Micron Technology Inc (MU) — Q1 2019 Earnings Call Transcript

Thank you and welcome to Micron Technology's first fiscal quarter 2019 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including audio and slides, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release filed a short while ago. Today's discussion of financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website along with the convertible debt and capped call dilution table. As a reminder, the prepared remarks from this call and webcast replay will be available on our website later today. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on various financial conferences that we will be attending. You can also follow us on Twitter, @MicronTech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, specifically, our most recent Form 10-K and Form 10-Q for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after today's date to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon everyone. In the first quarter, we demonstrated solid execution, further improved our balance sheet, and began executing on our $10 billion share buyback program. We delivered strong profitability despite revenue headwinds from the inventory adjustments at several customers and industry-wide CPU shortages. Our results also reflect our success in further diversifying our business as evidenced by record sales in our mobile, automotive, and industrial businesses in the quarter. As we enter calendar 2019, we are seeing weakening demand from our customers. As a result, we are taking decisive actions, including a meaningful reduction in our fiscal 2019 CapEx plan, in both DRAM and NAND that will materially reduce our supply bit growth. I'll provide more details on these items later in the call after first reviewing the highlights of the quarter. I'll start with our execution progress. We are focused on improving our cost structure and increasing the mix of high-value solutions in our portfolio, both of which provide immediate benefits and strengthen Micron's ability to drive long-term profitable growth. Our cost reductions in DRAM and NAND have meaningfully outpaced the industry over the last three years. Our progress on advanced technology gives us confidence that we will deliver healthy year-over-year cost declines in DRAM and NAND in fiscal 2019, even after taking into account the supply and CapEx changes, which I referenced earlier. In the first quarter, we achieved crossover of 1X nanometer DRAM shipments and started revenue shipments of 1Y nanometer products. Our 1Y ramp is ahead of schedule, and we remain on track for meaningful production by the fiscal third quarter. We're also making excellent progress on our 1Z technology, which leverages our leadership in advanced materials and cost-effective lithography techniques. In NAND, we continue to lead with our QLC product offerings, and have introduced both consumer QLC and VME SSDs and enterprise QLC SATA SSDs. In the first quarter, we started shipping 96-layer NAND products. Yields on 96-layer are ahead of plan. We remain focused on increasing the mix of high-value solutions in our portfolio and investing in differentiated products for our customers. In DRAM, we introduced our 1Y nanometer 12-gigabit low power DRAM which offers the highest density available for the mobile market. We are seeing strong demand for this product as the market continues to move toward higher densities. In NAND, high-value solutions now represent over 50% of our NAND bits, which is an important milestone for us. The improving mix of high-value solutions increases our gross profit opportunity and provides better margin stability. The strength of our high-value solutions this quarter, which was driven by managed NAND products, helped us maintain overall NAND gross margins above 45%, despite industry oversupply. We strengthened our number one share position in SATA enterprise SSDs, gaining about three percentage points of market share sequentially according to industry reports. In addition to the QLC consumer and VME SSD, mentioned earlier, we also introduced the industry's first one terabyte TLC NVMe automotive SSD in the first quarter. We are working to further expand our NVMe product portfolio and plan to introduce SSDs targeting client, enterprise, and cloud markets throughout the course of calendar 2019. Looking ahead, we expect the SSD market opportunity will continue to shift from SATA to NVMe. Fiscal 2019 will be a year of transition for our SSD portfolio and we expect our SSD share gains to resume in fiscal 2020. In the meantime, the growth of our high-value NAND solutions in fiscal 2019 will be driven by our mobile managed NAND products, where we believe we have significant opportunity to increase share. In the first quarter, we shipped multiple high-capacity, high-performance UFS solutions, nearly tripling our bit shipments quarter-over-quarter. We continue to make good progress in developing high-value solutions using our 3D XPoint technology and plan to introduce differentiated products towards the end of calendar 2019 as previously discussed. Our conviction in the opportunities ahead is reflected in our October announcement that we intend to exercise our option to acquire Intel's interest in the IMFT Facility in Lehi, Utah, early in calendar 2019. Now, turning to end markets, I will start first with mobile, where we set records for revenue, gross margins, and operating margins in the first fiscal quarter. In addition to strong seasonal sales, we benefited from major product wins with several customers, which is driving our managed NAND share gains. We are seeing strong demand elasticity in this market and within our MCP portfolio, our average NAND density was up over 25% sequentially and over 150% year-on-year. Content growth also continues to do well in mobile DRAM with more than 25% growth in density per unit shipped on a year-on-year basis. We expect content growth to continue in mobile devices, driven by broader use of artificial intelligence, and the increasing number of cameras in the average smartphone. These elements will become pervasive while the industry readies for 5G implementation. In data center markets, we saw reduced revenue coming off a record-setting fiscal fourth quarter due primarily to inventory adjustments at our customers. We expect this headwind will persist for a couple of quarters. We are seeing some cloud customers go through a digestion period following very strong growth over the last two years. We believe we are still in the early innings of cloud growth and long-term end customer demand trends remain strong in this market. Our engagement with our customers continues to be deep and now includes collaboration on our 3D XPoint product roadmap. Higher density DRAM products are seeing stronger demand across the data center market. Revenue from our high-density 64-gigabyte DRAM modules grew more than 50% quarter-over-quarter. We are focused on the upcoming industry transition from eight to 16-gigabit DRAM, and expect to start sampling our new 16-gigabit DRAM by our fiscal third quarter. In graphics, we started the volume ramp of our high-performance GDDR6 memory and are working closely with our key customers in this segment. Higher than normal inventories in gaming cards and the fall-off in crypto-related demand created revenue headwinds, which we expect to continue for a couple more quarters. Looking ahead, we see broadening interest in high-performance graphics memory for AI enablement in segments like data center and automotive. Our product leadership in GDDR6 is already creating new opportunities in these segments. Turning to markets requiring our long lifecycle products, in the fiscal first quarter, we had record revenue in auto and industrial markets with a sequential expansion in gross margins. Strength in automotive continues to be driven by increasing demand for in-vehicle infotainment and advanced driver assistance systems. As a result, we see strong demand for our latest generation of automotive products. In November, we announced a collaboration with BMW to define and validate next-generation automotive solutions. This is another proof point of Micron's leadership in automotive and the growing criticality of memory and storage to leading-edge automotive applications. Turning to our DRAM industry outlook, as I've mentioned previously, DRAM demand weakened through the course of our fiscal first quarter. Since the start of this fiscal second quarter, the weakening demand trend has continued and our near-term visibility is limited. Due to a lengthy period of rising DRAM prices, we believe some of our customers had decided to carry higher than normal inventory levels and as DRAM supply caught up with demand, these customers are bringing down their inventory levels. Smartphone unit demand is also continuing to weaken, particularly at the high end in what is a seasonally slow quarter for mobile. Lastly, we are continuing to see the impact of CPU shortages. While our customers and market demand in segments like industrial, cloud, enterprise, and client compute is healthy, this inventory adjustment period will contribute to weaker demand conditions in DRAM that will likely persist through the first half of calendar 2019. We now expect DRAM bit demand growth for the industry in calendar 2019 at approximately 16% compared with our prior expectation of approximately 20%. Even after factoring in the recent CapEx cuts publicly announced across the industry, DRAM supply growth is tracking above our view of demand growth in calendar 2019. Given this supply/demand dynamic, we are taking decisive actions to lower our DRAM bit output growth to approximately 15% for calendar 2019 versus our prior plan of around 20% bit growth. These actions include a significant reduction to our capital expenditures in fiscal year 2019. Based on our current demand estimates, our DRAM bit shipments for the fiscal second quarter will decline sequentially, but more importantly are likely to be flat to down on a year-over-year basis as well consistent with a weak quarter for the memory industry and significantly below the long-term demand growth rate. This shows that inventory adjustments by our customers are well underway. Barring weaker macroeconomic conditions, we expect our DRAM bit demand to grow sequentially in our fiscal third quarter. Looking beyond fiscal Q3, as we enter the second half of calendar 2019, we expect a healthier demand environment alongside an improved industry supply picture, which should contribute to improved financial performance. In NAND, while the inventory levels at customers are in better shape, NAND suppliers appear to have elevated levels of inventory. The transition from planar to 3D NAND in the industry and the successful ramp of 64-layer across the NAND manufacturers has resulted in oversupply in the market over the last several quarters. We currently expect calendar 2019 NAND industry bit demand growth to be approximately 35% with ongoing impacts due to client compute CPU shortages and weaker high-end smartphone unit demand. Even after taking into account recently publicly announced NAND CapEx reductions for calendar 2019, our assessment is that the NAND industry supply growth will exceed industry demand growth in the coming calendar year. We are therefore lowering our 2019 planned NAND bit growth and further reducing our fiscal 2019 NAND CapEx. We now expect our calendar 2019 NAND supply bit growth to be meaningfully reduced from prior expectations and expect our bit shipment growth to be in line with the industry demand at approximately 35%. We also expect NAND demand to accelerate in the second half of the calendar year as demand elasticity kicks in for the mobile, enterprise, and client markets. Given our attractive cost structure on leading-edge NAND and DRAM, in this market environment, we will manage pricing and carry inventory as necessary to optimize our profitability. We are taking decisive action on the supply side to manage our business in a prudent fashion with an eye towards delivering a robust return on our investments. Our actions will significantly reduce our fiscal 2019 CapEx and allow us to continue delivering strong profitability and healthy free cash flow while investing in our strategic priorities as we position Micron to capitalize on the exciting growth opportunities for the company. I'll now turn it over to Dave to provide financial details of our fiscal first quarter and guidance for the second quarter.

Thanks, Sanjay. Micron delivered strong results in our fiscal first quarter, including double-digit year-over-year growth in revenue, gross profits, and earnings per share. While our near-term outlook has become more challenging, the actions taken to improve our cost structure and increase our mix of high-value solutions will ensure that our profitability profile remains strong. Moreover, Micron's financial position remains healthy with an improved net cash position and with total liquidity reaching our target levels. Total fiscal first quarter revenue was $7.9 billion, up 16% from the prior year and down 6% from the record fiscal fourth quarter. Revenue was adversely impacted by inventory adjustments at key customers in the cloud, graphics, and enterprise markets. Offsetting these headwinds, we delivered record revenue in the mobile, industrial, and automotive markets. DRAM represented 68% of total company revenue in the fiscal first quarter. DRAM revenue increased 18% year-over-year and declined 9% from the prior quarter. On a blended basis, DRAM ASPs declined high single-digits percent compared to the prior quarter, while shipment quantities were relatively flat. Trade NAND revenue represented 28% of total company revenue in the fiscal first quarter. Trade NAND revenue increased 17% year-over-year and declined 2% quarter-over-quarter. Our overall NAND ASP declined in the low to mid-teens percent and shipment quantities increased in the low to mid-teens percent compared to the prior quarter. Now, turning to our revenue trends by business unit. Revenue for the compute and networking business unit was $3.6 billion, up 12% year-on-year and down 17% quarter-on-quarter. The sequential decline was driven by the impact of inventory adjustments at some of our customers in the graphics, enterprise, and cloud markets. The mobile business unit delivered a strong quarter with record revenue of $2.2 billion; revenue increased 62% year-over-year and 17% from the prior quarter. Revenue growth was driven by the continued strength of our low-power DRAM offerings and share gains in our mobile managed NAND business with several leading handset customers. Embedded business unit revenue of $933 million was up 12% year-on-year and up 1% quarter-on-quarter. The automotive and industrial businesses had record revenue, driven by strong sales of our DRAM and NOR products. And finally, turning to the storage business unit, or SBU, fiscal first quarter revenue was $1.1 billion, down 17% year-on-year and 8% quarter-on-quarter. The sequential decline in revenue was driven by weaker pricing and the ongoing transition from SATA to NVMe SSDs. The impact of this transition will continue through calendar 2019. Our strategy to move bits from SBU components to high-value solutions in mobile is also contributing to a decline in revenue for SBU. The consolidated gross margin for the fiscal first quarter was 59%, up 360 basis points from the prior year and down approximately 230 basis points from the prior quarter. This includes a 120 basis point impact from 3D XPoint underutilization costs. During the last few months, we successfully leveraged our global supply chain to mitigate the impact of the China trade tariffs to less than 50 basis points to our consolidated fiscal first quarter gross margin. We expect to be able to mitigate approximately 90% of the impact from tariffs starting in January 2019. We believe that Micron will not be directly impacted by any expansion of trade tariffs to additional product categories. Operating expenses were $783 million, slightly above our guidance, mainly due to higher than expected prequalification expenses associated with new product introductions. Looking forward, as our joint development work with Intel comes to a conclusion around the end of this fiscal year, the R&D cost sharing between the companies will naturally reduce and come to an end. In the fiscal first quarter, Intel's share of joint R&D expenses was approximately $30 million. We expect that our R&D expenses will continue to increase in the coming quarters due to the combination of these declining R&D contributions from Intel as well as increased investments in future technologies and high-value solutions across our portfolio. We continue to drive strong profitability in the fiscal first quarter with operating income of $3.9 billion, representing 49% of revenue. This margin is up three percentage points year-over-year and down three percentage points from the fiscal fourth quarter. As previously mentioned, the improvements that Micron has made over the prior several years have resulted in structurally higher margins. The tax rate for the fiscal first quarter was 10%, and we expect our fiscal year 2019 tax rate to be around 11%. Non-GAAP earnings per share in the fiscal first quarter totaled $2.97, up from $2.45 in the year-ago quarter and down from $3.53 in the prior quarter. We commenced our capital return program in the fiscal first quarter with the repurchase of $1.8 billion of common stock, representing a reduction of approximately 42 million shares or about 3.5% of shares outstanding. We expect to remain active with our stock buybacks in the fiscal second quarter as we continue to make progress on our $10 billion repurchase program by returning at least 50% of our ongoing free cash flows to shareholders. Turning to cash flows and capital spending, in the fiscal first quarter, we generated $4.8 billion in cash from operations, representing 61% of revenue. Capital spending, net of third-party contributions was $2.5 billion, up from $2.1 billion in the prior quarter. In the fiscal first quarter, our free cash flow was approximately $2.3 billion, up about $600 million from the year-ago quarter and down approximately $750 million from the prior quarter. We deployed approximately 80% of the quarter's free cash flow towards our share repurchase program. Even with the substantial outlay for share repurchases, we ended the fiscal quarter in a record net cash position of $3.1 billion with approximately $7.2 billion in cash, marketable investments, and restricted cash and $4.1 billion in debt. While we largely completed our deleveraging activities in fiscal year 2018, we further reduced our debt balance in the quarter by approximately $500 million through the settlement of outstanding convertible note redemptions of $160 million and other scheduled payments. Overall, our solid balance sheet, strong cash flow, and robust liquidity put us in an excellent position to execute on our capital returns program. Prior to issuing our fiscal second quarter guidance, I'd like to provide some context for our outlook. Due to the weaker demand environment, we expect fiscal second quarter sequential bit shipments to be down meaningfully for both NAND and DRAM. Given the weaker near-term outlook, we are lowering our CapEx plans to a range of $9 billion to $9.5 billion for fiscal 2019. At the midpoint, this represents a $1.25 billion reduction from our prior guidance and our front-end equipment CapEx is now down year-on-year. We'll continue to remain flexible with capital spending to respond to market conditions. With that in mind, our non-GAAP guidance for the fiscal second quarter is as follows. We expect revenue to be in the range of $5.7 billion to $6.3 billion, and gross margins to be in the range of 50% to 53%. Operating expenses are expected to be $800 million, plus or minus $25 million. As we execute on longer-term growth investments, we're actively managing OpEx by implementing expense controls across the company, including tighter controls on headcount, holiday work schedule slowdowns, and reductions in discretionary spending. Based on a share count of approximately 1.15 billion fully diluted shares, we expect EPS to be $1.75, plus or minus $0.10. In closing, Micron continues to deliver solid financial results on a stronger performance foundation. We are making progress on all of our key initiatives including our high-value solutions product portfolio, our cost profile, capital return program, and financial structure with a record net cash position and $9.7 billion of liquidity at the end of the fiscal first quarter. While near-term market conditions are challenging, we are taking appropriate steps to manage production and spending in order to deliver healthy profitability and cash flows. There is no doubt Micron remains in the strongest financial position in the company's history as we transition to next-generation technologies and products. I'll now turn the call over to Sanjay for some concluding remarks.

Thank you, Dave. While we end calendar 2018 on the heels of unprecedented profitability and revenue for both Micron and the industry, we do believe we are entering a period of weaker market conditions. We are taking prudent actions to adapt our manufacturing plans to the changing demand environment. While we are implementing expense controls, we are also continuing to invest in our technology and cost competitiveness as well as strengthening our portfolio of high-value solutions. Memory and storage have become essential ingredients to the value created by the data economy and it is this added value that is driving a virtual cycle of long-term growth and innovation. We continue to believe that the memory industry is structurally stronger with more diversified demand drivers and moderating supply growth capability. Micron is better positioned than ever before to win in this environment with our strong balance sheet and the structural improvements we have made to our operating model in the past several years. We believe 2019 will be a year of solid profitability and I look forward to sharing our results over the quarters ahead. We will now open for questions.

Thank you. Sanjay, I was wondering if you could help quantify the inventory at your big hyper-scale customers. It sounds like in aggregate it's maybe two months. So, I'm wondering if you can help with that number. Thank you.

So, inventory at our customers and this is customers in various segments of our market, some of those customers are carrying higher levels of inventory, and that inventory level varies from customer to customer we believe. And our assessment is that inventory adjustments will take couple of quarters for it to be corrected, for it to work through the system entirely and, of course, we continue to work with our customers in the meantime, in terms of understanding their longer-term demand requirements. And certainly, our customers are indicating optimism towards the demand requirements in the second half of the year. And especially, as inventory adjustments work through the system and as supply cuts, the effect of those come through the industry, as well as the second half of the calendar year tends to be seasonally stronger compared to the first half of the year, we do expect that by the second half of the year, we'll have an environment that will be improved stronger compared to the first half of the year. And just keep in mind that the long-term demand trends in our end markets of cloud, client, enterprise, graphics all of these end markets, the trends continue to be strong, needing more memory and more storage ultimately. We're just going through an air pocket here related to primarily inventory adjustments as well as some seasonal weak mobile demand, including mobile demand on the high-end smartphones that is impacting some of our near-term visibility as well as the near-term outlook.

Thank you for that. And then I guess just as a quick follow-up, Dave. So, I think maybe the surprise in the guidance that the bit shipments are down, I think you said, meaningfully for both NAND and DRAM. I'm wondering, what that means for inventories? Are you going to ship out of inventory? Or are you cutting utilization? Can you sort of walk us through that? Thank you.

We are reducing our production for both DRAM and NAND. From a DRAM standpoint, we expect bit supply growth to approximate 15% in calendar year 2019. For NAND, we are also significantly reducing production, and we anticipate shipping close to demand, which we estimate to be around 35%. Therefore, there may be times when our inventory increases for a while, but it will ultimately adjust down as demand and supply become more balanced. In the first quarter, our inventory days reached 107 days, which I find acceptable. This product has a low cost and poses no risk of obsolescence; it's likely that the inventory days might rise again next quarter, and I'm comfortable with that outlook. Over the long term, we aim to align inventory levels closer to our targets.

Thank you, Dave.

Yes, good afternoon guys. Thanks for letting me ask the question. Dave, just relative to the guidance for OpEx in February quarter of $800 million, plus or minus $25 million, does that now reflect, what we should think about as a fully burdened OpEx as you move away from the shared cost with Intel? And relative to the $6 billion of operational efficiency gains, you talked about at the Analyst Day this past summer, how does that fit in with this OpEx guide? Because this is about $200 million more OpEx per quarter than we saw at similar revenue levels back in sort of 2016, 2017, and it's about $300 million above per quarter what we saw kind of in the 2015 sort of correction?

Yes, that's a good question. We have guided for $800 million in operating expenses for the second quarter, with a potential variance of $25 million. This amount does not fully account for all costs. In the first fiscal quarter, we benefited from approximately $30 million due to Intel's contribution through R&D expenses. This benefit will be slightly less in the second quarter and will gradually reduce throughout the year. Consequently, we expect operating expenses to be higher in the third and fourth quarters compared to the second quarter. While we are managing expenses wisely, reducing discretionary spending, and closely monitoring our headcount, we are still making necessary investments in products and technology. As Sanjay mentioned, we are currently experiencing a temporary challenge, and we do not want this to affect our long-term strategy. So, operating expenses may increase slightly. It’s important to note that if you consider our guidance for the second quarter alongside our revenue guidance compared to the first quarter, the midpoint of our earnings and revenue guidance suggests an operating margin of over 38%, which is an impressive figure. In my previous company, we aimed for such a target, so it's a great operating margin. This reflects our achievement of the $6 billion in improvements we committed to at the Analyst Day. We believe there is still more work ahead to enhance our mix towards high-value solutions and improve our cost competitiveness both in production and overall operations. We are committed to an additional $3 billion in improvements and feel optimistic about this goal.

And then as my follow-up for Sanjay, can you just walk us through the strategic puts and takes of building inventory into the February quarter as opposed to trying to let those bits out into the marketplace and let elasticity sort of take over? Is this sort of intangible reflection of your view that this will be relatively short-lived a couple of quarters? And what would you need to see before you would think that inventory build was too risky?

So, I think our inventory, our cost structure is very good, both on DRAM as well as on the NAND side. And so we are definitely prepared that in terms of managing our overall profitability, which is absolutely our primary focus, that we'll manage pricing and manage inventory accordingly as necessary. If inventory has to be carried over, we will carry it over because the demand in NAND will kick-in with elasticity. In DRAM, the inventory consumption with our customers will occur; supply cuts will be driving return to stronger demand environment compared to in the second half compared to first half. So, we will be using inventory as a lever to ultimately manage for the best profitability of the company. And certainly, be prepared to use that inventory as necessary to also capitalize on the second half opportunities. And our focus really will also remain in terms of our CAGR, in terms of output growth to be aligned with demand CAGR, and we'll of course from time to time use inventory as a lever to manage the profitability of our business and, of course, manage our customers' requirements as well.

Thank you.

Thank you, John.

Thank you.

Yes, good afternoon. Thank you for taking my question. I guess, first question, can you talk about what you're thinking in terms of cost-down efforts both for DRAM and NAND, particularly as you move to higher-value solutions changing mix, including 1Y, 1Z as well as 96 layers in the 2019 timeframe?

With respect to the cost structure, we continue to be in a very good position, as we said that for our fiscal year 2019, we'll have healthy cost reductions, both for NAND as well as DRAM. And you're of course right to note that as we increase the mix of our high-value solutions, for example, over the longer term as we increase our SSD mix or increase our managed NAND solutions, those do tend to incur higher costs. But they also bring higher margins, higher profitability, higher pricing associated with them as well. So, cost-wise, we are in good shape.

That's helpful. And I guess, as a follow-up, a question for you, Dave. I think in the past, you've talked about wanting to have liquidity including gross cash and revolver of roughly one year CapEx, which would basically put you on the screws here. So, the question is how to think about incremental free cash flow generation? And what percentage of that would be used for buybacks?

Yes, that's a great question, C.J. Currently, we have approximately $9.7 billion in liquidity, which includes the cash on our balance sheet and our $2.5 billion revolving credit facility. As you mentioned, we are in very strong shape in relation to our target liquidity. In the first quarter, we returned a significant amount of cash to shareholders, with around 80% of our free cash flow allocated for buybacks, while the remainder was used to further reduce our debt. Moving forward, there won’t be much deleveraging for the rest of the year. Therefore, I anticipate that we will continue to actively buy back stock over the next three quarters, devoting a large portion of our free cash flow to these buybacks.

Very helpful. Thank you.

Yes, thanks for taking my question. First question really, I'd like to ask on the supply adjustments you're making, you're taking down the guidance for both DRAM and NAND reduction. You mentioned about some of that being inventory, but you also mentioned some of that being some reduction adjustments. It would be useful to understand a bit more about that. For example, is that reduction of utilization? Is that a no more capacity additions or what is that? Because some of your competitors have been pushing out some of their capacity additions and so it would be useful to understand what Micron is doing here, on the capacity adjustments to get this slightly lower bit growth that you are forecasting for calendar 2019?

We are taking various actions to reduce our production output, and we won't go into specifics about what those actions are. We will maintain inventory as needed to manage profitability. Importantly, we are implementing measures to decrease our production in both NAND and DRAM, which is the reason for the $1.25 billion reduction in capital expenditures compared to our previous guidance. Our goal is to adjust our supply output to align with industry demand trends, and we are confident in the steps we have taken. In DRAM, we have adjusted our expectations from a 20% supply bit growth in calendar 2019 to a 15% growth on a year-over-year basis. We have also modified our output in DRAM to ensure our shipments meet the anticipated demand of around 35% for 2019. To clarify, we will not be adding any new wafer capacity. The reduced capital expenditures we discussed today, particularly in wafer equipment, are focused solely on technology transitions, which is the most effective way to realize a return on those investments.

So, does that mean slower technology migration or does it perhaps mean slightly lower utilization for a temporary period?

So, Mark, I'm not going to get into the specifics. The most important thing is that we have managed our capital expenditures lower, and we continue to take actions to reduce our production output to align our supply with our demand expectations. I believe the effects of these actions will start becoming apparent as early as this quarter.

And if you look at our gross margin, it would reflect that we have a very good cost structure for our products.

And the reduction of these outputs that we are talking about, our cost structure will remain in very good shape even with that. And in fact, in terms of cost, on a year-over-year basis, we actually, our cost reductions we believe both in DRAM and NAND will be above the industry. Cost reductions remain above the industry, yes.

My follow-up question is about demand. You mentioned some inventory correction among customers, and some competitors have noted this as well. However, you seem reasonably confident that demand will rebound in the second half of calendar 2019, suggesting that the inventory will have been significantly reduced by then. Could you share any data points that explain your confidence in the demand resurgence? Is it related more to NAND and demand elasticity, or is it on the DRAM side? Any insights on the inventory levels customers have would be beneficial to understand how you anticipate this inventory being utilized within a couple of quarters. Thank you.

First of all, we should recognize that overall market demand trends remain quite strong, and our customers continue to express optimism about long-term demand. In our fiscal second quarter, DRAM bits are expected to decline year-over-year, which should be considered against a long-term demand growth of around 20%. This year-over-year reduction indicates that significant inventory adjustments are taking place during the fiscal second quarter, and it will take a couple of quarters for these adjustments to fully unfold. The decrease in our DRAM shipments is a crucial point in understanding that our customers are actively adjusting their inventory. Meanwhile, demand drivers in the cloud market are robust, and the increase in average capacity for flash storage and smartphones, as well as the DRAM content driven by AI and machine learning, continues to rise. Applications in sectors like automotive and industrial IoT are also fueling the need for more storage and memory. We discussed some of these opportunities at our Investor Day, and they remain solid and vibrant in the market. The shipment volume in November was below the seasonal average, and the first quarter's year-over-year reduction highlights that inventory adjustments are ongoing. It's essential to view this alongside the fact that industry output is decreasing. We have shared our decisive actions and outlook for output growth in 2019 for both NAND and DRAM. Historically, the second half of the year tends to have stronger demand compared to the first half, which builds our confidence that the second half will be more robust in terms of demand and industry fundamentals. Additionally, compared to previous cycles, capital expenditure cuts are occurring earlier and at higher profitability levels, which bodes well for the long-term fundamentals of the industry and for Micron specifically.

All right. Great. Thank you very much. Appreciate that.

Yes. Thank you for taking the questions. I was wondering if I could build on that last comment, you've talked a lot about your own plans in terms of curtailing your capacity expansion this year. But given that you are in an off quarter, off calendar quarter, I'm just curious of how you will characterize maybe the competitive landscape? Maybe what you've seen change over the last month and a half or so relative to some of your competitors in the context of both DRAM and NAND? And I have a follow-up.

I think in that regard, you know as much as I do and over the course of the last couple of months, there have been a reduction that have been discussed in the industry, the reductions that you have heard about that manufacturers have talked about, but also several analysts have indicated those as well. And of course, the near-term outlook has also as we said, continued to weaken through the course of our FQ1 timeframe and even since our FQ2 has started, those demand weakening trends have continued as well. So, I think this is the information that is out there, is what we're using, but we can only talk about ourselves and we certainly have taken here decisive actions in terms of managing our output growth in line with our demand expectations.

Okay. As a quick follow-up regarding your product portfolio, particularly in the enterprise SSD market, I'm interested to know if you're experiencing a faster transition to NVMe than previously expected. Is there a way to quantify how much of the enterprise SSD market is moving away from you? And how soon can we expect to see your products in the market towards the end of this calendar year?

Certainly, the transition from SATA to NVMe is accelerating in both enterprise and cloud applications. We have been dedicated to developing our own products, which is why we mentioned that our fiscal year 2019 will be more of a transitional year for us as we launch our new NVMe products. It's clear that the market is shifting from SATA to NVMe across the board. We have already introduced some of our early NVMe products for consumer SSDs, and I've discussed our NVMe products for automotive applications as well. Throughout 2019, we will first release client NVMe products and later in the year, we will introduce enterprise and cloud NVMe SSDs. Therefore, we expect that calendar year 2020 will be the time when we start to regain market share in the SSD sector.

Thank you.

Yes. Thank you. Sanjay, I heard you indicate that you expect above-average cost declines, but I guess my question is, aren't the actions that you've announced today probably more of a hit to cost per bit in 2020 versus 2019? How do we think about that?

We have demonstrated our ability to take prompt and decisive actions. It’s important to note that FQ4 was a record year for the company, and we first noticed signs of inventory adjustment in FQ1. Throughout FQ1, we effectively reduced our capital expenditures and managed our output growth. This emphasizes our capability to respond quickly to marketplace changes. We continuously monitor this situation closely, focusing on maximizing long-term profitability and growth opportunities for Micron. We are confident about our cost position for 2019 and beyond. Additionally, we are making solid progress on our technology nodes. As I mentioned, our 1Z technology is advancing well, and we are also making good headway with our NAND roadmap. This will set us up favorably for both 2019 and 2020. Furthermore, we are shifting our portfolio towards high-value solutions, which will enhance our profitability profile.

I guess as my follow-up on CapEx, I mean, you are cutting your forecast for the year, but CapEx is still up on a year-on-year basis. I'm curious if this downturn ends up being longer than any of us sort of anticipate? Is there a leverage to reduce CapEx any further from its current levels?

I want to provide an update on our capital expenditures and costs. We are making significant progress in reducing costs related to back-end assembly and testing, as well as improving our supply chain operations, which should yield substantial cost savings. Overall, I am optimistic about our technology and manufacturing roadmaps, along with our cost capabilities for 2019 and beyond. Regarding capital expenditures, we have made some adjustments, and I want to highlight that our wafer equipment CapEx is actually decreasing in fiscal year 2019 compared to 2018. In previous discussions, we noted that Micron has underinvested in clean room shell CapEx necessary for future technology transitions. A significant portion of our CapEx is directed towards the buildings and facilities required for these upcoming transitions, and this expenditure does not contribute to bit growth. Additionally, we are increasing our CapEx for back-end testing and assembly operations in fiscal year 2019 compared to 2018, but this is also aimed at cost reduction and not bit growth. We have the flexibility to manage CapEx effectively and will continue to monitor it carefully. If any factors necessitate a change in our CapEx outlook, we will address it promptly and responsibly. We constantly evaluate the market environment and our technological transition needs, making real-time adjustments as required.

It seems like the actions you are taking are very prudent, but I'm confused because if you're slowing your process migration, there should be some impact on the cost per bit. I just don't understand what that impact is.

Again, in terms of cost per bit, there are a lot of details that have to be looked at. We're not going to get into all of those details here. Key message here is that we are bringing our production output in line with our demand expectations. Second, we feel very good about our technology position and our cost position and will continue to do very well in this regard. Cost position, of course, includes wafer level, die cost position but also includes the benefits of assembly and test cost improvements that we are making. And third, as we absolutely stay focused on our high-value solutions strategy and we're executing well in the area, we talked about how in mobile, even in a market environment of significant NAND oversupply, we actually have delivered strong gains in our mobile high-value solutions portfolio as well.

All right. Thank you.