Q3 2019 Earnings Call
Over the last few months customer inventory improvements have progressed largely in line with our Ics expectations in most end markets.
This reinforces our confidence that demand for DRAM will return to healthy year over year growth in the second half of calendar 2019.
NAND bit demand is also increasing in most markets as the elasticity kicks in in response to price declines over the last year.
Even as customer inventory levels of DRAM and NAND improve across most end markets.
Producer inventory levels are elevated.
Although previously announced Capex Curtis will start to impact industry supply in the second half of the calendar year.
Our assessment is that further cuts in capex in bed supply will be required to return the industry to a healthy supply demand balance.
I will discuss our actions on this front shortly but first let me provide an overview of our fiscal third quarter results.
At our 2018 analyst day, we discussed our priorities related to technology cost competitiveness and high value solutions.
Solid execution on these strategies has now yielded over 2000 basis points of EBITDA margin improvement relative to our peers since 2016.
Unlike the last downturn during which microns relative profitability declined in this downturn our relative profitability has continued to improve.
Indeed, we are on track to deliver good cost declines in fiscal 2019.
We continue to increase the mix of unwind nanometer and are making excellent progress towards ramping ones. The next fiscal year.
In April we broke ground on our new clean room, and tightened Taiwan and earlier this month, we announced the opening of a new clean room in Hiroshima Japan.
These clean room expansions will enable future DRAM node transitions of our existing wafer capacity.
In NAND, we continue to ramp our 96 layer Threed NAND and are on track to achieve healthy caused declines in fiscal 2019.
We continue to make progress on our Onetwenty eight layer Threed, NAND, which uses replacement gate technology.
As we discussed on the last call, we expect a partial transition to this note with a full portfolio transition occurring on the second generation replacement Gate Nord.
In addition to these node transitions in DRAM and NAND, we're also improving our cost structure by increasing the percentage of products produced through captive backend packaging facilities.
These facilities now account for more than half of our total assembly requirements.
Our captive backend operations are tightly integrated with our front end systems, enabling greater product customization title quality control improved responsiveness to shifts in demand and lower costs.
Hi value solutions now account for over two thirds of NAND revenues.
We made further progress in strengthening our SSD portfolio with the launch of our 9300 data center, and we EMEA Ssds for cloud and enterprise markets.
We more than doubled revenue shipments of our new and we I mean client SSD two large PC Oems.
And more customer qualifications are in progress.
As a reminder, this new Nvme me drive is built with our own controller technology.
QL Cssd shipments increased approximately 75% sequentially driven by growth of our consumer Nvme Ssds.
Overall, the micron team continues to execute well on cost reductions and on high value solutions.
While we are operating in a difficult industry environment today, our progress is visible in our reported profitability and increases our confidence in our ability to drive long term shareholder value.
Now turning to highlights by end markets.
Our mobile business was impacted by us trade restrictions, which Dave and I will discuss later in the call.
Looking ahead innovations such as Fiveg, foldable phones, and advanced cameras will drive growth for our products.
Our portfolio of mobile DRAM products features best in class power consumption.
On low power DDR five we are leading the industry and recently started sampling the highest density die in the market.
We continue to make good progress on our managed NAND products as well and recently launched our second generation you Fs product with best in class in Deodorants.
Within the data center market cloud customers are turning the corner on inventories and more start approaching normal inventory levels.
Our cloud DRAM bit shipments grew sequentially in the fiscal third quarter exceeding our expectations and early trends suggest strong sequential growth for the fiscal fourth quarter.
Enterprise customer inventories are taking somewhat longer to normalize than we had previously expected.
We continue to sample and secure qualifications on 64 gigabyte Ddrfour server modules built with our one y nanometer DRAM.
In graphics, we saw robust sequential growth as customer inventories normalized.
We expanded our customer base, where our high performance GDR safe, which positions us well for strong growth in the second half of calendar 2019.
In the PC market DRAM bit shipments returned to growth as CPQ shortages started to improve.
Looking ahead, we expect strong sequential DRAM bit growth in our fiscal fourth quarter as laptop sales improve.
In automotive while global auto sales are slow content growth remains strong driven by innovations in Adas and infotainment systems.
Micron is well positioned to benefit from the growth opportunity in this market, given our leading market share deep customer relationships and high quality products.
We recently began ramping shipments with an industry, leading OEM for their most advanced autonomous system, which uses 16 gigabytes of our low power DRAM.
Before talking about the market outlook I want to provide some comments related to follow.
As you know effective May 16, the U.S. Commerce Department's bureau of industry and security or.
This added Ravi and 68 of its non us affiliates to the BDI as entity list.
To ensure compliance micron immediately suspended shipments to Harvey.
And began a review of micron products sold to our way to determine whether they are subject to the imposed restriction restrictions.
Through this review, we determined that we could lawfully resumed shipping a subset of current products.
Because they are not subject to export administration regulations and entity list restrictions.
We have started shipping some orders of those products to walk away in the last two weeks.
However, there is considerable ongoing uncertainties surrounding the evolving situation.
And we are unable to predict the volumes are time periods over which we will be able to ship products to walk away.
Micron will continue to comply with all government and legal requirements just as we do in all our operations globally.
Of course, we cannot predict whether additional government actions may further impact our ability to ship to walk away.
Now turning to the market outlook for DRAM.
As I mentioned earlier, we have seen early signs of bit demand recovery in most DRAM end markets.
Based on our assessment of customer inventory improvement, we anticipate robust demand growth for the industry in the second half of the calendar year compared to the weak demand in the first half.
Our view of calendar 2019 industry DRAM bit demand growth is in the mid teens with industry supply growing mid to high teens.
Despite the early signs of recovery in DRAM bit demand, the excess supply and resulting higher producer inventory levels have created a challenging pricing environment.
We expect that strengthening demand growth will begin to contribute to an improving trend in producer inventory later in calendar 2019.
Turning to our supply at Micron, our focus continues to be on taking prudent steps to help bring the DRAM market back to stabilization.
We are continuing the previously announced wafer start reductions of approximately 5%, which we which we expect will bring our DRAM bit supply growth for calendar 2019 close to market demand growth.
The overall NAND market remains oversupplied from the accelerated supply growth driven by the industry to transition from Twod NAND production to Threed NAND.
Our NAND industry bit demand growth expectations for calendar 2019 are unchanged at the mid 30% range.
We continue to target our bed shipments to be close to the industry demand growth rates.
Since our last earnings call, we have taken actions to further adjust wafer starts from the previously announced 5% reduction to not only approximately 10%, which will result in lower supply growth in the second half of the calendar year.
These reductions are the result of both capital optimizations.
To reuse more existing equipment for our 96 lead conversion.
As well as loading some of our legacy NAND capacity, which we announced previously.
While we still believe the NAND industry supply is growing above demand. This year. The market is showing signs of increased elasticities stemming from recent price declines.
We are optimistic that the overall NAND market will start to stabilize in the second half of calendar 2019.
With the higher levels of macro uncertainty and the relatively high levels of inventory on our balance sheet. We are taking decisive action to manage our DRAM and NAND bed production.
In addition to the wafer start reductions that we discussed we are also taking action on capex.
Earlier this year, we announced a reduction in fiscal 2019, capex forecast from $10.5 billion.
Plus or minus 5% at the start of the year.
To approximately $9 billion now.
For fiscal 2020, we plan for capex to be meaningfully lower than fiscal 2019.
While our Capex plans are still being finalized we seek to balance our manufacturing investments with our free cash flow objectives.
I will now turn it over to Dave to provide financial results of our fiscal third quarter and guidance for the fourth quarter.
Thanks Sanjay.
Microns fiscal third quarter results were within the guided revenue range and above the guided EPS range that we provided on our last call.
We also generated healthy levels of free cash flow and made further progress on our share repurchase program.
Total fiscal third quarter revenue of approximately $4.8 billion was at the midpoint of our guidance range and was down 39% on a year over year basis, and down 18% sequentially from the fiscal second quarter.
Both DRAM and NAND revenue were negatively impacted by restriction on sales to walk away without which we would have reached the high end of our revenue guidance.
DRAM revenue was approximately $3 billion, representing 64% of total revenue.
DRAM revenue declined 45% year over year, and 19% sequentially from the fiscal second quarter.
Compared to the prior quarter, the DRAM ASP decline approached 20%.
While bit shipments were roughly flat.
If not for the impact of walkaway pitch shipments in DRAM would have increased sequentially as we had guided on our last earnings call.
Net revenue was approximately $1.5 billion, representing 31% of total revenue.
And revenue declined 25% relative to fiscal third quarter 2018.
And declined 18% sequentially from the fiscal second quarter.
Overall NAND asps declined in the mid teens percent range, while shipment quantities declined in the mid single digit percent range compared to the prior quarter.
Adjusting for the waterway impact pitch shipments came in better than our expectation due to stronger component sales.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was $2.1 billion.
Down 48% year over year, and 30% from the prior quarter.
Lower pricing across major market segments continued to be the leading cause of lower revenue.
However, normalized customer inventory levels led to shipment volume growth in the fiscal third quarter, particularly in graphics and client.
Revenue for the mobile business unit was $1.2 billion down 33% year over year and down 27% from the fiscal second quarter due in part to lower shipments to walk away.
Lower pricing and DRAM volume drove the quarter over quarter decline.
Our managed NAND portfolio continued to show strength in the fiscal third quarter with bit shipments increasing by over 200% year over year.
The embedded business unit revenue of $700 million was down 22% from the prior year and down 12% from the fiscal second quarter.
Revenue was adversely impacted by broad macroeconomic weakness.
Weaker pricing and inventory adjustments in the consumer segment.
Automotive and industrial which represented almost 75% of VBU revenue showed strong margin resilience with gross margins down only 300 basis points from the last fiscal quarter.
And finally, the storage business unit third quarter revenue was $813 million down, 29% year over year and down 20% quarter over quarter.
The sequential decline was driven by competitive pricing and an unfavorable comparison on component volumes coming up a large onetime sale, we completed in the prior fiscal quarter.
The consolidated gross margin for the fiscal third quarter was 39% compared to 61% in the prior year and 50% in the fifth fiscal second quarter.
Lower pricing in both DRAM and NAND was the primary driver of the lower margin in the fiscal quarter.
Gross margins were also negatively impacted by approximately 200 basis points due to under utilization charges related to IMF tea.
US tariffs on imports from China were less than 30 basis point impact to gross margins as we have successfully mitigated approximately 90% of the impact from tariffs.
Fiscal third quarter NAND gross margins remained above 25%.
Operating expenses of $774 million were well within our guided range.
As we've said on prior calls our goal with Opex is to remain disciplined with respect to expense control, while continuing to invest in future products and technologies throughout the market cycle.
Operating expenses also benefited from the strong execution on qualification of our one Z nanometer mobile DRAM product ahead of our internal schedule.
We delivered solid profitability in the fiscal third quarter with operating income of $1.1 billion, representing 23% of revenue.
This margin is down 28 percentage points year over year, and down 13 percentage points from the fiscal second quarter.
non-GAAP taxes included $162 million of benefits in the fiscal third quarter.
Due to a favorable state lot state tax law change and a change in our annual tax rate from 10.5% to 9%.
non-GAAP earnings per share in the fiscal third quarter was one dollar and five cents down from $3.15 in the year ago quarter and down from one dollar and 71 cents in the prior quarter.
Fiscal third quarter non-GAAP EPS was 15 cents higher due to the $162 million of tax benefits.
Turning to cash flows and capital spending.
We generated $2.7 billion in cash from operations in the fiscal third quarter, representing 57% of revenues.
Capital spending net of third party contributions was approximately $2.2 billion down from $2.4 billion in the prior quarter.
We still expect fiscal 2019 capex at approximately $9 billion. However, we expect meaningfully lower capex in fiscal 2020.
In the fiscal third quarter, our adjusted free cash flow defined as cash flow from operations less net capex was approximately $500 million compared to $2.2 billion in the year ago quarter and $1 billion in the fiscal second quarter.
We bought back approximately $157 million of stock in the fiscal third quarter, representing 3.8 million shares.
For the fiscal year to date, we have returned $2.7 billion to shareholders in the form of share buybacks, which represents approximately 70% of our year to date free cash flow.
Combined with the redemptions of outstanding converts we've reduced outstanding share count by over 8% since fiscal third quarter 2018.
We will continue to prudently manage capital according to our philosophy of maintaining liquidity throughout the cycle.
Investing in capital assets to enable cost effective node transitions and backend cost competitiveness.
And returning over 50% of free cash flow to shareholders.
Inventory ended the quarter at $4.9 billion, increasing from $4.4 billion at the end of the fiscal second quarter.
The fiscal third quarter ended with 151 days of inventory outstanding were 143 days using our average inventory balance for the fiscal third quarter.
As we mentioned on the last call calendar 2020, NAND bit supply will be constrained as we make the transition to replacement gate.
To meet expected demand growth, we're carrying higher levels of NAND inventory in calendar 2019 and 2020.
We also projected carry higher than normal levels of DRAM inventory in calendar 2019, as industry is industry supply and demand work toward getting into balance.
Total cash ended the quarter at $7.9 billion down quarter over quarter, largely as a result of our $1.4 billion redemption of our series G convertible notes announced last quarter and completed in the fiscal third quarter.
Total liquidity exceeded $10 billion at quarter end, while we maintained a healthy balance sheet.
In the quarter, we announced that the close of the IMF tea joint venture acquisition will be October 30, Onest, which is during our fiscal first quarter of 2020.
We expect to pay approximately $1.4 billion for Intel share of IMC team.
A portion of the payment will also be used to repay member debt financing, which at the end of the fiscal third quarter was approximately $860 million.
Now turning to our financial outlook.
Both the DRAM and NAND markets remain oversupplied.
Having said that we are starting to see some of some signs of demand improvement.
As Sanjay mentioned, we expect strong growth in our DRAM bit shipments for the cloud graphics and PC markets in fiscal fourth quarter.
Followed by more normal bit growth in fiscal first quarter.
In NAND, while the industry is benefiting from elasticities kicking in our bid shipment growth in fiscal fourth quarter will be limited due to the ongoing transition of our SSD portfolio.
With that in mind.
Our non-GAAP guidance for the fiscal fourth quarter is as follows.
We expect revenue to be in the range of $4.5 billion, plus or minus $200 million.
Gross margin to be in the range of 29% plus or minus 150 basis points.
And operating expenses to be approximately $785 million plus or minus $25 million.
Based on a share count of approximately 1.13 billion fully diluted shares we expect EPS to be 45 cents plus or minus seven cents.
In closing, despite the industry and geopolitical challenges.
Micron continues to execute on our key initiatives and remains on strong financial footing.
We will continue to draw on our strong relationships with our customers and manage through this cycle with a focus on gross margins and free cash flow.
I'll now turn the call over to Sanjay for some concluding remarks.
Thank you Dave.
Clearly fiscal 2019 has been challenging for both micron and the industry.
While we continue to believe that the industry is structurally stronger the confluence of events that impacted this year was unprecedented.
Still we have fared better due to the tremendous progress we have made on improving our product costs advancing our technology and increasing the mix of high value solutions.
The recent industry financial results show that microns profitability and balance sheet are best in class.
Having said that we had not testing on our recent accomplishments and are continuing to raise the bar for dollar sales.
Our capex and expense controls reflect our focus on profitability and free cash flow.
With economic and trade challenges facing the industry the near term continues to be uncertain.
But looking beyond these challenges I am excited about microns future.
We are in the early innings of growth in cloud computing and the value of data in the new economy is going to drive secular growth in numerous memory and storage intensive applications.
AI Adonis vehicles, Fiveg and Aiotv will drive significant improvements in our lives and we look forward to bringing the value of our innovative market leading solutions to our customers.
In April we issued our fourth annual sustainability report, which details microns commitment to enhancing the world we live in through all of our products and business practices.
We achieved perfect scores on industry standard environmental and social audits, all fiber facilities in 2018 and 2019.
Our ongoing focus and improvements in sustainable practices is a competitive differentiator for both our customers and our employees and an important part of the transformation we are driving at micron.
I'm energized by the potential ahead of us and proud of the culture of innovation and execution that we are building.
We will now open for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the question queue. Please press the pound key again Thats star one on your Touchtone telephone to ask a question to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated again Thats star one on your Touchtone telephone.
Our first question comes from the line of C.J. Muse of Evercore. Your line is open.
Yeah. Good afternoon. Thank you for taking the question.
I guess first question I was hoping you could provide a little more granularity on wall, where you talked about the ability to sell subset of product.
You walk through I guess, you know where your allow where you're not.
They are I believe a 13% customer at least last.
Quarter fiscal year.
What kind of impact do you expect as we proceed in the coming quarters across both DRAM and NAND.
So as I said in my prepared remarks.
After the holiday was placed on entity list.
We began the view of fall product.
Against the export administration, the quiet regulations and through that analysis, we determined that certain of our products a subset of our products that weve previously shipping to have a good continue to ship because it is lawful it just compliant to those export regulations.
And.
Of course, it had impact as Dave noted in the holiday if you'd see it had an impact because you could not ship at that time any product to them.
Of.
Nearly $200 million.
And for the F. Q4, then would be impact to our revenue.
What I would say is that our revenue with fovista in F Q4 would be less than what it otherwise would have been if Bobby was not on the entity listing and of course as we look ahead beyond F Q4 .
If volume continues to be on the entity list.
Then in fiscal year 20, as well, we would have an impact.
Compared to what our revenue, but they would have been if they were not on the entity listing of course, you know we had a supplier to all customers in all end markets across the globe and.
Even though.
And our presence with several of those other customers is growing you know in terms of our penetration there in terms of our share there and we will continue to work on.
Ed just think those but we would not be able to make up in fiscal year 20. If this were to continue the fully shortfall and we all do we plan to make a part of it through other parts of the business.
That's very helpful and if I anticipate it affect both our DRAM as well as the NAND side of the business.
Great. Thank you.
And if I could follow up on Capex, you talked about a meaningful cut I guess is meaningful meaning scandal type territory.
And as part of that is more focused on DRAM NAND, both how should we think about the implications there. Thank you.
So with respect to Capex, we have said meaningful reduction.
In Capex from the fiscal year 2019 levels and we'll provide more details in the next call as we finalize our plans of course, our goal is to have.
Our long term considerations in mind with respect to technology and product cost capability, but most importantly to have our supply bit growth in line with our expectations of demand, but Lord and when we look at supply bit growth of course, we keep in mind. The inventory that we are getting from fiscal year 19 into fiscal year 20 for both DRAM as well as NAND, which will help us to apply some of the demand requirement in fiscal year 20, and enable us to reduce our capex requirements in fiscal year 20, and our Capex management of course applies to both NAND as well as DRAM.
Oh.
Thank you. Our next question comes from the line Mark Newman Bernstein.
Your question please.
[noise] Yeah, My I think it's on thinking about cool taking my question. The first question really photo norm on.
Walked away can you give a little bit more quantification on when and how much are the the 13% or so revenue.
You expect.
You will be able to continue to exports to two hallway.
And it is can you give us some guidance also for your.
Peak gross.
For this next quarter I don't think you had mentioned that yet.
On the earnings and then on the guidance if you can mention about youre.
Expectation for because of the following quarter.
I have a follow up question. Thanks.
So with respect to Bobby as I said before.
Our revenue expectation in fiscal Q4 is less than what it would have been without being on entity list beyond that we don't really get into specifics in terms of revenue et cetera on a customer by customer basis of course, our revenue expectation with wallaby is baked into the guidance revenue guidance that they've provided for FQ, four or 4.5 million billion plus or minus.
$200 million.
And your second question with respect to so on DRAM bit growth, we said it would be up meaningfully in the fourth quarter.
NAND will be more modest given here.
Ah environment.
Okay. Thanks, Thanks, very much state and Sanjay My final question is really taking a step back and looking at the industry.
You know clearly been quite challenging years, he shared with your supply spot I'm. Just looking forward. It's 220 20 with that said that pretty severe cuts you guys are making on utilization and the Capex and you know what you're way ahead similar.
Cuts from some of your competitors in Asia.
I'm just curious what you think so so next year I guess.
I guess it very much depends on.
The economic outlook, which is little unpredictable at the moment, but looking forward to 2020 do you not think that there could be a danger potential undersupply at some point next year I'm, just curious how you're thinking about that because to me at this level of.
Utilization in Capex I it seems like the inevitably there will be a period of under supply coming I, just a matter of time.
So as we have said you know the industry is in oversupply right now you know both in denim as well as in.
I meant and wireless demand.
Isn't teasing you know in the second half both for NAND and DRAM.
The oversupply situation.
Does persist and we have talked about in d. them in a challenging pricing environment and therefore, it's important that you know capex cuts are made as well as supply bit growth has managed to bring the supply bit growth in line with the demand growth as well as overtime to bring inventories in line with expectations as well. So we are not providing a fiscal year to any guidance at this point, but all of the actions that we're taking here are really targeted to.
Lets tour the industry demand and supply balance over the course of next few quarters.
Thanks.
Thank you. Our next question comes from the line of John Pitzer of Credit Suisse.
Your line is open guys. Thanks for let me ask the question Sanjay Congratulations on the solid execution given the industry conditions.
Just going back to the Capex question is I I would argue started at one of the biggest strategic initiatives. You've had has been to try to close the cost gap with your peers and clearly capex is a pretty important tools in which to do that you guys are sort of bucking. The trend this fiscal year with capex actually up slightly versus peers that have actually taken it down I'm just kind of curious.
To help us get some comfort level that despite the cuts you're talking about for the fiscal year 20, you are still very much on plan relative to closing those cost caps with your peers.
So you know certainly as you noted we have made tremendous improvement in our cost position and with respect to our peers and that reflects in our financial performance. As was noted in the prepared remarks, our margin improvement relative margin improvement from previous times has really improved by 2018 basis points and that's because of our execution on the cost front as well as on the execution on the high value solutions front and of course, we have more room to go with respect to.
Cost competitiveness as well as strengthening our high value solutions portfolio. So we are extremely focused on this and you know as we look at are driving our future opportunities. We of course are going be make our capex decisions, we make them based on cost competitiveness of our supply in the future and of course, keeping in mind, our free cash flow considerations and most important is that our total supply available to us coming from our inventory and coming from our supply bit growth should be.
Matching with our demand expectations going forward over the course of next few quarters and to continue to improve our inventory position, but on the cost side, we feel very good about the one why and won the progress on de them as well as we feel good about our 96 layer and you know overall, even with the Capex reductions that we are talking about we'll be in a good position with respect to cost both in DRAM and NAND.
Our next year of course, we have talked about in NAND. Our first generation replacement gate node will be a small note in the sense that it will be deployed across a small set of products and we will not have a.
Any significant cost benefit from that first generation replacement get node, but the second generation replacement go get node will give us a meaningful cost benefit compared to the last generation. So floating ignored. So we absolutely are on top of the game in terms of managing to our cost objectives I just add that.
Essentially already mentioned this drive to high value solutions another way we can.
You know improve our gross margins, but also we're.
The no transitions isn't the only way we affect the cost of the product and so.
One example is for example, the backend warfare acutely focused on the Bakken are bringing.
Some of that activity that we're doing.
That was being outsourced internally, we think we can improve our cost structure in that regard to so there are many ways, we can drive the cost to improve it.
And one thing I would add is in terms of our overall capex that you mentioned of course as you know that in fiscal year 19, we had a meaningful part of our capex around $2 billion that was actually tied to facilities you know clean room expansions to enable technology transitions and you know this facility spend you know may not be the same from once.
You know manufacturer to the other manufacturer, but for us that was a meaningful part two again as noted in our remarks before our to prepare us for technology transitions and not targeting any of their clean room space for any meaningful capacity.
But going forward technology transition.
Thanks, Jeff.
And David just on inventory, but it's clearly a key metric that investors are looking at I'm kind of curious how we should think about inventory levels exiting the fiscal fourth quarter and as he answered. The question can you clearly the inventory is somewhat a reflection of where we are in the cycle, but you've got sort of the added burden of wanting to build some NAND inventory as you make this transition replacement gate. So how do we how would inventories look if you sort of normalize for that and then lastly, as part of the question I apologize.
Utilization coming down Capex coming down is a good way of controlling inventory. So is the potential for write downs can you just talk about how you're thinking about the value of the inventory into sort of environment.
The three part question how John .
Okay. So yeah the.
The inventories obviously are elevated right now as you point out.
One of the big drivers of our increased inventory level is in NAND and that is.
You know kind of by design for US we are trying to build up some inventory going into 2020 fiscal 2020 for us.
Because we are going to make this transition a replacement gate for placement gate doesn't drive very much bit growth for us in the first.
Node in replacement gate.
And so we'll need to draw on our inventory in order to meet meet demand.
And that's a.
I don't know the exact number but thats a decent chunk of.
The.
The overage in terms of days.
The other aspect of the elevated level of inventory is in DRAM.
That was a little bit more a function of.
Pretty good bit growth in the first couple of.
First first couple of quarters of the calendar year of 2019.
And of course, we had had customers working down their inventories and so inventory is building up in our.
On our balance sheet.
We do expect now that we're in a place Sanjay mentioned that we're seeing inventories get to be in a good place in the.
In the cloud space in the graphic space in the PC space and so.
You know, we would still we would expect to start to see inventory start to come down now.
We think we'll be in a relatively good spot by the end of the calendar year may not be at a quote unquote optimal levels, but certainly in a in a healthier place.
And then you know kwik trip quickly after that I would expect DRAM to be in a good place.
From a write down perspective, we did write down about $40 million of inventory this quarter specific to walk away with.
Finished goods inventory.
With wild way that does not look like that's going to get sold so we did.
Reserve that.
Outside of that from a kind of an obsolescence perspective, we don't see really any risk.
With the inventory we're carrying we think it's very good inventory, it's got a good cost position.
You know Barry.
Good demand with that inventory so unlikely this have any issue as it relates to obsolescence. The other of course area you have to concern yourself with is done.
The any sort of lower cost or market issue with the inventory.
And you know I think you can.
Kind of guess by the quality of our gross margins that were not really in danger of having any write down associated with lower cost to market.
So you know outside of these kind of one off issues that we deal with from time to time like we did with wild way this quarter I don't really see a big issue with inventory in terms or write downs or reserves.
So before turning to the next question I, just want to make a small correction.
In the prepared comments I mentioned that Q, we'll see shipments.
What up approximately 75%.
I meant to say that QL CE bit shipments, what up 75% quarter over quarter.
So just wanted to make that connection and now I think we can move onto the next question.
Thank you. Our next question comes from the line of Ambrish.
Srivastava BMO capital.
Your question. Please hi, thank you very much Sanjay good to see the disciplined here on the Capex and also it does focus on free cash flow.
I was just a little confused I want to make sure I understood. This if we go and I. Appreciate that you don't want to talk about any specific customer, but if we go back to the reported last two quarters and if you triangulate that if you exclude while way that would mean that bit shipments would be at best up single digits. So the question is in your Capex thinking for fiscal pretty.
How are you handicapping the warming impact or are you expecting.
This to continue to be on that list and enhance your capex lower capex includes a.
A certain amount of capacity being taken off line because of that what's the right way to think about it and then I had a quick follow up.
So I think we'll be able to provide you more details related to fiscal year 20 capex.
Et cetera in our next.
Earnings call I would just point out you know that there is obviously considerable uncertainty here you know as you can all see from that other fluid situation with respect to lobby as well as with respect to you as China trade matters and of course, we are just staying focused on optimizing what we can control and really remaining nimble interactions you have seen that how over the course of last one year we have.
For fiscal year, 19, manage our capex down from tenant to have billion plus minus 5% to $9 billion. Now. So we continue to stay vigilant and we are making decisive actions with respect to a meaningful capex reductions in fiscal year, 20, but especially with respect to the further details we will be in a better position to provide you information at the next earnings call.
Okay I appreciate that Sanjay and then just a quick follow up and it's not a multipart day for you.
What's the.
Hey, or deals so trying to get that we should be thinking about as we go through the next couple of quarters. Thank you.
Yeah, so it got up there.
And we did kind of work it down this quarter I think we got it down to about 62 days.
I would say ideally it should be in the fifties.
You know there was a little bit of a mix challenge this quarter that kind of drove it up a bit.
And there is.
A couple of customers that have extended terms and are they kind of hit us at that point, but.
Ideally, we'd like to be somewhere in the mid Fiftys.
Okay. Thank you good luck.
Thank you. Our next question comes from Chris Danely of Citi. Your question. Please.
Hey, Thanks, guys.
You said Youve mitigated I think 90% of the tariffs so far.
Now we're.
Looking at another 300 billion in tariffs.
Can you estimate the approximate impact to your business if that goes through.
I would say that.
As we of course, we don't know for sure what the list looks like.
We have a general sense based on what we've seen.
Minimal impact.
From the incremental.
List.
Most of what affects US was contemplated in the first two.
When a one b and then the second list.
Got it and then for my follow up.
So Jay talked about Fiveg being a big driver.
With the Wawa issue is that is that impacting the development of Fiveg have you seen any any change and.
In.
You know like the ongoing development of the standards out there.
So I think it is too soon to tell and.
You know keep in mind that in certain countries. You know fiveg is already started to be deployed such as Korea.
There are of course.
Leading suppliers. Other then Harvey as well for Fiveg. So we remain to be seen you know how this deployment.
You know occurs over the course of next few quarters.
In particular here, but there is no doubt that you know fiveg will bring about you know greater applications for memory and storage not only in smartphones, but also in machine to machine on the IOTV front and all of this will drive greater demand for memory and storage.
At the end, we remain absolutely well prepared of course in a flexible fashion to meet the growing demand requirements for the business that Fiveg. We think will provide over the course of next many years, but near term in terms of exactly what happens with respect to Bobby aspects I think really it is too soon to though.
Okay. Thanks, a lot guys.
Thank you. Our next question comes from Harlan Sur JP Morgan. Please go ahead.
Good afternoon. Thanks for taking my question I'm in DRAM, given the transition to one lie in early one Z move can you guys just help us understand qualitatively your cost reduction profile as you move to the second half of this calendar year, and maybe compare that versus the cost downs in the first half of this year.
With respect to the cost declines of course.
You know, we are continuing to execute well with respect to our.
You know nor to transitions as well as continuing to drive.
Cost declines or the one blind ones. The nodes that you talked about and we are on plan in terms of ramping up these nodes as well.
And as I said before you know, we don't break out the cost reductions on first half versus second half of course, our expectations of cost reductions are baked into for a few for the gross margin guidance as well as of course, you know that takes into account our price decline assumptions as well for FQ. Four so all of that is really baked into it we don't break it down but keep in mind that as the new technology nodes advance the cost reduction coming from new technology nodes is it less and less compared to the prior nodes.
Just because as we have explained several times before they naturally give you given the.
Challenges of scaling a less part of a four bedroom capability and less cost reduction capability.
Yeah. Thanks for the insights there and then back in April the team announced its.
9300 series Envy I mean this is your new cloud and enterprise. This is Steve family. I think you guys have had solid momentum in cloud and enterprise with Thier SATA family and that's helped to sustain a better margin profile for the NAND business. So what's the design win momentum been like on the 9300 series and when do you anticipate your cloud customers to start ramping these new nviant need products. Thank you.
So as we have discussed in the past that we would be introducing over the course of our fiscal year 2019 actually during calendar year 2019 hour and via me products and we started that first with consumer and via me and later with our OEM Nvme me that we talked about today and now also for a cloud and enterprise applications and Jimmy drives and these will you know take some period of time, where you know over the course of.
Next a few months in terms of getting qualified by customers in terms of getting traction with customers and that's why we had mentioned that you know 2019 will basically be a year of transition from for us from sat out to envy me I just want to remind you that you know a couple of years ago Micron did not actually have investments in Nvme me product development.
We did very well and are continuing to do very well in fact as you noted.
And we began to significantly increase our investments in LPMI product development couple of years ago and it takes a while to have these products in the marketplace. So in 2020 as our nvme solutions get adopted by our customers and as we them those into production.
I do.
We expect to be gaining share event Nvme me.
All throughout the 2020 timeframe.
Thanks Sanjay.
Thank you. Our next question comes from the line of Timothy Arcuri.
Oh, Yes your question please.
[noise].
That's been asked a couple times.
And I'm, just trying to figure out how lower Capex, you know you're going to cut capex by a couple of billion and you're certainly cutting wafer starts quite a bit.
How that doesn't ultimately have some negative impact on your costs I think I think you've been costing down in DRAM, maybe low to mid teens and the expectation was that you'd be down somewhere that you know 2020 would be kind of another good year for DRAM cost downs and you've been down kind of like mid twentys in NAND. So yet it sounds like you're saying that it does not having much of an effect on your cost. So I'm just trying to fit those two things. Thank you.
No I'm, not saying that we'll not have effect on cost what I'm, saying is that we will be in good position with cost because our technologies underlying technologies give us a good cost reduction capabilities from one node to the next node overall from a cost point of view, we'll be in good position and you know Fernando just remind you that you know our Cmos are under that age technology gives us the smallest die size in the industry and that has.
Meaningful implications with respect to the cost competitiveness that we have so overall.
We feel good about the technology and the production mix that we will be driving.
You know through the remainder of fiscal year 19, as well as through fiscal year 2020 in terms of meeting our demand expectations as well as remaining cost competitive.
Thanks for that and then I guess just related to that maybe Dave.
Can you maybe break down capex sort of how much is building versus equipment. It sounds like theres roughly $2 billion that was.
Buildings. This year in fiscal 19 is the cut next year going to be almost all in infrastructure. So that Wi Fi is kind of like flat to down to mid year over year is that kind of how to think about it. Thanks.
Yeah, so getting back to their point 18, just to be clear.
Let's now he said it was about $2 billion was kind of construction related spend.
The rest is.
Front end.
And back end. So there is some and some miscellaneous capital spend for the R&D group and so forth. So there's more to it than even that I'll be honest with you. We have not you kind of completely finalize capex budget for next year, we have a pretty good sense of Directionally, where it's going.
But you know all the pieces, specifically, we're not quite there yet and so.
We'd like to do is wait and give you more granularity around that in the next quarter's call.
Okay, but I would anticipate that both areas would have some reduction to them.
Okay awesome. Thanks.
Your next question comes from Blayne Curtis of Barclays. Your line is open.
Hey, guys. Thanks for taking my question sort of follow up on the wall I point, just want to make sure I understood. What you are saying are you able to ship because the IP resides in another country.
Just trying to understand.
How exactly are able to continue to ship and then just kind of curious as you look out.
Sure there's going be some components that go into these phones.
From other vendors that don't have.
An ability to ship some kind of just curious your thoughts on kind of the downstream impacts and whether you've encapsulated all that.
So with respect to what we are able to ship to all of it as I said before.
That.
What we are able to ship is what is not under the export administration.
Regulations.
And that's what we are able to ship and actually exported acquisition regulations have various complex aspects and cancellations you know several other criteria that you have to go through if you're interested in that you can certainly go to the BLS site and look for those and we assess salad products worsens those and these cancellations are not just limited to any one or two aspects such as what you mentioned I mean, they have several aspects and we assess our products that we can ship.
To flavio versus those and have made a determination of shipments and we as we said we began those shipments in last two weeks and with respect to your question around.
The other components et cetera of course, you know this is a.
Company by company decision and you know well and each company has to evaluate its own situation and obviously you know Bobby has to look at its own supply chain. So with respect to the products that we can ship to them we work.
Closely with them to understand what is their latest demand on those products and therefore, the that is what is baked into our Q4 guidance.
What I would like to point out here that at the end of the day since you asked the question about.
Mobile phones.
The smartphone demand overall from consumers point of view is really going to be the same I mean consumers are going to be buying the phones that they are going to buy you know based on the features the new models all of that with the board that maybe some share shift that may be occurring between the various suppliers of smartphones.
And as you know we are very engaged with customers.
Across the smartphone ecosystem as a supplier to them of course.
We have already was our number one customer we continue to engage with.
Other customers.
As well and we will we have had growing presence with those other customers and we'll continue to look for opportunities to best optimize our business, while always of course, continuing to comply with us laws and regulations and for that matter, we always comply with laws and regulations in all countries that we operate in.
Thanks, and then I just want to actually on the card is and obviously an important segment and you did have some encouraging comments just kind of curious on that pace of recovery maybe versus what you had thought a quarter ago, just kind of the health of the channel and the pace of recovery there. Thanks.
Peace of recovery in patent data or for cloud and data center.
I mean, as we said I think cloud customers as well as several other customers had operated with high levels of inventory in the.
Starting late last year and through the course of first half of this year those inventory levels have been largely vote to normal levels, except for in enterprise as we noted in our prepared remarks, and we look forward to robust growth in fiscal fourth quarter in the area of.
Cloud and.
Yes of course, continuing to broaden our product portfolio as well with solutions, such as Nvme solutions and that will.
Bring us bigger opportunities in the future as well.
Yes.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may disconnect. Your lines at this time.
Yeah.