Micron Technology Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 28, 2023

There are 10 speakers on the call.

Operator

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. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Farham Ahmad, Vice President, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and welcome to Micron Technology's fiscal 3rd quarter 2023 financial conference call. On the call with me today are Sanjay Mehrotra, our President and CEO and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations call, I will now turn the call over to our website at investors. Micron.com, including GodYou and Slides. In addition, the press release detailing our quarterly results has been posted on our website, along with the prepared remarks for this call.

Speaker 1

Today's discussion of the financial results is presented on a non GAAP financial basis unless otherwise specified. Presentation, a reconciliation of GAAP to non GAAP financial measures can be found on our website. We encourage you to visit our website at micron.com throughout the quarter As a reminder, the matters we are discussing today include forward looking statements regarding market demand and supply, our expected results and other matters. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. Call, we refer you to the documents we filed with the SEC, including our most recent Form 10 ks and 10 Q for a discussion of the risks that may affect our future results.

Speaker 1

Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Call, we are under no duty to update any of the forward looking statements to conform these statements to actual results. I'll now turn the call over to Sanjay.

Speaker 2

Thank you, Farhan. Good afternoon, everyone. Micron delivered fiscal third quarter revenue within our guidance range As a result, pricing trends are improving and we have increased confidence that the industry has passed the bottom for both quarterly revenue year on year revenue growth. Our technology leadership and strengthening product portfolio position us well across diverse growth markets, call, including AI and memory centric computing. Beyond this downturn, we expect to see record TAM in calendar 2025, presentation of China on Micron's business remains uncertain and fluid.

Speaker 2

Several Micron customers, including mobile OEMs, have been contacted by certain critical information infrastructure operators or representatives of the government in China 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.

Speaker 2

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 call 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.

Speaker 2

We are also making good progress towards the introduction of our EUV Phase 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 1st 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.

Speaker 2

In China, we announced an investment of approximately $600,000,000 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, Powertec Semiconductor Xi'an, who has been operating inside our Xi'an facility for the last 8 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 side.

Speaker 2

In India, with the strong support of the Indian government, we will build a new assembly and test facility in Gujarat call to address demand for the latter half of this decade. We are also increasing our investments in assembly and test capacity in Taiwan Now turning to our end markets. Customers continue 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 6 months ago. Some of these inventory levels can get distorted by customer attempts to leverage current prices, Data center customer inventory is also improving and will likely normalize around the end of this calendar year In data center, we saw strong sequential revenue growth in both cloud and enterprise

Speaker 3

call, we will now begin

Speaker 2

the call to discuss the call 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 presentation, 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 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 6 to 8 times the DRAM content of a regular server 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 144 terabyte.

Speaker 2

A significant majority of that memory footprint is enabled by a joint development project between our two companies that expense Micron's low power DRAM leadership to server class applications. We are proud to pioneer this differentiated LPD LAN innovation to deliver a significant reduction in data center power consumption 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 We expect to begin a mass production ramp for this exciting HBM3 product in early calendar 2024 addition 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 crossover D4 At the end of 1st 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 call, we expect these high density modules to ramp in calendar Q2 Our 96 Gigabyte D5 high density module built on 1 Alpha technology using 24 Gigabit DIE is already shipping in volume dual diode package based 128 gigabyte modules.

Speaker 2

In datacenter 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 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.

Speaker 2

We are excited about the ongoing industry transition to D5 and are well positioned for it with our strong D5 product lineup. Industry clients' D5 mix is expected to crossover 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 Leased a new record for the 3rd consecutive quarter, with growth in both client and consumer. Last month, we launched Crucial T700, the world's fastest Gen 5 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.

Speaker 2

We expect customer inventories to normalize in calendar Q3. We plan to introduce our next generation G7 product In mobile, we now expect calendar 2023 smartphone unit volumes 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 twenty twenty three. 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.

Speaker 2

In addition, we achieved significant milestones In UFS, with the qualification and ramp of a high capacity UMCP5 featuring 16 gigabyte of DRAM 5 12 gigabyte of NAND. We have also started to sample a new UFS-four 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.

Speaker 2

We continue to expect growth in auto memory demand call, we will now begin the call for the second half of calendar twenty twenty three, driven by easing non memory semiconductor supply, normalizing customer inventory levels 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. Call, as a result, we expect an improvement in demand in the second half of calendar twenty twenty three. We are excited about our growth prospects in this market as industrial customers continue to adopt and implement IoT, Now turning to industry outlook. Our expectations for calendar 2023 industry bid demand growth have been further reduced to lowtomidsingledigits 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 low 20s percentage range in NAND.

Speaker 2

While the AI driven demand has been stronger than our expectations 3 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 We see both DNAM 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.

Speaker 2

We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. Our fiscal 2023 CapEx plan of $7,000,000,000 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. Presentation, I will now turn it over to Mark.

Speaker 4

Thanks, Sanjay. Good afternoon, everyone. Fiscal Q3 results were in line to better than expectations, with revenue coming in above the midpoint of our guidance range call, we will now begin the call and press release. Total fiscal Q3 revenue was approximately $3,800,000,000 call, up 2% sequentially and down 57% year over year. Fiscal Q3 revenue included $72,000,000 from an insurance settlement close at the time we provided guidance.

Speaker 4

Fiscal Q3 DRAM revenue was $2,700,000 call, representing 71% of total revenue. DRAM revenue declined 2% sequentially, With fit shipments increasing in the 10 percentage range and prices declining by approximately 10%. Fiscal Q3 NAND revenue was $1,000,000,000 representing 27% of Micron's total revenue. NAND revenue increased 14% sequentially, with pit shipments increasing in the upper 30 percentage range Compute and networking business unit revenue was $1,400,000,000 up 1% sequentially. Strong sequential growth in server and graphics revenues was offset by a decline in client.

Speaker 4

Embedded business unit revenue was $912,000,000 up 5% sequentially. On a sequential basis, automotive and Consumer revenues were strong. Revenue for the mobile business unit was $819,000,000 Down 13% sequentially due to timing of shipments. As Sanjay mentioned, we expect growth in mobile revenues call in fiscal Q4. Revenue for the storage business unit was $627,000,000 call, up 24% sequentially and driven by increased shipments across most of the portfolio.

Speaker 4

The consolidated gross margin for fiscal Q3 was negative 16%, improving 15 percentage points sequentially. This result was negatively impacted by approximately $400,000,000 or 11 percentage points call, we will now begin the call to discuss the financial results of write downs associated with inventory produced in the quarter. Operating expenses in fiscal Q3 were press release, we will now begin the

Speaker 3

call to discuss our financial results for

Speaker 4

$866,000,000 down roughly $50,000,000 sequentially. OpEx benefited from ongoing call, we had an operating loss of roughly $1,500,000,000 in fiscal Q3, resulting in an operating margin of negative 39%, improved from negative 56% in the prior quarter. Fiscal Q3 taxes were $102,000,000 As mentioned in previous quarters, despite a consolidated loss on a worldwide basis, We still have taxes payable in certain geographies due to taxable income levels reported in those geographies. The non GAAP loss per share in fiscal Q3 was $1.43 quarter, we expect to be in a listen only mode. Fiscal Q3 EPS included approximately $0.37 Turning to cash flows and capital spending.

Speaker 4

Our operating cash flows were approximately $24,000,000 Capital expenditures were $1,400,000,000 during the quarter. We continue to expect capital expenditures to be approximately $7,000,000,000 call for the fiscal year, thus near $1,000,000,000 in fiscal Q4. Free cash flow was negative $1,400,000,000 in the quarter and improved from the previous two quarters. Our fiscal Q3 ending inventory was $8,200,000,000 or 168 days. Due to increases in process steps and product complexity, we now target inventory levels call of around 120 days, which at present would equate to approximately $6,000,000,000 Our current inventories include strategic stocks of approximately $1,000,000,000 over target levels At quarter end, we held cash and investments of $11,400,000,000 and had total liquidity of $13,900,000,000 call, including our untapped credit facility.

Speaker 4

We issued $1,500,000,000 of long term debt in the quarter. And with part of those proceeds paid down $600,000,000 of our term loan facility, resulting in a net increase to debt of $900,000,000 Our fiscal Q3 ending debt was $13,200,000,000 call, now turning to our outlook for the fiscal Q4. As mentioned in filings and our comments today, the CAC decision is a headwind to our outlook. We expect the revenue impact to vary by quarter, With the impact in fiscal Q4 being less than the quarterly impact in the first half of fiscal twenty twenty four. Over time, we have a goal of retaining our global market share in both DRAM and NAND.

Speaker 4

In fiscal Q4, as the industry demand continues to improve and despite the effects on our business from the CAC decision, We still see record bit shipments. Fiscal Q4 gross margin will be impacted by costs from underutilization, weak pricing levels and product mix. In the current business environment, the gap between our DRAM and NAND profitability is significant and changes in the mix can drive large variability in gross margins. Our gross margin guidance does not contemplate additional write downs of inventory. Call, we continue to aggressively manage our operating expenses and remain on track to exit the fiscal year at less than $850,000,000 Looking beyond fiscal Q4, call, we expect OpEx to increase over $50,000,000 in fiscal Q1 2024 on R and D program expense timing call and as reductions to employee compensation end.

Speaker 4

With all these factors in mind, our non GAAP guidance for fiscal Q4 is as follows. We expect revenue to be $3,900,000,000 plus or minus $200,000,000 Gross margin to be in the range of negative 10.5 percent, plus or minus 2 50 basis points and operating expenses to be approximately $845,000,000 plus or minus $15,000,000 We expect tax expenses of approximately $40,000,000 Based on the share count of approximately 1,100,000,000 shares, we expect EPS to be a loss of $1.19 plus or minus $0.07 In closing, we continue to act quickly While preserving our solid balance sheet, in this environment, we remain sharply focused on improving our profitability and free cash flow. As market conditions improve, we will continue to drive efficiencies to hold on to productivity gains. Despite the impact of this downturn and effects of the CAC decision, we remain confident in our financial model and our ability to deliver long term profitability, cash flow and shareholder returns. I will now turn it back over to Sanjay.

Speaker 2

Thank you, Mark. I'm proud of the execution of the Micron team and the progress we've 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'm excited about the new product introductions call 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'm confident that this portfolio momentum combined with our technology capability, manufacturing excellence, financial discipline presentation, we will position us well for the future.

Speaker 2

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.

Operator

And our first question comes from the line of C. J. Muse from Evercore ISI. Your question please.

Speaker 5

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

Speaker 2

Thanks, We, of course, continue to work closely with our customers. And as we said, that customer inventories are Improving, except for data center, inventories are close to normal in most of our other end markets. Data center, we said by end of this year or somewhat thereafter, shortly thereafter, data center customer inventories, we expect to improve as well. And we continue to work closely with our customers. Some of the customers definitely Interested in some of the longer term outlook for the business and other customers operate on month to month basis.

Speaker 2

And overall, of course, we continue to mitigate through some of the impact of the China decision as well. But the value that we are bringing to the customers for our products continues to strengthen, and Micron is very much focused on navigating through the current downturn and working closely with our customers to address their future demand. And

Speaker 5

as we

Speaker 2

have said in my remarks that some of the customers, presentation, given the low pricing that exists in the industry today and before prices begin to increase substantially, trajectory is of continuing improvement in their inventory levels end to end across the supply chain, add the customers directly as well as third parties who may be supplying to the customers. And as you know, inventories at the suppliers are coming down as well.

Speaker 5

Very helpful. If I could just follow-up real quickly on PM3, you guided to meaningful revs in fiscal 2024. 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 out kind of 3, 5 years? Thank you.

Speaker 2

Well, with respect to HBM3, we are very excited about this product. Micron has focused on bringing an industry leading product, an HBM3 product that is in early stages of sampling, and we expect To begin, production volume ramp of this product in early 2024 is a product that has Significantly higher performance, bandwidth and significantly lower power. In fact, as a product, it is close to a generational leap ahead of anything else that is in the market. We have received a strong endorsement for this product in the market, and we expect the volume ramp of this product for us to be lapped to be steep ramped and this will bring in, in our fiscal year 2024, strong revenue growth opportunity for us. So we are very excited about this standout product.

Speaker 2

It will be a significant growth driver for Micron. And everything that we have done here is, of course, built on our industry leading one beta technology and applying to it, of course, advanced packaging, differentiated packaging and TSV capability. So this is, we believe, going to be a standout product for us. And we expect we target

Operator

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

Speaker 6

Thanks a lot. I had 2. Mark, the first one is for you. I was wondering if you can sort of lay out what the fiscal Q4 guidance would have looked like net of the ban. I know you said that the impact from the ban gets worse actually in the fiscal first half.

Speaker 6

So Is it as simple as maybe fiscal Q4, you had said low double digit bit impact, but it sounds like it's probably not that big in fiscal Q4. So 5 or 4 rather, can you sort of handicap that for us and shape it for us?

Speaker 4

Yes. We had a small impact in 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.

Speaker 4

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 Q4 is contemplated in our guidance.

Speaker 6

Got it. Maybe I'll ask you in the follow-up. But my second question is for Sanjay. So Sanjay, I asked you this last call too. So, you alluded to the smartphone customers at least wanting to kind of get out in front of What they see maybe could be some tightness and maybe they're opportunistically trying to take advantage of pricing being so low.

Speaker 6

Can you just talk more broadly about What might change in your relationship with your customers coming out of this downturn? I mean, could we be headed toward a situation where maybe the data center customers have pushed you and your peers so far during the downturn that maybe we can talk about LTAs at some point. I know that this is ways away given kind of where we are today. But can you just talk about maybe over the past 3 months when I asked you last time how the tone of the discussion with the data center customers in particular has changed. Thanks.

Speaker 2

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 presentation, we work closely with our customers in those regards. And we have had close relationships with the customers.

Speaker 2

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 make 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 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.

Speaker 2

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, etcetera, Have all different considerations at the back end and these are the kind of things LTS really help us plan with our customers.

Operator

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

Speaker 7

Thanks for taking my question and congrats on the good results. Sanjay, the first question I wanted to ask you was you spoke about AI servers having 6 to 8 times more DRAM content I'm just kind of curious how to think about overall DRAM demand as AI grows, but probably cannibalizes some of your regular data center server DRAM content? And then I had a follow-up.

Speaker 2

So look, when we look at the overall DRAM demand, the 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.

Speaker 2

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 taking 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 2, 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 in examples such as superclusters, etcetera, but all of them are really Tending toward 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 6 to 8 tags that we have mentioned is the multiple of DRAM requirement in AI server versus standard server.

Speaker 2

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 100 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 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.

Speaker 7

Got it, got it. Very helpful, Sanjay. And then a follow-up for Mark. You said no inventory write down in the current quarter expected. And I meant if I remember right, Mark, you also mentioned in the past that inventory write down is tied to your view on pricing 3 quarters out.

Speaker 7

So is it fair to assume that you're expecting a pricing drop pretty much at this quarter? And If the CAC decision does get really worse that 15% to 25% of your sales gets impacted, is there any more risk of inventory write down or is that agnostic

Speaker 4

Yes. Our reported gross margin, our outlook, it's a function of many factors, including pricing. The inventory write downs, which do include our incorporate our forward view of pricing, The effects of utilization, which you heard today, we've increased our 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.

Speaker 4

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 2nd quarter As we reported $1,400,000,000 took another $400,000,000 this quarter. And with these write downs, we've pulled forward inventory costs lowered the carrying value of on hand inventories. Yes, as the slower cost inventory clears in the future quarters, We realized more income in those quarters than we would have otherwise without the charge. So as an example, Yes, we took this $400,000,000 of additional write downs in Q3 for inventories produced.

Speaker 4

And considering our latest views on volume mix, we also realized a benefit of near $300,000,000 from selling through the lower cost inventories impacted by the 2nd 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 Q3 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 $1,100,000,000 of underutilization impact in FY 23 associated with the front end, most of that will impact the P and L this year. Some of it will carry over to next year.

Speaker 4

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 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. Yes, 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 $1,400,000,000 write down. With a much lower inventory charge forecasted in the 3rd quarter, which happened, That margin improved about 15 points.

Speaker 4

And then also as mentioned last quarter, we said that 4th quarter would be better than 3rd quarter on a lower write down and hence we guided today 5 points better than the 3rd quarter. Again, these estimates are sensitive to pricing changes and but in our current view, we expect a gradual improvement Yes. Now if you take our non GAAP 3rd quarter gross margin of negative 16% And we were to strip out the write down effects in Q3, both the write down portion and the realized benefit. And also to normalize, you strip out the insurance settlement, which we had in the Q3. We would still be those two things Largely offset, so we'd be at still at about 16% negative gross margin.

Speaker 4

Yes, so again, over 100 net inventory effects, the 400,000,000 write down less than 300,000,000 realized benefit and then the roughly the same over 100 insurance settlement. So, and this is a function of the pricing environment, Which we I think properly captured in our guide. Now that adjusted Yes. 16% or that adjusted margin 16% is down clearly versus the adjusted Q2 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 2024.

Speaker 4

So this is a profile that's consistent with what we've discussed Before, those 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.

Speaker 7

Yes. Thanks a lot, Mark. Thank you.

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.

Speaker 3

Hi, good afternoon. Thanks for taking my question. I guess as a follow-up to that, Mark, on your gross margin guidance for the Q4, I know there are no inventory write Sounds good. Is it contemplating a step up in underutilization charges or period costs associated with underutilization charges And then as a follow-up, is the incremental 5% cut in utilization primarily a result of the CAC restrictions?

Speaker 4

It is not. It's more of an industry dynamic and our intent to get supply discipline in the market, supply needs to come As far as the effects of utilization, It is already incorporated in this guide. The period costs In the Q4 are about $200,000,000 and again, they're contemplated in the guidance.

Speaker 3

Perfect. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ambrishavasova from BMO Capital Markets. Your question please.

Speaker 8

Hi. Thank you very much, Mark. I want to come back to the gross margin. When you had given the guidance for this quarter, you had walked us through in detail and you had said that stripping out all the adjustments and the inventory write down, 3Q would be at 7.5%. Am I reading this right that now You stripped out to negative 16, right?

Speaker 8

So it's much worse than what you were thinking?

Speaker 4

No, I don't think it's much worse than what you'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.

Speaker 8

Got it. And then a follow-up either for you or for Sanjay. On the 15% round number, 15% of bit loss, share loss in China. How do you recoup that? Is that Based on the assumption that bit growth or bit supply will be constrained and so if the other 2 suppliers are able to meet the China demand, they'll leave some demand out here in other regions for

Operator

you to basically go after or is

Speaker 8

there a pricing element to that?

Operator

I'm just not very sure I understand how you get that.

Speaker 2

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 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.

Speaker 2

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.

Speaker 2

So while near term CSE decision is challenging, longer term, we will work with customers who are not impacted our global customers We're not impacted by CSE 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 It's 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 will certainly focus on Improving the profitability of our business from current levels as well. So we will, of course, keep profitability in mind.

Speaker 2

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

And our final question for today comes from the line of Tom O'Malley from Barclays. Your question please.

Speaker 9

Hey, guys. Thanks for taking my question. Recently, we've been picking up that there is a change in some of the A Series, where you're starting to see some HVM IIe use just given the fact that there's limited capacity of HVM III. I guess part 1 is, Are you seeing an ability to service that market today? And then the second part of the question is, you're saying that AI servers see about 6x to 8x DRAM content.

Speaker 9

I assume that contemplates some HBM, but you guys are talking about some AI tailwinds today, when you're really not servicing that market as much. So could you talk about What you're seeing ex HBM as, the multiplier effect on DRAM today, just so we can get a picture of How you guys are seeing the improvement in data center with AI today ex that product? That'd be really helpful. Thank you.

Speaker 2

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. It's shifting to HBM3. And Micron's HVM 3 plus product, which I called as a generational leap ahead of anything in the industry, It's going to position us well as we bring that into volume production during the course of our fiscal year 2024, Starting early part of calendar 2024, contributing to several $100,000,000 of revenue opportunity 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. 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.

Speaker 2

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 the D5 and LP DRAM products, we gave you some examples In our script as well, large amount of LP DRAM being used In industry leading high performance compute platforms, In fact, the 144 terabyte that we mentioned in DGX GH200, about 122 terabyte That is LPDRAM, and Micron is very well positioned with differentiated solution of our LPDRAM call. So I think it's important to understand that the AI server market is made up of HPM, it's made up of high density Our D9 modules includes it also is made up of DDDR5, LP5 and some element of graphics memory as well. So we do have a broad portfolio. And in 2024, with HPM and high density DRAM modules getting on production, I really believe we'll be extremely well positioned to capture the growing opportunity in AI.

Speaker 2

And 75% of DRAM on AI servers today is DDDR5. And as I presentation, as I'm sure you well know, we participate very well in D5. In fact, we led the industry

Speaker 9

Thank you, Sanjay, and appreciate you guys speaking

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Earnings Conference Call
Micron Technology Q3 2023
00:00 / 00:00