Seagate's Storage Supercycle: KV Cache and Physical AI Take Center Stage
Record quarter, record guidance — and a confident push into fiscal 2027
STX · Earnings Call · 2026-07-28
Seagate Technology delivered a stunning fiscal Q4, with revenue jumping 48% year-over-year to $3.6 billion and non-GAAP EPS of $5.71, up 121%. Gross margin expanded to 52.7%, a record, and free cash flow hit $1.1 billion, the strongest quarter in over a decade. The company guided September quarter revenue to $4.1 billion, implying 56% year-over-year growth, and operating margin around 50%. CEO Dave Mosley credited the results to three structural pillars: sustainable demand, a differentiated technology roadmap, and disciplined execution. “We delivered fiscal year revenue growth of 34%, led by cloud customers' demand for data storage solutions amplified by the adoption of AI-enhanced applications.” — William Mosley, Chair and Chief Executive Officer · 2026-07-28
New Demand Drivers: KV Cache and Physical AI
Perhaps the most consequential shift on the call was the introduction of KV cache and Physical AI as concrete demand catalysts. Dave explained that agentic AI workflows require massive amounts of persistent context, which is now being stored on hard drives. He elaborated: “When you set up these agents, you really need to give them context and sometimes that's a very broad set of rules across your business... So that's what's driving storage, but still very early days.” — William Mosley, Chair and Chief Executive Officer · 2026-07-28 He further described physical AI as more of a data play: "These robots have sensors on them, they're sensor networks, in order for them to learn, the data actually comes back up into a local cloud or a bigger cloud." This is a clear new angle for Seagate, which previously emphasized video and general cloud growth. The company's own keyword trajectory confirms this: nearline exabyte shipments are being driven by these new workloads, and storage demand is described as structural.HAMR Ramp and Margin Expansion
Seagate's HAMR-based Mozaic platform is hitting its stride. HAMR now represents about 40% of nearline exabyte shipments, and the second-generation Mozaic 4 platform is ramping with the two largest CSPs. CFO Gianluca Romano emphasized that the mix shift and pricing power are driving margin expansion: “We are guiding up again. So our pricing strategy is continuing as we have discussed now for several quarters.” — Gianluca Romano, Chief Financial Officer · 2026-07-28 The company expects sequential margin improvement throughout fiscal 2027, with incremental gross margins well above 60%.Balance Sheet and Capital Allocation
Seagate is now in a cash-generation machine. Free cash flow hit $1.1 billion in the quarter, and the company used it to reduce gross debt to $3.6 billion, with plans to retire another $1.2 billion in September. This de-risks the balance sheet and enables a resumption of share buybacks, which were limited in recent years. Free cash flow (less SBC) reached $1.1 billion, up from $899 million in the prior quarter, a 10-year peak.Outlook: Confident, But Is the Bar Set Too High?
Management is guiding for revenue to accelerate, with the September quarter midpoint implying 56% year-over-year growth. They also said "the vast majority of our nearline exabytes are now allocated into calendar 2028." This level of visibility is unprecedented for the industry. However, the stock, which is up 68.9% over the past 90 days, has already priced in much of this optimism, and the recent pullback of 22% from its June peak suggests some investors are taking profits. The key risk is whether the demand drivers, particularly KV cache and physical AI, materialize as quickly as management expects.In prior quarters, management spoke about AI tailwinds but not with such specificity. In the April call, Dave said: "We are picking up confidence because of some of these new applications." (component_hash="204701333933457949") Today, they are modeling these applications into the numbers. This evolution from hope to concrete expectations is a pivotal change. Overall, Seagate is executing flawlessly, but the bar is now very high. The market will watch whether the company can sustain this trajectory.We expect fiscal 2027 revenue growth to outpace our performance in fiscal 2026.