Micron Technology Inc (MU) — Q3 2021 Earnings Call Transcript

Thank you, and welcome to Micron Technology’s fiscal third 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 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 Form 10-K and 10-Q that we file with the SEC, 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. We delivered outstanding results in FQ3. Our strong execution enabled us to achieve the largest sequential EPS improvement in our history and to set multiple revenue records. NAND hit record revenue, propelled by a record mobile MCP, consumer SSD, and client SSD revenues. Our embedded business exceeded $1 billion for the first time, with record revenue across automotive and industrial markets. We also achieved key technology and product milestones, with our industry-leading 1-alpha DRAM and 176-layer NAND, reaching a meaningful portion of our bit production and QLC NAND accounting for a majority of our client SSD bit shipments. We expect DRAM and NAND supply to remain tight into calendar 2022 as the global economy rebounds. The strong demand for memory and storage across the data center, intelligent edge, and user devices puts Micron in the best position ever to fully capitalize on these exciting opportunities. We continue to make solid progress on our goals to deliver industry-leading technology and improve our cost structure, to bring differentiated products to market and improve our product mix, and to grow our share of industry profits while maintaining stable bit share. I will start with an update on our operations. Despite shortages across the semiconductor ecosystem in various assembly materials and assembly capacity, Micron delivered record assembly output this quarter, which helped fuel our strong revenue performance. Our assembly and test success was the result of a strategic decision we made several years ago to increase our captive footprint and strengthen relationships with suppliers and partners. We successfully mitigated the impacts of the drought in Taiwan with no reduction in our production output. Taiwan’s rainy season has begun, bringing with it sufficient water supply to support our manufacturing requirements. While the drought in Taiwan is behind us, the rise in COVID-19 cases in Malaysia, India, and Taiwan are a risk to our manufacturing operations and R&D activities in these regions. We are also working with local governments to facilitate on-site testing and vaccination for Micron team members where possible. Additionally, in order to protect Micron team members at our Muar, Malaysia back-end facility, we temporarily reduced our on-site workforce early in FQ4, which reduced output levels. We have since started bringing back team members to the site as the situation has improved. While we ramp back toward full production levels in Muar, we will utilize our global supply chain, including subcontractor partners, to meet our customer commitments and minimize any disruption to delivery schedules. Earlier this year, we announced our decision to exit 3D XPoint development and manufacturing and to reprioritize our R&D investments toward new CXL-enabled memory solutions. CXL, or Compute Express Link, is a new industry standard interface that will significantly change data center architecture through high-performance connectivity between compute, memory, and storage. We are developing exciting CXL-enabled products and will have more to share on our roadmap in the future. As part of our exit from the 3D XPoint business, we announced our intent to sell our Lehi, Utah, fab. Today, I’m pleased to report that Micron has reached an agreement to sell the fab to Texas Instruments in a transaction that we expect to close later this calendar year. We see this transaction as positive for our team members, the Lehi community, and our shareholders. The Lehi site has been an important part of the Micron network and responsible for many technology and manufacturing innovations across NAND and 3D XPoint products. Texas Instruments will offer all Lehi team members the opportunity to become TI employees at the Lehi site upon closing. After the sale closes, we will be able to eliminate the remaining underloading costs we were incurring at Lehi, enhancing our efficiency and strengthening our profitability. Dave will provide additional details. Now for an update on technology and products. Our industry-leading 1-alpha DRAM and 176-layer NAND process technologies are now in production and ramping according to plan. These nodes accounted for a meaningful portion of our bit production in FQ3 and are on track to become a meaningful portion of our revenue in FQ4. We expect that, by end of calendar 2021, the combination of 1-alpha and 1z DRAM nodes will represent the majority of our DRAM bit production, and at the same time, 176-layer NAND will be the majority of our NAND bit production. In fiscal year 2022, we expect these workhorse nodes to fuel bit growth and provide us with good front-end cost reduction on a like-for-like basis. However, there are two factors that will create cost headwinds for us next fiscal year. The first is driven by our strategic portfolio migration toward more advanced and higher-value products such as DDR5 memory, high-density server modules, and SSDs. While this portfolio shift helps us increase profit share, it will also impact our costs next fiscal year. The second cost headwind is driven by several actions we have taken in our supply chain to increase resilience and provide business continuity to our customers across all product lines. While these actions will allow us to capitalize on robust market demand, they will also impact our costs. We are on track to support customers as they begin to introduce DDR5-enabled platforms in the second half of calendar 2021. DDR5 was designed to meet modern data center requirements, including improved performance through doubling of memory bandwidth and improved reliability and efficiency through integration of on-die ECC. DDR5 features a larger die size compared to DDR4, limiting DRAM industry supply growth and cost reduction as it ramps, starting from the second half of calendar 2021. In storage, we introduced the industry’s first UFS 3.1 solution for automotive applications this quarter. We also announced volume production of client PCIe Gen4 SSDs built on the world’s first 176-layer NAND and available in a variety of form factors. We are delivering 176-layer NAND in volume to OEM and channel customers across multiple markets and have several products in customer qualifications. We are also driving an increased mix of QLC NAND, which brings down the cost of SSDs, accelerating the replacement of hard drives. QLC SSD adoption continues to grow, and we delivered record QLC SSD revenue and bit mix in FQ3. Turning to end markets. In the data center, integration of AI into data-centric workloads will drive long-term growth, with memory and storage becoming an increasing portion of server BOM cost. Propelled by the transition to DDR5, strong capabilities in graphics memory and the introduction of HBM and NVMe SSD product offerings, Micron’s strong product roadmap across DRAM and NAND positions us for success in the data center. We will enhance our NVMe SSD portfolio with the introduction of new products with internally designed controllers in the coming months. In FQ3, data center DRAM revenue grew quarter-over-quarter, driven by strong demand from cloud customers and increases in module density. Data center SSD bit shipments and revenue grew sequentially, driven by both cloud and enterprise. Data center demand is expected to be strong in the second half of calendar 2021 as cloud demand picks up and enterprise demand improves due to broad economic recovery. In addition, we expect that the new CPUs featuring more memory channels will accelerate server memory demand starting later this year and continuing into 2022. The PC market continues to benefit from the trend toward greater mobility as people embrace a work or learn-from-anywhere culture. Industry expectations for calendar 2021 PC unit demand growth have increased to the high teens, driven by robust notebook sales and a recovery in the desktop market. In the fiscal third quarter, we achieved several customer qualifications for our 1-alpha-based DDR4 products across various PC platforms. Our client SSD bit shipments were up sharply quarter-over-quarter and year-over-year. In graphics, bit shipments increased sequentially and year-over-year, driven by strong next-generation game console and graphics card shipments. Micron has an excellent position in the graphics market, with a broad product portfolio and deep customer partnerships. Mobile business achieved record MCP quarterly revenue. We made strong progress with our 1-alpha LPDRAM products and 176-layer UFS 3.1-enabled solutions. We have already completed customer qualifications for some of these products. While COVID-19 has softened mobile demand in parts of Asia, supply shifts to address stronger demand in other regions are keeping the global market in tight supply-demand balance. Mobile unit sales are expected to show healthy growth this year, with some variability across geographies, driven by an expected doubling of 5G units in calendar 2021 to more than 500 million units. These 5G phones also feature rich content demanding significantly higher DRAM and NAND. We are also encouraged to see bold OEM innovation in new devices like gaming smartphones featuring 18 gigabytes of DRAM. Our automotive business delivered a third consecutive record quarter, driven by continued manufacturing recovery and increased LPDDR4 and eMMC content for in-vehicle infotainment and driver assistance applications. Auto unit sales are expected to grow significantly from last year. Auto memory and storage content growth trends remain strong, particularly as EVs, which have significantly higher memory and storage content requirements, grow much faster than the broader auto market. We are continuing to see record automotive and industrial segment demand, yet despite our best efforts, we may be unable to meet all the demand from these customers over the next few months due to certain non-memory semiconductor component shortages in our supply chain. Turning to our market outlook. While the pandemic remains a risk factor, calendar 2021 is shaping up to be a strong year fueled by the macroeconomic recovery combined with secular drivers, such as AI and 5G, that are creating sustained demand increases across broad end markets. As a result, our expectations for calendar 2021 DRAM and NAND bit growth have increased since our last earnings call, and we now expect calendar 2021 DRAM bit demand growth to be somewhat above 20% and NAND bit demand growth in the mid-30% range. There is currently unmet demand for DRAM and NAND due to end market strength. This unmet demand would have been even larger had it not been for the non-memory component shortages influencing our customers’ ability to manufacture their products, particularly in the PC, automotive, and industrial markets. These shortages can cause variability in demand patterns as customers experience challenges sourcing matched sets of non-memory components. We are hopeful that foundry capacity coming online can begin to alleviate some of the component shortages in the second half of calendar 2021 and support robust memory and storage growth. Additionally, as a result of strong end market demand trends, the lessons of the pandemic and ongoing geopolitical uncertainty, some customers will change their inventory management strategy from just-in-time to just-in-case and increase the target level of what they consider normal inventory levels. Long term, we see 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 are targeting to align our long-term bit supply growth CAGR with the industry bit demand growth CAGR across DRAM and NAND. However, we expect 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 bit demand growth, and we have used our inventory to add to our bit shipment growth this year. Before handing over to Dave, I have one more important announcement to share regarding our DRAM technology and manufacturing strategy. Based on our assessment of the progress EUV has been making and aligned with our technology strategy and industry-leading DRAM scaling roadmap, we plan to insert EUV into our DRAM roadmap starting in the 2024 timeframe. Micron has placed purchase orders for multiple EUV tools from ASML as part of a long-term volume agreement. The pre-payments for these systems will contribute towards the fiscal year 2021 and fiscal year 2022 CapEx. We have increased our fiscal year 2021 CapEx to be somewhat above $9.5 billion, mostly from areas that do not impact calendar 2021 and fiscal year 2022 bit growth, such as these EUV pre-payments, construction spending, and other R&D and corporate items. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered outstanding FQ3 results. Revenue and EPS grew by a record amount sequentially on an organic basis, and we generated over $1.5 billion in free cash flow in the quarter. Total FQ3 revenue was approximately $7.4 billion, up 19% quarter-over-quarter and up 36% year-over-year. Revenue growth was driven by stronger DRAM and NAND pricing and by robust customer demand for Micron’s products. FQ3 DRAM revenue was $5.4 billion, representing 73% of total revenue. DRAM revenue increased 23% sequentially and was up 52% year-over-year. Bit shipments increased in the low single-digit range sequentially, and ASPs were up approximately 20% quarter-over-quarter. FQ3 NAND revenue was approximately $1.8 billion, representing 24% of total revenue and an all-time high for the Company. NAND revenue increased 10% sequentially and was up 9% year-over-year. Bit shipments increased by low single digits sequentially while ASPs increased in the high single-digit percentage range quarter-over-quarter. Now turning to our revenue trends by business unit. Revenue for the Compute and Networking Business Unit was approximately $3.3 billion, up approximately 25% sequentially and 49% year-over-year. CNBU revenue growth was driven by broad-based sequential pricing increases. Revenue for the Mobile Business Unit was $2 billion, up 10% sequentially and 31% year-over-year. Mobile demand remained healthy as 5G handset sales continue to ramp. Revenue for the Storage Business Unit was $1 billion, up approximately 19% from the prior quarter and approximately flat year-over-year. Both client and consumer SSD revenues set records. And finally, the Embedded Business Unit generated record revenue of $1.1 billion, which was up 18% sequentially and 64% year-over-year. Automotive and industrial revenues were at an all-time high for the Company. The consolidated gross margin for FQ3 was 42.9%, up 10 percentage points from the prior quarter. DRAM and NAND price increases helped drive the margin expansion in FQ3. Gross margins also benefited by 100 basis points from $75 million less depreciation at our Lehi fab, which is classified as “assets held for sale.” Operating expenses were $821 million in FQ3, which we continue to tightly manage. Operating expenses also benefited from approximately $21 million of gains from the sales of certain assets. FQ3 operating income was $2.4 billion, resulting in an operating margin of 32%, compared to 20% in the prior quarter and 18% in the prior year’s quarter. FQ3 EBITDA was $4 billion, resulting in an EBITDA margin of 53%, compared to 45% in the prior quarter and 44% in the prior year. Net interest expense was $31 million in FQ3, and we expect it to be roughly flat going forward. Our FQ3 effective tax rate was 8.4%. We expect our tax rate to be in the high single digits for FQ4. Non-GAAP earnings per share in FQ3 were $1.88, up from $0.98 in FQ2. The $0.90 sequential improvement was the largest in Micron’s history. EPS included approximately $0.05 from the sale of certain assets, investment gains from Micron Ventures, and one-time tax items. Turning to cash flows and capital spending. We generated approximately $3.6 billion in cash from operations in FQ3, representing 48% of revenue. Net capital spending was approximately $2 billion during the quarter. As Sanjay mentioned, we now expect our FY21 capital spending to be somewhat higher than $9.5 billion. Most of this CapEx increase that we are highlighting today will not increase our CY21 and CY22 bit supply. We expect that while we invest in the EUV infrastructure and initial deployment, our capital intensity will increase to mid-30% of revenues. Once we get past the investment period of EUV adoption, we expect that these tools will boost our competitiveness and help drive productivity of our fabs. As a result of the strong market environment and Micron’s extraordinary execution, we generated positive free cash flow of $1.5 billion in FQ3. The increased cash flow was driven by strong revenue growth, higher margins, and efficient working capital management. We expect free cash flow to continue to improve in the fourth quarter, driven by continuing growth in revenue and earnings. We completed share repurchases of $150 million, or approximately 1.7 million shares, in FQ3. From the inception of the share repurchase program, we have repurchased $3 billion worth of Micron stock, representing 55% of our cumulative free cash flow. In addition, since FY19, we have used approximately $2 billion in cash to settle conversions of our convertible notes, including approximately $800 million to settle the convert premiums. Combining the share repurchases and convert premiums, we have used $3.8 billion or 69% of our cumulative free cash flow toward reducing our share count. We plan to continue repurchasing shares in FQ4. Ending FQ3 inventory was $4.5 billion or 98 days. We remain in a very lean inventory position as demand continues to outstrip our supply. We ended the quarter with total cash and investments of $9.8 billion and total liquidity of approximately $12.3 billion. FQ3 ending total debt was $6.7 billion. Our balance sheet is rock solid, with investment-grade ratings from all three rating agencies. In the last three months, Fitch and Standard & Poor’s both raised their outlook from stable to positive for Micron debt. These upgrades to the outlook for our debt ratings are further evidence of the financial transformation underway at Micron. Before providing the financial outlook, I want to cover the financial implications of the sale of our Lehi fab. We are pleased with this transaction and believe that it is good for our shareholders, as it frees up capital and enhances our ongoing profitability. The economic value for Micron from the sale is $1.5 billion, comprised of $900 million in cash resulting from the sales transaction and approximately $600 million in value for select tools and other assets that Micron will retain for redeployment to its other manufacturing sites, or that are sold to other buyers. We are taking an impairment charge of approximately $435 million, or approximately $330 million on an after-tax basis, as the $900 million sale price is below our book value of the assets being sold. Note that the tools that we are keeping have largely been depreciated but have substantial future value in our manufacturing network. As we have previously disclosed, we stopped depreciation of the Lehi fab assets last quarter, and this benefited our costs by approximately $75 million in FQ3. Once the sale is completed, we will further improve our profitability by entirely eliminating our underload charges. Now turning to our near-term outlook. Both DRAM and NAND markets are tight, and we expect pricing increases for both markets in the fiscal fourth quarter. In FQ4, we’re qualifying 1-alpha and 176-layer nodes with several customers. We expect these nodes to support a modest level of bit growth and face cost headwinds that are common at this stage of the ramp. Additionally, we also expect cost headwinds from product mix and COVID mitigation. Despite cost headwinds, we expect strong improvement in our financial performance in FQ4. Our growth opportunity is healthy, and market momentum heading into fiscal year 2022 is strong. With all these factors in mind, our non-GAAP guidance for FQ4 is as follows: We expect revenue to be $8.2 billion, plus or minus $200 million; gross margin to be in the range of 47%, plus or minus 100 basis points; and operating expenses to be approximately $900 million, plus or minus $25 million. Finally, based on a share count of approximately 1.15 billion fully diluted shares, we expect EPS to be $2.30, plus or minus $0.10. Micron’s relentless focus on execution positions us well to generate solid returns for our shareholders. Measuring our performance trough to trough across the cycle from FY16 to FY20, 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 financial performance will continue cross-cycle, and over the long term, our revenue growth will outperform the broader semiconductor industry. Our industry-leading technology, dramatically improved product portfolio, and financial strength position us well to capitalize on the long-running demand trends driving the memory and storage industry. I will now turn it back to Sanjay.

Thank you, Dave. Micron’s fiscal third quarter results demonstrate the strength of our business, and we expect to achieve continued strong results in the future. Demand for memory and storage is solid across market segments, and industry trends like artificial intelligence, edge computing, and 5G continue to create new opportunities for Micron. Our team is building on our technology leadership to deliver bold new solutions that offer valuable differentiation for our customers. Micron’s business is healthier and more robust than ever, and we’re energized to seize the opportunities ahead at a truly exciting time in the semiconductor industry. We are also leveraging our success to deliver results for all our stakeholders. In April, we released our sixth annual sustainability report, highlighting progress towards our environmental, social, and governance goals. I am pleased to report that we are on track to achieve the environmental and sustainability goals we set last year, despite the challenges posed by the pandemic. In fact, our ESG risk scores have improved to the top 10% of the semiconductor industry according to the third-party rating agency Sustainalytics. We are also making good progress on achieving 100% renewable energy consumption in the U.S. by the end of 2025. In calendar 2021, we continue to focus on emissions abatement, transition to renewable sources, water restoration, and increased efforts to reduce, reuse or recycle waste. We will pursue these goals with the same focus with which we have created sustained momentum in the business, and I look forward to providing updates on our progress on future calls. We will now open for questions.

Yes. Good afternoon. Thank you for taking the question. I guess, end-market demand question. There are clearly fears out there around PC speaking volatility around handsets and whether there’s any inventory build on the cloud side. Yet here, you’re talking about DRAM and NAND remaining tight into calendar 2022. So, I guess, can you walk through what you’re seeing out there from a demand perspective? And then also, I think very importantly, particularly to the DRAM side, how you’re thinking about supply, which clearly seems to be constrained both this year and next year?

Thanks, C.J. We are witnessing strong demand across nearly all end markets. In the PC segment, year-over-year growth for calendar year 2021 is in the high teens. Additionally, the average SSD attach rate continues to rise on the NAND side, and the PC market continues to drive robust demand for DRAM. Our data center segment, following a period of adjustment earlier in the year, is also experiencing strong demand in the second half. The trends in 5G are boosting unit sales and average content growth in smartphones. In the automotive sector, we cannot meet the strong demand. The industrial markets are also showing significant demand. Overall, we are seeing strong demand across nearly all end markets, and the industry is facing unmet demand amid a semiconductor shortage affecting the technology ecosystem. As this shortage eases over time, we expect to see an increase in demand for memory and storage, as all end applications today, whether in analog ICs or CPU cores, require memory and storage. The ongoing semiconductor shortage is currently impacting some demand, but as it improves over the next seven quarters, we anticipate heightened demand. Demand trends are strong, and supply remains tight as we approach the end of the year and into calendar year 2022. It is important to note that capital expenditures in the industry have been particularly disciplined on the DRAM side, and supplier inventories are running very low. Our own inventory is at just 98 days, which is extremely low. Capital intensity in the industry is increasing as well, supporting disciplined supply growth. We have discussed how the DDR5 specification requires more on-chip ECC, resulting in larger die sizes across the industry compared to DDR4. As the industry transitions to DDR5 over the next several quarters in 2022 and 2023, this will further constrain available supply from wafers. Overall, both demand and supply trends are positive for our industry.

That’s very helpful. If I could follow-up on the gross margin side, Dave, you talked in the prepared remarks around higher cost mix and investment in the supply chain. Can you walk through the moving parts there for fiscal 2022 gross margins?

One of the main factors affecting margins for fiscal 2022 will be pricing. We won't provide pricing details beyond the current quarter, but we anticipate that pricing will increase next quarter, with tight conditions expected to persist into 2022. On the cost side, when considering like-for-like reductions for next year, driven by the ramp-up of 1-alpha and 176 in NAND, we believe those costs will be favorable. However, we will encounter a higher mix of products that have increased costs, such as DDR5 and higher density server modules, which may pose some challenges. Additionally, we expect to carry some COVID mitigation costs at the start of the year, which will also create headwinds. We hope that as the year progresses, these costs will ease, providing some relief for margins. Another positive impact will come in Q4 from Lehi, as depreciation charges will cease in the fiscal fourth quarter. Once we finalize the sale, various underload charges will also disappear. I would estimate a benefit of around $20 million in the fourth quarter and an additional $20 million in the first fiscal quarter, assuming we close around the end of the first fiscal quarter, that should resolve those issues.

Thank you.

Yes, guys. Just two quick questions. Dave, maybe to follow-up on C.J.’s questions about cost. I want to make sure I understand the messaging here. I get that these higher value-added parts have higher costs, but should they also have higher gross margins, or am I thinking about that incorrectly? And then, I have a follow-up.

It somewhat depends on the product itself. However, in general, we are aiming to focus on higher value products, which would typically have better gross margins when compared to other products.

Perfect. And then, as my follow-up, two quarters ago, Dave, you didn’t buy back any stock. This quarter, it was $150 million, which was I think 10% of free cash flow, notwithstanding what you’ve done over multiple quarters. I’m just kind of curious as to the message you’re trying to give us here, especially if you look at sort of the cross-cycle risk reward in the stock, why not be more aggressive with the buyback here? And does that portend something about next fiscal year’s CapEx? And as you’ve talked about that CapEx, is next fiscal year a year that you should outgrow bits relative to the industry?

Okay. There are a lot of questions regarding the buyback. I wouldn’t read too much into the $150 million figure. Depending on the quarter, our buyback levels will vary. We were mindful of our net cash position and aimed to move in a positive direction. You’ll see in the fourth fiscal quarter that our buybacks will be significantly higher than in the third fiscal quarter, so there's no reason for concern there. We believe this is a favorable time to repurchase stock, and we remain committed to our prior statement of returning at least 50% of our free cash flow through buybacks. Currently, we are at about 55%, which is a positive result. This doesn't even include the convertible securities, which by the end of this fiscal quarter will be fully converted and removed from the balance sheet, eliminating that dilution. Regarding CapEx and its relation to buybacks, I’ll just say that due to our investments in EUV, it seems we will operate at a different level in terms of percentage of sales than we had previously anticipated. We were looking at low 30s, but with EUV, it makes sense that we are now likely in the mid-30s as a percentage of revenue for CapEx while we expand our EUV toolset.

Perfect. Thank you very much.

I had a question about DRAM average selling prices. The 20% growth quarter-over-quarter was the highest we’ve seen in several years. Can you discuss the factors contributing to this growth? How much of it was due to price increases driven by the current tight supply compared to benefits from product mix? And how should we assess the sustainability of this growth?

So, certainly, on a like-for-like basis, pricing increased across the board in the DRAM industry, and again, driven by the strong demand, as I mentioned earlier, pretty much across all of the end markets. So, we enjoyed price increases across all end markets. And as we have mentioned, that even in FQ4, we see price increases not just in DRAM, but we also see that in NAND.

Okay. And then, I guess, given the conversation or comments you made about customers moving to just-in-case inventory management, can you unpack that a little bit just in terms of magnitude? I mean, is this sort of a one-off conversation you’re having with people as they’re dealing with the supply issues that are out there right now, or do you think this is something that’s going to be sort of a meaningful transition within the industry? Thanks.

We view this as an emerging trend in the industry. Looking back over the past couple of years, or perhaps a bit longer, we faced challenges due to geopolitical consolidations. The COVID pandemic highlighted the need for resilient and flexible supply chains. Alongside the digital transformation acceleration and the surge in demand, the semiconductor industry is experiencing shortages that leave a lot of unmet demand across various sectors. This situation is prompting both customers and suppliers to prepare their supply chains to meet this demand effectively. At Micron, we've taken steps to secure capacity for our assembly operations. For instance, when our Muar operation had to reduce its workforce due to a COVID outbreak in Malaysia, our adjustments to our assembly capacity allowed us to quickly shift production to other facilities. These are the types of strategies being considered by customers and suppliers alike to effectively manage their supply chains and meet end-customer demand. Consequently, some just-in-time inventory management practices have proven costly over the past few quarters, especially as the world has tried to adapt during the COVID period. There's a growing trend towards just-in-case inventory management, driven by geopolitical factors, natural disasters, and the challenges posed by COVID. This trend is evident as some customers have already begun to strengthen their inventory positions, while others are still trying to address their requirements. We believe this trend will continue as companies focus on ensuring their supply continuity in the future, similar to the measures Micron has implemented to meet its customer needs.

Thanks a lot. I had two questions, first on EUV and then on cost down. So Sanjay, I guess, the first question on EUV is sort of what’s changed on EUV? I mean, it’s not like there’s been a sea change in the progress made on EUV. Is it simply maybe that there’s another big chipmaker trying to get in the queue and taking up some slots and so you felt like you had to get in the queue? So, I’m just sort of curious what changed on EUV? And then, I had a follow-up.

So, we had always said that we monitor EUV progress. We have actually engaged in EUV evaluation. We have had EUV tool in the past. So, we had always said that we will intercept EUV in our roadmap at the right time when we see the EUV platform as well as the ecosystem becoming more mature. That’s when we plan to intercept EUV in our roadmap. And that’s what our plan is that in the 2024 timeframe, and again, aligned with our technology and leadership DRAM scaling roadmap that we’ll be implementing this in 2024 timeframe. So, it’s consistent with how we have always approached it. And of course, EUV has continued to make good progress, and we really think that with our EUV technology capability from 2024 onward timeframe, coupled with our multi-patterning expertise that Micron has a leadership in the industry, we really will have unique differentiated capabilities and absolutely feel confident about continuing to lead our DRAM scaling roadmap through our, of course, currently 1-alpha, but then 1-beta and then 1-gamma and beyond. And initially, we will deploy EUV in a limited layer count in 2024 timeframe with our 1-gamma node and then we will broaden it to the 1-delta node with greater layer adoption and just keep in mind that we will combine it with our immersion multi-patterning techniques as well. And so, we really believe that we will have a very strong roadmap. And this is pretty much along the lines of how we always intended to insert EUV in our roadmap in the future, basically keeping in track of cost effectiveness, productivity as well as our overall scaling roadmap, and we feel really good about our leadership, DRAM scaling roadmap ahead.

Dave, my follow-up is about cost reductions. You seem a bit more cautious about your fiscal 2022 cost cuts compared to last quarter. I believe this year in DRAM, you'll be close to about 10%. The expectation was that 1-alpha would help you next year, so it appeared that you could exceed 10% next year. However, it seems some mix issues might lead to lower performance next year compared to this year. Can you clarify what next year looks like in relation to your performance this year? Thanks.

I don’t think I’m ready to discuss next year's plans completely since we haven’t finalized them yet. It might be a bit early for me to talk specifically about cost reductions for next year. I can say that 1-alpha's cost declines are quite impressive. The timing of the 1-alpha ramp-up definitely influences this, as does reaching its mature yield state. Additionally, it's challenging to predict the mixed elements that may introduce some challenges. However, when considering our strategy, we believe many factors will play a role. From a front-end perspective, the outlook is favorable and relatively consistent. In terms of mix, it largely depends on how the market evolves. Based on our initial assessment for next year, we anticipate some challenges ahead.

Great. Thank you. I want to follow-up on the just-in-time to just-in-case inventory question. You’re talking about demand not being fulfilled in the short term. So, is the message here that the customers don’t really have inventory, but that they want to put that inventory into place, or are there pockets where there’s inventory kind of waiting for other components?

So, again, this really varies from customer to customer. Some customers may have reacted fast and would be carrying adequate level of inventory or inventory in line with their strategy in terms of how to cope with the current environment with respect to demand and supply for their own components, whereas some other customers may have less level of inventory. So, really, it varies from customer to customer. So, what I’m saying is that regarding just-in-time shifting towards just-in-case kind of mindset, it really is that customer focus on managing their supply chain so that they can have sufficient inventory to meet their end-market requirements, some customers may have moved more in that direction. And some other customers may have yet to move in the direction of just-in-time mindset towards just-in-case. So for example, the car production, we are seeing that the auto market has suffered through significant supply chain shortages and, of course, has incurred significant cost to that industry as well in not being able to fulfill all their supply requirements. And of course, that then drives a different mindset on how to avoid this kind of situation in the future. So, it varies from end market to end market. It varies from customer to customer. But overall, what we are saying is that with the lessons of the geopolitical consolidations, with the lessons of the pandemic and the lessons of the recent supply chain shortages, in the backdrop of digital transformation requiring more and more of semiconductor solutions, customer ecosystem, parts of the customer ecosystem likely is approaching their inventory consolidations in a different manner compared to before. And again, we look at it as an emerging trend in the industry.

Hey. Thanks, guys. Just a follow-up on that previous question. If you look at the three main end markets for DRAM, PC, cellphone server and your, I guess, your best guess of inventory in each, where would you say it’s lowest? And then, when do you think that those end markets will achieve their, whatever the heck normal is, these days level of inventory?

So, we’re not going to go there in terms of trying to break it down by market by market. Of course, you sometimes see different moving parts in different parts of the market. For example, in mobile, you saw that with the India COVID situation as well as April and May in China, there was a reduction in demand in certain parts of the smartphone market. However, in other parts of the world, the smartphone suppliers moved to supply the increased demand in the other parts of the world. And of course, some of the demand because supply is in shortage, some of the supply in the industry got shifted toward other parts of the market too. So, we’re not going to break it down. I mean, I gave you mobile just as one example. And this situation can vary from customer to customer. But all-in-all, when you look at the end markets, almost all end markets are seeing shortages. And in aggregate, there is tight supply today. That’s what is resulting in increase in prices in the industry that we reported for FQ3, and we guided to it in FQ4 also for DRAM and NAND, we see price increases. And overall, we see supply tightness continuing through the year and into the 2022 timeframe as well.

Well said…

I meant 2022.

2024 is great. 2026, I’ll take it.

We’ll definitely be talking about that one of these days too. Yes.

One quick one, Sanjay. What do you think is going to be the Chips Act impact to Micron and just the memory ecosystem in general?

I understand your question about the impact of the Chips Act. It’s encouraging to see the U.S. government acknowledge the significance of semiconductors for both economic and national security reasons. Semiconductors play a crucial role in the economies worldwide. We are looking forward to enhanced support for U.S. leadership in semiconductor research and manufacturing in the future. As the sole provider of semiconductor memory and storage in the industry, Micron is actively collaborating with the U.S. government. The government also acknowledges the strategic importance of memory and storage within the semiconductor sector. We are eager to explore opportunities that will address our future requirements. Our engagement with governments in all locations where we operate remains strong, and we are optimistic about opportunities in the U.S. as well. We are pleased that funding has progressed in the Senate, and we hope it will also pass in the House, allowing the U.S. industry to focus on strengthening leadership in semiconductor research and manufacturing for years to come. We are committed to scaling our supply in alignment with industry demand while maintaining discipline in our approach.

Hi everyone. Thank you for addressing my questions. I have one regarding DRAM and another about NAND. Regarding DRAM, I'm interested in your ability to increase bit production over the next four to six quarters. Dave, you mentioned at some conferences that bit growth is expected to be flat through August due to your transition and low inventory levels. As you move towards 1-alpha technology, when should we expect to see an increase in your DRAM bit supply? Additionally, if you find it challenging to meet demand in the upcoming quarters, how do you plan to approach capacity increases in DRAM? On the NAND front, Sanjay, I sense a more optimistic outlook from you regarding the balance of supply and demand. What developments have occurred over the past few quarters to contribute to this change? Is it primarily an improvement in demand, issues with controller shortages, better yields on higher layer count nodes, or a combination of these factors? I'm eager to know what has shifted in the NAND market recently. Thank you.

I'll address the DRAM question first. We anticipate modest sequential growth in DRAM for the fourth quarter, which we believe will continue into the first fiscal quarter. We expect a gradual increase as we ramp up 1-alpha, without a clear inflection point for a significant growth rate boost. Our focus has been on balancing supply and demand, which is why we have invested in 1-alpha. Regarding your follow-up question, we maintain a long-term perspective on the growth rates for both DRAM and NAND. Sanjay mentioned that we project long-term growth rates for DRAM to be in the mid to high teens, while NAND should grow around 30% over the long term. This outlook informs our capital expenditures. Year-to-year variations may occur, but our strategy remains focused on expanding our supply in line with anticipated demand growth, and we have not strayed from that approach.

And on the NAND front, yes, as you noted that we have increased our outlook in terms of year-over-year NAND industry growth to now mid-30s. At the prior discussion, NAND industry was somewhat in oversupply. What we have seen is that NAND certainly has stabilized, and the trends have improved. In fact, we talked about price increases that we experienced in FQ3 for NAND as well as have guided to price increase in NAND in FQ4 as well. So, overall, we see tightness in NAND as well through the remainder of this calendar year and into 2022, and NAND demand is being driven by elasticity and certainly, continuing strength in PCs and also data center and smartphone markets as well. Overall, our outlook has changed because the supply of inventories we believe are healthier. And certainly, Micron inventory in NAND also is running lean. And certainly, our 176-layer NAND industry-leading node is ramping well. And overall, we expect our long-term supply growth CAGR to be in line with the market there as well.