Micron Technology Inc (MU) — Q1 2022 Earnings Call Transcript

Thank you, and welcome to Micron Technology's fiscal first-quarter 2022 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 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. Micron delivered outstanding results in fiscal Q1, achieving strong year-over-year revenue growth and solid profitability. Our strong start to the year and our product portfolio momentum keep us on track to deliver record revenue and robust profitability in fiscal 2022. We are rapidly ramping our industry-leading 1-alpha DRAM and 176-layer NAND products and achieving excellent yields, and these products are now shipping across our major end markets. We achieved significant product advancements and customer wins, including launching our first DDR5 solution, introducing our vertically integrated Gen4 NVMe data center SSD, validating the world's first low-power DDR5X with MediaTek and shipping our GDDR6X for AMD's Radeon RX 6000 graphics card. The secular demand for memory and storage, along with Micron's focus on building our technology and product leadership and deepening our customer relationships, continues to strongly position us to create significant shareholder value in fiscal year '22 and beyond. With the successful ramp of 1-alpha DRAM and 176-layer NAND products across major end markets, we are several quarters ahead of the industry in market deployment of these leading-edge process technologies. The combination of 1-alpha and 1Z DRAM nodes represents the majority of our DRAM bit production and 176-layer NAND now accounts for the majority of our NAND bit production. Our strong execution on these advanced nodes sets us up for the successful fiscal year '22. We are also investing to scale our technology for the next decade. We are planning for volume DRAM production on EUV in 2024 with our 1-gamma node. Integrating EUV with our existing multi-patterning immersion lithography expertise will help us maintain DRAM technology leadership for many years to come. And in NAND, we have successfully transitioned to replacement gate and have a road map to scale for several generations while leveraging our leadership in CMOS and early QLC to maintain a bit density leadership. In addition to being a technology leader, Micron is the industry quality leader with two-thirds of our customers ranking us number one in quality. As a technology and quality leader and as an innovation partner with a strong global manufacturing network, we have become a strategic supplier to our customers. And its ongoing semiconductor supply chain challenges, Micron has leveraged our deep related partnerships with customers and suppliers to support DRAM, NAND, and NOR supply continuity. On the customer side, we are seeing greater commitment and collaboration on supply planning, including the use of long-term agreements. Today, over 75% of our revenue comes from volume-based annual agreements, a significant increase from five years ago when they accounted for around 10% of our revenue. On the supplier side, we have entered into strategic agreements to secure the supply of certain components that we need to manufacture our products. As a result of these agreements, the current tight supply of these components is expected to gradually improve for us throughout calendar 2022. Now let us review our end markets. Demand for memory and storage is broad, extending from the data center to the intelligent edge and to a growing diversity of user devices. Memory and storage revenue has outpaced the rest of the semiconductor industry over the last two decades, and we expect this trend to continue for years to come, thanks to AI, 5G, and EV adoption. In addition, the build-out of immersive virtual worlds often referred to as the Metaverse will offer even more opportunity due to the intensive use of significant memory and storage in these applications. Our team's execution on strengthening our product portfolio has been outstanding, with several new product launches and customer qualifications in FQ1, achievements we are very proud of. I will highlight some of these achievements as I discuss our end markets. Data center is the largest market for memory and storage, and we expect it to outpace the broader memory and storage market over the next decade. Memory and storage is growing as a portion of server BOM supported by new and heterogenous computing architectures; the growth of data-intensive workloads and AI; and the ongoing displacement of HDDs by SSDs. In the fiscal first quarter, data center revenue grew more than 70% year-over-year as a result of continued cloud demand and the resurgence of enterprise IT investments. Our strengthening product portfolio also contributed to strong profitability. In Q1, we launched the 7400SSD, the first data center NVMe SSD to utilize our internally developed controller and firmware, along with our DRAM and NAND. This Gen4 NVMe product has already been qualified by two key customers. Looking ahead, we expect a strong ramp in our data center SSD revenues in FQ2 driven by increased sales of our NVMe SSD products. In addition, we launched the industry's leading DDR5, and see strong demand as customers prepare for new server product launches in calendar '22. While PC end demand remains strong, our client revenue declined sequentially due to the PC production impact from ongoing non-memory component shortages and related customer inventory adjustments of DRAM and NAND products. Consistent with the expectations we articulated in our last earnings call, the inventory adjustment at most PC customers is now largely behind us, and we are seeing signs of stabilization in demand in this end market. As we enter calendar year 2022, we expect PC unit sales to be in line with those for calendar year 2021. The mix of enterprise PCs in calendar year 2022 is projected to be higher as companies invest to support hybrid work environments. This shift in the mix of PC unit shipments should increase average PC DRAM and NAND content. Low-power DRAM has grown to 20% of the PC industry DRAM bit demand today and is projected to become the majority of the PC market in five years. Given our industry-leading solutions in low-power DRAM, we are well positioned to benefit from this trend. In FQ1, we achieved qualifications and volume production of our 176-layer Gen4 PCIe client SSD at several PC OEMs as well as our first revenues for DDR5 memory. Across the PC industry, demand for DDR5 products is significantly exceeding supply due to non-memory component shortages impacting memory suppliers' ability to build DDR5 modules. We expect these shortages to moderate through 2022, enabling bit shipments of DDR5 to grow to meaningful levels in the second half of calendar 2022. We are poised to take advantage of this transition with industry-leading DDR5 solutions for PCs. In the fast-growing graphics market, Micron holds an excellent position with a broad product portfolio featuring our proprietary GDDR6X product line and partnerships with leading GPU suppliers. We increased our revenue sequentially and year-over-year. Our proprietary GDDR6X continues to have market success, including integration on NVIDIA's high-end gaming cards. In FQ1, we were pleased to announce the availability of our GDDR6 memory solutions on AMD's Radeon RX 6000 graphics card, extending the value of GDDR6 memory to the entire gaming market. FQ1 mobile revenue increased more than 25% year-over-year. Mobile memory and storage demand continues to strengthen, supported by content-hungry applications and the continued transition from 4G to 5G, with recent 5G phones having more than 50% higher DRAM and double the NAND content versus 4G phones. 5G smartphone sales are forecast to exceed 500 million units in calendar year '21, with 700 million units forecast for calendar year '22. We expect mobile content to continue increasing as 5G phones benefit from further innovation in 5G-enabled applications. Following several industry-first last year in FQ1, our 1-alpha-based LPDDR5X, the world's fastest mobile DRAM, was sampled and validated with MediaTek, further demonstrating Micron's leadership in the mobile market. We expect automotive and industrial to be the fastest-growing memory and storage markets over the next decade and we are exceptionally well-positioned as a market share leader with over 10% of our revenue coming from these end markets. In the near term, non-memory component shortages are limiting calendar year '21 auto unit production to be flat year-over-year, significantly below end-consumer demand. However, our FQ1 year-over-year auto revenue growth remained strong at 25% as a result of content growth from in-vehicle infotainment and driver assistance applications, which are advancing rapidly, especially as EV adoption accelerates. New EVs are becoming like a data center on wheels, and we are already seeing examples of 2022 model year EVs supporting level three autonomous capability with over 140 gigabytes of DRAM and also examples with over 1 terabyte of NAND. In addition to continued content growth, we expect calendar year '22 auto unit production to increase as non-memory component shortages ease. We entered into a new supply agreement with UMC to improve our ability to support our automotive customers with NAND solutions as market demand strengthens in calendar year '22. In industrial IoT, we saw more than 80% year-over-year revenue growth, fueled by the continued ramp in applications such as factory automation and security systems. In consumer IoT, we saw more than 40% year-over-year revenue growth, driven by applications such as VR headsets and smart home devices. We expect IoT demand trends to accelerate further as 5G speeds the adoption of data-intensive applications powered by intelligent edge infrastructure. Our view of calendar 2021 and calendar 2022 industry bit demand and supply growth is largely unchanged from last quarter. We expect calendar 2021 DRAM industry bit demand growth to be in the low 20% range and industry NAND bit demand growth to be in the high 30% range. We expect calendar 2022 industry bit demand growth to be in the mid to high teens for DRAM and approximately 30% for NAND, in line with our view of the long-term bit demand growth CAGRs for each. We anticipate underlying demand in calendar 2022 to be led by increasing volume of data center server deployments, 5G mobile shipments, and continued strength in automotive and industrial markets. Non-memory supply shortages have constrained customer bills and pushed out some demand across many end markets. While these shortages may cause some variability to our demand, we expect them to ease through 2022, supporting memory and storage demand growth. Turning to our bit supply expectations for the year. Given prudent industry CapEx and very lean supplier inventories, we expect a healthy industry supply-demand balance in calendar year '22. Micron's calendar year bit supply growth for DRAM and NAND will be in line with industry demand. We are planning to deliver record revenue with solid profitability in fiscal year '22, with stronger bit shipment growth in the second half of the fiscal year. The stronger second half bit shipments will be aided by the easing impact of non-memory component shortages on our supply and on customer demand, together with additional product qualifications of our 1-alpha DRAM and 176-layer NAND-based products. As expected in fiscal year '22, the continued ramps of 1-alpha DRAM and 176-layer NAND are providing us with good front-end cost reductions. Our efforts to increase supply chain resilience and provide business continuity to our customers are headwinds for our assembly and packaging costs, consistent with the broader industry. Overall, we expect annual cost per bit reductions to be competitive with the industry in fiscal year '22 and over the long term. Turning to capital expenditures. We expect fiscal year '22 CapEx in the range of $11 billion to $12 billion. For both DRAM and NAND, we plan to achieve bit supply growth with no transitions alone through the middle of the decade. Beyond this time horizon, we anticipate the need to add greenfield wafer capacity for DRAM. However, for our NAND supply growth, we expect continued 3D scaling to be sufficient to meet industry demand growth without the need for wafer capacity additions. We recently announced our intent to invest more than $150 billion globally over the next decade in leading-edge memory manufacturing and R&D. As part of our commitment to investing in R&D, we announced plans to establish a state-of-the-art memory design center in Atlanta. These announcements reflect our confidence in persistent long-term demand growth for memory and storage and our ability to generate returns on these investments. We look forward to working with governments around the world, including in the U.S., as we consider sites to support future expansion. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered outstanding results to start the fiscal year with revenue, margin, and EPS all coming in within our guidance ranges while also generating healthy free cash flow. Total FQ1 revenue was approximately $7.7 billion, down 7% quarter-over-quarter and up 33% year-over-year. The sequential revenue decline was predominantly attributable to weakness related to non-memory component shortages at our customers, as Sanjay discussed earlier. FQ1 DRAM revenue was $5.6 billion, representing 73% of total revenue. DRAM revenue declined 8% quarter-over-quarter and was up 38% year-over-year. Sequentially, bit shipments declined in the mid-single-digit percentage range, while ASPs declined in the lower single-digit percentage range. FQ1 NAND revenue was approximately $1.9 billion, representing 24% of Micron's total revenue. NAND revenue declined 5% quarter-over-quarter and was up 19% year-over-year. Sequential bit shipments were approximately flat and ASPs declined in the mid-single-digit percentage range. Now turning to our FQ1 revenue trends by business unit. Revenue for the Compute and Networking Business Unit was $3.4 billion, down 10% quarter-over-quarter and up 34% year-over-year. Cloud, enterprise, and graphics performed well in the quarter, while client revenues declined sequentially. Revenue for the Mobile Business Unit was $1.9 billion, up 1% sequentially and up 27% year-over-year. Micron continues to lead in managed NAND, and MCP revenue surpassed 50% of Mobile revenue in FQ1 for the fifth consecutive quarter. Revenue for the Storage Business Unit was $1.2 billion, down 4% from the prior quarter and up 26% year-over-year. SBU profitability benefited in FQ1 from the strong progress made in ramping our 176-layer node. Finally, revenue for the Embedded Business Unit was $1.2 billion, the second highest in our history. EBU revenue was up 51% year-over-year and down 10% from record levels in the prior quarter. EBU gross margin and operating margin improved sequentially, driven by strong execution. The consolidated gross margin for FQ1 was 47% at the midpoint of our guidance and down approximately 85 basis points from the prior quarter. A higher mix of NAND sales was a headwind to FQ1 gross margin. Operating expenses in FQ1 were $891 million. We continue to expect FY '22 R&D to be up approximately 15% over FY '21 as we invest to strengthen our portfolio. FQ1 operating income was strong at $2.7 billion, resulting in an operating margin of 35%, down slightly from 37% in FQ4 and up from 17% in the prior year. FQ1 adjusted EBITDA was $4.4 billion, resulting in an EBITDA margin of 57%, flat from the prior quarter and up from 43% in the prior year. Non-GAAP earnings per share in FQ1 were $2.16, down from $2.42 in FQ4 and up from $0.78 in the year-ago quarter. EPS included approximately $0.01 of gains from Micron Ventures investments. Turning to cash flows and capital spending. We generated $3.9 billion in cash from operations in FQ1, representing 51% of revenue. Net capital spending was $3.3 billion during the quarter. We continue to expect fiscal 2022 CapEx to be between $11 billion and $12 billion, and it will be front-end loaded in the fiscal year. Due to the strong revenue and profitability, we generated approximately $671 million in free cash flow. In addition, we received approximately $900 million from the sale of the Lehi fab, which closed in the quarter. We completed share repurchases of approximately $260 million, or approximately 3.6 million shares in FQ1. Including our dividend payment, we returned around $371 million to shareholders in the quarter, which represented more than 50% of the free cash flow generated during the quarter. In addition, our Board of Directors approved a quarterly dividend of $0.10 to be paid on January 18 to shareholders of record on January 3. We remain committed to returning more than 50% of the cross-cycle free cash flow through a combination of dividends and buybacks. As we've mentioned before, we will be opportunistic in share repurchases and more aggressive when the shares are trading at larger discounts to intrinsic value. Our ending FQ1 inventory was $4.8 billion, and average days for the quarter were 103 days within our normal target range of 95 to 105 days. We expect to exit FY '22 with days of inventory at less than 100 days as we expect our DRAM and NAND supply to be tight for the year. We ended the quarter with $11.5 billion of total cash and investments and $14 billion of total liquidity. Our FQ1 total debt was $7 billion. Following our successful sustainability-linked credit facility in May and continuing with our strong commitment to enhancing our environmental and social performance in FQ1, we achieved two important milestones for Micron: our inaugural green bond and inaugural long bonds. The total proceeds from these bonds were $2 billion, and several nationally recognized minority disabled veteran and women-owned financial institutions participated. The $1 billion green bond proceeds will finance eligible sustainability-focused projects, including reducing the Company's greenhouse gas emissions, energy and water use and waste generation. The $1 billion proceeds from the long bonds, along with cash on hand, were used to redeem Micron's senior notes maturing in 2023 and 2024. The net result from the green and long bond offering was essentially leverage-neutral for Micron, while improving our net interest expense and increasing the weighted average maturity of our notes and bank debt from four years to nine years. Now turning to our outlook for the fiscal second quarter. We're starting to see stabilization in demand for PC customers and end demand remains solid across our markets. On the margin front, we expect that mix improvements are a positive factor for gross margins in NAND. While we continue to have cost headwinds due to COVID-19 mitigation expenses and above-normal assembly, test, and component costs, our front-end costs continue to benefit from our ramp of 1-alpha DRAM and 176-layer NAND. We expect operating expenses to increase sequentially as we invest in next-generation technologies and products for both DRAM and NAND and accelerate our new product roadmap. With all these factors in mind, our non-GAAP guidance for FQ2 is as follows. We expect revenue to be $7.5 billion, plus or minus $200 million; gross margin to be in the range of 46%, plus or minus 100 basis points; and operating expenses to be approximately $975 million, plus or minus $25 million. We expect our non-GAAP tax rate to be approximately 10% for FQ2. Based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $1.95, plus or minus $0.10. Our FQ1 results and FQ2 outlook keep us on track to deliver record revenue and solid profitability and free cash flow in FY '22. In closing, our business is delivering strong cross-cycle performance, revenue growth has significantly outpaced the broader semiconductor industry, gross margins have averaged over 40%, and operating margins have averaged around 30%. The strong product and technology momentum and Micron's solid execution give us confidence that we can sustain solid financial performance in the future. I'll now turn it back to Sanjay.

Thank you, Dave. Micron's culture has played a significant role in driving our strong results. Our vision to transform how the world uses information to enrich life for all serves both as an inspiration for our team and is a foundation for everything we do. Earlier this month, we released Micron's 2021 DEI report entitled 'For All,' which highlights significant accomplishments across the six DEI commitments that we introduced last year. These accomplishments include achieving comprehensive global pay equity as well as increasing representation of underrepresented groups among new college graduate hires by 7%. We also publicly disclosed consolidated equal employment opportunity or EEO-1 data for the first time. This report is available on our website. Demand for memory and storage remains strong. The broad integration of AI, proliferation of the intelligent edge, continued data center growth, EV adoption, and 5G deployment are creating expanded opportunities for Micron to innovate and deliver new value to our customers. The strategic importance of semiconductors to economic growth has never been clearer, and ensuring the security of supply for customers across all industries has never been more important. We look forward to working with governments and initiatives to invest in domestic production both here in the U.S. through the CHIPS Act and FABS Act and in other countries around the world. It is a truly exciting time in the industry. Our business is robust and growing, and our team is energized to seize the opportunities ahead of us. We'll now open for questions.

I guess first question would be around more depth from you on kind of the current supply-demand environment as this cycle is really different from any other cycle. Obviously, in the last quarter, we've seen PC kitting issues. Now that appears to be largely resolved. You've talked about shortages in auto. Curious how you're thinking about kind of normal seasonality, if at all, into the first half and middle part of 2022, where you're seeing ongoing tightness and how we should interpret that in terms of the sequential bit growth into the second half of fiscal '22 and beyond in calendar '22?

Thank you, C.J. Happy holidays to you and all our listeners on the call. Regarding demand trends, we anticipate strong bit growth in the second half, aided by the alleviation of shortages across our customer base. These shortages have limited their demand for us, but their end demand trends have remained robust. As the supply chain shortages diminish throughout 2022, we expect this to boost demand for our memory and storage products. There's also a seasonal aspect to consider this quarter, particularly in segments that are more consumer-focused. In the second half, we expect to see stronger seasonality as well. Additionally, there are product cycles from our customers, including new data center products with updated processors and architectures that support more memory channels and cores, as well as increased AI and big data workloads driving higher demand for memory and storage in 2022. We predict a strong year for data center demand. The rise of 5G in smartphones continues to enhance content increases, along with a growing number of 5G devices being sold. In the automotive sector, we have observed new vehicles incorporating more technology, particularly electric vehicles that have significant DRAM and NAND content. Overall, devices are incorporating more features, and, considering that we have 90 million automobiles compared to about 15 million servers, the demand from the automotive sector, with its increasing content, will be a powerful driver not just for 2022 but beyond. The demand trends we are seeing are fundamentally strong, and we are closely collaborating with our customers to understand their demand projections for 2022. We expect a favorable demand and supply environment in 2022, with disciplined CapEx reflected in supply growth, forecasting mid to high teens for DRAM and around 30% for NAND. Despite supply constraints and long equipment lead times, we remain optimistic about the supply outlook for 2022. Overall, we believe we are well-prepared to achieve a robust second half, supported by the demand and supply dynamics I've outlined, along with strong profitability leading to record revenue and substantial profitability for fiscal year 2022.

That's very helpful. As a quick follow-up, Dave, can you speak to the cost side? You highlighted expectations for strong front-end cost down. Curious how you are thinking about normalization of COVID-related expenses? And how should we be thinking about any mix shifts in your product portfolio in calendar '22?

Sure. Thanks, C.J. and happy holidays. Let me join Sanjay in wishing everyone happy holidays. From a cost perspective, I want to take a moment to address margins. We achieved very strong gross margins in the first quarter at 47%, which aligns with our expectations. It's important to note that just a year ago, our gross margins were slightly above 30%, indicating significant improvement. This enhancement is attributed to pricing, effective cost management, and the initial ramp-up of 1-alpha and 176-layer technology that we began last year and are continuing into this year. Looking into the second quarter, we anticipate ongoing cost reductions related to both the 176-layer and 1-alpha nodes, which should support our performance throughout the year. Additionally, as Sanjay noted, we have several product launches planned this year that will shift our business toward higher-value solutions, which we believe will be advantageous. Regarding your question about COVID-related costs and inflationary pressures, we expect those challenges to persist throughout the year, though it is difficult to determine when they will ease. Nonetheless, in areas where we have control, we are executing well in achieving cost reductions. Given our current profitability levels, the return on investment from our business is quite high. Overall, I feel we are in a very favorable position.

You mentioned, Sanjay, that you are starting to see PC customers less constrained from a component perspective. I'm curious, is that a near term? Or is that an expectation of second half of fiscal year '22 comment? So when do you expect your shipments to PC customers to start to improve?

The comment refers to observations from three months ago. As we mentioned in our last earnings call, certain PC customers faced supply chain challenges that hindered their ability to obtain all non-memory components, restricting their production of PCs despite strong consumer demand. However, the inventory adjustments resulting from these non-component shortages are mostly resolved now, and we are witnessing a recovery in PC demand compared to three months prior. For the calendar year 2022, we anticipate total PC unit sales to be similar to those of 2021. Therefore, we expect to see a recovery in demand for PCs as we progress through calendar year 2022.

Right. Very helpful. And for my follow-up, Sanjay, you mentioned 75% of your revenues are now based on these long-term agreements. What kind of assumptions go into that? Are these take-or-pay arrangements? Just given the cyclical nature of the industry, how fixed or dependable are these contracts from a price or volume or margin perspective?

So again, I would like to remind you that about four years ago, five years ago, we used to have about 10% of our revenue based on these LTAs. And today, we have more than 75% of our revenue based on LTAs. What the LTAs have done is bring us closer to the customer and really enable us to have a much closer dialogue on their planning, their forecast, and enables us to plan our supply and the mix of supply appropriately as well. These LTAs are nonbinding in nature, but they do help build greater visibility, greater transparency. And over the long haul, build greater trust and accountability between us and partners because the value of memory is just continuing to increase. And there is sentiment, of course, wanting to make sure that there is sufficient supply of memory available to our customers. So we work closely with them, and it helps us decide our product portfolio as well and manage our overall product portfolio and the mix of the product. So these agreements are volume-targeted agreements. They're not generally based on pricing, but they do help us as well as our customers plan our business far better and give us greater visibility. And again, these have been worked on, improved upon over the course of the last few years, and we continue to look forward to strengthening these LTAs going forward as well.

Congratulations on the solid results. Sanjay, I want to go back to your expectation for industry bit demand growth for DRAM in calendar year '22 of mid-to-high teens. While that's in line with your long-term view for bit demand, it would be a relatively big deceleration from this year despite the fact that it sounds like you've got a lot of good tailwinds next year, whether it be PC mix improving, smartphone mix and units improving, or new architectural shifts on the server side that are going to significantly increase DRAM density per server. And so I'm kind of curious, when you look at that expectation for next year. Is that being gated by what you and your peers can supply to the industry? Is it being gated by your view of demand? Is it being gated by components outside of your control?

So I think you're right to note that certainly, supply is limited. As I highlighted earlier, CapEx in the industry has been disciplined. And of course, as you know, that exiting 2020, there was inventory in the industry. Supplier inventories are at lean levels as well. And of course, in terms of supply growth, given the various aspects of supply chain shortages across all industries that have been discussed, equipment today has long lead time as well. So overall, when you really look at calendar year '22, overall supply is rather limited. And of course, demand trends are strong. What I would like to highlight is that you really have to look at long-term CAGR. The long-term CAGR on DRAM of mid-teens to high teens is really driving strong growth, and it is there because of all of the demand trends we have discussed. And so you can't just look at one year, you have to continue to look at longer-term trends. These are secular trends in nature, driving more demand for memory and storage. And of course, what we have provided here is our estimation regarding the bit growth, this is what we expect and we'll continue to monitor this. Essentially, we expect a healthy industry demand-supply environment in calendar year '22, particularly on the side of DRAM.

That's helpful. And then, Dave, as a quick follow-up just on the OpEx line, both this quarter and last quarter, you sort of characterized fiscal year '22 as an investment year, but you kind of came in at the low end of OpEx for the fiscal first quarter. Were there any sort of pandemic issues that are preventing you from investing at the rate you want? And as you think about the balance of the fiscal year, how do we think about linearity of OpEx? And what are the two or three big buckets of incremental spend?

Yes, it's important to acknowledge that the labor market is a bit tight, which presents some challenges. However, the main factor affecting our operating expenses this quarter was lower research and development costs related to prequalification efforts. These expenses can be unpredictable, sometimes shifting between the first and second quarters. In this case, they weren't realized in the first quarter, but we're confident they will come through in the second quarter. We expect to spend the same amount for the year as we predicted last quarter; it's more about timing. Therefore, we'll see an increase in operating expenses for the second fiscal quarter, followed by a slower rate of growth in the third and fourth quarters, leading us to approximately 15% for R&D, with SG&A slightly below that. Overall, we're managing the numbers we aim for.

Dave, my first question is for you. Can you walk us through the impact from the Lehi sale? I think there were some underloading charges and there was maybe like $100 million a quarter worth of OpEx. So can you sort of bridge that for us as it relates to Lehi between the fiscal Q1 results and the fiscal Q2 guidance?

We had approximately $100 million in revenue from wafer sales in the first fiscal quarter, which was somewhat accelerated since we closed at the end of October. This figure is slightly above our performance over the last few quarters, but we expect it to decline in the second quarter. Regarding margins, they were fairly close to the corporate average. Typically, margins are lower, but we transitioned the assets to held-for-sale status at the end of the second fiscal quarter last year, which led to a cessation of depreciation expense. Consequently, margins remained relatively stable once we factored that in. A significant portion of the underloading was addressed in the first fiscal quarter, so it should not significantly affect gross margins in the second fiscal quarter.

Got it. And then, Sanjay, for you, just back on the topic of long-term agreements with your customers. Obviously, there's been quite a change in the tenor of sort of how you engage with them. And my question is sort of where do you see this all heading? I mean when you talk to your customers, they're very, very concerned about procuring DRAM at a reasonable price. So for example, do you envision a scenario where maybe you can get them to prepay you for bits?

As we highlighted, I mean, our discussions with our customers and LTAs are more around the requirements of supply. And of course, these lead to closer discussions in terms of understanding their product portfolio, their road map, and how our road map gets defined and how our portfolio fits in with their requirements. So as I mentioned earlier, I mean, these discussions and these relationships with our customers have continued to evolve over the course of the last few years, taking us from yes, that 10% LTAs to now 75% LTAs. But they're also continuing to evolve in terms of the relationship that is based on value as well. So of course, we will continue to look for opportunities, as I mentioned earlier, to strengthen these LTAs in the future as well. And I would just like to highlight that we are in this good position with the customers in terms of gaining greater visibility to their requirements and being able to drive these LTAs through a lot of good work that our team has done here. The sales teams, our business unit teams, and, of course, supported by strong technology, product portfolio, and supply chain execution that just gives these customers and other partners the confidence in engaging in these LTA discussions with us.

Yes. Sanjay, my first question is for you. I was wondering if you have any thoughts as to how you see the mix of DDR5 as a percentage of overall server DRAM trending throughout 2022? And I have a follow-up for David.

So with respect to 2022, as the new processors that are able to use DDR5 are rolled out into the marketplace, that will drive adoption of DDR5 in the server space as well. As we noted, in the PC space, DDR5 adoption has already started, and we have begun to shape the DDR5 product. DDR5 currently is in high demand. Actually, supply there is limited for DDR5 in the industry. So when I look at PC as well as for server, we expect that DDR5 will be ramping up first in PC. And as the processors with DDR5 new processors become available in the industry, we particularly see that ramping up later in calendar year '22. I expect that we will be exiting calendar year '22 with approximately 20% the mix of DRAM in the compute space at approximately 20%. And so, a stronger ramp in the second half versus the first half because, again, as those new processors ramp up into production with our customers, that will drive a ramp of DDR5 in the second half in the server space. And in PC, as I mentioned, it's happening well throughout calendar year '22.

Got it. For David, I’m trying to better understand the supply-demand environment. When I review your revenue guidance and what you reported for DRAM and NAND average selling prices, it seems that the underlying assumption is based on a moderate decline in blended prices. I’m not asking you for guidance, but is that a fair observation?

For second fiscal quarter, you're talking, Mehdi?

Yes.

Yes. So obviously, we can't comment on pricing on a forward-looking basis. I would just reiterate Sanjay's comments that we see a healthy supply/demand dynamic for the fiscal year for both DRAM and NAND, and we continue to ramp 176-layer and 1-alpha, which gives us a good cost structure going forward. We're going to continue to drive the mix. All of those assumptions are built into our margin guidance. Of course, there's a high and a low to that margin assumption based on how things can play out.

I wonder if you could talk about the role of sort of just in case philosophy that you talked about a couple of quarters ago. Clearly, you're comfortable with your customer inventory levels now. But how are they feeling? And do you expect there to be a higher level of inventory on a sustained basis from here?

The inventory strategy varies significantly among customers. Some customers are maintaining higher inventory levels due to supply chain shortages resulting from the pandemic, while others may be influenced by geopolitical factors. Currently, we haven't observed customers returning to pre-pandemic inventory levels, and the inventory strategy is inconsistent across the board. On an industry-wide level, while certain customers may be holding excess inventory, overall customer inventory levels are relatively stable given the current situation. At Micron, we are also increasing our inventory of raw materials to ensure a reliable supply to our customers. Our operations planning is managing with increased inventory levels in light of the higher uncertainty related to geopolitical issues and the pandemic. Similarly, our customers are adopting a comparable approach to their inventory management.

My first question is about the supply side. Sanjay, you mentioned constraints in the equipment space a couple of times. Are you experiencing any delays or pullbacks from your suppliers? You've kept your full year CapEx guidance, so maybe not, but I wanted to confirm. Also, regarding the supply issue, did the earthquake in Taiwan have any impact this quarter, either from a cost perspective or on your ability to reduce costs?

Our procurement and supply chain teams collaborate closely with equipment suppliers for long-term planning and securing equipment slots. We are actively managing this process. While we have observed longer lead times, these have been accounted for in our overall planning. We are experiencing increased collaboration with suppliers regarding our demand and the timing of equipment. Therefore, I wouldn’t say we have encountered any delays beyond our expectations. However, it's important to note our delivery expectations are founded on our partnership with suppliers and the transparency we’ve provided, along with extensive planning efforts. As for the second part of your question, could you please repeat that?

Earthquake in Taiwan, any impact on bid shipments in the quarter or cost downs?

So the earthquake in Taiwan, at the time of the earthquake, certainly did reduce some of our bid production. By the end of the quarter, our impact on our overall output was meaningfully reduced.

Got it. And then as a follow-up, I wanted to ask about your business in automotive and industrial. You talked about the two businesses or the two end markets combining for more than 10% of your overall revenue. In a fairly normal environment, whatever that is, both in automotive and industrial, how are you thinking about the sustainable growth rate in those two end markets? You threw out a couple of growth rate numbers for the quarter, but curious how you're thinking about both auto and industrial on a cross-cycle basis?

The auto and industrial certainly will be high-growth drivers for us across the cycle. I spoke to all the demand drivers in the automotive market. Micron is clearly an automotive leader in this space. And we said that auto and industrial combined, over 10%. If you look at automotive itself, our share of the market is somewhere in the mid-single digits. And this year, we would expect to continue to grow based on all our experience in this market, our share leadership, the high quality we provide, and the increasing demand for memory and storage content in these markets. And of course, industrial is also growing for us with 5G enabling tremendous demand in the industrial segment with industrial IoT, market drones with surveillance, equipment with automation in the factories. All of this is tending to drive greater demand as well. So we expect solid growth in both of these markets. We expect the overall, if you look at DRAM content CAGR in the automotive market, that's approximately 40% over the course of the next three years, NAND CAGR in the automotive power kit, above 50% as well over the course of the next three years. So, this really has legs in terms of sustainable growth. And again, we are well positioned in these markets, and we expect our percentage of revenue in this market to continue to increase over the course of the next several years.

I have one and then a follow-up. I realize it's early in what's going on with regard to the current variants. But I'm wondering if you've seen any impact from it? And also given here as the first company, at least that I cover that has had to provide guidance in light of some of the changes. I'm curious how you approach thinking about the variant? And then I have a follow-up.

So first of all, regarding our focus on the business and our people, Micron has been proactive throughout the pandemic in taking steps to ensure the safety of our team members. This includes managing strict protocols for our on-site operations related to masking, physical distancing, and vaccinations. As a result, we have successfully maintained our operations throughout the pandemic. Despite various industry-wide supply challenges, we have generally performed well in supporting our customers. Micron will continue to prioritize the safety of our team members while ensuring our operations run smoothly. We remain vigilant and will keep monitoring all trends and developments. I would like to emphasize that even with the Delta variant, all our operations continued effectively, and the demand for our products has remained strong. We've experienced higher demand in some parts of the business due to COVID at certain times, while other areas may have seen lower demand. We will keep tracking these trends, and while the Omicron variant could influence the macroeconomic environment, potentially impacting our business, we have demonstrated agility and adaptability, and we will continue to do so.

We will have many good products launching throughout 2022, thanks to the investments we've made in previous years. This represents a continuation of our product development across all markets. We still need to invest in the SSD area to fully leverage the opportunities presented by NVMe. We will also invest in the next generation of process technologies, including ongoing investment in EUV for the 1-gamma that Sanjay mentioned. We believe these various products will be essential to meet market demand, alongside continued investment in process technology to maintain our leadership and cost advantages.