Seagate (STX) Q2 2026: Data Center Revenue Jumps 28% as Hammer Drives Propel Margin Expansion
Seagate’s Q2 2026 results underscore a decisive shift to higher-capacity drives, driving record profitability as cloud and AI workloads accelerate exabyte demand. The Hammer technology ramp is ahead of schedule, with nearline capacity fully allocated into 2027 and pricing discipline supporting stable revenue per terabyte. Management signals continued operating leverage and cost-down tailwinds as Mosaic 4 transitions ramp, positioning Seagate for sustained margin gains and cash generation through the AI data boom.
Summary
- Hammer Ramp Accelerates: Next-gen Mosaic drives qualified at all major US cloud providers, driving mix and margin upside.
- Data Center Share Grows: Cloud and enterprise end markets now account for 87% of shipments, cementing Seagate’s pivot away from legacy.
- Visibility Extends Into 2027: Nearline capacity fully booked through 2026, with long-term agreements in place and pricing power holding firm.
Performance Analysis
Seagate delivered a record quarter with 22% year-over-year revenue growth, led by a 28% surge in data center revenue—now 78% of total sales—anchored by robust demand from global cloud and edge customers. Gross margin reached a new high at 42.2%, up 210 basis points sequentially, as the company leveraged its pricing strategy and a rapid shift to high-capacity Hammer drives. Free cash flow hit $607 million, the highest in eight years, while operating margin expanded to nearly 32%. Executives emphasized that unit shipments remained flat, but exabyte volume grew 26% year-over-year, with average nearline drive capacity up 22%, reflecting the ongoing transition to larger drives and improved aerial density.
The edge and IoT segment, though smaller at 21% of revenue, also benefited from seasonal strength and continued adoption of video and VR workloads. Operating expenses were tightly managed, declining to 10.3% of revenue, trending toward Seagate’s long-term 10% target. The company retired $500 million in debt, further strengthening its balance sheet. Management credits both product mix and disciplined supply management for the margin expansion, with Mosaic 3 and Mosaic 4 Hammer products driving the next phase of cost and capacity improvements.
- Exabyte Mix Shift: Higher average drive capacities and rapid Mosaic adoption drove exabyte growth and margin leverage.
- Pricing Resilience: Revenue per terabyte remained stable, as supply discipline and long-term agreements limited price erosion.
- OPEX Control: Operating expense as a percent of revenue dropped sharply, reinforcing profitability gains.
Overall, Seagate’s operational discipline and technology roadmap are translating into accelerating profitability, with management guiding for further sequential improvement through 2026.
Executive Commentary
"2025 marked a transformational period for Seagate, both financially and operationally. Over the calendar year, we increased revenue by over 25%, improved gross margins by nearly 740 basis points, and expanded operating margins by an even greater amount, demonstrating the profitability leverage in our financial model. 2025 also solidified Hammer technology as a long-term enabler of mass capacity storage."
Dave Mosley, President & CEO
"We shipped 190 exabytes in the December quarter, up 26% year-over-year, while keeping overall unit capacity relatively flat. The data center market accounted for 87% of our shipment volume, supported by ongoing demand momentum from global cloud customers and sequential growth across enterprise OEM markets."
Gianluca, Chief Financial Officer
Strategic Positioning
1. Hammer Technology Leadership
Seagate’s Hammer platform, heat-assisted magnetic recording, has moved from proof-of-concept to industry standard, with Mosaic 3 qualified at all major US cloud service providers and Mosaic 4 (4TB per disk) on track for multi-customer qualification this quarter. This roadmap not only underpins Seagate’s aerial density gains but also creates a durable moat through advanced materials and photonics expertise.
2. Supply Discipline and Pricing Power
With nearline drive capacity fully allocated through 2026 and long-term agreements extending into 2027, Seagate is exercising rare supply discipline. Management emphasized that pricing could remain “flat to slightly up” as new product transitions allow for renegotiation at higher value points, especially as legacy agreements roll off and customers prioritize supply assurance over price concessions.
3. Margin Expansion Through Product Mix
The shift to higher-capacity drives—average nearline capacities rose 22% YoY to nearly 23TB—means Seagate is delivering more exabytes without increasing unit volumes, a key driver of gross margin leverage. Executives note that cost reductions are tightly linked to this mix shift, as Mosaic 4 will deliver meaningful cost-per-terabyte improvements and further margin upside as volumes ramp.
4. Capital Allocation and Balance Sheet Strength
Seagate’s improved free cash flow enabled $154 million in shareholder returns and $500 million in debt retirement, dropping net leverage to 1.1x. CapEx remains disciplined at 4% of revenue, focused on maintaining Hammer ramp and supply flexibility rather than expanding unit output. Management expects further deleveraging as profitability grows.
5. End-Market Diversification and AI Tailwinds
While data center demand is the primary engine, Seagate is also benefiting from edge and video applications, with emerging AI-driven video and agentic AI workloads expected to fuel sustained exabyte growth. The company’s technology is now positioned as the backbone for checkpointing, vector databases, and persistent storage demanded by next-gen AI architectures.
Key Considerations
Seagate’s Q2 reveals a company executing on multiple fronts: technology transition, supply management, and capital discipline. The following considerations will shape investor debate as the cycle unfolds:
Key Considerations:
- Product Transition Pace: Mosaic 4 qualification and ramp speed will determine the next leg of cost and margin improvement.
- Pricing Durability: Tight supply and long-term agreements limit downside, but any shift in demand or competitive response could alter pricing power.
- AI-Driven Demand: The magnitude and persistence of AI and video workload growth will shape exabyte requirements and customer procurement behavior.
- Operational Bottlenecks: Manufacturing is running “quite tight,” with wafer fab lead times and transition complexity as key constraints to upside.
- Capital Allocation Flexibility: Continued deleveraging and disciplined CapEx signal room for increased buybacks or investment if cycle strength persists.
Risks
Risks center on the sustainability of current demand and Seagate’s ability to execute aggressive product transitions at scale. Any unexpected deceleration in cloud or AI workloads, delays in Mosaic 4 ramp, or competitive pricing moves from SSD or legacy HDD players could pressure both top line and margins. Supply chain tightness, while currently a tailwind, could become a constraint if not managed with precision.
Forward Outlook
For Q3 (March quarter), Seagate guided to:
- Revenue of $2.9 billion plus or minus $100 million
- Non-GAAP operating margin approaching mid-30% range
- Non-GAAP EPS of $3.40 plus or minus $0.20
For full-year 2026, management signaled:
- Sequential improvement in both revenue and profitability each quarter
- Continued mix shift to higher capacity drives and further gross margin expansion
Management highlighted:
- Strong demand visibility driven by long-term agreements and customer procurement planning into 2027
- Ongoing cost reductions as Mosaic 4 volumes ramp and product mix shifts upward
Takeaways
Seagate’s Q2 2026 marks a clear inflection in profitability and execution, with the Hammer roadmap and disciplined supply strategy underpinning both margin and revenue visibility into 2027. The company’s ability to manage product transitions and capitalize on AI-driven demand will define its long-term value proposition.
- Margin Expansion Is Structural: Mix shift to Mosaic and disciplined supply is driving sustainable gross margin gains, not just cyclical upside.
- Visibility and Pricing Power: Nearline capacity is fully booked through 2026, with pricing discipline increasingly embedded in long-term agreements.
- AI and Cloud Tailwinds: The scale and persistence of AI and video workloads are accelerating exabyte demand, reinforcing Seagate’s strategic relevance.
Conclusion
Seagate’s Q2 execution demonstrates a rare combination of technology leadership, supply discipline, and financial leverage. With Hammer technology now mainstream at top cloud customers and Mosaic 4 ramping, Seagate is positioned for durable margin expansion and cash flow generation as AI workloads reshape the storage landscape.
Industry Read-Through
Seagate’s results confirm that the mass capacity HDD market is entering a new phase of secular growth, driven by AI, video, and cloud data center workloads. The company’s ability to command pricing discipline and lock in long-term agreements signals a shift in bargaining power toward leading storage vendors. For competitors in SSD and legacy HDD, the message is clear: without a credible aerial density roadmap and supply discipline, margin compression and share loss are likely. Cloud and hyperscale customers are prioritizing supply assurance, suggesting that storage procurement cycles will increasingly favor technology leaders with predictable roadmaps and manufacturing execution. The broader industry should monitor how quickly AI and video workloads translate into persistent exabyte growth, as this will drive both capex cycles and competitive dynamics across the storage ecosystem.