Seagate Technology Holdings plc (NASDAQ:STX) Bank of America 2022 Global Technology Conference Call June 8, 2022 12:30 PM ET
Company Participants
Gianluca Romano – Executive Vice President & Chief Financial Officer
Conference Call Participants
Ruplu Bhattacharya – Bank of America
Ruplu Bhattacharya
Thank you all for coming to our second day of our Global Technology Conference. It’s actually great to see you guys in-person. I have been getting used to Zoom so much that finally I get to meet you all in-person.
And a special thanks to Gianluca Romano who you know is the CFO of Seagate. He has been with the company since 2019 but if you look at his career he has been 20 years in the business. He has worked at many different semiconductor companies including Micron, Numonyx and STMicro. So lots of talent, lots of industry experience. So we hope to have a really good discussion today. By the way, my name is Ruplu Bhattacharya and I’m part of the IT Hardware Equity Research team which is led by Wamsi Mohan.
So Gianluca, thank you for coming today. Really appreciate your presence.
Gianluca Romano
Thank you, Ruplu for inviting me today and before we start, I have to remind everyone that I will be making forward-looking statements today and you can learn more about the risk associated with those statements on our website.
Ruplu Bhattacharya
Great. Gianluca, when I think of Seagate, the first thing that comes to my mind is the phenomenal job that the company has done over the last several years in pivoting towards mass capacity. So maybe I thought we could start the discussion by talking about demand in mass capacity. So, if you can talk about both of the markets, the nearline demand from cloud as well as from enterprise and OEMs as well as the VIA or the video and image applications market, where you saw some weakness from COVID shutdowns in China. So just talk about what you’ve seen in terms of demand.
Gianluca Romano
Yes. Thank you. Yes, I think not only Seagate but the industry really changed business model moving from what we call legacy, that was more PC focus and consumer focus to what we call mass capacity but include nearline, video and image application and NAS. We have done five consecutive quarters of record in nearline and we see very strong demand, particularly in the cloud part of the nearline.
On the video and image application, we think this is a very good segment. It’s a very important segment for the industry, in particular for Seagate. We have a strong leadership in this segment. Unfortunately, the COVID situation in Asia has slowed down a little bit demand temporary in this segment. Video and image application is not a cyclical business, it’s more a seasonal business. So in general, you see a very strong September and December quarter.
And I’ll say, less strong March and June. On top of the seasonality unfortunately this year, we have COVID, is the fourth wave of COVID in Asia with a lot of city which went into lockdown. So a lot of projects were delayed. So this is what mainly impacted our March quarter as we discussed at our last earning release and we also said it now June quarter will probably be fairly similar.
We are seeing right now some openings in Asia and in China in particular. So hopefully, this is the start of those projects to start again and we will see in the next few weeks and we are of course very positive for this segment in the next few quarters.
Ruplu Bhattacharya
Got it. So it’s safe to say, I think in the last earnings call, you said that for the VIA market, you think the second half of the calendar year will be stronger so that remains. Any further thought?
Gianluca Romano
Well, absent a new wave of COVID or other external macroeconomic factors in terms of demand, in terms of business, in terms of number of projects that we see now VIA is basically supporting in all the smart cities, smart factories, all those applications, so no autonomous driving. So the demand will be strong. Those applications are generating a lot of data and that will need a lot of data storage. So it will be an important part of Seagate and of the industry, this industry in general.
Ruplu Bhattacharya
Got it. Let me ask you on the nearline side. Demand from cloud has been very strong over the last several years. I mean do you think that that trend can continue or do you think that we’re due for a period of digestion because the cloud — the hyperscalers have taken so much product. So do you think — what’s your view on the sustainability of the demand? And then can you talk about what you’re seeing in U.S. versus China?
Gianluca Romano
I would say demand is growing. Demand is strong and is growing. I don’t believe into all the digestion. I don’t think right now, especially in the cloud business, there is a digesting phase. Is a normal business that is requiring to physically build new data center and then fulfills data center and use the drive. So it’s not a digestion, it is really a utilization of what they buy.
So when you have a limited number of customers after they build data center and they buy that disk and they start using that disk, this is what we’re calling digestion but now with the number of customer is elevated, you always have someone which is building a data center, someone that is buying our disk and someone that is utilizing our disk. So you don’t see that pace of what we were calling before digested is now a fairly consistent growth. And in fact, now I think this is demonstrated by five consecutive quarters of record and we said at our earnings release, we think June is another very good quarter.
Ruplu Bhattacharya
Got it. And then U.S. versus China, is it strong across the board?
Gianluca Romano
I would say, well, in this particular time, U.S. is stronger. But again, it’s not a general statement. I think Asia will be very strong in the next few quarters. Of course, when they are impacted by other items, other issues, they slow down a little bit but then they recover. And actually, I think a big part of the cloud growth in the future in the long-term is actually coming from outside the U.S. so Asia, not only China but Asia in general, Europe and the rest of the world.
Ruplu Bhattacharya
Got it. Maybe now let’s focus on the legacy business. Can you talk a little bit about the mission-critical drives, maybe you talk about compute and the consumer space?
Gianluca Romano
I would say in the short-term, where we see the majority of the slowdown is probably PC and consumer. Part of that is due to inflation. So again I think it will be temporary. But in general, no, we think the legacy part of the business will continue to decrease for maybe another couple of years and then probably we’re having a fairly long tail. It’s not the part where we generate the higher part of our gross margin. But still, we will serve the demand until it’s there and it’s actually very important for us in terms of free cash flow. Is a part of the business that does not require a lot of CapEx or a lot of OpEx. So even if the gross margin is a bit lower than what we generate in other parts of the business it’s still good for free cash flow. And so we will be happy to serve that demand until it’s there.
But it’s a trend that started a few years ago. I think five years ago, the legacy business was 80% of our revenue. And now it’s maybe 25% of our hard disk revenue. So it’s declining and will continue to decline. The important is overall, the company is growing, the company revenue is growing and the mass capacity is what will create the future opportunity for this business.
Ruplu Bhattacharya
Yes, no, I agree you’ve done a great job moving away from the PC stuff into the mass capacity markets. Maybe the other segment is the non-HDD segment where you have the SSDs and the systems business. I think last quarter you talked about some component shortages in that part. What are the trends you’re seeing now?
Gianluca Romano
Well, I’ll say for the hard disk, we were very careful in managing our supply chain. And we also created a little bit of safety stock. This is our — this is why our inventory is a bit higher. And this actually allowed us to not having any major issue on the hard disk production. So we were always able to serve the demand we had. The non-hard disk maybe were a little bit less careful and we got some shortage in some components.
Starting with system, probably already in the December quarter and March quarter and we still see that in the current quarter, a little bit better than March but still some impact for sure. SSD started a little bit later. Actually, December was a good quarter but March and June are — we are seeing some impact.
Ruplu Bhattacharya
Okay. Maybe I want to talk a little bit about a change that has happened in the industry where our customers are now going in for longer-term agreements. And so can you talk a little bit about what percent of your customers are going in for these agreements, what’s the average contract size? And is it just cloud customers who are looking into this or even enterprise and OEMs?
Gianluca Romano
It’s not only cloud, I would say it’s a certain number of big customers that have not only on cloud. Specifically to cloud, I think we said more than 50% of our revenue is actually covered by LTAs today. The duration is usually between six months and a year. So no, it’s not a multiyear contract. I think as everything that is new, it has to start from a certain point and then maybe get longer. One year ago, we didn’t have any LTAs. So it’s good that now we have 50% of the cloud revenue covered by LTAs and you start with now six months and then you go to nine months, you go to a year. And hopefully, the future this business will require longer LTAs that is good for the customers because it gives them confidence in the supply. And it’s very important for supplier to really managing and planning manufacturing.
Ruplu Bhattacharya
Got it. So one of the benefits you said of these agreements is visibility should be better in terms of what’s going on in the pipeline. So I think you’ve guided fiscal ’22 revenues to grow low double-digits that’s, the implication of the guidance. Is visibility any better for the calendar year for calendar ’22 any thoughts on revenue growth for that?
Gianluca Romano
Well, we are having a very good fiscal year. So you said double-digit growth is something that this industry didn’t see in many, many years. It’s very important, right? In the fiscal 2020 is when the mass capacity business basically crossed over with legacy and starting from that you have seen a revenue growth for the company in total. So I would say that is important. We are demonstrating a major improvement in the short-term, actually today.
Now when you go longer, I would say, demand, very strong. So we don’t have — we are not worried about demand. The only impact we can have is from external factor so now the COVID in Asia that is slowing down part of the demand. Now it’s not because the demand is weak. It’s because they cannot go and install new cameras and they cannot work on the sensor for autonomous driving and this is just a temporary delay. And then, the war in Ukraine again, it’s something that hopefully will end very soon but it’s impacting part of our revenue and then you have inflation. And you have many things that are not normal and that are all happening at the same time today and this is just slowing down the demand in terms of how they can really support the end demand. Now say shortages in electronics.
It’s not that they don’t have demand but if they cannot build a product, they cannot build a product. So this is why the visibility is a little bit difficult today. It’s depends from so many external factors it is difficult to know I have a precise view of what will be next quarter. If you tell me next quarter COVID will not be there at all and inflation start to abate and there is no war and there is no shortage of electronics we will do really, really good but I think some of those factors will still be there.
Ruplu Bhattacharya
Got it. Gianluca, maybe I want to talk about the ramp of the 20 terabytes. So I think in the last earnings call, you talked about units tripling in the June quarter to over 1 million. So how should we think about units in the December quarters? And when do you think there’s a crossover between 18 terabytes and 20 terabytes?
Gianluca Romano
I think, Dave, our CEO, made that comment during the earnings release, it’s a very — is a very strong ramp. I think we said this is actually the fastest ramp of any product in Seagate history. So this is also demonstrating a strong demand in the nearline segment in the cloud segment in particular. We will continue to ramp. So September will be higher, December will be higher.
I think we said look we said but in September is probably when we crossed over with IT. So it’s a good rent is an important part of our business. I know that the high capacity drive always takes a headline of our business. It is very important. I would say it’s not the only important things. So, I know I invite everyone to look at the overall mass capacity segment. And by the way, even the rest of our business. The high capacity is important but we generate a lot of revenue, a lot of profitability from now say mid half and other drives.
Ruplu Bhattacharya
So maybe just talk about that. So can you talk about the relative demand between 16 terabytes, 18 terabytes and 20 terabytes? And one question is if the 20 terabytes are now ramping, customers who have the 16 terabytes, do you think they would actually go for the 18 or they just leapfrog into the 20 terabytes there?
Gianluca Romano
Well, it’s not the same depending from the customer. In general, I would say, you see the first adopter for the highest capacity as the cloud customers but not all. No, we have more than 10 cloud customers, they are not all on 20 terabyte. We have customers that are in 16. Customers are in 18, customers are in 20 and they will probably move to the 20 but at different time.
And first of all, we don’t have enough volume for everyone. But even for their road map, how they qualify the product when they want to change their replacement cycle, they don’t move at the same time. They have different timing. And then a few quarters later, maybe even a year later, you start seeing the high capacity into the on-prem those, enterprise OEM. And a few years later, you see that into the video and image application. So the 16, 18, 20 for sure, you’ll see a much lower demand on 16 today from the cloud but we still sell a lot of 16 in other parts of the business. So the life of a product is actually fairly long. It’s not only focused on a cloud customer.
Ruplu Bhattacharya
Right. At this point, maybe I want to ask you a different question. Elliott Management has sent a letter to Western Digital, suggesting value creation potentially through separation of HDD business and NAND business. So maybe I thought I’d ask you about your thoughts on that. How would that affect the industry? I mean, do you have any thoughts on your views on that?
Gianluca Romano
Well, I don’t want to comment on my competitor situation. I would say for the industry, it should not be a big difference. I think internally, our competitor is already organized as a hard disk and a flash business. So I guess from a business standpoint, we will not see a lot of changes. So I don’t think it will be no disruptive tools of business if better then I’m not sure it will be happens or not.
Ruplu Bhattacharya
Okay. No, that’s fair. Maybe I want to shift the discussion to margins. I think Dave mostly in the last earnings call talked about your focus to get gross margins to the high end of the long-term range over the next couple of quarters. Maybe can you talk about what are some of the drivers for that margin improvement? And what is giving you the confidence that within a couple of quarters, you can get to that high end of the range?
Gianluca Romano
What I would say there are different factors. One is the mix and the mix, as we were discussing before, is actually moving more and more into the mass capacity part of the business. So this is for sure, a positive of the ramp of our 20-terabyte and the ramp of the next product, 22 and 24 terabytes, et cetera, all that will be positive to the gross margin. Of course, on the other hand, there is a little bit of inflation that is impacting our cost. And we discussed at the earnings release, we are also looking at our pricing strategy and we have started to do some price increase. We have a different strategy for different segments and different customers, of course. But you will see some of that coming in the next quarter or two.
So with all this and hopefully, with less impact from COVID that is still impacting our gross margin by about 200 basis points, you will see gross margin progression into the range into the higher part of the range, as Dave said.
Ruplu Bhattacharya
So let me just dive a little bit deeper into that. So inflationary environment, are the component costs still going up? Are you seeing freight costs still going up? And have you had to raise prices across the whole portfolio? And is that actually impacting the P&L now or we still — we’ll see that benefit in the course?
Gianluca Romano
I would say of course it’s impacting the P&L now. On the pricing side, we have different strategy for different parts of the business. So we have not increased our pricing everywhere in the business but we are active with price increase and we have LTAs in place. So in some cases, we need to wait until the LTAs arrive at the end and then we renegotiate with the new pricing. So it will take a couple of quarters of course, no, this current quarter, next quarter. So you will see some impact from the pricing later.
Ruplu Bhattacharya
And then how are customers reacting to these price increases? Do you think there’s any danger of demand destruction, like, would our customers accepting the price increases?
Gianluca Romano
I’ll say the price increase is not only a Seagate trend, I would say, is the industry and the world, actually. I know everyone is a little bit increase in the pricing because of inflation. So I don’t see a strong impact to demand. It’s part of what we have to do in order to have a certain level of return but we believe this industry deserve for our CapEx, for our OpEx, for our effort that we do in producing a very important product to the world.
Ruplu Bhattacharya
Got it. I think you talked about a 200 basis points impact to margins. So can you talk about like just to remind us on the impact of the China lockdowns on supply and demand? And in terms of the impact on your margins for the March quarter, was that the 200 bps? And how do you see that impact in the June, September and December quarters?
Gianluca Romano
Yes, I would say that 200 basis points is mainly — holds a extra cost from COVID. The majority of that extra cost is freight. But of course, as you said, also the decline into — from the video and image application or the client demand. Of course, we are not keeping our factories fully full. We were fairly full utilized in September and December. So we had a very — two very good quarters.
Now March and June, demand in that segment is lower and we have the seasonality from the legacy business in general, it is lower in March and June. So we don’t have the same level of utilization and this is also being part of the cost structure.
Ruplu Bhattacharya
Got it. Maybe let’s talk about inventory now. So I think at the end of the last quarter, your inventory stood at about $1.5 billion, so it was up 16% year-on-year. And I think you’ve talked about making strategic purchases of components. So how should investors think about the cash conversion cycle and the working capital requirements and free cash flow?
Gianluca Romano
Well, I would say we are generating a very good free cash flow even in the March quarter, almost $400 million. So despite we are for sure focusing on being prudent on the supply chain and adding a little bit of inventory there. We also have a little bit of inventory increase due to the ramp of the 20 terabyte. But again, that is not impacting too much our free cash flow in general. So we are still very confident we can generate in the current quarter, in the following few quarters, very, very strong free cash flow.
Ruplu Bhattacharya
Got it. And then if you broaden the discussion and talk about distribution, I know you used distribution for the legacy part of the business. Do you see — how do you see inventory in distribution? Is it lean? And could that be a tailwind for you if towards the end of the year or in the second half of the year distribution were to pull more inventory?
Gianluca Romano
Well, I would say, in general, I think everyone is adding a little bit of inventory just to reduce the risk from a supply chain disruption. But we don’t see anything that is of not normal in this situation. So yes, maybe a little bit of inventory in the industry in general but that will be absorbed fairly quickly. So I don’t see that as an impact to our demand or a major impact in the next quarters.
Ruplu Bhattacharya
So there may not be an inventory correction per se because whatever excess inventory is there, whether or elsewhere can come down. But do you think that there could be a tailwind through sell-in because if distribution pulls inventory? I mean, do you think that there is a chance that that can benefit you there?
Gianluca Romano
I will go back to what I said before. I think demand is really strong. Now demand — we cannot take the full benefit of the demand because of all those factors we have discussed. They are all external factors to hard disk. When they will go away, you will see a major increase in the industry, a major increase in our own revenue. But I would say overall in the hard disk industry, everyone will really benefit.
Ruplu Bhattacharya
Got it. One question that comes up from investors is heads and media. So can we talk about what are the utilization rates that you have? Where do you need to invest for capacity growth and what is the lead time for you to do that?
Gianluca Romano
Yes. As a media our — now the two most important components when you build up a hard disk and as you know we produce those internally. And I said this before, September and December, we were fairly fully utilized. And now we are a little bit less utilized. So we have a opportunity to increase our production in the next few quarters when we expect demand to be more available.
In the longer term, I would say there is a trade-off between below material and capacity. So with our new technology, with HAMR technology, we think the major increase will come from aerial density, not from more below material. So we can increase the exabytes sold without increasing two months the bill of material. And this is why HAMR is so important is, first of all, is giving the opportunity to Seagate and in the future, I think also to the industry in general to increase the exabyte provided to the mass capacity business. But second is we can do that without adding too much of bill of material.
Ruplu Bhattacharya
Got it. Maybe I want to jump to capital spending in terms of CapEx. I think your long-term guidance is 4% to 6% but this year, you’re going to be at or below the range. So when we think about maintenance CapEx versus new builds, I mean, how should we think about that? And how should we think about the CapEx for HAMR versus non-HAMR?
Gianluca Romano
I would say today, almost all the tools that we are buying are compatible with HAMR technology. So we will — it’s not that, no, we will stop buying the tool, the current tools and we go to a completely different center of tool are as the same that we’re already buying today. Maintenance is of course, part of our CapEx. I don’t think we have ever really defined how much is that. I would say it’s not a majority for sure. It’s — I would say it’s less than the 50% of what we spend. But I think what is important to understand is when we start ramping HAMR, we already have a lot of the tools in place. So we’ll not need to have a big increase in our CapEx. And the 4% to 6% of revenue, I think as a model is a good range.
Ruplu Bhattacharya
Okay. So can we now talk about capital allocation? I mean, so how do you — looking at the environment we’re in, how do you prioritize debt reduction versus buybacks versus dividend and M&A opportunities that you see?
Gianluca Romano
Yes. Well, first of all, we focus on the internal need. So the CapEx that we need, that we just discussed is not a lot but it’s a certain amount. The OpEx that we need, especially in R&D to focus on our product development, because I would say our technology development has been done. We already have an HAMR product in the market it’s a 20 terabyte. So it’s not a big drive. But it’s there, it exists. So we demonstrated the technology.
We demonstrated the product. Our customers are starting to use this product and getting ready for the next generation but will be a much higher capacity. So it’s more product development, the technology development. But of course, is very important to us and we want to go fast. And then with free cash flow, I would say today, the major focus is shareholder return and we do that through dividend. We increased our dividend in the last three years, every year. And we said publicly, we want to do even more in the future. And the other part of course, the share buyback. Today, our share price is very undervalued. So it’s a good time to continue to do share buyback. The return from the share buyback is very high.
And if you look our TSR in the last one year, two years, three years, I think we are one of the best in the S&P 500 Group. So we are very focused and it’s a priority of the company together with generating a lot of free cash flow.
Ruplu Bhattacharya
Got it. And then in terms of M&A, I mean, what is management’s philosophy on that? I mean what type of targets do you look at? And any size expectations or just your thoughts on feasibility?
Gianluca Romano
But our — this business today is very different than 10 years ago or 20 years ago. The consolidation already happened. So there is not a lot that we can really do in the RV space over just three competitors. I would say in the high-capacity drives is basically two competitors. So I don’t think there is any opportunity to do big M&A in the RV space. So I would say today we don’t have any big M&A on the horizon.
Ruplu Bhattacharya
Okay. Gianluca, I want to ask you another question that keeps coming up nowadays. Some investors are concerned about possibility of a recession in the U.S. and a slowdown in Europe. When you look at the business, I mean, the last main recession was 2008, 2009. Do you think that the business now is more resilient to a downturn? Has it changed significantly since then and so just your thoughts that if we were to go into a recession, I mean, how would your playbook change and do you think the business will weather that better than in past recessions?
Gianluca Romano
I think so for a couple of reasons. The first one is what we have discussed, consolidation. So right now the business is very consolidated in just three players. That is very different than 2008, 2009. Second is the business that we serve. We are not now 80% on PC or consumer. So that is a part that will get more impacted through a recession. I don’t think now the nearline space, maybe even the video and image application, I don’t think they will get the same level of impact than consumer and PC client.
Ruplu Bhattacharya
Okay. I want to talk about some of your new businesses, the live storage as a service, HD cloud service. How has the reception been for that? How many ecosystem partners do you have and when can investors think that that will be a significant part of your revenues?
Gianluca Romano
Oh, I think we are developing that business. We think in the future will be an important opportunity for Seagate. Is a little bit different business than hard disk but it’s still based on our core business, what we know how to do it but it is not producing hard disk. So it’s an adjacent business that is, we think, will be important to us. It’s growing. Of course, now we are in the phase where we are more investing than getting not a return but the return will come in the next few years. It will take a little bit of time and it’s not a cloud as our customers’ cloud, no, it’s a simplified cloud. It is a cloud based on backup, on disaster recovery. So it’s a very different cloud. Of course, we don’t want to compete with our customers but we don’t also have — we don’t have that same ability to do no compute and analytics that’s there and we don’t want to go there.
So I think in the future, there is a good space for Seagate in that part of the cloud business. And so I’ll say let’s wait a few more quarters and see how that will develop. We already have a few customers. We have not done a few press release, just to keep everyone aware, so it’s growing. Once again it’s also based on a service so you need time to see revenue coming in.
Ruplu Bhattacharya
Got it. Can we talk about HAMR because I think that’s a technology that Seagate has championed, how do you see the roadmap of HAMR over the next several years and when do you think that will become a mainstream like volume shipments or any?
Gianluca Romano
Yes, HAMR is the future. So it’s extremely important. It’s extremely important for our core business. It’s extremely important to our customers that is their way to reduce the TCO. It’s based on — in the same physical space, you put many, many more terabytes. And HAMR is the only solution to do it. So as I said before, we have a product. We have demonstrated technology. We are working on new generation of products toward the terabyte that as a fourth product, then you will have a 26, 40, 50. And so the technology is extremely important for this industry, not only for Seagate. I think now in the future, probably all the players in the hard disk will be in that technology, we’ll have to develop that technology. But we believe we have a fairly good time advantage. And of course, we want to take the benefit from that advantage also in terms of profitability. We said HAMR is a way to reduce the TCO to our customers but it’s also the way to get some improved profitability to Seagate.
Ruplu Bhattacharya
Got it. You were talking about gross margins but one thing we didn’t talk about is the gross margin for the non-HDD business. I mean what do you think some of the drivers are for improving margins in that segment?
Gianluca Romano
That’s a good question. I would say for that segment, we don’t focus too much on gross margin. We actually focus more on the free cash flow contribution. So as you know, in our non-hard risk, we have two main segments and will be three when we have the life part of the revenue. But right now basically all our revenue in the non-hard disk is coming from SSD and it’s coming from system solutions. So not very high gross margin for sure, lower gross margin than hard disk but important from gross profit dollar and free cash flow.
Ruplu Bhattacharya
Okay, all right. I’ve been asking all the questions. Maybe I’ll stop and ask to see if there are any questions from the audience. So let me ask you one more in the time that we have left, a lot of technology companies are seeing a problem with labor. The competition for talent is very fierce, right? So how should we think about your attrition rates? And how should we think about OpEx trending over the next several quarters? I mean, what are your thoughts on that?
Gianluca Romano
In terms of labor, we have not seen a very unusual turnover. I would say we are probably not too different than what happened before COVID. Now we are also now seeing other — some companies that start talking about layoffs and reduction in head count is something that no, we don’t need to do it. We don’t think we need to do. And — but I think that we maybe reduce the pressure on some of the turnovers.
So in terms of OpEx, we are very, very good in the last several years to reduce our OpEx and to keep our OpEx well under control. I’ll say, for the future, I see our OpEx between probably 11% and 12% of revenue. I think it’s a very reasonable level of OpEx in the high-tech industry. I think it’s one of the competitive advantage that we have in general and we want to keep it.
Again, we still want to go fast with our R&D and our HAMR product development. So this is a priority but again, still embed a range of spending.
Ruplu Bhattacharya
Got it. We have about two minutes left. Let me ask you one more question. So I started the discussion by saying that you’ve done a great job pivoting the business away from legacy into the mass capacity market. But how do you see your mix of business over the next couple of years if the PC demand, if there’s a Windows 11 refresh?
I mean do you think that the legacy part can become a greater part of the mix or is management’s focus now really to drive more nearline, more cloud-centric mix? So just your thoughts, if you had the opportunity for more legacy business, either on the PC side or on the consumer side, would you go for that or would you try and shift the mix on current mass capacity?
Gianluca Romano
I would say we will not try to shift the mix. We will serve all the demand that is there. We have a capacity to do it. So if there is demand, we will serve the demand. As I said before, it’s not the part that is generating the high gross margin for us but is generating a good part of our free cash flow. But it’s very little CapEx. I don’t think we’ll invest CapEx to serve more demand but we have enough of what is needed, very little OpEx. So if there is demand, we are happy with that. We take the demand and we are happy to get all the free cash flow to use the free cash flow for our shareholder return program, right?
Ruplu Bhattacharya
We covered a lot of topics. We are out of time. So thank you so much, Gianluca, for coming, giving us all of your insights. Thanks, everyone, in the audience. Thanks so much. Thanks for attending our event today.
Gianluca Romano
Thank you.
Question-and-Answer Session
End of Q&A
Source: seekingalpha.com