Micron Technology Inc (MU) — Q3 2020 Earnings Call Transcript

Thank you, and welcome to Micron Technology's fiscal third quarter 2020 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 the 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 and prepared remarks 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 may be found on our website. As a reminder, a 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 the various financial conferences that we will be attending. You can follow us on Twitter at 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 file with the SEC, specifically our most recent Form 10-K and 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. I hope that you, your family, and your colleagues are safe and healthy. Along with Dave and Farhan, I am doing this call from Micron’s offices. Micron’s strong execution in the fiscal third quarter drove solid sequential revenue and EPS growth. We are ramping the industry’s most advanced DRAM node and increasing our mix of high-value NAND. Our strong competitive position and diversified product portfolio put Micron in an outstanding position for the many exciting growth opportunities in the memory and storage markets. I’ll start with an update on our operations. Due to the excellent work of Micron's operations team, most of our fab and assembly sites operated at full production throughout the quarter, with our Singapore and Taiwan assembly and test facilities achieving record production. COVID-19's impact on our production early in our third quarter was limited to our backend assembly and test sites in Muar and Penang, Malaysia, and we quickly offset this impact with production adjustments at our other facilities. All our production facilities are operating normally at this time. We continue to prioritize the health and safety of all team members and contractors and have strong COVID-19 safety measures in place at all our sites worldwide. We are taking a conservative, phased, and site-specific approach to returning our team members on-site, prioritizing our manufacturing workforce and engineering teams. Now, turning to the market environment. The pandemic has impacted the cyclical recovery in DRAM and NAND, causing stronger demand in some segments and weaker demand in others. Market segments driven primarily by consumer demand have seen a negative impact. Calendar 2020 analyst estimates for end-unit sales of autos, smartphones, and PCs are meaningfully lower than pre-COVID-19 levels, even though estimates for enterprise laptops and Chromebooks have increased. The reduced level of global economic activity has also curtailed near-term demand. The pandemic is driving rapid change in consumer and corporate practices around the world. Consumers are significantly increasing online activity, including e-commerce, gaming, and video streaming, all of which drive additional data center capacity requirements. Trends like working-from-home and online learning are likely to drive long-term changes in how we think about workforce flexibility and education. Several governments around the world are considering ways to ensure a level playing field by considering significant programs that provide Chromebooks or tablets to students who cannot afford them, as online learning becomes a necessity in these times. Additional government fiscal stimulus programs are also supportive of economic activity and will accelerate trends like electric vehicle production. Emerging technologies such as drone-based deliveries and the increased use of robotics across many applications are now being pursued with urgency. Technology solutions are rapidly helping society adapt and manage the temporary and permanent changes stemming from this pandemic. Clearly, certain trends that would have taken 2 to 4 years to develop have been accelerated into months. It is easy to see how these changes will drive higher consumption of memory and storage in the long term. The faster pace of digital transformation in the economy is here to stay. Looking ahead to the second half of calendar 2020, let me discuss certain key market trends. First, we expect the data center outlook to remain healthy. Second, we expect smartphone and consumer end-unit sales to continue to improve, accelerating inventory consumption across the supply chain. And third, new gaming consoles will drive stronger DRAM and NAND demand. Despite these trends, our short-term visibility across end markets remains limited due to COVID-19, macro and trade uncertainties, as well as customer inventory changes. The recent restrictions on Huawei are also impacting our opportunity in the near term. As these risks recede, we expect a resumption of industry growth, with a long-term bit growth CAGR of mid to high teens for DRAM and approximately 30% for NAND. This growth will be supported by powerful secular technology trends ranging from AI and machine learning to cloud computing, 5G and the growth in edge computing, and the industrial IoT economy. Turning to industry supply, second-half 2020 supply growth may be somewhat muted compared to pre-COVID-19 expectations. Some suppliers have commented about delays in equipment deliveries, which can result in slower node transitions and lower bit growth. Specific to Micron, we are proactively aligning our bit supply to market demand. Our fiscal year ‘20 front-end equipment CapEx is down more than 40% from fiscal year ‘19 and is at its lowest level in the last 5 years. While we expect to increase fiscal year ‘21 CapEx to support high ROIC node transitions, this CapEx will be meaningfully lower than our pre-COVID-19 plan. We have also made changes to our DRAM utilization to align with the current lower demand in the automotive market. As end-market conditions evolve, we will remain flexible to make any needed adjustments to our supply. Since 2016, Micron has made tremendous progress narrowing the competitive gap on leading edge technology nodes. In DRAM, we are ramping 1z technology, which is the industry’s most advanced node, and achieving yield improvements that reduce our cost. We have several customer qualifications underway for this technology. Our 1y and 1z nodes together now make up more than 50% of our bit production. We continue to make progress on our 1-alpha node, which we expect to introduce in fiscal 2021. We have begun sampling our first high-bandwidth DRAM memory product, which is competitive with the industry’s most advanced products, and will expand our AI data center opportunity. We are excited about entering this new high-value segment of the DRAM market and look forward to ramping this product after it is qualified with our customers. In NAND, our 128-layer first-generation RG NAND technology entered volume production in FQ3, and we are pleased to announce that we have recently initiated customer shipments. We are also making good progress on our second-generation RG node, which will be deployed broadly across our product portfolio. We remain on track for RG production to make up a meaningful portion of our NAND output by the end of calendar 2020. Micron also continues to make progress with QLC. QLC bits now represent more than 10% of Micron’s overall NAND production, contributing to our NAND cost improvement. Fiscal 2020 has been a year of extraordinary gains in the mix of our high-value solutions in NAND, which now make up over 75% of our quarterly NAND bits. We remain on target to increase this to 80% for fiscal 2021. The new Micron is undergoing a dramatic transformation to combine product leadership with technology, manufacturing and supply chain excellence. Across our entire portfolio of DRAM and NAND products, we will continue to focus on product differentiation and portfolio expansion to grow our share of industry profits while maintaining stable bit share. Turning to end markets. We had record quarterly revenue in solid-state drives, as cloud SSD revenue more than doubled quarter-over-quarter. We continue to introduce new NVMe products in our SSD portfolio, while maintaining our leadership in the enterprise SATA market. Customer qualifications are progressing well for our next-generation products for both NVMe and SATA markets. Our client NVMe SSDs have also contributed to our SSD growth. In May, we announced a TLC client SSD and our first QLC client SSD, both using next-generation 96-layered NAND technology. As the only company with a portfolio of DRAM, NAND and 3D XPoint technologies, Micron is uniquely positioned to benefit from the secular data growth that is driving the cloud, enterprise and networking markets. Our cloud DRAM sales grew significantly quarter-over-quarter, with strong demand due to the work-from-home and e-learning economy and significant increases in e-commerce activity around the world. This quarter, we started early sampling of 1z DDR5 for enterprise applications. Additionally, we also started sampling our higher-frequency DDR4 modules for Intel’s Ice Lake server platform, which we expect to drive server DRAM content growth. In networking, our DRAM bit shipments expanded significantly on a sequential basis, driven by rapid work-from-home infrastructure deployment, as well as increased 5G deployment, particularly in Asia. Despite demand headwinds in the smartphone market due to COVID, our mobile business delivered healthy sequential and year-over-year growth due to continuing momentum of our DRAM and NAND solutions. The outlook for calendar 2021 is promising, with 5G expected to drive a resumption in smartphone unit sales growth, with the multiplier effect of higher memory and storage content. 5G phones will have greater content than 4G phones, and we can see this already in the phones being introduced in calendar 2020. We see the strongest memory and storage content growth in the low-to-mid range part of the smartphone market, which is also the largest segment in terms of units. In this part of the market, 5G phones have 6 gigabytes of DRAM and 64 and 128 gigabytes of NAND versus 4G phones with 2 to 4 gigabytes of DRAM and 32 to 64 gigabytes of NAND. We are encouraged to see sub-$250 5G phones, which make 5G accessible to a broader market. This lower price point has been enabled by BOM cost reductions in semiconductor content outside of memory and storage. Micron is well-positioned to help our customers win in the 5G era, with an industry-leading product portfolio, including low-power DRAM and multichip packages. We continue to achieve design-ins for LP4 and LP5 5G platforms, and our most advanced managed NAND products based on UFS 3.1 are now sampling at several major Android OEMs. In PC, our bit shipments declined modestly as we strategically moved supply of compute DRAM to address demand in the data center market. Demand was strong for certain PC sub-segments that are supporting increased work-from-home and remote learning activities, and our PC DRAM revenue was up sequentially as ASPs increased. While certain parts of the PC market have strengthened, overall PC unit shipments are expected to decline this year due to weakness in desktop PCs. In graphics, we have started shipping GDDR6 DRAM for next-generation gaming consoles, and we expect strong demand in the second half of calendar 2020. In auto, revenue declined significantly from the previous quarter due to broad auto supply chain disruption. Despite auto unit weakness, secular content growth from ADAS and autonomous driving platforms resulted in record LP4 DRAM revenue for our auto business in fiscal third quarter. As automotive production rates improve around the world, our auto business should return to a growth trajectory. I’ll now turn it over to Dave to provide our financial results and guidance.

Thanks Sanjay. Despite COVID-19, we achieved strong results, thanks to resilient execution from our team members across the globe. Total FQ3 revenue was approximately $5.4 billion, up 13% sequentially and 14% year-over-year. Sequential revenue growth was led by the data center and mobile markets. FQ3 DRAM revenue was $3.6 billion, representing 66% of total revenue. DRAM revenue increased 16% sequentially and 6% year-over-year. Bit shipments were up by approximately 10% sequentially. ASPs were up sequentially in the mid-single-digit percentage range. FQ3 NAND revenue was approximately $1.7 billion, representing 31% of total revenue. NAND revenue increased 10% sequentially and was up over 50% year-over-year. Bit shipments increased in the lower single-digit percentage range sequentially. ASPs increased sequentially in the upper single-digit percentage range. Now turning to our revenue trends by business unit. Revenue for the Compute & Networking Business Unit was $2.2 billion, up 13% sequentially and up 7% year-over-year. CNBU sequential growth was driven by double-digit quarter-over-quarter pricing improvements and stronger demand for data center products. We were supply-constrained for certain compute DRAM products, which limited our ability to meet some demand upside from customers. Revenue for the Mobile Business Unit was $1.5 billion, up 21% sequentially and up 30% year-over-year. The sequential growth was primarily driven by strong growth in our LPDRAM bit shipments. MCP revenue remained strong and was up significantly year-over-year. Revenue for the Storage Business Unit in FQ3 was $1 billion, up 17% from FQ2 and up 25% year-over-year. SBU operating margins increased dramatically to 17%, up from a breakeven level last quarter. This significant sequential improvement in operating margins was driven by improved pricing, stronger data center SSD mix and overall record SSD revenue. And finally, revenue for the Embedded Business Unit was $675 million, down 3% sequentially and down 4% year-over-year, primarily from a reduction in automotive demand. The consolidated gross margin for FQ3 was 33.2%. Sequential gross margin improvement was driven by pricing improvements in both DRAM and NAND, as well as our ongoing improvements in product mix that continue to underpin our financial performance. The impact of underutilization at our Lehi fab was approximately $155 million or 285 basis points in FQ3. We expect underutilization to be approximately $135 million in FQ4 and expect gradual declines in underutilization through FY2021. Operating expenses were $823 million in FQ3. As we said on last quarter’s call, we’ve taken several actions to control our operating expenses, given the increased uncertainty surrounding COVID-19. As a result, we continue to expect favorable underlying OpEx trends to continue into FQ4. FQ3 operating income was $981 million, resulting in an operating margin of 18%, compared to 11% in the prior quarter and 23% in the prior year. Net interest expense increased to $24 million, compared to $6 million of net interest expense in the prior quarter. This increased expense was primarily driven by the drawdown of our revolver and subsequent $1.25 billion investment-grade note issuance in the quarter. We expect net interest expense will be approximately $30 million in FQ4, due to the decline in interest income because of lower interest rates. Our FQ3 effective tax rate was 3%, which benefited from approximately $19 million of one-time items. We expect our tax rate in the fourth quarter to be approximately 6%. Going forward into fiscal 2021, we expect our tax rate to be in the high single-digit to low double-digit range. Non-GAAP earnings per share in FQ3 were $0.82, up from $0.45 in FQ2 and down from $1.05 in the year-ago quarter. FQ3 non-GAAP EPS was approximately $0.02 higher due to the tax benefits reported in the quarter. Turning to cash flows and capital spending, we generated $2 billion in cash from operations in FQ3, representing 37% of revenue. During the quarter, net capital spending was approximately $1.9 billion, approximately flat quarter-over-quarter. As we enter the final quarter of FY20, we are projecting fiscal year 2020 CapEx to be approximately $8 billion. Our FY20 front-end equipment CapEx will still be down more than 40% from last year. However, back-end CapEx and building CapEx, neither of which add to bit supply growth, are up from last year. Free cash flow in the quarter was $101 million, compared to $63 million in the prior quarter. This represents the 14th consecutive quarter of positive free cash flow, reflecting the structurally improved profitability and working capital improvements of the new Micron. We repurchased approximately 929,000 shares for $40 million in FQ3, at an average price of $43.54. In the nine months of FY20, we’ve returned $134 million of capital through repurchases and paid $266 million to settle conversion of convertible notes. Combining the convert premiums and share repurchases, we have used $338 million or 135% of FY20 free cash flow towards reducing the share count. Ending FQ3 inventory was $5.4 billion or 131 days versus 134 days last quarter. Our overall days of inventory are above our approximately 110-day target level, partly due to elevated NAND inventory as we transition to replacement gate. We are also carrying higher raw material levels as a precaution, given the increased supply chain uncertainty due to the pandemic. We ended the quarter with total cash of $9.3 billion and total debt of $6.7 billion. Total liquidity was approximately $11.8 billion, up from $10.6 billion at the end of the second quarter. In the quarter, we issued $1.25 billion of investment-grade notes, and those proceeds, together with $1.25 billion of cash on hand, was used to repay the $2.5 billion revolving credit facility we drew at the beginning of the fiscal third quarter. Prior to providing our outlook and guidance, we’d like to remind everyone that our fiscal Q4 is a 14-week quarter. Now turning to our outlook. As Sanjay mentioned, while visibility remains limited overall, data center trends are strong, and new gaming consoles will be a tailwind to demand in the second half of the calendar year. While end-unit sales of consumer devices such as smartphones have started to recover, we are seeing an impact from the recent restrictions imposed on Huawei. It is also important to remember that we are a lagging indicator relative to the end demand. In addition, the risk of a second wave of COVID-19 infections is continuing to drive greater uncertainty for the economic recovery and our business. Lastly, inventory strategies of our customers are difficult to predict. We continue to closely monitor market conditions and respond to changes in the market environment in a timely and disciplined manner. With all of these factors in mind, our non-GAAP guidance for FQ4 is as follows: We expect revenue to be $6 billion, plus or minus $250 million; gross margin to be in the range of 35.5%, plus or minus 150 basis points; and operating expenses to be approximately $850 million, plus or minus $25 million. Finally, based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $1.05, plus or minus $0.10. In closing, we are extremely proud of Micron’s performance in this unprecedented period of market uncertainty and operational challenges. The tenacity, creativity, and dedication of our team members around the world drove strong results that surpassed our initial expectations. Micron remains on very solid footing with an investment-grade balance sheet, ever-strengthening product portfolio, and secular industry trends that will continue to drive long-term demand. I’ll now turn the call over to Sanjay for closing remarks.

Thank you, Dave. The pandemic has impacted our financial performance trajectory, which was shaping up for a robust outcome this calendar year. Nevertheless, we have moved with agility to leverage the new opportunities in the marketplace and have further strengthened our product portfolio. Micron’s portfolio is now dramatically better positioned from a competitive perspective, and we have driven a tremendous transformation here over the last three years. In the coming quarters and years, we will continue to strengthen our business foundation. And as the industry environment improves, Micron is exceptionally well-positioned to take advantage of long-term trends and drive superior returns for our shareholders. Of course, preparing Micron for a bright future has to be about more than just quarterly business performance. We also have to be leaders in creating positive outcomes for all of our stakeholders. In that context, there are two topics that I would like to touch upon before we move to Q&A. First, earlier this month, we issued our fifth annual sustainability report. This year, we set challenging new goals for energy use, emissions, water use, and waste generation that aim to dramatically improve the environmental sustainability of our operations worldwide over the years ahead. We also established an aspirational future vision that will drive us to achieve even more. Reaching our goals will require investment, and we plan to devote approximately 2% of annual capital expenditures to environmental sustainability initiatives, amounting to about $1 billion over the next five to seven years. These initiatives underpin our commitment to achieve significantly higher standards and help create a better planet. Second, I’d like to address the social unrest and racial division that have gripped our country. The senseless and tragic deaths of people in our black community in the U.S. must be addressed with real and lasting reforms. Hate, racial discrimination, violence, and social injustice have no place in our society. Micron is committed to creating a welcoming and safe work environment for everyone, and we are taking concrete actions to increase technical training, career preparedness, and opportunities for underserved populations. We are also actively engaging and investing in community programs that aim to create a more just and fair society for everyone. There is much work to do, and we look forward to being part of the solution. We will now open for questions.

Sanjay, David, congratulations on solid results. Sanjay, if you think back 90 days ago, when you gave guidance for the May quarter, there was a lot of uncertainty around the pandemic. And you guys guided accordingly in hindsight, extremely conservatively. I think your comment on the call last time was that you're building inventory, so you're assuming that your customers are building inventory. I guess as you look to the August quarter guide, was there a similar methodology used to inform this guide? And I guess specifically, there's a lot of consternation in the investment community about data center demand. And you seem to be arguing that in your fiscal fourth quarter remained strong and you expect it to remain strong in the calendar second half. I'm wondering if you could just share with us why you think that and why you're not as concerned as some perhaps in the investment community about inventory build?

Before COVID, we anticipated 2020 would see robust growth in cloud, especially with the rising demand for memory and storage driven by AI trends. The onset of COVID accelerated certain trends, such as the work-from-home economy, e-commerce, gaming, and video streaming, resulting in a significant increase in cloud demand. As we look to the second half of the year, the COVID situation introduces uncertainties, limiting our visibility, but we believe cloud demand will remain strong. We are in close collaboration with our customers to track their inventory and demand trends, and current data shows that customer inventories for cloud services are in a good position. In contrast, the mobile phone sector faces different challenges, including geopolitical factors and COVID-related issues, which might have led customers to accumulate additional inventory. For example, in April, following the COVID period in China, smartphone demand surged, prompting customers to prepare for a rebound in consumer demand. Thus, while the customer inventory landscape is mixed, cloud inventories look healthy, and the mobile sector is adjusting for anticipated demand and supply chain challenges. Overall, as we assess our fiscal first quarter, the situation resembles what we encountered in the last two fiscal quarters, and our guidance reflects our best understanding of these dynamics.

Good afternoon. Thank you for taking the question. I guess a question on gross margins. How should we be thinking about mix, particularly DRAM, as we move into the August quarter? And I guess what would love to hear, as part of that, what implied cost downs will look like? And really just trying to understand, the nice step up you're seeing, how much of that is mix versus cost down versus perhaps other?

Let me take a moment to focus on the third quarter. Gross margins improved in the third quarter as I mentioned earlier. The pricing environment in both DRAM and NAND, along with a better mix of higher-value products that carry enhanced gross margins, contributed to this improvement. Looking at high-value solutions, we anticipate similar trends in the fourth quarter, which supports a more positive outlook for gross margins for that period. While we do not provide specific details on pricing and cost forecasts for future quarters, we do consider both pricing adjustments and cost reductions, and overall, these factors are quite favorable. Additionally, in the third quarter, we incurred some expenses related to COVID-19, which included increased spending to manage early disruptions. Furthermore, we had to rearrange back-end production, leading to higher tariff expenses in the third quarter. We do not expect these issues to recur in the fourth quarter, which will further benefit our gross margins.

Just on CapEx. It seems like this year, there was some concern that maybe lowered it 1 billion. I guess, when you look at next year, I don't know where your starting point was. So I was wondering if you could walk us through some of your moving pieces. You talked about 5G as being the big tailwind. That makes sense. I'm curious what you would highlight that you're taking into account for next year on the other way?

The one thing to keep in mind is so CapEx spending this year had a fair amount of construction expense. And actually we drove the front-end equipment expense down quite considerably on a year-over-year basis. So as I said in the prepared remarks, it was down more than 40% in both DRAM and NAND. So, we cut back pretty heavily on the front-end equipment side this year. Next year, we would expect some of that to come back. In particular, we're going through a full rotation into our second-generation replacement gate that certainly will drive some cut back increases. And offsetting that, we'll have to look at construction and see what directionally we want to do there. I think we haven't firmed up on the CapEx plans quite honestly for the year. As you know, we maintain a lot of flexibility around CapEx. We take a hard look at the demand profile of bits over the next few years and we kind of manage the front-end CapEx accordingly to make sure that we're staying aligned with that. So, over the next couple of months, we'll continue to refine our outlook over the next year or two. And I think we'll be able to give you a better picture when we have our fourth quarter earnings announcement. I would say when we looked at coming in pre-COVID levels on CapEx front for front-end equipment, and now that we look at it now, it certainly has been cut back. And our expectation is that will impact kind of our bit supply in the calendar fourth quarter.

Congratulations on the solid execution. Last earnings call the team highlighted the supply production shift and mix from mobile to server DRAM to service the higher demand from your data center customers. Given the outlook for stronger data center demand, are you guys keeping the production mix more heavily weighted towards server DRAM? Or are you already starting to shift part of your DRAM production mix back to mobile?

We manage our mix on an ongoing basis by evaluating customer demand and making decisions regarding that mix. As you pointed out, we have shifted some supply from mobile to server applications. Currently, we are studying how trends are evolving and believe we are well-positioned to manage our mix. However, changes are necessary, and we will certainly make those adjustments in the future.

Thanks a lot. Sanjay, you talked about Huawei, I think twice or maybe three times. And I know you've been reshipping under the licenses, and the new restrictions are really on ASICs, not on standard products. So, is that comment really more around the fact that this is sort of the last extension of the commerce licenses? And so you won't be able to ship to them in another three months, and can you sort of quantify how much is your Huawei exposure right now? Thanks.

Thank you for your question. To clarify, regarding Huawei's placement on the entity list, we applied for and secured licenses for mobile and server shipments, but we do not supply to the networking side and have not sought that license. The entity list placement from several months ago did affect some of our outlook, but we have been operating under the licenses we have received. My comments today relate to last month's actions by the Commerce Department that will take effect next month. Consequently, we are already starting to see an impact in our fiscal Q4 as our customers respond to U.S. actions, and the situation with Huawei is still evolving. We do expect some impact concerning Huawei, particularly related to the foundries, but it also influences their overall business management and supply chain. These effects will persist into FQ1 and beyond, further complicated by changing inventory strategies among customers and market share shifts among smartphone manufacturers. Overall, we have improved our revenue diversity, significantly expanded and strengthened our product portfolio, and maintained strong design-in activities with all key players, especially with new products like UFS 3.1, LP5, DRAM, and multichip packages. We continue to collaborate with our customer ecosystem to address these impacts, but the specific comments regarding Huawei are tied to the recent U.S. government actions, which have led to customer responses that are influencing our outlook in FQ4.

I wanted to ask about customer inventory, I want to revisit that. To the extent that customers are wrestling with pretty unprecedented potential supply challenges, do you think they're building up buffer inventory to deal with that? We've seen single earthquakes in one region cause that to hit another in the past, now we’re dealing with rolling outages across multiple continents. Do you think customers may be building inventory? And if so, do you think memory sort of less or more impacted than other things from that? And I have a follow-up.

What I can share is that Micron has been focusing on increasing inventory for raw materials in our supply chain operations to ensure we are prepared to meet customer demand amidst global uncertainties related to COVID. The rising inventory levels are a common trend in the tech supply chain. Regarding our specific customers for memory and storage, as I mentioned earlier, some customers have indeed built inventory due to concerns about potential supply chain disruptions linked to COVID uncertainties, as well as trade tensions between the U.S. and China. These are unprecedented and uncertain times not only for us and the memory industry but also for our customer ecosystem. Customers are adjusting their inventory strategies based on the evolving market trends and their own inventory needs. This environment is continually changing, and we are working closely with our customers and making necessary adjustments. The key is to stay adaptable and agile. Over the first half of this calendar year, we have demonstrated significant adaptability and agility in our operations while continuing to achieve positive results.

Great, thank you for that. And then in terms of the strength that you guys are seeing in the cloud in the second half, would you differentiate it all by geography? I think you mentioned China being stronger. But is it any different China versus the rest of the world in cloud?

We won't provide a breakdown between China and the rest of the world. However, in general, we observe a consistently strong demand trend in the cloud for the second half of the year. In the long term, the cloud market is still in its early stages with robust growth potential. The integration of AI and 5G is creating smarter devices at the edge, generating more data opportunities, which fosters a beneficial cycle between cloud services and intelligent devices. Additionally, trends in industrial IoT, autonomy, and robotics indicate growth in both cloud and edge technologies. While there may be occasional fluctuations, the fundamental drivers for long-term cloud growth remain strong and consistent.

You mentioned two points during the call that I wanted to delve into. The first is regarding the delays in some shipments of semiconductor capital equipment. Do you think these delays are significant enough to impact memory prices? I'm not asking for specific figures, but do you believe the shipment timing was impactful enough to influence pricing? Secondly, at a high level, do you have any thoughts on the U.S. government's efforts to promote domestic manufacturing? With TSMC establishing operations in the United States, what potential impact do you foresee for your company in the future?

So regarding the equipment fees that you asked, let me be very clear that Micron did receive its equipment in time, because our equipment deliveries were rather early in fiscal Q3 toward our 1z technology RAM and DRAM, and of course, other aspects on demand front as well. So we did not say that equipment deliveries were delayed for us during FQ3. However, it is well known and has been talked about in the industry that given the various challenges due to COVID, such as logistics and transportation related challenges, as well as supply chain challenges, some of the equipment deliveries have been impacted in the industry. And, yes, for us in the future it is possible, given the challenges of COVID that some of our deliveries in the future may get impacted. But in the past we have been in good shape, overall, with respect to our receipt of equipment. Again because timing of most of that equipment delivery was such that we were able to actually escape some of the potential challenges in this regard. So from an industry point of view, if equipment deliveries get impacted, which has been talked about, there have been reports, equipment suppliers have talked about some of that as well, then obviously that impacts technology transition capabilities and therefore it can impact supply, perhaps some supply growth somewhat lower than pre-COVID expectations due to the difficulty in making sure that the equipment is delivered on time as well as equipment installed and equipment RAM is happening smoothly given all the travel considerations involved as well. So yes, to the extent that affects the supply growth and lessens the supply growth, it obviously impacts the industry supply and demand environment. We've talked about the demand due to COVID in certain pockets certainly has been less, particularly those pockets related to COVID. So we didn’t really comment on the pricing but obviously supply has an important role to play on the pricing front. Your second piece of the question regarding possible U.S. incentives for semiconductor manufacturing, let me first say that we are pleased that the U.S. administration as well as the Congress are considering incentives for the U.S. semiconductor industry. This just goes to highlight that U.S. semiconductor industry is extremely important to our economy today. Semiconductor really forms the foundation of the economy of the future, and also highlights the recognition of this importance by the officials in Washington DC, and really it's important that the U.S. maintains its global competitiveness and innovation capabilities. So from that point of view we are pleased that there are these considerations. The bill that is being put together, of course, a lot of details still has to be worked out and the bills have to be approved. So we will continue to monitor this. And from the point of view of memory, I think the important thing is that cost and scale in memory are extremely important considerations. Micron in this regard actually has a well-diversified footprint of front-end manufacturing across the globe. You know that we have fabs here in the U.S., in Manassas, Virginia, as well as in Utah and a state-of-the-art, best-in-class R&D facility in Boise, Idaho as well. And of course, we have R&D and manufacturing for memory in Asia as well. So we will continue to monitor these trends, but important considerations are scale, cost, and ROI on any investments are important. It's not just about government incentives. It's about managing the business in a healthy fashion, keeping in mind ROI considerations. And above all, it's extremely important that supply growth is managed in a cost-effective fashion, but also managed in a fashion to not disrupt the industry, to certainly not disrupt Micron’s supply plans and make sure that supply CAGR is aligned with demand CAGR. So while we welcome these incentives for the growth of the U.S. semiconductor industry and innovation agenda, we will continue to monitor this in a very disciplined fashion before we make any decisions in this regard.

Can you just talk about the linearity of bookings during the quarter to-date, sort of build all quarter, was there some volatility in there? And then you also mentioned that mobile and data center were the strongest end markets; were both of those stronger than expected?

The bookings were quite consistent throughout the quarter, with no surprises. The data centers performed well, while mobile was a bit weaker than we anticipated. Overall, I would describe the quarter as fairly consistent for us.

Most of the good questions have been answered. I just have a follow-up. I'm just wondering, Sanjay, what would it take for your customers to feel comfortable in signing a multi-year, multi-quarter contract? I remember when supply was tight back in 2016 and '17, the industry was highlighted longer-term contracts associated with enterprise customers. I think that has changed. And in that context, how do you see this coming back and a more peculiar part of the memory industry?

Mehdi, your question is quite relevant. Our customer base is very diverse, spanning automotive, data centers, PCs, smartphones, networking, industrial, and consumer sectors. Customer needs regarding supply discussions vary widely. Some customers handle it monthly, others quarterly, and we also have some supply agreements that last a year. Pricing decisions are typically not included in these contracts; they mostly revolve around supply, and we have ongoing conversations about pricing. The automotive sector, for example, often involves multi-year contracts. It varies significantly across markets, and as you know, our technology and product mixes are continually evolving. We aim to manage the length of contracts carefully and maintain a strong diversity among our customers. Our customers appreciate our supply and the product portfolio that Micron offers, recognizing us as the only company with NAND, DRAM, and 3D XPoint technologies, which allows us to provide innovative solutions with a better mix of technologies. This unique position influences our discussions about long-term plans, product roadmaps, and supply-related considerations. Since the industry changes frequently, multi-year contracts are typically more common in the automotive market, where older technology nodes are needed for extended periods. In faster-moving markets, the contracts tend to vary in length based on the customers’ end needs.

It's great to see the improvements in your SSD segment, both client and enterprise. First, what sort of percentage could QLC drives represent as a portion of your overall SSD mix next year, could it be 25% or more? And I'd appreciate hearing your perspective on the developments taking place in enterprise such as these. On one hand, your U.S.-based competitor has been adamant they're going to gain significant share in enterprise SSDs this year. Yet merchant controller manufacturers do enable cloud providers to design their own in-house enterprise SSDs rather than just relying off-the-shelf SSDs from OEMs. So I was hoping if you could just provide the opportunity that you see in enterprises SSDs this year versus peers, and how you see that playing out in the next 12 to 24 months, particularly as some of the new technologies that you're introducing and providing such as PCIe 4.0 become more mainstream? Thank you.

Thank you for your question. We are very satisfied with our performance in SSDs, as we achieved a record quarter and solid sequential growth. As we mentioned earlier, in 2020 we will be broadening our range of SSD solutions, launching NVMe options for both client and data center markets. As we introduce these new solutions and qualify them with customers, we expect to gain market share throughout the year. This has been the trend so far, and while we have been gaining share, it still remains relatively low. As we continue to release more products, with several already in progress and qualifications underway with customers, we anticipate ongoing opportunities for profitable share gains in the SSD market next year. Regarding QLC, we are also pleased with our advancements here. We are shipping QLC SSDs in the consumer market and have additional offerings that will help us capture future value in the PC and OEM sectors. QLC SSDs are also being utilized in read-intensive applications, replacing 10K HDDs. This shows that there are multiple market applications and opportunities for our SSDs. We have already surpassed 10% of our total NAND consumption in QLC, which presents a promising opportunity. We expect our SSD mix to continue to grow as we launch more new products in the coming quarters. Therefore, the percentage of QLC in our SSD mix will increase moving forward. Let me just add that QLC is obviously an opportunity that instead of three bits per cell, it has four bits per cell. So obviously, once done right and you really have all the borne cost taken care of on the product side, it gives you lower cost and therefore improved profitability opportunity as well. So we are certainly focused on increasing the mix of QLC. At the same time, TLC will remain the vast majority of the market for a considerable period of time.

Hi, thank you for including me. Congratulations on the strong results today. I have a follow-up question regarding the data center segment. It appears that the overall sentiment remains optimistic, particularly about the sustained demand in this area. However, there are some concerns in the market, especially among investors in hyperscalers, regarding a slight increase in inventory. I believe this concern is rooted in the events of 2018 when there were significant order cuts towards the end of that year and continuing into much of 2019. My question is: how has your communication evolved with hyperscalers? Are you engaging with them more frequently and closely to gain insights into their inventory levels? Additionally, how can you reassure stakeholders that data center demand will remain strong for an extended period, as we anticipate?

So first of all, I would say on the inventory side, pre-COVID, data center customers as well as other customers largely had inventories that had returned to normal levels. And certainly, supplier inventories were at normal level as well pre-COVID. And in the COVID environment, work-from-home environment has driven strong surge in demand on the data center front. And as we mentioned, we expect dimensions to continue to be healthy in the second half for data center as well. In terms of inventories in the data center market, yes, while certain customers may be carrying higher levels of inventory, again for the reason that I’ve mentioned earlier related to their own supply chain considerations, as well as the changing environment with respect to demand, but the point is that compared to 2018 or 2019 environment, customer inventories are really at a much better, much healthier level. This is not like a 2018, 2019 situation, even if certain customers are carrying some higher levels of inventory, again given the uncertainties around COVID. And another point I would say is that while COVID does give us lower visibility and does bring about uncertainty, not just for us but for our customers as well, cloud is an area where the long-term dimensions, as I mentioned, are secular in nature overall. So memory and storage, given the kind of applications that customers, our data center customers, and hyperscalers are working on, those are requiring more memory and more storage. So the longer-term trend continues to be healthy. In the near term, yes, I mean COVID does have unprecedented amounts of challenges and uncertainty in the entire tech ecosystem, and we're doing our best to continue to work with our customers. Our relationships today, since you were asking about those, are certainly a lot closer than they were in the previous timeframe. I would say that even hyperscale customers have become somewhat more sophisticated in terms of understanding the memory dynamics and improving their own supply chain operations. So it's really a two-way relationship. We do work closely together with them. Having said all of that of course, our visibility cannot be perfect in this area. We continue to focus on working closely with the customers, understanding the requirements and planning our supply chain accordingly. And what also helps is that the markets are quite diverse for us. I mean yes, cloud is a strong driver of growth for the business, but also we are well diversified with a strong mobile footprint as well as PC and between DRAM and NAND. And as we talked about, diversified into the gaming side with new gaming consoles coming in, needing more DRAM, twice as much DRAM, the new gaming consoles. So the diversity of the business is certainly a helpful factor for us to manage through some of these uncertainties.