Operator:

Thank you for standing by, and welcome to Micron Technology's Fiscal Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Satya Kumar, Investor Relations. Please go ahead, sir.

Sanjay Mehrotra:

Thank you, Satya. Good afternoon, everyone. I am pleased to report that Micron delivered fiscal Q3 revenue, gross margin, and EPS, all above the high end of guidance ranges. Micron drove robust price increases as industry supply-demand conditions continued to improve. This improved pricing, combined with our strengthening product mix, resulted in increased profitability across all our end markets. In data center, rapidly growing AI demand enabled us to grow our revenue by over 50% on a sequential basis, and we grew share in high-margin AI-related product categories such as HBM, high-capacity DIMMs, and data center SSDs. Our mix of data center revenue is on track to reach record levels in fiscal 2024 and to grow significantly from there in fiscal 2025. Robust AI-driven demand for data center products is causing tightness on our leading-edge nodes. Consequently, we expect continued price increases throughout calendar 2024 despite only steady near-term demand in PCs and smartphones. As we look ahead to 2025, demand for AI PCs and AI smartphones and continued growth of AI in the data center creates a favorable setup that gives us confidence that we can deliver a substantial revenue record in fiscal 2025, with significantly improved profitability underpinned by our ongoing portfolio shift to higher-margin products. Micron is ramping the industry's most advanced technology nodes in both DRAM and NAND. Over 80% of our DRAM bit production is now on leading-edge 1-alpha and 1-beta nodes. Over 90% of our NAND bit production is on our two leading-edge NAND nodes. 1-gamma DRAM pilot production using extreme ultraviolet lithography is progressing well, and we are on track for volume production in calendar 2025. Our next-generation NAND node is on track, with high-volume production planned for calendar 2025. We experienced some operational disruptions after the recent Taiwan earthquake but were able to recover quickly, thanks to diligent efforts from Micron Taiwan team members working together with our global operations teams. Despite impacts from the earthquake, we now expect our fiscal 2024 DRAM front-end cost reductions, excluding HBM, to be in the high single-digit percentage range. We expect our fiscal 2024 NAND front-end cost reductions to be in the low-teens percentage range. These cost reductions are supported by our industry-leading 1beta DRAM and 232-layer NAND nodes. During the quarter, Micron signed a nonbinding preliminary memorandum of terms, or PMT, with the U.S. government for $6.1 billion in grants under the CHIPS and Science Act. These grants support our planned leading-edge memory manufacturing expansions in Idaho and New York. Federal and state incentives, projected power-cost advantages and R&D co-location synergies will enable Micron to achieve cost-competitive, leading-edge memory manufacturing in the United States when these projects reach efficient manufacturing scale. Fab construction in Idaho is underway, and we are working diligently to complete the regulatory and permitting processes in New York. This additional leading-edge greenfield capacity, along with continued technology transition investments in our Asia facilities, is required to meet long-term demand in the second half of this decade and beyond. These investments support our objective to maintain our current bit share over time and to grow our memory bit supply in line with long-term industry bit demand. Micron retains flexibility under the PMT to manage construction and timing of supply growth in a manner that allows us to remain responsive to market conditions. Now turning to our end markets. We are in the early innings of a multi-year race to enable artificial general intelligence, or AGI, which will revolutionize all aspects of life. Enabling AGI will require training ever-increasing model sizes with trillions of parameters and sophisticated servers for inferencing. AI will also permeate to the edge via AI PCs and AI smartphones, as well as smart automobiles and intelligent industrial systems. These trends will drive significant growth in the demand for DRAM and NAND, and we believe that Micron will be one of the biggest beneficiaries in the semiconductor industry of the multi-year growth opportunity driven by AI. Most data center customer inventories have normalized, and demand from customers continues to strengthen. PC and smartphone customers have built additional inventories due to the rising price trajectory, the anticipated growth in AI PCs and AI smartphones, as well as the expectation of tight supply as an increasing portion of DRAM and NAND output is dedicated to meeting growing data center demand. Due to expectations for continued leading-edge node tightness, we are seeing increased interest from many customers across market segments to secure 2025 long-term agreements ahead of their typical schedule. In data center, industry server unit shipments are expected to grow in the mid-to-high single digits in calendar 2024, driven by strong growth for AI servers and a return to modest growth for traditional servers. Micron is well positioned with our portfolio of HBM, D5, LP5, high-capacity DIMM, CXL, and data center SSD products. Recently, our customers have announced their long-term AI server product roadmaps, with an annual cadence of new products with significantly improved capabilities for the next several years. Micron's technology and product leadership puts us in an excellent position to support this growth. Customers continue to provide feedback that our HBM3E solution has 30% lower power consumption compared to competitors' solutions. Our HBM shipment ramp began in fiscal Q3, and we generated over $100 million in HBM3E revenue in the quarter, at margins accretive to DRAM and overall Company margins. We expect to generate several hundred million dollars of revenue from HBM in fiscal 2024 and multiple billions of dollars in revenue from HBM in fiscal 2025. We expect to achieve HBM market share commensurate with our overall DRAM market share sometime in calendar 2025. Our HBM is sold out for calendar 2024 and 2025, with pricing already contracted for the overwhelming majority of our 2025 supply. We are making significant strides toward expanding our HBM customer base in calendar 2025, as we design-in our industry-leading HBM technology with major HBM customers. We have sampled our 12-high HBM3E product and expect to ramp it into high-volume production in calendar 2025 and increase in mix throughout 2025. We have a robust roadmap for HBM and are confident we will maintain our technology leadership with HBM4 and HBM4E. Our next generations of HBM will provide further performance and capacity enhancements while we continue to evolve our industry-leading low-power innovations. We achieved full validation on our 1-beta 32 gigabit monolithic-die-based 128 gigabyte high-capacity server DIMM products and are on track to achieve several hundred million dollars of revenue from high-capacity DIMMs in the second half of fiscal 2024. Additionally, we continue to see strong interest in our industry-leading 1-beta LPDRAM in data center applications. Data center SSD is in the midst of a strong demand recovery as customers have worked through their 2023 inventory. Hyperscale demand is improving, driven primarily by AI training and inference infrastructure, and supplemented by the start of a recovery of traditional compute and storage infrastructure demand. Micron is gaining share in data center SSDs as we reach new revenue and market share records in this important product category. During the quarter, we more than tripled bit shipments of our 232-layer-based 6500 30 terabyte SSDs, which offer best-in-class performance, reliability, and endurance for AI data lake applications. We continued our leadership and innovation by becoming the first NAND vendor to supply 200-plus-layer QLC for the enterprise storage market. In PC, unit volumes remain on track to grow in the low single-digit range for calendar 2024. We are optimistic that the planned Windows 10 end-of-life in 2025, the launch of Windows 12, and the introduction of a new generation of AI PCs will accelerate the PC replacement cycle starting in late calendar 2024. The PC replacement cycle should gather momentum through calendar 2025 as new AI applications are rolled out. During Computex in Taiwan, we saw several announcements of next-generation chipsets and AI PCs. These devices feature high-performance neural processing unit chipsets, and we expect these devices will have 40% to 80% more DRAM content than today's average PC. Microsoft's minimum system requirement for Copilot+ PCs, such as the Surface Pro, is 16 gigabyte of DRAM. We expect next-gen AI PCs to make up a meaningful portion of total PC units in calendar 2025, growing each year until most PCs ultimately support next-gen AI PC specs. AI PCs are also likely to require higher performance and higher average capacity SSDs than traditional PCs, aligning well with our leading technology portfolio on our 232-layer NAND with our performance 3500 SSD and our industry-leading value QLC 2500 NVMe SSDs. Turning to mobile. Smartphone unit volumes in calendar 2024 remain on track to grow in the low- to mid-single-digit percentage range. Leading smartphone OEMs recently announced new AI capabilities, and we are optimistic that delivering high-quality AI experiences can accelerate the smartphone refresh cycle. Smartphones have tremendous potential for personalized AI capabilities that offer greater security and responsiveness when executed on device. Micron's leading LP5X is enabling the recent 12 gigabyte and 16 gigabyte AI phone releases at all Android Tier 1 customers, representing a 50% to 100% increase over last year's flagship models. Micron's leading mobile solutions provide the critical performance, capacity, and power efficiency needed to unlock AI capability. Our mobile DRAM and NAND solutions are now widely adopted in industry-leading flagship smartphones. In calendar Q1, we received recognition for being Number One in quality by five of the world's leading smartphone OEMs. Qualifications are on track for our second-generation 1-beta LP5X products, and we see broadening use of our 232-layer NAND, moving beyond flagship phones into high-capacity high-and mid-tier phones. Turning to auto and industrial. The automotive sector continued to experience robust demand for memory and storage, and Micron achieved a record quarter for automotive revenues. Car production volumes are returning to pre-pandemic levels, and broader adoption of intelligent digital cockpits and more advanced driver-assistance capabilities are driving content growth. We anticipate further content growth as additional intelligence, including generative AI-based technologies, is adopted in vehicles. Micron continues to be a leader in automotive with high-quality and industry-first product introductions. In the fiscal third quarter, we launched the world's first multiport Gen 4 NVMe SSD in support of next-generation centralized compute architectures. In industrial and retail consumer segments, which are a smaller part of our business, we are seeing some near-term demand uncertainty from our distribution partners and end customers. We remain confident in the long-term fundamentals and growth drivers of these businesses, especially with the increasing adoption of AI in a variety of applications. Now, turning to our market outlook. We forecast calendar 2024 bit demand growth for the industry to be in the mid-teens percentage range for both DRAM and NAND. Over the medium term, we expect industry bit demand growth CAGRs of mid-teens in DRAM and high teens in NAND. Turning to supply. We expect calendar 2024 industry supply to be below demand for both DRAM and NAND. As discussed previously, the ramp of HBM production will constrain industry supply growth in non-HBM products. Industrywide, HBM3E consumes approximately three times the wafer supply as D5 to produce a given number of bits in the same technology node. With increased performance and packaging complexity, across the industry, we expect this trade ratio for HBM4 to be even higher than the trade ratio for HBM3E. We anticipate strong HBM demand due to AI, combined with increasing silicon intensity of the HBM roadmap, to contribute to tight supply conditions for DRAM across all end markets. As the memory industry is still recovering from the challenging environment in 2023, this tight supply environment will help drive the considerable improvements in profitability and ROI that are needed to enable the investments required to support future growth. Micron's bit supply growth in fiscal 2024 remains below our demand growth for both DRAM and NAND. Micron will continue to exercise supply and CapEx discipline and focus on improving profitability while maintaining our bit market share for DRAM and NAND. We continue to project we will end fiscal 2024 with low double-digit percentage less wafer capacity in both DRAM and NAND than our peak levels in fiscal 2022. We intend to use our existing inventory to drive a portion of the bit growth supporting our revenue in fiscal 2025 to enable a more optimized use of our CapEx investments. Micron's fiscal 2024 CapEx plan will be approximately $8 billion, and WFE spending will be down year-on-year in fiscal 2024. We expect to increase our capital spending materially next year, with CapEx around mid-30%s range of revenue for fiscal 2025, which will support HBM assembly and test equipment, fab and back-end facility construction as well as technology transition investment to support demand growth. The construction CapEx in the planned Idaho and New York greenfield fabs in fiscal 2025 will be half or more of the expected increase in total CapEx. In fact, the growth in both greenfield fab construction and HBM CapEx investments, is projected to make up the overwhelming majority of the year-over-year CapEx increase. These fab construction investments are necessary to support supply growth for the latter half of this decade. This Idaho fab will not contribute to meaningful bit supply until fiscal 2027, and the New York construction CapEx is not expected to contribute to best supply growth until fiscal 2028 or later. The timing of future WFE spend in these fabs will be managed to align supply growth with expected demand growth. I will now turn it over to Mark for our financial results and outlook.

Sanjay Mehrotra:

Thank you, Mark. I want to close by commending our team in Taiwan for their response to the significant earthquake in fiscal Q3. In many ways, that response exemplifies Micron, an agile, prepared team that assesses and reacts quickly, supported by a brilliant network of colleagues around the globe. That collaboration, planning, discipline, and experience are precisely what ensures Micron is so well positioned today. I look forward to our teams accelerating Micron's memory and storage leadership as AI solutions present increasing opportunities to provide greater value, from data centers to the edge. Thank you for joining us today. We will now open for questions.

Krish Sankar:

Yes. Hi. Thanks for taking my question. I have two questions. Sanjay, the first one. It's on HBM. Clearly, you're gaining traction in HBM3E. I'm just curious how the HBM3E is, and how is the qualification going beyond one customer? Last time, you publicly said that you're qualified at NVIDIA's H200. I'm kind of curious, how is it going with the B100 for NVIDIA? And also, along the same path, your competitors spoke about pulling in the timeframe for HBM4 versus the regular 18-month cadence for HBM technology transit system. So, basically, I'm curious, Sanjay, any comment on HBM3E? Call a different customer, timing of HBM4 would help. Then I have a quick follow-up.

Krish Sankar:

Got it. Thanks, Sanjay, for that. Another quick follow-up, on NAND, in this -- on the NAND bit demand, you kind of mentioned that the bit growth -- demand bit growth is going to be in the high teens. If I remember right, last quarter, you said it's going to be in the low 20%s. So, I'm kind of curious, what was the delta since last few months ago? Because there's a general view that AI should be helping NAND. So, why is the NAND bit demand growth not going higher? Looks like it's going lower. Thank you.

Krish Sankar:

Got it. Thanks a lot, Sanjay. Very helpful. Thank you.

Vivek Arya:

Thanks for taking my question. Sanjay, you mentioned a 3x trade ratio of HBM to D5. What happens to this ratio as you go to higher stacks, 12-high or more? And on the other hand, what happens as you make yield improvements? Just overall, is 3x still the operative assumption for calendar '25? And just what are the puts and takes around this ratio?

Vivek Arya:

Got it. And a quick follow-up, maybe for Mark. So, you're suggesting fiscal '25 could be a record in terms of sales. Why can't it be a record in terms of gross margins? What are the puts and takes of gross margins as we go into next year? So, maybe give us some sense of what incremental margins can be. Let's say sales are up $5 billion or $10 billion year-on-year, just so we can level-set our model from a gross margin perspective. Thank you.

Vivek Arya:

Thank you.

Toshiya Hari:

Hi. Thank you so much for taking the question. I had two as well. The first one on HBM, I guess recently there have been a couple of reports about you all having some yield issues. Just based on your commentary, it didn't sound like you were having these issues, but just wanted to clarify that. If you could address that, that would be really helpful. And then on HBM, the second part is, so gross margins are intuitive to overall corporate margins today. What are your thoughts on sort of relative profitability going into the second half of the year and into calendar '25, particularly given the fact that you have pretty good visibility as it pertains to HBM pricing?

Mark Murphy:

It is helping to drive continued gross margin expansion through '25.

Mark Murphy:

Yes, we -- good questions, Toshiya. And your view on CapEx, we've given enough that we don't want to guide revenue for '25 because we -- we'll do that at a future date by quarter. But we do expect a material increase year-over-year. For the quarter, sequentially, we'll see a meaningful step up, and we were at $3 billion, we increased from $2.1 billion to $3 billion third quarter to fourth quarter guide. I would characterize that both on a dollar and percent basis as more than meaningful, so it would be less than that sequentially. But we are spending more. Yes, to your question on, we are very constrained on bits, bit production, and so we will -- as I mentioned in my earlier comments, we will certainly see inventory levels come down. In fact, we expect to be approaching target inventory levels by the end of 2025.

Operator:

Thank you. And now our next question comes from the line of Thomas O'Malley from Barclays. Your question, please.

Sanjay Mehrotra:

Well, as we have said before, that we see the CAGR for HBM growth, in terms of bit growth CAGR to be well above 50% over the next few years. So, certainly, HBM is a strong growth driver. And again, as we increase our mix of HBM going forward, it will of course be continuing to be accretive to our financial performance, including margins. And we are pleased that with the strong performance that we have, we are sold out for '25 as well, with a overwhelming part of our output already committed in terms of pricing. So, that points to a strong position that we have in terms of continuing to work toward achieving our goal of getting to our HBM market share to be in line with DRAM share sometime in 2025. And of course, we are working with a broad range of customers, in qualifications, and next year we plan to be shipping to broader set of customers. Having said all of that, no question that HBM is a complex product for our customers to qualify as well. It's highly resource intensive, not just for us, but for our customers as well. And this is where we think that our strong product position, highlighting again those attributes of 30% better power than nearest competitor, and a better performance, and really high quality here positions us well when customers work with those resource-intensive qualifications for Micron. And that's what we are already seeing in terms of our engagement. So, we feel pretty good about our plans here for HBM.

Sanjay Mehrotra:

So, for us, certainly, our CapEx is dominated by our DRAM-related CapEx. That's certainly HBM because it's growing as mixed in the industry and HBM is capital intensive when it comes to unique clean room requirements for HBM and in packaging and assembly as well as test equipment. So, our CapEx is dominated by that, as well as to meet the future requirements in the second half of this decade. And that involves the construction of the fab. So, NAND CapEx is certainly a much smaller portion of our total CapEx. And we have a very strong technology position with our NAND and strong portfolio that you see. And we are continuing to shift that portfolio toward higher-value solutions as well. So, we certainly will remain extremely disciplined when it comes to NAND as well in terms of driving the CapEx. And we will be disciplined in terms of driving our technology node transitions in the timing of node transitions across the industry. I think it is certainly helpful given the bit growth that you get from those transitions to slow down the timing of those -- the cadence of those node transitions so that your bit growth CAGR versus the gain of bits that you get from the wafers can be managed well. These are the kind of things we are very much focused on in order to maintain a good supply discipline, maintain supply growth that is very much in line with the demand growth, and managing our CapEx here prudently. But yes, I mean overall our CapEx is -- in NAND is significantly smaller, but we remain extremely disciplined, focused on managing our supply growth in line with demand there. And again, I want to point out that with NAND, technology transitions are sufficient to meet the demand growth. We do not need the new clean room, the new greenfield fabs, the kind that are needed in DRAM. And HBM and the trade ratio of HBM with standard DRAM is a factor in the greenfield requirements only, also.

Christopher Danely:

Hi, thanks, guys. So, I think you mentioned you are signing up some customers to long-term contracts. Given your belief that the pricing is going to keep going up, why sign people up to long-term contracts and potentially miss out on some of the increased pricing? Or is there some potential for wiggle room on pricing with the contracts and it is more of a unit basis? Just curious there.

Christopher Danely:

Great. Thanks, Sanjay. And then just a quick one for Mark. Mark, was the Taiwan quake impact limited to the May quarter, or is it impacting the current quarter as well?

Christopher Danely:

It was just May. All right. Thanks.

Harlan Sur:

Good afternoon. Thanks for taking my question. Enterprise SSDs are seeing really strong demand pull from AI workloads, right? The team has driven significant share gains in enterprise SSD just over the past few quarters. I think in calendar Q1, I think Micron was the number three global share leader in enterprise SSD. I think it's now about 20%, 25% of the overall NAND business. I mean, this is a position that we've never seen Micron in before. So, I think first question is, are enterprise SSD gross margins accretive to your overall NAND gross margins? And then secondly, I saw your next-gen PCIe Gen5 SSD demo at NVIDIA's GTC conference. Pretty significant performance uplift on AI workloads versus your Gen4 SSDs. So, are you qualifying these next-gen Gen5 SSDs for AI applications? When do you expect to shift? Just wanted to understand the sustainability of your strong share position here.

Mark Murphy:

So, I would just add, Harlan, that the storage business unit delivered operating profit in the quarter.

Operator:

Thank you. This does conclude the question-and-answer session, as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Micron's Second Quarter 2024 Financial Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Satya Kumar, Corporate Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Sanjay Mehrotra:

Thank you, Satya. Good afternoon, everyone. I am pleased to report that Micron delivered fiscal Q2 revenue, gross margin, and EPS well above the high end of guidance. Micron has returned to profitability and delivered positive operating margin a quarter ahead of expectation. I would like to thank all our Micron global team members for their dedication and excellent execution that made this result possible. Micron drove robust price increases as the supply-demand balance tightened. This improvement in market conditions was due to a confluence of factors, including strong AI server demand, a healthier demand environment in most end markets, and supply reductions across the industry. AI server demand is driving rapid growth in HBM, DDR5, and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND. This is resulting in a positive ripple effect on pricing across all memory and storage end markets. We expect DRAM and NAND pricing levels to increase further throughout calendar year 2024 and expect record revenue and much improved profitability now in fiscal year 2025. Micron is at the forefront of ramping the industry's most advanced technology nodes in both DRAM and NAND. Reinforcing our leadership position, over three-quarters of our DRAM bits are now on leading-edge 1-alpha and 1-beta nodes, and over 90% of our NAND bits are on 176-layer and 232-layer nodes. We expect fiscal 2024 front-end cost reductions, excluding the impact of HBM, to track in line with our long-term expectations of mid to high single digits in DRAM and low teens in NAND, supported by the continued volume ramp of 1-beta DRAM and 232-layer NAND. We continue to mature our production capability with extreme ultraviolet lithography and have achieved equivalent yield and quality on our 1-alpha as well as 1-beta nodes between EUV and non-EUV flows. We have begun 1-gamma DRAM pilot production using EUV and are on track for volume production in calendar 2025. The development of our next-generation NAND node is on track, with volume production planned for calendar 2025. We expect to maintain our technology leadership in NAND. Now turning to our end markets. Inventories for memory and storage have improved significantly in the data center, and we continue to expect normalization in the first half of calendar 2024. In PC and smartphone, there were some strategic purchases in calendar Q4 in anticipation of a return to unit growth. Inventories remain near normal levels for auto, industrial, and other markets. We are in the very early innings of a multiyear growth phase driven by AI as this disruptive technology will transform every aspect of business and society. The race is on to create artificial general intelligence, or AGI, which will require ever-increasing model sizes with trillions of parameters. On the other end of the spectrum, there is considerable progress being made on improving AI models, so that they can run on edge devices, like PCs and smartphones, and create new and compelling capabilities. As AI training workloads remain a driver of technology and innovation, inference growth is also rapidly accelerating. Memory and storage technologies are key enablers of AI in both training and inference workloads, and Micron is well-positioned to capitalize on these trends in both the data center and the edge. We view Micron as one of the biggest beneficiaries in the semiconductor industry of this multiyear growth opportunity driven by AI. In data center, total industry server unit shipments are expected to grow mid to high single digits in calendar 2024, driven by strong growth for AI servers and a return to modest growth for traditional servers. Micron is well positioned with our portfolio of HBM, D5, LP5, high-capacity DIMM, CXL, and data center SSD products. Delivering improved memory bandwidth, power consumption, and overall performance is critical to enable cost-efficient scaling of AI workloads inside modern GPU or ASIC-accelerated AI servers. Our customers are driving an aggressive AI roadmap on their GPU and ASIC-based server platforms that require significantly higher content and higher-performance memory and storage solutions. For example, earlier this week, Nvidia announced its next-generation Blackwell GPU architecture-based AI systems, which provides a 33% increase in the HBM3E content, continuing a trend of steadily increasing HBM content per GPU. Micron's industry-leading high-bandwidth memory HBM3E solution provides more than 20 times the memory bandwidth compared to standard D5-based DIMM server module. We are executing well on our HBM product ramp plans and have made significant progress in ramping our capacity, yields, and quality. We commenced volume production and recognized our first revenue from HBM3E in fiscal Q2 and now have begun high-volume shipments of our HBM3E product. Customers continue to give strong feedback that our HBM3E solution has a 30% lower power consumption compared to competitors' solutions. This benefit is contributing to strong demand. Our HBM3E product will be a part of Nvidia's H200 Tensor Core GPUs, and we are making progress on additional platform qualifications with multiple customers. We are on track to generate several hundred million dollars of revenue from HBM in fiscal 2024 and expect HBM revenues to be accretive to our DRAM and overall gross margins starting in the fiscal third quarter. Our HBM is sold out for calendar 2024, and the overwhelming majority of our 2025 supply has already been allocated. We continue to expect HBM bit share equivalent to our overall DRAM bit share some time in calendar 2025. Earlier this month, we sampled our 12-high HBM3E product, which provides 50% increased capacity of DRAM per cube to 36 gigabyte. This increase in capacity allows our customers to pack more memory per GPU, enabling more powerful AI training and inference solutions. We expect 12-high HBM3E will start ramping in high-volume production and increase in mix throughout 2025. We have a robust roadmap and we are confident we will maintain our technology leadership with HBM4, the next generation of HBM, which will provide further performance and capacity enhancements compared to HBM3E. We are making strong progress on our suite of high-capacity server DIMM products. During the quarter, we completed validation of the industry's first mono-die-based 128 gigabyte server DRAM module. This new product provides the industry's highest-bandwidth D5 capability, with greater than 20% better energy efficiency and over 15% improved latency performance compared to competitors' 3D TSV-based solutions. We see strong customer pull and expect a robust volume ramp for our 128 gigabyte product, with several hundred million dollars of revenue in the second half of fiscal 2024. Additionally, we also started sampling our 256 gigabyte MCRDIMM module, which further enhances performance and increases DRAM content per server. We achieved record revenue share in the data center SSD market in calendar 2023. During the quarter, we grew our revenue by over 50% sequentially for our 232-layer-based 6500 30 terabytes SSDs, which offer best-in-class performance, reliability, and endurance for AI data lake applications. In PC, after two years of double-digit declines, unit volumes are expected to grow modestly in the low single-digit range for calendar 2024. We are encouraged by the strong ecosystem momentum to develop next-generation AI PCs, which feature high-performance Neural Processing Unit chipsets and 40% to 80% more DRAM content versus today's average PCs. We expect next-generation AI PC units to grow and become a meaningful portion of total PC units in calendar 2025. At CES, the consumer electronics show in Las Vegas, Micron launched the industry's first low-power compression-attached memory module, or LPCAMM2, for PC applications. LPCAMM2 brings a modular form factor, with a maximum capacity point of 64 gigabyte for PC module and 128 gigabyte for server module, along with a number of benefits such as higher bandwidth, lower power, and smaller form factor. During the quarter, we launched our 232-layer-based Crucial T705 Gen 5 consumer SSD, which won several editor choice awards and was recognized by a leading publisher as the fastest M.2 SSD ever. We increased our client SSD QLC bit shipments to record levels, with QLC representing nearly two-thirds of our client SSD shipments, firmly establishing Micron as the leader in client QLC SSDs. Turning to mobile. Smartphone unit volumes in calendar 2024 remain on track to grow low to mid-single digits. Smartphones offer tremendous potential for personalized AI capabilities that offer greater security and responsiveness when executed on device. Enabling these on-device AI capabilities is driving increased memory and storage capacity needs and increasing demand for new value-add solutions. For example, we expect AI phones to carry 50% to 100% greater DRAM content compared to non-AI flagship phones today. Micron's leading mobile solutions provide the critical high performance and power efficiency needed to unlock an unprecedented level of AI capability. In DRAM, we are now sampling our second-generation, 1-beta LPDRAM LP5X product, which delivers the industry's highest performance at improved power for flagship smartphones. And in NAND, we announced our second generation of 232-layer NAND UFS 4.0 devices, featuring the industry's smallest package and breakthrough features that enable greater reliability and significantly higher real-world performance for complex workloads. Our mobile DRAM and NAND solutions are now widely adopted in industry-leading flagship smartphones, with two examples being Samsung's Galaxy S24 and the Honor Magic 6 Pro announced this year. The Samsung Galaxy S24 can provide two-way, real-time voice and text translations during live phone calls. The Honor Magic 6 Pro features the Magic LM, a seven-billion parameter large language model, which can intelligently understand a user's intent based on language, image, eye movement, and gestures and proactively offer services to enhance and simplify the user experience. Turning to auto and industrial. The automotive sector continues to experience robust demand for memory and storage as non-memory semiconductor supply constraints have eased and as new vehicle platforms are launched. In the past quarter, we experienced strong growth with partners who are driving the most advanced capabilities within the automobile's increasingly intelligent and connected digital cockpits. In addition, adoption of Level 2+ ADAS capabilities continues to gain momentum, further expanding content per vehicle. The industrial market fundamentals for memory are also healthy, with improving distributor inventory, book-to-bill, and demand visibility improvements, as well as pricing benefits from the tight supply for products, especially those built on leading-edge nodes. Now, turning to our market outlook. Calendar 2023 DRAM bit demand growth was in the low double-digit percentage range, and NAND bit demand growth was in the low-20s percentage range, both a few percentage points higher than previous expectations. We forecast calendar 2024 bit demand growth for the industry to be near the long-term CAGR for DRAM and around the mid-teens for NAND. Given the higher baseline of 2023 demand, these expectations of 2024 bit growth have driven an increase in the absolute level of 2024 bit demand in our model for DRAM and NAND versus our prior expectations. The industry supply-demand balance is tight for DRAM and NAND, and our outlook for pricing has increased for calendar 2024. Over the medium term, we expect bit demand growth CAGRs of mid-teens in DRAM and low-20s percentage range in NAND. Turning to supply. The supply outlook remains roughly the same as last quarter. We expect calendar 2024 industry supply to be below demand for both DRAM and NAND. Micron's bit supply growth in fiscal 2024 remains below our demand growth for both DRAM and NAND, and we expect to decrease our days of inventory in fiscal year 2024. Micron's fiscal 2024 CapEx plan remains unchanged at a range between $7.5 billion and $8.0 billion. We continue to project our WFE spending will be down year-on-year in fiscal 2024. Micron's capital-efficient approach to reuse equipment from older nodes to support conversions to leading-edge nodes has resulted in a material structural reduction of our DRAM and NAND wafer capacities. We are now fully utilized on our high-volume manufacturing nodes and are maximizing output against the structurally lowered capacity. We believe this approach to node migration and consequent wafer capacity reduction is an industry-wide phenomenon. We project to end fiscal 2024 with low double-digit percentage less wafer capacity in both DRAM and NAND than our peak levels in fiscal 2022. Significant supply reductions across the industry have enabled the pricing recovery that is now underway. Although our financial performance has improved, our current profitability levels are still well below our long-term targets, and significantly improved profitability is required to support the R&D and CapEx investments needed for long-term innovation and supply growth. Micron will continue to exercise supply and CapEx discipline and focus on restoring improved profitability while maintaining our bit market share for DRAM and NAND. As discussed previously, the ramp of HBM production will constrain supply growth in non-HBM products. Industrywide, HBM3E consumes approximately three times the wafer supply as D5 to produce a given number of bits in the same technology node. With increased performance and packaging complexity, across the industry, we expect the trade ratio for HBM4 to be even higher than the trade ratio for HBM3E. We anticipate strong HBM demand due to AI, combined with increasing silicon intensity of the HBM roadmap, to contribute to tight supply conditions for DRAM across all the end markets. Finally, as we consider these demand and technology trends, we are carefully planning our global fab and assembly/test capacity requirements to ensure a diversified and cost-competitive manufacturing footprint. Announced projects in China, India, and Japan are proceeding as planned. On potential U.S. expansion plans, we have assumed CHIPS grants in our CapEx plans for fiscal 2024. Our planned Idaho and New York projects require Micron to receive the combination of sufficient CHIPS grants, investment tax credits, and local incentives to address the cost difference compared to overseas expansion. I will now turn it over to Mark for our financial results and outlook.

Sanjay Mehrotra:

Thank you, Mark. [Technical Difficulty]

Sanjay Mehrotra:

Hi, can you hear us?

Sanjay Mehrotra:

Yes, so we apologize for the technical difficulty here. But, operator if you can go ahead and start the Q&A section, please?

Toshiya Hari:

Hi, can you guys hear me okay?

Mark Murphy:

Yes, we can.

Sanjay Mehrotra:

So HBM3E, first of all, it's a great product. As I mentioned well received by our customers, high-performance, and 30% lower-power than any other product that's out there. So of course it has strong demand and as we have highlighted, we are sold out for our calendar year '24 supply and calendar year '25 supply is also mostly vast majority is already allocated. We are -- we have just begun production shipments, and these will continue to increase through the course of calendar year '24, as well as continue to increase through calendar year '25. We are continuing to work on increasing our capacity and making good progress with respect to capacity as well as overall yield and quality. So certainly, in calendar year '25 versus calendar year '24, given that we are just starting our production here now, will certainly be a significant growth over our calendar year '24 numbers. And you can look at it the same way for fiscal '24 versus '25, so it will be definitely a significant increase with us, achieving our shares in HBM, in line with our industry share, sometime in calendar '25. I'm not in a position to spell it out exactly for you in terms of what is the volume increase, but certainly HBM with our strong product position, it will be a strong driver of revenue growth, fiscal year '24 -- fiscal year '25 or fiscal year '24. Regarding the wafer capacity by end of this fiscal year, we have said low double-digit structural reduction in capacity. And of course, we will be managing this capacity in fiscal year '24, keeping in mind our focus on supply-demand discipline, I was staying extremely disciplined with respect to supply growth, staying extremely disciplined with respect to our HBM share as well. And advantaging our technology transitions, as we go through the year. And our CapEx in '25 -- well, in fiscal '25 will be higher than fiscal '24. WFE will be higher as well. And of course, construction CapEx related to the Greenfield that is required for the second half of the decade will contribute to some of the CapEx increase in fiscal '25. But some of those details we'll provide you as we get closer to fiscal year '25. So, most important thing is that we will manage our wafer capacity technology transitions to really maintain our bit share, that is part of our strategy to have stable bit share even with increasing penetration of HBM. And again, just keep in mind that our overall framework of our CapEx being 35% of our revenue across the cycles still applies.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Aaron Rakers from Wells Fargo. Your question, please.

Sanjay Mehrotra:

So with respect to the accretive nature of HBM, look, HBM carries a higher cost, but it also carries a significantly higher pricing because it brings such great value in the applications in terms of its performance and power. And we are executing well. Our yield ramp is going well as well according to plan. And therefore, we are pleased that in this quarter when we have begun our production shipments, we will be having it accretive to our gross margins in the quarter. And of course, this momentum will continue to build in the quarters ahead. And regarding the second part of your question on traditional server demand, so yes, we do see that in calendar '25, traditional server demand will grow modestly. And of course, it's coming after a significant decline in server unit sales in calendar '23. We are very pleased to see the increasing momentum of content growth in the traditional server demand. But also AI server units are going up and AI -- we have said overall server units going up in mid- to high-single-digits range with AI server driving a higher growth percentage year-over-year and traditional servers being modest. And I may have said '25 here, I just want to clarify that I'm talking about 2024 here. So when I'm talking about modest server unit growth, it's referring to 2024 versus 2023.

Sanjay Mehrotra:

And we are actually seeing strong demand for both our DRAM products and NAND products in server and actually we are shifting some of our portfolio toward these higher mix solutions. HBM being one of them. High-density DIMMs being another one that's in strong demand for server applications and then data center SSDs. All of this is -- we are seeing a healthy demand drivers. And just remember we had said that for memory and storage, customer inventories in data center market would be largely normalized in first half of '24. And we are seeing the market play out just as we had predicted several quarters ago.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Your question, please.

Sanjay Mehrotra:

So on your questions regarding wafers shift to HBM, as we have highlighted that HBM -- HBM3E needs three times more wafers than nearly three times more wafers than DDR5 in the same technology node of the same capacity to produce the same bits. So this is of course highly silicon intensive technology and this factor of three has the trade ratio between HBM and D5 is really common across the industry. So what -- and HBM demand is increasing rapidly, you see all the recent announcements that are only showing you that even greater attach rate of HBM to the latest GPU solutions that were just announced earlier this week. 192 gigabyte in the Blackwell platforms versus the 144 gigabyte. And of course, this is a phenomenon that's occurring across the Board. Even today, I think, Broadcom talked about how HBM content is going to further increase. So HBM is in a high-demand growth phase and this demand growth will continue in terms of bits, in terms of revenue over the course of the foreseeable future. And this is putting tremendous pressure on the non-HBM supply. The trade ratio of three to one, increasing demand in HBM, increasing -- increased profitability of HBM is putting non-HBM part of the memory in tight supply. This is why we say that leading-edge nodes are in very tight supply. And as a result, we would fully expect that D5, as well as other DDR products will improve in their profitability picture as well, given their very much tight supply there. And of course, HBM being in a strong position. When you look at the LTAs, we have talked to you about our supply already being locked up for '24 and '25, and this then increases our confidence in our D5 as well as LP5 -- LPA positions with the customers.

C.J. Muse:

Very helpful. Thank you.

Timothy Arcuri:

Thanks a lot. Sanjay, I had a question just around the tenor of the discussions that you're having with your customers. I mean the industry is bigger this year in terms of bits. It sounds like mostly due to a higher baseline coming off last year. But it sounds like supply hasn't really increased to match that higher bits this year. So the balance has gotten even tighter over the past three months. So how has that changed the dynamics of your discussions with your customers? I know you had a $600 million prepay last quarter. Did you get any prepays this quarter? Are you talking about new sort of contract structures with customers where they maybe fund some of your CapEx? Can you kind of talk about all that? Thanks.

Timothy Arcuri:

Great, thanks. But I guess that means that there were no prepays this quarter, correct?

Timothy Arcuri:

Okay, okay. Thank you, Sanjay.

Joseph Moore:

Great, thank you. The 128 gig that you talked about getting qualified, it seems like that's a pretty important market in AI. And you guys are approaching it monolithically where I know your competitor has used this packed approach. Can you talk about the reception to that, and you spoke of several hundred million. How big do you think that opportunity could be?

Joseph Moore:

Great, thank you.

Brian Chin:

Hi, great. Thanks for taking our questions and congratulations on the results. I guess it is sort of an extrapolation question. But if HBM worth 20% of Micron DRAM revenue, and you have said that, again, at some point next year, you think on a bit basis, it could be equivalent to your market share, that HBM were 20% of Micron DRAM revenue as opposed to a much lower percentage today. Could you maybe help quantify how accretive to gross margins as that richer mix would represent?

Brian Chin:

Okay. Thank you, very helpful.

Chris Danely:

Hey, thanks, guys. I guess just another multipart question on margins like everybody else. So you mentioned that there's still some underutilization charges related to legacy manufacturing capacity. When do those go away? And then as a follow-up to all these HBM margin questions. Can you just talk about the gross margin arc of your HBM products as more competition and capacity comes on to the market? Like when would the gross margins peak and then start to decline as Samsung starts to increase capacity, your capacity goes up, all that stuff? Thanks.

Sanjay Mehrotra:

And regarding your question on gross margin projections for HBM, so we are not going to do that here. We are totally focused on increasing our production capability and bringing in 2025 a bit share for DRAM -- for HBM to be in line with our DRAM share. And of course, this will bring about greater profitability opportunities, but we are really not projecting pricing of HBM here in the future. But clearly, HBM brings tremendous value in the applications. You are seeing these new platforms that are hungry for more HBM, and HBM has been in shortage, and we have talked about our '24 and '25 supply being spoken for. So all of that, I think, bodes well for high revenue growth and highly profitable HBM business for us. And of course, we will stay extremely focused on maintaining discipline, maintaining our CapEx discipline and maintaining our share target discipline for HBM and really staying very disciplined on overall supply growth being in line with our DRAM share for the whole DRAM part of our business. So I think these will be key as we continue to look ahead at our execution and driving our opportunities forward.

Operator:

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Micron Technology's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Satya Kumar, Investor Relations. Please go ahead.

Sanjay Mehrotra:

Thank you, Satya. Good afternoon, everyone. In fiscal Q1, Micron delivered revenue, gross margin, and EPS above the high-end of the guidance ranges we provided at the last earnings call, reflecting Micron's strong execution combined with improved pricing. We are in the very early stages of a multi-year growth phase catalyzed and driven by generative AI, and this disruptive technology will eventually transform every aspect of business and society. Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time. Micron is well positioned to leverage this growth, having executed the most robust set of new technology and product introductions in our 45-year history. The improved supply-demand environment in the current calendar quarter gives us additional confidence in the trajectory of our business. We have driven a strong inflection in industry pricing this calendar quarter, which will allow us to benefit from higher prices earlier in our fiscal year compared to our prior plans. We intend to stay very disciplined with our supply and capacity investments as our pricing is still far from levels associated with necessary ROI. We expect our pricing to continue to strengthen through the course of calendar 2024. We expect improved margins and financial performance throughout 2024 and record industry TAM in calendar 2025. We have made significant progress with our industry-leading technology roadmap. Micron is at the forefront of ramping the industry's most advanced technology nodes in both DRAM and NAND. The vast majority of our bits are on leading-edge nodes

Sanjay Mehrotra:

Thank you, Mark. Over the last year, our world-class technology, business, and manufacturing teams ensured ongoing leadership in foundational memory technologies and the expansion of our industry-leading product portfolio. We are encouraged by the progress we have made on pricing, and we are on track to restore profitability more commensurate with the great value our solutions provide to our customers. We expect 2024 to be a year of recovery and can see the path towards a healthy supply-demand environment along with strong growth in critical new technologies like HBM3E. From the data center to the edge, AI has emerged as a significant secular driver that will further bolster the industry towards record revenue TAM in 2025 and drive growth for years to come. Micron's broad and growing suite of leading-edge products positions us well to capitalize on the immense opportunities ahead. Thank you for joining us today. We will now open for questions.

Krish Sankar:

Yes. Hi. Thanks for taking my question. Sanjay or Mark, the first question I had is kind of you spoke about sustainability of pricing in calendar '24. I'm kind of curious if you can peel the onion one layer below and say how we think about pricing through calendar '24 for DRAM and NAND, and if you can extrapolate it into 2025, that'll be very helpful. And then I had a follow-up.

Krish Sankar:

Got it. That's very helpful, Sanjay. And then just a quick follow-up on CapEx. I understand a lot of the CapEx is going towards HBM and WFE is going to be down year-over-year. Is there a way of quantifying how much of the CapEx for next year is for HBM? And at -- what is the catalyst for you to start investing in NAND? Is it price? Is it gross margin? Any such catalyst for NAND. That'd be very helpful. Thank you.

Krish Sankar:

Thanks, Sanjay.

Aaron Rakers:

Yes. Thanks for taking the question. I have two as well, real quick. You know, first, building on the HBM comment that you're basically sold out for the year. I know that you referenced in your prepared remarks that you're qualified in with the GH200 and the H200 at NVIDIA. I'm just curious, when you get qual-ed in on HBM3E, you know, how does that market work in terms of -- you know, do these customers dual qualify? Do you have line of sight and kind of your share position within those product SKUs? I'm just curious of how the qualifications work and the visibility that you have to basically kind of, you know, double down on the fact that you expect to be kind of, you know, comparable market share in HBM as DRAM in total as you look out into '25.

Aaron Rakers:

Yes. And then as a quick follow-up, I'm curious, in the comment you had said that basically your leading-edge inventory was very tight. And I think the follow-up comment was that you're really, you know, focusing on minimizing any pull-in in the midst of, you know, pricing increases materializing. Can you just help us appreciate what exactly you're able to do to minimize any pull-in or the visibility you have in whether any customers are taking strategic inventory? Just curious how you manage that.

Aaron Rakers:

Fair enough. Thank you.

Toshiya Hari:

Hi. Good afternoon. I had two questions as well. One on gross margins, maybe for Mark, and then my follow-up is for Sanjay. Mark, so the gross margin profile is improving from, you know, breakeven or 1% in the prior quarter to 13%. I was hoping you could sort of break that down, the sequential change for us in terms of pricing, I guess lower underutilization charges, and whatever else is happening from an inventory perspective. And beyond Feb, as we sort of look out into May, you talked about pricing improving throughout '24, so that continues to be a tailwind. How should we think about some of the other dynamics that go into your gross margin math?

Toshiya Hari:

Okay. Great. That's super helpful. And then, as my follow-up for Sanjay, you know, you guys had presented a, you know, cross-cycle financial model at your Investor Day, I think it was last May. Clearly, the environment has changed quite a bit. But when you sort of, you know, talk about necessary ROI for your business, as you guys debate when to increase production, when to increase CapEx, should we look at the model from last May still as a reference point, you know, through cycle operating margins of 30%, free cash flow margins of 10% or higher? Is that still the model that's relevant in your view, or have things changed since? Thank you.

Toshiya Hari:

Thank you.

Timothy Arcuri:

Thanks a lot. I had a question on these prepays that you're getting. That's $600 million. That's a pretty big number. So is that more of a one-time deal or should we expect these, you know, prepays to continue? And as part of that, is that mostly related to say HBM or a particular vertical like data center or is that across, you know, most of your end markets? And then I had a follow-up as well.

Timothy Arcuri:

Okay. Okay, got that. I guess then can you talk, Sanjay, just about limiting the bit shipments? I think you said you're limiting the bit shipments to prevent pull-ins ahead of price increases. Sounds like bits are flat sequentially for fiscal Q2 and fiscal Q3. Can you talk about the logistics of that? Are you just kind of holding back on volumes to regain some, you know, pricing leverage? I guess if your competitors don't match that approach, you might risk losing some shares. So can you just talk about the logistics of that? Thanks.

Timothy Arcuri:

Okay. Thank you so much.

Mehdi Hosseini:

Yes. Thanks for taking my question. Two follow ups. Sanjay, historically, memory industry tends to gravitate towards higher-margin products, which has historically led to margin erosion. Why is HBM any different? And what are your thoughts? Anything you can share with us as to what can preserve the higher margin associated with these high-end products? And I have a follow-up.

Mehdi Hosseini:

Great. Thanks for detail. Just a quick follow-up for Mark. Is there a normalized capital intensity that we should think of, especially as we come off this kind of nuclear winter in memory? Is there any -- if you don't have a normalized capital intensity, what else out there that could help us better forecast free cash flows?

Mehdi Hosseini:

Thank you.

Harlan Sur:

Good afternoon. Thanks for taking my question. As you mentioned, your leading-edge DRAM and NAND supply output is oversubscribed for the full year. Does you factor in your CapEx plans, conversion of capacity from mature nodes to leading-edge nodes? When do you guys see your ability to fully supply to your customers' demand profile? Is that looking more likely now calendar year '25 and what end markets or applications are you seeing the largest demand-supply gap as you move through the fiscal year?

Harlan Sur:

Great. Thanks for that. And again, you mentioned this briefly in your prepared remarks, but if you look at some of the third-party research estimates, September quarter was the second consecutive quarter where the team had, I think, somewhere about 10% to 12% market share in data center NVMe SSDs. If I look back historically, like your share has been more in the sort of 3% to 5% range. So obviously strong recent market share performance. You've got a strong lineup of data center SSDs. What's been the big differentiator for the team here and how do you guys continue to grow your share going forward?

Harlan Sur:

Thank you, Sanjay.

Operator:

Thank you for standing. Welcome to Micron's Fourth Quarter 2023 Financial Call. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Samir Patodia, Investor Relations. Please go ahead, sir.

Sanjay Mehrotra:

Thank you, Samir. Good afternoon, everyone. In fiscal Q4, Micron delivered revenue and gross margin above the midpoint of our guidance, with EPS above the high end of the range. These results reflect our strong execution, and we are well-positioned to drive significant improvements in our financial performance. We believe pricing has now bottomed. Ongoing demand growth, customer inventory normalization, and industry-wide supply reductions have set the stage for increased revenue, along with improved pricing and profitability throughout fiscal 2024. We continue to expect record industry TAM in calendar 2025 with more normalized levels of profitability. Fiscal 2023 was a challenging year for the memory and storage industry as the revenue TAM reached a multiyear low, resulting in a significant impact to financial performance. Despite this difficult backdrop, the Micron team stayed focused on our strategy, executed well and accomplished several important milestones. We achieved record annual automotive revenue, record NAND QLC bit shipments for the full fiscal year, and reached record levels in calendar Q2 for revenue share in data center and client SSDs. We were the first in our industry to introduce 1-beta DDR5 and LP5X DRAM products and the first to ship HBM3E samples with industry-leading performance and power efficiency. We were also the first to introduce 232-layer NAND SSD products in data center, client and consumer markets. These accomplishments were underpinned by our leadership technology and continued strong progress in manufacturing execution. We achieved world-class mature yields in record time on our industry-leading 1-beta DRAM and 232-layer NAND technologies. In addition, Micron took several prudent and timely actions to reduce our CapEx and supply in order to address the market imbalances through the course of fiscal 2023. Our industry-leading technology roadmap continues to progress well. As we have mentioned before, the vast majority of our bits are on leading-edge nodes 1-alpha and 1-beta in DRAM and 176-layer and 232-layer in NAND. We continue to make good progress on 1-gamma DRAM development using EUV and are on track for production in calendar 2025. Development of our next-generation NAND node is also well on track. Now turning to our end markets. Customers continued to reduce their excess inventory for memory and storage in fiscal Q4. Most customer inventories for memory and storage in the PC and smartphone markets are now at normal levels, consistent with our prior forecasts. Inventory levels are normal across most customers in the automotive market as well. Data center customer inventory is also improving and will likely normalize in early calendar 2024. Consequently, we see demand continuing to strengthen, which has led to an inflection in pricing. Some customers have made strategic purchases in DRAM and NAND to take advantage of unsustainably low pricing as the market begins its recovery. In data center, traditional server demand remains lackluster while demand for AI servers has been strong. Data center infrastructure operators have shifted budgets from traditional servers to higher-priced AI servers. Total server unit shipments are expected to decline in calendar 2023, the first year-over-year decline since 2016. We expect total server unit growth will resume in calendar 2024 to help fulfill ever-increasing workload demand. We also expect content growth in both AI and traditional servers. Compared to traditional servers, AI training servers contain significantly higher DRAM and NAND content with greater technology complexity, robust product value and higher profitability. We believe our data center revenue has bottomed, and we expect growth in fiscal Q1 and increasing momentum through fiscal years '24 and '25 in our data center business. Micron has a strengthening portfolio of solutions optimized for bandwidth, capacity and power. These include HBM3E, DDR5 and associated high-capacity modules, LPDRAM, and data center SSDs. This portfolio of industry-leading products positions us well to capture the opportunities presented by data-centric computing architectures and AI. The introduction of our HBM3E product offering has been met with strong customer interest and enthusiasm. Our HBM3E provides superior bandwidth, power and capacity for generative AI workloads. We developed this industry-leading design using our 1-beta technology, advanced TSV, and other innovations that enable a differentiated packaging solution. We have been working closely with our customers throughout the development process and are becoming a closely integrated partner in their AI roadmaps. Micron HBM3E is currently in qualification for NVIDIA compute products, which will drive HBM3E-powered AI solutions. We expect to begin the production ramp of HBM3E in early calendar 2024 and to achieve meaningful revenues in fiscal 2024. Micron also has a strong position in the industry transition to D5. We expect Micron D5 volume to cross over D4 in early calendar 2024, ahead of the industry. We expanded our high-capacity D5 DRAM module portfolio with a monolithic die-based 128 gigabyte module, and we have started shipping samples to customers to help support their AI application needs. We expect revenue from this product in Q2 of calendar 2024. Last month, we announced the introduction of 128 gigabyte and 256 gigabyte CXL 2.0 memory expansion modules. By leveraging a unique dual-channel memory architecture, we are able to deliver higher module capacity and increased bandwidth. We have shipped samples to several customers and key partners. In data center SSDs, Micron's entire portfolio utilizes 176-layer or 232-layer NAND in production, a testament to our product and technology leadership. We are well-positioned to serve the growing demand for fast storage as data-intensive AI applications proliferate. We saw strong demand for our data center NVMe SSDs across our AI-focused, industry-leading 30-terabyte product, as well as for our mainstream products. Micron ended the second calendar quarter with record high revenue share in data center SSDs, based on independent industry assessments. We expect to build on this momentum in fiscal 2024. In PCs, we continue to forecast calendar 2023 PC unit volume to decline by a low double-digit percentage year-over-year and then grow by a low to mid-single-digit percentage in calendar 2024. AI-enabled PCs will drive content growth and an improved refresh cycle over the next two years. In fiscal Q4, we saw strong sequential bit shipment growth at PC OEMs driven by demand for LPDRAM in thin client notebooks. We expect to begin revenue shipments of our industry-leading 1-beta-based client D5 in fiscal Q1 to PC OEMs. According to third-party analysts, in calendar Q2, we reached record revenue share in client SSDs for PC OEMs as customers adopted our industry-leading solutions. Our 232-layer NVMe client SSD is now qualified at large OEMs and shipping in volume production. Our SSD QLC bit shipment mix reached a new record for the second consecutive quarter, with growth in both client and consumer markets. We continue to expand our footprint in the high-end consumer SSD space with the launch of three new products that extend our reach into professional content creators and enthusiast PC gamers. In mobile, we expect calendar 2023 smartphone unit volume to be down by a mid-single-digit percentage year-over-year and then grow by a mid-single-digit percentage in calendar 2024. Elasticity, along with a mix shift toward premium phones with greater capacity, is contributing to memory content growth. About a third of smartphones sold today have at least 8 gigabyte of DRAM and 256 gigabyte of NAND, up more than 7 percentage points versus smartphone units a year ago. Similar to our view on PCs, AI-enabled mobile phones could drive content growth and a stronger refresh cycle over time. Longer term, we see generative AI applications executing on handsets. These applications will continue to drive new requirements for higher capacity, lower power and increased performance in memory and storage. Last, I'll cover the auto and industrial end markets, which contribute to more stable revenue and profitability. Fiscal 2023 marked another record revenue year for our automotive business. Micron continues to lead in automotive market share and quality. Long term, we expect memory and storage content per vehicle to increase in both ADAS and in-cabin applications. In addition, fast-growing EVs typically contain higher memory and storage content. Our automotive design win trajectory remains strong. The industrial market showed signs of recovery in fiscal Q4. Inventory levels for memory and storage are stabilizing at distribution partners and at the majority of our customers. We expect the volume recovery that we observed in the second half of fiscal 2023 to continue into 2024. We see strong growth prospects in this market over time, as industrial customers continue to adopt and implement the IoT, AI and machine learning solutions. As previously discussed, the CAC or Cybersecurity Administration of China decision earlier this year has impacted our business, particularly in the domestic data center and networking markets in China. We remain committed to serving our customers in China for those areas of their business not impacted by the CAC decision. While there is near-term impact to our demand due to these challenges in China, we remain focused on maintaining Micron's global market share. Our team's grit and Micron's deep relationships with our customers, underpinned by our technology leadership, increasing product momentum, excellent product quality, and extensive manufacturing and supply chain capabilities position us well toward these goals. Now, turning to our market outlook, starting with demand. We expect calendar 2023 DRAM bit demand to grow in the mid-single-digit percentage range. In NAND, our expectations for demand growth this calendar year have increased from high-single digits to high teens percentage. These are below the expected long-term bit demand growth CAGRs of mid-teens in DRAM and low-20s percentage range in NAND. While calendar 2023 DRAM demand has been in line with expectations, NAND growth expectations have increased due to stronger than expected demand in certain parts of the consumer market and a trend of greater elasticity in per unit content. While macroeconomic factors remain a risk, we expect robust year-over-year bit demand growth in calendar 2024 for both DRAM and NAND, driven by improving end-market demand, normalized customer inventory levels, content growth across products, and ongoing growth in AI. Calendar 2024 bit demand growth is expected to exceed the long-term CAGR for DRAM and to be near the long-term CAGR for NAND. Turning to supply. Significant supply and CapEx reductions across the industry have helped to stabilize the market and are enabling the recovery that is now underway. We see both DRAM and NAND year-over-year supply growth in calendar 2023 to be negative for the industry. We expect Micron's year-on-year bit supply growth to be meaningfully negative for DRAM. We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. In calendar 2024, we expect industry DRAM and NAND supply growth to be below industry demand growth and meaningfully so for DRAM. We believe calendar 2024 is positioned to be a year of recovery in the memory and storage industry. A sustained period of supply growth less than demand growth will strengthen the pace of recovery. HBM production will be a headwind to industry bit supply growth. Across the industry, the HBM3E die is roughly twice the size of equivalent-capacity D5. The HBM product includes a logic interface die and has a substantially more complex packaging stack that impacts yields. As a result, HBM3 and 3E demand will absorb an outsized portion of industry wafer supply. The ramp of HBM3 and 3E production will reduce overall DRAM bit supply growth industry-wide with particular supply impact on non-HBM products as more capacity is diverted to addressing HBM opportunities. Micron is experiencing a similar impact of our planned HBM3E ramp on our bit supply capability. Micron's bit supply growth in fiscal 2024 is planned to be well below demand growth for both DRAM and NAND, and we expect to decrease our days of inventory in fiscal 2024. We continue to execute to our strategy of maintaining global bit shipment market share for DRAM and NAND while sustaining tight supply and CapEx management discipline. Micron's fiscal 2024 CapEx is projected to be up slightly compared to fiscal 2023 levels. WFE CapEx will be down again year-over-year in fiscal 2024. We remain focused on carefully managing overall supply growth. In last quarter's earnings call, we communicated that total wafer start reductions in both DRAM and NAND are approaching 30% versus peak 2022 levels. Amid an intense focus on capital efficiency over the last few quarters, we have redeployed a portion of the underutilized equipment to support production ramp of leading-edge nodes in both DRAM and NAND. Given the higher process step count of these leading-edge nodes, transitioning this equipment results in a significant and structural reduction to our overall wafer capacity in both DRAM and NAND. Due to this structural reduction in capacity, our DRAM and NAND wafer starts will remain significantly below 2022 levels for the foreseeable future. Our industry supply projections assume a similar structural reduction in wafer capacity industrywide. Lead times to increase this wafer capacity will be long and will depend on improving demand, pricing and financial performance. We expect underutilization to continue in our legacy nodes well into calendar 2024. We see our demand at leading-edge nodes exceeding our supply in fiscal and calendar 2024, particularly in the second half of the year. Construction CapEx will be elevated to support our plans to build leading-edge memory fabs in Idaho and New York, for which we filed CHIPS applications in August. As we have highlighted before, the requested level of CHIPS grants for our Idaho and New York projects are essential to the viability and global competitiveness of each of these projects. Our CapEx plans assume that a certain level of CHIPS grant funds will be made available to us in fiscal year 2024. Assembly and Test CapEx is projected to double year-over-year in fiscal 2024, predominantly driven by investments to support HBM3E production. Our planned fiscal 2024 CapEx investments in HBM capacity have substantially increased versus our prior plan in response to strong customer demand for our industry-leading product. Over the course of calendar 2024, we see accelerating AI-driven opportunities for memory and storage across multiple market segments from the data center to the edge. We are encouraged by the improving industry demand and supply fundamentals. We believe that the CapEx constraints created by the industry profitability environment, coupled with improved inventories, announced supply reductions and the impact of the HBM ramp on DRAM bit supply growth will create conditions that will increasingly tighten the supply-demand balance, particularly in the second half of our fiscal year. Our Micron team is executing well and they are taking prudent and proactive actions to navigate through the near-term environment and position the company to emerge stronger from the current downturn. We look forward to a recovery in our business financials taking shape in fiscal 2024. I will now turn it over to Mark for our financial results and outlook.

Sanjay Mehrotra:

Thank you, Mark. The past four quarters tested the resilience and agility of our entire industry. While the recovery from this downturn has begun, Micron will exercise continued supply discipline to drive a return to sustained profitability. I am proud of our team's response to adversity, sustaining our technology leadership, improving time to mature yield, and launching a suite of leading-edge products that represent one of the strongest portfolio expansions in Micron's 45-year history. As our global investment announcements throughout the year clearly show, Micron remains keenly focused on building our business to meet future demand driven by the proliferation of AI from the data center to the edge. I have full confidence in our team, the position we have built for Micron, and our collective ability to capitalize on the opportunities ahead. Thank you for joining us today. We will now open up for questions.

Tom O'Malley:

Hi guys, thanks for taking my question. I just want to understand the trajectory here on the NAND business. You guys in the quarter kind of took your demand profile from high-single-digits to high teens and you pointed out consumer in particular. What can you do to give us confidence that, that wasn't a pull in from some of your large consumer customers, and that later this year there might be a little hole there, and just talk about the trajectory of where you see that business going, just given you said that bits are going to be down sequentially into November? Thank you.

Tom O'Malley:

Very helpful.

Tom O'Malley:

Helpful. And then just as a follow-up, obviously you're facing headwinds from the CAC band. Can you just talk about areas of the market where you guys are targeting to help make up some of those bits. Is it just conversations with customers in the consumer space or are you looking at content increases in the data center, just given the puts and takes of you know where you're making up that a double-digit percentage hole and if you see kind of any change to that. Is it getting worse or is it getting better into February and May of this year? Thank you very much.

Tom O'Malley:

Thank you, Sanjay.

Toshiya Hari:

Hi guys, thank you for the question. I had a gross margin question for you, Mark. You're guiding November quarter up five percentage points sequentially. I was hoping you could provide a bridge, if you will, on a sequential basis. You talked a little bit about you know period costs continuing to be a headwind. You gave a little bit of color for the benefit you'll see from selling through written-down inventory. But, you know what are your thoughts on pricing. What are your thoughts on cost-downs? And if you can give you know directional guidance for FED and the puts and takes there, that would be helpful as well. Thank you.

Toshiya Hari:

Thank you. And then maybe as a quick follow-up on HBM for Sanjay. You know, three months ago, you guys talked about or at least hinted that in fiscal '24, you might be able to generate you know several $100 million in revenue. Is that sort of target still intact? Have things improved since then and I guess at what point do you expect your presence in HBM to be similar to your presence in DRAM overall? Thank you.

Toshiya Hari:

Thanks so much.

Timothy Arcuri:

Thanks a lot, Mark, I wanted to clarify the statement on gross margin. So, you had said in the prepared remarks that it would be positive in the back half of the fiscal year. But in response to the question just before, you said that it will be positive through fiscal '24. So since you're guiding negative in fiscal Q1, does that tell us that fiscal Q2 gross margin will be positive?

Timothy Arcuri:

Okay. So you don't want to state that fiscal Q2 will be positive, maybe it will be, maybe it won't.

Timothy Arcuri:

Got it, thanks. And then as a follow-up, just on that comment you just made about called special deals and - that you, you know, struck in, you know, fiscal Q4. NAND demand, you're more positive on NAND demand, but pricing was still as bad if not worse than at least I thought it would have been in - you know, side of fiscal Q4. So is - can you kind of foot that, is that maybe you offering some big deals on the NAND side, some you know customers coming in and being opportunistic and you offerings some big deals to move bits and maybe shore up your NAND share, but at the expense of price. Can you just walk through that force? Thanks.

Timothy Arcuri:

Thanks, Mark.

Mehdi Hosseini:

Yes, sir. Thank you for taking my question. Two follow-ups. I would like to better understand the dynamics of seasonality. You talked about the NAND bit shipment declining in the Q1 fiscal year and most of the growth coming from DRAM, but how should we think about seasonality impact in February quarter? And I have a follow-up.

Mehdi Hosseini:

But would there be seasonality in February quarter?

Mehdi Hosseini:

Great, thanks for detail. And second question has to do with the puts and takes in reducing wafer starts. And I understand that more emphasis is on the trade mix. But as you - as I think about memory like, there is no trailing edge. And in that context as you think about bringing utilization rate back up to the normal level. and some of the trailing edge converted to the leading edge, could that help with a bigger step-up in gross margin improvement? How should we think about it, assuming that the trailing edge would be phased out?

Mehdi Hosseini:

Thank you.

Operator:

Thank you for standing by, and welcome to Micron's Third Quarter 2023 Financial Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Farhan Ahmad, Vice President, Investor Relations. Please go ahead, sir.

Sanjay Mehrotra:

Thank you, Farhan. Good afternoon, everyone. Micron delivered fiscal third quarter revenue within our guidance range, with gross margin and EPS above the range. The ongoing improvement of customer inventories and memory content growth are driving higher industry demand, while production cuts across the industry continue to help reduce excess supply. As a result, pricing trends are improving, and we have increased confidence that the industry has passed the bottom for both quarterly revenue and year-on-year revenue growth. Our technology leadership and strengthening product portfolio position us well across diverse growth markets, including AI and memory-centric computing. Beyond this downturn, we expect to see record TAM in calendar 2025 along with a return to more normalized levels of profitability. The impact of the May 21 decision by the Cyberspace Administration of China on Micron's business remains uncertain and fluid. Several Micron customers, including mobile OEMs, have been contacted by certain critical information infrastructure operators or representatives of the government in China concerning the future use of Micron products. As discussed before, Micron's revenue with companies headquartered in mainland China and Hong Kong, including direct sales as well as indirect sales through distributors, accounts for approximately a quarter of Micron's worldwide revenue and remains the principal exposure. We currently estimate that approximately half of that China-headquartered customer revenue, which equates to a low double-digit percentage of Micron's worldwide revenue, is at risk of being impacted. This significant headwind is impacting our outlook and slowing our recovery. Micron is working to mitigate this impact over time and expects increased quarter-to-quarter revenue variability. Micron's long-term goal is to retain its worldwide DRAM and NAND share. Turning to technology. Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness while managing CapEx, node ramps and wafer start reductions to reduce our bit supply and align it with demand. Our industry-leading 1-beta DRAM and 232-layer NAND nodes are achieving world-class yields, and the yield ramp for these nodes has been faster than any of our prior nodes. These leadership nodes provide a strong cost capability, along with best-in-class power and performance specifications that will be leveraged across the portfolio of DRAM and NAND products. In fiscal Q3, we achieved several important product qualifications on these advanced nodes and are well positioned to ramp them in fiscal 2024. We are also making good progress toward the introduction of our EUV-based 1-gamma node in 2025. This node will be manufactured first in our Taiwan site, where we already have EUV capability installed and operating in preparation for this ramp. We also recently announced plans to bring EUV technology to our fab in Hiroshima, Japan, with support from the Japanese government. Micron will be the first company to bring EUV technology to Japan for production. We are also advancing our global assembly and test network in order to support our product portfolio and extend our ability to deliver on global customer demand in the future. In China, we announced an investment of approximately $600 million over the next several years in our operations in Xi'an. This builds on our long history of significant investment in our Xi'an assembly, packaging and test operations. As a part of this investment, we have decided to purchase the assembly equipment of our partner Powertech Semiconductor Xi'an, who has been operating inside our Xi'an facility for the last eight years. We also intend to construct a new building at our Xi'an site to provide space to add more product capabilities. This will allow us, over time, to serve more of the demand from our customers in China from the Xi'an site. In India, with the strong support of the Indian government, we will build a new assembly and test facility in Gujarat to address demand for the latter half of this decade. We are also increasing our investments in assembly and test capacity in Taiwan for high-bandwidth memory products as we gear up for stronger demand in this segment driven by the AI wave. Now turning to our end markets. Customers continued to make progress in reducing their excess inventory in fiscal Q3. Most customer inventories in the PC and smartphone segments are close to normal levels now, consistent with our forecast six months ago. Some of these inventory levels can get distorted by customer attempts to leverage current prices, which are deemed to be transient and unsustainable at these levels, to purchase additional volumes before prices rise significantly. Data center customer inventory is also improving and will likely normalize around the end of this calendar year or somewhat thereafter, depending on the growth in traditional data center spending. In data center, we saw strong sequential revenue growth in both cloud and enterprise in fiscal Q3, driven by some recovery from depressed sales levels in fiscal Q2. The recent acceleration in the adoption of generative AI is driving higher-than-expected industry demand for memory and storage for AI servers, while traditional server demand for mainstream data center applications continues to be lackluster. Micron's product portfolio and roadmap of innovative products position us to capture growth opportunities from AI and data-centric computing architectures for both training and inferencing. Increasingly large AI models with an exponentially growing number of parameters are driving demand for dramatically higher memory content. As we have said before, AI servers have six to eight times the DRAM content of a regular server and three times the NAND content. In fact, some customers are deploying AI compute capability with substantially higher memory content. A striking example is NVIDIA's DGX GH200 supercluster, which shows just how memory-intensive AI workloads can be; it provides developers the ability to support giant models with a massive, shared memory space of 144TB. A significant majority of that memory footprint is enabled by a joint development project between our two companies that extends Micron's low-power DRAM leadership to server class applications. We are proud to pioneer this differentiated LP DRAM innovation to deliver a significant reduction in data center power consumption compared to DDR-based solutions, helping to support our customers' green initiatives. High-bandwidth memory, used in high performance computing, is seeing very strong demand this year, driven by demand for generative AI. We are working closely with our customers and have begun sampling our industry-leading HBM3 product offering. The customer response has been strong, and we believe our HBM3 product delivers significantly higher bandwidth than competing solutions and establishes the new benchmark in performance and power consumption, supported by our 1-beta technology, TSV, and other innovations enabling a differentiated advanced packaging solution. We expect to begin a mass production ramp for this exciting HBM3 product in early calendar 2024 and to achieve meaningful revenues in fiscal 2024. Micron also has a strong position in the industry transition to D5, which is the latest generation of DDR memory. Our D5 percentage of DRAM shipments has more than doubled from fiscal Q2 to Q3, and we expect Micron D5 volume to cross over D4 at the end of first calendar quarter of 2024 versus mid-calendar 2024 for the industry. Micron's 1-alpha D5 modules are qualified and shipping to data center customers. We are also making good progress on our 1-beta-based, high-density 128 gigabyte D5 modules using a 32 gigabit die that optimizes cost and performance to provide customers with a lower cost-of-ownership solution for memory-intensive workloads like AI. We expect these high-density modules to ramp in calendar Q2 of 2024 with significant cost improvements over today's expensive TSV-based solutions in the industry. Our 96 gigabyte D5 high-density module built on 1-alpha technology, using 24 gigabit die, is already shipping in volume and delivers equivalent performance for the majority of workloads versus the more expensive TSV dual-die package-based 128 gigabyte modules. In data center SSDs, Micron's entire portfolio is now on 176-layer or 232-layer NAND, demonstrating our product and technology leadership. We are in a strong position to serve AI demand for fast storage as these data-intensive applications proliferate. In fiscal Q3, we launched the world's first 200-plus layer NAND data center SSD, and qualification is in progress at multiple key customers to support AI cluster installations. In fact, we have already passed qualification of this product at a critical server OEM partner. We also launched our extreme endurance data center SSD, which offers superior scalability and affordability versus hard drives. In PCs, we now forecast calendar 2023 PC unit volume to decline by a low double-digit percentage year-over-year, with PC units expected to be below the pre-COVID levels last seen in 2019. We are excited about the ongoing industry transition to D5 and are well positioned for it with our strong D5 product lineup. Industry client D5 mix is expected to cross over from D4 in early calendar 2024. In fiscal Q3, we achieved record quarterly client SSD bit shipments, driven by share growth in client SSDs as customers adopted our industry-leading solutions. Our SSD QLC bit shipment mix reached a new record for the third consecutive quarter, with growth in both client and consumer. Last month, we launched Crucial T700, the world's fastest Gen5 PCIe consumer SSD, built with our 232-layer NAND. In graphics, industry analysts continue to expect graphics' TAM growth CAGR to outpace the broader market, supported by applications across client and data center. We expect customer inventories to normalize in calendar Q3. We plan to introduce our next-generation G7 product on our industry-leading 1-beta node in the first half of calendar year 2024. In mobile, we now expect calendar 2023 smartphone unit volume to be down by a mid-single digit percentage year-over-year. While units are weaker, we are seeing stronger memory content growth driven by a mix shift toward premium phones and elasticity. We expect sequential growth in fiscal Q4 as customers prepare for upcoming product launches in the back half of calendar 2023. In fiscal Q3, we achieved key mobile customer qualifications on our 1-beta-based LP5X and started high-volume revenue shipments to Tier-1 OEMs. In addition, we achieved significant milestones in UFS with the qualification and ramp of a high-capacity uMCP5 featuring 16 gigabyte of DRAM and 512 gigabyte of NAND. We have also started to sample a new UFS 4 product based on our latest 232-layer NAND technology, which enables industry-leading performance for flagship handsets. Last, I'll cover the auto and industrial end markets, which represent over 20% of our revenue and contribute more stable revenue and profitability. Micron continues to lead in automotive, which is a key market and growth driver for us. In fiscal Q3, auto revenue reached another quarterly record and grew by a high single-digit percentage year-over-year. We continue to expect growth in auto memory demand for the second half of calendar 2023, driven by easing non-memory semiconductor supply, normalizing customer inventory levels, and increasing memory content per vehicle. The industrial market saw early signs of recovery in fiscal Q3. Inventory levels are stabilizing at distribution partners and at the majority of our customers. As a result, we expect an improvement in demand in the second half of calendar 2023. We are excited about our growth prospects in this market, as industrial customers continue to adopt and implement IoT, AI, and machine learning in the factory. Now, turning to industry outlook. Our expectations for calendar 2023 industry bit demand growth have been further reduced to low- to mid-single digits in DRAM and to high-single digits in NAND, which are well below the expected long-term CAGR of mid-teens percentage range in DRAM and low 20%s range in NAND. While the AI-driven demand has been stronger than our expectations three months ago, the PC, smartphone and traditional server demand forecasts are now lower. We continue to expect stronger industry bit shipments for DRAM and NAND in the second half of the calendar year, driven by secular content growth and continued improvement in customer inventory. While the industry demand forecast for calendar 2023 is now lower, the significant supply reductions across the industry have started to stabilize the market. We see both DRAM and NAND year-over-year supply growth to be negative for the industry in calendar 2023 as utilization and CapEx cuts across the industry impact supply growth. While supply demand balance is improving, due to the excess inventory, profitability and cash flow will remain extremely challenged for some time. Market recovery can accelerate if there is further reduction in industry production and these cuts are sustained well into calendar 2024. In response to the industry environment, Micron has taken decisive actions to bring our supply back in balance with demand. We expect Micron's year-on-year bit supply growth to be meaningfully negative for DRAM. We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. Our fiscal 2023 CapEx plan of $7 billion is down more than 40% from last year, with WFE down more than 50%. We continue to expect fiscal 2024 WFE to be down year-on-year. Recently, we have further reduced wafer starts to approach 30% in both DRAM and NAND. We currently expect reduced wafer starts will continue well into calendar 2024 as we remain focused on managing down our inventories and controlling our supply. I will now turn it over to Mark.

Sanjay Mehrotra:

Thank you, Mark. I am proud of the execution of the Micron team and the progress we made this quarter. The leadership products we released and qualified are strengthening Micron's portfolio across multiple key markets. While there are near-term headwinds, I am excited about the new product introductions that we have planned for the next several quarters, which will further enable us to leverage the dramatic growth in AI that is ahead of us. I am confident that this portfolio momentum, combined with our technology capability, manufacturing excellence, financial discipline, and excellent customer relationships, will position us well for the future. I also want to call attention to Micron's 2023 sustainability report, which published yesterday. The report underscores our continued commitment to innovation, the environment, our people and the communities where we operate, outlining our progress and aspirations across our environmental, social and governance programs. I encourage you to review the full report on Micron's website. Thank you for joining us today. We will now open for questions.

C.J. Muse:

Yes, good afternoon. Thank you for taking the question. I guess first question, with inventory expected to normalize in the coming months -- quarter, how are you seeing customer purchasing behavior perhaps change given that we're clearly hitting a pricing trough very soon? We'd love to hear kind of how those discussions might be changing.

C.J. Muse:

Very helpful. If I could just follow-up real quickly on HBM3, you guided to meaningful revs in fiscal '24. Can you give us a sense of what that means? And over time, what size kind of could that look like for you guys looking at kind of three to five years? Thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Mark Murphy:

Yes. We had a small impact -- very small in Q3. It's a more material impact in Q4. We do expect the impact to increase. However, our actions to mitigate that will help offset the effect. But really, at this time, it's a headwind, but there's -- and that's clear. However, we are taking mitigating actions and it's very uncertain, continues to evolve on what the impact will be. And again, the impact that we see in the fourth quarter, it's contemplated in our guidance.

Sanjay Mehrotra:

Well, our customers, of course, work with us on LTAs. And as we have said, LTAs relate to their forecast for the year, generally. And while some customers may be operating on shorter term or other customers longer term, but generally speaking, they operate on yearly LTAs and LTAs involve supply and demand commitments from the two sides. Of course, sometimes with the changing industry environment on either side, on the supply or on the demand side, there can be adjustments made to those LTAs, and we work closely with our customers in those regards. And we have had close relationships with the customers. We have a very strong product momentum. You are particularly inquiring about data center. And let me tell you that our product momentum in data center with strong portfolio of solutions, particularly addressing the growing interest in AI, in data center, generative AI, becoming a big opportunity, and we look at it for 2024 as a big year for AI and for memory and storage and Micron will be well positioned with this product. And these are all parts of our discussions when we address their requirements on their future purchases when we address LTA requirements. And of course, we need the necessary investments related to our production mix in terms of die requirements, in terms of our assembly and test requirements, and we really work closely with our customers to help manage these. And just keep in mind that -- as I mentioned, that a lot of new product considerations go into the LTAs as well, as well as, of course, the volume and overall demand and supply considerations. So LTAs, at the end, really help both the parties. They help us plan our engineering, our product roadmap, alignment on that, our investments in things such as back-end capacity because products like HBM, product like high-density modules and, of course, in the mobile sector, products like MCPs, et cetera, have all different considerations at the back end. And these are the kind of things, LTAs really help us plan with our customers.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Krish Sankar from TD Cowen. Your question please.

Sanjay Mehrotra:

So look, when we look at the overall DRAM demand, the DRAM TAM, of course, the AI is driving growth. Automotive, certainly driving growth. Other end markets, such as we mentioned, mobile and PC, in terms of -- or consumer, in terms of their end demand, has been somewhat lackluster. The AI demand that is driven in data center, whether it is in the enterprise definitely drives healthy trends for memory growth. Yes, enterprise server and some of the data center demand has been recently somewhat impacted by the macro trends, but the trend of AI and more memory is absolutely continuing. And that's what -- when we look at our overall 2023 demand growth and the projections of CAGR that we have ahead of us, we have taken those into account. This is very, very early innings for AI, and AI is really pervasive. It's everywhere in, of course, cloud applications, enterprise server applications, applications such as generative AI would be in enterprises too. Because due to confidentiality of data, enterprises will be building their own large language models. And as you know, while the enterprise large language models may not be as large as the large language models you may see, and examples such as super clusters, et cetera, but all of them are really tending towards greater number of parameters. Now we are talking about parameters with generative AI getting into even trillion parameter range. Not too long ago, these used to be in 100 millions of range. That requires more memory. So regardless of the applications, whether it is on the enterprise side or on the cloud server side, the memory requirements are continuing to increase. And I'll just point out that 6x to 8x that we have mentioned is the multiple of DRAM requirement in AI server versus standard server. And of course, as we highlighted in the script, there are many compute configurations, such as the supercluster example that we gave you, where the DRAM content that is required is few hundred times higher than a standard server. So really, I think the journey here ahead of us will be very exciting. And when we look at machine-to-machine communication, when we look at opportunities for the virtuous cycle for the ever-increasing data that training applications, that inferencing at scale and various edge applications, including automotive, are driving the requirements for memory and storage will continue to grow well, and Micron is going to be well positioned with our products. And we consider 2024 to be a big banner year for AI, for memory and storage. And Micron will be well positioned to capture this with our strong portfolio of products from D5 to LP5 to HBM to high-density modules, even including graphics.

Mark Murphy:

Yes. Thanks, Krish. Maybe I'll spend a few minutes just covering because it's a very complicated topic with a lot of moving parts, maybe spend a bit of time on the topic. So our reported gross margin, our outlook, it's a function of many factors, including pricing. The inventory write-downs, which do include or incorporate our forward view of pricing. The effects of utilization, which you heard today, we've increased -- or reduced our wafer starts further. And then just volumes and associated leverage on period costs as discussed in previous quarters, and of course, mix. These factors are continuously changing due to market environment and our actions. And as I've stated before at these lower levels of profitability, our margin forecast and results are more sensitive to slight changes in assumptions such as price. Now given price trends and our current view on pricing and costs, we took a material write-down in the second quarter as we reported $1.4 billion, took another $400 million this quarter. And with these write-downs, we've pulled forward inventory costs, thus lowered the carrying value of on-hand inventories. Yes, as this lower cost inventory clears in the future quarters, we'll realize more income in those quarters than we would have otherwise without the charge. So as an example, we took this $400 million of additional write-downs in third quarter for inventories produced. And considering our latest views on volume mix, we also realized a benefit of near $300 million from selling through the lower cost inventories impacted by the second quarter write-down. So I do want to call out that it's -- with all the uncertainty, complexity and sensitivity at these profitability levels, our write-down and the benefits that we had in the third quarter were not far off what we estimated in our guide. So I think that's a good reflection of our handle of what's happening in the business. Now we've also got underutilization effects, which are creating higher costs in inventories and adding period costs. We project roughly $1.1 billion of underutilization impact in FY '23 associated with the front end. Most of that will impact the P&L this year. Some of it will carry over to next year. But because of the effect of the write-down accounting, less of it will carry over to next year than would have otherwise. Beyond this period of write-down effects, the impact of lower wafer starts between the period cost and the higher cost inventories, the effect is higher single digits on margins, then down to mid and lower single digits on margins as revenues increase. So considering all this, just to give you a sense of profile of margin and in turn pricing, to your question, we said last quarter that we expect -- or as we said last quarter, we expect -- we had a reported second quarter margin to be the trough, and that was driven by the $1.4 billion write-down. With a much lower inventory charge forecasted in the third quarter, which happened, that margin improved about 15 points. And then also, as mentioned last quarter, we said that fourth quarter would be better than third quarter on a lower write-down, hence, we guided today 5 points better than the third quarter. Again, these estimates are sensitive to pricing changes. And -- but in our current view, we expect a gradual improvement on margin to continue sequentially on a reported basis. Now if you take our non-GAAP third quarter gross margin of negative 16%, and we were to strip out the write-down effects in third quarter, both the write-down portion and the realized benefit, and also to normalize, you strip out the insurance settlement which we had in the third quarter, we would still be -- those two things largely offset, so we'd be still at about 16% negative gross margin. So again, over $100 million net inventory effects, the $400 million write-down less than $300 million realized benefit and then the roughly the same over $100 million insurance settlement. So -- and this is a function of the pricing environment, which we, I think, properly captured in our guide. Now that adjusted 16% -- that adjusted margin 16% is down clearly versus the adjusted second quarter margin, which, as I recall, is about 7%, so down 23 points. So under this adjusted view, we would trough on gross margin over the next few quarters, and then we would improve off these low levels through FY '24. So this is a profile that's consistent with what we've discussed before, though the levels are a bit lower and a bit delayed. And so hopefully, that provide you some color both on how we see pricing and how we see gross margin playing out with all the puts and takes.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Harlan Sur from JPMorgan. Your question please.

Mark Murphy:

It is not. It's more of an industry dynamic and our intent to get supply discipline in the market. Supply needs to come out of the market given inventory levels, and that's the principal driver. As far as the effects of utilization, it is already incorporated in this guide. The period costs in the fourth quarter are about $200 million. And again, they're contemplated in the guidance.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Ambrish Srivastava from BMO Capital Markets. Your question please.

Mark Murphy:

No, I don't think it's much worse than what we're thinking. If you strip out just the underutilization effects, but you keep in the insurance settlement, you're close to what we said, sort of that 7%, 8%. So that you need to consider. We had said that was in there.

Sanjay Mehrotra:

I will take that. So what we have said is that approximately 50% of our business in China is at risk of getting impacted. And of course, we are focused on mitigating any share loss with CIIOs or as a result of CAC decision, with those customers -- global customers who are not impacted by CAC decision. So keep in mind that our share in DRAM is approximately 23% and our share in NAND is approximately 12%. So obviously, we have opportunities to gain share with other customers. And this is what we are focused on. It will take some time, and the CAC decision can -- I mean, as we have said, it is hurting our business. It is slowing our recovery. It can result in quarter-to-quarter variations as well. But over longer term, our target is to maintain our share. So while near term, CAC decision is challenging, longer term, we will work with customers who are not impacted -- our global customers who are not impacted by CAC decision to increase our share. And we have a long history of working with our customers. We have brought tremendous value of our innovation, our supply, our product portfolio supporting their innovation and roadmaps in the marketplace. Our customers want to see a strong Micron. Our strategy of keeping our target share consistent over longer term with our current share is understood by our customers because, again, they want to see a strong Micron, so they are supportive of this. And we will continue to work with our customers. And of course, as we bring value to our customers with our products and our product portfolio, we will focus on ROI on our investments, and we'll certainly focus on improving the profitability of our business from current levels as well. So we will, of course, keep profitability in mind. And again, it's important that Micron is a strong partner to our customers. And I think customers understand that multiple strong players in the industry is a benefit for multiple reasons to our customer ecosystem.

Operator:

Thank you. One moment for our next question. And our final question for today comes from the line of Tom O'Malley from Barclays. Your question please.

Sanjay Mehrotra:

So certainly, we have had HBM2E product in the marketplace that actually gave us strong experience in bringing up our technology and production capability with HBM. The market, as I mentioned, is -- has shifted -- is shifting to HBM and Micron's HBM3+ product, which I called as a generational leap ahead of anything in the industry is going to position us well as we bring that into volume production during the course of our fiscal year '24, starting early part of calendar '24, contributing to several hundred million dollars of revenue opportunity over time. And with respect to AI part of the market, I want to be very clear that, yes, with respect to high-density modules and with respect to high bandwidth, HBM3 solutions, that part of the market is growing this year, and it's an opportunity that we want to capture, and I believe that we'll be well positioned to capture, as I mentioned, that we will be targeting share in HBM with our absolute industry-leading product that's higher than our DRAM industry average share. So -- but it's important to understand is that AI is being served not only by HBM or high-density DRAM modules, but it is also being served by D5 memory and by LP DRAM as well. And this is where with the D5 and LP DRAM products, we gave you some examples in our script as well. A large amount of LP DRAM being used in industry-leading high-performance compute platforms. In fact, the 144 terabyte that we mentioned in DGX, GH 200, about 122 terabyte of that is LP DRAM. And Micron is very well positioned with a differentiated solution of our LP DRAM there today. So I think it's important to understand that the AI server market is made up of HBM, it's made up of high-density DRAM modules, includes -- it also is made up of DDR5, LP5 and some element of graphics memory as well. So, we do have a broad portfolio. And in 2024 with HBM and high-density DRAM modules getting into production, I really believe we'll be extremely well positioned to capture the growing opportunity in AI. And 75% of DRAM on AI servers today is DDR5. And as I emphasized, and as I'm sure you well know, we participate very well in D5. In fact, we led the industry with our D5 products, again, built on 1-beta technology here.

Operator:

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Micron's Second Quarter 2023 Financial Call. [Operator Instructions]. I would now like to introduce your host for today's program, Farhan Ahmad, Vice President, Investor Relations. Please go ahead, sir.

Sanjay Mehrotra:

Thank you, Farhan. Good afternoon, everyone. Micron delivered fiscal second quarter revenue within our guidance range, and excluding the impact of inventory write-downs, margins and EPS were also within the guidance range. The semiconductor memory and storage industry is facing its worst downturn in the last 13 years with an exceptionally weak pricing environment that is significantly impacting our financial performance. We have taken substantial supply reduction and austerity measures, including executing a company-wide reduction in force. We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply-demand balance in the months ahead. Excluding the impact of inventory write-downs, we believe our balance sheet DIO has peaked in fiscal Q2, and we are close to our transition to sequential revenue growth in our quarterly results. We are navigating the near-term difficult environment with our strong technology position, deep manufacturing expertise, strengthening product portfolio, solid balance sheet and incredibly talented team. Beyond this downturn, we anticipate a return to normalized growth and profitability in line with our long-term financial model. Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness while managing node ramps to reduce our bit supply and align it with demand. In DRAM, 1-alpha represents most of our DRAM bit production, and we continue to make great progress in initiating our transition to 1-beta. In NAND, 176-layer and 232-layer now represent more than 90% of NAND bit production. We also continue to lead the industry in QLC. QLC accounted for over 20% of our NAND bit production and shipments in fiscal Q2. The Micron team's solid execution and implementation of smart manufacturing has driven superb yield enhancement across our leading-edge nodes. Yields on 1-alpha DRAM and 176-layer NAND have reached levels that are now higher than any node in our history. In addition, both our 1-beta DRAM and 232-layer NAND have reached targeted yields ahead of schedule and faster than any of our prior nodes. We are well positioned to qualify these leading-edge nodes across our product portfolio and will ramp them based on customer demand. We are also making good progress towards the introduction of our EUV-based 1-gamma node in 2025. Similar to our 1-alpha and 1-beta nodes, we expect this node to provide us with competitive performance, power, cost and density improvements. Now turning to our end markets. As a result of inventory adjustments across our end markets, slowing demand growth and an extremely challenging pricing environment, revenue was down year-over-year in all end markets. While our industry faces significant near-term challenges, we believe that the memory and storage TAM will grow to a new record in calendar 2025 and will continue to outpace the growth of the semiconductor industry thereafter. Recent developments in AI provides an exciting prelude to the transformational capabilities of large language models, or LLMs, such as ChatGPT, which requires significant amounts of memory and storage to operate. We are only in the very early stages of the void split deployment of these AI technologies and potential exponential growth in their commercial use cases. As more applications of this technology proliferate, we will see training workloads in the data center supplemented with voice spread influence capabilities in the data center as well as in end user devices, all of which will drive significant growth in memory and storage consumption. In data center, we believe that our revenue bottomed in fiscal Q2, and we expect to see revenue growth in fiscal Q3. Data center customer inventories should reach relatively healthy levels by the end of calendar 2023. We continue to see AI as a secular driver of demand growth in the data center. An AI server today can have as much as 8x the DRAM content of a regular server and up to 3x the NAND content. We are well positioned to capture the memory and storage opportunities that AI and data-centric computing architectures will provide. Our product roadmap includes exciting HBM3 and CXL innovations, and I look forward to sharing more details about these solutions in the future. In fiscal Q2, we expanded shipments of CXL DRAM samples to OEM customers that service enterprise, cloud and HPC workloads. Micron is leading the industry with world-class DDR5, or D5 technology. We are shipping D5 in high volume to data center customers and achieved our first customer qualification for our 1-alpha 24-gigabit D5 product. The latest generation of server processors, AMD's Genoa and Intel's Sapphire Rapids, require D5 DRAM. Servers using these new processes will drive higher D5 industry bit demand in second half of calendar 2023, towards mix crossover with D4 in mid-calendar 2024. In fiscal Q2, we also began volume production and shipments of the fastest PCIe Gen4x4 NVMe SSD in the market, our 9400 176-layer performance NVMe data center SSD, which excels in AI and high-performance computing workloads. In PCs, we now forecast calendar 2023 PC unit volume to decline by mid-single-digit percentage, returning PC unit volume to pre-COVID levels last seen in 2019. Although still elevated, client customer inventories have improved meaningfully, and we expect increased bit demand in the second half of the fiscal year. With our strong product lineup, we are well positioned for the ongoing industry transition to D5. Client's D5 adoption is expected to gradually increase through calendar 2023, with D4 to D5 mix crossover in early to mid-calendar 2024. In fiscal Q2, our NAND QLC bit shipment mix reached a new record for the second consecutive quarter, driven by growth in both client and consumer SSDs. We qualified our Micron 2400 SSD, the world's only 176-layer QLC SSD qualified at OEMs, across the client customer base. In graphics, industry analysts continue to expect graphics TAM growth CAGR to outpace the broader market supported by applications across client and data center. Customers' inventory adjustments are progressing well, and we expect demand in the calendar second half of 2023 to be stronger than the first half. As the performance leader in graphics, we are excited to see our proprietary 16-gigabit G6X featured in the recently launched NVIDIA RTX 4070 Ti. In mobile, we now expect calendar 2023 smartphone unit volume to be down slightly year-over-year. While some customer inventories are back to normal levels, other OEMs' inventories remain elevated. In aggregate, we expect mobile customer inventory to improve through the remainder of calendar 2023, and we expect growth in mobile DRAM and NAND bit shipments in the second half of our fiscal year versus the first half. In fiscal Q2, we continued sampling and qualifying our industry-leading 1-beta 16-gigabit LP5X, receiving very positive feedback on its power, performance and quality from customers. We expect to generate revenue on this 1-beta product later this fiscal year. We showcased our leading products earlier this month at Mobile World Congress, where we displayed 8 flagship mobile customer design wins. Last, I'll cover the auto and industrial end markets, which now represent over 20% of our revenue and contribute more stable revenue and profitability. Micron is the market share leader in these important and fast-growing markets. In fiscal Q2, auto revenue grew approximately 5% year-over-year. Our leadership in automotive was evidenced by several milestones in Q2. We reached a new record customer quality score, qualified the industry's first 176-layer e.MMC 5.1 automotive product, and began shipping the industry's first 176-layer UFS 3.1 automotive solution. We expect continued growth in auto memory demand for the second half of calendar 2023, driven by gradually easing nonmemory supply constraints and increasing memory content per vehicle. The industrial market continued to soften in Q2, as our distribution channel partners reduce their inventory levels and end demand weakened for some customers. Inventories are starting to stabilize at the majority of our customers, and we expect demand to improve in the second half of our fiscal year. In our fiscal second quarter, Micron achieved advanced startup sampling and design-in across automation OEMs, ODMs and integrators with our latest generation of products. Now turning to our market outlook. Our expectations for calendar 2023 industry bit demand growth have moderated to approximately 5% in DRAM and low-teens percentage range in NAND, which are well below the expected long-term CAGR of mid-teens percentage range in DRAM and low-20s percentage range in NAND. The reduction in calendar 2023 demand from our prior forecast is driven by an assessment of customer inventories as well as some degradation in end market demand. We expect that improving customer inventories will support sequential bit demand growth for DRAM and NAND through the calendar year. China's reopening is also a positive factor for calendar 2023 bit demand. Public reports indicate that there have been significant CapEx cuts throughout the industry, and utilization rates have declined at all DRAM and NAND suppliers. We now expect that the industry bit supply growth for DRAM and NAND in calendar 2023 will be below demand growth, which will help improve supplier inventories. While the supply-demand balance is expected to gradually improve due to the high levels of inventories, industry profitability and free cash flow are likely to remain extremely challenged in the near term. Market recovery can accelerate if there is a year-to-year reduction in production or, in other words, negative DRAM and NAND industry bit supply growth in 2023. In response to the industry environment, Micron has taken a number of decisive actions in fiscal 2023. First, we are further reducing our supply. We have made additional reductions to our fiscal 2023 CapEx plan and now expect to invest approximately $7 billion, down more than 40% from last year, with WFE down more than 50%. In fiscal 2024, we expect WFE to fall further as we ramp 1-beta and 232-layer nodes in a capital-efficient manner. We have further reduced DRAM and NAND wafer starts, which are now down by approximately 25%. As a result, for calendar 2023, we now expect Micron's year-on-year bit supply growth to be meaningfully negative for DRAM. We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. Excluding the impact of inventory write-downs, we expect Micron's DIO to decline sequentially going forward from its peak in the second quarter. Second, we have made further reductions to our operating expenses beyond the executive salary cuts and suspension of Micron's fiscal 2023 bonuses company-wide. We now expect our overall headcount reduction to approach 15%. This will occur through a combination of workforce reductions, which are now largely complete as well as anticipated attrition through the remainder of the year. Third, Micron continues to execute to a strategy of maintaining flat annual bit share in both DRAM and NAND. While we have had to reduce price to remain competitive in the market, we have not done so in an attempt to gain share. As such, share changes at customers are generally transitory. Lastly, we have taken additional steps to ensure ample liquidity. Mark will go into further detail. Micron continues to have the strongest balance sheet among the pure-play memory and storage companies, and our strong liquidity will enable us to weather this downturn while ensuring our product and technology competitiveness. I will now turn it over to Mark.

Sanjay Mehrotra:

Thank you, Mark. We are carefully managing our business to weather this industry downturn, preserving our technology and product portfolio competitiveness and manufacturing capabilities. Micron is the leader in DRAM and NAND process technology and one of only a handful of leading-edge semiconductor manufacturers in the world. Our team continues to drive new breakthroughs for our customers. Memory and storage are at the heart of systems and solutions that fuel the global economic engine, drive new efficiencies, create higher productivity and spud advances that make life better for people around the world. We look forward to a normalization of market conditions, and we remain confident in the long-term demand for our solutions based on the value they create across multiple end markets. Thank you for joining us today. We will now open for questions.

Christopher Muse:

I guess I was hoping to get your sense of how you're thinking about the shape of the recovery. Obviously, things don't look great today, but you've been through this before and will get through it. And so would love to hear your thoughts around how you think will come out of this. And given the CapEx cuts we've seen across the industry, it certainly looks like we're going to be an undersupply situation, at least for DRAM in calendar '24. I'm curious what some of your largest customers are saying today, particularly in the data center as they start to consider this likelihood.

Operator:

And our next question comes from the line of Timothy Arcuri from UBS.

Sanjay Mehrotra:

So I think with respect to the industry environment, you have to look at that over the course of last 3 years, the world faced once-in-100-years kind of pandemic, once-in-multiple-decades kind of Russia-Ukraine war and its impact on the economy, 40-year-high inflation and its impact on the macro. And all of these really resulted in an environment that created a material dislocation in terms of the demand, the surge in demand, and then the inventory adjustments that took place and resulted in a material dislocation in the customer behavior as well. And now you are seeing the process of recovery that is starting, the process of recovery with respect to the supply growth reductions actions that are being implemented. We talked about ours today. And so this will ultimately lead to the industry to recover to healthier levels. The profitability levels in the industry today are simply not sustainable. So the demand and supply environment has to improve in the industry. And keep in mind that before this period of last 2 to 3 years with all these events that I just mentioned, the industry for 10 years plus has been disciplined particularly in DRAM. So I do believe that the investments in the future that require healthy levels of profitability and, of course, supply discipline will be back and the industry will grow. And particularly, keeping it in mind the strong demand trends. I talked about 2025 being -- we think will be a record revenue year for the industry because last 2 years have been slow demand growth in terms of shipments. We think '24 and '25 will be strong years that will drive strong growth. You are seeing actions on the supply side. The health of the industry will be restored in the future quarters. And no doubt that AI -- and we talk about generative AI, right? I mean this is very, very early stages of generative AI, and these are the trends that ultimately really drive greater demand for a long time to come for memory and storage. I mean when you look at really the future, it equals AI and AI equals memory, and Micron is well positioned with our technology and product roadmaps to address the growing opportunities there.

Operator:

Our next question comes from the line of Chris Danely from Citi.

Sanjay Mehrotra:

So with respect to the utilization rates, of course, we will continue to monitor the industry demand, and it's important for us to continue to work on bringing our days of inventory down, and utilization could continue into fiscal year '24 as well. We'll make decisions regarding utilization as a function of, again, our latest status in the future around our inventory position and assessment of demand. Regarding your question on the smartphone market, as we have said that in calendar year '24, we expect that smartphone unit volume will decline on a year-over-year basis, and Q2 growth for us was above seasonal. And as customers' inventory levels normalize over the course of the year, then normal demand trends will also be restored in the smartphone market. And regarding the smartphone market, even though the unit volume may be down on a year-over-year basis, important thing is that the smartphone market is shifting its mix more towards flagship phones, and flagship phones require more memory as well. So these are some of the trends that will play out as the demand grows over the course of the year for -- in the smartphone market.

Harlan Sur:

On the underutilization charge, I know last call the team had articulated roughly $460 million of charges recognized primarily in fiscal Q3 and Q4. So how much of this is embedded in your Q3 numbers and Q3 guidance? And given the lower utilization, tick it down to 25% or cut it by 25%. If you continue to drive lower utilization through the second half of this calendar year, like how do we think about some of the utilization charges in fiscal Q4 and second half of this calendar year?

Operator:

Our next question comes from the line of Toshiya Hari from Goldman Sachs.

Sanjay Mehrotra:

So with respect to NAND, we are well positioned with our technology and product roadmap. We shared with you today that 176-layer NAND yields are doing exceptionally well. 232-layer NAND, we have begun shipping in the market already. And with 176, as well as 232-layer, we have been well ahead of any competitor in the industry. 90% plus of our supply today in NAND that we are shipping is 176 plus 232-layers. So overall, we are well positioned with our technology. Our underutilization actions, we really believe are -- is what is needed to bring supply in line with demand, and we think these are the actions that are needed to restore the health of the business. And we have said in our prepared remarks that the industry recovery could be accelerated if NAND and DRAM supply growth, production growth, is negative on a year-over-year basis. And we certainly are taking our actions accordingly. And regarding China, I can't really comment on the part of other customers. But what I can tell you is that our customers really do see a strong technology execution, a strong product execution from Micron, and it's our product portfolio. We have done well with leveraging our NAND and DRAM in mobile markets with multichip packages. In automotive, I talked about some of the NAND product portfolio expanding and creating opportunities to strengthen our leadership position in automotive markets. And certainly, in the data center market, SSDs is also an opportunity. And our Gen4 NVMe SSDs have been continuing to do well in the client market as well. So our customers see our execution and innovation capabilities in technology and products, and that's what is bringing us stronger relationships with our customers for the NAND business. And of course, in terms of market opportunities, those continue to be healthy in terms of NAND-displacing HDDs in the data center, and Micron having the right products to grow those opportunities in the future. This has been -- we have been -- with NVMe SSDs and data center, we have been absent in the past, and now we have a healthy product portfolio, and we look forward to growing our opportunities in that space in the future. So NAND overall, in combination with DRAM, enables us to have a strong differentiated value for our customers. And Micron is well positioned with our technology and product roadmap, and certainly, we believe that our supply actions here are prudent.

Aaron Rakers:

So Mark, I apologize, I just want to go back to the inventory discussion a little bit. Is there any way to bridge the prior comment of the $460 million, again, that Harlan had brought up relative to that? It sounds like $900 million for fiscal '23. I'm just curious on what's embedded in the gross margin for underutilization this quarter. And I guess on inventory, is there any risk of obsolescence of inventory? Or is the inventory good, it just gets sold through at a lower cost of goods at this point?

Operator:

And our next question comes from the line of Joseph Moore from Morgan Stanley.

Mark Murphy:

That's right, Joe. You did a decent job of sort of answering the question. But if you -- I would refer you to our public filings, but as a reminder, we evaluate the recoverability of inventory as a single pool. This method we've applied consistently and as disclosed, we analyzed the recoverability of our inventory based on quantities and values on hand at the end of each quarter. We project the period over which that inventory will be sold based on our most recent forecast and consider the expected selling prices during that forecast horizon. Since the pre-write-down inventory, days of inventory were about 235 days. That projection covers nearly 3 quarters. The amount by which our inventory carrying cost exceeds expected sales values adjusted for selling expenses determines the charge. And in this case, that yielded a $1.4 billion write-down in the second quarter, and we expect that same process to result in a $500 million charge in the third quarter.

Hadi Orabi:

This is Eddy for Krish from TD Cowen. It seems you adjusted the language regarding your DDR4 and DDR5 crossover date from mid-2024 to mid-to-early 2024, so slightly better than prior outlook. It's a bit surprising given that data center inventory for DDR4 is pretty high. Is that improved outlook driven by better-than-expected demand for new CPUs from Intel and AMD? Or is it a function of you seeing higher share than expected in DDR5? Or is it more of data center customers buying ahead and taking advantage of low price environment? Any color regarding the improved outlook would be helpful.

Operator:

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Operator:

Good day, and welcome to Micron's First Quarter 2023 Financial Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Farhan Ahmad, Head of Investor Relations. Please go ahead.

Sanjay Mehrotra:

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 on 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 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 [Audio Gap] have declined from our expectation earlier this year primarily due to lowered growth expectations from 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.

Sanjay Mehrotra:

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.

Tim Arcuri:

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?

Operator:

Thank you. One moment for our next question and that will come from the line of C.J. Muse with Evercore ISI. Your line is open.

Sanjay Mehrotra:

Thank you, C.J. Of course, Micron is in a strong technology position. We feel very good about our technology capabilities and our road map. Our -- if you look at our 1-alpha DRAM that compared to our prior 1-z node gave us a 40% bit efficiency gain per wafer. And now if you look at our 1-beta, industry, you would expect less, but what you see in our 1-beta node is a 35% improvement in terms of bit efficiency per wafer versus our 1-alpha node. And our 1-beta DRAM node is well designed for D5, DDR5 deployment as well with good performance and good power efficiency improvements over prior products. So it's really 1-beta is a very good node when you compare it to any other even EUV nodes that are out there in the industry. So it's an industry-leading node. We are well positioned with our 1-beta node. And of course, our 1-gamma node will be well positioned as well. And we are timing the production of these nodes to maximize the ROI in our R&D and manufacturing. And of course, to bring supply and demand in balance overall and keeping in mind the longer-term CAGR for DRAM growth and adjusting our technology cadence accordingly. So I think we are managing our technology node development and manufacturing plans our supply plans in a highly responsible fashion, and we'll be well positioned with our technology. And same thing on NAND side, our 232-NAND is in very good shape. Both 1-beta and 232-layer NAND in terms of cost, in terms of quality and in terms of, of course yields, we are well positioned with them and continuing to work with customers in qualifying those products. So not only just 1-beta and 232 layer, we feel good about our technology road map, capabilities and position with our plans for 1-gamma and the node beyond the 232-layer in NAND. And just to point out that Micron, I was recently talking to a leading customer and executive there, and the customer was facing Micron's as being the best in the industry. And same kind of accolades we get from customers on LP5, on GDDR6 on our QLC NAND. And of course, we are broadening our portfolio of products too. So not only with respect to technology, we are well positioned. I think we are well positioned with respect to our product momentum as well.

Chris Caso:

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?

Operator:

Thank you. One moment for our next question, that will come from the line of Tom O'Malley with Barclays. Your line is open.

Sanjay Mehrotra:

So inventories with data center customers including cloud is higher than what we thought. So that inventory adjustment has begun, and it has some wood to chop in that area. And of course, the end demand for cloud operations that are driven by consumer-related activities given the overall consumer environment and the macro trends, some portions of cloud and demand may be weaker as a result of that as well. And also in the macro environment that exists today, there is -- given the higher interest rates and other macro trends, companies do become somewhat cautious in terms of managing their overall expenses and any long-term agreements, et cetera. So that can impact some of the current environment for end demand in cloud. But what I would like to point out is that digitization trends ultimately do remain positive. Cloud definitely helps drive that efficiency that businesses seek in an environment like this. We do absolutely expect that once we get past the current macroeconomic environment and macroeconomic weakening, longer-term trends for cloud will remain strong. In terms of the current environment, yes, inventory adjustments and some impact of cloud and demand weakening as well. that's impacting our overall data center outlook.

Krish Sankar:

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?

Operator:

Thank you. One moment for our next question, that will come from the line of Mehdi Hosseini with Susquehanna. Please go ahead.

Sanjay Mehrotra:

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 fast 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 supplier just to demand.

Toshiya Hari:

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.

Sanjay Mehrotra:

And on your questions regarding customer inventory, what I would like to point out is that customer inventory in aggregate -- and that means in terms of volume in bits, we believe it has come down, although still at high levels. And you can see that in Q2, we are guiding to increase bit shipments. And just keep in mind that where demand used to be in terms of or the industry shipments used to be a few quarters ago versus now, they have come down substantially. And even though there may be some end market weakening in demand that points to that some of the inventory is being consumed by the customers. Basically, some of the inventory that the customers are holding is being consumed by them to address their end demand. So basically, the ship out by customers is greater than the ship in, in terms of purchases by customers from suppliers. And this trend of inventory improvement, gradual inventory improvement we believe will continue. And by mid calendar '23, we are projecting even though we don't have perfect visibility, but based on all of our discussions with our customers, we are projecting that inventory at customers will be in relatively healthier position by that time. And that's where we say that our second half of fiscal year revenue will be greater than first half, and we would expect continued improvements beyond the second half as well. And regarding the question on China, of course, China reopening has to be monitored closely, and it may be choppy. In terms of the near term, we are assuming that China is reopening for the second half of the calendar year, will result in benefit in terms of increased demand coming from the China markets. And of course, China reopening is not just issue to be monitored in terms of Chinese customer demand, but also any impact on global electronics system supply chains. And of course, we have assembly and test operations in China as well, and we are continuing to monitor those as well with respect to some of the recent COVID cases there. So, I think China, COVID cases and reopening will have to be -- continued to be closely monitored.

Sanjay Mehrotra:

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 dynamic 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.

Sanjay Mehrotra:

So of course, it has been pushed out. I mean compared to the plans last year or over the last few months, some of those new processor deployments have been pushed out, but we look forward to them getting broadly adopted as the year progresses in '23.

Aaron Rakers:

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 our pace of pricing declined this quarter as we saw last quarter? Or are you kind of factoring in any kind of acceleration of price degradation?

Operator:

Thank you. Thank you all for participating. This concludes today's conference call. You may now disconnect.

Operator:

Thank you for standing by, and welcome to Micron's Fiscal Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program may be recorded. And now, I'd like to introduce your host for today's program Farhan Ahmad, Vice President, Investor Relations. Please go ahead, sir.

Sanjay Mehrotra:

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 an approximately 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 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.

Sanjay Mehrotra:

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.

C.J. Muse:

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 taking about any underutilization charges to gross margins in November and February quarters?

Mark Murphy:

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 points and 2 points of impact at this point. And of course, depending on market conditions, we would either dial that back or bringing utilization lower.

Mark Murphy:

Well, I think I'll state -- really no change around, we're going to continue to focus on returning 100% of free cash flow to shareholders. We did repurchase in the first quarter and so we will opportunistically repurchase. As you pointed out C.J., we are a cash flow challenged in the first quarter. It's been an unprecedented downturn, sharp and sudden and it has of course associated inventory builds, it's suppressed our income of course and then we've got elevated CapEx as it happened so quickly. So we expect $1.5 billion negative in the first. What we challenge in the second as well as we deal with, with elevated inventory levels and then the revenues that we guided or the bit shipments we talked about. And then the CapEx will take time to work down. We expect it to be weighted in the first half more heavily. We do expect a volume recovery in the back half of the year and lower CapEx and inventories coming down. We do expect to return to free cash flow generation in the second half. And of course, we're working -- continue to work CapEx, continue to work expenses down, working cap -- working our -- managing our working capital best we can to improve from this first quarter projection we have.

Operator:

Thank you. One moment for the next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Sanjay Mehrotra:

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 are 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 brings an improving trajectory [Technical Difficulty] of industry supply-demand balance in improving fundamentals for our business as we go through calendar year '23.

Sanjay Mehrotra:

What we are saying is that the supply growth will be mid-single digits and -- but the shipments will be in the mid-teens range in line with the demand recovery that we expect. And we are also saying that we expect industries supply growth to be also in the mid-single digit for DRAM next year. Remember, this is -- this would correspond to the lowest on record supply growth for DRAM.

Sanjay Mehrotra:

So again, the supply growth will be in the mid-single digit, 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.

Mark Murphy:

Yeah. Maybe -- maybe Tim just to maybe provide some color around the quarters. We do expect as we've laid out the bits in ASP will be down in the first quarter and they're down about the same volume, maybe down a little bit more. Costs are slightly up and DRAM and NAND and that's just a combination of volume mix inflation and then just node timing. In the second quarter, as Sanjay mentioned bits will be up, but they'll still be down year-over-year, and then as we said, the revenue range will be similar to the first quarter. And then in the second half, bits will be up sequentially, third to fourth quarter and then second half should be up in bits year-over-year. And then cost for the full year, we would expect DRAM cost downs to be lower than the long-term average. We do get some benefit from FX, but we get some inflation and some other factors that go against us. And then NAND, cost reductions are challenged, combination of mix and inflation and just a more difficult situation there. But I think the important takeaway, first quarter we expect things to improve versus volumes and then the market better in the second half.

Karl Ackerman:

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 calendar '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.

Karl Ackerman:

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.

Karl Ackerman:

Very clear. Thank you.

Joseph Moore:

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 is 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?

Joseph Moore:

Okay.

Joseph Moore:

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?

Joseph Moore:

Got it. Okay. Thank you very much.

Mehdi Hosseini:

Yes, sir. Thanks for taking my question. Mark, just a quick follow-up. You commented that February revenue could track flattish, but gross margin would at least be down 2 points, because you said the under-utilization charges would have a gross margin impact later, is that -- should I assume that that will happen in February?

Mehdi Hosseini:

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

Mehdi Hosseini:

Got it.

Mehdi Hosseini:

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?

Mehdi Hosseini:

Got it. Thank you.

Vivek Arya:

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?

Vivek Arya:

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?

Mark Murphy:

And then maybe just to add, Vivek is, I think we made the point that of the remaining spend we have, its focus is on technology. So to your point, we appreciate the need to invest in advancing the technology into business, so the remaining spend we have will be focused on that. And then, we still can maintain our position in the market with the inventories that we have -- that we talked about in the prior question, well over 150 days as we enter the next or the next quarter and we'll have that drawn for some period of time.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Brian Chin from Stifel. Your question please.

Sanjay Mehrotra:

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.

Sanjay Mehrotra:

So I think it's important to understand that we are delaying the ramp off 232-layer and 1-beta technologies versus our prior plans. And most of the CapEx -- the $8 billion CapEx that we have talked about or the WFE CapEx that we are talking about is actually going toward preparing those technologies for engineering learning and producing the products for new -- in production for customer qualifications. In turn, these technologies will really not be contributing to the revenue shipments through our fiscal year '23 until late in fiscal year '23, they will be the primary drivers of bit growth and revenue growth and of course, cost reductions in fiscal year '24. Because we will be again relying on using the inventory to supplement our reduced supply growth to meet the uptick in demand that we expect in fiscal year '23.

Operator:

Thank you. And this does conclude the question-and-answer session as well as today's program. Thank you ladies and gentlemen for your participation. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Micron Technology’s Fiscal Third Quarter 2022 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions] I would now like to hand the call over to Farhan Ahmad, Vice President, Investor Relations.

Sanjay Mehrotra:

Thank you, Farhan. Good afternoon, everyone. Micron delivered record quarterly revenue with strong profitability and free cash flow, enabled by our team’s excellent execution and our industry-leading technology and product portfolio. Micron achieved revenue records in the auto, industrial and networking markets, and in SSDs for both data center and client. Our NAND business delivered record quarterly revenue, and our Embedded Business Unit and Storage Business Unit NAND revenues also hit all-time highs. Our 1-alpha DRAM and 176-layer NAND ramps are several quarters ahead of the industry and progressing well as we continue to qualify new products that use these nodes. The Micron team delivered these excellent results despite supply chain challenges and COVID-19 control measures in China, which impacted our business on both the demand side and the supply side. There are consumer demand and inventory-related headwinds impacting the industry and consequently our fiscal Q4 outlook. However, we remain confident about the secular demand for memory and storage, the attractiveness of our market opportunity, Micron’s excellent competitive position and strong execution capabilities, and our cross-cycle financial model. Micron is leading the industry in both DRAM and NAND technology, and we are also well-poised to continue this lead into calendar 2023. In DRAM, our 1-alpha node ramp is several quarters ahead of the industry, and in fiscal Q3, 1-alpha represented the largest DRAM node in our shipment mix. Our newest node, 1-beta, is on track to ramp in manufacturing by the end of calendar 2022. In NAND, our industry-leading 176-layer node continues to grow in mix of sales, having previously reached the majority of our NAND bit shipments in fiscal Q2. This technology node is contributing to a competitive cost structure across our product portfolio, and in FQ3, we achieved several important 176-layer product qualifications. We are also making excellent progress on our 232-layer node and expect to ramp production by the end of calendar 2022. Across the industry, there are cost challenges stemming from supply chain and inflationary pressures; however, we continue to expect our cost reductions to outpace those of the industry this year, driven by excellent productivity improvements in our fabs and the well-executed ramp of our world-class 1-alpha DRAM and 176-layer NAND nodes. Despite COVID-19 control measures in China that created challenges for the global electronics supply chain, Micron’s strong execution enabled record assembly output in fiscal Q3, supporting record quarterly revenue. However, these COVID-19 control measures in China impacted our outsourced assembly and test subcontractors and led to some impact to fiscal Q3 results. Now turning to our end markets. AI, ongoing cloud adoption, EVs and the ubiquitous connectivity offered by 5G are strong secular demand drivers, enabling the memory and storage industry to outpace the broader semiconductor industry. Micron’s product portfolio has become significantly stronger, and we have established product momentum in several attractive growth markets. We are also driving a portfolio mix shift toward higher growth and more stable markets. Fiscal 2021’s 55 to 45 revenue split in favor of the more mature mobile, PC and consumer markets is expected to shift, by fiscal 2025, to a 38 to 62 split in favor of the higher growth data center, auto, industrial, networking and graphics markets. Several of these end markets also exhibit more stable profitability. Our fiscal Q3 new product launches and customer qualifications reflect solid execution toward this portfolio transformation. Data center is the largest market for memory and storage today, and the rapid growth of AI and memory-intensive workloads ensures that it will sustain strong growth through the end of the decade. Corporations around the world are investing in digitization and extracting more value from data, and this approach remains one of the primary ways of improving efficiency and driving competitive advantage. Data center fiscal Q3 revenue grew by a double-digit percentage sequentially and well over 50% year-over-year. Data center end demand is expected to remain strong in the second half of calendar 2022, driven by robust cloud CapEx growth. Despite the strong end demand, we are seeing some enterprise OEM customers wanting to pare back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns. In fiscal Q3, we achieved several product and customer milestones. We began volume shipments of HBM2E, one of the fastest-growing product categories, driven by the growth in AI and machine-learning workloads. Micron continues to lead in DDR5; however, delays in the rollout of new server CPU platforms have slowed the industry DDR5 ramp versus prior expectations. In data center SSDs, we more than doubled revenue year-over-year and achieved a new revenue record in the fiscal third quarter. We are excited by the strong reception of our industry-leading 176-layer data center NVMe SSDs, which are already in volume production, and in fiscal Q3, we completed qualifications with three OEMs. We recently launched the world’s first 176-layer data center SATA SSD, which will help sustain our industry leadership in this product category. In fiscal Q3, we achieved client revenue growth in the mid-teens percentage range sequentially, driven by DRAM shipments and share gains in client SSD. A number of factors have impacted consumer PC demand in various geographies. As a consequence, our forecast for calendar 2022 PC unit sales is now expected to decline by nearly 10% year-over-year from the very strong unit sales in calendar 2021. This compares to an industry and customer forecast of roughly flat calendar 2022 PC unit sales at the start of this calendar year. We expect PC per unit memory and storage content growth trends to remain healthy in calendar 2022, driven by a mix shift toward enterprise PCs and the increasing content in new architectures such as Apple’s M1 Ultra platform, which features up to 128 gigabyte of DRAM. Micron has a strong product portfolio and is well-positioned in this market. We are leading the DDR5 transition and expect our DDR5 revenue to continue to grow as multiple client customers launch next-generation notebooks. Increased availability of non-memory bill of materials will also improve our ability to ship DDR5-based modules. In addition, we continue to lead the industry in client QLC SSD technology and expect QLC to increase as a percentage of 176-layer bit output in fiscal Q4 and beyond. In fiscal Q3, graphics revenue grew at a strong double-digit percentage rate sequentially and year-over-year, driven by the strength of Micron’s products and customer relationships. Micron continues to be the industry performance leader in graphics. We announced volume shipments of our new 1z 16 gigabit GDDR6X in fiscal Q3, which features twice the capacity and up to 15% higher performance than the previous 1y generation. The 24 gigabit per second peak bandwidth of GDDR6X is made possible by Micron’s groundbreaking PAM4 signal transmission technology. No other memory vendor offers this capability or level of performance. We also began volume shipments of our newest 1z 16 gigabit GDDR6 product to our largest graphics customers. Fiscal Q3 mobile revenue declined slightly year-over-year but grew quarter-over-quarter due to strong customer partnerships and product execution. Smartphone unit sales expectations have declined meaningfully for calendar 2022. We are now projecting smartphone unit volume to decline by mid-single-digits percent range year-over-year in calendar 2022, well below the industry and customer expectation earlier in the year of mid-single-digit percentage growth. 5G unit sales are expected to grow and reach approximately 50% penetration of the smartphone unit TAM this year. The growth of 5G units will also drive higher DRAM and NAND content. We continue to deliver key mobile customer qualifications and strong mobile product ramps on our leading nodes. In fiscal Q3, we expanded our 1-alpha LPDRAM leadership with the industry’s first ramp of 1-alpha LPDDR5. In addition, 176-layer NAND made up over 90% of our mobile NAND bit shipments. Micron is the market share and quality leader in the fast-growing auto and industrial end markets, and in fiscal Q3, we achieved record revenue in both. These markets also exhibit higher stability in their gross margin profile through the cycle. Auto growth has been driven by robust demand that remains constrained by auto unit production. We see robust auto content growth as OEMs adopt significant architectural changes to support ADAS, infotainment and electric vehicles. In fiscal Q3, there were announcements of several new EVs featuring content-rich ADAS, including the Ford F-150 Lightning, Mercedes EQS SUV and EQE sedan, and BMW iX1. We expect the auto market to have a strong long-term bit growth CAGR in DRAM and NAND that is roughly twice the CAGR of the overall DRAM and NAND markets, and consequently our strength in this market will become increasingly important. Industrial IoT achieved record revenue in fiscal Q3, demonstrating broad-based growth with various end market applications. We continue to see tailwinds from secular growth drivers as industrial customers invest in increasing factory automation and digitization. Turning to the market outlook. Our expectations for calendar 2022 industry bit demand growth have moderated since our last earnings call. Near the end of fiscal Q3, we saw a significant reduction in near-term industry bit demand, primarily attributable to end demand weakness in consumer markets, including PC and smartphone. These consumer markets have been impacted by the weakness in consumer spending in China, the Russia-Ukraine war, and rising inflation around the world. COVID-19 control measures in China have exacerbated supply chain challenges for some customers, and the macroeconomic environment is also creating some caution amongst certain customers. Several customers, primarily in PC and smartphone, are adjusting their inventories, and we expect these adjustments to take place mostly in the second half of calendar 2022. While end demand in the mobile, PC and consumer markets has weakened, cloud, networking, automotive and industrial markets are showing resilience. Due to weaker demand in the second half of calendar 2022, we now expect year-over-year calendar 2022 industry bit demand growth to be below the long-term CAGRs of mid-to-high-teens percentage for DRAM and high-20s percentage for NAND. Despite the near-term weakness, secular demand trends remain strong, and our view of long-term DRAM and NAND bit demand CAGR remains unchanged from prior expectations. Turning to supply. Given the change in market conditions, we are taking immediate action to reduce our supply growth trajectory. To protect profitability, we will maintain pricing discipline, manage capacity utilization, and use inventory as a buffer to navigate through this period of demand weakness. Additionally, we are planning for a reduced level of bit supply growth in fiscal 2023 and will use inventory to supply part of the market demand next year. This approach will enable us to reduce wafer fab equipment CapEx for fiscal year 2023 versus our prior plans, and we now expect our fiscal 2023 wafer fab equipment CapEx to decline year-over-year. Overall industry supply is also being impacted. Manufacturing equipment shipment delays, challenges for some in the industry in ramping new nodes of technology and DRAM supply discipline evident in the industry are all expected to limit supply growth over the next few quarters. These supply reductions will help offset some impact of the weaker demand. I will now turn it over to Mark Murphy, Micron’s Chief Financial Officer.

Sanjay Mehrotra:

Thank you, Mark. The memory and storage TAM is expected to grow to $330 billion by 2030 and become an increasing portion of the semiconductor market. The near-term market environment notwithstanding, we are executing extremely well on all aspects of the business that are within our control. Micron’s continuing technology, product and manufacturing leadership puts us in an excellent position to capitalize on the long-term opportunity and to extend the frontiers of what is possible with memory and storage. We will continue to exercise supply discipline and take appropriate actions to navigate through the near-term headwinds, and we remain focused on creating value for shareholders and generating healthy free cash flow cross cycle. Thanks for joining us today. We will now open for questions.

Harlan Sur:

Good afternoon. Thanks for taking my question. On the data center business, as you guys mentioned, I mean, enterprise CIOs are concerned on the macro outlook and pulling back on their spending budgets. Cloud remains strong. But within that, we’ve heard that continue -- there’s continued strength from the U.S. cloud service providers, but a pullback in spending from the China cloud customers. Are you guys seeing these dynamics within your cloud segment? And then, on the supply side, again, within your cloud business, can you discuss the level of inventories in the channel and at customers that feed into the cloud segment? Because we’re hearing that kind of similar to enterprise that inventories in the cloud channels are also pretty elevated, but wanted to get your views.

Sumit Sadana:

Yes. I mean, I think the inventory level, as Sanjay said, is higher on the cloud customer side and generally on the data center side compared to where it was pre-COVID. The channel business on the cloud side is relatively in a better place compared to the consumer business challenges that Sanjay highlighted. But of course, different customers have different strategies on how they manage their particular inventory. And the smaller customers in the channel that focus on data center products have had more challenges getting their hands on some of these products that are in shortage like NIC cards to complete server builds, and the smaller customers are getting more impacted there than some of the bigger customers.

Operator:

Our next question comes from C.J. Muse of Evercore.

Sanjay Mehrotra:

So certainly, on the -- in terms of inventory adjustments that are primarily happening in the smartphone and the PC market. Of course, those inventory adjustments are happening in NAND as well as in DRAM. And clearly, as we have said that in terms of overall demand projection for this year, we definitely see it below -- for DRAM below the guidance we had provided earlier as well as the longer term CAGR for DRAMs mid-teens to high teens. So, we see that below that trajectory. And in terms of NAND, same thing that earlier we had said that the CAGR is high 20s, and we see that in calendar year ‘22 coming in below that. Again, adjustments are happening with respect to inventory both in smartphone and PC market. And just keep in mind that compared to earlier in the year estimation for PC growth, we now are projecting that PC year-over-year in calendar year ‘22 will be down nearly 10%. Similarly, smartphone at the start of the year was expected to grow in mid-single digits in terms of total unit sales worldwide year-over-year and now, one is looking at a decline of mid-single digits. So, a swing of 10% in smartphones as well. If you were to translate it into units, it amounts to like 130 million units reduction versus expectation earlier in the year for smartphone. And similarly for PC, let’s say, 30 million kind of reduction in terms of total units versus the projections earlier in the year. And of course, PC and smartphone combined represent half of the memory and storage worldwide demand in terms of bits, right? So, with this adjustment primarily happening in the second half of this year in these two markets, clearly that is resulting in a year-over-year change versus prior expectations in DRAM as well as NAND demand growth.

Mark Murphy:

Yes. C.J., as mentioned in the prepared remarks, we expect to end fiscal ‘22 at around $12 billion, so -- on total CapEx. So that would be an uptick in Q4. And that’s consistent with previous statements. Now, with bit supply growth assumptions coming off versus previous group -- the view, we’re actively working to bring spend down. And as you say, we’re confident that as we sit here today, WFE spend will be down in fiscal ‘23. We’re also evaluating construction and other large areas of spend. We’re looking to reduce utilization on some older nodes to maintain supply and drive CapEx for use and shift production to more cost-effective nodes, doing a number of things. And the market is dynamic. So, this is real time. I’m not going to size the reduction next year just at this point because it’s still moving. But at this point, we’re confident that WFE will decline year-over-year.

Krish Sankar:

I have two quick ones. First one, Sanjay or Sumit, I kind of have different way of asking the cloud question. As you mentioned, mobile and PC are slow, but it seems like data center the next year to drop, but yet, you seem optimistic about data center to remain strong in the second half 2022, but you also said cloud inventory is high. So, it seems like if consumer spending slows, which it is, data center CapEx is a drift. So, love to hear your thoughts why you think overall, the U.S. cloud trends, one, drop in the second half of this year? And then a quick follow-up question for maybe Mark was on the impact of the China Shanghai COVID-19 lockdown. Is there a way to quantify what it was in the May quarter and what it means to second half output for Micron?

Sumit Sadana:

Yes, sure. So, Krish, very quick on the cloud discussion. As Sanjay mentioned, the CapEx trends for our customers in the cloud space continue to be pretty strong and the end demand for cloud services and the growth in those cloud services continues to be robust. And so, of course, like you also pointed out, I mean, the inventory levels are higher compared to where they were pre-COVID. Now, it remains to be seen how the macroeconomic environment is going to cause the cloud spending trends to modulate over time. But if anything, we think that the cloud spending trends are going to be pretty secular, pretty strong. Even if there is some kind of an impact, it will come back strongly as things stabilize. And even companies that do focus on tightening their belt in this macroeconomic environment will continue to look for ways to become more efficient, become more profitable, improve their competitive positioning. And that means extracting more value from data, digitization trends to continue. So, those kind of things, we feel are going to be well sustained through the environment that may happen. But of course, a lot depends on how the macroeconomic environment evolves, and that’s why we are staying very close with customers. Switching to your China question. China has been a pretty significant impact to our FQ4 trajectory. This time last quarter when we were contemplating our FQ4 trajectory compared to that to our latest guidance that we have provided. Our view for China revenue has come down by approximately 30%. And that reduction in the China revenue has caused roughly a 10% reduction in our consolidated company-wide revenue. And so, that’s the impact to the Q4. It’s pretty substantial. And the China impact is largely driven by, of course, smartphone weakness, PC weakness, the general consumer environment there has been weak due to the COVID shutdowns, and that has percolated to different parts of the economy. So, the economic environment is weak. Now, we do feel like given the weakness in that economy, as you know, China does tend to provide stimulus to improve the financial and economic conditions, and we are hopeful that that kind of stimulus and improvement in the economy will be forthcoming in the quarters ahead. The timing of that and how it plays out with further COVID-related issues in China is unclear. But we remain optimistic that over time, the consumer demand will come back and improve things.

Timothy Arcuri:

I guess I had two questions. The first one is for you, Mark. The buyback this quarter was great. But I guess -- and you did say that you’re going to buy back more in August. But I guess I had a bigger picture question around sort of you have an opportunity now with the stock where it is. You have leadership in terms of technology. Where would you be willing to take cash balance to take advantage of this price weakness? I mean, is there a sort of a minimum cash balance that we can think of where you could sort of opportunistically buy back a fairly significant piece of the Company?

Timothy Arcuri:

Cool. Thanks for that. And I guess, second question also, Mark, for you. What does the guidance assume for your inventories in August? And sort of how do you think about sort of the balance between holding some inventory if you believe that data center will stay strong and sort of how should we think about inventory in August and sort of your bigger picture strategy around keeping some inventory on the bet that cloud does remain strong?

Operator:

Our next question comes from Vivek Arya of Bank of America.

Sanjay Mehrotra:

So clearly, we don’t guide to Q1 here. But as I pointed out in the prepared remarks that we expect these inventory adjustments to be working themselves out over the course of second half of the year. We have pointed out that the inventory adjustments primarily are taking place in PC and the smartphone market. And I’ll just point out that from the past history as well, that once inventory adjustments begin in a certain part of the segment, then it takes a couple of quarters for them to work out. And here, we, of course, have macroeconomic uncertainties as well. It has been a rapidly changing and uncertain environment. And this is what we have to keep in mind when we look at when does normally see return in terms of demand. And that’s why, just like Mark pointed out here in response to the last question, we will be using inventory to address the demand next year. And we will continue to closely with our customers to understand their overall demand environment. We think that sometime in fiscal ‘23 is when -- in our fiscal ‘23 is when demand will rebound, but more importantly, it’s really about the supply-demand balance. And with respect to supply-demand balance, you can see, that we are taking actions immediately in terms of curtailing our supply growth for fiscal year ‘23 by sharing the plans with you that we are bringing down our CapEx versus our estimations earlier. So, that’s an important step. And of course, industry has shown that in DRAM that it has CapEx discipline as well. We believe our actions will also contribute toward returning the industry health sooner. So, I would expect that sometime in our fiscal year ‘23 demand will rebound as well as industry demand supply environment, there’s a store to a healthy level. But again, I will point out that, look, this is a highly uncertain rapidly changing environment. We are, of course, responding fast and -- in terms of any changes we see. So we are not been pointing to any specific quarter at this time. And again, I think what’s also important is that Micron execution continues to be really strong. I mean, whether you look from technology, product, manufacturing, customer relationships and of course, our strong balance sheet, we are well poised to emerge stronger on the other side of this downturn. So, we are really executing well, working closely with our customers to understand the latest demand trends in various end market segments and adjusting our plans as necessary and as fast as we can, and really positioning the Company for overall healthy growth in the long term. And again, the long-term trends -- as Sumit also pointed out earlier, and I shared with you, the long-term trends absolutely bode well for memory and storage.

Sanjay Mehrotra:

Look, I mean, it really varies by customer to customer, right? So I mean, we can’t exactly give you some of those details here.

Ambrish Srivastava:

Sanjay, good to see the financial and the CapEx discipline. With respect to supply growth and you’re ramping down supply growth heading into fiscal -- for fiscal ‘23. What’s the right way to think about demand growth? And so, within the supply meeting demand, how much do you think will be production growth, production supply versus coming from the inventory from the industry? Because I think the industry seems to be consistent in that, at least what we heard a week or two ago from one of your large competitors is also lowering CapEx. So, that’s the good part. But what -- how should we think about inventory on the balance sheet of the three participants adding to the production supply growth? And then, I had a quick follow-up for Mark as well, please.

Ambrish Srivastava:

Got it. And Mark, real quick one on the WFE versus non-WFE, what’s the percentage? And I respect the fact that plans are still in flux, so you can’t give us a number for ‘23. But what’s the number expected to be for this year, please? Thank you.

Ambrish Srivastava:

Sorry. My question was, what’s the wafer front end versus non-wafer front end spend in the CapEx for this year?

Ambrish Srivastava:

So, when you say you will be -- you could take down construction as well, that means construction as well as development, or what’s the right way to think about the kind of the playbook is what everybody is looking for if things continue to…

Ambrish Srivastava:

Got it. Thank you. And again, I apologize if misinterpreted your comments. Thank you.

Aaron Rakers:

I just wanted to ask in this environment, these last couple of quarters and at the Analyst Day, you emphasized how much of your business you had kind of line of sight in terms of kind of the long-term agreements that you’ve established. I’m curious, as we’ve gone through this kind of correction or downturn, how would you characterize your discussions on those long-term commitments? Have they changed at all? Have customers pushed back on taking the amount of previously committed supply from you guys. How has that changed at all as we go through this kind of correction right now?

Sumit Sadana:

Yes. Happy to talk about that. So, the long-term agreements, generally, we go out four quarters, talk about volume in each quarter. And as I have pointed out in the past, these are not meant to be take-or-pay agreements, but more meant for planning and shared assumptions and so on. We have had extensive discussions. We keep having ongoing dialogue with our customers about the environment. We obviously continue to press our customers to stick with the agreements and the quarterly SKU, et cetera, as much as possible. But, when there are such significant extraneous events that are happening, exogenous shock sometimes to the environment and such unpredictable type of situations that Sanjay was highlighting, fast-changing environment that is causing impact to the end demand, especially given some of the consumer spending shifts that are happening in the world that are causing reductions in purchasing of certain electronics products, PCs, smartphones, et cetera. Then it is not possible for our customers to purchase based on the LTAs that were established when the assumptions around the industry were very different. And so, our goal then is to work with our customers to come up with the best approach and figure out how best to position ourselves in terms of the forward-looking views of their purchasing patterns. And this is where I feel like the product momentum that we have had has played out really well. We just mentioned that our data center SSD revenue doubled in the most recent quarter year-on-year. We have tremendous product portfolio momentum across all of our products. We are shipping in volume, HBM products. We have the world’s fastest graphics DRAM product, first to market with low power DRAM and mobile and really strong capability in automotive, number one share in auto, industrial and networking. So, these all play to our strengths with our customers. So, in the areas where we want to improve our portfolio position, improve our share because they are more stable segments in the market or they are more profitable portions of the industry profit pool. That’s where we focus on. And then our portfolio strength really helps enable that transition with customers to make our own business more optimized and more profitable, more steady over time. So, that’s the engagement that we have with customers. And we use those LTAs to then drive those longer-term goals that we have with customers.

Operator:

Thank you for standing by, and welcome to Micron Technology's Fiscal Second Quarter 2022 Financial Conference Call. [Operator Instructions] Please be advised that today's call may be recorded. [Operator Instructions] I would now like to hand the call over to Farhan Ahmad, Head of Investor Relations.

Sanjay Mehrotra:

Thank you, Farhan. Good afternoon, everyone. Micron delivered an excellent performance in fiscal Q2 with results above the high end of our guidance. We grew revenue and margins sequentially while driving favorable mix and cost reductions amid ongoing global supply chain challenges. We saw broad-based demand for our products with our SSD products achieving record revenue and our auto market revenue also reaching an all-time high. Execution was outstanding with our industry-leading 1-alpha DRAM and 176-layer NAND technology node ramps delivering strong cost reductions. Our portfolio transformation continues to gain momentum as we lead the industry on the DDR5 transition and grow our mix of NVMe data center SSDs. Following a solid first half, we are on track to deliver record revenue and robust profitability in fiscal 2022 and remain well positioned to create significant shareholder value in fiscal '22 and beyond. In fiscal Q2, 1z and 1-alpha DRAM combined represented the majority of our DRAM bit shipments, while 176-layer NAND represented the majority of our NAND bit shipments. Our 1-alpha DRAM and 176-layer NAND products are achieving excellent yields, providing us with solid front-end cost reductions and contributing meaningful revenue. We qualified additional products on these advanced nodes with a broad set of customers, which sets us up for continued strong revenue ramp in the second half of the fiscal year. We are tracking several quarters ahead of the industry in ramping products based on these leading-edge process technologies. We are also investing to maintain technology leadership for the next decade and making good progress in the development of future technology nodes. Micron is not only a technology leader, but also the industry leader in quality with the majority of our customers ranking us #1. Our leadership in quality is an important differentiator for Micron, particularly in fast-growing data center and automotive markets, where our quality scores are excellent. We have also strengthened our position as a strategic supplier to our customers as demonstrated by our commitment to supply continuity amid ongoing semiconductor supply chain challenges this past quarter. In late December, a government-mandated COVID-19 lockdown impacted production output at our back-end facility in Xian, China. The Micron team executed with tenacity to return the Xian site back to normal output levels post lockdown. As a result of this outstanding effort, we mitigated the lost output from Xian and delivered on our customer commitments for the quarter by leveraging our global manufacturing network. Additional COVID-19-related lockdowns in the region present a risk to the global electronic supply chain, and we continue to monitor the situation closely. The global semiconductor supply chain is experiencing pressure due to impact of Russia's invasion of Ukraine. The region is an important source for the global supply of noble gases and other critical minerals that are used in semiconductor manufacturing. We have strategically diversified our supply chain over the last several years and maintained appropriate inventories of materials and noble gases. We currently do not expect any negative impact to our near-term production volumes because of the Russia-Ukraine war, but we do expect an increase in our costs as we secure supply of certain raw materials that could be at risk. We also remain vigilant in this dynamic situation and are engaged with our key suppliers to ensure continuous availability of materials to support our operations. Now let's 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 2 decades, and we expect this trend to continue over the next decade, thanks to ongoing advancement of AI, 5G and EV adoption. Our team's execution on strengthening our product portfolio has been outstanding with several new product launches and customer qualifications in fiscal Q2, achievements that we are very proud of. Last year, data center became the largest market for memory and storage, eclipsing the mobile market. Looking ahead, we expect data center demand growth to outpace the broader memory and storage market over the next decade, fueled by secular drivers in cloud and healthy enterprise IT investment. Memory and storage share of server bond costs already exceeds 40%, and this number is even higher for servers optimized for AI and ML workloads. This growth is supported by new heterogenous computing architectures, the increase in data-intensive workloads and ongoing displacement of HDDs by SSDs. In the fiscal second quarter, data center revenue grew more than 60% year-over-year, supported by robust demand across our DRAM and SSD portfolio. We have broadened the qualifications for our 1-alpha DRAM products and are well positioned to support the data center DDR5 transition driven by new CPU platforms, which are targeted to begin ramping later this calendar year and gain momentum in 2023. Following the introduction of our 7400 SSD, in fiscal Q2, we introduced the 7450, which is the industry's first 176-layer vertically integrated data center NVMe SSD. These Gen4 NVMe data center drives are generating an enthusiastic response from our customers. We are making robust progress in our qualifications of these drives with data center customers, which has contributed to a doubling of our fiscal Q2 data center SSD revenues year-over-year. We expect strong growth of data center SSD revenues to continue for the remainder of this fiscal year. In fiscal Q2, we saw recovery in our client revenue driven by strength in enterprise PCs, which more than offset softer consumer and Chromebook demand. We expect that calendar '22 PC unit sales will be flattish versus last year's sales, but we expect solid growth in DRAM and NAND content driven in part by increasing mix of content-rich enterprise desktops and laptops. We are leading the industry's client to DDR5 transition, and our DDR5 revenue continues to increase as multiple PC customers launch next-generation notebooks. Client DDR5 demand continues to outstrip supply, and we are seeing meaningful price premiums over DDR4 alternatives. Building on our QLC leadership, in fiscal Q2, we also launched our 2400 NVMe SSD, the world's first client SSD built on 176-layer QLC NAND. Micron maintains a leading position in the fast-growing graphics market. We have a broad product portfolio, featuring industry-leading product performance and deep partnerships with leading GPU suppliers. In fiscal Q2, revenues grew year-over-year driven by strong demand for the latest generation of gaming consoles and graphics cards. Our advanced GDDR6X continues to lead the industry in performance. And in fiscal Q2, we began revenue shipments of our next-generation GDDR6X solutions. Fiscal Q2 mobile revenue grew slightly year-over-year as the 5G transition continues in smartphones. We see some weakness in the China market as the local economy slows, smartphone market share shifts and some customers take a more prudent approach to inventory management. Mobile memory and storage demand continues to be supported by content-hungry applications and the ongoing transition from 4G to 5G, which is driving 50% higher DRAM content and the doubling of NAND content. 5G smartphone sales are expected to grow to 700 million units in calendar year '22. In fiscal Q2, we achieved the first qualification of our 1-alpha LP5 DRAM, which delivers more than a 15% power improvement over the previous generation, enabling our customers to offer an improved 5G experience with better battery life. We are also seeing a very strong revenue ramp for our 176-layer NAND UFS products, which are now qualified in nearly 50 different OEM platforms. The automotive and industrial segments are expected to be the fastest-growing memory and storage markets over the next decade. Today, more than 10% of our revenue comes from these end markets, and we are exceptionally well positioned as a market share leader. In fiscal Q2, our auto revenue set a new record driven by robust demand for memory and storage. Auto unit production remains below demand constrained by numerous supply chain challenges, including logic and analog semiconductor component shortages. The Russian invasion of Ukraine has also impacted auto bills. Nevertheless, the demand for memory and storage remains strong driven by auto content growth. New EVs are becoming like data center on wheels, and we expect over 100 new EV models to launch worldwide in this calendar year alone. These new EVs include advanced ADAS and in-vehicle infotainment features that have significantly higher memory and storage requirements. In fact, some of these Level 3 autonomous EVs have about $750 in memory and storage content, which is 15x higher than the average car. In Industrial IoT, we saw approximately 60% year-over-year revenue growth, fueled by the continued ramp in applications such as factory automation and security systems. Turning to the market outlook. Our expectation for calendar '22 industry demand is largely unchanged from our last earnings call. We expect calendar '22 industry bit demand growth to be in the mid- to high teens for DRAM and at approximately 30% for NAND. We anticipate underlying demand in calendar '22 to be led by data center, ongoing adoption of 5G smartphones and continued strength in automotive and industrial markets. Currently, we see a healthy supply-demand balance across both DRAM and NAND given these demand trends, supply discipline across the memory industry, long semiconductor manufacturing equipment lead times and reduced NAND supply from some of our competitors that experienced a contamination issue in their fab. Nonmemory component shortages are improving, and we expect that further improvements should support memory and storage demand growth for the rest of this year. However, there are some pockets where semiconductor shortages have not improved as fast as we had expected, and these shortages are likely to continue into calendar year 2023. We are mindful of increased macroeconomic uncertainty and remain vigilant of any changes in market conditions. Turning now to Micron's bit supply growth expectations for the year. Consistent with the rest of the industry, we are experiencing a challenging environment for equipment and material suppliers. However, due to strong execution by Micron's operations team, our calendar year '22 bit supply growth for DRAM and NAND remains unchanged from prior expectations and will be in line with industry demand. We are on track to deliver record revenue with solid profitability in fiscal year '22, and we continue to expect strong bit shipment growth in the second half of the fiscal year. We expect our cost reductions to outpace that of the industry this year driven by the exceptionally well-executed ramp of our world-class 1-alpha DRAM and 176-layer NAND nodes. However, across the industry, there are cost challenges stemming from supply chain and inflationary pressures, which will limit cost reductions this year for the industry. We remain confident in our long-term technology road map and our ability to drive competitive cost reductions for years to come. I will now turn it over to Sumit.

Sanjay Mehrotra:

Thank you, Sumit. I'm proud to note that earlier this month, Micron was named one of the world's most ethical companies by the Ethisphere Institute. This recognition reflects our global team's dedication to holding ourselves the highest ethical standards both in how we operate and how we pursue environmental and social responsibility. We continue to manage our business with a discipline and foresight that is driving industry-leading technology ramps, improving our product portfolio and strengthening our customer relationships. A strong first half performance and our guidance for an all-time record quarter show our continued progress toward delivering record fiscal '22 revenues and robust profitability. Given our technology leadership, Micron is in an excellent position to capitalize on the broad trends that are driving demand for DRAM and NAND solutions, solutions that transform data into better customer experiences and greater business value. I look forward to seeing you at our Investor Day presentation on May 12 in San Francisco, where we will discuss the technology drivers behind these trends in greater depth and detail Micron's strategies to seize the opportunity ahead. Thanks for joining us today, and we'll now open for questions.

C.J. Muse:

I guess first question, as I look at your results, the mix and operational performance is excellent. And as you look ahead to the second half, you did talk about a pull-in of costs in the February quarter, but would be curious to hear how you're thinking about mix, both like-for-like in DRAM and NAND into the second half of the fiscal year and how we should think about kind of the gross margin trajectory from here.

Operator:

Our next question comes from Vivek Arya of Bank of America Securities.

Sanjay Mehrotra:

So certainly, let me take this question. Regarding PC, what I would like to point out is that in PC, enterprise and desktops are strong. Chromebooks and consumer PCs have had some weakness as is well known, but enterprise and desktops are strong. And that's a favorable mix for us because enterprise and desktops take higher content of both DRAM and NAND. So while we look at PC unit growth on a year-over-year basis to be flattish, the enterprise and desktop mix is favorable in terms of DRAM and flash content requirements there. And data center, certainly a strong market for us. Second half of calendar year '22 should be strong for data center because of new CPUs that are expected to be launched, which will be driving greater content in the servers. So data -- and you have heard about various hyperscalers talking about their investments -- their CapEx investments in data center as well. And again, all the workloads related to AI/ML are just driving greater content within the data center space. But it's not just about data center or the aspects of PC that we just discussed. Of course, 5G smartphones continuing to drive strong DRAM and NAND content as we mentioned; and automotive market, strong growth driver as well. So the point is that the demand is broad-based and demand, we expect to be strong going forward as well. And of course, on the aspect of supply, of course, the supply is contained in the industry because of the discipline on CapEx that has been exercised by the various players. And of course, on the NAND side, the aspect of the contamination issue that impacted a competitor's fab and impacted the supply in NAND in a big way there, too. So overall, healthy environment that we see for -- in terms of DRAM and NAND supply and demand balance through the year.

John Pitzer:

Congratulations on the strong results. Sanjay, you've spent the last several years trying to reposition the NAND portfolio to higher-value products. I'm kind of curious, relative to the May guide of NAND growing faster sequentially than DRAM, can you help us better understand what products and end markets are really driving that? And is this really the fruits of some of your qualification labors? And as you answer the question, I'd be curious, when you think about NAND gross margins, what's the impact as the mix continues to improve? How much of the gap between NAND and DRAM do you think you can close over time? Or how much more upside do you think there is in the NAND gross margin business over time as you optimize the portfolio?

Operator:

Our next question comes from Timothy Arcuri of UBS.

Sanjay Mehrotra:

We feel really good about our technology road map. And just like we have led the industry with our 1-alpha DRAM as well as with our 176-layer NAND, we certainly plan to lead the industry with our future generation nodes as well, and we are making good progress on those. And those nodes will be introduced sometime in calendar year '23 time frame as well. So really, it's our technology leadership position and our ability to successfully ramp it into production across a broad range of products, is key to our strength in continuing our cost position in the industry. So we feel very good about our cost position versus our competitors going forward as well.

Pierre Ferragu:

I have, first, like very quick simple one on the mobile market. So it's slowing sequentially now. What kind of visibility do you have there? Do you think we are reaching like a -- kind of like plateau in content increase in the kind of growth that 5G generated in that market? Or is that something different and more temporary? And then I have like a broader question for you guys. Your peers in logic are very active on, I would say, the geopolitical front, investing in the U.S., investing in Europe to create a more balanced manufacturing footprint in the world. And we don't hear much about that in the memory market. And so I was wondering if there could be a topic there, if there are conversations and is that something that could benefit Micron at some point.

Sumit Sadana:

Sure, Sanjay. So Pierre, thanks for that question. So in terms of the model average capacities node, we don't see this anywhere close to a plateau of any kind. We are very positive on average content growth in mobile. The 5G transformation in the industry continues in the handset portfolio. So if you think about an industry of about 1.4 billion smartphones approximately being sold on an annual basis, about 500 million or so in calendar 2021 were sold as 5G. We expect a 40% growth to 700 million being sold as 5G handsets this year. And a 5G handset has typically 50% more DRAM content, more than double the NAND content of a 4G handset. So that trend has a lot to run still. And I think on the -- even beyond that, we do expect applications to come up that take advantage of 5G in ways that are going to continue to drive the average capacities for both DRAM and NAND hire. So there's plenty of room to run there. Yes, the smartphone business, we do expect a low single-digit sort of unit volume growth in this calendar year overall for the smartphone volumes, consolidated volumes overall. And average capacity is then on top of that. So the overall growth is going to still be robust. And keep in mind, we are going to enter a seasonally stronger period when new handsets get introduced in the fall for the mobile business. So that's going to be another catalyst as well. So with that, I will pass it over to Sanjay.

Operator:

Our next question comes from Mehdi Housseini of SIG

Sanjay Mehrotra:

So I think we mentioned in our prepared remarks that DDR5, of course, it is a bigger die because of the specs of DDR5. By the way, that has an effect in terms of moderating the supply bit growth in the industry as well as DDR5 continues to ramp in client and, in the future, in the data center space as well. So DDR5, we noted in our remarks, that has a pricing premium in the industry as well. And Micron actually is leading in terms of DDR5 supply capability in the industry today as well. So it is a positive contribution to our overall DRAM margins with DDR5. And certainly, we are getting pricing premium for DDR5 in the industry. And as new processors get deployed widely in the data center space that can make use of DDR5, which are expected to begin later this year, you will see DDR5 continuing to ramp rapidly during calendar year '23 as well. We are well positioned with our DDR5 road map for client as well as for data center market.

Sanjay Mehrotra:

DDR5, as we noted, has pricing premium, yes.

Chris Danely:

So just specifically to DRAM, can you just talk about how the 3 main end markets did relative to your expectations? And then on the guidance, how they did -- or how they're -- you expect them to do relative to the expectations as far as PC, server, data center and mobile?

Operator:

Our next question comes from Joe Moore of Morgan Stanley.

Sanjay Mehrotra:

It certainly brought down the year-over-year supply growth for the industry. It had brought it down based on some of the estimates that are out there by a couple of percentage points in terms of, again, the year-over-year industry supply growth. And certainly, that's -- in terms of the demand-supply dynamic in the industry, that's favorable because the demand for all the reasons that we have just discussed, whether it's in data center or in the client applications or on the mobile phones or even in the automotive markets, the demand for NAND along with demand for DRAM continues to increase. And we fully expect a healthy demand-supply balance for the NAND industry as we look ahead.

Toshiya Hari:

I had a question on NAND ASPs and how to think about the evolution going forward. I think in the February quarter, your ASPs were up mid-single digits sequentially despite the industry environment still being relatively soft from a pricing perspective. Sanjay, just given your comments around your success in data center SSDs and winning some of those important designs, is it fair to assume that your sequential ASP expansion going forward should outperform the industry throughout the year? Is that a fair assumption to be making? And then separately, Sumit, you talked about the headwinds associated with inflationary pressures and the supply chain mitigation actions. I think you said 100 basis points. At what point could that reverse? I know that's a hard question to answer, but should we expect those headwinds to persist for a couple of quarters? Or could those headwinds turn into tailwinds eventually?

Sumit Sadana:

Yes. In terms of our cost pressures, certainly, if you look at the overall environment out there, things are continuing to be challenging. And this is an industry-wide statement. So whether you look at the price of oil and natural gas that are important commodities that impact even the price of electricity, to a lot of the other raw materials and commodities that we purchase, noble gases, a lot of these things, even the pricing of OSAT external subcon services. And of course, you're seeing inflation and even foundry logic prices. So there are lots of vectors. And then, of course, we are also seeing wage inflation happening. So there are lots of vectors through which inflation is getting transmitted into the business. And of course, we are, I believe, doing a really extraordinary job of containing our costs. But of course, these inflationary pressures are there. So we are planning for these pressures to persist for several quarters. We are not thinking that these will let up anytime soon. And so our work is focused on continuing to find efficiencies, continuing to ramp our new technology as fast as we have been doing in an excellent way. So the rest of it comes from, of course, considering these costs as we think about how we price our products, and of course, driving stronger mix of products so we can get not only good ASPs, but also have positive gross margin benefit of products that have higher ASP, better high-value mix in our portfolio. And that mix improvement is happening on the NAND side. It's also happening on the DRAM side with examples like DDR5. So with that, I'll turn it over to Sanjay.

Operator:

Our next question comes from Ambrish Srivastava of BMO.

Sumit Sadana:

Yes. Yes, that is -- your understanding is correct. Yes, your understanding is correct. The 100 basis points impact to sequential gross margin in FQ3 versus FQ2 stemmed from the variable comp increase that I mentioned that's going to impact FQ3 as well as the NAND revenue mix that is going to increase in FQ3 and caused an impact to the consolidated gross margin just mathematically. So the sum of the 2 is over 100 basis points and --

Sumit Sadana:

On the gross margin side, that's right.

Sumit Sadana:

Sure. So in terms of the first question about costs, yes, we do expect that the availability of components is going to improve the overall shortages that we have been experiencing quite significantly over the last several quarters. The situation is improving. And as Sanjay said in the prepared remarks, it's not improving to an extent that all of those issues will be gone this year. We expect continuous improvement through the course of calendar '22. And we expect that because of those improvements in availability, the full demand will be experienced in terms of memory and storage because our customers can now order match sets of products. They can get their hands on all of the components that are short. We can get our hands on more components to build our products. And so that is improving through the calendar year, but there is going to be some components that will shift into -- in calendar '23 in terms of when we expect further improvement. There will be still some shortages. And even though the availability of some of these components is improving, there is a level of cost pressure across the supply chain. And these cost pressures are coming across a range of commodities that we buy, a range of input costs in the way we operate our fabs in back-end facilities. So it's an industry-wide pressure across a range of issues, and they will continue despite the improvements of availability of some components. And now switching to your question about inventory. We have been managing our inventory tightly. So our finished goods inventory is down quarter-on-quarter by design. We have higher levels of WIP, mainly staging for a pretty robust growth in FQ3 sequentially. And you can see that in our guidance. We are growing very robustly in FQ3 compared to FQ2. So we do expect inventory to come down in FQ3 and to end up in pretty much the normal range that we have for the year at the end of FQ4. So we do still have that expectation that we would -- as we had mentioned last quarter as well, we would build inventory ending FQ2 and then reduce inventory in FQ3, FQ4. So that is continuing to be the plan, and that's the set of numbers that you see. Just one last point I last point is part of the inventory increase is to just ensure supply continuity, right? I mean this has been a challenge in terms of getting our hands on all the components we need. So part of it is just ensuring that we have adequate supply on hand to meet our customer demand as we ramp revenue.

Sumit Sadana:

Yes. Exactly.

Operator:

Hello. Thank you for standing by, and welcome to Micron's First Quarter 2022 Financial Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Farhan Ahmad, Vice President of Investor Relations. Please go ahead.

Sanjay Mehrotra:

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 and 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 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 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 clients 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. 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 the 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 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, recent 5G phones, which had 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. As we mentioned before, 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.

Sanjay Mehrotra:

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 more clear 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 the 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.

C.J. Muse:

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 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?

C.J. Muse:

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 are you thinking about normalization of COVID-related expenses? And how should we be thinking about any mix shifts in your product portfolio in calendar '22?

Operator:

Our next question comes from Vivek Arya with Bank of America. You may proceed with your question.

Sanjay Mehrotra:

So, the comment is relative to what we saw three months ago. And as we had highlighted in our earnings call -- last earnings call, we have seen that certain PC customers had their supply chain challenges, making it hard for them to get all non-memory components, thereby limiting their production of PCs, even though their end demand of PCs was still strong. So yes, compared to that, what we have seen is that their inventory adjustment that was as a result of their non-component shortages, is now largely behind them, and we are certainly seeing recovery of demand on the PC front compared to the levels that existed three months ago. And overall, as I noted that for calendar year '22, we expect total PC unit sales to be similar calendar year '21 level. So PC, we expect will be recovering for us in terms of demand as we go forward here in calendar year '22.

Sanjay Mehrotra:

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 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 last few years, and we continue to look forward to continuing to strengthen these LTAs going forward as well.

John Pitzer:

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 kind of 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?

John Pitzer:

That's helpful. And then, Dave...

John Pitzer:

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?

Operator:

Our next question comes from Timothy Arcuri with UBS. You may proceed with your question.

Dave Zinsner:

Sure. So we had about $100 million of revenue in the first fiscal quarter related to wafer sales. It was somewhat accelerated because we closed at the end of October. That's a little bit higher than we've actually been running for the last couple of quarters. So that does actually go away in the second quarter. On the margin front, it was actually pretty close to the corporate average. We -- normally, that's lower, but we moved the assets to a held-for-sale status, I think, at the end of the second fiscal quarter of last year. And so that discontinued the depreciation expense there. And so, we saw margins generally -- relatively similar levels once you kind of factor that in. So a lot of the underloading got somewhat removed over the course of the third and fourth fiscal quarter -- or let's call it the fourth -- first fiscal quarter, such that it won't have a meaningful impact to gross margins in the second fiscal quarter.

Sanjay Mehrotra:

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 discussion 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, these relationships with our customers have continued to evolve over the course of 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.

Mehdi Hosseini:

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.

Mehdi Hosseini:

Got it.

Mehdi Hosseini:

Got it. And for David, I'm just trying to better understand the supply-demand environment. And when I look at your guide -- revenue guide and what you reported for DRAM and NAND ASP, seems to me the underlying assumption is based on moderate decline in blended prices. And I'm not asking you for a guide, but is that a fair observation?

Mehdi Hosseini:

Yes.

Operator:

Our next question comes from Joe Moore with Morgan Stanley. You may proceed with your question.

Sanjay Mehrotra:

So inventory strategy is clearly vary from customers to customers. And some definitely, given what pandemic introduced in terms of supply chain shortages, are looking at strategically higher level of inventory. Some may also be doing it for geopolitical considerations. So we don't really yet see customers going back to pre-pandemic levels, but the strategy around inventory does vary from customer to customer. And overall, as I said, for -- on an industry-wide level, while there may be some pockets of some customers carrying extra inventory overall, given the current environment, customer inventory levels are in a decent shape. And just look at us, Micron itself is also, in our own manufacturing, we are holding a lot more inventory of raw materials just to make sure that our supply chain has assuredness with respect to our ability to supply our customers. And our operations planning just in the current environment of somewhat higher uncertainty on the geopolitical front as well as pandemic-related front is operating with greater levels of inventory -- with non-memory components inventory. And similarly, customers have similar approach as well in terms of managing their inventory.

Toshiya Hari:

I guess my first one is on the supply side. Sanjay, you talked about constraints in the equipment space a couple of times. Are you actually seeing delays or sort of decommits from your suppliers at all? I guess you've maintained your full year CapEx guidance, so perhaps not, but I just wanted to clarify that. And then my part two of my supply question, were there any -- was there any impact from the earthquake in Taiwan in the quarter, whether it be from a bit perspective or in terms of your ability to reduce costs?

Toshiya Hari:

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

Toshiya Hari:

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?

Operator:

Our next question comes from Shannon Cross of Cross Research. You may proceed with your question.

Sanjay Mehrotra:

So first of all, with respect to our focus on the business, with respect to our people and Micron has been proactive all throughout the pandemic in taking actions to protect the safety of our team members, whether it is managing strict protocols with our operations -- on-site operations with respect to masking, physical distancing as well as vaccination. And of course, as a result of that, we have been successful in continuing to run our operations all throughout the pandemic. And despite various industry-wide challenges on supply, we have been overall generally quite good in terms of our ability to support our customers. With respect to the Micron, of course, we will continue our stringent focus on safety of our team members as well as continuing to run our operations. We will not let our guard down in this regard and of course, continue to monitor all the trends and developments here. I would like to point out that even with Delta, all our operations continued to run well. And of course, as you saw, the demand for our products continued to be strong as well. And of course, we saw in some parts of the business, higher demand as a result of COVID for certain periods of time, whereas other parts may have had lower demand for certain periods of time as well. So of course, we will continue to monitor the trend. And to the extent that Omicron has any impact on the macroeconomic environment, of course, that might impact some of our business. However, you have seen that we have been extremely adaptive. We have been extremely agile, and we will continue to do so.

Dave Zinsner:

Well, you're already seeing a lot of the benefit. We'll have a lot of good products coming out through 2022, which were the benefit of the investments that we made in prior years. It's -- to a large extent, it's a continuation of the progression of our products in all markets. Obviously, there's more that we have to do in the SSD front to fully capture all of the opportunity from an NVMe perspective. So there's going to be investment there. There's obviously the next set of process technologies, which will include continued investment in EUV for the 1-gamma that Sanjay mentioned. So lots of different products that we think will be necessary to address the whole market plus continued investment on the process technology side to keep our pace in terms of a leadership position and cost leadership position.

Latif Masud:

Good afternoon. My name is Latif, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's Fourth Quarter 2021 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time [Instructor Instructions]. [Operator Instructions]. Thanks. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Sanjay Mehrotra:

Thank you, Farhan. Good afternoon, everyone. We delivered outstanding results in Fiscal Q4, achieving robust profitability and the second-highest quarterly revenue in Micron's history. Strong execution drove healthy results across segments, including record quarterly revenue in NAND, as well as in our embedded business. Fiscal 2021 was a year of many records for Micron. We achieved our highest ever mobile revenue driven by all-time high managed NAND revenue and MCP mix. Our embedded business had a tremendous record-breaking year, with auto and industrial businesses both had substantial new highs. Another crucial advantage is consumer business and overall QLC mix and NAND, all hit records in fiscal 2021. Through the year, we successfully navigated multiple obstacles brought on by the pandemic and reached several key milestones. For the first time in Micron's history, we established technology leadership concurrently in both DRAM and NAND. Micron's 1-alpha DRAM and 176-layer NAND are the industry's most advanced nodes in high-volume production. And we further strengthened our product leadership by becoming the first to introduce LP5x DRAM and uMCP5 managed NAND in mobile and the industry's first functional safety capable LP5 for automotive applications. The secular demand for memory and storage, combined with Micron's focused execution and have a rock-solid balance sheet, position us well to deliver strong financial performance and create significant shareholder value in fiscal 2022 and beyond. Demonstrating our confidence in our business trajectory, we initiated a quarterly dividend that we aim to grow over time. Memory is at the leading edge of semiconductor manufacturing, and Micron has leadership in both DRAM and NAND technology. This quarter released maturities in our ramp of 1-Alpha DRAM, 176-layer NAND, 20% to 30% faster than prior nodes, and delivered performance and featured improvements, that will help unleash customer innovation. We believe we are several quarters ahead of the industry in the deployment of these process technologies. Additionally, through deeper customer collaboration, we have further accelerated the time-to-market for value-added solutions built using these nodes. 1-Alpha and 1-DRAM nodes combined now represent the majority of our DRAM bit production, driven by strong growth of 1-Alpha production. And by the end of the calendar year or 176-layer NAND will make up the majority of our NAND bit production. Looking beyond 1-Alpha DRAM and 176-layer NAND, we are investing to sustain scaling in both technologies for the next decade. Adding momentum to our years of R&D and EUV, we recently took delivery of the industry's latest E UV system, NXE 3600 at our Boise headquarters, where we operate one of the world's most advanced centers for semiconductor research and development. The delivery of this tool is an important milestone towards our previously disclosed plan of implementing EUV in high-volume manufacturing, in the 2024-time frame. We expect that the integration of EUV with our existing multi-patterning immersion lithography expertise will help us maintain DRAM technology leadership for many years to come. In addition to being the technology leader and an innovation partner, we are uniquely positioned as a strategic supplier to our customers. Micron is the only U.S.-based memory Company, and our strong global manufacturing network provides us with a diversified source of supply, which has become increasingly critical to ensure that we continue to deliver products reliably to our customers. The advantages of this unique position have been proven throughout the past 18 months, as we have successfully navigated the challenges of COVID-19 across our global manufacturing network while maintaining continuity of supply to our customers. Now let us review our end markets. The demand for memory and storage has evolved dramatically from the PC - centric era. Today, demand for memory and storage is driven by diversified end markets that extend from the data center to the intelligent edge, and to a growing diversity of user devices. As a result of growing memory and storage containers for devices DRAM and NAND now account for an ever-increasing portion of the bill applications for our customers. DRAM and NAND stem share of the semiconductor industry has steadily grown over the last two decades, from around 10% to approximately 30% today. The AI and 5G revolution are only in their infancy. And as these secular growth drivers gain further traction, we expect new data-intensive applications to continue to fuel significant increases in DRAM and NAND stem. In the fiscal Fourth Quarter, data center revenue grew sequentially and year-over-year, fueled by secular drivers in cloud demand and the resurgence of enterprise IT investment linked to improving economic growth. The data center has become the largest market for memory and storage, driven by the rapid growth in the cloud. With our broadening portfolio of differentiated products across memory and storage, we are in a strong position to drive strong growth and profitability in this important segment. We have been engaged on DDR5 from initial specification development, and are very pleased to support customer transitions to DDR5-enabled platforms starting later this calendar year. We're also enhancing our NVMe SSD portfolio and we'll soon introduce PCIe Gen four datacenter SSDs with Micron-designed controllers and leveraging the full benefit of vertical integration. These SSDs will strengthen our market position over the course of the coming quarters and years in the fast-growing data center, NVMe storage market. Work and learn from anywhere trends are driving the second consecutive year of double-digit PC unit sales growth in calendar 2021. In the fiscal fourth quarter, PC DRAM revenue was up significantly year-over-year. We're making strong progress transitioning our PC DRAM to our 1-alpha node, which represented a meaningful portion of our FQ4 PC big shipments. Client QLC SSD bit mix hit a new effort and made up the majority of our client SSD bit shipments in FQ4. Our QLC leadership enhances our bit supply capability and product profitability. We also have continued momentum ramping 176-layer NAND products for the PC markets, and we qualified our 176-layer NAND-based Gen 4 NVMe client SSDs with several PC OEMs during the quarter. In graphics, revenue increased sequentially and year-over-year, driven by a continuation of last quarter's strong next-generation game console and graphics card shipments. Micron holds an excellent position in the fast-growing graphics market with a broad product portfolio featuring our proprietary GDR 6X product line, and deep partnerships with leading GPU suppliers. FQ4 mobile revenue increased more than 25% year-over-year, driven by continued unit sales and content growth. We expect overall smartphone unit sales to grow this year, with sales up over 500 million 5G mobile phones forecasted. These contents 5G phones featured more than 50% higher DRAM and doubled the NAND content than 4G phones. We expect 5G and AI to drive new innovation in applications such as AI optimized video capture and editing, that will fuel DRAM and NAND content growth for years to come. Our 1-alpha LP4 16 - gigabit design is now fully qualified and ramping at multiple OEMs. While our 176-layer NAND achieved its first UFS 3.1 qualifications at two OEMs. These wins demonstrate Micron's leadership in the mobile market and our continued strength in managed NAND products where MCP sales surpassed $1 billion for the third straight quarter. We are continuing to see strong demand in our edge markets, which includes automotive and industrial IOT. We expect our automotive and industrial markets to be the fastest-growing memory and storage markets over the next decade. As the number one player in these markets, Micron is exceptionally well-positioned to benefit from these secular growth trends. Other automotive businesses delivered a fourth consecutive record quarter, driven by continued recovery in auto manufacturing and the growth of memory and storage content driven by in-vehicle-infotainment and driver assistance applications. Industrial IOT revenues also set records in the Fiscal Fourth Quarter, benefiting from the continued growth of applications, such as point-of-sale devices, factory automation, and surveillance. We expect industrial demand trends to accelerate further, at 5G speeds, that adoption of data-intensive applications powered by Intelligent Edge infrastructure. We're also seeing an acceleration in other consumer IOT businesses driven by rapid growth in device sales such as VR headsets, smart exercise equipment, and smart speakers. Turning to market outlook calendar 2021 is shaping up to be a strong year. We expect calendar 2021 industry DRAM, bit demand growth to be in the low 20% range. And industry NAND width demand growth to be in the high 30% range. Overall, our preliminary view is that calendar 2022 industry width demand growth will be consistent with long-term industry bit demand growth categories. In the mid to high teens for DRAM, and approximately 30% for NAND. We anticipate underlying demand in calendar 2022 to be led by increasing datacenters, server deployments, 5G mobile shipments, and continued strength in automotive and industrial markets. Additionally, non-memory supply shortages that are constraining customer bills across various end market segments and that are pushing out some demand should ease throughout 2022 supporting demand growth during the year. Given prudent industry CapEx and very lean supplier inventories, we expect healthy industry supply-demand balance and robust profitability for both DRAM and NAND in the year. In the near term, our FQ1 big shipments will decline modestly in both DRAM and NAND from very strong levels in FQ4. Some PC customers are adjusting their memory and storage purchases due to shortages of non-memory components that are needed to complete PC bills. We expect this adjustment for our PC customers to be largely resolved in the coming months. We're also seeing constraints within our supply chain for certain IC components, which will some work limit our big shipments in the near term. Big shipping growth will resume in the second half of the fiscal year, and we're planning to deliver record revenue with solid profitability in fiscal 2022. Our calendar year '22, big shipment growth for DRAM and NAND will be in line with the industry. However, due to the strong shipments in fiscal year '21, and our below normal current inventory level, for fiscal year '22 our big shipment growth for DRAM and NAND will somewhat lag the long-term CAGR. In fiscal year '22, the continued ramp of 1-alpha and 176-layer NAND should provide us with good front-end cost reductions. Our efforts to increase supply chain resilience and provide business continuity to our customers will cause headwinds to our assembly and packaging costs, consistent with the trend in the overall industry. Overall, we expect the 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. The year-on-year increase in CapEx is driven by our continued 176-layer NAND transition pilot line enablement for next-generation NAND and DRAM and continued infrastructure and prepayments to support the introduction of EUV. Fiscal year '22 DRAM equipment CapEx for manufacturing will decline from fiscal year '21 as we benefit from the capital efficiency of our mature 1-alpha node. For fiscal year '22, our big supply growth will be achieved through node transitions alone, as we are a few years away from needing wafer start additions to keep up with the industry demand. We also expect to increase fiscal year '22 R&D investment by approximately 15% from fiscal year '21 to deliver bold product and technology innovations designed to fuel the data economy, as well as to expand our portfolio to capitalize on opportunities such as high bandwidth memory and CXL solutions. Our leadership portfolio, [Indiscernible] quality, supply chain agility, and deep customer relationships make us a preferred partner in many of our markets. And we are confident in our ability to continue to create long-term, sustained profitability, and returns built on that leadership. I will now turn it over to Dave.

Sanjay Mehrotra:

Thank you, Dave. I would like to share the recent accomplishments that make me especially proud of our Company. Our strong Micron culture has played a significant role in driving our results aligned to our broader vision to transform how the world uses the information to enrich life for all. Our Company culture, community leadership, and business performance have been recognized globally, earning multiple industry awards and recognitions this year. This month, we were ranked by Fortune as one of the top 20 best places to work in manufacturing and production. The only semiconductor Company to earn this recognition. Fiscal '21 was an excellent year for Micron. As our fourth-quarter results clearly demonstrate, we are delivering strong financial results. We are planning to deliver record revenues and solid profitability in fiscal year '22. Demand for memory and storage is solid across market segments. Industry trends like the broad integration of artificial intelligence into all computing, proliferation of the Intelligent Edge, continued data center growth, and deployments of 5G networks create new and expanding opportunities for Micron. The importance of semiconductors to these markets is underscored by government initiatives to invest in domestic semiconductor production, both here in the U.S. through the chipset and in other countries around the world. We're focused on building our technology leadership to deliver broad new solutions, that offer unique value to our customers. Our business is robust and we are energized to seize the opportunities ahead of us, as a truly exciting time in the semiconductor industry. We will now be open to questions.

Operator:

At this time, [Operator Instructions] we have your first question from Harlan Sur with JP Morgan, your line is open.

Sanjay Mehrotra:

I will have Dave comment on the second part of your question, and on the overall inventory question, I would say that by and large, inventory among our customers is in decent shape. Of course, we talked about the PC market, where due to semi-conductor component shortages, our PC customers, some of them are not able to fulfill all of their end demand, and therefore they have made some adjustments in their purchases, impacting some of our demand in the near-term into the PC market. And we think this is short-lived, and over the course of the next few months, this will work itself out. And on the smartphone side, of course, you know that new full-cycle, new full launches are coming up, and this tends to be a seasonally strong quarter for new smartphone shipments as well. While some customers may because of geopolitical considerations or through the lessons learned during the pandemic, or their own supply chain considerations of supply chain shortages, maybe having a strategy of carrying more inventory than some other customers. Overall, the smartphone market continues to be driven by 5G transition smartphones over the course of calendar year '22 with 5G increasing by 50% from the 2021 levels. And on the data center side, of course, the investment cycle is strong on the data center side, and of course, the pandemic has driven strong acceleration in digital transformation, and that certainty extending into the cloud, cloud services, video streaming, e-commerce, all of these trends, along with new architectures, new processors that are being introduced that actually enable greater AI capability into the workloads and greater usage of data attach of memory in the servers. All of these also are creating new demand, so overall data center inventory levels are also in decent shape. So, what -- inventory in our markets today is in much better shape than it was back in the 2018-time frame. Again, some customers may have higher levels due to their strategic considerations and they may choose to continue to do so in the longer term as well. Given the challenges faced by the supply chains during the pandemic, as well as given geopolitical considerations. This is what I would like to share with you on inventory and Dave; you can add a second part of the question.

Harlan Sur:

Thank you for the insights, Daron. And you mentioned in your prepared remarks, seeing constraints within your supply chain for certain IC components, which is going to limit some of your bit shipments also here in the near term. Can you just give us some examples of some of these IC components both in DRAM and NAND? I assume, for example, you have some NAND controller constraints, but what about in DRAM?

Harlan Sur:

Thank you, Sanjay.

C.J. Muse:

Yeah. Good afternoon. Thanks for taking the question. I was hoping to drill into your gross margin. Pretty impressive despite the topline guide. So, I guess a couple of parts here. First, in terms of the costs down within the November quarter, I'm assuming more DRAM than NAND. Can you speak to that? Can you also speak to mix shifts in the quarter? And then, for all of fiscal '22, how should we be thinking about the type of cost downs across both DRAM and NAND? Should we think 10 plus percent is sustainable year-over-year for DRAM and similar type number, if not higher, on NAND, or how should we think about that? Thank you.

C.J. Muse:

Thank you.

Shannon Cross:

Thank you very much. The first question I have is with regard to pricing. Can you talk about some of the pricing dynamics, especially with the pullback in demand from the PC vendors? Are you expecting to see any more aggressive moves from your competitors? Although given your comments on gross margin, I'm guessing the answer, maybe no. And then my second question is, just with regard to your PC OEM partners, how are you tracking confidence that they're going to actually see the demand come through in the second half of the year. Because I get a lot of questions from people about double ordering, even just from their end customers. So, I'm just wondering if you've changed any methodology in how you're tracking what your partners are seeing or how you're providing guidance as you lookout. Thank you.

Shannon Cross:

Thank you.

Toshiya Hari:

Hi, good afternoon. Thanks so much for taking the question. I was hoping you could provide a little bit more context around your fiscal '22 CapEx guidance of 11 billion to 12 billion. If you can speak to WFE within that number for fiscal '22 and then differentiate between DRAM and NAND that would be super helpful. And then just to remind us what bit supply growth are you expecting purely from transitions in both DRAM and NAND as you think about calendar '22? Thank you.

Toshiya Hari:

Okay and Dave, the transitions, you guys talked about calendar 22, a bit strong mid to high teens on the DRAM side and approximately 30% of the NAND side in line with the industry. What portion of that growth? Are you guys expecting purely from transitions to 1-alpha --

Toshiya Hari:

Thank you.

Aaron Rakers:

Yeah. Thanks for taking the question. I wanted to ask a little bit more about the end demand dynamics, particularly around the data center. I'm curious as we move forward, how you are thinking about the bit demand profile of the data center and the server market. And what are you seeing as far as kind of the progression of memory to compute ratio as we move forward to next-generation CPUs? I'm just curious about how you're rolling forward the expectations over the next year and that growth profile from a bit perspective.

Aaron Rakers:

And then as a quick follow-up, Dave, I'm just curious as you start the last quarter, implement some share repurchases. How do you think about the liquidity on the balance sheet or managing the Company from a cash-on-hand perspective versus continuing to learn more in on share repurchases? How much cash do you need operationally to comfortably run the Company?

Aaron Rakers:

Perfect. Thank you.

Joe Moore:

Great. Thank you. I wonder if you could address what transitions going on in both DRAM and NAND to 1-alpha and our G2. Are there any issues that that creates from a mix standpoint in terms of it seems like it's quite a bit demand for the older products? Where are you in terms of getting qualified for the newer products? How is that affecting you guys?

Joe Moore:

Great. Thank you very much.

John Pitzer:

Thanks, guys. Thanks for letting me ask questions. Congratulations on the solid execution. Sanjay, you're characterizing the current environment as relatively short-lived, are we supposed to read into that as we go into the February quarter, your business might normally buck normal seasonal headwinds and I guess importantly upturn to date, this memory cycle has been very different than prior memory cycles. Typically, you have eight quarters at unabated ASP, growth, and margin expansion. The least plateaued in year three quarters into it. What's different about this cycle? And I guess what makes you confident this is just a pause and not something more?

John Pitzer:

Sanjay, those inventory comments were very helpful. I'm just curious as a quick follow-on, your guidance for bids to be down in the November quarter. How much is that a conscious decision by you to hold bits off the market to help me be pushing pricing, and how much of that is just being driven by there's no demand for those bits and that's why bits are down?

John Pitzer:

Perfect. Thank you.

Timothy Arcuri:

Thanks a lot. I appreciate that. Dave, I guess I had a question on gross margin. I wanted to go back to a question asked earlier. It's down on the 100 basis points on your guidance; I would like a deep percent down revenue quarter NAND it sounds like you're only down modestly at both DRAM and NAND. So, it sounds like the delta is probably pricing. I would think more on the DRAM side. And then somebody asked you about costs and you said, well, costs aren't coming down very much. So, I guess I'm trying to figure out how gross margin is so good? Is this going back to some of the mixed comments that you made ASP quarter? It seems like a more sustainable trend that maybe people were missing. So, I'm wondering if you can flip that for us next.

Timothy Arcuri:

Got it. Okay. And then I guess just last thing. So just on the cost curve, so you reached -- you said you’re reached production crossover on 176 and on 1-alpha and 1Z. So how much -- like what's the lag effect in terms of when that really starts to bend the cost curve in a favorable direction, given that you've had production crossover on those things. Thanks.

Timothy Arcuri:

Perfect. Awesome. Thank you.

Operator:

Good afternoon. My name is Josh, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron’s Third Quarter 2021 Financial Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Sanjay Mehrotra:

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

Sanjay Mehrotra:

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

C.J. Muse:

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

C.J. Muse:

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

C.J. Muse:

Thank you.

John Pitzer:

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

John Pitzer:

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

John Pitzer:

Perfect. Thank you very much.

Shannon Cross:

I had a question about DRAM ASPs. 20% quarter-over-quarter growth was the highest in several years. So, you can talk -- can you talk a bit about the drivers of the growth? How much of it was like-for-like price increases given the current tight supply versus, say, benefit from mix? And how should we think about sustainability?

Shannon Cross:

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

Operator:

Our next question comes from Timothy Arcuri with UBS.

Sanjay Mehrotra:

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

Dave Zinsner:

So, I don’t think I’m ready to -- we haven’t completely finished the plans on next year. So, maybe it’s a little premature for me to talk about next year, specifically on cost downs. I would say that when you look at 1-alpha’s cost declines, they are very, very good. The timing in which the 1-alpha ramps is certainly an impact, and when it gets to its mature yield state is certainly an impact. And then, of course, it’s hard to call these mixed elements that drive some headwinds. But suffice it to say, when you kind of think about what our strategy is, we do feel that we’ll see many of these things enter into the equation. So, I think when you look at it on a front-end basis is quite good and quite comparable. I think when you look at it on a mix basis, somewhat dependent on how the market unfolds. But based on our early view into next year in terms of the x, we’d expect some headwinds.

Joe Moore:

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

Operator:

Our next question comes from Chris Danely with Citi.

Sanjay Mehrotra:

So, we’re not going to go there in terms of trying to break it down by market by market. Of course, you sometimes see different moving parts in different parts of the market. For example, in mobile, you saw that with the India COVID situation as well as April and May in China, there was a reduction in demand in certain parts of the smartphone market. However, in other parts of the world, the smartphone suppliers moved to supply the increased demand in the other parts of the world. And of course, some of the demand because supply is in shortage, some of the supply in the industry got shifted toward other parts of the market too. So, we’re not going to break it down. I mean, I gave you mobile just as one example. And this situation can vary from customer to customer. But all-in-all, when you look at the end markets, almost all end markets are seeing shortages. And in aggregate, there is tight supply today. That’s what is resulting in increase in prices in the industry that we reported for FQ3, and we guided to it in FQ4 also for DRAM and NAND, we see price increases. And overall, we see supply tightness continuing through the year and into 2024 timeframe as well.

Sanjay Mehrotra:

I meant 2022.

Sanjay Mehrotra:

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

Sanjay Mehrotra:

So, I think, when you say chipset impact, yes -- oh, Chips Act, I see. Okay. So with respect to Chips Act, we definitely -- first of all, it’s really great that U.S. government is recognizing the importance of semiconductors and how important semiconductors are to national economic consideration as well as national security considerations. And of course, semiconductors are important to all global economies today. So, we certainly look forward to greater support for U.S. leadership in semiconductor research as well as semiconductor manufacturing in the years to come. And of course, Micron, as the only player in semiconductor memory and semiconductor storage in the industry is well engaged with the U.S. government. And I know that the U.S. government also recognizes the importance of memory and storage as a strategic part of the semiconductor industry. So we really look forward to opportunities in terms of addressing our future needs. We continue to stay engaged. We stay engaged with the governments in all global sites where we have major operations, and we look forward to the opportunities here in the U.S. as well. And we are really glad that the funding has crossed the finish line in the Senate, and we certainly hope that in the House as well, this will pass. And U.S. industry can get on with the business of really strengthening U.S. leadership in research and manufacturing in semiconductor for the years to come. And we definitely remain always committed to growing our own supply in line with the industry demand, and we remain disciplined in that regard.

Toshiya Hari:

Hi guys. Thanks a lot for taking my questions. I have one on DRAM and one on NAND. On the DRAM side, I wanted to ask about your ability to grow bits over the next, call it, four to six quarters. I think, Dave, at a couple of conferences, you talked about bits being flattish into the August quarter, just given where you are in the transition and given low inventories. But as you progress and sort of transition to 1-alpha, at what point should we expect your bit supply to accelerate in the DRAM business? And to the extent you can’t meet demand, call it, over the next couple of quarters, how should we think about your willingness to increase capacity in DRAM? And then, on the NAND side, at a very high level, I think, Sanjay, it feels like you -- to me, it feels like you sound a little bit better on NAND supply-demand or less cautious on NAND supply-demand. Curious what’s changed over the past couple of quarters? Is it purely demand being better? Is it sort of the shortages around controllers? Yields on higher layer count nodes or all of the above? Just curious what’s changed in NAND over the past couple of months, couple of quarters. Thank you.

Sanjay Mehrotra:

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

Operator:

Good afternoon. My name is Latif and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's Second Quarter 2021 Financial Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Sanjay Mehrotra:

Thank you, Farhan. Micron delivered strong FQ2 results above our original projections, driven by solid execution and higher than expected demand across multiple end markets. The DRAM market is in severe shortage and the NAND market is showing signs of stabilization in the near-term. The execution from the Micron team and these strengthened conditions enabled us to set revenue records for mobile MCPs and automotive products and to reach normal levels of inventory ahead of schedule. Following last quarter's introduction of 176-layer NAND into volume production, in FQ2, we began volume production on our 1-alpha DRAM node, solidifying our technology leadership in both DRAM and NAND. We are in an excellent position to capitalize on the strong demand for memory and storage, driven by artificial intelligence and 5G across the data center, the intelligent edge, and user devices. I will start with an update on our operations. The Micron team is doing everything we can to meet customer demand despite the challenges of the pandemic, non-memory component shortages in the electronics industry, and disruptions that occurred in our Taiwan fabs in December. We are confident that our COVID19 safety protocols will allow us to continue at full production levels, and we are encouraged to see vaccines become increasingly available around the world. Micron has been able to mitigate the impact of broad electronics industry shortages to our production output through our proactive supply chain and inventory management strategies. Investments made over the last several years in facilities infrastructure allowed us to minimize lost output caused by the power outage and earthquake at our Taiwan operations in December. Recently, due to the drought in central Taiwan, there has been a reduction in the water supply for one of our DRAM fab sites. To mitigate the water shortage, we are accelerating our water conservation efforts and have secured alternative sources of water. At this time, we do not see an impact to DRAM production output. However, this is a developing situation that we are monitoring closely for the next several months. Now turning to technology and products. We continue to make solid progress on our key goals; first, to deliver industry-leading technology and improve our cost structure; second, to bring differentiated products to market and improve our product mix; and third, to grow our share of industry profits while maintaining stable bit share. I am proud to report that Micron was one of the top 20 U.S. patent registrants in 2020. This achievement attests to the brilliant innovation of our teams and is proof of the tenacious focus we have placed on technology and product leadership over the past several years. Our industry-leading 1-alpha DRAM and 176-layer NAND nodes are in volume production and are ramping on plan. We expect these nodes to be our workhorse for fiscal year 2022, fueling our bit growth and contributing to our long-term cost reduction goals. Across both DRAM and NAND, we target our long-term cost reductions that are in line with the industry. In products, Micron is on track to support customers as they begin to introduce DDR5 in the fiscal second-half of 2021. We are also driving an increased mix of QLC NAND, which helps to make SSDs more cost-effective and accelerates the replacement of HDDs with SSDs. QLC SSD adoption continues to grow, and we achieved a record high QLC bit mix in FQ2. Earlier this month, Micron took a decisive step to exit 3D XPoint development and manufacturing. As mentioned on our recent 3D XPoint update call, Micron is prioritizing investment toward other memory solutions that use the Compute Express Link, or CXL, and we are excited about addressing this market opportunity with differentiated products. Most of the R&D teams previously working on 3D XPoint have already been transitioned to other programs, including accelerating introduction of CXL-enabled memory products. This change will allow Micron to better address future needs of our data center customers and also drive higher ROI and shareholder value. We are running an open process to identify the best acquirer for the Lehi fab, which provides an excellent location for advanced foundry, logic, and analog semiconductor manufacturing, and expect to finalize the sale within calendar 2021. We anticipate that the overwhelming majority of the highly skilled Lehi manufacturing team will find strong career opportunities with the buyer. Turning to end markets. In data center, AI and data-centric workloads will drive long-term growth, with memory and storage becoming an increasing portion of server BOM cost. Micron is positioned for success in this market, with a broad portfolio of high-quality and power-efficient products. Enterprise demand, which had been anemic for the last few quarters, is starting to improve as IT budgets increase in anticipation of economic recovery. Enterprise DRAM bit shipments grew sharply quarter-over-quarter, but were still down year-over-year. Cloud DRAM bit shipments also grew quarter-over-quarter and we anticipate robust demand from U.S. hyperscale customers, especially as we enter the second-half of calendar 2021. In data center SSDs, revenue declined sequentially as customers in certain segments reduced their higher than average inventory levels. We are continuing to expand our data center NVMe SSD portfolio with internally developed controllers and have new product introductions planned in the coming quarters. In PC, we continue to benefit from the remote work and learning trend that drove healthy notebook and Chromebook demand in fiscal Q2. Micron delivered record PC DRAM bit shipments despite pockets of non-memory component shortages experienced in the PC OEM supply chain. We also began sampling 1-alpha-based DDR4 products. In client SSDs, we are on track to begin customer qualification of our next-generation client SSDs using 176-layer NAND in the fiscal second-half of 2021. By the end of calendar 2021, we expect to cover multiple segments of the market, including consumer, value OEM and premium OEM with our 176-layer-based client portfolio. In graphics, revenue declined quarter-over-quarter from an exceptional fiscal first quarter, which benefited from the launch of new gaming consoles. Nevertheless, fiscal second quarter revenue grew significantly year-over-year. Micron has an excellent position in this market with a broad product portfolio and deep customer partnerships. In mobile, revenue grew 21% sequentially, driven by strong execution, coupled with better-than-seasonal demand, due to continuing recovery in smartphone volumes. We achieved record MCP revenue and nearly tripled our LP5 revenue sequentially. We have also begun sampling the industry's first 1-alpha LPDRAM and 176-layer NAND with mobile customers. Smartphone unit sales in China have been robust, and 5G momentum is continuing. In auto, we delivered a second consecutive record-revenue quarter as auto manufacturing recovers around the globe and as memory and storage content per vehicle continues to grow. We have more demand than we can supply and we are working diligently with our customers to address their memory and storage needs. We are also advancing our product portfolio targeted for automotive applications. In FQ2, we completed qualification of our auto-grade LP5 and began sampling the industry's first automotive LP5 that is hardware-evaluated to meet the most stringent Automotive Safety Integrity Level, ASIL D. Turning to the market outlook, calendar 2021 is shaping up to be a solid year, and our overall outlook across DRAM and NAND has improved since our last earnings call, with broad strength across nearly all end markets. The pandemic has driven changes in our economy that we believe will not only benefit us this year, but also serve to accelerate the digital transformation of the economy and drive new opportunities for Micron. Recovery from the pandemic and pent-up demand are expected to drive strong demand growth in markets such as enterprise, cloud, desktop PCs, mobile, auto, and industrial. Data center demand is expected to be strong in calendar 2021, particularly in the second-half of the calendar year, due to a combination of factors. First, enterprise demand has started to come back as the economy recovers and is expected to further strengthen through the calendar year. Second, our opportunity at cloud service providers will continue to strengthen through calendar 2021, driven by robust demand for their solutions and offerings, as well as secular growth in AI and data-centric workloads. And finally, the introduction of new CPUs will support more memory channels and higher-density modules, contributing to increases in server memory content across both cloud and enterprise. Forecasts for calendar 2021 PC unit sales have increased from three months ago and are expected to approach an average of one million units per day. There is robust demand in notebook PCs, especially Chromebooks. We also expect the desktop market to improve as workers gradually return to the office this year. Mobile unit sales are expected to show robust growth this year and we also expect to benefit from higher content in 5G phones, which are forecast to double in calendar 2021 to more than 500 million units. Auto unit sales are expected to grow significantly from last year, while secular memory and storage content growth trends remain strong as EVs proliferate. The strong demand across various end markets, combined with disruptions at certain logic and foundry semiconductor producers, has resulted in a shortage of these non-memory ICs for our customers, and we believe memory demand would have been even greater without these shortages. In DRAM, due to the stronger demand, we now expect calendar 2021 bit growth at 20%, above our prior forecast of high teens. This growth builds on calendar 2020 bit growth, which was in the lower 20% range. As a result of disciplined CapEx investments since the start of the pandemic, we expect industry DRAM supply to be below demand. As a result of the strong demand and limited supply, the DRAM market is currently facing a severe undersupply, which is causing DRAM prices to increase rapidly. We see the DRAM market tightening further through the year. In NAND, we now expect calendar 2021 bit growth in the low to mid-30% range, above our prior expectation of 30%. While we are seeing stabilization in near-term pricing, the elevated levels of industry CapEx are a cause for concern and more CapEx cuts are needed to allow for healthy NAND industry profitability. Long-term, we expect a DRAM bit demand growth CAGR of mid to high teens and a NAND bit demand growth CAGR of approximately 30%. Turning to Micron supply, we target our long-term bit supply growth CAGR to be in line with the industry bit demand growth CAGR for both DRAM and NAND. However, there can be year-to-year variability caused by node-transition timing. In both DRAM and NAND, we expect our calendar 2021 bit supply growth to be below the industry demand growth, and we have used our inventory to add to our bit shipment growth this year. We are targeting fiscal 2021 CapEx to be approximately $9 billion to support our long-term goal of maintaining a stable share of industry bit supply. I will now turn it over to Dave.

Sanjay Mehrotra:

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

C.J. Muse:

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

Operator:

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.

Sanjay Mehrotra:

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

Timothy Arcuri:

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

Operator:

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question please.

Sanjay Mehrotra:

So, of course, if you look at last year, we had said that our supply growth was somewhat greater last year compared to the industry supply growth and the industry demand growth as well. So that positioned us well in terms of using our power inventory this year. And our supply growth this year is expected to be less than the industry demand growth. Industry demand growth we have just raised our estimations to approximately 20% in calendar year 2021. So, our supply growth to be somewhat less than the industry and of course, we have used up in DRAM our inventory to supply -- to meet the growing customer requirements. As we look ahead, it will be -- our supply growth will be driven by our 1-alpha technology in DRAM. We will be ramping it over the course of next few quarters. It will be the workhorse of technology for us in terms of bit growth in fiscal 2022 as well. And, of course, as we bring out our products in this technology node, we have to get them qualified with our customers and that's what we are focused on in terms of getting the ramp up of this technology, 1-alpha technology getting products qualified in time for it to position us to drive our supply bit growth to meet the ultimate customer demand growth requirements during the rest of the calendar year.

Sanjay Mehrotra:

So, again, our inventory in DRAM is really very lean at this point, and going forward, the growth will come from our 1-alpha node. And I think what's again important is that there can be fluctuations from quarter-to-quarter, but long-term, it is really about having a stable market share driven by technology transitions, which is our focus and which we have delivered successfully, whether you look at our 1z node in DRAM, that was the first 1z node in the industry, now 1-alpha node is the first -- 1-alpha node in the industry as well. So, technology transitions is what we are focused in terms of driving our long-term demand -- supply bit growth CAGR to be in line with the demand growth CAGR. And from quarter-to-quarter depending upon the timing of the technology transitions, there can be fluctuations. Second-half in terms of our year-over-year growth will be lower than the first-half. Yes.

Operator:

Thank you. Our next question comes from Chris Danely of Citi. Your line is open.

Dave Zinsner:

Yes, well, so our current obviously approach towards returning cash to shareholders is through the buyback. We mentioned in the second fiscal quarter, we didn't buy back stock nor did we buy back stock in the first quarter and that was really a function of the fact that cash flow was negative and we were protecting our cash -- our net cash position. But as you say -- suggest and as we talked about we do expect to have good cash flow in the back half of the fiscal year and we do expect this business to generate good free cash flow over time. So, I think primarily, you can look to us to buy back stock. We're going to return at least 50% of our free cash flow in the form of buybacks and we have in the past returned more than that. So, potentially, we could do that in the future. There is a few things on the balance sheet as it relates to converts and debt that might use some of that cash as well. As far as the dividend, we haven't talked with the Board about that. Certainly, a possibility, but I think we need to get through this year and discuss with the Board if that makes sense.

Dave Zinsner:

Sure.

Toshiya Hari:

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

Toshiya Hari:

Thank you.

Harlan Sur:

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

Harlan Sur:

All right. Thanks for the insight Sanjay.