, look we will give, as you can imagine, more specific guidance in February around the year, but broadly speaking, like we have pointed out, I think we've got specific areas of growth and if we are able to execute on that, which we are working very hard towards, is making sure that we essentially can get that incremental growth. So that's really what it's about. So I think as long as the market remains stable, as long as we can execute, we do have an opportunity to get that exaggerated growth, if you will. Specifically, look, it's different areas and different product lines. For example, I've talked in the past on MPD around our Modus launch. This year was really about getting the launch done, getting packages built, getting the supply chain together and getting them out in the field, finishing up the field trials, et cetera. This has been incredibly successful, so next year that should create a little bit more of a [bonus] (ph) for growth for us. The other area I look at is a very broad thematic approach where we are really focused is this notion of production optimization around mature fields. So everything that we've got from a product line capability really comes to the fore, in this notion of mature field rejuvenation production optimization, ex cetera. Our MARS offering, which is our mature asset rejuvenation through surveillance. We have had some great examples there. Our Well Services portfolio brings that through our intervention capabilities, all the way up to decommissioning. So that's where we think there is still going to be an extremely strong emphasis because customers in this environment are actually going to be far more focused on how do they get more out of their existing fields, how do they get more out of their existing wells, and that should give us an opportunity to grow. James West: Got it. Okay. And then maybe a follow up on that. As you have some growth next year, how do you think about margin profile? And I know again you'll get more color in February, but how do you think about the potential to take what are already very good margins higher in a slower growth environment? Girish Saligram: Yeah, so look, we will probably not see margin expansion to the [tune] (ph) that we've seen in the past two years to three years of multiple hundreds of basis points. But you know we feel comfortable and confident that we should still be able to grow margins in that 25 bps to 75 bps in a flat to slightly up kind of an environment. And that's really a combination of several things that we are driving internally, improving the value gap, improving our execution, and as I've pointed out before, we still have opportunities within the company to get more efficient. So the capabilities that we have developed over the past three years, you know, while we've gotten a lot of the low-hanging fruit, there is still enough fruit out there on the trees and we've built a few small ladders to go with that as well. Operator: And our next question today comes from Scott Gruber at Citigroup. Please go ahead. Scott Gruber: I want to stay on the margin topic. Just because the slower growth environment, often - [of course management team's] (ph) an opportunity to kind of reassess those margin enhancement drivers that they've been thinking about. Are you guys thinking about the margin enhancement drivers, any differently in the slower growth environment? Are there certain levers that you can pull faster or harder? Can you introduce technology internally faster? Just some additional thoughts on how you pull those margin enhancement levers. Girish Saligram: Yeah, so look Scott, for us the levers are consistent, right? So the first one is pricing. Obviously pricing in a slower growth environment becomes a bit more challenging, but we still think there is enough tightness of supply in highly differentiated product lines and technologies that -- that is still an opportunity and we expect pricing to at a minimum offset inflation and be a slight net positive. The second and probably most significant one is the introduction of new technology. And as we do that, we're really trying to enhance the value gap. So really position it at the point where we can get higher price, but also at the same time deliver it with more efficiencies and a lower cost. The third for us is what we've been working on for a while is our entire fulfillment network. Now this is a Herculean task. It is a four year to five year roadmap. We're making good progress on it. The initial part of it was a lot of facility consolidation. We are done with that. Now it's about how do we optimize the supply chain and our sourcing networks around that. You know, just a very simplistic example on that. I talked on one of the calls I think three or four quarters ago about moving to lower cost countries from a sourcing base. That's providing us already significant benefits. And what's interesting about that is we are 10 years late on doing this. Everyone else has already done this. So for us it's actually a significant margin expansion that -- we're still able to get really good margins, but doing that, keeping price where it is or slightly above, getting a significant cost reduction does help that. So network optimization, the supply chain optimization and fulfillment is a big factor. And we will lean on that a lot harder now is because cost becomes more important. And sticking to that cost team, the last lever really is our own internal efficiencies and our cost structure. Look, the team's done an outstanding job over the past few years, improving the company, taking a lot of cost out, but Weatherford was never really designed to be what it is today. And so we've still got an opportunity to get more efficiencies, everything from how information flows to material flows to where we have people, what roles they're doing, how we can consolidate, how we can use technology better. So that's going to be a huge emphasis for us over the next 18 months or so. And so all of that combined, I think, gives us enough ammunition to really get after cost and improve margins in this slower growth environment. Scott Gruber: That's great. I appreciate the color. I want to come back to the pricing point because we get questions from investors on the topic of margin resiliency for Weatherford. And I think some folks wonder if you benefited disproportionately versus peers from price inflation on the way up, and if that introduces risk in a more competitive marketplace. Is that a risk that folks should be concerned about? Girish Saligram: So, Scott, the way I think about it is, I think it is reasonably fair to assume that we might have benefited, if you will call it disproportionately. Look, we've put a tremendous amount of emphasis on pricing as part of our commercial approach and strategy. So, we have gotten price, we have significantly increased price, but what I would say is I don't think that poses a risk on the other side because of a couple of factors. One is I feel that the whole industry has strong pricing discipline and I think hopefully we'll all continue to maintain that. I think second look, we've got internally a very, very rigorous mechanism and a culture around pricing. I talked to my prepared remarks that we've got opportunities, frankly, every day, every week to increase revenue by reducing prices fairly significantly. And we are absolutely not giving in to that. So we are very clear about our North Star, which is cash generation and margins are the first proxy for that. So we are very clear about that. And so our focus on making sure that we can articulate the value proposition that our differentiating technology brings to customers allows us to keep that pricing. So I think the first part, I would say, is fair. I think the second part is not something that I am personally overly concerned about. Scott Gruber: That's great. Color. Appreciate it. Thank you. Operator: Thank you. And our next question today comes from Ati Modak with Goldman Sachs (NYSE:GS). Please go ahead. Ati Modak: Hi, good morning team. Girish, you highlighted a new MPD award in the Middle East. So maybe from an adoption perspective, can you talk about which other regions are an area of focus for you where adoption might be lower at the moment and can drive growth in the next 12 months? Girish Saligram: Yes. Ati, Look, I think MPD adoption continues to be something that is very important for us. And we're seeing very positive signs of that. There isn't necessarily a region per se. It's really our -- it's sort of ubiquitous. We are trying to push this in every part of the world. And as we are able to get in front of customers, show them more case studies, share best practices. We are seeing that adoption increase. The Middle East, I'd say, has been by far, the probably most significant part of it, but there is areas in Asia. There is areas in Europe, in Latin America, where we are seeing more and more of that as well. So it is really sort of an overall perspective. Look, what we are really -- if you look at it though, what we are trying to now get after is this performance segment of the market, right? So we have always had the basic RCDs that go on the sort of the lower end of the market. We've got our very high-end Victus offering, which is typically deepwater types of applications, et cetera. But there really has never been in the market this performance tier offering. So that's something that we are really focused on, and Modus is an outstanding product and really allows us to capture that both in land and in offshore. And offshore, as you think about the jack-up market, for example that's something that now starts to open up for us and something that we are excited about getting after. Ati Modak: Great. Appreciate that. And then for next year, you've mentioned flattish revenue, maybe some margin growth. Any early thoughts on free cash flow cadence because the working capital seasonality will obviously be different for a year like next year versus what previous years have been. So maybe any thoughts around that and cash use, if you could. Girish Saligram: Sure. Arun? Arun Mitra: Ati, as we've mentioned, one of the things we take very seriously is the efficiency at which we use working capital. And what you would have seen over the last 21 months, is a consistent improvement in the efficiency of working capital. We were at 28% beginning of last year. We find ourselves at 25.8%. Now the idea is to sustainably be at 25% or below going forward. So what I can tell you is you should expect continuous efficiency improvement across the board, DSO, DSI and DPO translating into a better conversion cycle. And then as we've mentioned for, we will keep continuing to work on [debt] (ph), which translates into lower interest costs and we expect over time, cash taxes to moderate as well. So we expect cash conversion to sequentially improve over the next three years. Ati Modak: Appreciate that. Thank you. Operator: And our next question today comes from Jim Rollyson with Raymond James. Please go ahead. Jim Rollyson: Hi, good morning everyone. Girish, congrats. I guess, on the first quarter of returning capital to shareholders. Along those lines, you look around oilfield service space and guys that have been doing this for a little while, you kind of see this breakdown into a couple of different ways of executing it. Some people just look at what their annual free cash flow is going to be and kind of execute the buyback portion of the annual return kind of programmatically across the year and some guys are a little more opportunistic based on share price. Just curious how you guys, since this is your first quarter with the $50 million, but curious how you will execute that going forward, how you're thinking about that? Girish Saligram: Yes. Jim, I'll let Arun take the specifics on this, but I will just sort of kick it off with saying, look, I think this is a learning process for us. We are trying to figure out the most optimal way. But really with the focus on doing this like we do everything else in the most prudent and responsible fashion without going nuts and taking undue risk. Arun Mitra: Jim, what we can tell you is we did a bit of both this quarter. And what we also know for a fact that empirical evidence suggests that companies are not very good at opportunistically executing buybacks and adding value. So we will be careful, and we will be looking at market signals, which trigger opportunistic buybacks. But at the same time, the dilution component which is triggered by grants to employees, that is something we expect to buyback programmatically. So more to come in the future quarters on this. Jim Rollyson: Yes. That's helpful color. And thanks for both answers. And Girish, just one follow-up. At the FWRD conference, you guys talked about a lot of different things on the digital front from sensors to obviously, Datagration and the ability to integrate a lot of different things. Maybe just order of magnitude -- there's been a lot of talk about digital, but order of magnitude, kind of how impactful is that as we think about Weatherford going forward from a growth aspect? Girish Saligram: Yes. Look, we talked earlier, Jim about those pockets of growth. Digital is most certainly one of those pockets, right? So I highlighted production focus and this mature field rejuvenation [PNAs] (ph) and other digital is a third and a very significant portion. And look, it is far more than about the simplistic revenue growth that we get out of it. We get a couple of other things with that digital capability. The first is significantly higher margin. So it is very accretive to margins. And the second is, while there is a lot of typically upfront cost in software development, et cetera, our approach is a little bit different, really becoming more of an integrator of different things. So it's actually less capital intensive as well. Today, it is not big enough that we would peel it out and talk about it, as a separate segment or anything like that. But it is something that we are really counting on as we talk about in those levers of margin expansion technology being a driver, Digital is smack dab and center in the middle of that. Jim Rollyson: Perfect. Appreciate the answer. Operator: Thank you. And our next question comes from Saurabh Pant with Bank of America (NYSE:BAC). Please go ahead. Saurabh Pant: Hi, Girish, maybe I want to start with a little more color on the orders that you announced. I know you're not primarily an order-driven company, right? But it is interesting to see a dozen orders in your press release that you announced. I think seven or eight of them are in the Middle East. And I know we are simultaneously talking about concerns on the Middle East, maybe Saudi more specifically slowing down. But on the other hand, you continue to get stronger orders. How do you feel about the trajectory going forward, right? I mean, considering the order inflow, the conversation still looks relatively positive. Girish Saligram: Yes. Look, Saurabh, great question. As we highlighted in the press release, I mean there is still a lot of activity out there. So I think it is important to understand that activity growth is slowing, no question. But activity itself is actually still very much there and it's growing a little bit. So I think the orders not just show that there is activity, but that we are actually winning in several different areas of the business in several different geographies. And the Middle East, I think is still the place that we think about as spearheading growth overall, right? As we sort of look at a global landscape, I think everyone understands and recognizes that North America is likely as we look into the next 12 months or so, going to be challenged sort of flat, more likely a bit down. On the international side, we think there is growth, but that growth is very mixed. Europe obviously, with some of the things happening in the UK, the North Sea, that's likely to be down. We think Sub-Saharan Africa has probably mid-single digits kind of growth. We think Asia has mid-single-digit growth. But then Middle East, select countries have high-single digits. And overall we think Middle East is about mid-single digits growth as we look at next year. And then for us therefore, when you look at the total international business, it is probably up sort of in this low-single digits kind of place, but then select pockets that have significant margin accretion that we continue to exploit should give us that ability to deliver higher EBITDA margins. The one wild card, I would say, is probably going to be Latin America, which really is -- we have got to wait and see a little bit how it eventually modulates, especially in places like Argentina and Mexico, what really happens. But those awards, you are 100% right, really showcase what's happening and there is still activity out there. Saurabh Pant: Right, right, right. No, exactly right. I mean we hear about all the concerns, but on the other hand, like you said, the trends on the ground still look like they are relatively resilient, right, if not positive. Girish Saligram: Yes. I mean look, we talked about our year-to-date growth and granted that's retrospective. But it is still very, very strong year-to-date growth. So even if that moderates, I think we've got enough momentum, we've got enough scale that we should now really be able to continue to get momentum and efficiencies and really drive those margin expansion story. So I've been saying this consistently for three-plus years is this is a margin and cash story. Yes, you've got to have revenue growth to help drive that. But even in a flat to slightly up environment, we should be able to get significant value creation from that margin expansion. Saurabh Pant: Right, right. Perfect. Perfect. Arun, one for you very quickly. I know you talked about working capital efficiency in response to Ati's question. And you've done a great job, right 25.8%. That's a fantastic number you are sitting at and the target is to come down to 25% or less than 25%. How soon we expect you to get there? And does the fact that the overall market growth is slowing, does that make it harder to further accelerate, for example collections for you? Arun Mitra: Look, we haven't seen Saurabh any impact on collections. As a matter of fact, we had a pretty strong collections quarter. But if things slow down, history suggests that collections would slow down as well. But at the same time, you would expect inventory to build up much less or actually reduced. So overall environment, which is start growing as quickly as it was, you would expect some -- actually working capital to go in a favorable direction. Now if the world falls apart and everything goes to hell in a hand basket, that of course, you would expect to see working capital unwind. But in a flat to moderately up, you would see continuous efficiency improvements. And when you ask about how soon, we have some critical dependencies. I mean concentrations. You've seen from our [Qs] (ph) that a significant portion of our AR is concentrated in Mexico. So we are actively working to reduce the concentration. So I couldn't tell you that we sustainably get to 25% next quarter or the quarter after. What I can tell you is we are working on the structure, which reduces concentration on any particular customer or any particular geography. And once we do that, which we expect to do over the next couple of years, you could expect us to be 25% or better sustainably. Saurabh Pant: Okay. No, I got it, Arun. It makes a lot of sense. Okay. Perfect, Girish, Arun, thank you I'll turn it back. Operator: Thank you. And our next question today comes from Kurt Hallead with Benchmark. Please go ahead. Kurt Hallead: Thanks for the opportunity here to pepper you with some questions. So Girish, let's go back to some of the commentary you kind of referenced, obviously moderation in the growth rates, and they went through a very detailed explanation of where you think that growth is going to come. You've got the size, the focus on maintaining and improving your margins even in that environment. So how do you guide the organization, if you will, in the context of maybe feeling pressure to take some work that doesn't meet necessarily the margin or return thresholds? Or are you getting any indication of a little bit of I don't know, anxiety within the organization about having to book work even if it's not the best work? Girish Saligram: Yes. Look, Kurt the way we do that is just a lot of communication firstly. And then the second is making sure we've got the right operating rhythms and mechanisms set up to ensure that everyone is on the same page. I feel really good about the culture within the company, the changes that we have had over the last four years. I think everyone understands today what the North Star is. And again, it is cash and the proxies to get to that. So no one is really looking to say, hey I'm just going to grow revenue or share at the expense of margins and cash. So I feel really good about that, and it's been four years of a lot of work that we have put in as a leadership team, but more importantly making sure that -- that message is percolated through the 19,000 people in the organization. We have had bidirectional interaction, a lot of dialogue around it. So is it perfect? Probably not. But I feel really good about the overall system that people will have the opportunity to ask those questions, and then we can address them. But yes look, we are absolutely not going to go chase low-quality work. Kurt Hallead: That's great. Appreciate that color. Maybe as a follow-up, right? And typically in periods like we are experiencing now like, which is not really typical, it's either going to go up in a big way or down in a big way, and now we're just kind of moderating. But nonetheless, the customer base tends to utilize these types of situations to really kind of lean on the suppliers and service companies from a pricing standpoint. So you kind of explained the culture dynamic around it, but maybe can you give us some insight as to -- are you seeing that increased amount of discussion from the customers really trying to lean on you to kind of reduced prices. Is it more intense now than it might have been three, four, five months ago? Girish Saligram: Look, it is always something that is part of every conversation, right? We do that with our supply base. Our customers do that with us. That's just the circle of business that you go through. So we are certainly having, I would say, maybe a few more conversations, but it is nothing to the extent that we would say it is a widespread phenomenon or something that we are overly concerned about. Most importantly, look, I think a couple of things. One is we have really tried as we have worked on pricing over the past few years, to make sure that it is backed up by a very strong value proposition. So it's not a pricing argument that's been, hey commodity prices are high, so our prices should go high. It is been about the value that we generate and create for our customers. The second is customers are still very cognizant and very keen on ensuring security of supply, especially when there is a lack of different choices around differentiating technologies. So that's a big, big factor. I think the industry has been a lot more prudent in this cycle of not building out a lot of capacity. And so there isn't this huge mismatch right now again, especially in those differentiated areas where we get the higher margins that would suggest that there is a lot of surplus capacity to throw that could create pricing softness. And look, I think last but not least, I think customers are also very, very cognizant that the cycles have changed, and this is not that whipsaw effect. There is a moderation in activity, but there isn't a drop. And I think that is a fundamental difference. And customers recognize that they need a healthy service sector as well. So I think the conversations are constructive. And net-net, we still believe we've got an opportunity and a road map to increase margins. Kurt Hallead: All right. That's great. Great color. Thank you so much. Operator: And our next question today comes from Doug Becker with Capital One. Please go ahead. Doug Becker: Thank you. Girish, Mexico is an important market for Weatherford. The country has a new President, national oil company has a new CEO. And then yesterday, there was a report that Pemex is looking to suspend some rigs just to manage budget. So just given that dynamic backdrop, I wanted to get your outlook for Latin America specifically. Girish Saligram: Yes. Doug look, Latin America has been one of the challenges over the past six months. We have referenced it on the prior call, as well as on this call in terms of delays that we have seen. And certainly, Mexico is a part of that. We recognize that leading up to the elections, there was a little bit of churn and things got slowed down and now we've got a new administration. I think it is still very early days to say exactly what it's going to look like. But clearly, there is a big focus on what they want to do in terms of getting Pemex on the right footing, and we want to support them, as a supplier and partner to the extent we can while making sure that we generate the value that's due. So as I look at Latin America as a whole, as I sort of said earlier, on one of the questions. Latin America is probably the wildcard for next year. As we look at it right now, it probably feels like it is flat to maybe slightly down, but it also is the one region that has the ability to inflect the strongest. Argentina has probably the most positive outlook at this point than it is had in several years. But we still need to see that shift actually happen and the full ability to free up capital controls, et cetera. If that happens, I think there could be a significant positive opportunity there. Colombia we have talked about some of the changes there and the slowdown, et cetera. That is likely going to persist and not really change for a bit longer. Brazil has been pretty steady and growing, and that continues to do well. And then it really comes down to Mexico, which is a very significant market. So I think more to come on that, especially in the February call as we lay out guidance, et cetera. but it is something that we are very cognizant of. We are keeping a very close eye on and making sure that we are modulating our workforce, our plans, everything in-line with customer activity and really ensuring that we are well-positioned as a company to manage overall exposure there. Doug Becker: That makes sense. Switching gears a little bit. The industry seems to be increasingly focused on the production phase of the well life cycle. At your recent digital conference, you were highlighting the ForeSite production platform that you can integrate artificial lift into and then specifically the power regenerative system. Just how would you characterize the growth opportunity for Weatherford from the digital production-related offerings? Girish Saligram: Yes. Look, I think it is one of our most significant opportunities. We've got a very extensive portfolio on two dimensions. The first one is really around artificial lift, right? So we don't have an ESP offering, but we have just about every other form of lift, and it is the most comprehensive lift offering with a very strong installed base that we've got in the industry. So that's a huge advantage for us. We really understand this production domain. The second is the digital capability. We're the only OFS company that has its own SCADA platform with Cygnet, and that is a huge competitive advantage for us. And so as we modernize that -- feed that into ForeSite, the ability to then bring together different data structures, different databases, different data models with what we have with Datagration now, this capability of a unified data model that allows us to create incredibly powerful algorithms, platforms for customers to drive their operational efficiency. So that's what we're really focused on. So we think it's an area that we will get tremendous capability. And what we are adding to these two legs now is the third dimension, which is not just hey, we've got the artificial lift. We've got the digital capability, but we are now making sure we've got that comprehensive portfolio to help customers rejuvenate their mature fields to improve their production from existing wells through a combination of intervention services, well services, et cetera -- a lot of different technologies that really help drive that. So it is an area that we are probably most excited about in terms of the growth potential. Operator: Thank you. And our final question today comes from Josh Chan with Daniel Energy Partners. Please go ahead. Joshua Chan: Thanks for taking my questions. I have one with a related follow-up that you discussed on the service a little bit in your last question, but I just wanted to drill down further on. So first, you completed the acquisition of Datagration in the third quarter. And can you just speak to why now exactly was the right time for that specific deal and maybe a bit more detail on PetroVisor and EcoVisor? And then as my follow-up, can you just give a bit more detail about how they're ultimately going to work together with ForeSite and Cygnet and the increasing importance of real-time analysis and how that's -- how you see that specifically evolving over time over the next couple of years? Thanks. Girish Saligram: All right. A lot of different things in there, Josh. But let me try and sort of address most of them at a high level. So look, in terms of the why now, it's -- that's always a bit hard to answer, everything typically comes together. But really, as we looked at the market landscape as well as our own capabilities, there was a couple of things that we realized. Look, first is customers are struggling with the same issue, which is we've got a lot of data. We just don't know how to really bring it all together. The second is nobody really wants to get tied into a particular platform or a particular system. They see different things that are best-in-class, but lack the ability to stitch it all together, especially when you think about all of the consolidation in granted, that's more of a US phenomenon, but it's a huge market. Customers are consolidating and they are saying, hey look, company acquired was on this system. I've got the system. There's this huge treasure trove of data, but they don't talk to each other, the different systems. How do we pull all of that together. We looked at that, we see that internally, but we also see that within the offerings that we have to customers. Datagration really is a solution that bridges that gap for our customers. It passed this ability with this unified data model to really bring things together in a very sort of crude fashion, the layman in me sort of describes it, as it's sort of the universal plug adapter for the digital world. So that's really what we get with that. And it creates then a very powerful message for customers that we can help them bring together different data sources and most importantly, do it very fast, do it real time, do it on the cloud, do it as a software-as-a-service kind of a model or if they want it on-prem, we can do that as well. Different delivery mechanisms that bring that together. So that's really what it is. Look, in terms of the exact road map of integration with ForeSite, PetroVisor, et cetera, that's something that we are working on. But what is more important than the actual platform is the fact that we have the capability now to deliver to customers' specific optimization platforms. We've got the ability to drive these AI ML models on a variety of their use cases to whatever channel that they want along with a very simple user interface that can be delivered to them in a subscription model, in whatever mechanism that they want. So that's really what this whole thesis is about. Joshua Chan: Thanks. Operator: Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks. Girish Saligram: Great. Thanks, Rocco. Thank you all for joining the call today. Look, appreciate it. So just to summarize again, we recognize that the market is changing. It's evolving. We still though, believe that we have pockets of growth. We have the ability to grow the business in several different areas that we are excited about. And most importantly, we have the ability to continue the margin expansion journey that we've been on for the past few years. And for this year, we are on track to deliver over 25% EBITDA margins and over $500 million of cash. So -- thank you all so much for joining, and we'll talk to you on our fourth quarter call. Arun Mitra: Thank you. Operator: Thank you, everybody. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.