Micron Technology Inc (MU) — Q2 2021 Earnings Call Transcript

Thank you, and welcome to Micron Technology's fiscal second quarter 2021 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 the 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 the GAAP to non-GAAP financial measures can 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 the 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 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. Micron delivered strong fiscal Q2 results above our original projections, driven by solid execution and higher than expected demand across multiple end markets. The DRAM market is in severe shortage and the NAND market is showing signs of stabilization in the near-term. The execution from the Micron team and these strengthened conditions enabled us to set revenue records for mobile MCPs and automotive products and to reach normal levels of inventory ahead of schedule. Following last quarter's introduction of 176-layer NAND into volume production, in Q2, we began volume production on our 1-alpha DRAM node, solidifying our technology leadership in both DRAM and NAND. We are in an excellent position to capitalize on the strong demand for memory and storage, driven by artificial intelligence and 5G across the data center, intelligent edge, and user devices. I will start with an update on our operations. The Micron team is doing everything we can to meet customer demand despite the challenges of the pandemic, non-memory component shortages in the electronics industry, and disruptions that occurred in our Taiwan fabs in December. We are confident that our COVID-19 safety protocols will allow us to continue at full production levels, and we are encouraged to see vaccines become increasingly available around the world. Micron has been able to mitigate the impact of broad electronics industry shortages to our production output through our proactive supply chain and inventory management strategies. Investments made over the last several years in facilities infrastructure allowed us to minimize lost output caused by the power outage and earthquake at our Taiwan operations in December. Recently, due to the drought in central Taiwan, there has been a reduction in the water supply for one of our DRAM fab sites. To mitigate the water shortage, we are accelerating our water conservation efforts and have secured alternative sources of water. At this time, we do not see an impact on DRAM production output. However, this is a developing situation that we are monitoring closely for the next several months. Now turning to technology and products. We continue to make solid progress on our key goals; first, to deliver industry-leading technology and improve our cost structure; second, to bring differentiated products to market and improve our product mix; and third, to grow our share of industry profits while maintaining stable bit share. I am proud to report that Micron was one of the top 20 U.S. patent registrants in 2020. This achievement attests to the brilliant innovation of our teams and is proof of the tenacious focus we have placed on technology and product leadership over the past several years. Our industry-leading 1-alpha DRAM and 176-layer NAND nodes are in volume production and are ramping as planned. We expect these nodes to be our workhorse for fiscal year 2022, fueling our bit growth and contributing to our long-term cost reduction goals. Across both DRAM and NAND, we target our long-term cost reductions that are in line with the industry. In products, Micron is on track to support customers as they begin to introduce DDR5 in the fiscal second-half of 2021. We are also driving an increased mix of QLC NAND, which helps to make SSDs more cost-effective and accelerates the replacement of HDDs with SSDs. QLC SSD adoption continues to grow, and we achieved a record high QLC bit mix in Q2. Earlier this month, Micron took a decisive step to exit 3D XPoint development and manufacturing. As mentioned on our recent 3D XPoint update call, Micron is prioritizing investment toward other memory solutions that use the Compute Express Link, or CXL, and we are excited about addressing this market opportunity with differentiated products. Most of the R&D teams previously working on 3D XPoint have already been transitioned to other programs, including accelerating introduction of CXL-enabled memory products. This change will allow Micron to better address the future needs of our data center customers and also drive higher ROI and shareholder value. We are running an open process to identify the best acquirer for the Lehi fab, which provides an excellent location for advanced foundry, logic, and analog semiconductor manufacturing, and expect to finalize the sale within calendar 2021. We anticipate that the overwhelming majority of the highly skilled Lehi manufacturing team will find strong career opportunities with the buyer. Turning to end markets. In data center, AI and data-centric workloads will drive long-term growth, with memory and storage becoming an increasing portion of server BOM cost. Micron is positioned for success in this market, with a broad portfolio of high-quality and power-efficient products. Enterprise demand, which had been anemic for the last few quarters, is starting to improve as IT budgets increase in anticipation of economic recovery. Enterprise DRAM bit shipments grew sharply quarter-over-quarter but were still down year-over-year. Cloud DRAM bit shipments also grew quarter-over-quarter, and we anticipate robust demand from U.S. hyperscale customers, especially as we enter the second-half of calendar 2021. In data center SSDs, revenue declined sequentially as customers in certain segments reduced their higher than average inventory levels. We are continuing to expand our data center NVMe SSD portfolio with internally developed controllers and have new product introductions planned in the coming quarters. In PC, we continue to benefit from the remote work and learning trend that drove healthy notebook and Chromebook demand in fiscal Q2. Micron delivered record PC DRAM bit shipments despite pockets of non-memory component shortages experienced in the PC OEM supply chain. We also began sampling 1-alpha-based DDR4 products. In client SSDs, we are on track to begin customer qualification of our next-generation client SSDs using 176-layer NAND in the fiscal second-half of 2021. By the end of calendar 2021, we expect to cover multiple segments of the market, including consumer, value OEM, and premium OEM with our 176-layer-based client portfolio. In graphics, revenue declined quarter-over-quarter from an exceptional fiscal first quarter, which benefited from the launch of new gaming consoles. Nevertheless, fiscal second quarter revenue grew significantly year-over-year. Micron has an excellent position in this market with a broad product portfolio and deep customer partnerships. In mobile, revenue grew 21% sequentially, driven by strong execution, coupled with better-than-seasonal demand, due to continuing recovery in smartphone volumes. We achieved record MCP revenue and nearly tripled our LP5 revenue sequentially. We have also begun sampling the industry's first 1-alpha LPDRAM and 176-layer NAND with mobile customers. Smartphone unit sales in China have been robust, and 5G momentum is continuing. In auto, we delivered a second consecutive record-revenue quarter as auto manufacturing recovers around the globe and as memory and storage content per vehicle continues to grow. We have more demand than we can supply, and we are working diligently with our customers to address their memory and storage needs. We are also advancing our product portfolio targeted for automotive applications. In Q2, we completed the qualification of our auto-grade LP5 and began sampling the industry's first automotive LP5 that is hardware-evaluated to meet the most stringent Automotive Safety Integrity Level, ASIL D. Turning to the market outlook, calendar 2021 is shaping up to be a solid year, and our overall outlook across DRAM and NAND has improved since our last earnings call, with broad strength across nearly all end markets. The pandemic has driven changes in our economy that we believe will not only benefit us this year but also serve to accelerate the digital transformation of the economy and drive new opportunities for Micron. Recovery from the pandemic and pent-up demand are expected to drive strong demand growth in markets such as enterprise, cloud, desktop PCs, mobile, auto, and industrial. Data center demand is expected to be strong in calendar 2021, particularly in the second-half of the calendar year, due to a combination of factors. First, enterprise demand has started to come back as the economy recovers and is expected to further strengthen through the calendar year. Second, our opportunity at cloud service providers will continue to strengthen through calendar 2021, driven by robust demand for their solutions and offerings, as well as secular growth in AI and data-centric workloads. And finally, the introduction of new CPUs will support more memory channels and higher-density modules, contributing to increases in server memory content across both cloud and enterprise. Forecasts for calendar 2021 PC unit sales have increased from three months ago and are expected to approach an average of one million units per day. There is robust demand in notebook PCs, especially Chromebooks. We also expect the desktop market to improve as workers gradually return to the office this year. Mobile unit sales are expected to show robust growth this year, and we also expect to benefit from higher content in 5G phones, which are forecast to double in calendar 2021 to more than 500 million units. Auto unit sales are expected to grow significantly from last year, while secular memory and storage content growth trends remain strong as EVs proliferate. The strong demand across various end markets, combined with disruptions at certain logic and foundry semiconductor producers, has resulted in a shortage of these non-memory ICs for our customers, and we believe memory demand would have been even greater without these shortages. In DRAM, due to the stronger demand, we now expect calendar 2021 bit growth at 20%, above our prior forecast of high teens. This growth builds on calendar 2020 bit growth, which was in the lower 20% range. As a result of disciplined CapEx investments since the start of the pandemic, we expect industry DRAM supply to be below demand. As a result of the strong demand and limited supply, the DRAM market is currently facing a severe undersupply, which is causing DRAM prices to increase rapidly. We see the DRAM market tightening further through the year. In NAND, we now expect calendar 2021 bit growth in the low to mid-30% range, above our prior expectation of 30%. While we are seeing stabilization in near-term pricing, the elevated levels of industry CapEx are a cause for concern, and more CapEx cuts are needed to allow for healthy NAND industry profitability. Long-term, we expect a DRAM bit demand growth CAGR of mid to high teens and a NAND bit demand growth CAGR of approximately 30%. Turning to Micron supply, we target our long-term bit supply growth CAGR to be in line with the industry bit demand growth CAGR for both DRAM and NAND. However, there can be year-to-year variability caused by node-transition timing. In both DRAM and NAND, we expect our calendar 2021 bit supply growth to be below the industry demand growth, and we have used our inventory to add to our bit shipment growth this year. We are targeting fiscal 2021 CapEx to be approximately $9 billion to support our long-term goal of maintaining a stable share of industry bit supply. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered very strong fiscal second quarter results, with solid revenue growth, margin expansion, and positive free cash flow. Market conditions improved throughout the quarter, and DRAM and NAND volumes, as well as DRAM pricing, were above our original expectations. Before discussing the details of our fiscal second quarter results, I want to discuss the financial impact of our decision to cease 3D XPoint development and manufacturing. As a result of this decision, we wrote off $49 million of 3D XPoint inventory in our fiscal Q2 GAAP financial results. This inventory exceeded our needs to fulfill customer commitments. We remain committed to fulfilling our customer commitments to manufacture 3D XPoint wafers and currently expect modest revenues, consistent with recent history until the end of calendar 2021. Our Lehi fab was re-categorized at the end of fiscal Q2 as held for sale on our balance sheet, and beginning in fiscal Q3, depreciation expense for the building and related equipment will stop. As a result, fiscal Q3 gross margins will benefit from approximately $75 million of lower depreciation expense. The remaining costs will continue until the closing of the sale of our 3D XPoint fab in Lehi, Utah. As we discussed on our 3D XPoint update call, Micron will continue to maintain our current R&D investment level and redeploy the 3D XPoint R&D teams to work on technologies and products that align with our vision for memory and storage. We have already made progress on this front since our update call. Now, moving on to our results for the fiscal second quarter. Total fiscal Q2 revenue was approximately $6.24 billion, up 8% quarter-over-quarter and up 30% year-over-year. We saw solid growth in most of our end markets, notably in the data center, mobile, PC, auto, and industrial markets. Fiscal Q2 DRAM revenue was $4.4 billion, representing 71% of total revenue. DRAM revenue increased 10% sequentially and was up 44% year-over-year. Bit shipments grew in the high single-digit percentage range sequentially, and ASPs were up slightly quarter-over-quarter. Fiscal Q2 NAND revenue was approximately $1.7 billion, representing 26% of total revenue. NAND revenue increased 5% sequentially and was up 9% year-over-year. Bit shipments increased in the high single-digit percentage range sequentially, while ASPs declined in the low single-digit percentage range quarter-over-quarter, showing an improvement in trajectory in the NAND pricing environment. Now, turning to our revenue trends by business unit. Revenue for the Compute and Networking Business Unit was approximately $2.6 billion, up approximately 4% sequentially and up 34% year-over-year. Revenue growth was broad-based and driven by a combination of volume and pricing across data center, networking, and client. Revenue for the Mobile Business Unit was $1.8 billion, up 21% sequentially and up 44% year-over-year. Mobile demand remains strong as 5G momentum increases and the mobile market continues to recover from the impact of the pandemic. Revenue for the Storage Business Unit was $850 million, down approximately 7% from the prior quarter and down 2% year-over-year. Both SSD revenue and component revenue declined sequentially. We expect our storage revenue to increase as we introduce our 176-layer client SSDs into volume production. Finally, the Embedded Business Unit generated record revenue of $935 million, which was up 16% sequentially and 34% year-over-year, driven by strong industrial demand and record auto revenue as demand recovered from pandemic-related shutdowns. The consolidated gross margin for fiscal Q2 was 32.9%, up 200 basis points from the prior quarter. DRAM price increases and cost declines drove the margin expansion in fiscal Q2. For fiscal 2021, due to product mix changes, we now expect that our DRAM cost reductions will be somewhat higher than our prior expectations of mid-single-digits, while our NAND cost reductions will be somewhat lower than our prior expectation of low to mid-teens. Operating expenses were $797 million in fiscal Q2. Operating expenses were slightly lower than our expectation as prequal expenses were less than we had anticipated. We continue to expect operating expenses to increase in the second-half of the fiscal year as we incur increased prequalification and labor expenses. As always, we remain committed to tightly managing expenses. Fiscal Q2 operating income was $1.3 billion, resulting in an operating margin of 20%, compared to 17% in the prior quarter and 11% in the prior year's quarter. Fiscal Q2 EBITDA was $2.8 billion, resulting in an EBITDA margin of 45% compared to 43% in the prior quarter and 40% in the prior year. Net interest expense improved to $24 million, and we expect it to be approximately $25 million in fiscal Q3. Our fiscal Q2 effective tax rate was 10.1%. We expect our tax rate to be in the high single digits for fiscal 2021. Non-GAAP earnings per share in fiscal Q2 were $0.98, up from $0.78 in fiscal Q1 and up from $0.45 in the year-ago quarter. EPS included one cent of non-operating income related to gains from investments in our venture arm, Micron Ventures. Turning to cash flows and capital spending, we generated approximately $3.1 billion in cash from operations in fiscal Q2, representing 49% of revenue. Net capital spending was approximately $2.9 billion during the quarter. Through the first six months of the fiscal year, we have deployed approximately $5.7 billion or slightly less than two-thirds of our expected annual capital spending. As we look ahead to the second-half of the fiscal year, we expect capital spending to decline from the first-half and continue to target approximately $9 billion in total for fiscal 2021. As a result of our strong cash flow from operations of $3.1 billion, we generated positive free cash flow of $174 million despite the relatively high level of capital spending in the quarter. The increased cash flow was driven by strong revenue growth and efficient working capital management. We expect free cash flow to continue to improve in the second-half of the fiscal year, driven by continued revenue growth, higher margins, and lower capital spending. While we did not have share repurchases in fiscal Q2, we will begin repurchasing shares in the third quarter and remain committed to returning at least 50% of annual free cash flow to shareholders in fiscal 2021. Ending fiscal Q2 inventory was $4.7 billion or 99 days, which reflects the inventory reporting changes we announced on last quarter's earnings call. We ended the quarter with total cash of $8.6 billion and total liquidity of approximately $11.1 billion. Fiscal Q2 ending total debt was $6.6 billion. Now, turning to our outlook. DRAM prices have started to strengthen, and we expect the market to remain undersupplied this calendar year. In addition, NAND conditions are stabilizing. These improving market conditions, combined with our significantly stronger competitive position, set us up to generate stellar financial results in the second-half of the fiscal and calendar year. While demand is strong across both the DRAM and NAND markets, our supply is now constrained as our inventories are very lean, particularly in DRAM. This restricts our ability to serve potential upside to demand. On the cost side, we are facing additional headwinds due to foreign exchange rates and drought mitigation impacting our Taiwan operations, and as a result, our fiscal Q3 DRAM costs could be sequentially up. We are also assuming that there is no impact to our production output due to the Taiwan drought. With all these factors in mind, our non-GAAP guidance for fiscal Q3 is as follows. We expect revenue to be $7.1 billion, plus or minus $200 million; gross margin to be in the range of 41.5% plus or minus 100 basis points; and operating expenses to be approximately $875 million, plus or minus $25 million. Finally, based on a share count of approximately 1.16 billion fully diluted shares, we expect EPS to be $1.62, plus or minus $0.07. In closing, as we reflect on our financial performance for fiscal year 2020, which was a trough year for Micron in this cycle, and compare it to the prior trough in fiscal year 2016, I am amazed by how far we have come. From fiscal year 2016 to fiscal year 2020, we substantially improved our EBITDA margin, and our revenue grew by more than 70%. During this time, we delivered average gross margins of 40%, EBITDA margins of 50%, and return on invested capital of 20%. We believe Micron's strong performance will continue cross-cycle and outperform the broader semiconductor industry. I will now turn it back to Sanjay.

Thank you, Dave. None of our achievements are possible without the great work of our world-class Micron team. We seek to recognize and reward team member performance and to do so fairly. Last week, we announced that we achieved comprehensive global pay equity in total employee compensation across base pay, bonuses, and stock rewards for women and all underrepresented groups at Micron. Pay equity is a key pillar of our diversity, equality, and inclusion strategy and core to creating an environment that attracts and retains the best talent. We continue to strengthen Micron's inclusive, values-driven culture, which is an integral part of our broader transformation. We have come a long way since Micron's founding as a startup in Boise, Idaho more than 40 years ago, and today we are a global technology and product leader. As the United States' only remaining memory and storage manufacturer, we welcome the U.S. government's commitments to enhance America's long-term technology leadership and competitiveness in semiconductor manufacturing. This emphasis on our industry, which is reflected by governments globally, is a recognition of the critical role we play in today's digital economy. Memory and storage represent approximately 30% of semiconductor industry revenue today, up from 10% in the early 2000s, and DRAM and NAND are growing in importance as a critical enabler of the most advanced technologies driving economic growth and well-being. Micron's innovation over the decades has created a strong foundation, and we look forward to delivering value for all our stakeholders as the data economy accelerates. Thank you for joining and for your support of Micron. We will now move to Q&A.

Yes, good afternoon. Sanjay, thank you for taking the question. I guess I was hoping you could compare and contrast what you're seeing this cycle versus previous cycles on the DRAM side? You're talking severe shortages yet, we're really not seeing anyone up-ticking on CapEx. And if you ordered a tool today, you wouldn't get it until Q1 next year at the earliest. So I guess, how are you thinking about things as well as what kind of changes are you seeing in terms of customer behavior and how might that affect your business going forward? Thank you.

Thank you, C.J. And in terms of how we see the demand environment today versus what you refer to a few years ago, no question that at that time, the demand was driven with the increases in cloud primarily and today the demand drivers are much more diverse. We are seeing shortages across all end markets. The demand is strong across all end markets. When you look at cloud, while cloud may have gone through some digestion over the course of last couple of quarters. When we look ahead, cloud demand is expected to be healthy, given the refresh with the new CPUs that are driving greater content in the servers. Similarly, mobile with 5G is driving much greater content, a first 5G phone and on a year-over-year basis, the number of smartphones being sold are expected to increase on a double-digit basis as well. So, a strong driver of growth on mobile phones as well. Automotive experienced, of course, big decline last year. But on a year-over-year basis, a mid-double-digit range growth in automotive number of units sold. So, automotive is also driving greater content increases as well as unit increases. So, overall, the industry is experiencing strong demand virtually across all end market segments. The CapEx has been disciplined, particularly in DRAM over the course of the last couple of years, and the environment is one of severe undersupply. So, we are very excited about the opportunities ahead. And we absolutely believe that Micron in this environment in terms of demand and supply considerations and our own execution from a technology point of view, having industry-leading edge, 1-alpha node industries first as well as having industry-first 176-layer node, we are well-positioned to drive our growth ahead and really well-positioned to deliver stellar financial results over the course of the next several quarters. And in terms of our customers, a question that you asked as well. I mean, customers across the board are seeing that memory DRAM is in short supply and that does affect some of the lead times that we expect from those customers and by and large, those customers are supportive of those lead-time considerations. And in this environment of extremely tight supply, the flexibility that is available for customers to switch between products is also becoming more limited. And this then does require customers to have longer lead times as well.

Yes. Sanjay, Dave, thanks for letting me ask questions. Congratulations on strong results. Sanjay, just sticking on the CapEx side, you're characterizing the DRAM market as a severe shortage, the NAND market is stabilizing, which is sort of an uptick of how you've been characterized in the market over the last couple of quarters. You're under growing industry bids and you've got sort of an industry-leading cost position, especially in DRAM with 1-alpha. And yet when I look at your full-year CapEx versus what you've spent fiscal year-to-date, you're going to be down over 40% in the second-half of the year. Why not get a little bit more aggressive on CapEx? What would you need to see? And at these levels, can you maintain your goal of being in line with industry bit share at these CapEx levels?

So, I think it is important to understand that we do remain disciplined with respect to CapEx. We want to make sure we manage it prudently. Our goal is that over the longer term in terms of supply growth CAGR to be aligned with the industry demand growth CAGR. And we have made prudent decisions over the course of the last few years in terms of CapEx investment. If you look at our fiscal year 2021 CapEx of approximately $9 billion, this is really almost the highest CapEx that the company has spent in its history, and we are putting that into positioning us well for the future in terms of creating more cleanroom expansion, but also investing in leading edge technologies, which as we look ahead will drive our supply growth with our 1-alpha node in DRAM as well as with our 176-layer NAND node. So, even last year, while the industry was going through a trough period, Micron actually took the steps to invest for building for the future strength of the company. So, all in all, we believe that our bit share in the industry would stay stable. And overall, it is a good environment for us to operate in where our demand growth and our supply growth on a CAGR basis is aligned. Yes, from quarter-to-quarter, there can be variations, but the most important thing is that long-term supply growth CAGR is managed in a disciplined fashion. And this is what is Micron's focus, and we believe we are well-positioned. As I said before, well-positioned to deliver stellar results over the course of the next several quarters.

Thanks a lot. I guess I also had a question on CapEx. Dave, given what you're guiding the back half of the year to, you're going to basically be exiting the year like annualizing roughly $6 billion in CapEx, something like that. So, it requires a pretty big ramp just to get to that like 30% capital intensity number for next year that you've been kind of talking about. So, is that still the right number to think about that you can get to like low 30s capital intensity for fiscal 2022? Because there's just not a lot of slots that you can get right now, even if you decide that you want to spend more money, those tool shipment slots aren't even really free until the start of next year or so? Thanks.

All right. Yes, I mean, keep in mind that CapEx can be a little lumpy. There are times where we need to make the investments ahead of our node transitions and though sometimes can get more consolidated into a couple of quarters. And I think that's essentially what you're seeing in fiscal 2021. We're not ready to talk to numbers about our fiscal 2022 yet. We haven't finished fiscal 2021, and we need to do that before we kind of formulate the plan. But I would tell you, over the long-term, we feel very comfortable with our target CapEx spend of low 30s or 30% to 35% of our revenue in terms of CapEx. As Sanjay talked about, we take a very long-term view of CapEx and align that CapEx investment to make sure that supply and demand are in balance for us and we'll continue to do – to approach it that way.

Great. Thank you. If I look at the sort of quarter-on-quarter bit growth for DRAM, you've given the last four quarters, I get to 40% plus type growth in February versus supply that you're sort of talking about less than 20%, I think. So, obviously, there is some deceleration implied there that you unwound inventory a little bit in February. I know you talked about that a little bit after the pre-announcement, but maybe just give us a little bit of color on how you got to that bit growth and how that affects the next couple of quarters?

Last year, we noted that our supply growth exceeded both industry supply and demand growth, which allowed us to utilize our lower inventory effectively this year. However, our supply growth for this year is projected to be lower than the industry's demand growth. We have recently revised our industry demand growth estimates to about 20% for the 2021 calendar year. Consequently, our supply growth will be somewhat less than the industry's. Additionally, we have reduced our DRAM inventory to meet increasing customer needs. Looking forward, our supply growth will primarily be driven by our 1-alpha technology in DRAM, which we plan to ramp up over the next few quarters. This technology will play a crucial role in our bit growth for fiscal 2022. As we introduce products using this technology, getting them qualified with our customers is essential, and our focus is on ensuring this ramp-up occurs in time to meet customer demand growth throughout the remainder of the calendar year.

Okay that makes sense, but I am I right in thinking that there is an implied kind of decline in kind of sequential bits as you moved a lot of inventory in February, you don't have that inventory to move in May?

Our inventory in DRAM is currently very lean, and moving forward, growth will come from our 1-alpha node. It's important to note that while there may be fluctuations from quarter to quarter, our long-term goal is to maintain a stable market share through technology transitions, which we've successfully achieved with our 1z node being the first of its kind in the industry, and now with the 1-alpha node, which is also the first in the industry. We are focused on these technology transitions to ensure our long-term demand and supply bit growth rates align with customer demand growth. Fluctuations can occur from quarter to quarter based on the timing of these transitions. Additionally, year-over-year growth in the second half of the year will be lower compared to the first half.

Hey. Thanks guys. Just a bit of a longer-term question. So, Sanjay/Dave, if things continue to be strong for hopefully several quarters like you guys are talking about, your cash pile is going to grow fairly substantially. So, theoretically speaking, from sitting here a year or a year and a half out, what are you thinking about as far as the usage of that cash going forward? And could we see a dividend potentially in the future?

Yes, our current strategy for returning cash to shareholders is through stock buybacks. In the second fiscal quarter, we did not repurchase any stock, nor did we in the first quarter, mainly because our cash flow was negative and we needed to safeguard our net cash position. However, as mentioned, we anticipate strong cash flow in the latter half of the fiscal year, and we expect the business to generate solid free cash flow over time. Therefore, our primary focus will be on buybacks, as we plan to return at least 50% of our free cash flow through this method, and historically we have returned even more. There are some considerations on the balance sheet regarding convertible securities and debt that might also require some of that cash. Regarding dividends, we have not yet discussed that with the Board. It is certainly a possibility, but we need to get through this year and have discussions with the Board to determine if it's feasible.

Great. Thank you for taking the question. Dave, you're guiding gross margin up about 900 basis points sequentially for the May quarter. You talked about the exit from 3D XPoint driving lower depreciation. I think it was $75 million. You also talked about DRAM costs potentially being up due to FX and the drought in Taiwan. But outside of those two items, how are you thinking about costs in your NAND business given the transition to second-gen replacement gate and what are your thoughts on pricing for both DRAM and NAND? I think for DRAM, most of us are expecting 10%, 15% pricing increases. On the NAND side perhaps up low single-digits, but how are you guys thinking about pricing and how are you thinking about sustainability of pricing into the second-half? Thank you.

Thank you. As mentioned, we expect a $75 million benefit in the third fiscal quarter from the halt in depreciation expenses in Lehi, which will positively impact the following quarter, possibly even more than anticipated. This will also contribute as a benefit in the fourth fiscal quarter. Regarding DRAM costs, there are several factors at play. The drought mitigation is creating some challenges with our DRAM costs. Additionally, due to the tightness in our supply chain, we're experiencing increased spending on the back end. Also, as highlighted earlier, foreign exchange has posed a challenge, particularly with the Taiwanese dollar, which has appreciated about 5% this year. These issues are leading to a slight rise in costs, but we believe this effect will be temporary, lasting one or two quarters. We're enthusiastic about the 1-alpha node, which offers an excellent cost structure and will serve as an important component for us in fiscal 2022, helping to lower DRAM costs. For NAND, we anticipate cost improvements next quarter consistent with our annual cost reduction expectations, which indicates a low double-digit decrease year-over-year. This will positively affect our gross margins. Gross margin guidance will depend on pricing and product mix, and while we can't provide precise figures, we are confident about the pricing landscape in DRAM due to the tight supply conditions. We remain cautiously optimistic about NAND pricing due to recent stabilization, but I prefer not to provide further comments on pricing at this time.

Good afternoon. And great job on the quarter's execution. Just given the DRAM tightness and what appears to be tightness in literally all of your end markets, is the team you allocating your production mix, let's say from mobile toward more higher growth, higher margin segments of the market like enterprise and cloud and gaming as you move towards the second-half of the year, especially on your view of strong cloud demand in the second-half, improving enterprise trends, improving gaming trends in the second-half of the year? Is there any reallocation on the product mix in terms of wafers that you guys are starting today?

The lead-time for wafer production typically falls within a two to three month range. When wafers start today, they are usually shipped to customers three to four months later, after accounting for assembly and testing. In the current tight market environment, it is crucial for us to plan our wafer starts and allocate them to various end markets effectively. Our team actively collaborates with customers to understand their demand mix, not just the overall bit demand, but also the specific types of products required. This alignment is vital as we need to ensure our wafer starts meet customer expectations several months in advance, considering the cycle-time involved. We are continually managing this mix and have observed supply shortages across all end market segments and DRAM nodes. This situation underscores the importance of understanding lead-times and the flexibility customers have in switching between product types, which is currently more limited. Previously, with higher DRAM inventory levels, this management was easier; now, with lean inventory, it is a constant focus for us at Micron. Our supply chain team, business units, and sales teams have been effective in working with customers to meet market demands, and this effort is reflected in our inventory management for both DRAM and NAND. We are also prioritizing SSDs and multi-chip packages in our push towards higher density solutions, as these factors are increasingly important in this tightening supply environment.

Yes, thanks for taking the question and also congratulations on the strong execution. I wanted to ask you a little bit about the longer-term secular growth drivers in the server DRAM market. How do you see kind of content growth on a per server basis progressing? And I know you've talked about CXL, what's the thoughts on what CXL means to that equation and when that starts to matter? Thank you.

And so in terms of server content, as we mentioned in the prepared remarks with the new compute platform architectures and the processors that are being introduced, they are all leading toward more cores, more channels, and greater usage of higher density modules. And of course, the end market applications when you look at, those workloads are becoming more and more data-intensive, more AI-driven. This ultimately drives for greater need for data, and greater attach rate, and greater content on a per server basis. So, enterprise and cloud combined, really when you look at CAGR in terms of demand growth, expected to be a stronger CAGR in terms of big demand growth versus the average of the market. So, this is definitely one of high growth areas. The average content growth continues to be very strong and at a strong clip in terms of gigabytes per CPU, when you look at it for DRAM that is more like in – on a CAGR basis is more like 20% average capacity growing on a per server basis, growing from something like 200-gigabytes per CPU to growing to 300-gigabytes per CPU over the course of the next two to three years. So, DRAM has strong growth and of course, same for SSD as well in terms of cost of ownership benefits that SSDs provide as well. And CXL is a new emerging trend, and this will create a greater opportunity for differentiated solutions. As we mentioned earlier, these are opportunities that we believe we'll be very well-positioned to capture with our emerging technology solutions that we are working on which we believe will provide higher ROI as well as high-performance solutions for our customers. So, CXL is again a development where Micron will be well-positioned to really address the memory hierarchy needs of our customers as they evolve over the course of the next few years.

Yes. Just couple of follow-ups for me. I'm going to go back to inventory. Obviously, your commentary about the supply and demand environment suggests that prices are on the rise, but perhaps you want to lean your inventory or you want to continue to reduce because that inventory is now really fungible for new application that you're going to be shipping to in the second-half. Is that the right way to think about this?

As it relates to our inventory, it's pretty lean at this point. I mean all the inventory that you're seeing is either WIP or raw materials. There is a bit of finished goods, but it's just the amount of finished goods we need to stage to meet the customer demand. So, I think we're not in a position to lean it out anymore. We are quite lean at this point.

Okay, got it. So, there is no fungibility question. And then just moving on to NAND and Sanjay, I see the same demand dynamics that are making you very bullish on DRAM also applied to NAND as a matter of fact CXL could be a material catalyst for NAND. What is it with your underlying assumption that is still keeping your long-term NAND bit growth to 30%? There is a ton of data created and some of these architectural changes could actually be good for storage especially SSDs. And I'm just curious why you're not as upbeat as end market data points would suggest?

The long-term compound annual growth rate for DRAM is approximately 30%. This is something we continually assess in collaboration with our customers, and we revise our estimates as necessary. Currently, our projection for long-term DRAM growth remains around 30%. It's important to note that when examining price elasticity trends in DRAM and the growth following the pandemic, as well as the cost advantages of NAND in the data center market and the impact of 5G on more complex smartphones, the demand for NAND appears strong. The key factor to observe is the need to align supply management with demand expectations. Industry capital expenditures should be better managed to correspond with long-term demand considerations. I must clarify that when I mentioned the 30% CAGR for demand growth, I intended to refer to NAND, not DRAM. For DRAM, we anticipate long-term demand growth in the mid to high teens percentage range.

Good afternoon, Sanjay and Dave. And thanks for taking my question. This one is more related to Dave. You talked about DRAM costs in the May quarter potentially being up because of a couple of factors, but you also took the full year guide for costs and so that there could be a bit better. Is that a comment on August costs accelerating and being better there? Or can you just walk me through the dynamics of how you're seeing costs up in May and then the full year a little bit better in terms of overall costs?

First of all, good question, Tom. We saw much better costs in the second fiscal quarter for DRAM, which really influenced the overall full-year costs to be higher. This was more related to mix than you might think, but that was what led to the improvement on the cost side. Did I say higher? I meant lower; yes, costs look to be lower. As for the upcoming quarter in August, we're not quite ready to provide an expectation, but it seems likely that there won't be an increase in sequential cost and it will probably be slightly lower.

Hi, thank you for fitting me in. Sanjay, I have a question about the shortages and how you are responding to the challenges in planning and allocating wafers. We’ve heard some semiconductor companies are changing their order cancellation policies from 45 days to 90 days, and some are saying there will be no cancellations allowed. How are your long-term arrangements with key customers evolving because of this, and how is Micron adapting to these changes? Could you share your insights on Micron's approach?

We are working closely with our customers across all our end markets. Lead times for supply are increasing, and customers are beginning to understand that the flexibility regarding their bit demand is becoming more limited. This is due to both our tight supply situation and the overall constraints in the semiconductor industry concerning materials and capacity. Our supply chain team has performed remarkably well over the past year, securing materials and capacity early. Although we are facing tightness, we can still meet customer requirements, though with less flexibility than before. As mentioned, some of the capacity procurement does create cost pressures for our outlook in the second half of the year, which is reflected in our guidance for fiscal Q3. Our customers recognize the need for close collaboration in this environment, and our teams are effectively managing this situation. This close partnership will be essential not only in the upcoming quarters but also moving into 2022, as we are confident in the demand for that year. As the world recovers from the pandemic, global economies are expected to experience strong growth, which will drive increased technology demand. Vaccinations are progressing in the U.S., with the rest of the world expected to follow later in the year. Hence, growth is anticipated in both 2021 and 2022, and we feel positive about the demand drivers leading into that time frame. Working together with our customers to manage product mix and supply requirements will be a key focus beyond just the next couple of quarters, extending well into 2022.

Thank you, Sanjay.