Micron Technology Inc (MU) — Q1 2023 Earnings Call Transcript

Thank you, and welcome to Micron Technology's Fiscal First Quarter 2023 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 on 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 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 that we may be attending. You can 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 filed 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 fiscal first quarter revenue and EPS within our guidance range despite the pricing environment, which deteriorated significantly from our prior call. The industry is experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years. Micron is exercising supply discipline by making significant cuts to our CapEx and wafer starts while maintaining our competitive position. We are also taking measures to cut costs and OpEx across the Company. Customer inventory, which is impacting near-term demand, is expected to continue improving, and we expect most customers to have reduced inventory to relatively healthy levels by mid-calendar 2023. Consequently, we expect the fiscal second half revenue to improve versus the first half of our fiscal year. We expect our days of inventory to peak in our current fiscal Q2 and gradually improve over the next few quarters as our bit shipments improve and our supply growth is significantly reduced. Despite this improving bit shipment and revenue trajectory, we expect industry profitability to remain challenged through calendar 2023. The combination of our technology leadership, manufacturing expertise, diverse product portfolio, a strong balance sheet and our decisive actions provide a solid footing to navigate this challenging near-term environment. I'll start today with an overview of our technology position. Micron continues to lead the industry in both DRAM and NAND technology. We are first to market with 1-beta DRAM and 232-layer NAND. While both 1-beta DRAM and 232-layer NAND offer strong cost reductions, we have slowed their ramps to better align our supply with market demand, as we previously indicated. Yield trajectory for these nodes is on track, and we are continuing to qualify these nodes across our product portfolio and will be well positioned to ramp these nodes when industry conditions improve. Our 1-beta DRAM node, which we introduced in fiscal Q1, delivers around a 15% power efficiency improvement and more than 35% bit density improvement versus 1-alpha. 1-beta will be used across our product portfolio, including DDR5, LP5, HBM and graphics. Now turning to our end markets, across nearly all of our end markets, revenues declined sequentially in fiscal Q1 due to weaker demand and steep decline in pricing. Shipment volumes were impacted by our customers' inventory adjustments, the trajectory of their end demand and macroeconomic uncertainty. We believe that aggregate customer inventory while still high, is coming down in absolute volume as end market consumption outpaces shipping. In the data center, we expect cloud demand for memory in 2023 to grow well below the historical trend due to the significant impact of inventory reductions at key customers. End demand at cloud customers is not immune to macroeconomic challenges, but should strengthen once the economic environment improves. DDR5 is extremely important for data center customers as the industry begins to transition to this new technology in calendar Q1. As modern servers pack more processing cores into CPUs, the memory bandwidth per CPU core has been decreasing. Micron D5 alleviates this bottleneck by providing higher bandwidth compared to previous generations enabling improved performance and scaling. Feedback from our customers across the x86, and ARM ecosystem suggests that Micron leads the industry with the best D5 products. We expect server D5 bit shipments to become more meaningful in the second half of calendar 2023, with crossover expected in mid-calendar 2024. Building on our existing D5 products, in fiscal Q1, we began qualifying 1-alpha 24-gigabit D5, and we announced availability of D5 memory for the data center that is validated for the new AMD EPYC 9004 series processors. In addition, we are also making progress on CXL, and in fiscal Q1, we introduced our first CXL DRAM samples to data center customers. In data center SSDs, we are continuing to proliferate our 176-layer SSD, and in fiscal Q1, we nearly doubled the number of customers where we are qualified. We have also completed qualification of our 176-layer QLC with an important enterprise customer. In PCs, we now forecast calendar 2022 units to decline in the high-teens percentage and expect 2023 PC unit volume to decline by low to mid-single-digit percentage to near 2019 levels. Client D5 adoption is expected to gradually increase through calendar 2023, with crossover in mid-calendar 2024, and we are well positioned for this transition with leading D5 products. We also continue to lead the industry in QLC, and it is an important competitive advantage for us. In fiscal Q1, client and consumer QLC SSDs had very strong growth which helped increase our NAND QLC mix to a new record. Earlier this month, Micron began shipping the world's most advanced client SSD, featuring 232-layer NAND technology. As the world's first client SSD to ship using NAND over 200 layers, the Micron 2550 NVMe SSD demonstrates superior speed, density and power savings enabled by our industry-leading NAND node. In Graphics, we expect bit growth to outpace the broader market in calendar 2023. Micron continues to drive the industry's fastest graphics memory with 24 gigabit per second, 16-gigabit GDDR6X shipping in high-volume production. In mobile, we now expect calendar 2022 smartphone unit volume to decline 10% year-over-year versus our high single-digit percentage decline projection last earnings call. We forecast calendar year 2023 smartphone unit volume to be flattish to slightly up year-over-year driven by improvements in China following the reopening of its economy. Micron continues to build on a strong product momentum in mobile. As of fiscal Q1, 1-alpha comprised nearly 90% of mobile DRAM base and 176-layer made up nearly all of our mobile NAND bit shipments. We are also well positioned for the LP5 transition, and in FQ1, the majority of our mobile DRAM bit shipments were LP5. In fiscal Q1, our LP5X was validated for Qualcomm's latest platform and integrated into Snapdragon 8 Gen 2 reference designs. In addition, we shipped the industry's first 1-beta DRAM qualification samples with our 16-gigabit LP5. Last, I'll cover the auto and industrial end markets. Micron is well positioned as a leader in automotive and industrial markets, which offer strong long-term growth and relatively stable margins. In fiscal Q1, auto revenues grew approximately 30% year-over-year, just slightly below our quarterly record in fiscal Q4 2022. The automotive industry is showing early signs of supply chain improvement and auto unit production continues to increase. The macro environment does create some uncertainty for the auto market, but we see robust growth in auto memory demand in fiscal 2023. This is driven by the volume ramp of advanced next-generation in-vehicle infotainment systems as well as the broader adoption of more advanced driver assistance systems. Over the next five years, we expect the bit growth CAGR for DRAM and NAND in autos to be at approximately twice the rate of the overall DRAM and NAND markets. The industrial market saw continued softening in Q1 as our distribution channel partners reduced their inventory levels and end demand weakens for some customers. The fundamentals of industrial IoT, AI, ML, 5G and Industry 4.0, all remain intact, and we expect volumes to improve in the second half of our fiscal year. In our fiscal first quarter, Micron continued to collaborate closely with customers and achieved advanced product sampling and design-in across automation, OEMs, ODMs and integrators with our latest generation of D5, LP5 and 3D NAND solutions. Now turning to our market outlook. We expect calendar 2022 industry bit demand growth in the low to mid-single-digit percentage range for both DRAM and NAND. For calendar 2023, we expect industry demand growth of approximately 10% in DRAM and around 20% in NAND. For both years, demand in DRAM and NAND is well below historical trends and future expectations of growth largely due to reductions in end demand in most markets, high inventories at customers, the impact of the macroeconomic environment and the regional factors in Europe and China. Near term, over the next few months, we expect gradually improving demand trends for memory as customer inventory levels improve further, new CPU platforms are launched and China demand starts to grow as the economy reopens. Longer term, we expect that industry growth projections have declined from our expectation earlier this year primarily due to lowered growth expectations from the PC and smartphone markets and some moderation in the strong long-term growth in the cloud. Turning to industry supply growth. Industry supply growth in calendar 2022 for DRAM and NAND is closer to their respective long-term demand CAGRs and well above the industry demand growth in calendar 2022. Given the current pricing and resulting industry margins, we expect a significant decline in industry capital investments as well as a reduction in utilization rates for the industry. We expect that DRAM and NAND industry supply growth in calendar year 2023 will be well below their long-term CAGR and also well below expected demand growth in 2023. Due to the significant supply/demand mismatch entering calendar 2023, we expect that profitability will remain challenged throughout 2023. The timing of the recovery in profitability will be driven by the rate and pace at which supply and demand are brought into balance and inventories are normalized across the supply chain. We believe that negative year-on-year calendar 2023 industry DRAM bit supply growth and flattish year-on-year calendar 2023 industry NAND bit supply growth would accelerate this recovery. Micron is taking a number of decisive actions in this environment to align supply with demand and to protect our balance sheet. First, we are reducing our CapEx investments to reduce bit supply growth in 2023 and 2024. Our fiscal 2023 CapEx is being lowered to a range between $7 billion to $7.5 billion from the earlier $8 billion target and the $12 billion level in fiscal year '22. This represents approximately a 40% reduction year-on-year and we expect fiscal 2023 WFE to be down more than 50% year-on-year. We are now significantly reducing our fiscal 2024 CapEx from earlier plans to align with the supply-demand environment. We expect fiscal 2024 WFE to fall from fiscal 2023 levels even as construction spending increases year-on-year. Second, we have reduced near-term bit supply through a sharp reduction in wafer starts. As we have previously announced, we reduced wafer starts for DRAM and NAND by approximately 20%. Through a combination of these actions, we expect our calendar 2023 production bit growth to be negative in DRAM and up only slightly in NAND. Given the manufacturing cycle times, the full impact of the wafer start reductions on supply will be realized starting in our fiscal Q3. Due to our reductions to our fiscal 2024 WFE CapEx, our bit supply levels in 2024 will be materially reduced from the prior trajectory. We continue to target a relatively flat share of industry bit supply. Third, in response to the decline in expected long-term CAGR for DRAM and NAND bit growth, we are slowing the cadence of our process technology node transitions. This change will help us align our long-term bit supply CAGR investments. Given our decision to slow the 1-beta DRAM production ramp, we expect that our 1-gamma introduction will now be in 2025. Similarly, our next NAND node beyond 232-layer will be delayed to align to the new demand outlook and required supply growth. We expect these changes to the technology node cadence to be an industry-wide phenomenon. With our industry-leading technology capability, we expect to remain very well positioned. Fourth, we are taking significant steps to reduce our costs and operating expenses. We project our spending to decrease through the year driven by reductions in external spending, productivity programs across the business, suspension of 2023 bonus company-wide, select product program reductions and lower discretionary spend. Executive salaries are also being cut for the remainder of fiscal 2023, and over the course of calendar 2023, we are reducing our headcount by approximately 10% through a combination of voluntary attrition and personnel reductions. We expect to exit fiscal 2023 with quarterly OpEx of around $850 million with additional savings and cost in our P&L. Although we have taken these aggressive steps, we are prepared to make further changes and remain flexible to exercise all levers to control our supply and manage our cost structure. I will now turn it over to Mark.

Thanks, Sanjay. Fiscal Q1 revenue and EPS came within our guidance ranges despite worsening market conditions over the course of the quarter. Total fiscal Q1 revenue was approximately $4.1 billion, down 39% sequentially and down 47% year-over-year. Fiscal Q1 DRAM revenue was $2.8 billion, representing 69% of total revenue. DRAM revenue declined 41% sequentially with bit shipments decreasing in the mid-20% range and prices declining in the low 20% range. Fiscal Q1 NAND revenue was $1.1 billion, representing 27% of Micron's total revenue. NAND revenue declined 35% sequentially with bit shipments declining in the mid-teens percent range and prices declining in the low 20 percentage range. Now turning to revenue by business unit. Compute and networking business unit revenue was $1.7 billion, with weakness across client, data center, graphics and networking. Embedded business unit revenue was $1 billion, with automotive staying stronger than consumer and industrial markets. Storage business unit revenue was $680 million, while QLC mix increased to a new high. Mobile business unit revenue was $655 million, a low level, partly due to the timing of shipments between fiscal Q1 and fiscal Q2. We expect mobile revenue to grow through the rest of the fiscal year. The consolidated gross margin for fiscal Q1 was 22.9%, down approximately 17 percentage points sequentially, primarily due to lower pricing. Operating expenses in fiscal Q1 were down roughly $50 million sequentially to $101 billion. We are taking significant additional actions to reduce our operating expenses through the remainder of this fiscal year. We reported an operating loss of $65 million in fiscal Q1, resulting in an operating margin of negative 2%, down from operating margins of 25% in the prior quarter and 35% in the prior year. Fiscal Q1 adjusted EBITDA was $1.8 billion, resulting in an EBITDA margin of 45%, down 9 percentage points sequentially. Fiscal Q1 taxes were $1 million as a result of profit before tax being close to breakeven. Non-GAAP loss per share in fiscal Q1 was $0.04, down from earnings per share of $1.45 in fiscal Q4 2022 and $2.16 in the year ago quarter. Turning to cash flows and capital spending. We generated $943 million in cash from operations in fiscal Q1, representing approximately 23% of revenue. Capital expenditures were $2.5 billion during the quarter, and we see CapEx trending down from these levels through fiscal '23. Free cash flow was negative $1.5 billion in the quarter. Under a 10b5-1 plan in place during the quarter, we completed share repurchases of $425 million or 8.6 million shares at an average price of $49.57. Our ending fiscal Q1 inventory was $8.4 billion, and average DIO for the quarter was 214 days. The rapid decline in bit shipments in fiscal Q4 and fiscal Q1 has driven inventories well above our target levels, and our actions reflect our intent to work these down. We expect our DIO to peak in our fiscal Q2 and then gradually improve. We ended the quarter with $12.1 billion of total cash and investments and $14.6 billion of total liquidity. Given macroeconomic uncertainty and the market environment, we bolstered our liquidity in the quarter through $3.4 billion of added debt, bringing our total fiscal Q1 ending debt to $10.3 billion. With this additional debt and net of income on our deposits, we project net interest income of approximately $15 million in the fiscal second quarter. We project and intend to maintain ample liquidity while maintaining leverage consistent with our investment-grade rating. Now turning to our outlook for the fiscal second quarter. The near-term market environment remains challenging and negatively impacts our profitability outlook. For both DRAM and NAND, we expect bit shipments to be up in fiscal Q2, but revenue to be down. Included in the fiscal second quarter guide is an insurance recovery of approximately $120 million, most of which will be recognized as revenue. This insurance recovery is related to an operational disruption in 2017 and settlement occurred in fiscal Q2. Beyond fiscal Q2, we expect revenue and free cash flow to improve in our fiscal second half as we anticipate a continued recovery in demand. Related to announced wafer start reductions, we forecast approximately $460 million of headwinds to our cost of goods sold in fiscal '23, most of which we expect to incur in the second half. Excluding these underutilization effects, we expect fiscal 2023 cost per bit reduction to be healthy in DRAM but to be challenged in NAND, primarily due to inflation and energy costs unique to Singapore. As higher cost inventory sells through, we expect these underutilization impacts to continue into fiscal 2024. In this environment and considering the outlook, we continue to aggressively manage costs. And as Sanjay mentioned, we see OpEx trending down from approximately $1 billion in fiscal Q1 to around $850 million by fiscal Q4. Below the operating line, we will have lower net interest income, as previously mentioned. While there is still a fixed level of tax, as we discussed last quarter, due to the geographic mix and level of income, we now see fiscal 2023 taxes coming in at less than $250 million. We are reducing our planned capital expenditures in fiscal 2023 to be in the range of $7 billion to $7.5 billion with the spending weighted towards the first half of the fiscal year. Fiscal 2023 CapEx includes an increased level of construction for long-term capacity planning. WFE CapEx will be down more than 50% year-over-year. We are also significantly reducing CapEx in fiscal 2024 compared to prior plans. Until market conditions and our cash flows improve, we will focus our capital return on dividends and have suspended our share repurchases for now. With all these factors in mind, our non-GAAP guidance for fiscal Q2 is as follows. We expect revenue to be $3.8 billion, plus or minus $200 million. Gross margin to be in the range of 8.5%, plus or minus 250 basis points; and operating expenses to be approximately $945 million, plus or minus $15 million. We expect tax expense of approximately $60 million. Based on a share count of approximately 1.09 billion shares, we expect EPS to be a loss of $0.62, plus or minus $0.10. As we work through this period of challenging market conditions, Micron has the benefit of best-in-class technology, a competitive product portfolio, strong operations, a solid balance sheet and most critically, a tenacious team. Beyond this downturn and over the long term, we are confident that memory and storage revenue growth will outpace the broader semiconductor industry. This is supported by the combination of strong secular trends, memory content growth and better supply-demand balance. Micron is focused on operating and investing in a responsible and disciplined manner to achieve profitable growth and free cash flow generation consistent with our long-term model. I will now turn it back to Sanjay.

Thank you, Mark. In the last several months, we have seen a dramatic drop in demand. Micron has responded quickly to reduce our CapEx and supply output, and we are taking strong enterprise-wide actions to control our expenses. We have increased liquidity on our balance sheet and adjusted our operational plans. While the environment remains challenging, we currently expect second half fiscal 2023 revenue to improve from the first half. We are confident that the broad advantages enabled by data-centric technologies will create long-term growth for our industry and expect the total available market to reach approximately $300 billion by 2030. Thank you for joining us today. We will now open for questions.

Sanjay, I had a question about the market outlook for DRAM. You have already said that your DRAM production will be down mid- to high singles year-over-year in calendar '23. And then you said in your remarks, you said that if the industry production was down, this would accelerate the recovery in profitability. But at this point, I guess, I have two questions. One, do you think the industry will be down in terms of production for DRAM? There's some concern about what your big core income competitor is going to do. So I'm just sort of curious, do you think that they are cutting such that the industry production in DRAM will be down just like yours is down year-over-year?

Tim, I want to emphasize that we indicated our DRAM supply growth would be slightly negative in fiscal year '23. Therefore, the expected supply growth for Micron is not at mid to high single digits but rather negative. This is due to the actions we have taken, including reducing wafer output and underutilizing our fabrication facilities. Additionally, we have lowered our capital expenditures and postponed the production of our 1-beta DRAM to align our supply more closely with demand. The industry is currently oversupplied, and we believe that necessary actions are being reflected in Micron's supply reduction efforts. The rate and pace of supply cuts across the industry will influence how quickly we can restore balance between supply and demand. While we can't comment specifically on our competitors' actions, we can say that if industry supply growth for calendar year '23 is negative for DRAM and flat for NAND, it will help speed up the industry's recovery.

I guess the question is, you've in the last few years, really taken the leadership role both in DRAM and NAND. And so as you think about hitting the worst downturn in 13 years and taking the appropriate reductions in supply and cost. How can you, at the same time, make sure that you maintain your leadership? What are you doing on that front? Such that when we do go into the next upturn that you are in that lead position, lead role and can really take advantage of technology again.

Thank you, C.J. Micron is in a strong technological position, and we are confident in our capabilities and roadmap. Our 1-alpha DRAM has achieved a 40% increase in bit efficiency per wafer compared to our previous 1-z node. Even with our 1-beta node, which typically would yield less, we are seeing a 35% improvement in bit efficiency per wafer compared to our 1-alpha node. The 1-beta DRAM node is well-suited for DDR5 deployment, offering good performance and enhanced power efficiency over older products. It stands out as an industry-leading node, and we are well-prepared for the 1-beta node. Our future 1-gamma node will also be positioned effectively, and we are timing the production to optimize return on investment in research and development and manufacturing while balancing supply and demand. We are mindful of the long-term growth rate for DRAM and are adjusting our technology timing accordingly. We are managing our technology development and manufacturing plans in a responsible manner, ensuring strong positioning in the marketplace. On the NAND side, our 232-layer NAND is performing well in terms of cost, quality, and yields, and we are actively working with customers to qualify these products. We have a solid technology roadmap and feel good about our plans for the 1-gamma node and beyond the 232-layer in NAND. Recently, I spoke with a key customer who highlighted Micron as the best in the industry. We receive similar praise for our LP5, GDDR6, and QLC NAND products. Additionally, we are expanding our product offerings. Overall, we are well positioned in terms of technology and product momentum.

The question is on the pace of gross margins as you go through the year. And you spoke about revenue and free cash flow being better in the second half. Do you believe that's the case for gross margins as well? Do you think gross margins are bottoming here? And if you can comment about some of the impact of the unutilization charges and how they flow through the year and beyond Q2?

Chris, this is Mark. I’ll address that. Regarding our profile, we mentioned earlier that the first quarter would be the lowest for bits, but we anticipate an increase in bits in the second quarter, alongside a decline in revenue, highlighting ongoing challenges in market conditions. We expect Q2 to reach peak levels for DIO, while Q3 will be when inventory dollars peak. The industry is still experiencing oversupply, but customers are reducing their inventory levels, which should put them in a stronger position by the second quarter of the calendar year. However, profitability will face challenges throughout the year, affecting gross margins. On the topic of utilization effects, let me first discuss costs in general. Historically, Micron has successfully reduced costs in line with or better than the industry standards through node advancements and manufacturing productivity. However, fiscal year 2023 presents short-term challenges as lower utilization and volumes exert pressure on our cost per unit and margins. There are three main factors contributing to this situation. Firstly, the ongoing impact of routine period costs presents a challenge, involving scrap, preproduction, and freight costs that remain constant despite our lower volumes and revenue, which will influence margins negatively. Secondly, the decreased volumes are leading to underload issues in the back end, resulting in higher inventory costs, which predominantly remain in inventory rather than being classified as period costs, significantly impacting our costs earlier in the year. Lastly, our decisions to reduce utilization on the front end will create substantial costs, with many of these costs reflected in inventories rather than as period expenses. We estimate that around $460 million, which is just over half of our total fixed costs, will affect fiscal year 2023. The remaining costs will carry over into fiscal year 2024. If our volumes exceed expectations, we could see those higher cost inventories being utilized sooner, while lower volumes would result in a larger portion of those costs rolling into fiscal year 2024. Currently, we expect about $460 million in fiscal year 2023. In summary, we foresee a modest increase in cost per bit in the first quarter, primarily due to normal period cost impacts and some back-end effects linked to low volumes. The second quarter will see additional costs, mainly from back-end effects as inventories are gradually cleared. In the third quarter, we’ll experience back-end challenges arising from underutilization and front-end effects as inventory begins to clear. However, in the third quarter, especially in the fourth, we will have some counterbalancing factors, including a return to cost reductions as volumes increase and absorption occurs. This situation is temporary and results from unforeseen volume decreases, as well as proactive measures we are taking to reduce supply. It is crucial to note that while managing costs is important and we are paying attention to details, the main factor influencing our profitability and financial outlook is the balance between supply and demand. The pace of improvement in this balance will depend on our ability to align supply with demand, and we are taking firm actions regarding capital expenditures and utilization to tackle this issue.

My question is really on the demand side. I think that you did a good job of calling out what you saw from an end market perspective into next year. But I just wanted to ask specifically on the data center. You've called out inventory in the past, but versus where you guys talked about the data center last quarter, do you think that inventory at customers was worse than you initially thought? Or do you think that you're seeing a weakening in terms of data center and demand?

Inventories with data center customers, including those in the cloud sector, are higher than we anticipated. An inventory adjustment has started, and there are still challenges to address in that area. Furthermore, end demand for cloud operations is influenced by consumer-related activities, and considering the current consumer environment and macro trends, some aspects of cloud demand may be weaker as a result. Additionally, in the present macroeconomic climate, characterized by higher interest rates and other trends, companies are becoming more cautious in managing their expenses and long-term agreements, which can affect the current demand for cloud services. However, it is important to note that digitization trends remain positive. The cloud plays a significant role in helping businesses achieve efficiency in such an environment. We expect that once we navigate through the current macroeconomic challenges, the long-term outlook for cloud will be strong. In this current environment, inventory adjustments and some weakening in cloud demand do impact our overall outlook for data centers.

I just have a quick question for Mark. Mark, you said inventory base to peak in the second quarter and inventory dollars in F3Q. What kind of inventory days should we expect in F3Q? And what is the risk of inventory write-down? Kind of wondering what is your inventory write-down methodology?

Sure, I understand the question. We expect the peak inventory days to occur in the second quarter, with the inventory dollars peaking in the third quarter. Following these peaks, we anticipate a gradual improvement, which aligns with our previous projections, although market conditions have become more challenging, and volumes are slightly lower. We believe customers will be in a better position by the second quarter of the calendar year, which is a positive sign. We've also taken measures to reduce inventories. I recently discussed this at a conference, and it's worth reiterating. Inventory poses a risk that we monitor closely, especially given our lower utilization rates and the increased cost per unit, along with the current weak market conditions. As a result, our margin of safety has diminished compared to previous levels. We conducted our standard quarter-end analysis, which includes our outlook, and determined that no write-downs to the lower of cost or net realizable value are necessary. We carry out detailed reviews of projected pricing and analyze customer trends, among other considerations. If our estimates were to change further, there could be a risk of write-offs in future quarters, but there are none for the November quarter. I recommend referring to our inventory policy as outlined in our 10-K. We have a long-standing practice of evaluating inventory as a single pool, which we review regularly and apply consistently.

Yes, Sanjay, I want to revisit the insights you shared about the demand trend based on end customers or applications. You mentioned that PC units are projected to decrease by 5% to 10%. If I consider the current build rate for December and factor in a seasonal decline in Q1, it seems that the PC market might hit its lowest point around March or April, following the Chinese New Year. Could this situation potentially lead to improved pricing visibility for DRAM and NAND? I ask because the decline originated in the PC market, and I'm trying to understand if the PCM market could help stabilize certain areas within the DRAM and NAND sectors.

Well, of course, the markets where DRAM and NAND are well diversified. PC is one of the markets. And we already talked about the decline in PC units. Actually, in calendar year '22, high teens decline in PC units. This is the sharpest decline in the history of the PCs, and smartphones, another area where unit sales of smartphones globally down 10% as well. And that, too, historically, in terms of a decline is high. So these are, of course, impacting the end consumer demand and then inventory adjustments on top of it impacting the demand. And of course, as I spoke about earlier, that inventory adjustments are happening in other parts of the market as well. I think with respect to our outlook for next year in terms of demand, we expect about 10% demand growth for DRAM in calendar year '23. And when you look at mid-single digits, low- to mid-single-digit demand growth in '22 and approximately 10% in '23 that over a two-year time period is really significantly lower growth rate compared to the years in the past, the CAGRs that have been prevalent over time. So, I think what's important here is that the supply has to be reduced. The biggest factor here really would be the supply reduction. Of course, once inventory adjustments, we are able to get past and the macroeconomic environment improves, the long-term trends for demand driven by all the factors we have spoken about before, AI, 5G, industrial IoT, autonomous, all of those long-term factors will drive that demand along the lines of the CAGR that we have discussed today. But in the near term, the biggest factor to really address the demand supply is a reduction in supply in the industry. And of course, the rate and pace of the financial performance improvement will very much depend on how quickly the supply comes into balance. And as we have discussed, we have taken our actions in terms of CapEx reduction, in terms of underutilization, in terms of adjusting the technology node cadence. And we do believe that with the supply actions, the industry environment will improve. I do see that in fiscal year '24, the revenue, the profit and the free cash flow profile would be much better than '23. And of course, again, will be a function of how quickly the supply just to demand.

I had one quick clarification and then a question, clarification for Mark. You talked about the $460 million of headwind related to the underutilization of your fabs. When you throw out that estimate, what assumptions are you making for utilization rates for the next couple of quarters? You obviously talked about the 20% cut as of today. But are you assuming you stay at that 20% rate for Feb, May and perhaps August? Or are you assuming production rates or utilization rates kind of step up as you progress through the remainder of the fiscal year? And then the question is on the demand side. Sanjay, in your prepared remarks, you talked about customer inventory normalization and new server CPU platforms in China reopening as some of the key drivers for bit growth over the next couple of months or few months. How much visibility do you have into those three dynamics? You talked a little bit about inventory, but we're hearing customer inventory in some cases, might be increasing given some of the deals, not just you specifically, but the industry is striking, the server platforms could be a little bit more skewed to the second half of calendar '23 and China reopening still seems pretty gray. So curious what kind of visibility you have there.

We're anticipating that the high levels of underutilization will continue for most of fiscal year '23. After that, we'll constantly assess the market conditions and provide updates to you and the market as needed.

Regarding customer inventory, I want to emphasize that overall, we believe customer inventory levels have decreased, although they remain high. In Q2, we are anticipating an increase in bit shipments. It's important to note that industry shipments have dropped significantly compared to a few quarters ago. While there may be some weakening demand in the end market, this indicates that customers are consuming some of their inventory to meet their demand. Essentially, customers are shipping out more than they are purchasing from suppliers. We expect this gradual improvement in inventory to continue. By mid-calendar '23, although we lack complete visibility, our discussions suggest that customer inventory will be in a healthier state. This is why we anticipate that our revenue in the second half of the fiscal year will surpass that of the first half, with ongoing improvements beyond that period. Regarding China, we will closely monitor the reopening, which may be unpredictable. In the near term, we expect that China's reopening in the second half of the calendar year will lead to increased demand from that market. Additionally, we need to observe how the reopening affects global electronics supply chains, as we also have assembly and testing operations in China that we are closely watching in light of recent COVID cases. Therefore, we will continue to keep an eye on COVID cases and the reopening in China.

And Sanjay, Sapphire Rapids in Genoa, the new server CPU platforms, visibility there in terms of the ramp?

So our products are well positioned, and we expect that these will be ramping during the course of '23 and, of course, continue to ramp in '24 as well. And these are the ones that will drive a greater D5 attach with the servers. And as we said, we expect that for servers, D5 in 30s percentage range in terms of deployment by end of calendar '23 and somewhere around 50% by mid-calendar. So our products are well positioned, and we are looking forward to deployment of those new CPU platforms and that will drive healthier dynamics with respect to D5 deployment. These new processors, they work with more cores. They increase the attach rate for memory because they are bandwidth hungry and that just points to greater adoption of DRAM, particularly D5 memory with those processors.

I'll make just a quick question. I'm just curious, as you guys kind of thought about the guidance for this current quarter and given the pace of change that we saw in the pricing environment through the course of this last quarter. I guess, when you roll up your assumptions for DRAM and NAND, is it as simple to think that you guys are assuming kind of a similar pricing environment or pace of pricing decline this quarter as we saw last quarter? Or are you kind of factoring in any kind of acceleration of price degradation?

So look, we don't comment specifically on pricing, but I can certainly tell you that both DRAM and NAND are experiencing a challenging environment. And again, it is about oversupply in the market and decisive actions that we have highlighted today are the kind of actions that are important to make progress towards bringing supply and demand into balance.