Seagate (STX) Q4 2025: Nearline Shipments Jump 52%, Hammer Ramp Drives Margin Trajectory

July 29, 2025 | By EarningsIQ Research

Seagate’s Q4 marked a pivotal inflection, with Nearline exabyte shipments up 52% year-over-year and record gross margins as Hammer technology accelerates adoption among cloud and edge customers. Management’s build-to-order strategy is locking in demand visibility, while the Hammer ramp is set to further expand profitability and cash flow into fiscal 2026. Investors should focus on the pace of Mosaic platform qualifications and exabyte crossover as key catalysts for sustained outperformance.

Summary

• Hammer Ramp Accelerates: Multiple cloud customers are qualifying Mosaic drives, expanding Seagate’s margin potential.
• Build-to-Order Model Locks Demand: Capacity is largely spoken for into mid-2026, reducing supply-demand risk.
• Profitability Leverage Building: Technology transitions and disciplined pricing underpin a structurally higher margin profile.

Performance Analysis

Seagate delivered a breakout quarter, with Nearline shipments into cloud and edge data centers surging 52% year-over-year to 137 exabytes, which now represent 91% of mass capacity exabytes shipped. The company’s mass capacity revenue exceeded $2 billion, up 40% from the prior year, reflecting both robust cloud demand and the increasing adoption of high-capacity drives. Non-GAAP gross margin expanded for the ninth consecutive quarter, reaching a record 37.9%, driven by favorable product mix, higher pricing, and operational discipline.

Management’s focus on supply-demand alignment and cost discipline resulted in non-GAAP operating profit more than tripling for the year, while free cash flow nearly doubled sequentially to $425 million in Q4. Capital returns remain a priority, with 75% of annual free cash flow returned to shareholders and a resumption of share repurchases planned for the current quarter. The company ended the quarter with $2.2 billion in liquidity and a net leverage ratio of 1.8x, positioning it well for continued investment in technology and capacity expansion.

• Nearline Drives Dominate Mix: Nearline shipments now account for the vast majority of exabytes shipped, reflecting a structural shift in end-market demand.
• Hammer Adoption Drives Margin: Mosaic platform ramp and Hammer-based drives are accretive to gross margin, with further upside as qualifications expand.
• Cash Generation Surges: Free cash flow nearly doubled quarter-over-quarter, supporting both debt reduction and capital returns.

Legacy and other product lines now represent just 20% of revenue, underscoring Seagate’s successful pivot to mass capacity storage and cloud-centric business models.

Executive Commentary

Strategic Positioning

1. Hammer Technology and Mosaic Platform

Hammer (Heat Assisted Magnetic Recording), Seagate’s next-generation hard drive technology, is central to the company’s roadmap for aerial density gains and exabyte output. The Mosaic platform—built on Hammer—has now been qualified by three major cloud service providers, with additional qualifications tracking to plan. The four-terabyte-per-disk ramp is on schedule for early 2026, and management expects exabyte shipment crossover on Hammer-based drives in the second half of calendar 2026. This transition is structurally accretive to gross margin and positions Seagate for leadership in both cloud and edge markets.

2. Build-to-Order Model and Demand Visibility

Seagate’s build-to-order (BTO) strategy, where customers commit to long lead-time orders, is providing unprecedented visibility, with Nearline exabyte capacity largely booked through mid-2026 and further demand visibility into the second half. This approach enables efficient supply chain management and capital allocation, while reducing risk from market volatility and overproduction.

3. Pricing Discipline and Mix Shift

Seagate continues to benefit from disciplined pricing, with like-for-like pricing increasing on each new BTO contract. The mix is rapidly shifting toward higher-capacity, higher-margin Hammer and PMR (Perpendicular Magnetic Recording) drives, supporting ongoing margin expansion. Management emphasized that the TCO (Total Cost of Ownership) benefits of higher-capacity drives incentivize customer transitions without requiring price concessions.

4. Capital Allocation and Shareholder Returns

With debt at target levels and free cash flow accelerating, Seagate is resuming share repurchases this quarter, supplementing its dividend policy. The company returned nearly 75% of free cash flow to shareholders in fiscal 2025, demonstrating a strong commitment to capital returns even as it invests in next-generation technology and capacity.

5. Edge and AI-Driven Demand Expansion

Edge data center and AI workloads are emerging as new growth vectors, with demand for mass capacity storage driven by the proliferation of video, data analytics, and data sovereignty requirements. Seagate’s roadmap and partnerships position it to capture this incremental demand, particularly as AI inferencing and data retention needs accelerate at the edge.

Key Considerations

This quarter marks a strategic transition for Seagate, with technology, mix, and demand visibility converging to drive both near-term and long-term financial leverage. The company’s ability to execute on Hammer ramp and Mosaic platform qualifications will determine the sustainability of this momentum.

Key Considerations:

• Hammer Qualification Pace: The timeline for customer qualifications and the four-terabyte-per-disk ramp will be critical for exabyte growth and margin expansion.
• Supply Alignment to Demand: Build-to-order contracts provide visibility, but production must keep pace with rapid demand shifts and technology transitions.
• Pricing and Mix Management: Maintaining pricing discipline and a favorable product mix is essential as legacy businesses decline and mass capacity becomes dominant.
• AI and Edge Growth Opportunities: The ability to capture incremental demand from AI and edge workloads will test Seagate’s execution and adaptability.
• Capital Allocation Discipline: The balance between investment in technology, share repurchases, and debt reduction will shape shareholder value creation.

Risks

Execution risk remains around the Hammer ramp, particularly the pace of customer qualifications and the transition to higher-density products. Trade policy and global minimum tax changes introduce potential headwinds to profitability, while any slowdown in cloud or AI-driven demand would challenge the current growth trajectory. The company must also manage working capital and supply chain complexity as production shifts to new platforms.

Forward Outlook

For the September quarter, Seagate guided to:

• Revenue of $2.5 billion, plus or minus $150 million
• Non-GAAP operating expenses of approximately $290 million
• Non-GAAP EPS of $2.30, plus or minus $0.20, assuming a 16% tax rate

For full-year 2026, management maintained its outlook for:

• Low- to mid-teens revenue growth and continued gross margin expansion toward the 40% target

Management highlighted:

• Further Hammer ramp and Mosaic qualifications as key to exabyte and margin growth
• Free cash flow expected to expand in the second half of calendar 2025, even after accounting for variable compensation payouts

Takeaways

Seagate’s strategic transition to Hammer-based drives and build-to-order contracts is unlocking a new era of profitability and demand visibility.

• Technology Transition is the Core Lever: The Mosaic platform and Hammer ramp are driving both exabyte growth and margin expansion, with customer adoption broadening beyond a single cloud provider.
• Visibility and Pricing Power: Long-term BTO contracts are de-risking supply-demand alignment and supporting disciplined pricing, even as technology transitions accelerate.
• Watch for Exabyte Crossover and Edge Uptake: Investors should monitor Hammer exabyte shipment crossover and the pace of edge and AI-driven storage demand as leading indicators for sustained outperformance.

Conclusion

Seagate’s fiscal 2025 exit sets a new baseline for growth, profitability, and capital returns, powered by Hammer innovation and robust cloud demand. The company’s execution on technology ramp and customer qualifications will determine whether this momentum can be sustained into fiscal 2026 and beyond.

Industry Read-Through

Seagate’s results confirm that mass capacity hard drives remain critical to cloud and edge data center architectures, even as NAND flash and alternative storage technologies evolve. The accelerating adoption of Hammer and the shift to build-to-order models signal a broader industry trend toward demand-driven supply chains and higher-margin, high-capacity products. AI and edge workloads are reshaping storage requirements, with data retention and sovereignty driving new use cases. Competitors in storage, data center hardware, and memory should note the margin and mix dynamics at play, as well as the operational discipline required to capitalize on these secular trends.

STX Technology Storage Cloud Hammer Build-to-order Capital returns Edge