Micron Technology Inc (MU) — Q4 2022 Earnings Call Transcript

Thank you, and welcome to Micron Technology's fiscal fourth quarter 2022 financial conference call. On the call with me today are Sanjay Mehrotra, our President and CEO; and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call. Today's discussion of financial results is presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of the GAAP to non-GAAP financial measures may be found on our website. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the company, including information on the financial conferences, which we may be attending. You can also follow us on Twitter at MicronTech. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results and other matters. 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, including our most recent Form 10-K and 10-Q for a discussion of the 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 to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. Micron delivered record annual revenue in fiscal 2022 with solid profitability and free cash flow, despite the challenging environment in the latter part of the year. In 2022, we ramped our industry-leading 1-alpha DRAM and 176-layer NAND nodes across our portfolio and returned a record amount of cash to shareholders. We strengthened our product portfolio significantly during the year, as evidenced by record revenue in mobile, auto, industrial, and networking end markets. Our share gains in client and data center SSDs contributed to record revenue in SSDs and also in our consolidated NAND business. We also ramped new product categories like high-bandwidth HBM2e memory and GDDR6X. In addition, a record number of customers recognized Micron as the industry leader in product quality. Our fiscal Q4 financial results were impacted by rapidly weakening consumer demand and significant customer inventory adjustments across all end markets. We are responding decisively to this weak environment, by decreasing supply growth through significant cuts to fiscal 2023 CapEx and by reducing utilization in our fabs. We are confident that the memory industry supply-demand balance will be restored, as a result of reduced industry supply growth combined with the long-term demand growth drivers for memory. Micron's technology and manufacturing leadership, deep customer relationships, diverse product portfolio and strong balance sheet put us on a solid footing to navigate this industry down cycle and position the company for strong long-term growth. Our industry-leading 1-alpha DRAM and 176-layer NAND nodes drove strong cost reductions in fiscal 2022. In fiscal Q4, we led the industry again in introducing our 232-layer NAND, becoming the first company to enter volume production on a node with more than 200 layers. We also remain on track to begin the ramp of our 1-beta DRAM node in manufacturing by the end of calendar 2022. Both the 1-beta DRAM node and 232-layer NAND node will provide us with robust cost reduction when they ramp in high volume. Artificial intelligence, cloud computing, electric vehicles and the ubiquitous connectivity offered by 5G are strong long-term demand drivers for memory and storage. As we have discussed previously to support memory demand in the second half of the decade and beyond, we will need to add new DRAM wafer capacity. The recently passed CHIPS and Science Act will help to reduce the memory manufacturing cost disparities that exist between the U.S. and Asia. Following passage of the CHIPS Act, Micron announced our intent to invest $40 billion through the end of the decade in leading-edge memory manufacturing in the U.S., contingent on CHIPS Act support. These investments will ultimately create tens of thousands of American jobs, strengthen U.S. supply chain resiliency and further diversify our global fab footprint. Earlier this month, we announced that we have chosen Boise as one of two leading-edge DRAM manufacturing fab sites that we are planning in the U.S. and we expect to invest approximately $15 billion at the site, through the end of the decade. The co-location of this new manufacturing facility with our existing R&D site at our headquarters in Boise provides multiple strategic benefits including improving efficiency across both R&D and manufacturing, simplifying technology transfer and reducing time to market for leading-edge products. We will soon announce a second high-volume U.S. DRAM manufacturing site. These new fabs will fulfill our requirements for additional wafer capacity starting in the second half of the decade and beyond. We plan to build these sites in stages. Tool installation and production output will be ramped in line with industry demand growth, which is consistent with our goal to maintain stable bit supply share as well as supply discipline. Now turning to our end markets, Micron's product portfolio has become significantly stronger and contributed to our momentum in the most attractive markets. In fiscal 2022, data center and graphics revenue grew approximately 35% and auto, industrial and networking revenue grew approximately 40%. The combined revenue mix of these important markets grew from approximately 45% of our total revenue in fiscal 2021 to 52% in fiscal 2022, putting us on track to hit our target of 62% by fiscal 2025 as outlined at our Investor Day earlier this year. This portfolio transformation will increase our exposure to the most attractive and stable profit pools in the industry. In fiscal Q4, data center revenue was down both sequentially and year-over-year, driven primarily by declines in ASP. In fiscal 2022, we set a new revenue record for our cloud revenues, which grew more than 30% year-over-year. Cloud end demand remains healthy, driven by secular growth in AI and the digital economy. However, the data center market, including both cloud and enterprise continues to face some supply constraints that are limiting server bills and customers are reducing memory and storage inventory due to macroeconomic uncertainties. With a diverse set of products across DDR4, DDR5, graphics memory, high bandwidth memory and data center SSDs, Micron offers a wide portfolio of solutions targeting this market with industry-leading quality. Building on our recent momentum of market share gains in data center SSDs, in the first half of calendar 2022, we continue to make solid progress in ongoing qualifications of our 176-layer NVMe data center SSDs at hyperscalers and OEMs around the world. Fiscal Q4 client revenue was down both sequentially and year-over-year, as PC unit end-demand declined and customers reduced inventory. We now forecast calendar 2022 PC unit sales to decline by approximately a mid-teens percentage year-over-year. In fiscal Q4, we began ramping 16-gigabit DDR5 in high volume production ahead of anticipated client platform launches. We also commenced volume production of Gen4 QLC NVMe client SSDs and are the only company with a full portfolio of 176-layer TLC and Gen4 QLC NVMe SSDs qualified and shipping to PC OEMs. In fiscal Q4, graphics revenue declined both sequentially and year-over-year. Micron continues to hold an excellent position as the performance leader in the graphics market. In fiscal Q4, we began shipping the industry's fastest graphics memory with 24 gigabits per second GDDR6X shipping in high-volume production. We are excited to see our proprietary GDDR6X memory featured in the recent launch of NVIDIA's GeForce RTX 4090 and 4080 GPUs. Fiscal Q4 mobile revenue declined both sequentially and year-over-year. Despite the weakness in end unit sales, we achieved two consecutive years of record mobile revenue in fiscal 2021 and 2022. We now project calendar 2022 smartphone unit volume to decline by a high-single digit percentage year-over-year. 5G continues to drive greater content per device and we project 5G penetration to exceed 50% of the smartphone unit TAM in calendar 2022. We continue to execute well on our mobile product roadmap. In fiscal Q4, 1-alpha comprised over 70% of our LPDRAM mobile bit shipments and 176-layer made up approximately 95% of our mobile NAND bit shipments. Micron is exceptionally well positioned as a leader in automotive and industrial markets, which are attractive because of strong long-term growth and relatively stable margins. In fiscal Q4, our automotive business delivered another record revenue quarter and fiscal 2022 auto revenues grew 30% year-over-year, setting a new all-time high. In fiscal Q1, we see some slowdown in our automotive demand as our customers rebalanced DRAM and NAND inventory levels as they deal with non-memory semiconductor shortages and production challenges. However, we see continued strong growth in our second half of fiscal 2023 with volume ramp of advanced next generation, in-vehicle infotainment systems as well as the broader adoption of more advanced driver-assistance systems. We are extremely excited by the long-term prospects for memory and storage in the automotive market and expect long-term CAGR for DRAM and NAND in autos to be at about twice the rate of the overall DRAM and NAND markets. While long-term fundamentals remain strong, our industrial IoT business saw sequential and year-over-year revenue declines in fiscal Q4. Softening macroeconomic conditions have led some customers to reduce overall purchases of DRAM and NAND. Nevertheless, our long-term outlook remains strong for our Industrial business, driven by the proliferation of factory automation and digitization. Turning to the market outlook. The memory and storage industry environment has deteriorated sharply since our last earnings call. Calendar 2022 industry bit demand growth for DRAM is now expected to be in the low-to-mid single digit percentage range, and for NAND, slightly higher than 10%. An unprecedented confluence of events has affected overall demand including COVID-related lockdowns in China, the Ukraine War, the inflationary environment impacting consumer spending and the macroeconomic environment influencing customers' buying behavior in multiple segments. In addition, inventory adjustment at customers across all end markets are also contributing to demand weakness. These factors are depressing demand for DRAM and NAND to well below end market consumption levels. We are also seeing an extremely aggressive pricing environment. Due to the sharp decline in near-term demand, we expect supply growth to be significantly above demand growth in calendar 2022, contributing to very high supply inventories for both DRAM and NAND. Looking ahead in calendar 2023, while macroeconomic uncertainty is high and visibility is low, we currently expect demand growth to be closer to the long-term growth rates of both DRAM and NAND bouncing back from very weak levels in calendar 2022. We expect the inventory at our customers to improve in early calendar 2023 causing demand to rebound starting from the second quarter of calendar 2023. We expect calendar 2023 industry DRAM supply to grow well below demand growth. We are modeling a mid-single digit percentage growth in DRAM industry supply in 2023, which would represent the lowest ever industry supply growth. NAND supply growth in calendar 2023 is also expected to fall below demand growth. Given the elevated supplier inventories entering calendar 2023, we expect industry profitability to remain challenging in 2023. Following a weak first half of fiscal 2023, we expect strong revenue growth in the second half of fiscal 2023 as bit demand rebounds following substantial improvement in customer inventories. Projections for long-term demand trends remain strong across multiple end markets. We expect long-term demand bit growth to be in the mid-teens percentage slightly lower than our prior expectation of mid- to high-teens due to a moderation in the expectation of long-term PC unit sales. We continue to expect the NAND market, which benefits from elasticity to grow around 28% over the long term. Turning to our supply. Given the change in market conditions, we have been taking immediate action to reduce our supply growth trajectory and align it to market demand. We made significant reductions to CapEx and now expect fiscal 2023 CapEx to be around $8 billion, down more than 30% year-over-year. CapEx would be lower if it were not for more than doubling our construction CapEx, year-over-year to support the supply growth required to meet the demand for the second half of this decade, as well as investment for EUV lithography systems to support 1-gamma node development. WFE CapEx will decline nearly 50% year-over-year and reflects a much slower ramp of our 1-beta DRAM and 232-layer NAND versus prior expectations. Fiscal 2023 WFE CapEx is focused on developing the technology capability of our leading nodes and new product introductions. To immediately address our inventory situation and reduced supply growth, we are reducing utilization in select areas in both DRAM and NAND. Our CapEx and utilization actions will have an adverse impact on our fiscal 2023 costs, but they are necessary to bring our supply and inventory closer to industry demand. We will aim to grow our DRAM and NAND supply in line with demand over time while continuing to optimize our costs and portfolio to improve our profitability. Before passing it over to Mark, I want to reflect on the tremendous progress that the Micron team has made over the last few years. Today, we are the technology leader in both DRAM and NAND with a very competitive cost structure. We have leadership products and a strong portfolio that is transitioning towards high value solutions and we are gaining share in products that represent a more attractive profit pool in our industry. Our balance sheet is strong and allows us to invest appropriately to maintain technology, product and manufacturing leadership going forward. Our world-class quality and manufacturing expertise is recognized by our customers worldwide. We have delivered record revenues in multiple end markets in fiscal 2022, while returning record levels of cash to our shareholders. While the near-term environment is challenging, we are confident in our ability to emerge stronger and deliver financial performance in line with our long-term financial model. The long-term manufacturing investments we are making will further strengthen our diversified fab footprint and position us to capitalize on the exciting long-term opportunities ahead of us. I will now turn it over to Mark.

Thanks, Sanjay. Our fiscal Q4 revenues came in consistent with our August 9 update, while EPS was within the original guidance range. Fiscal Q4 capped off a strong fiscal year in which we set a record for total revenue, generated substantial free cash flow and returned $2.9 billion to shareholders. Total fiscal Q4 revenue was $6.6 billion, down 23% sequentially and down 20% year-over-year. Fiscal 2022 total revenue was a record at $30.8 billion, up 11% year-over-year. Fiscal Q4 DRAM revenue was $4.8 billion, representing 72% of total revenue. DRAM revenue declined 23% sequentially and was down 21% year-over-year. Sequentially, bit shipments decreased by roughly 10% while ASPs declined in the low teens percentage range. For the fiscal year, DRAM revenue increased 12% year-over-year to $22.4 billion, representing 73% of total fiscal year revenue. Fiscal Q4 NAND revenue was $1.7 billion, representing 25% of Micron's total revenue. NAND revenue declined 26% sequentially and was down 14% year-over-year. Sequential bit shipments declined in the low-20 percentage range and ASPs declined in the mid- to high-single digit percentage range. For the fiscal year, NAND revenue increased 11% year-over-year to a record $7.8 billion, representing 25% of total fiscal year revenue. Turning to our fiscal Q4 revenue trends by business unit, revenue for the Compute and Networking Business Unit was $2.9 billion, down 25% sequentially and down 23% year-over-year. The sequential decline was primarily driven by client, while declines in server and graphics were less pronounced. Networking revenue hit a new record in fiscal 2022. Revenue for the Mobile Business Unit was approximately $1.5 billion, down 23% sequentially and down 20% year-over-year. Mobile revenue for fiscal 2022 set a new record. Revenue for the Storage Business Unit was $891 million, down 34% sequentially and down 26% year-over-year. For the fiscal year, NAND revenue in the Storage Business Unit was its highest ever with share gains in both client and data center SSDs. Finally, revenue for the Embedded Business Unit was $1.3 billion, down 9% sequentially and down 4% year-over-year. For fiscal 2022, EBU delivered $5.2 billion of revenue, supported by revenue records in automotive and industrial markets. The consolidated gross margin for fiscal Q4 was 40.3%, down approximately 7 percentage points sequentially. Lower pricing was the primary driver of the decline. For the fiscal year, the consolidated gross margin was 45.9%, up approximately 6 percentage points year-over-year. Operating expenses in fiscal Q4 were just over $1 billion and below the guidance range provided on our last earnings call due in part to lower variable compensation in the quarter. Sequentially, OpEx was up around $60 million due primarily to the timing of technology development spend. For the fiscal year, operating expenses were $3.8 billion, up approximately $500 million year-over-year, driven by R&D to support our product and technology roadmaps. Fiscal Q4 operating income was $1.7 billion, resulting in an operating margin of 25%, down approximately 11 percentage points sequentially and down 12 points from the prior year. Fiscal 2022 operating income was $10.3 billion, resulting in an operating margin of 33.4%, up approximately 6 percentage points from the prior year. Fiscal Q4 adjusted EBITDA was $3.6 billion, resulting in an EBITDA margin of 53.5%, down 390 basis points sequentially. For the fiscal year, adjusted EBITDA was $17.4 billion resulting in an EBITDA margin of 56.7%. Fiscal Q4 taxes were $74 million or over 4% of pre-tax income. Our fiscal 2022 total taxes were $793 million or approximately 8% of pre-tax income. Non-GAAP earnings per share in fiscal Q4 was $1.45, down from $2.59 in fiscal Q3 and $2.42 in the year-ago quarter. Non-GAAP EPS was $8.35 for the fiscal year, up from $6.06 in the prior year. Turning to cash flows and capital spending. We generated $3.8 billion in cash from operations in fiscal Q4, representing 57% of revenue. For the fiscal year, we generated $15.2 billion of cash from operations, representing 49% of revenue. Capital expenditures were $3.6 billion during the quarter and $12 billion for the fiscal year. We generated $196 million of free cash flow in fiscal Q4 and $3.2 billion for the fiscal year. Fiscal year 2022 was the sixth consecutive year of positive free cash flow for Micron. During the quarter, we completed share repurchases of $784 million or 13.2 million shares. For the fiscal year, we completed share repurchases of $2.4 billion, representing 35.4 million shares. Including our dividend payments, we returned $2.9 billion to shareholders in fiscal 2022 representing 90% of free cash flow. We remain committed to returning 100% of free cash flow across the cycle through a combination of share repurchases and dividends. Our ending fiscal Q4 inventory was $6.7 billion and average days of inventory for the quarter was 139 days, reflecting weaker market conditions during the quarter. Our balance sheet is rock solid with strong liquidity, low leverage ratio and a net cash position. We ended fiscal 2022 at $13.6 billion of liquidity, exceeding our mid-30's percentage of revenue target. Fiscal Q4 ending cash and investments were $11.1 billion and total debt was $6.9 billion. Now turning to our outlook for the fiscal first quarter. As a result of the demand challenges described by Sanjay earlier, we expect fiscal Q1 bit shipments and pricing to decline in both DRAM and NAND. We expect that inflationary pressure will continue to be a headwind to costs in Q1 and fiscal 2023. We remain disciplined in our expense management and have taken specific actions with more planned. As we look ahead, macroeconomic uncertainty is high and visibility is low. In fiscal Q2, we currently expect revenue to be in a similar range as fiscal Q1 with bit shipments up, but still weak for both DRAM and NAND. We also expect a recovery in volumes and revenues in the second half of the fiscal year. We expect our inventory to increase in the fiscal first half of 2023 and days of inventory to improve as demand recovers in the second half of the fiscal year. As Sanjay mentioned, we expect our fiscal 2023 capital spending to be around $8 billion, down more than 30% year-over-year, driven by a near 50% decline in wafer fab equipment CapEx. We expect capital spending to be weighted toward the first half of the fiscal year. And as a result, we project to be over $1.5 billion negative free cash flow in the November quarter. We continue to evaluate ways to improve free cash flow, including reducing CapEx, lowering expenses and managing working capital as we respond to market conditions. In fiscal 2023, we expect our tax rate to be elevated. Unless Congress appeals or delays recent changes to R&D deductibility, recent legislation requires that for tax purposes, we capitalize and amortize R&D expense this fiscal year. In addition based on our income mix and U.S. and foreign tax rules, our taxes become more fixed at these lower profitability levels. These factors resulted in an estimated tax of approximately $300 million at a minimum. Beyond this level the actual tax expense will depend on the level of operating income through the year. So in this lower pre-tax profitability fiscal year 2023, we expect to have a materially higher tax rate. Long term, as our profitability normalizes, we expect our tax rate to be in the low to mid-teens percentage range. With all these factors in mind, our non-GAAP guidance for fiscal Q1 is as follows: We expect revenue to be $4.25 billion, plus or minus $250 million. Gross margin to be in the range of 26% plus or minus 200 basis points and operating expenses to be $1 billion, plus or minus $25 million. Based on a share count of approximately $1.12 billion, fully diluted shares, we expect EPS to be $0.04, plus or minus $0.10. In closing, we had many meaningful accomplishments in fiscal 2022, including delivering record revenue, achieving clear technology leadership in both DRAM and NAND, increasing share in client and data center SSDs, further strengthening our balance sheet and returning a record amount of capital to our shareholders. While the near-term environment is challenging, the Micron of today is extremely well prepared to navigate it with our competitive cost structure, strong product portfolio and rock solid balance sheet. Beyond fiscal 2023, a year starting out with a challenging set of external events, we are confident in our ability to deliver financial performance consistent with our long-term cross-cycle financial model, including revenue growth of high-single digits, operating margins of 30% and free cash flow margin of over 10%. I will now turn it back to Sanjay.

Thank you, Mark. The current macroeconomic environment presents an unprecedented challenge for the industry. Our rapid actions to both moderate utilization and sharply reduced CapEx illustrate our commitment to supply discipline and our focus on bringing our supply and demand back into balance. The Micron team continues to execute with agility to changing business conditions. We remain committed to our strategy of maintaining stable bit share and growing profitability with a portfolio of higher value solutions and we are confident in the long-term technology drivers for memory. New data-centric applications and technologies will drive long-term memory demand on the trajectory that outpaces growth in other semiconductor categories. Our strategic investments underscore this confidence and will ensure Micron is able to capitalize on these long-term trends in the decade ahead. Thanks for joining us today. We will now open for questions.

Yeah. Good afternoon. Thank you for taking the question. I guess first question, can you provide a little bit more detail on the magnitude of utilization cuts and how we should be regarding any underutilization charges to gross margins in November and February quarters?

So I think I can answer the first part and then Mark can take on the second part on the margins. So with respect to the utilization cuts, they are across NAND and DRAM and approximately in the mid-single-digit range. And of course, these cuts are for the products that have been in high inventory. And so we are cutting production of those products and using the equipment that is freed up and the space that is freed up to deploy it toward the new technology transitions. So that actually helps us with CapEx efficiency. And Mark can comment on the gross margin impact.

Yeah. C.J., as you mentioned, it's going to hit us not in the first quarter, but later in the year and it would be between 1 point and 2 points of impact at this point. And of course, depending on market conditions, we would either dial that back or bring utilization lower.

Very helpful. As a quick follow-up, considering your strong net cash position and your guidance indicating negative free cash flow, what is your near-term philosophy regarding buybacks?

We will continue to emphasize returning 100% of free cash flow to shareholders. We did repurchase shares in the first quarter and will look for opportunities to do so again. As you noted, we faced cash flow challenges in the first quarter due to an unprecedented downturn that was both sharp and sudden, leading to increased inventory levels and suppressed income, along with elevated CapEx. We expect a negative cash flow of $1.5 billion in the first quarter. We will also face challenges in the second quarter as we work through high inventory levels and the revenues we guided for. The CapEx will take time to reduce, but we anticipate a return to free cash flow generation in the second half of the year. We are committed to managing CapEx, reducing expenses, and optimizing our working capital to improve on our projections from the first quarter.

Thank you.

Thank you. Mark, it seems you are suggesting that February will be the low point for earnings. Revenue appears to be relatively stable, but gross margins are likely to decline as pricing decreases and costs increase. My question is about the behavior of cloud customers considering the current supply situation. As you mentioned, DRAM supply is expected to grow only in mid-single digits, with much of that coming from inventory next year, which likely means production will remain flat or even decrease. Since these customers are quite knowledgeable, I assume they will start engaging again early next year, potentially leading to a rapid recovery in pricing. Could Sanjay or Mark discuss the behavior of these cloud customers and how you foresee this playing out throughout the year, especially with February marked as the low point? Thank you.

So look we are not going to project future pricing trends here, but of course, we will continue to work closely with customers, not just in cloud, but customers across all end market segments. And of course, as we noted that inventories at our customers are high, across all end market segments and they are adjusting their inventory levels including in cloud. We will of course, most important thing is to take actions and we have taken decisive action with respect to WFE reduction by nearly 50% and reducing our supply growth. We expect the industry supply growth to be in the mid-single digit in 2023 and our supply growth will also be in line with the industry around the same for DRAM. So I think what's important is that the supply growth will be less, while the demand growth once inventory adjustments at customers have normalized or have substantially improved by our second fiscal second half, then demand will go up from customers and we expect that the DRAM demand will be in mid-teens supported by inventory, but the supply growth will be meaningfully less than demand growth and that's what will bring an improving trajectory of industry supply-demand balance in improving fundamentals for our business as we go through calendar year '23.

Thanks. Can I just clarify on that, Sanjay? So, your supply will be mid-single digits, but your production is actually going to be down year-over-year, correct?

What we are saying is that the supply growth will be in the mid-single digits, but the shipments will be in the mid-teens range in line with the demand recovery that we expect. We also anticipate that the industry's supply growth for DRAM next year will be in the mid-single digits, which would correspond to the lowest recorded supply growth for DRAM.

Perfect. Thank you.

So again, the supply growth will be in the mid-single digits, inventory will be used to supply the demand, which will be higher than the supply growth. We expect the demand to be in mid-teens next year.

We expect that in the first quarter, both the bits and average selling prices will decline, potentially even more than the same volume decrease we’ve observed. Costs are slightly increasing in DRAM and NAND due to a mix of volume changes, inflation, and timing related to technology nodes. In the second quarter, as mentioned, bits will increase, but will still be lower compared to the previous year, and revenue will likely stay in a similar range as the first quarter. In the second half, bits are expected to rise sequentially from the third to the fourth quarter, and should be up year-over-year. For the full year, we anticipate that the reduction in DRAM costs will be less than the long-term average. While we’re seeing some benefits from foreign exchange, inflation and other factors will be challenging. Overall, we expect improvements in volumes in the first quarter and a better market in the second half.

Yes. Thank you. Good afternoon. I have two questions please. I guess the first question is just kind of a follow-up on CapEx. I know in the past you have described capital intensity being in the 30% to 35% range of sales. But it does appear that memory demand for calendar '22 and '23 could still be below your long-term expectations of mid-teens DRAM demand and 20% to 30% for NAND demand. And so I guess the question is, do you believe that the industries framework for CapEx needs to consider a lower terminal bit growth rate for DRAM and NAND? And I guess, what are your own views on managing long-term capital investment to support bit demand beyond fiscal '23? And I have a follow-up please.

So our view on long-term DRAM CAGR is mid-teens and NAND CAGR approximately 28%. And we would always be managing our investments to grow our supply in line with demand. Of course, there can be variations through the cycle, but we will overall focus on making adjustments as needed, just like you have seen adjustments now. And just keep in mind that as we look ahead at CapEx considerations, we should keep in mind that the tech transitions are getting more expensive. And of course, tech transitions are taking longer as well. So the capital intensity is higher. Tech transitions and also giving actually lower bit growth, and of course, transition to DDR5 is also contributing to lower bit growth per wafer because of DDR5 die tends to be just bigger than DDR4 die because of the specifications. So our expectation is, cross-cycle on average over long term, our CapEx would be around mid-30s that we had stated earlier, mid-30% of revenue. And of course, any given year there can be variations, but that's across cycle CapEx intensity that we would be expecting.

I appreciate that, Sanjay. Thank you. I guess for my follow-up, I was curious, what portion of your unfinished goods inventory is fungible and can be repurposed to either different end markets or different customers, even within that same end markets? Is there any clarity in terms of how you can kind of repurpose on the inventory that you have would be quite helpful? Thank you.

I think, Karl, most of it is designed to be repurposed. There are some limitations, but that strategy will yield benefits here because this downturn was so sharp and sudden, unprecedented, that inventories have grown to levels beyond what we anticipated just last quarter during our earnings call. We ended at 139 days. Ideally, we should be down to around 100 or 110 days, but we expect an increase in the first quarter to over 150 days, and it will likely remain elevated through the second quarter and possibly for the rest of the year until recovery is meaningful and customers begin to replenish their own inventories. However, we expect to see a decline in inventory days during the latter half of the year. This perspective also influences our capital expenditures to reduce supply. We are confident that over time, this is good inventory. Primarily, it's leading node and, as you mentioned, it's fungible, so we believe that eventually, we will be able to redeploy or use that inventory and reach our target of 100 to 110 days.

Great. Thank you. I wonder if you could talk about the November quarter. At the midpoint, it looks like your cost of sales comes down almost $900 million sequentially and I think of that as being kind of depreciation labor overheads things like that. What's happening there that the sort of fixed cost elements of that are coming down so much and is that sustainable beyond the November quarter?

We are clearly running the fabs, and that is being absorbed into inventories. So, I believe that answers your question.

And volumes down are down of course, so...

Yeah. Okay. So you built $1 billion worth of inventory in August quarter, almost that much and you had $4 billion cost of sales, and it's going down $3.1 billion next quarter. So I guess it is a pretty significant inventory build is what we would readout?

I believe our inventory levels are currently high and we anticipate they will increase further, exceeding 150 days. This situation is a result of this unprecedented period. We are taking steps to influence future supply and capacity to manage these inventories, which are of high quality. Although our inventory is substantial, it remains usable, and we are actively managing working capital expenses and cash flow during this time.

Yes, thank you for taking my question. Mark, just a quick follow-up. You mentioned that February revenue might remain flat, but the gross margin is expected to decrease by at least 2 points due to under-utilization charges impacting gross margin later. Should I take that to mean it will occur in February?

It depends on when the inventory is cleared, but later in the year, Mehdi. The gross margin will be influenced not only by cost but also by pricing and market conditions at that time. We believe volumes are recovering, and we are not providing guidance on the rest of the P&L or its components at this moment.

Should I spread 200 basis point of gross margin hit due to under-utilization throughout the remainder of fiscal '23?

Yeah, Mehdi. That's going to be a challenge in the second half of the year.

Got it.

But we're not providing guidance for those quarters at this point. We have outlined a framework for how we expect our business to recover in line with the broader industry and what we anticipate will be the demand activity from our customers.

Sure. Fair. And I guess my follow-up question is also related to under-utilization rates. You've laid out a very conservative view on bit shipment for '23, especially, on the supply side, but you're also assuming demand would inflect to be after February quarter. Would there be a scenario that given actually the demand improvement is not as significant and would you be willing to take additional under-utilization like charges?

So Mehdi, we will consistently monitor macro trends, industry dynamics, and our overall business. We are prepared to take necessary actions to address both short-term and long-term needs. We will continue analyzing under-utilization, focusing on products with excess inventory and leveraging that to defer capital expenditure requirements. We will keep seeking those opportunities as they arise.

Got it. Thank you.

Hello. Thanks for taking my question. I think Sanjay in your prepared remarks, you mentioned calendar '23 bit demand will be in line with historical trends. I'm curious, what are your assumptions about the PC and the smartphone market next year that would support bit demand growth to be in line with historical trends?

This year, overall PC unit demand is down by mid-teens percentage points. For next year, we expect it to be flat to slightly down. Regarding smartphones, we anticipate that China will be reopening and its economy will rebound after the significant impact of COVID lockdowns on demand. Overall smartphone unit sales are down in the high-single digits year-over-year, but we expect a rebound in sales next year. It's important to note that content remains the biggest driver of growth; 5G phones require more memory and storage. Additionally, we are focused on shifting our business from 55% in the consumer sector, including PC and smartphones in fiscal year '21, to 38% by fiscal year '25. We made progress in fiscal year '22, reducing that percentage to 48%. We are successfully increasing our mix towards more attractive and stable markets such as data center, automotive, industrial, networking, and graphics.

Got it. Very helpful. And then on the range of WFE cuts for next year, are you expecting your competitors to also reduce spending by the same level? And where I'm going with that question is that at what point does it become a competitive concern, because historically most of your spending has been on technology. So if you're cutting that by 50%, at what point does that impact your competitive capabilities and impact your cost down capabilities?

So look, historically, the DRAM industry in recent years has been disciplined in terms of CapEx management and supply growth management. Of course, the current environment is unprecedented with respect to the confluence of factors that we discussed, that have impacted demand, and the unprecedented level of inventory adjustments by our customers as well. We will take the necessary actions to bring our supply in line with demand. We think it is prudent. It is important to be rational in this regard. Of course, as we highlighted that this is a headwind to costs, with respect to delaying the technology transitions for our 1-beta and for our 232-layer NAND, as well as using under-utilization. But this is the right thing to do for the business to bring supply growth in line with demand growth and this is what will restore the healthy trajectory of demand-supply balance. So this is the right thing to do and I just want to also highlight that we would, of course, maintain our share as well and that is important, but as part of that strategy, we will also continue to shift towards parts of the market, as I highlighted in my prior comments, where the profit pool is greater. So we will maintain share, but we will also continue to shift towards strengthened profitability. And I think you've seen that from Micron over the course of the last few years, whereas we used to be significantly behind our competitors in margins. Today, we are matching the margins, if you look at past few quarters. So I think that just shows that we remain disciplined and we remain focused on continuing to shift our portfolio towards greater pools of our profitability.

To add to that, Vivek is right in saying that our remaining spending will be concentrated on technology. We recognize the importance of investing in technology to enhance our business, so our remaining expenditures will reflect that focus. Additionally, we are able to maintain our market position with the inventory we have, which exceeds 150 days as we head into the next quarter, and we expect to utilize that for some time.

Good afternoon, and thank you for allowing us to ask a question. It is related to the last question, but what is your assumption for the industry's memory WFE decline in 2023 that translates into a mid-single digit increase in DRAM bit supply next year?

Look, we have shared with you what we are implementing in terms of our WFE, but we certainly can't be commenting on parts of others in the industry with respect to their WFE actions. But as I pointed out, historically, the industry has been disciplined, has been prudent in terms of taking actions to manage supply growth, especially when it gets ahead of the industry demand.

I was curious about the assumptions driving the mid-single-digit supply growth for DRAM bits. Also, if you start ramping up 1-beta DRAM and 232-layer NAND in the second half of this year, how many quarters do you think it will take for those products to make up 50% of bit shipments? If the ramp is slower than planned, how does that timeframe compare to what is typical for new technologies?

It's important to note that we are postponing the introduction of 232-layer and 1-beta technologies compared to our earlier plans. The majority of the $8 billion in capital expenditures we mentioned is actually directed towards getting these technologies ready for engineering learning and producing products for customer qualifications. As a result, these technologies will not significantly contribute to revenue shipments in fiscal year '23 until late in that year. However, they will be key drivers of bit growth, revenue growth, and cost reductions in fiscal year '24. We will continue to use our inventory to cover the reduced supply growth to meet the anticipated increase in demand in fiscal year '23.

Okay. Fair enough. Thank you.