# How Seagate makes money

CXProWealth Business Lens · Seagate (STX) · Q1 FY2027

Read from the 10-Q for the period 2026-07-04 to 2026-10-02, filed 2026-10-29 with the SEC (accession 0001137789-26-000309): https://www.sec.gov/Archives/edgar/data/1137789/000113778926000309/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $4.2B (+61.0% on the year)
- Operating income: $2.1B (operating margin 48.8%)
- Net income: $1.8B (net margin 41.6%)
- Gross margin: 57.3%
- Free cash flow: $1.5B (34.9% of revenue)
- Cash conversion (operating cash flow / net income): 0.96x
- Capital expenditure: 5.0% of revenue

## Where the money goes (Q1 FY2027)

- Revenue → Total operating expenses: $2.2B
- Total operating expenses → Cost of revenue: $1.8B
- Total operating expenses → Marketing and administrative: $159.0M
- Total operating expenses → Product development: $200.0M
- Total operating expenses → Restructuring and other, net: $4.0M
- Revenue → Income from operations: $2.1B
- Income from operations → Other expense, net: $82.0M
- Other expense, net → Interest expense: $41.0M
- Other expense, net → Net loss from debt transactions: $44.0M
- Other expense, net → Other, net: $4.0M
- Interest income → Other expense, net: $7.0M
- Income from operations → Income before income taxes: $2.0B
- Income before income taxes → Income tax expense (benefit): $221.0M
- Income before income taxes → Net income: $1.8B

## Where the revenue comes from

### ContractWithCustomerSalesChannel (Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| OEMs | $3.4B | 80.7% |
| Distributors | $626.0M | 14.8% |
| Retailers | $193.0M | 4.6% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q1 FY2027 | Of revenue |
|---|---:|---:|
| Revenue | $4.2B | 100% |
| Cost of revenue | $1.8B | 42.7% |
| Product development | $200.0M | 4.7% |
| Marketing and administrative | $159.0M | 3.8% |
| Restructuring and other, net | $4.0M | 0.1% |
| **Total operating expenses** | $2.2B | 51.2% |
| **Income from operations** | $2.1B | 48.8% |
| Interest income | $7.0M | 0.2% |
| Interest expense | ($41.0M) | 1.0% |
| Net loss from debt transactions | -$44.0M | 1.0% |
| Other, net | -$4.0M | 0.1% |
| **Other expense, net** | -$82.0M | 1.9% |
| **Income before income taxes** | $2.0B | 46.8% |
| Income tax expense (benefit) | $221.0M | 5.2% |
| **Net income** | $1.8B | 41.6% |
| Effects of derivative instruments | -$4.0M | 0.1% |
| **Other comprehensive loss, net of tax** | -$4.0M | 0.1% |
| **Comprehensive income** | $1.8B | 41.5% |
| Basic (in dollars per share) | $8 | 0.0% |
| Diluted (in dollars per share) | $8 | 0.0% |
| Basic (in shares) | 228,000,000 |  |
| Diluted (in shares) | 232,000,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2009 | $9.8B | -$2.7B | -$3.1B | $823.0M | $633.0M | $190.0M |
| FY2010 | $11.4B | $1.7B | $1.6B | $1.9B | $639.0M | $1.3B |
| FY2011 | $11.0B | $806.0M | $511.0M | $1.3B | $843.0M | $421.0M |
| FY2012 | $14.9B | $3.1B | $2.9B | $3.3B | $636.0M | $2.6B |
| FY2013 | $14.4B | $2.1B | $1.8B | $3.0B | $786.0M | $2.3B |
| FY2014 | $13.7B | $1.8B | $1.6B | $2.6B | $559.0M | $2.0B |
| FY2015 | $13.7B | $2.1B | $1.7B | $2.7B | $747.0M | $1.9B |
| FY2016 | $11.2B | $445.0M | $248.0M | $1.7B | $587.0M | $1.1B |
| FY2017 | $10.8B | $1.1B | $772.0M | $1.9B | $434.0M | $1.5B |
| FY2018 | $11.2B | $1.6B | $1.2B | $2.1B | $366.0M | $1.7B |
| FY2019 | $10.4B | $1.5B | $2.0B | $1.8B | $602.0M | $1.2B |
| FY2020 | $10.5B | $1.3B | $1.0B | $1.7B | $585.0M | $1.1B |
| FY2021 | $10.7B | $1.5B | $1.3B | $1.6B | $498.0M | $1.1B |
| FY2022 | $11.7B | $2.0B | $1.6B | $1.7B | $381.0M | $1.3B |
| FY2023 | $7.4B | -$342.0M | -$529.0M | $942.0M | $316.0M | $626.0M |
| FY2024 | $6.6B | $452.0M | $335.0M | $918.0M | $254.0M | $664.0M |
| FY2025 | $9.1B | $1.9B | $1.5B | $1.1B | $265.0M | $818.0M |
| FY2026 | $12.2B | $4.1B | $3.2B | $3.7B | $569.0M | $3.1B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +34.1% (year before +38.9%): slowing
- Operating income: +116.6% (year before +318.1%): slowing
- Net income: +116.7% (year before +338.5%): slowing
- Free cash flow: +279.6% (year before +23.2%): accelerating

## Operating figures stated in the filing

- HDD exabytes shipped: 220 exabytes (as of 2026-10-02). "During the September 2026 quarter, we shipped 220 exabytes of HDD storage capacity." (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Nearline exabytes shipped: 198 exabytes (as of 2026-10-02). "Nearline 198 195 160" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Non-nearline exabytes shipped: 22 exabytes (as of 2026-10-02). "Non-nearline 22 23 22" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- HDD exabytes shipped: 218 exabytes (as of 2026-07-03). "Total 220 218 182" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- HDD exabytes shipped: 182 exabytes (as of 2025-10-03). "Total 220 218 182" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Nearline exabytes shipped: 195 exabytes (as of 2026-07-03). "Nearline 198 195 160" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Nearline exabytes shipped: 160 exabytes (as of 2025-10-03). "Nearline 198 195 160" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Non-nearline exabytes shipped: 23 exabytes (as of 2026-07-03). "Non-nearline 22 23 22" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Non-nearline exabytes shipped: 22 exabytes (as of 2025-10-03). "Non-nearline 22 23 22" (Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### Price, not volume, carried the quarter

Revenue rose to $4.23B from $3.63B last quarter on 220 exabytes against 218, and the filing credits pricing actions for the rise.

Against the prior quarter, Q4 FY2026, revenue rose to $4.23B from $3.63B while HDD exabytes shipped went to 220 from 218. The filing attributes the rise "primarily" to "favorable pricing actions undertaken by the Company". Cost of revenue moved only to $1.81B from $1.73B, so its share of revenue fell to 42.7% from 47.7%, and operating income rose to $2.06B from $1.56B. _(from the filing)_
Against the same quarter a year earlier, revenue rose 61.0% while cost of revenue rose 13.4%, and exabytes went to 220 from 182. Here the filing names two causes: pricing actions and "an increase in nearline exabytes shipped reflecting higher demand for nearline products". Gross margin reached 57.3%, which the filing credits to pricing and "product mix shift to higher capacity products". _(from the filing)_
The year-ago quarter was a week longer than this one, so the year-on-year growth rates compare a shorter quarter with a longer one. The comparison with the prior quarter, which was the same length, is free of that effect and still shows revenue rising on almost unchanged volume. _(from the filing)_
Read as analysis: when shipped capacity holds nearly flat and revenue climbs, the extra dollars arrive with little added cost of their own, which is why operating income grew faster than revenue against the prior quarter. The same arithmetic runs in reverse if prices ease. _(analysis)_

### Same revenue as FY2022, twice the operating profit

FY2026 revenue of $12.2B was close to FY2022's $11.66B, but operating income was 2.1 times as large, as cost of revenue fell to $6.64B from $8.19B.

In FY2022 Seagate had revenue of $11.66B, cost of revenue of $8.19B (70.3% of revenue) and operating income of $1.96B, a 16.8% operating margin. In FY2026 revenue was $12.2B, cost of revenue $6.64B against $8.19B, and operating income $4.09B, a 33.6% margin. Free cash flow was $3.11B against $1.28B. _(from the filing)_
The filing attributes this quarter's gross margin gain to pricing and "product mix shift to higher capacity products", and lists "executing our pricing strategy and maintaining supply discipline" among the structural changes it has made to the business, together with long-term customer engagements. _(from the filing)_
Read as analysis: selling a similar dollar amount of drives at a much lower cost of revenue means each dollar of sales now carries far less factory cost. That fits higher prices per exabyte and a mix tilted toward high-capacity nearline drives, rather than a larger business. The filing does not split the effect between price and mix. _(analysis)_

### One quarter earned half of last year's operating profit

Operating income of $2.06B equals 50.4% of FY2026's $4.09B, and free cash flow reached $1.48B in the quarter.

FY2026 operating income was $4.09B and free cash flow $3.11B. This quarter alone produced $2.06B of operating income and $1.48B of free cash flow. Net income was $1.76B for the quarter, against $3.18B for all of FY2026. _(from the filing)_
The climb was steady rather than sudden: quarterly operating income went $694M, $843M, $998M and $1.56B through FY2026, then $2.06B this quarter. The operating margin rose to 48.8% from 26.4% a year earlier. _(from the filing)_
Profit arrived as cash. Operating cash flow of $1.69B equals 96.0% of net income, and capital spending of $211M took 12.5% of it, leaving a free cash flow margin of 34.9% on revenue. _(from the filing)_
Read as analysis: a quarter is not a year, and the filing itself warns that quarterly results "fluctuate, sometimes significantly". The ratio measures how far the business has moved from last year's level, not a run rate for the year ahead. _(analysis)_

### Interest now takes 2.0% of operating income

Interest expense fell to $41M from $80M while operating income nearly tripled, so interest went from 11.5% of operating income to 2.0%.

Interest expense fell 48.8% to $41M from $80M a year earlier as the company redeemed and repurchased notes. Retiring notes early produced a $44M net loss from debt transactions, against $6M a year earlier, so other expense, net was $82M against $80M: this quarter, the one-off loss offset the interest saving. _(from the filing)_
Income before income taxes was $1.98B. The tax charge of $221M was 11.2% of it, against 10.6% a year earlier, and net income was $1.76B, a 41.6% net margin. Diluted earnings per share were $7.59 against $2.43, on 232M diluted shares against 226M. _(from the filing)_
Read as analysis: a smaller fixed interest charge lowers the operating income the business must earn before anything is left for shareholders, which matters most in a slow year. The filing still describes the company as leveraged and bound by a net leverage covenant, so the cushion is growing, not complete. _(analysis)_

### Competitive edge

- **A qualified supplier to a few large cloud buyers** OEM sales were 80.7% of revenue and nearline drives 90.0% of exabytes; lengthy customer qualification makes such a supplier hard to replace.
- **Capacity per drive is the cost lever** Nearline rose to 90.0% of exabytes from 87.9%, and the filing credits higher-capacity mix, with pricing, for gross margin reaching 57.3%.
- **Growth that needs little new capital** Capital spending of $211M was 5.0% of revenue and 12.5% of operating cash flow, leaving free cash flow of $1.48B.

### What to watch

- **Margins rest on price, which can reverse** Against last quarter, revenue rose on nearly flat exabytes, and the filing warns price competition could "risk the commoditization of our products".
- **Demand follows a few buyers' AI spending** A limited number of key customers account for much of revenue, and the filing ties their orders to "the pace of their AI-related infrastructure investments".
- **Fixed costs that widen margins also deepen losses** In FY2023 revenue fell to $7.38B from $11.66B, and the same factories produced an operating loss of $342M.

## Investor view

**Price did most of the work: Seagate's revenue rose 61.0% while the cost of making its drives rose far less**

### How it makes money

Seagate designs and makes hard disk drives, and what it sells is capacity. This quarter it shipped 220 exabytes of HDD storage, 198 of them on nearline drives, the high-capacity units that cloud data centers buy. That is 90.0% of the exabytes shipped. The filing describes "sustained demand for our high-capacity nearline drives across global cloud customers". _(from the filing)_
It sells through three channels. Sales to OEMs, its direct channel, brought in $3.41B of the $4.23B revenue, or 80.7%. Distributors added $626M (14.8%) and retailers $193M (4.6%). The company reports a single operating segment, so the filing gives no split of profit by product or market. _(from the filing)_
The economics are a factory with a thin layer of overhead on top. Cost of revenue took $1.81B, or 42.7% of revenue, leaving a gross margin of 57.3%. Product development was $200M (4.7% of revenue) and marketing and administrative $159M (3.8%). What remains, $2.06B of income from operations, is a 48.8% operating margin. _(from the filing)_
Profit turned into cash almost dollar for dollar. Operating cash flow was $1.69B, equal to 96.0% of net income of $1.76B. Capital spending was $211M, 5.0% of revenue, which left free cash flow of $1.48B, a 34.9% margin on revenue. _(from the filing)_

### What shifted

Revenue rose 61.0% to $4.23B from $2.63B a year earlier, while exabytes shipped went to 220 from 182. The filing attributes the rise "primarily" to "favorable pricing actions undertaken by the Company" and more nearline exabytes. Against the prior quarter, revenue rose to $4.23B from $3.63B on 220 exabytes against 218, and the filing names pricing as the main cause. The year-ago quarter was a week longer than this one. _(from the filing)_
Costs barely moved. Cost of revenue grew 13.4%, to $1.81B from $1.59B, so its share of revenue fell 17.9 points to 42.7% and gross margin reached 57.3%. The filing credits pricing and "product mix shift to higher capacity products". Against the prior quarter it notes the gain was "partially offset by higher external component costs". _(from the filing)_
Operating income rose 197.4% to $2.06B from $694M, and the operating margin rose 22.4 points to 48.8%. This one quarter's operating income equals 50.4% of the $4.09B earned in all of FY2026. Product development grew 7.5% and marketing and administrative 10.4%, both far slower than revenue. _(from the filing)_
Below the operating line, debt shrank. Interest expense fell 48.8% to $41M from $80M as the company redeemed and repurchased notes, and the early redemptions produced a $44M net loss from debt transactions. The tax charge of $221M was 11.2% of pretax income, against 10.6% a year earlier. Diluted earnings per share were $7.59 against $2.43, on 232M diluted shares against 226M. _(from the filing)_

### Risks in the filing

Demand is concentrated and must be planned far ahead. A limited number of key customers, including hyperscale data center companies and cloud service providers, account for a significant portion of revenue, and their orders depend on "the pace of their AI-related infrastructure investments". Seagate builds inventory months before orders arrive, with "significant fixed costs that are difficult to reduce in the short-term". _(from the filing)_
Competition and substitution. The company warns that price competition could "risk the commoditization of our products", and that "solid-state storage continues to displace lower capacity HDDs" in Edge IoT and client uses. In data centers it describes nearline drives and enterprise SSDs as mostly complementary, competing only for certain high-performance workloads. _(from the filing)_
Supply and technology. Key parts such as read/write heads, media substrates, DRAM and NAND come from single or few suppliers, and the filing notes "Many of these rare earth elements are sourced from China". The move to HAMR recording on the Mozaic platform carries its own risk: longer development, qualification or production cycles could cost sales and market share. _(from the filing)_
Money and policy. The company states "We are leveraged and require significant amounts of cash to service our outstanding indebtedness", under a credit agreement with a net leverage covenant. It also names tariffs, export controls and trade policy, an ongoing export settlement with the U.S. Commerce Department, and quarterly results that swing, sometimes significantly. _(from the filing)_
The numbers already show two of these. Concentration is plain in a channel split dominated by OEM sales. The fixed-cost risk is visible in the annual history: the same factories that now earn wide margins produced an operating loss in the downturn the filing recalls, when demand fell and underutilization charges hit. The leverage risk is easing as notes are retired, which the falling interest line shows. _(analysis)_

## Founder view: mechanisms

### Supply discipline turns price into margin

Seagate is choosing not to chase volume. The filing credits its pricing strategy, its supply discipline and long-term customer engagements. When a maker holds capacity steady while demand grows, buyers compete for the supply, prices rise, and because the factory cost of each drive does not rise with its price, most of the increase falls through to profit. _(analysis)_

### A fixed-cost factory amplifies the cycle

Seagate designs and manufactures most of each drive itself, so much of its cost is factories, equipment and engineers that cost about the same whether the lines run full or half empty. Extra revenue at high utilization carries little new cost, and lost revenue in a downturn takes profit with it. The filing names these fixed costs as a risk for exactly that reason. _(analysis)_

### More capacity from each unit built

A hard drive's cost is mostly physical parts: platters, heads, motor, enclosure. Storing more data on each platter raises what a drive is worth to a cloud buyer without raising those parts in step. The move to HAMR recording on the Mozaic platform is that mechanism in hardware, and the filing credits a shift toward higher capacity products for part of the margin gain. _(analysis)_

### Qualification locks in a few large buyers

Selling drives into hyperscale data centers requires a long, rigorous qualification with each customer, and the filing says nearline sales cycles can run past a year. Once qualified, a supplier is hard to displace, and long-term engagements give it visibility on demand. The same concentration means one large buyer pausing can move a whole quarter. _(analysis)_

### Up-cycle cash retires down-cycle debt

Cyclical manufacturers tend to borrow through troughs and repay in booms. Seagate carried heavy debt out of its last downturn; with free cash flow now large, it is redeeming notes early. That costs a one-off loss on each redemption but cuts a fixed interest charge, which lowers the revenue the business needs to break even in a future slow period. _(analysis)_

## Member research

Signed-in members read, on the page: what Seagate's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Seagate 10-Q for the period to 2026-10-02: https://www.sec.gov/Archives/edgar/data/1137789/000113778926000309/ (2026-10-29)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02