Seagate (STX) Q1 2026: Data Center Drives Hit 80% Mix as Hammer Ramp Accelerates Margin Expansion
Seagate’s fiscal Q1 2026 marked a structural inflection, as data center demand drove a record 80% revenue mix and Hammer-based drives rapidly scaled, fueling margin expansion and long-term order visibility into 2027. The company’s focus on exabyte capacity, not unit volume, is reshaping its supply strategy and pricing power. Management’s tone signals confidence in a durable AI and video tailwind, but execution on next-gen product transitions and supply discipline remain critical watchpoints for investors.
Summary
- Data Center Shift: Data center revenue now dominates, reflecting a decisive pivot away from legacy markets.
- Hammer Ramp Drives Margins: Transition to higher-capacity Hammer drives is accelerating profitability and customer lock-in.
- AI and Video Demand Tailwind: Surging AI and video content are set to sustain storage growth and extend order visibility.
Performance Analysis
Seagate delivered a standout Q1 2026, with revenue up 21% year-over-year and sequential margin gains driven by a sharp mix shift to higher-capacity drives for cloud and enterprise data centers. Data center revenue reached $2.1 billion, now constituting 80% of total sales, a structural shift from historical edge and consumer exposure. This transition was underpinned by 159 exabytes shipped to data center customers, up from 137 exabytes in the prior quarter, and an average nearline drive capacity increase of 26% year-over-year.
Gross margin set a company record at 40.1%, propelled by Hammer-based product adoption and disciplined pricing. Operating leverage was evident, with non-GAAP operating margin expanding to 29%, and incremental margins running above the 50% long-term model. Free cash flow held steady at $427 million despite variable compensation outflows, and the company increased its dividend by 3%, signaling confidence in cash generation. Edge IoT revenue fell sequentially and now comprises only 20% of the business, reinforcing the pivot to enterprise and cloud.
- Data Center Dominance: The business is now overwhelmingly aligned to hyperscale and enterprise demand, reducing legacy cyclicality.
- Hammer Mix Acceleration: Over 1 million Mosaic (Hammer) drives shipped, with five global cloud service providers (CSPs) qualified and more in the pipeline.
- Pricing and Cost Discipline: Like-for-like pricing is stable or improving, while cost per terabyte continues to fall with the transition to higher capacities.
Seagate’s ability to lock in long-term contracts and deliver on technology transitions is translating into both top-line growth and margin expansion, but sustaining this trajectory depends on yield ramp and execution on next-gen platforms.
Executive Commentary
"Demand strength was led by global cloud service providers, and we also saw meaningful sequential revenue growth from enterprise customers... our high capacity nearline production is largely committed under bill to order contracts through calendar 2026. Additionally, longer term agreements that we have with our global data center customers provide clear visibility through calendar 2027, reinforcing our view that these favorable demand conditions will persist."
Dave Mosley, Chair and Chief Executive Officer
"We are expanding non-GAAP gross margin to 40.1%... This margin growth reflects the benefit of increased adoption of our latest generation products and ongoing execution of our pricing strategy. The combination of strong top line growth and significant financial leverage drove a 19% improvement in operating profit to $763 million."
Gianluca Romano, Chief Financial Officer
Strategic Positioning
1. Hammer Platform and Mosaic Roadmap
Seagate’s Hammer (Heat-Assisted Magnetic Recording) technology is now the backbone of its product differentiation, with five global CSPs qualified on Mosaic 3+ terabyte-per-disk products and a sixth in progress. The Mosaic 4+ platform, targeting up to 44TB per drive, has begun qualification and will ramp in the first half of calendar 2026. Management expects 50% exabyte crossover to Hammer in the second half of 2026, a critical milestone for cost and margin improvement.
2. Long-Term Order Visibility and Supply Discipline
Seagate has secured multi-year, bill-to-order contracts with hyperscalers and enterprise customers, providing revenue and production visibility through 2027. Rather than expanding unit capacity, the company is focused on increasing exabyte output via higher-density drives. This approach supports pricing discipline and mitigates risks of industry oversupply, a key factor in sector health.
3. AI and Video Content as Growth Catalysts
Explosive growth in AI inferencing and video generation is driving a surge in unstructured data, which underpins demand for large-capacity hard drives. Management cited a 50-fold increase in inferencing activity at a major hyperscaler and highlighted the storage implications of AI-generated video content, which is orders of magnitude larger than text data. This secular trend is expected to sustain demand well beyond the current cycle.
4. Pricing and Customer Economics
Seagate’s pricing strategy is centered on predictable, contract-based increases for legacy products and mix-driven price-per-terabyte declines as customers adopt higher-capacity drives. The value proposition for customers is total cost of ownership (TCO) reduction, not just unit price, which strengthens Seagate’s negotiating position and stickiness with hyperscalers.
5. Execution on Yield and Product Transition
Management acknowledges that yield ramp and manufacturing execution on next-gen Hammer drives are the gating factors for supply growth, not just customer demand. The transition to 4+ terabyte-per-disk platforms will require continued operational focus, as cycle times and process complexity are elevated during these transitions.
Key Considerations
Seagate’s Q1 2026 results reflect a business in the midst of a fundamental transformation, with the company now tethered to the secular growth of data centers and cloud, rather than legacy consumer or edge markets. This shift has implications for growth, margin structure, and capital allocation.
Key Considerations:
- Exabyte Growth Outpaces Units: The business is now managed for exabyte output rather than unit sales, aligning with hyperscale customer needs and supporting pricing power.
- Long-Term Contracts Mitigate Volatility: Multi-year agreements provide visibility and reduce risk of demand shocks or abrupt pricing swings.
- AI and Video as Durable Tailwinds: The secular increase in AI and video data generation is not just a cyclical lift, but a structural driver of storage demand.
- Supply Discipline Remains Critical: Management is resisting calls to add unit capacity, focusing instead on higher-density transitions to avoid oversupply and protect margins.
- Yield Ramp and Execution Are Key Risks: The pace of Hammer crossover and Mosaic 4+ ramp will determine whether Seagate can meet demand and sustain margin gains.
Risks
Seagate’s reliance on a concentrated set of cloud and enterprise customers heightens exposure to shifts in hyperscaler capital spending, and any execution slip on Hammer transitions could delay exabyte growth and margin expansion. Supply chain cycle times and manufacturing complexity introduce operational risk, while aggressive pricing or capacity additions by competitors could pressure industry health. Management’s supply discipline will be tested as demand visibility extends further out and customers seek to pull in orders.
Forward Outlook
For Q2 (December quarter), Seagate guided to:
- Revenue of $2.7 billion, plus or minus $100 million
- Non-GAAP operating margin around 30%
- Non-GAAP EPS of $2.75, plus or minus $0.20
For full-year 2026, management maintained a focus on:
- Capital expenditures within 4% to 6% of revenue
- Returning at least 75% of free cash flow to shareholders
Management highlighted:
- Continued strength in data center demand, especially from cloud customers
- Expectations for further margin expansion as Hammer adoption increases
Takeaways
Seagate’s Q1 2026 results confirm the company’s successful pivot to data center-driven growth and margin structure, underpinned by Hammer technology and multi-year contract visibility. The company’s ability to maintain supply discipline and execute on technology transitions will be the primary determinants of future value creation.
- Mix Shift to Data Center: The business is now fundamentally aligned to enterprise and cloud, reducing historical cyclicality and supporting higher margins.
- Hammer Execution Will Dictate Upside: Yield ramp and qualification of Mosaic 4+ drives are the gating factors for further exabyte growth and profitability.
- Watch for Supply Discipline and Customer Pull-Ins: Investor focus should remain on supply management, yield execution, and any signs of aggressive capacity additions or pricing shifts in the industry.
Conclusion
Seagate’s Q1 2026 marks a decisive inflection, with the company now structurally tethered to hyperscale and AI-driven data growth. Margin expansion and long-term visibility are evidence of successful execution, but the path forward depends on continued Hammer ramp and disciplined supply management.
Industry Read-Through
Seagate’s results and commentary reinforce that the storage industry is entering a new era, where exabyte growth, not unit volume, is the primary metric and hyperscale customers dictate market tempo. AI and video content are driving secular demand for high-capacity storage, raising the bar for technology transitions and supply discipline across the sector. For peers and adjacent suppliers, the message is clear: success will depend on innovation, yield execution, and the ability to lock in long-term customer relationships, rather than chasing short-term share or unit growth. Supply discipline and product differentiation will be critical as industry bottlenecks shift from demand to manufacturing execution.