Gianluca Romano
Executive Vice President and Chief Financial Officer at Seagate Technology
Thank you, Dave. Seagate is navigating through the near-term macroeconomic crosscurrents and executed to plan in the December quarter. We delivered top- and bottom-line results that came in slightly above the midpoint of our guidance ranges, revenue of $1.89 billion and non-GAAP earnings of $0.16 per share. Our actions to reduce costs, strengthen the balance sheet, and improve long-term profitability have yielded desired outcomes, including a continuation of positive free cash flow generation without sacrificing investment necessary to extend our technology leadership. Total hard disk drive shipments were 113 exabytes in the December quarter, down 5% quarter-over-quarter, with HDD revenue declining 6% sequentially, to $1.7 billion. Multiple factors led to an expected decline in the mass capacity business, including the inventory correction among cloud and enterprise customers, COVID-related disruption in China, and Seagate's own action to reduce production. Mass capacity sales were offset by a slight seasonal improvement in the legacy market.
Shipment into mass capacity markets totaled 97 exabytes, down 7% quarter-over-quarter. Of this total, roughly 82% were derived from nearline products, shifting to cloud and enterprise OEM customers. Nearline shipments of 80 exabytes were down 6% sequentially and roughly 30% of our recent high. We believe the actions we have taken to quickly adjust our production output have aided customers to start making progress in working down their inventory levels. The degree of progress varied from customer to customer, and notwithstanding the current macroeconomic uncertainties, we would expect it will take a few more months to reach more normalized inventory level across the customer base.
On a revenue basis, mass capacity sales were down 10% sequentially to $1.2 billion, reflecting the nearline trend that I just described as well as lower demand in the VIA market. As we expected, the prolonged economic slowdown in China continued to impact sales of our VIA products, and we did not see the typical seasonal pickup in sales during the December quarter.
As Dave mentioned earlier, the Chinese government is taking action to boost the country economy, including the rapid reversal of COVID policy restrictions. It will take time for these changes to take effect. And while still early, emerging customer dialogue support these encouraging leading indicators. As a result, we anticipate conditions to gradually improve over the next couple of quarters. Within the legacy market, revenue was $421 million, up 8% sequentially, primarily driven by a seasonal uptick in consumer demand, although a more subdued level compared to prior year.
Finally, revenue for our non-HDD business was $224 million, down 15% sequentially, reflecting the expected decline in our enterprise system business, following a very strong September quarter.
Overall, we are making great strides in growing the system business, increasing sales of our branded channel products, and building customer momentum with our CORVAULT self-healing technology. While we're continuing to navigate lingering supply constraint for a couple of system components, we expect non-HDD revenue to improve through the remainder of the fiscal year.
Moving to our operational performance. Non-GAAP gross profit in the December quarter was $403 million. Embedded in that figure are the underutilization costs associated with lowering production output to support inventory reduction, both as a customer and on our own balance sheet. Underutilization costs of $79 million were somewhat higher than we had projected at the onset of the December quarter and translated into 420 basis points of margin headwind. Accounting for risk costs, non-GAAP gross margin was 21.4%, down from 24.5% in the prior quarter. Based on our current outlook, we're planning to begin ramping production output in the March quarter, sometime after the Lunar New Year. Cost and efficiencies associated with the restarting and ramping of production are expected to largely offset the benefit of lower underutilization costs for the March quarter. However, as demand recovers in the coming quarters, we expect both gross profit and gross margin to move higher. We significantly reduced non-GAAP operating expenses to $294 million, down $20 million quarter-over-quarter, due to savings associated with our restructuring plans and proactive expense management. We expect quarterly non-GAAP opex to remain around the $300 million level through the balance of the fiscal year 2023. Based on the diluted share count of approximately 207 million shares, non-GAAP EPS for the December quarter was $0.16.
Moving on to the balance sheet and cash flow. We executed planning action to strengthen our balance sheet over the near term. We ended the December quarter with a liquidity level of approximately $2.5 billion, including our revolving credit facilities, flat with the prior quarter. We believe these levels are sufficient to support our strategic plans and meet customer demand. We drove a significant reduction in inventory to approximately $1.2 billion, down $400 million from the prior quarter, reflecting our effort to work down strategic inventory and finished goods. We expect inventory to remain around this level over the next couple of quarters, but we'll continue to focus on aligning our supply chain and finished good level to the prevailing demand environment. We reduced capital expenditures to $79 million, down 41% quarter-over-quarter. Capex is expected to trend lower through the second half of the fiscal year with total fiscal year expenditure below the long-term target range of 4% to 6% of revenue. Free cash flow generation was $172 million, up 54% sequentially with lower capital expenditure, and a $51 million improvement in working capital. We expect free cash flow to remain positive throughout calendar year 2023 and more than sufficient to support our dividend program. We used $145 million for the quarterly dividend. And as previously communicated, we paused our share repurchase program, exiting the quarter with 206 million shares outstanding. We're not currently planning to repurchase any share for the balance of the fiscal year, consistent with our near-term focus on optimizing cash flow through the current macro environment.
Returning capital to shareholders remains an important aspect of our financial model, and we will assess resuming our program in fiscal 2024, depending on business conditions. We lowered overall debt by approximately $220 million, largely through a debt exchange requiring minimal cash outlay. Additionally, we successfully renegotiated our debt covenants to temporarily increase the leverage ratio to 5 times. Our debt balance exiting the quarter was $6 billion, and adjusted EBITDA for the last 12 months totaled $1.6 billion, resulting in a gross debt leverage ratio of 3.8 times. Interest expense in the December quarter was $77 million and is expected to be approximately $82 million for the March quarter, reflecting higher interest rate associated with the new debt. We continue to evaluate options related to debt structure and reducing interest expense.
Turning to our outlook for the March quarter. The broader macroeconomic and geopolitical uncertainties continued to impact the business environment and shape our recovery. However, as indicated earlier, we're encouraged by the actions being taken to improve economic condition in Asia, and the early indication with cloud and enterprise customer inventory levels are trending lower. As a result, we expect March quarter revenue to be in the range of $2 billion, plus or minus $150 million, up about 6% quarter-over-quarter as a midpoint. We project incremental improvement in the mass capacity business from cloud and enterprise customers and higher system sales to offset seasonally decline in the legacy market.
As a midpoint of our revenue guidance, we expect non-GAAP operating margin to be in the mid- to upper-single-digit range, which includes both underutilization costs and inefficiencies associated with the resuming production output. And we expect non-GAAP EPS to be in the range of $0.25, plus or minus $0.20.
I will now turn the call back to Dave for final comments.
