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Seagate Technology PLC (NASDAQ:STX)
Q4 2019 Earnings Call
Aug 2, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Seagate Technology Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. My name is Kelly, and I'll be your coordinator for today. [Operator Instructions]. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions].

At this time, I would like to turn the call over to Shanye Hudson, Vice President, Investor Relations. Please proceed, Shanye.

Shanye Hudson -- Vice President, Investor Relations

Thank you. Good morning everyone and welcome to today's call. Joining me today are Dave Mosley; Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We posted our earnings press release and detailed supplemental information for our June 2019 quarter on the Investor's section of our web site.

During today's call we will refer to GAAP and non-GAAP measures, non-GAAP figures are reconciled to GAAP figures in the earnings release posted on our website and Form 8-K that was filed with the SEC. We do not reconcile certain non-GAAP outlook measures, because material items that may impact these measures are out of our control out of our cannot and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort.

As a reminder, this call contains forward-looking statements, including our September quarter financial outlook and expectations about our financial performance, market demand, industry growth trends, planned product introductions, ability to ramp production, future growth opportunities and general market conditions. These statements are based on management's current views and assumptions and should not be relied upon as of any subsequent date. Actual results may vary materially from today's statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in our most recent Form 10-K filed with the SEC, and the supplemental information posted on the Investor's section of our website. Following today's prepared remarks, we will do our best to accommodate your questions.

And with that I will turn the call over to you, Dave.

Dave Mosley -- Chief Executive Officer

Thanks, Shanye. Good morning everyone and welcome to our quarterly earnings call. I will start off by summarizing key highlights from the June quarter, and sharing some perspectives on the market, before outlining our progress on our key priorities. Afterwards, Gianluca will discuss details on our June quarter financial results and provide our outlook for the September quarter. Following the prepared remarks, we will open the call for questions.

Seagate continues to deliver on its financial commitments, achieving June quarter results that were solidly in line with our expectations. We recorded revenue of $2.37 billion and non-GAAP EPS of $0.86. Both toward the upper end of our guidance range, against the backdrop of increasing geopolitical uncertainty and regulatory hurdles.

These broader macro conditions disrupted our customers buying patterns, causing trepidation among some of our enterprise and OEM partners. While prompting others to accelerate demand, including a few surveillance customers.

Our ability to adapt to market volatility and intelligently manage our business, enabled us to increase revenue and exabyte shipments quarter-over-quarter, supported by improving demand for our nearline drives from cloud and hyperscale customers. Additionally, our fiscal year performance demonstrates, solid execution on our priorities to optimize profitability and free cash flow.

We have been successfully pivoting the business toward growing markets, which include Enterprise nearline drives, Edge stores for surveillance and NAS and our cloud system solutions. In fiscal 2019, we delivered annual revenue of $10.4 billion, of which approximately half was derived from these markets. These applications require reliable, cost-effective mass storage, making them well suited to our portfolio of products. Importantly, they contribute an even higher percentage of our gross profit, providing a solid platform for margins to expand, as they become a greater part of our overall revenue.

At the same time, we are continuing to supply HDDs into mature markets, which include mission critical, Edge compute, DVR, gaming and consumer applications to support our customers' needs. These products require minimal further investment, while contributing nicely to our overall operating income. We are continuing to tightly manage expenses, while prioritizing investments toward areas that deliver the greatest value to our customers and strong returns for Seagate.

In fiscal year 2019, we reduced our full year non-GAAP operating expenses by 9%, while increasing our investments in next generation technologies to improve areal density and lower cost per terabyte. We are leveraging our significant free cash flow generation, to enhance shareholder value. In fiscal 2019. We delivered $1.2 billion in free cash flow and returned $1.7 billion to shareholders through dividends and buybacks, demonstrating our long-standing commitment to capital returns, as well as our confidence in sustainable cash flow generation.

We continue to advance our technology roadmap and focus on being first-to-market with new product solutions. This strategy enables us to provide our customers with cost and performance benefits, at an attractive margin for Seagate.

As we shared last quarter, we began shipping our 16 terabyte drives in late March to deliver the world's highest capacity storage solutions, and we have already introduced products for both Enterprise and Edge storage applications. Customer qualifications are progressing well, and we remain on track to ramp high volume shipments later in calendar year 2019.

In addition to driving the next generation of high-capacity storage, we are the first to introduce dual actuator technology. This technology effectively doubles the performance at the doubles the performance at the same capacity points, making it ideal for cloud workloads and Edge sequential operations, servicing large data flows such as video streaming, smart factories, AI and machine learning.

Our MACH.2 dual actuator technology is garnering strong interest. Customers have started to qualify these drives, which we expect to begin shipping later this calendar year and becoming increasingly critical across the industry, starting around the 20 terabyte capacity point.

Looking ahead, we expect to capture another industry first, with the introduction of 20 terabyte capacity drives, which will be based on our highly scalable HAMR technology. Six years ago, I stated that HDDs would be 20 terabytes by the end of calendar 2020, and we remain on track to hit that target. We are focused on making the transition to HAMR Technology seamless for our customers. Our HAMR drives are built on a common platform to current 16 terabyte drives, which is helping to accelerate maturity and adoption in the market.

As we enter fiscal year 2020, we expect the macro related uncertainties that I described earlier, will continue to have some influence on near-term industry dynamics. However, we expect demand from global cloud and hyperscale customers will continue to improve, particularly for high capacity drives. Seagate is well positioned to address this growing demand, with a strong technology portfolio, deep customer relationships, manufacturing expertise in precision robotics, assembly and analytics, and the supply chain flexibility, which together all enable manufacturing cost advantages. We expect our exabyte shipments into the enterprise nearline market will be well above the long-term CAGR of 35% to 40% in fiscal year 2020. Additionally, we expect to deliver healthy revenue growth year-over-year.

With that, I'll turn the call over to Gianluca, to go into more depth on our June quarter results and share our outlook for the September quarter.

Gianluca Romano -- Executive Vice President and Chief Financial Office

Thank you, Dave. We are focused on driving strong operational efficiency and effectively managing the business to dynamic market conditions. On a sequential basis, we grew June quarter revenue by 30% to $2.37 billion, and above the midpoint of our guidance range. We increased total exabytes shipment by 10%, to 84.5 exabytes and we expanded non-GAAP operating income by 8% to $286 million.

While the geopolitical situation remains uncertain, we are seeing improving demand conditions, particularly among cloud, hyperscale customers, for high capacity nearline drives.

Revenue for the enterprise market, which includes nearline and mission critical hard disk drives represented 41% of total June quarter revenues, up from 39% in the March quarter, mainly due to stronger demand in nearline drives. Exabyte shipments into the enterprise market were up 15% quarter-over-quarter at 38 exabytes. Nearline drives accounted for more than 90% of that total, with the average capacity per nearline drive at nearly 8 terabytes. Revenue from 12 terabytes and higher capacity drives now represent more than 50% of total nearline revenue, compared with 36% in the prior quarter. We have successfully qualified our 16 terabyte drives with a number of customers, and we expect shipment volume to increase through the fiscal year.

Revenue for the edge non-compute market, which include the surveillance, NAS, gaming, DVR and consumer application, increased to 34% of the total June quarter revenue, compared to 32% in the prior quarter.

While the first half of the calendar yea is typically a weaker period for the edge non-compute market, we saw some acceleration in demand from a few surveillance and gaming customers, which led to a sequential increase in revenue and exabyte shipments. We shipped a total of 33 exabytes into the edge non-compute market during the June quarter, compared to 29 exabytes in the prior period. Similar to nearline application, a majority of edge non-compute platforms require reliable and secure mass data storage, which is well aligned to high capacity disk drives.

Revenue from the edge compute market, including desktop and notebooks hard disk drives contributed 18% of total revenue, relative to 20% of revenue in the March quarter. With exabyte shipments down approximately 6% to 14 exabytes, reflecting typical seasonality.

Our non-hard disk drive business, including cloud systems and SSD solutions, made up the remaining 7% of June quarter revenue, down from 8% in the prior period. The quarter-over-quarter revenue decline was mainly driven by lower demand from our enterprise SSD customers.

Revenue for our cloud system business was slightly down quarter-over-quarter. However, we improved operating profit, which reflect our ability to transition our portfolio to higher value products. During the quarter, we jointly announced a new partnership with Cloudian, to address the private cloud market opportunity, across healthcare, scientific research and media and entertainment. The Cloudian solution will be powered by Seagate's 16 terabyte high capacity drives and our new high-density storage server platform, which deliver a cost-effective solution for large-scale deployment.

Non-GAAP gross margin for the June quarter was 26.8%, up 20 basis points sequentially, on a more favorable product mix. Consistent with our expectations, during the June quarter, we incurred underutilization costs, which were only slightly improved from the March quarter, and thus negatively impacted gross margin. We continue to proactively manage our manufacturing output, to align closely with the demand environment, which is starting to improve for higher capacity drives. Therefore, we are expanding our production capabilities to address future growth opportunities. As a result of this dynamic underutilization costs will remain a headwind on gross margin until demand fully matches our production capacity later in the calendar year.

To efficiently manage our non-GAAP operating expenses, holding them flat [Phonetic] quarter-over-quarter there at $350 million, down nearly $50 million from the year-ago period. The combination of slightly higher gross margin and flat operating expenses, resulted in non-GAAP EPS of $0.86 for the June quarter, at the high end of our guidance range and reflecting our ongoing operational efficiency and expense discipline.

Cash flow from operations was $148 million in the June quarter. Capital expenditures were at $151 million in the June quarter and above $600 million for the fiscal year, which was just below 6% of full year revenues.

Looking ahead to fiscal 2020, we expect capex to be near the midpoint of our target range of between 6% and 8% of revenues, to support our plans to increase our manufacturing exabyte capacity, to address growing demand.

Free cash flow was a healthy $297 million for the June quarter and $1.2 billion for the full year. During the quarter, we received a cash payment of $1.35 billion from Toshiba Memory Holding company, for the early redemption of the outstanding preferred share we held in the company. As a reminder, just over the year ago, Seagate made a $1.27 billion investment in TMC preferred shares. The proceeds represent our original investment, as well as accrued interest income.

During the June quarter, we retired $272 million in debt, including the repayment of our revolving credit facility. At the end of the quarter, the company's debt balance was $4.25 billion, with a gross debt to last 12 months non-GAAP EBITDA ratio of just below two times. We reported 7.8 million ordinary shares for $350 million, in stating our view that Seagate shares represent an attractive investment. We exit the June quarter with 269 million ordinary shares outstanding, down 6% from the prior year.

At the end of the quarter, we had $2.2 billion remaining on our authorization. Our Board has again approved a quarterly dividend payment of $0.63 per share, which will be payable on October 9, 2019. Through the combination of dividends and share buybacks, Seagate returned approximately $1.7 billion to shareholders in fiscal year 2019, or about 145% of free cash flow, which reflects our focus on enhancing shareholder value. shareholder value.

As of the end of June, cash and cash equivalents were $2.2 billion, up $832 million from the prior quarter, with an additional $1.5 billion available through our revolver. As we enter fiscal year 2020, the industry landscape is improving, and we remain focused on executing plans to expand our manufacturing capacity to address growing demand for mass capacity storage. While these actions have a near term impact on gross margin, we believe this positions Seagate well to capitalize on future growth opportunities.

Prior to sharing our quarterly outlook, I would like to outline a change to our financial reporting. Staring in the September quarter, we will begin disclosing share-based compensation expense from our non-GAAP results, because company's utilize different factors and methodology to calculate this spend, as well as to be more consistent with the majority of our industry peers. This expense is approximately $30 million per quarter, of which the majority is included in operating expenses. I would also point out that December quarter is a 14-week period, and we expect to incur additional operating expenses due to higher variable compensation and the extra week in the quarter. We expect the net impact to operating expense to be an additional $20 million in the September quarter.

Taking these factors into account, our outlook for the September quarter is as follows; we expect total revenue to be in the range of $2.55 billion, plus or minus 5%. Non-GAAP gross margin to be relatively flat sequentially. Non-GAAP EPS of $0.90 plus or minus 5%. While the macro environment continues to disrupt near-term demand, we expect exabyte volumes to meaningfully grow. Over the long term, our focus on cash generation and a solid balance sheet, will provide us the financial strength to capitalize on future storage growth opportunities, and enhance shareholder value.

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

Dave Mosley -- Chief Executive Officer

Thanks Gianluca. To summarize, Seagate is executing well on its strategic priorities to optimize profit and free cash flow. We are continuing to manage the business intelligently, through industry related cycles and the current market dynamics. Over the longer term, we believe that fundamental demand for data is driving the need for mass storage capacity. Seagate is creating solutions to help customers manage the exponential volumes of data securely, efficiently and cost effectively.

As we enter fiscal 2020, I'm confident that we have the financial foundation, manufacturing expertise, and technology portfolio to capitalize on these future growth opportunities. We will be hosting an analyst event on September 19th in New York City, where we plan to outline our strategy in more detail.

Before opening the call for questions, I would like to take a moment to thank our customers, suppliers, business partners and employees for all of their contributions to the success of our business. Gianluca and I will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] . Your first question comes from the line of Katy Huberty from Morgan Stanley. Please go ahead, your line is open.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Good morning. I'm surprised gross margin din't recover more in the June quarter, given the 10% increase in exabytes shipped and the improvement in nearline in surveillance. It sounds like underutilization is still an issue. Does that tie entirely to the 16 terabyte investments? Are there other areas of the business where you're seeing under-utilization? And then just how should we think about the progression of gross margins over the next couple of quarters, as 16 terabyte ramps? Thank you.

Dave Mosley -- Chief Executive Officer

Thanks, Katy. At a very high level no, it doesn't tie to the ramp of the 16 terabyte. But I'll describe the market dynamics and then let Gianluca do a walk on of specific impacts, if that's more helpful.

I don't think we should underestimate disruptions in the market from a demand perspective that we saw in Q4 and continue to see ramifications of Q1. There is a lot of supply that was pushed into the market. I think into channels that are not necessarily tied to revenue quickly, and that's partly because, people are buying things in anticipation of maybe supply disruptions that didn't happen. And I think those factors have actually played into the quarter-to-quarter compare. And may even be a little bit of -- part of underutilization as well, just as we try to tie those things back together, because as you know, we like to build only what the customers absolutely need and those disruptions have impacted us. But I think if I step to the very high level of the industry and look at revenue per terabyte, you can see the revenue per terabytes going down quite a bit. Now, some of that has transitioned to higher capacity drives, some of it is fact that the cloud is still not fully turned on. But you could see that competitive progress there. How do we get out of it, and when, is to your question, that's when we can go drive cost per terabyte, and the biggest product that we have come in, there that's going to be impactful is 16s as well.

But I'll let Gianluca do the walk as well.

Gianluca Romano -- Executive Vice President and Chief Financial Office

Yes, hi Katy. So in term of underutilization costs. In FQ4, we still had about 100 basis point of gross margin that we lost due to underutilization. The overall gross margin was fairly well aligned to our guidance. And as you know, even in EPS, we are actually higher than the midpoint of our guidance. So I don't know [Indecipherable] expectation was to add a much higher gross margin for the FQ4.

In FQ1, you will still have some underutilization costs impacting the gross margin, less than FQ4, but still probably 50, 60 basis points. So Dave said, it's not really related to the 16 terabyte specifically, but we are adding capacity to our manufacturing capabilities because of our expectation of much higher volume coming in the next few quarters. So until we ramp all our production and fulfill the factories, we will have some underutilization costs. And as Dave said, there is also some pricing pressure in the market that is keeping gross margin, maybe little bit lower than what you were expecting.

And maybe let me take the opportunity to talk about also EPS for FQ1. So we guided $0.90 plus or minus 5%. But several items that will impact EPS in Q1 in different direction. So first of all we will have the positive impact of higher revenue at a similar gross margin, as we guided. We also have a positive impact from excluding share-based compensation starting FQ1, in order to be better aligned to our competitors and the normal practice in the industries.

And then we have a couple of negative impact. One is OpEx, because as FQ1 is a 14 week quarter. We will add about $25 million higher OpEx in the quarter and we also have higher OpEx due to the variable compensation. So that is probably another $20 million. Finally, we also have lower interest incomes, because we redeemed our investment in Toshiba. As you know, that investment was generating about $20 million of interest income that we will not have in FQ1. So this is how [Indecipherable] $0.86 in FQ4 to the $0.90 in FQ1.

Katy Huberty -- Morgan Stanley -- Analyst

That's really helpful. Thank you.

Dave Mosley -- Chief Executive Officer

Thanks.

Operator

Your next question comes from Steven Fox from Cross Research. Please go ahead, your line is open.

Steven Fox -- Cross Research -- Analyst

Hi, good morning. Sorry for the background noise. Just one question. As you ramp 16 terabytes in the interim, is there a meaningful share loss at the cloud that we should consider, and if so, can you sort of give us a sense for how that sort of plays out over the next few quarters? Thank you.

Dave Mosley -- Chief Executive Officer

Yes. Thanks Steven. The way I think about it is, we're ramping 16s and communicating to our customers what we want to do on 16s. That's the platform and we didn't just stage this [Phonetic] platform last month, we've been working on it for years. So that's a platform we've been out selling to our customers, getting them to align to getting them aligned on the ramps and so on. So to your point, especially when the market is relatively soft for nearline, we've been down -- it's actually starting to pick back up as we talked about, but it's not -- still not up to full speed and you can see that versus where we were say a year ago, when things were really hot. We want to make sure we don't push the wrong drives out there, then. So from our perspective, let's not overbuild say for example, on 12s or 10s and push those or 10s and push those into slots that ultimately the customers -- maybe they don't want for their long-term TCO proposition, they are going to be putting these datacenters up and running, drives for five, seven years. So the TCO proposition for the 16 is huge. We don't want to be temporarily going after that. So if you call that share loss or something like that, it's fine. That's not a metric we're really managing on to your point

Steven Fox -- Cross Research -- Analyst

Thank you.

Operator

Yeah. Your next question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead. Your line is open.

Aaron Rakers -- Wells Fargo -- Analyst

Yeah, thanks. Two real quick questions, if I can. So first of all, just kind of trying to understand the gross margin trajectory from here. Can you help us appreciate at what level of capacity shipments on a quarterly basis, you think that you kind of fully absorbed the under-utilization of your fabs? I mean is that north of 100 exabytes. So I'm just trying to understand or frame that, as we kind of build the model and I again do that [Speech Overlap].

Dave Mosley -- Chief Executive Officer

Yeah that's good Aaron. So -- and I think it's a good way to think about it. So this time last year, we were north of 100 exabytes, and then we dipped down into the 80s in the last couple of quarters, when things have been soft. I think we need to get up over 100 now and we're installing capacity for that, and largely a portion -- it's not just 16 terabytes, right, it's some of the low cap stuff moving to 8 terabytes and some of the surveillance markets, the edge storage markets moving to 4 and 8 terabytes and so on. Exactly to your point, but that's the -- those are the utilization targets that we've got set, and we think it's going to come. So we're staging for it.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. And then just not to read too much between the lines, but last quarter I think you said that the near line capacity shipments for fiscal 2020 may exceed 35 to 40. Now you're saying, 'well above' that range, that long-term margins. So can you help us understand or maybe define what well above means?

Dave Mosley -- Chief Executive Officer

Yeah, I think that goes back to deep collaborative work with our customers and talking about what exactly they need, when they need it, making sure that our ramps are big enough and flexible enough to be able to accommodate their needs. It goes without saying that 16 terabytes and above, 18 terabytes, when we get there, 20 terabytes when we get there, are very meaningful TCO improvements for the customers. They, depending on which ones they may be cycling out old equipment, they may be building new data centers as part of their plans. But all of that improves their capability and they're going to be running the gear for a long time. So we think we're up against a fairly, fairly big bubble this time in exabytes.

Aaron Rakers -- Wells Fargo -- Analyst

Thank you.

Operator

Your next question comes from the line of Christopher Muse from Evercore. Please go ahead. Your line is open.

Shanye Hudson -- Vice President, Investor Relations

C.J. are you there?

C.J. Muse -- Evercore ISI -- Analyst

Yeah, can you hear me?

Dave Mosley -- Chief Executive Officer

Now we can.

C.J. Muse -- Evercore ISI -- Analyst

Sorry about that. I guess to the September model, I'm having difficulty hitting the numbers. So I guess, could you provide guide for OpEx and gross margins, including stock-based comp?

Gianluca Romano -- Executive Vice President and Chief Financial Office

No, I don't think we will do that. But we -- it might -- as I said, where the impact is about $30 million. So you can [Indecipherable] very quickly.

Analyst

So I should be thinking $30 million, plus $20 million, plus $25 million, so $75 million higher OpEx Q-on-Q, including stock-based comp?

Gianluca Romano -- Executive Vice President and Chief Financial Office

No. So the OpEx part of the stock-based compensation is about $20 million. So, yes, $20 million that is not included in our guidance because of the stock-based compensation. The 14th week, so the extra week in the quarter, is a similar amount, so $20 million. And then because we enter into a new fiscal year, in the guidance there is an assumption for variable compensation, which is higher than what we had in the prior quarter. So we need to add all those items and come out soon.

C.J. Muse -- Evercore ISI -- Analyst

Okay, thank you. And as a follow-up, can you speak to, as you think about gross margins and I know you're focusing on underutilization, but is the 16 terabyte transition having any impact there, and at what point should that be mitigated?

Gianluca Romano -- Executive Vice President and Chief Financial Office

So we are ramping the 16 terabyte. As you know the expectation -- of course demand is really strong. But it is the time lag between when we started the capacity and when we can really ramp the production. So this is why we still have some underutilization costs. But depending from how much additional capacity we will add in the next few quarters, but we understand it will be fully -- close to be at full capacity fairly quick, probably a couple of quarters.

Dave Mosley -- Chief Executive Officer

Yeah, and I think you could start to see that C.J, in our capex numbers a little bit, if you look year-over-year as we're staging the right technology to be able to get to that. That's one of the reasons why we reinforced the expectation for revenue growth in FY 2020 as well is because we're getting to the point, where we believe that those TCO propositions are so advantageous, that people will stretch for that.

Aaron Rakers -- Wells Fargo -- Analyst

Thank you.

Operator

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

Ananda Baruah -- Loop Capital -- Analyst

Hi, good morning guys. Thanks for taking the questions. Dave and Gianluca just -- I have two if I could. The first is just sticking with gross margin. Dave, the metrics around utilization, how to get the margins going, that you are shooting for the 100 terabytes, that's really helpful. My question in that regard is, last cycle when you hit that 100, the gross margins, I believe were close to 32.5%. And so, could you just give us a little more context on -- is that the ultimate ceiling again -- I guess it's around the sliding scale, and the 100 terabytes and how we should think about what [Indecipherable] could be this time, and then I have a quick follow-up?

Dave Mosley -- Chief Executive Officer

I'm glad you asked that. If I think about gross margin percent, we don't manage the business on a day-to-day perspective for gross margin percent. But it's a long-term planning Item. So when we say last cycle , gosh, it was only a year ago. It just -- it feels like these cycles are going very-very quickly. We're investing to be able to hit the peaks of those cycles better, to your point. And then, I think there is competition as well, which is to my commentary about revenue per terabyte. We need to get cost per terabyte down, but we also have to realize that the revenue per terabyte is coming down fairly aggressively as we move. So all these things factor in over a longer period of time, the margin range serves as a guide for how much we want to invest, and where we think we're, we're going to go, and I think if you look over the entire fiscal year, to your point you saw a peak in the valley, if you will. We think there is another peak coming as well, exactly to your point. So if we -- I think if we get to the top end of the range again, we earned it and we would also -- I would also -- I would always ask the team to kind of in-quarter, if we have the opportunity to go grab dollars, even if they're dilutive to gross margin percentage, we will take it tactically. Does that make sense?

Ananda Baruah -- Loop Capital -- Analyst

Yeah it does. It does Dave. That's really helpful, I appreciate it. And then the second -- and then the follow-up is just with regards to 16 terabyte kind of quality and progression/ I believe, sort of 90 days ago or at least as we -- 60 days ago, let's say, you guys are expecting to get the volume in September quarter and some context of 16 terabytes, and then to really sort of see things kick up in the December quarter. It sounds like you're still expecting that in the December quarter of how is the progression relative to prior expectations in the September quarter? Appreciate it.

Dave Mosley -- Chief Executive Officer

Yeah, we are on a fairly aggressive ramp and remember that the lead times for things like heads and disks and drives are are getting longer, especially in these big capacity drives. But we're still driving it. The qualifications have -- really don't have any significant technical hitches at this point. Some have timed out. There is a few that are -- for various reasons, customers have pushed a few weeks, because their tools weren't ready or because they are not ready to intercept with where they want to -- to be able to take a 16 terabyte, and a lot of that is about where they want to go.

As far as I'm concerned, we're pretty happy that we're definitely spacing materials [Phonetic].

Ananda Baruah -- Loop Capital -- Analyst

Appreciate the --

Dave Mosley -- Chief Executive Officer

Hi Ananda, you are correct. you will see a big ramp in the December quarter. So we are very active already in this quarter, but you will see much more volumes starting next quarter.

Ananda Baruah -- Loop Capital -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Mark Delaney from Goldman Sachs. Please go ahead. Your line is open.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, hi, good morning. Thanks for taking the questions. First, I was hoping to follow-up more on the commentary around revenue per bed [Phonetic] and Dave, you spoke about dual actuators and improve performance. How do you think that translates into your ability to improve pricing? What sort of price premium do you think you can get for that type of technology? And so there are some sort of additional costs, so kind of relates to that -- what the gross margin implications be as well?

Dave Mosley -- Chief Executive Officer

It's an interesting space, Mark. I don't think it's near term, so just to be quite frank, I think there are some smaller customers, who have very high performance workloads, who are really pushing for this technology. And there are some smaller divisions of cloud service providers, because everything -- all cloud service providers are not created equal and many have different workloads. So where this technology is immediately applicable, is a subset. I think the technology over time, becomes much more important. And I would think abut it as above 20 terabytes. There are multiple -- you just can't continue to have bigger drives all behind one actuator, at relative IOPS per terabyte. For streaming speeds, it's less, if that makes sense. So we need to go to this technology.

I think it will be competitive, and I think we're being driven very hard for it, but I also think it provides -- since we're providing so much more value, if we happen to compete it should be good for us. I think the other interesting thing about the technology is -- everything I just said about the cloud, it's very applicable back into the edge data centers, which are right now, starved for that value, I think, from a lower cost per terabyte perspective, but also from a performance perspective. And then the rest of the edge is also -- if we -- we talked about surveillance drives or something, we're getting driven for multiple streams of surveillance drives.

So the technology is probably relevant there too. But I just want to be very upfront and say, that the first instantiation now that we are shipping these products is going to be the early adopters, if you will, are going to be more nichey for a while.

Mark Delaney -- Goldman Sachs -- Analyst

That's helpful. And my follow-up question, during the past quarter, the company announced the the EVP of sales will be leaving later this year. Can you talk about how Seagate plans to fill that sales position? And are you contemplating making changes in how you're going to market going forward? Thank you.

Dave Mosley -- Chief Executive Officer

Yeah, thanks for the question. It's interesting, no I won't talk about any individual staffing that we'll do. But I will say that, are we planning on changing how we go to market, it's really interesting, the markets are changing very quickly. The customer types are changing. Looking at the customers, we just even talked about on this call versus two or three years ago. To exactly to your point, there is a lot of changes going on. The Seagate team is pretty deep, I think as everybody knows, we have been together for a long time and I have a ton of faith in the rest of the team. I really think we've made great transitions in the last three years and some with Jim's help. I think going forward, we're going to have to rely on the growth of the Seagate team. And so, from my perspective, I am very focused on who are the new customers, how are they going to buy, how do we adapt to them and then some investments we're probably going to have to make.

Operator

Your next question comes from the line of Karl Ackerman from Cowen. Please go ahead. Your line is open.

Karl Ackerman -- Cowen -- Analyst

Hey, good morning, Dave or Gianluca, clearly your PC exposed drives have decelerated the last few quarters. Presumably, following the normalization of NAND ASPs that I think make it a little bit more economical for SSDs in those environments. Now in the past you've counteracted that headwind by raising the density per drive, while using only one platter. But I guess from here, how should we think about the levers you can pull on the cost side to stabilize that business? Thank you.

Dave Mosley -- Chief Executive Officer

Yeah. Karl, thanks. It's interesting. Now we said in the script that -- I don't know if you caught this, we talked about how we're doing minimal investments in some of these spaces. But I think what's important is we're managing the business for free cash flow over the long term, not over the short term. Right? And some of these markets are still without -- with minimal investment, the free cash flow is still quite good, operating margin is still quite good. As a matter of fact, I would argue that today, the competitor, if you will, that you just talked about being being flash drives or something like that, are not as good. So -- but there is a reality of the market space. So we're not really investing a lot in those spaces. We'll continue to run them over the long haul, and think about them as -- how do we generate free cash flow.

There will be disruptions in some of those spaces and we can forecast that over time. But I think we have to be careful because the tail is actually quite long as well.

I'll just pick on PCs for a second, because a lot of people like to talk about it. From my perspective, from a hard drive perspective, PCs -- the interesting one for hard drives, already dual drives in them. So it's actually a longer tail and there is a reason why the HDD is in there and the SSD is in there and so I don't really think of it as -- per se an either/or. And then the other thing to keep in mind is, we're out to service our customers and our customers kind of dictate the demand. We don't make demand by our strategy. We don't think of it that way. So if that helps you?

Gianluca Romano -- Executive Vice President and Chief Financial Office

And if I can add something on free cash flow, I think its very important to keep in mind, that even during a quarter, that is downcycle quarter, Seagate was able to generate $300 million in free cash flow, and was very similar last quarter. So I think it is a change compared to, not what was in the past. So even during the down cycle time, the focus on free cash flow is giving very good results.

Karl Ackerman -- Cowen -- Analyst

I appreciate the color. Thank you.

Operator

Your next question comes from the line of Mehdi Hosseini from SIG. Please go ahead. Your line is open.

Mehdi Hosseini -- SIG -- Analyst

Yes, thanks for taking my question. David, on a big picture it's very interesting and supportive, you having confidence in your enterprise exabyte for FY '20. Can you put that in context and give us some framework as to how the overall exabyte would grow by FY '20 versus FY '19. And I have a follow-up?

Dave Mosley -- Chief Executive Officer

Sorry, I didn't catch the very last part of it, Mehdi. Could you just repeat, just like, the last sentence?

Mehdi Hosseini -- SIG -- Analyst

Yes, sure, sure. And I was just going back to your enterprise exabyte growth of well over 35% to 40% for FY '20. How does that impact your overall exabyte shipment? And put the overall exabyte shipment in the context, given how comfortable you are with the enterprise segment?

Dave Mosley -- Chief Executive Officer

Oh, I see, I see, OK. Yes, it's becoming a bigger and bigger portion.I think in the script, we talked about it already in 50%. So from my perspective, it's going to be a bigger and bigger portion, and the leverage that we get, because we're doing fewer drive types of before, I think will get relatively better pay out. If I think about the large part of the driver for exabyte growth, it's the fact that we're getting higher capacity points, 16 versus 10 in the last peak of the last cycle. And I'm not saying that the hard drive size is the primary driver of that, I think there are many drivers. But, I think that's the biggest thing driving this near term.

Longer term, to your point, if I think about enterprise, the cloud will continue to grow. The cloud will continue to cycle through some of their existing footprint and upgrade as well. But I think data is still going to grow in the cloud. I think the other interesting topic that we have going on right now is that in the on-prem data centers, data is being repatriated, but there is a market difference in the costs between the cloud and the on-prem. And what we're seeing is a lot of people in the on-prem, [Indecipherable] focused on high performance storage, and that's fine, because it is going to be a lot of needs for compute there and the high-performance storage or high performance memory, if you will, needs to be very close to that compute. But in order to -- with the extreme data growth that's going on, in order to have enterprise growth in those places, you're going to need cost-effective solutions, vis-a-vis the cloud.

So we see a great opportunity there. We talked about it a little bit in the script and I think that's also an opportunity for us to get to market a little bit faster, with the same technology and that will drive exabyte growth.

Mehdi Hosseini -- SIG -- Analyst

If I may, refine my question, if you're enterprise exabyte is growing over 35%, 40%, your surveillance consumer electronic exabyte growing at a faster rate, would those to help you with double-digit total exabyte growth?

Dave Mosley -- Chief Executive Officer

Yes, eventually they will take over they will take over. May be going back to Karl's question, eventually they will take over from some of the more legacy systems from an exabyte perspective, exactly to your point. But what we've seen about some of that edge storage, like surveillance, is it has been a little choppy like the cloud has and unfortunately sometimes they phase up and and you don't see it. So I don't know it's easy on rolling one, two, three quarter basis to draw any trends. But certainly over the last three or four years, if you start drawing the cloud trend and the edge storage trends that are around that surveillance, then it presents a pretty good story.

Mehdi Hosseini -- SIG -- Analyst

Thank you.

Operator

Your next question comes from the line of Jim Suva from Citi. Please go ahead. Your line is open.

Jim Suva -- Citi -- Analyst

Thank you very much. And thus far, your answers have been very useful. I just wanted to make sure I heard correctly on the gross margin and under-utilization. The June quarter, it was about 100 basis points, in the September outlook about 50 to 60 basis points. But then you're going to be adding and filling with more capacity with more volume. So it should be normalizing pretty quickly after the September quarter. Is that the way to think about the impact past and forward?

Gianluca Romano -- Executive Vice President and Chief Financial Office

Yes, I think that's the right way. Of course, so it depends how much capacity we will add in the December quarter, and the following quarters. But I think from a modeling standpoint, you are correct.

Jim Suva -- Citi -- Analyst

And then my last question is, just knowing the cycle time or the throughput of your production. I would assume the materiality of the revenues kind of come in, probably after the December quarter, because you simply don't turn on the fabs and they come out perfect right away, probably more like the March quarter, as opposed to December quarter, or do you think December quarter won't be the the full run rate of the revenues coming out of your increased capacity?

Gianluca Romano -- Executive Vice President and Chief Financial Office

Well it is difficult to guide revenue right now, for December or later quarters. But of course it depends from how much we are ramping 16 terabytes, and as we said before, we will continue to ramp into the December quarter, and after that. So you will have probably more impact in the next few quarters.

Dave Mosley -- Chief Executive Officer

It's a good way to think about though with lead times, because we don't know exactly what's going to happen right now on -- when people pull. bBut relative to what we're staging from a materials perspective, we're staging those parts that will go against that ramp. And it's been -- we're being very aggressive with that. Does that make sense?

Jim Suva -- Citi -- Analyst

It does. Thank you so much for your details on questions. It's greatly appreciated

Operator

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

Sidney Ho -- Deutsche Bank -- Analyst

Great, thanks for taking my question. You've talked about improving demand conditions, especially for hyperscale customers. Can you give us some color as to how broad based that strength is? And given you are more than -- so if my numbers are right, given your exabyte by for nearline is still about 20% below a year ago, when do you think that -- on that, on the exabyte basis, that nearline drives could get back to year-over-year growth?Thanks.

Dave Mosley -- Chief Executive Officer

Year-over-year growth I think is coming, certainly in FY '20 some of it depends -- if we were talking about just on exabyte growth, some of it depends on the specifics of the ramp of the 16 and I don't want to get any further ahead than next quarter. But what I would say is, you're on the right point, which is last year, the drives -- the factories were full Q4 to Q1. This year, as we go through the -- as we're ramping right now, we're definitely staging to be able to capture the peak of that cycle again, and I think we make that available, you know for -- to guide the high, if you will, on our Investor Relations website, to show those cloud cycles. And what we've seen over time is that, the peaks and valleys if you will, of the decline in the cloud has really been fairly predictable. Things can always get thrown off just a little bit, but we believe there's another one coming in, and it's certainly consistent with the discussions we're having with our customers.

Gianluca Romano -- Executive Vice President and Chief Financial Office

So yeah, we expect a very good increase in exabytes already next Q1 for the nearline.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, great. Thanks.

Operator

Your next question comes from the line of Munjal Shah from UBS. Please go ahead. Your line is open.

Munjal Shah -- UBS -- Analyst

Yes, hi, thanks for taking my question. Last quarter you mentioned that nearline ramp would be wider and higher? Do you still expect that or do you think it's going to be coming back much stronger as we go through the next cycle?

Dave Mosley -- Chief Executive Officer

Yeah, I think -- let me say it this way, the data center build-outs that we've typically heard of, and even all way extending back to last August and September, some of the data centers we hear about being built, geographically, are still in the plans in a lot of places. They've just been postponed for various reasons. There are other people who you can tell that data is just growing against their application, and they want to continue to invest, but they wait for the right architectural decision. Sometimes it is the hard drive capacity point. Sometimes it has to do with other architectures that are going on. So it's hard to paint the cloud with a uniform brush, because there are so many different applications and strategies that are going on. But I do think the overall data growth is very consistent and that's what drives that [Indecipherable] that we're referring to.

A little wider and deeper this time, maybe I think certainly felt like that in the last six months, and I think what I said a year and a half ago was that geographically, we're starting to see enough diversity that maybe it wouldn't be as deep. Clearly, the markets have been fairly disturbed in the last six months. But I think that that overall data growth, the demand for places to put the data is still there and driving that trend.

Munjal Shah -- UBS -- Analyst

Just a follow up. So when we see the next ramp, are we seeing from existing applications, or do you think those build outs that were pushout are starting to happen, like the new data stuff?

Dave Mosley -- Chief Executive Officer

Yeah, that's certainly good. Yes, there are new applications coming online. I wouldn't talk about any specific customers of course. But there are new applications.

Munjal Shah -- UBS -- Analyst

All right, great. Thanks a lot.

Operator

Your next question comes from the line of Mitch Steves from RBC Capital Markets. Please go ahead. Your line is open.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey guys, thanks. Taking my question. I just had one just to talk about a little bit FY 2020. I know you guys don't give exact guidance, but given that this year has been a little bit of strange year in terms of the first half being a little weaker during the calendar year, when we look at 2020, should we assume that's going to be more of a typical seasonal year for you guys, or is there anything else we should be aware of? It sounds like maybe Q4 will be more seasonally strong. Just looking for any sort of high level comments in terms the seasonality next year?

Dave Mosley -- Chief Executive Officer

Yeah. Interesting I think, Mitch, there is still seasonality in some parts, like for example, consumer is still very seasonal, as we have less and less exposure to things like PC, some of the traditional seasonal spikes that we would see, that very predictable or are not there as much and as we talked about earlier, some of the PC. Design points are changing a little bit. They may be change -- they may be -- seasonality may be changing. The cloud and surveillance markets -- surveillance used to have a little bit of seasonality, I think it has been a little disrupted. So I would say, it's aseasonal, and the cloud certainly is aseasonal, they go through different patterns, because of the spikes that we talked about.

With all these things considered though, just looking at the data growth -- the total data growth over the last few years we think FY 2019, exactly to your point, people have been very conservative and in FY 2020 they're going to have to go invest in data, and that's why we have confidence in revenue growth.

Mitch Steves -- RBC Capital Markets -- Analyst

Perfect. And then just one last follow-up, just on the enterprise side, and we saw what Seagate -- sorry what NetApp posted during the year, pre-announced. So I guess is there anything there that surprises you guys in terms of their comments? Or do you guys think that, that would be more company-specific, anything you give in terms of why they're mostly so much [Indecipherable] versus what you are -- who you are kind of talking to in terms of demand?

Dave Mosley -- Chief Executive Officer

I wouldn't talk about it specific person. I would say it's super interesting to me what's going on in on-prem enterprise. I think if I look over the last five to 10 years, there have been people very focused on high performance rigs, and that's important. We see it in the -- our own data centers that we have to build. But we also see a lot of people want to grow the data on-prem for themselves, whether it's for their own control, their own application control. Some people talk about repatriation, I don't think it's a good way to think about it, because I think the cloud will grow substantially and the applications in the cloud are -- have a great value proposition as well. But I do think that on-prem low-cost efficient low cost efficient storage to cover the entire lifecycle of data, not just the compute, but the lifecycle of the data is super important. And I think some companies have been very focused and that's their business model, to be very focused on high performance. I think there is an opportunity for all of us, for everybody, in this more economical on-prem stuff, and we pointed to that a little bit in our script, and I think it's a space to watch in the next five years.

Mitch Steves -- RBC Capital Markets -- Analyst

Very helpful, thank you.

Operator

Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead. Your line is open.

Vijay Rakesh -- Mizuho -- Analyst

Yeah, hi guys. Just between -- on the hyperscale side, there has been some confusion in terms of -- as you look at the back half, if demand -- there is a difference in demand pickup between enterprise and hyperscale or what you're seeing geographically in terms of nearline demand picking up between US or your Chinese customers? Appreciate any color there.

Dave Mosley -- Chief Executive Officer

Yeah. It has been a little choppy this year, that's for sure. I think there is various reasons for that. But overall, most of the discussions we're having with our customers are -- there is a lot more planning involved. So is there a data center going to be built or are you going to be transitioning some of your old gear into new gear or new applications coming online to that point. We do feel that the last six months or nine months, geographically, there have been a lot of people to say I am on hold. We'll come back to this. But some of the business models are still desired in place, and then there may be new ones coming up, which I think causes of some of this choppiness that we see in the nearline exabyte demand.

Vijay Rakesh -- Mizuho -- Analyst

All right. And I know this is very recent, but in terms of some of these tariffs that are again going back in place in a month's time, any thoughts? I know this is very preliminary, but -- thanks.

Unidentified Speaker

Sorry, I didn't catch that.

Vijay Rakesh -- Mizuho -- Analyst

Just in terms on the tariffs that were announced yesterday?

Gianluca Romano -- Executive Vice President and Chief Financial Office

Yeah, we don't have any -- we don't expect any impact from the new tariffs.

Dave Mosley -- Chief Executive Officer

From the new ones. I think from our perspective, there is a lot of things that we are obviously working with our customers through. We tend to focus on, do we have the right stuff in the right place at the right time. We react to these things, just like everyone else does. I think we have pretty robust supply chain that we can react quickly. So from the new tariffs, I think there's minimal impact. And everybody is analyzing the same things in the world, and going through the same things, where Seagate markedly similar to everyone else, and I've heard their earnings calls it's -- you can tell other people are struggling with it a little bit more. But I think we're dealing with it.

Operator

And there are no further questions at this time. I will now turn the call back to Dave Mosley for closing remarks.

Dave Mosley -- Chief Executive Officer

Okay. Thanks everyone for joining us today in Dublin and thanks for your interest in Seagate. I'd once again like to thank our customers and our suppliers and business partners and all of our employees for their contributions to our fourth quarter performance. I'd also like to thank our shareholders for your ongoing support. We look forward to seeing you all at an analyst event in New York on September 19, and thank you, Kelly also for hosting the call.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Shanye Hudson -- Vice President, Investor Relations

Dave Mosley -- Chief Executive Officer

Gianluca Romano -- Executive Vice President and Chief Financial Office

Unidentified Speaker

Katy Huberty -- Morgan Stanley -- Analyst

Steven Fox -- Cross Research -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

C.J. Muse -- Evercore ISI -- Analyst

Analyst

Ananda Baruah -- Loop Capital -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Karl Ackerman -- Cowen -- Analyst

Mehdi Hosseini -- SIG -- Analyst

Jim Suva -- Citi -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Munjal Shah -- UBS -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Vijay Rakesh -- Mizuho -- Analyst

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