Q2 2020 Earnings Call - Financial Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to Micron technologies fiscal second quarter 2020 financial conference call at this time.
I am all participants are any listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that todays conference maybe recorded should require any further assistance. Please press star zero I would now like to hand, the conference over to your hosts.
Head of Investor Relations at Micron technologies for Han Ahmad Sir. Please go ahead.
Thank you and welcome to Micron technologies fiscal second quarter Twentytwenty Financial conference call.
On the call with me today, our son, Jim Hotel, President and CEO, and Dave is though chief financial Officer.
Today's call will be approximately 60 minutes and Lynn.
This call, including the audio and slide is also being webcast from our Investor Relations website at our Investor Dot Micron dotcom.
In addition, our website can do earnings press release, and the prepared remarks pilot shocked by local.
Today's discussion of financial results will be presented on a non-GAAP financial basis, unless otherwise specified a reconciliation of GAAP to non-GAAP financial measures can be found on our website.
As a reminder, although cast replay will be available on our website later today.
We encourage you to monitor or web site at my trucking dot com throughout the quarter for the most current information out there on the company, including information on diabetes financial conferences that we will be it in.
You can follow us on croteau at Micron.
As a reminder, d'amato's, we'll be discussing today include forward looking statements.
These forward looking statements that subject to risks and uncertainty that can cause actual results to differ materially from the statements made today.
We refer you to the documents filed with the FCC.
Specifically, our most recent form 10-K, <unk> and thank you for a discussion of risks that may affect our featured as though.
Although we believe that expectations reflected in the forward looking statements at reasonable we cannot guarantee feature to those levels of activity performance or achievements.
We are under no duty to update any of the forward looking statements. After todays date to conform these statements to actual results.
I'll now turn the call or what do Sanjay.
Thank you for on good afternoon, I Hope all of you and your families that save these are unprecedented times and I'm, calling from home today.
Microns fiscal second quarter, we delivered strong results, including revenue at the high end of our guided range, even as the covered 19 prices began to unfold halfway through over the quarter.
We have now achieved positive free cash flow for 13 consecutive quarters.
This performance represents a marked improvement from historical cycles and as evidence of this chance of the new micron.
The emergence of liquid 19 pandemic has created both operational challenges and macroeconomic concerns.
Micron has more than 37000 team members in 18 countries around the world.
Since the early signs of outbreak in China, we have taken proactive measures to safeguard our employees.
We had possible micron employees are working from home and we have suspended all local and international business traveler globally.
We implemented health screenings at all micron locations.
You bet among the first in the industry to implement physical separation protocols at all our manufacturing sites globally to mitigate the risk of community spread that routines and their teams that operate on older need schedules.
We have been declining sales degradation and says quarantine measures as this crisis as Fred nearby team members contractors and that immediate families observe 14 days of work from home after any added or see travel.
As of yesterday, we have two employees, who have tested positive for the novel Gonna lighters and receiving appropriate medical attention.
And the two sites, where do you have confirmed cases, we have used to contact racing to quarantine individuals who would in close contact with either infected team member.
We have also implemented more restrictive controls of onsite access social distance thing and service protocols.
As a result of engine preventative measures in place these events have not impacted other manufacturing operations thus far.
We've also taken measures to protect our raw material supply and increase our supply chain flexibility.
First we have been in close ongoing communication with our suppliers to ensure continuity and identify supply gap.
Second we have increased Albert on hand inventory of raw materials and have begun to store mode of that supply on our sites to minimize the impact off any logistics delays.
Third we have increased our focus on multi sourcing of parts to reduce supplier dependence risk.
And fourth we have added assembly and test capacity at both our captive and contract manufacturing sites to provide you didnt manufacturing capability in multiple regions.
Escalate 19 spreads we are complying with all government orders at our global sites.
These orders May result, in a temporary or prolong shutdown of our sites, which could impact our shipments this quarter.
For example on March 16, the Malaysian government issued a restriction of movement order, resulting in the closure of borders and most businesses in Malaysia.
Subsequently, the Malaysian government edit semiconductors to the list of essential services, and we've been able to resume operations.
I would assembly and test facilities in water and Penang, primarily used for packaging high value NAND, but briefly shutdown and have since been able to return to production on a very limited basis in compliance with local regulations.
We are using our global supply chain network and increased flexibility to try and mitigate this prediction impact.
And we are working to keep our commitments to our customers.
Turning now to covert nineteens effect on demand.
Covered 19 is significantly impacting China's economic growth and the calendar first quarter reflected in the sharp decline of smartphone and automobile unit sales.
We could sell through of consumer electronics, and our customers factory shutdowns in China, but headwinds for us late in our fiscal second quarter.
In China, lower consumer demand was offset by stronger data center demand due to increase gaming ecommerce and remote work activity.
Looking to the third quarter as these trends also take shape worldwide datacenter demand in all regions looks strong and is leading to supply shortages.
In addition, we are seeing that essendant season demand for notebooks used in the commercial and educational segments to support work from home and virtual learning initiative occurring in many parts of the word.
It also encouraged to see manufacturers in China increasingly turning to full production.
And we have recently started to see China smartphone manufacturing volumes recover.
Nevertheless, as the world deals with outbreak of covered 19.
We expect that overall demand for smartphones consumer electronics and automobiles will be below our pride expectations for the second half of our fiscal Twentytwenty.
Once the U.S. and other major economies have demonstrated containment of the lightest this spread we expect a rebound and economic activity.
Much depends on potential government stimulus and the rate pace and effectiveness of containment efforts.
We are modeling and improvement in their trajectory of economic activity later into the second half of calendar Twentytwenty <unk>.
With a further rebound in economic momentum into 2021.
This is a very fluid situation and we will learn more about the vitesse, it's spread and its economic impact over the next few weeks and months.
Anticipating changes to our customer demand, we have been moving supply from smartphone to service. This trend in data center markets for both DRAM modules as well as ssds.
Just like we have increased our raw materials inventory in these uncertain times.
It is possible that 13 customers are similarly, increasing their inventory of DRAM and NAND products.
People manage our business it prudent and proactive action and continue to work closely with customers to understand their latest demand outlook.
We are evaluating other production levels and Capex plans for calendar Twentytwenty and we'll adjust to the most recent demand requirements.
Once emerged from this little visibility environment that is impacted by covert 19.
We expect the industry to resume its long term growth trajectory, but that didn't DRAM demand growth CAGR in the mid to high teens and NAND in that 30% range.
For both DRAM and NAND, we expect our multi year supply growth CAGR to be in line with the industry's demand growth CAGR.
Focusing on Twentytwenty, we returned our DRAM operations to full utilization at the beginning of the calendar year and our NAND operations continue to done with reduced wafer starts as we deploy capital efficiently through our conversion to replacement gate.
Why do we returned our DRAM utilization to full production, we remain flexible to adjusting these levels, depending on the near term demand environment.
No transitions and industry supply growth in calendar twentytwenty could be impacted by disruptions to equipment companies operations, including travel restrictions hindering field service and engineering support.
Recently somebody could paint companies have also indicated delays and equipment deliveries due to the impact of various government actions to combat covert 19.
The situation that Corona Vitesse is rapidly evolving and deceptions could be much larger then we can see today.
However, our continued focus on innovation and execution combined with our is rock solid balance sheet puts us in an excellent position to navigate this period of uncertainty and capitalize on the long term opportunities driving our industry once conditions eventually normalize.
Stepping away from the covert 19 discussion I want to spend a few minutes talking about the tremendous progress we have made on our technology and products.
This progress is contributing to the underlying strength of the new Micron and this is a source of excitement for us as we look to the future.
The new Micron is undergoing a dramatic transformation to combine product leadership, it technology manufacturing and supply chain excellence.
Our objective is to have leading process technology. So that we can deliver differentiated products to our customers and maintain a competitive cost structure.
We're making good progress on this front in both DRAM and NAND.
Indeed them beyond the first to introduce ones Lee in volume production and expect over half of our bed production to be on one by and ones the by the summer of Twentytwenty.
We are managing their construction schedule of our new dive on clean room expansion carefully and currently remain on target for first output in calendar 2021.
In the fiscal second quarter, we began sampling ones. He based DDR five modules and not on track to introduce high bandwidth memory in calendar Twentytwenty.
We're also making good progress in our one alpha node.
In NAND, we made significant progress on our replacement gate or the Archie transition and expect to begin volume production in our current quarter that revenue shipments to follow in our fiscal fourth quarter.
We expect replacement gates production to be a meaningful portion of our total land supply by the end of this calendar year.
Micron continues to lead on key well see NAND, which lowers cost for their says these and helps us target market segments that are currently served by hdds.
Currency SSD bet shipments rose by 60% sequentially in our fiscal second quarter with a meaningful portion of our consumer that says these now shipping with our key we'll see technology.
We expect you will see to continue growing in the second half of the fiscal year as market adoption increases.
In the fiscal second quarter, we made significant progress on increasing the mix of high value NAND beds to over 70% of total land beds and we remain on track to drive this figure to around 80% in fiscal 2021.
Despite normal seasonal weakness and covered 19 mobile emcp products had record record revenue in the quarter and showed strong sequential growth.
SSD revenue also grew approximately 20% sequentially led by greater than 50% growth in data Center Ssds.
The resolution of the Assembly and test constraints, we experienced in the fiscal first quarter combined with market share gains drove strong growth in these product lines.
This mix improvement increases our profitability and did you see the volatility in other margins.
Now, let's turn to Threed Cross point.
As the only company in the world with a portfolio of DRAM NAND and Threed Cross point technologies Micron is uniquely positioned in the marketplace.
We are encouraged by the customer reception of our first CD crosspoint product.
The X 100.
Which is the fastest storage device in the world.
It does a great starts to our portfolio of differentiated Threed Cross point products built in collaboration with our customers.
As we mature this X 100 solution, we look forward to engaging a broader set of customers this year and delivering the value of Threed cross point to the datacenter market.
Early in March we entered into a new TD crosspoint via for sale agreement with Intel that replaces previous agreements.
Intel has been an important partner over the years and this new agreement ensures the continuation of our tools relationship.
Now turning to highlights I products end markets.
In Ssds, we had record consumer SSD revenue assisted by growth of our QL C N via me consumer Ssds.
We expect strong sequential bed growth in our N.B. I mean product portfolio in fiscal third quarter as we continue their transition from sater to EMEA me.
In Santa we achieved several customer qualifications for our newest 96 layers setup based data center that says D.
In the fiscal second quarter, we became the first company to deliver the LP five mobile DRAM products to customers, including she army, which is using our LP five and its fiveg capable me 10 smartphones in eight and 12 gigabyte configurations.
More recently, we have begun sampling the world's first LP five DRAM based you Fs emcps.
These L.P. five de them products will enable longer smartphone battery life and high performance image processing.
They are great examples of a whole micron is innovating for other customers to enhance the end user experience.
Get encourage that LP five and you Fs [laughter] will become even more important as fiveg adoption accelerates reigniting smartphone unit sales and driving content growth.
In just two short years, you have gone from trailing the competition in our mobile product portfolio to leading the industry with innovative first of all kind products consistent with our new micron strategy.
In the datacenter market, we benefited from strong demand for our products from key cloud and enterprise customers driven in part by ongoing strength and cloud markets increased yourself online properties, such as E commerce and the surgeon remote works requirements due to covert 19 containment measures.
In the graphics market DDR safe bet shipments increased more than 40% quarter over quarter, and we anticipate strong growth with the launch of new gaming consoles that are expected to features 16, gigabyte, Oh Gee de de our six.
These new consoles also deploy ssds in place of hard drives for the first time.
And the PC market DRAM bit shipments and revenue declined sequentially driven by slower seasonal demand and continued CPQ shortages.
Our client SSD sales also declined sequentially.
In the automotive market, we delivered record DRAM and NAND revenue despite soft global automobile unit sales as content growth remained strong in this market.
Micron continues to lead the auto market, but the industry's highest quality products.
Poverty efficiencies increasingly important and auto market, creating and unfortunately for micron to leverage hours trends and low poverty them.
S.P.D. them now makes up approximately half of our auto dealer EMS revenue.
In the industrial market, we had record bet shipments for both DRAM and NAND.
In the longer term, we expect secular growth in the industry loyalty market as fiveg rolls out and increases the importance of AI machine learning and compute at the edge.
I'll now turn it over to Dave to provide our financial results and guidance.
Thanks Sanjay.
We executed well in the fiscal second quarter and our reported financial results largely came in at the high end up our guidance ranges, despite the uncertainty and impacts related to cover the 19th.
Prior to the Identiv covert 19.
Outlined our expectations that at Q2 with Mark the low point of our financial performance in the cycle.
And our business trajectory has been consistent with those expectations.
Well, we still expect improvements in our financial results.
These expectations now need to reflect the evolving impacts of cover 90.
As Sanjay said the situation remains fluid.
We continue to assess our plan and make real time changes to adapt and optimize their operation.
Total at Q2 revenue was approximately $4.8 billion. The high end of the guidance, we provided for the quarter.
Revenue was down 7% sequentially and down 18% year over year.
Our Q2, DRAM revenue was $3.1 billion, representing 64% of total revenue.
DRAM revenue declined 11% sequentially and 26% year on year.
But shipments were down by approximately 10% sequentially and up more than 20% on a year on year basis.
Yes piece were flat sequentially.
That's key to NAND revenue was approximately $1.5 billion worth 32% of total revenue.
Revenue increased 6% sequentially and was up 9% year on year.
But shipments declined in the low single digit percentage range sequentially and increased approximately 20% year on year.
Asps increased in the upper single digit percentage range sequentially.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was approximately $2 billion down approximately 1% sequentially and down 17% year over year.
We have now started to include all Threed Cross point revenue.
Andy you reporting as they use cases for Threed Cross point technology more closely aligned with memory expansion and this business is being managed by CNB you.
Excluding Threed cross point.
Dnbi revenue would have been down 7% sequentially.
Not really driven by weaker sales in the PC market.
Revenue for the mobile business unit was $1.3 billion down 14% sequentially and down 22% you every year.
The sequential decline was primarily driven by seasonality in certain products as well as our decision to walk away from some business due to our concerns regarding pricing.
Revenue for the storage business unit now Q2 was $870 million down 10% from that Q1 down 15% year over year.
Without Threed Cross point SP revenue was up 9% sequentially.
Operating profit margins breast Bu improved sharply in the quarter, we're at approximately breakeven levels.
And finally revenue for the embedded business unit was $696 million down 5% sequentially.
Around 13% year over year.
The consolidated gross margin per at Q2 was 29.1%.
Exceeding the high end of the guidance range.
The quarter over quarter margin improvement was driven by portfolio mix improvements and NAND pricing and approximately $50 million that benefit came from the NAND Depreciable life change we made in the prior quarter.
The impact of under utilization at our Lehigh Fab was approximately $142 million or 295 basis points into Q2.
We expect under utilization to be approximately $160 million in FQ three.
We're continuing our efforts to reduce spending in our the I pad, which we expect will begin to materialize in fiscal 2021.
Operating expenses were $856 million nephew too.
Given the increased uncertainty we have taken additional steps to control our opex.
These actions include breathing or near term hiring cutting back significantly on discretionary spending.
As a result, we expect opex to decline sequentially in F Q3.
For modeling purposes, or after Q4 will be a 14 week quarter.
As a result, we expect an uptick in operating expenses for Q4 that is consistent with the extra week in the quarter.
Q2, operating income was $542 million, representing 11% of revenue.
Operating margin was nearly flat compared to the prior quarter.
Net interest expense was $6 million.
Compared to $7 million of net interest income in the prior quarter.
Since the Federal Reserve has cut short term interest rates, we anticipate lower interest income on our cash balance for Q3.
With increased debt from the drawdown of our revolver, we expect net interest expense to be approximately $35 million in Q3, and it will likely be modestly higher in FQ four with a full quarter impact of the lower interest income.
Our Q2 effective tax rate was 3.2%.
For the remainder if I've I've asked why 20, we expect our tax rate to be approximately 5%.
We expect our long term tax rate to be in the high single digit to low double digit range.
Non-GAAP earnings per share in FQ, two were 45 cents.
Down modestly from 48 cents in FQ one.
And $1.71 cents in the year ago corridor.
Turning to cash flows and capital spending we generated $2 billion in cash from operations that our Q2, representing 42% of revenue.
During the quarter.
Capital spending was approximately $1.9 billion up slightly quarter over quarter.
We're continuing to protect Applewhite 20, capex in the range of $7 billion to $8 billion, including some increases for assembly and test flexibility that Sanjay mentioned.
Free cash flow in the quarter was $63 million compared to $86 million in the prior quarter.
This marks the 13th consecutive quarter of positive free cash flow.
Our ability to generate cash consistently through the cycle is largely the result of the structural improvements made to microns profitability.
Which has led to more than $1.5 billion of operating cash flow improvement.
More than 25 percentage points of operating cash flow improvement compared to the top quarter of the prior cycle.
We repurchased approximately 785000 shares for $44 million into Q2.
In the first half of fiscal 2020, we've returned $94 million of capital through repurchases, representing approximately 65% of our free cash flow.
Ending FQ two inventory was $5.2 billion were 134 days.
The increase was expected and largely due to the seasonally weaker demand experienced not you to combined with our strategy a holding more NAND inventory as we approach our transition to replacement gate later in the calendar year.
We have also increased our raw material levels as a precaution given increased uncertainty in the supply chain with these materials.
As we had outlined on our prior earnings call. We continue to walk away from unfavorably price business, which also added to our near term inventory levels.
We ended the quarter with total cash of $8.1 billion in total liquidity of approximately $10.6 billion.
At Q2, ending total debt was $5.4 billion.
To preserve ready access to our liquidity in a period of macroeconomic uncertainty.
I believe this quarter, we grew $2.5 billion from our revolving credit facility.
Now turning to our outlook.
Based on our conversations with our customers the demand for our products remained strong and the pricing trends are favorable.
However, it is important to note that we are lagging indicator relative to end demand and macro projections have significantly weakened in the near term.
It is also currently unclear the extent to which inventory builds related to Kobe supply concerns might be masking weakness in demand.
In addition, we also faced the continued risk of production and logistic disruptions due to government actions labor and material shortages in the travel and border restrictions.
Given these unusual uncertainties our guidance ranges are wider than usual.
However, he's wider range is do not reflect the magnitude of all the rest and results can vary significantly from these ranges.
Our guidance ranges also include expenses for covert 19 mitigation efforts.
With all these factors in mind, our non-GAAP guidance for Q3 is as follows.
We expect revenue to be in the range of $4.6 billion to $5.2 billion.
Gross margin to be in the range of 31% plus or minus 150 basis points.
And operating expenses to be approximately $825 million plus or minus $25 million.
Finally.
Based on a share count of approximately 1.14 billion fully diluted shares we expect E. P. S. P 55 cents plus or minus 15 cents.
In closing notwithstanding the near term uncertainty, we are pleased with microns financial execution, including the cyclical downturn.
Q2 revenue was approximately 65% higher and gross margins 11 percentage points higher than in the prior trial, which occurred in Q3 2016.
This revenue growth far outpaced the growth of the overall semiconductor industry in this period.
As we assess our cross cycle performance from the last trough to this trough.
We have delivered average it turns as follows.
Gross margins of more than 40%.
EBITDA margins of 50%.
Capex to revenue in the Thirtys and return on invested capital exceeding 20%.
Well the near term business environment is uncertain, we believe that long term demand trends for micron remain robust.
Our focus on execution, our strong product portfolio and our solid balance sheet sort of micron isn't the best position to capitalize on the secular trends driving our business.
I'll now turn the call over to Sanjay for closing remarks.
Thank you, Dave I wanted to close by thanking all that extra ordinary micron team around the globe.
These recent weeks have plays unforeseen challenges on businesses, but more importantly on people and families.
Excellent team has responded very professionalism and care during this period and our team members of the reason, we can execute our business plan and delivered the strongest of we have reported today.
Do I says during this period, we had offering U.S. team members, earning less than $100000, buddier, especially onetime payment of $1000.
These figures out adjusted for market rates worldwide, and 68% off on a global team is eligible.
In addition, we had establishing an emergency really fun for employees facing financial hardship.
We're also focused on insisting that communities in which we operate through this difficult time.
As part of that effort, we are contributing an additional $10 million through the Micron Foundation to address the impact of covered 19 on top of what do you have already donated in China, Italy and the U.S.
We're also working with local officials to make space and I would have facilities available if neither folded in emergency services [laughter] as well as providing support to our supply chain operations to helps source needed screening and protective equipment.
Finally, Viet accelerating our payment terms to our small business vendors to help at their liquidity.
I've said, many times that the new micron is stronger than ever and we are showing that chance to today.
Micron is leveraging the power to quote exposed to used to drive leadership in technology products and manufacturing delivering differentiated solutions that initial <unk> for end customers around the world.
Well I linear time environment creates uncertainty for all of us in our daily life that long term fundamentals self all it industry are strengthening and unfortunately that expanding.
But these are fortunate ease in front of as people continue to execute bit tenacity and resilience as we make demonstrative will progress towards our division.
We will now open for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Did you. Please restrict yourself to one question then re queue.
Our first question comes from the line I'm, Joe Moore of Morgan Stanley. Your line is open.
Great. Thank you they never paired remark in your prepared remarks, you talked about inventory accumulation.
Potentially masking weakness that customers.
What where we might you have then anxiety it seems like in countries <unk> conditions are pretty strong and your customers don't seem to have a lot at least NPAC inventory. So when you look you know as that stat precautionary Mark on your side are there that's anything you're seeing it creates anxiety.
Well, we do you let me.
Oh, sorry.
Yes sure.
I'm sorry, I was just wanted to let me how does that first and then I will definitely have David expand on that so you know if there's an environment, where they can be supply shortages and of course underlying demand trends in the markets. We are participating continued to be strong there can be supply shortages you know given the.
Fluid situation there related to this fair enough that went up by the invidious well continue you know the need then base is different and ultimately you nicely depending upon the rules and regulations that different governments may impose that can potentially impact like its supply in the industry. So just like we are estimating gum and mint.
Really I would tell to make sure that we don't have supplies assumption. It has led to meet the thing that our customers can also be building some inventory to make sure that is supply chain in an under control. So I think this is the bar that you know the just mindful, though although and you look at.
Barthelme only economy and study from home the economy for students you know that if there's any driving they demand you know in the enterprise PC side, then certainly play thing you know.
[laughter] quite a bit of constraint.
Ends tests on day infrastructure, so the cloud infrastructure, the enterprise and stuff. So definitely is driving increased demand as well so in that backed up I think you know you're just.
Being mindful in terms of making those common but having that Dave a further elaborate on it.
I think what you covered it is.
This act is good.
I think I'd add is I think we believe.
Strengthen the data center market is real and that.
The inventory levels are normal in that market.
Great. Thank you.
Thank you. Your next question comes from Timothy Arcuri, Oh, Yes. Your line is open.
Thanks, a lot I guess Sunday.
There was some language in the release that Oh, Yeah, you because he talked about the fact that you are lagging indicator relative to demand can you just help parse through that I guess, it sounds like maybe you're suggesting that the fiscal fourth quarter could be needy down sequentially, which typically up I know that's very difficult to tell what's going on right now.
But maybe can you just help us walks through with the puts and takes a look like into Q4 I know you don't want to guide Q4, but when it sounds like it possibly down. So can you can you just help us think about that thanks.
So you know certainly as you know TMG, our dog vital to coupon here and of course, the environment and Floyd you know these are unprecedented time in terms of anybody delaying any big <unk> any vertical or any country, you're dealing with the situation and the spread and containment of killing the wider.
But what I would say hit is that Oh, you know going to stick to.
Our on assessment off a the demand trends I think you know underlying demand trends definitely a continued to be healthy and then he low cat you know more de supply to our customers you know customers building into the product if there has to be any macroeconomic weakness and.
We know that who then bottom end up going now why that.
Pandemic there'd be some impact on some aspect of the consumer demand.
The consumer demand, there's a lag between the consumer demand getting impacted the demand from our customers who are building that product in their supply chains getting impacted so that's why do you mean that sometimes there can be a lag between what you're supplying to our customers more says they impact on the demand.
In the marketplace.
So we're not guiding to do a fourth quarter, Oh, <unk> I think whats important is bad it will depend on a the spread all the why does the containment of the why do you know different contains me have their containment and then they are so while we have seen I'll put it back.
Well, that's the third quarter, our sq to demand in China, and the consumer demand and the smartphone demand decline. We've also seen that China has continued there and in fact production is coming back in China and the demand is being restored in China same thing will happen and.
The other parts of the world as well that while there may be some impact on smartphone demand in different countries. Eventually as the containment happened the consumer demand will be back and the long term. Sam you know certainly you called out little business are a strong <unk> the trends of Fiveg driving greater content and smartphone of indeed come back.
On the other side of the pandemic and there will be India. The demands I wasn't really a third themselves. A similarly, a you know clouds and demand you know continues to do well as I mentioned at the Corbett 19 scenario may actually be accelerating that demand in cloud that is driving their demand for memory and storage.
The point then it you know.
Situation is a fluid and we are really not prepared to guide you to after you bought at this point.
Okay project like as much.
Thank you and next question comes from John Pitzer Credit Suisse. Your line is open.
Yeah, guys. Thanks for all the details, especially given how uncertainty environment is I'm, just kind of curious sungy Dave.
Is it possible to quantify what the impact to covert was in the February quarter and more importantly is there a number in mind for May. It's it's clear the uncertainty is increasing the range for the May guide, but it also bringing down the midpoint of any sort of guidance of how you're thinking through that would be very helpful.
So I mean, let Dave address that.
Okay I sure so.
[laughter], maybe without throwing out a number because it's difficult to estimate clearly we would have been above the high end of the range on revenue if not for coven 19, and there were some litigation expenses already in both cost to sales and.
Operating expenses that impacted us a bit.
In the fiscal second quarter as well you know, we would've likely you've been more skewed to a higher growth number for fiscal third quarter. If not for October 19, and of course, you know it somewhat unusual for us be widened the range by a couple hundred million dollars also.
You account for the uncertainty.
As it relates to what might happen not only from a demand perspective, but from a supply perspective, either one has some risks to it.
Additionally, we have built in more Oh.
Cost associated with a covert mitigations for us down here and I already talked about the fact that we're carrying higher levels of of inventory of raw materials.
But we're also I'm happy to flex our supply chain back and have some redundancy that can drive up some expenses on the cost to sales side.
In addition, we may see an increased level of tariff expense a in an effort to mitigate.
You know some supply disruptions that might occur.
And also there is a fair amount of expense associated with just the work from home model.
And allow enabling our employees to be able to do all the work they do in the offices now in their homes and Southernsun expenses, such as you put it back so our expense might likely would've been down even more particularly with all the actions we've taken to reduce expenses if not for the fact that we have a better this it's offset.
Or headwind associated with litigation expense recorded.
Thank you. My next question comes from C.J. Muse Evercore. Your line is open.
Yeah. Good afternoon. Thank you for taking the question and great to hear that but you're saying well I guess my question is regarding.
The supply side, particularly for DRAM.
You talked about you know some issues related to equipment installation and part availability a you've also talked about switching over some of your capacity from ability to silver I'm. Just curious if you think that through you know what wasn't as big production look like now I didn't for you or or for the industry.
Free here in calendar 20, I think you know we were all thinking kind of 68% coming in is that still the right number or is there a change there. Thank you.
So I think what we had said before the quoted 19 scenarios that in.
And then do you get a 20 DRAM demand growth would be in mid teen around mid teen and that supply would be somewhat less for the year supply growth would be somewhat less for the year than bed demand growth and a you know of course and you look at the same audio supply.
No that's a technology transition the node transition in the industry, perhaps I can be impacted by 200 deliveries or the engendering or the service support in the industry, it's too soon to tell them.
But the point is that there could be some impacts to supply and not just related to the v. foot output, but there could be some in back to the supply and they said before depending upon the lucent regulations and the orders in various countries, where the supply chain for a memory and storage exists.
Yeah, those orders impact and any production been could be some.
Supply growth impact then as well it's hard to tell at this point and Yeah. You know we have you certainly you know when you look at our.
Current and supply growth you know our current supply growth at this point is intact, but we are mindful of the changes that could occur due to the goal. They didn't vitamin and of course, you know we continue to watch the demand as well and on the supply side I've, even pay Petchem and you know today and you have shortages in supply.
As we have mentioned for a server Dina EM.
As well as for cloud you know what all dennard shortages.
For the United and therefore, we are shifting some of the supply from mobile DRAM side.
Course, you know again continued to keep track of what the demand looks like and as we said yeah evil evaluates making deduction in not production utilization or a in terms of any capex that space to manage the supply growth during the calendar year 20, but it's too soon to really give you any specific because your children that.
Thank you. Your next question comes from Medio Seaney Aside you your line is open.
Yes, thanks for taking my question.
David though Sanjay can you. Please Oh tell me how you think of the mix of revenue from shy on it, especially going back to but certain Jay said earlier, China is resuming operation. There also provide the other incentives for Fiveg adoption and I'm, just curious how should I not a candidate pool.
Your revenues into February wondering how you see a trendy put the remainder of the year.
So I mean, let Dave answer that.
Yeah. So a I think a cumulative revenues I'll have to go back and look the exact statistic, but it was somewhere in that kind of 30% I think it was China revenue.
In aggregate clearly as you said there's a.
No there is a well come back to work kind of.
Phenomenon going on in China, and there is economic stimulus.
So that certainly will benefit but we're.
Also the customers a in the U.S. are a lot of them are in the cloud space and of course at the big driver of our.
Our business today, given it sounds you mentioned the the move to work from home in E Commerce, and so forth. So I'm not sure that the mix Oh, we project it is likely to shift around significant.
Geographically thank you Mark.
Thank you. Your next question comes from Ambrish Srivastava of BMO. Your line is open.
Hi, Thank you very much in Sanjay and they've thanks, a lot of detailed had a question on capacity and cost per bed.
What percent of your Capex is taxable and I appreciate that things are still fluid. It's very hard for you to tell us how much you're going to you would flex, but just as a ballpark what percentage and then is the cost down going to change based on what you know as of now versus what you're told us last quarter for both now.
And for D. that thank you.
In terms of Capex, you know me, it's called our fiscal third quarter, you know to <unk> me, but wouldn't be impacting the capex for fiscal third quarter. However for the that's something that calendar year. Two indeed, you certainly there would be as I said before evaluating our capex as well as out of production utilization to make sure that your knowledge.
Supply stays in line with our demand expectations demand expectations of course, we laid out working closely with our customers. So just like in 2019 be made changes to cafe, a fairly rapidly NBT acted fab as well as we manage our production. We will of course me doing the same things here just keeping.
Buying the situation with respect to Corona by list escalation that caused the global Jeff has really a evolve rapidly over the course of last couple of B.
So we will of course keep close tabs with our customers demand expectations.
And the Mo make sure that we make any adjustments to our capex if needed a accordingly, we are absolutely continuing to look at that and then turn so well cost reductions of course, you know cost reductions that a functional technology transitions that are being made in the fab and so far Viet unplanned business back to the.
Cost Guy do that vehicle I did do you for fiscal year two anything.
I would add that are on the NAND front as you've seen we've gotten a fair amount of benefit from the change in depreciation.
The first half of fiscal 20.
So that in essence kind of pulled ahead.
As you remember, probably we mentioned that as we transition to replacement gate halfway 20 would show minimal cost decline.
And really up by 21 was where we would see it by with the depreciation change in reality, what's happening is we're kind of pulling ahead.
Some of that improvement into fiscal 20, so when you look at the percentages, but a bit better like 20, and maybe not as good as we as originally kind of telegraphed enough by 21.
And in addition, and you know what we continue to drive this next to the high value solutions. They generally carry higher costs and we hope to continue that our goal is to get the 80%. So that certainly will also be an impact.
On the cost side as well, but if you step back and then look at how we do over a multiyear period in terms of NAND improvement once where we're really running on the second generation replacement gate and he is good momentum we're up to the right yields which running through the inventory and showing up to cost of sales.
And you see that over a multiyear period, you'll see that arc declining costs over the over a multiyear period, it's actually very good very healthy very competitive.
And I was just add that led you to covered 19, and we said that you know the our.
You know, enabling greater flexibility a in our supply network.
By adding a captive capacity as well as adding capacity on part of our subcontractor.
To give us Unfortunately at the end the billion in the supply chain a in kids that are who indignation immediacy country that impact out of production. So some of those aspects you know certainly do have.
Had been on the cost side, but by and large I think those are being managed well and although a lot of cost targets for fiscal year guarantee at this point out on track.
Thank you weren't next question comes from Aaron Rakers of Wells Fargo. Your question. Please.
Yeah. Thanks for taking a question also congrats on great execution, Yeah, I want to go back to get the customer inventory you don't get me I'm actually in trying to understand or appreciate you know how you. How you think about that potential buildup of inventory can you help us understand whether youve implemented anything differently or.
Yeah, Yeah, FERC winds that visibility into those customers or how you exactly playing on managing are seeing any kind of getting inquiry build particularly at some of the cloud customers.
I mean, we certainly workloads needed those customers thought relationships over time have only depend with those customers you have become more valuable partner to them as.
As well as we have expanded our product offering.
You know for example on death and decide you can be brought out and be a media says they know they're getting qualified in data center on the DRAM side, you had been a strong partner bad highest quality enables customers and a on the cloud side too you know in the very very early innings are all the good thing for memory and storage and cloud so.
Compared to the last cycle, you know our relationships with those customers have really expanded have a deep and we continue to work closely with them in terms of understanding there.
Demand requirements and you know this is what the bad that'd be can do in terms of working close needed those customers to understand that requirement and I would like to once again point out that de audit in an environment, even before a covance 19 that.
Capex investment in cloud body on a strong growth trajectory and north of that capex going toward the infrastructure for memory and storage requirements. Oh of course news GPU architectures with more course and them as well as more channel is giving you gave an attach rates for memory.
In storage and of course, the workload demanding.
More bienaime emoney for memory intensive compute application as well as supposed faster. They act is driving more that's as dean so those demand trend greenco bad what already strong and they go away. If anything he has seen bed work from home digital economy is driving greater demand on that structure. It ended.
Well anything some of that demand. So we of course, you know as we work to the memory shortages. We continue to work closely with Dod customers and while the smartphone demand maybe somewhat down for example in China and if you do but that demand is coming back in China and you don't give.
Continuing to monitor these trends in the other part and it just acquired continuing to work goes needed the customers understanding the requirement and applying our own judgment at the beginning mindful in terms of how you manage all our supply. So if there's any customer relationship in terms of managing our.
A supply growth and understanding that demand expectations.
Thanks. Your next question comes from Harlan sur of JP Morgan. Please go ahead.
Good afternoon, and thank you for taking my question I'm, just kind of memory demand driver in the second half and this year as you pointed out is the new game console refresh I think there's 35% to 100% more G.D.D.R. DRAM memory versus power generation as platforms and the most SSD storage versus H.T.D. given your leader.
Shipping graphics, DRAM, we know that micron team will be participating here on these new consoles, but given your good envy any client SSD positioning. It's a team also participating in the call to refresh with other you're adding to your SSD products.
You know certainly as we expand our portfolio of these Oh, yes. Previously we just had that though now we have envy EMEA studies as well and you have gardening lot of gauge the doing that and you have means diseased into the end market applications as well as with customers certainly it is a growth market. Unfortunately, you put up north.
Early in D. them, but also in this disease, but as you know these days quarter qualifications with their customers and then you know we are able to your line is the benefit of.
You know a sales and revenue growth in those areas.
I wanted to highlight here, but as we have expanded our product portfolio board.
You know on the <unk> says de side as well as in mobile on multi chip packages and bringing out discrete you affair gardez sort of mobile applications as well that you really have been able as I mentioned in the script. Unfortunately put us to gain share in the marketplace. We have gained share in NAND man.
This man solutions in mobile me have gained share in that they'd be that's well, that's enabling us to deliver a healthy there, though and ask you tube and again in shared an expanding product portfolio also positions as well.
To navigate through these choppy waters related to covert 19 and need a man very focused on continuing to expand the product portfolio and broaden our customer relationship in the kind of applications that you just talked about in Guinea fund. So our most for DRAM and NAND as we look forward to the future long term secular demand.
Genders demand trend and add the thing those requirements by our customers.
Thank you. My next question comes from Mitch Steves of RBC capital markets. Your line is open.
Yeah. Thanks, taking my question so impressive guidance there one of the one of the question. It did have though just the offset of kinda commercial PC is coming back because obviously where people are working from home offset by kind of the smartphone unit demand. How are you guys, but thinking about that for the rest of the calendar year, obviously like moving parts.
Just how do you guys track kind of the lower expected sales Probugs Mahanta type person a commercial PC have great people work.
So yes, that's correct I think a you know that is near term surging demand with respect to commercial Pcs I mean, if you look I'd just like on that well you know micron itself Unum bought something like 5000 notebook computers to really provided to our team members in terms of enabling them to work from home and you'd be implemented those really.
Very very fast so, yes, surging demand related to enterprise BC, then that bodes well for board, yes, indeed, as well as for a de them and as we noted also with respect to award show learning and you know student learning from home you know that also drive.
Demand in North book, how long they attend lab and of course, it did global in nature.
But how long does your class you know people have to see but or the overall, yes. I mean do you do see that you know why there maybe some smart on the deep map outside of China, while China recovering on the smartphone front you know certainly as I said and suffice meeting.
And other.
Pcs for virtual learning along bad.
Greater demand in the datacenter world is a tailwind for us.
Thank you. Your next question comes from Roger Gill with Needham and company. Please go ahead.
Yes. Thank you.
Another question on the demand conditions, I think David mentioned.
In his prepared remarks that the macro conditions had a weekend in the last couple of weeks [laughter].
And you talked about some of the movie.
Moving pieces of that.
Try to quantify that the the impact eat a DRAM is about 70% of your revenue NAND is 30%.
What percentage of of DRAM is coming from from Pcs Hyperscalers.
Mobile and likewise on the NAND side. So you can just kind of I get a sense of where the the potential strengths and weaknesses could be.
So we don't break it down specifically in terms so person days, but I think whats important is that you know they are a very very diversified supplier and you have a broad portfolio and the end market application, but well diversified as well a you know for Olivia.
On data center to be Cetone smartphone networking.
For the them and my question is well positioned.
In these markets and certainly some of these market 13th them.
Shortages today, you know such as.
On the fight off data center, a de them requirements.
And you know while.
Others, we are continuing to monitor but overall demand trend, but we don't break it out but you know important thing is that the underlying vectors for demand are good and you know as we go through the uncertainties related to covert 19, when we come out on the other side I'm very confident that bid our broad portfolio.
And deep customer engagement and with technology and product capabilities I think we go overall do just fine.
By and large you know I'll admit it's fairly similar to the industry either in terms of you know overall mix. If you look at the industry I think you'll see that their voted in that 25% to 30% range. You know the mobile tends to be at around 25%, how easy is 20% give or take some and.
Of course, then it's all the others, but you can call like especially allergy, which include a automotive includes industrial and other applications. Given that you can I think but down around 20%. So I think you know that makes me think I think that's the kind of mix and you can as you can see it well diversified I call.
All.
These linear end market segment.
Thank you. Your next question comes from Chris Danely, Oh Citigroup. Please go ahead.
Hey, Thanks, guys I guess, just a follow up on some other.
Books questions. So you you talked about the demand forecast or.
Yes things changing in the last couple of weeks can you just give us a sense of what you've seen in the last couple of weeks and then also for your you know sort of your forward forecasting whether its internal or what you're giving us are you.
Shaving down what what your internal forecast is in anticipation of some more weakness or is this kind of like what we see as what we have.
So I think as Dave mentioned in his prepared remarks that you see a strong demand and favorable.
Sam but be it also seem that in China, Yeah as is well known that during that timeframe of artists. The second quarter. You know a nine bad you know the Colgate 19 spread in China are starting from a unmet generally kind of timeframe. It had impacted your smartphone demand in China.
While it.
Ooh the demand in the relative infancy structure in China. So as now over last couple of weeks, you see that spread of Corona light up because the globe and you know various actions being taken in various countries to kinda contain the spread of Corona light as we do expect that there'll be some uh huh.
Packed on the consumer demand a bucket, it's really too soon to quantify though.
And again, having said that we also see increasing demand coming from the cloud side as well as enterprise a PC.
Applications of yet seeing acceleration of demand on that front. So we're continuing to really manage that and this is all their flipping over last couple of you can be done of course continues to work closely with our customers to understand they didn't he's in demand as well as they are you know demand outlook Oh for example in the consumer devices, and then manage our business accord.
Really.
The only thing I'd add is Ah you know in the prepared remarks, leading up to what I did say that.
They seem to end demand trends were favorable.
And that included all the way up until today I'll hop on of course, you know there's higher degree of uncertainty and that's kind of why we got to the range we did.
That does end our session ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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