Q4 2020 Micron Technology Inc Earnings Call
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Good afternoon. My name is Shirley and I will be your conference facilitator today at this time I would like to welcome everyone to Mike One fourth quarter 2020 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and.
Answer period, if you would like to ask a question. During this time. Please press. The Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
In order to allow as many analysts to ask a question as possible. Please limit yourself to one question. Thank you. It is now my pleasure to turn the floor over to your host far Han Ahmad Vice President of Investor Relations you May begin your conference.
Thank you and welcome to my confidence in all these fiscal fourth quarter, we wouldn't be pretty financial conference call.
On the call with me today are sundry, Mehrotra, President and CEO and President Chief Financial Officer.
This call will be approximately 60 minutes and then this.
This call will be all your life. It's also being kept us from our Investor Relations website investors, both my goal, but coal.
In addition, our that's like them being still earnings press release, and the prepared remarks finder shortly nickel.
But his discussion of financial results will be presented on a non-GAAP financial leases unless otherwise specified.
Reconciliation of GAAP to non-GAAP financial measures, maybe found on our website.
As a reminder of the dots replay will be available on our website later today.
We encourage you to monitor all website micron dot com well support for the most current information on the company, including information on the various financial conferences that we will be attending you can.
You can follow us on Radone micron thick.
I thought in mind the models, we will be discussing today include forward looking statements.
These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today.
We refer you to the documents we filed with the FCC specifically, our most recent phone banking and 10-Q for a discussion of risks that may affect our future results.
Although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future 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 over to Sandra. Thank you put 'em. Good afternoon, everyone. My southern Delaware, its solid fiscal fourth quarter revenue and profitability driven by strength in DRAM shipments to cloud PC and game console customers.
As I reflect on the fiscal year Twentytwenty accomplishment I'm extremely proud of our micron team, whose dedication and tenacity enable the new micron to deliver customer value and healthy financial results throughout fiscal 2020.
In D. them, we introduced the industry's first ones the nanometer node we will.
We were first to market with mobile LP flight products and shattered industry performance records with our graphics G. D. D. R. Six X innovation.
In the end, we began shipping our first replacement gate based products and drove significant increases in our Q, we'll see mix.
In addition in fiscal Q4, we already achieved our high value solutions mix target.
We are entering fiscal 2021 with momentum in our product portfolio and confidence in our technology roadmap and manufacturing capabilities.
This year, well get 19 presented a real life stress tests of the new microns resilience.
Thanks in large part to the commitment and innovation of our team members around the globe. We continue to operate our fabs at normal capacity and achieved record production from other assembly and test facilities, and Shannon, Taiwan and Singapore.
Stringent industry, leading safety protocols have enabled us to gradually return to work on site.
As of today, almost three quarters of Micron team members are back on site with our manufacturing operations running close to fully staffed levels.
The new Micron is also making solid progress toward our goal to bring differentiated industry, leading products to our customers and to improve our product mix and cost structure. So that we can grow our share of industry profits, all while maintaining stable bed share.
In D. them, we are leading the industry in one the nanometer production mix and this node was a significant contributor to our fiscal fourth quarter sales.
We are making good progress on our next generation, one as footnote, which remains on track for introduction in fiscal 2021.
We have further strengthening our DRAM product portfolio.
This quarter, we announced GTD, our six ex the world's fastest discrete graphics memory solution and the first two power system bandwidth to one terabyte per second.
DGD our six six is a great example of clothes color customer collaboration on differentiated technology that significantly improves the end user experience.
Our innovative GDR six X. memory is featured in the Nvidia GE Force RPX 30, 90, and 30 80 graphics cards that deliver an immersive real life gaming experience.
Our strength in graphics de them also positions us well for the data center market where growth in GPU computing is being driven by AI workloads.
We're also excited about our progress with high bandwidth memory to serve the fast growing Iot market and remain on track to commence volume shipments by the end of this year.
And then we are on track for replacement gate to make up a meaningful portion of our NAND output by the end of calendar 2020.
Our onetwenty eight layer first generation RG NAND technology entered volume production in fiscal Q3, 2020 and in fiscal Q4, we began shipping our GBS consumer ssds.
We are also making good progress on our second generation RG note, which we expect to introduce into volume production during fiscal 2021.
This industry, leading technology will be broadly deployed across our product portfolio and drive NAND cost reduction later in fiscal 2021 and into fiscal 2022.
We are also driving product innovation and cost reduction through an increased mix of you will see NAND.
Our QFC innovations offer PC customers, a more cost effective high capacity SSD solution and data center customers, a highly effective HDD replacement option with a compelling value proposition.
We are leading the industry with the broadest portfolio of Q will see us as these across client consumer and data center and I think you will see adoption accelerates.
Our midst of you'll see SSD business more than doubled quarter over quarter, surpassing our expectations.
Fiscal Twentytwenty has been an extraordinary year for our high value solutions, which now make up around 80% of our quarterly NAND bit achieving the goal we had set for ourselves ahead of schedule.
We are now intensifying our focus on profitability enhancement to further improvements to our product mix within our high value solutions portfolio.
Over the next several quarters, we will be introducing a slate of new SSD and mobile NAND products that leverage increased vertical integration using our internally developed controllers and our industry, leading second generation replacement gate TLC and QFC technology.
Turning to end markets.
Fiscal Twentytwenty was a strong year for our SSD business.
We expanded our nvme mean portfolio and continued our SSAT our market leadership.
Fiscal Q4, SSD revenue almost doubled year over year led by data Center SSD sales.
Client SSD average capacities grew almost 30% quarter over quarter, driven by acute we'll see growth.
Consumer SSD had another record quarter in volume shipped with nvme EBIT more than doubling quarter over quarter.
Turning to data center memory and networking.
The data center market continues to be a growth engine for micron and this year covert 19 accelerated this growth specifically in cloud.
Leveraging our industry, leading ones the DRAM micron executed well to drive robust sequential growth in cloud DRAM bit shipments, which more than doubled year over year in fiscal Q4.
Meanwhile, traditional on premise enterprise demand was weaker in fiscal Q4 with lower investment from businesses due to the impact of the pandemic.
Looking ahead, the datacenter market is expected to start this transition to DDR five in the second half of fiscal 2021, and we have begun sampling DDR five server modules to customers.
In networking Fiveg deployments, particularly in Asia drove healthy DRAM bit growth quarter over quarter.
In mobile Micron is well positioned to win in the Fiveg era as a supplier to all the major smartphone manufacturers with an outstanding portfolio of industry, leading low power DRAM and managed NAND solutions.
We have been diversifying and broadening our mobile business for some time and achieved a record number of design wins in fiscal Q4.
We're also excited about our product momentum in mobile Emcp solutions, which combined DRAM and NAND solutions into one efficient package.
The smartphone market has been impacted by the pandemic in a meaningful way in calendar 2020.
But as we look ahead to calendar 2021, we expect a rebound in smartphone unit volumes.
Coupled with robust average capacity growth across both DRAM and NAND solutions.
Fiveg handset volumes could grow to approximately 500 million units in 2021 from around 200 million units in calendar 2020, and these fiveg products featured higher memory and storage content to enable enhanced consumer experiences.
In the PC market the work from home trends drove strong demand for notebooks with pockets of non memory component shortages in the supply chain.
Desktop PC sales are read due to pandemic driven changes to customer buying patterns.
In graphics GDR six shipments to support next generation gaming consoles. In addition to the initial shipments of our breakthrough GDR six X product helped drive strong quarter over quarter and year over year bit growth.
We expect this market to drive growth for us in fiscal 2021.
DRAM and NAND content growth continues to be a secular trend in the automotive market supported by advanced infotainment systems and increased automation in cars.
Covered 19 have significantly impacted both auto production and demand in fiscal 2020, but we saw a strong recovery towards the end of fiscal Q4, and expect sequential growth in sales of our products into the automotive market in FQ one.
Economic recovery from the Sharklet session in calendar Q2 is underway, but the pace has been limited by the continuation of the pandemic.
Smartphone auto and consumer end markets has started to recover and we see further demand improvements ahead.
Cloud and laptop demand continues to be healthy supported by the work from home and sharp from home trends.
Gaming demand is robust.
However, our short term outlook has weakened due to a combination of factors.
Chris the ongoing pandemic is taking a toll on certain segments of the economy.
Consequently, enterprise demand has weakened due to lower it spending and somewhat higher inventories at certain customers.
In addition, due to the previously announced US administration restrictions on Ravi, we halted shipments too far away on September 14.
While there has been a large customer at approximately 10% our fiscal Q4 sales.
Given that we only had one month notice before halting shipments we had limited ability to ship supply to other customers.
As a result, we expect a negative impact to fiscal Q1 sales and to a lesser extent fiscal Q2 sales.
Our well established relationships with mobile customers worldwide will allow us to offset the impact of these restrictions by the end of fiscal Q2.
Now turning to our industry outlook.
We now estimate that calendar 2020 industry DRAM bit demand growth is likely to be in the mid teens percent change, while NAND bit demand growth is likely to be in the mid twentys.
Due to the shift of industry production capacity to a more efficient 16 gigabit die, we're seeing industry supply constraints for eight gigabit base be them products.
We are optimistic that overall market demand will improve throughout calendar 2021, following the seasonal patterns of the first calendar quarter.
We are very excited by the combination of growth drivers coming into alignment for the industry for calendar 2021.
These growth drivers include economic recovery from the pandemic, new CP architectures, which are enabling higher silver content cloud.
Cloud AI and machine learning growth robust mobile demand driven by Fiveg and strength in gaming and automotive.
We expect calendar twentytwenty, one industry DRAM bit demand growth of approximately 20%.
Further expects that disciplined industry Capex will result in improving DRAM market conditions and industry profitability throughout calendar Twentytwenty one.
Calendar Twentytwenty, one industry NAND bit demand growth is expected to be approximately 30%.
Unless industry Capex moderates from current levels or demand exceeds our expectations we see.
We see a risk of challenging NAND industry profitability levels.
Turning to micron supply, we target our bit supply growth CAGR to be in line with the industry bit demand growth CAGR for both DRAM and NAND.
However, there can be year to year variability caused by node transition timing.
For example, we expect our d. land bit supply growth to be above industry demand in calendar 2020, but to moderate to less than industry demand in calendar 2021.
In NAND, we expect our bit supply growth in calendar 2020 to be well below the industry demand due to our ongoing RG transition.
In calendar 2021, we expect our NAND bit supply growth to be somewhat below the industry demand and.
And we plan to use inventory to support a bed shipment growth that is in line with the industry demand.
For fiscal 2021, we expect DRAM cost reduction in the mid single digit percent range with somewhat higher levels of cost reduction on a like for like basis.
Our higher mix of LP, five graphics, and our R&D land of high bandwidth memory will impact overall DRAM costs.
We anticipate NAND cost reduction in the low to mid teens percent range, even after accounting for the cost impact of our mix shift as we continue our focus on optimizing our high value solutions portfolio.
We are targeting fiscal 2021, capex to be approximately $9 billion to support our long term goal of maintaining stable share of industry bit supply, which will be achieved through node transitions alone and without a net increase to be for starts.
This capex target is significantly lower than than our peak already expectation and reflects our continued commitment to exercise supply discipline, while staying focused on deploying our leading edge technology nodes, which deliver a strong ROI.
Within this capex envelope fat fab building Capex will remain elevated relative to historical levels.
We are also continuing investments in backend assembly and test capacity that do not impact based growth, but have strong ROI.
Sure demand expectations change, we remain flexible to adjust our bit supply growth to align with better demand growth using capex and utilization and utilization of levers.
Despite covered nineteens broad impact on our lives and the business environment. We believe it has accelerated demand growth in some parts of the markets we serve.
This is certainly true and cloud deployments, where some trends that would have taken two to four years to develop have been accelerated in two months and will likely persist into the future.
As we look ahead, we remain extremely excited about the growth and health of our diverse end markets.
That will benefit from powerful secular technology trends, including AI Fiveg and Aiotv.
These trends will enable the data economy and increase the importance of DRAM and NAND supporting a long term DRAM bit demand growth CAGR of mid to high teens, and the NAND bit demand growth CAGR of approximately 30%.
I will now turn it over to Dave to provide our financial results and guidance.
Thanks, Sanjay we.
We generated solid results in the fiscal fourth quarter with revenue and earnings per share coming in above the midpoint of our guided range. Despite significant demand variability as customers continue to react to the impacts of cobot 19.
Total Q4 revenue was approximately $6.1 billion up 11% sequentially and 24% year over year.
As a reminder, our Q4 results reflect a 14 week quarter and the extra week contributed to revenues costs and expenses for the quarter.
Sequential revenue growth was led by strong DRAM shipments.
Revenue was backend loaded based on timing of customer demand.
The fiscal year 2020, total revenue was $21.4 billion down 8% from the prior fiscal year.
At Q4, DRAM revenue was $4.4 billion, representing 72% of total revenue.
DRAM revenue increased 22% sequentially and 29% year over year.
But shipments were up in the mid 20% range sequentially and Asps were down in the low single digit percent range quarter over quarter.
For the fiscal year.
Revenue was $14.5 billion, representing 68% of total revenue.
DRAM revenue declined 14% from the prior fiscal year.
FQ four NAND revenue was approximately $1.5 billion, representing 25% of total revenue.
Yeah, and revenue declined 8% sequentially and was up 27% year over year.
Good shipments were approximately flat sequentially.
In ASP declined in the upper single digit percent range quarter over quarter.
For the fiscal year NAND revenue was $6.1 billion, representing 29% of total revenue.
Net revenue increased 14% from the prior fiscal year.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was approximately $3 billion up approximately 36% sequentially and up 59% year over year.
CNBU revenue was driven by continued strength in the cloud and client segments. Following the work from home infrastructure build out as well as growth in demand from gaming consoles.
For the fiscal year CMB revenue was $9.2 billion down 8% from the prior fiscal year.
Revenue for the mobile business unit was $1.5 billion down, 4% sequentially and up 4% year over year.
For the fiscal year and be revenue was $5.7 billion down 11% from fiscal 2019.
Revenue for the storage business unit with $913 million down, 10% from Q3 and up 8% year over year.
For the fiscal year SP revenue was $3.8 billion down 2% from fiscal 2019.
Finally revenue for the embedded business unit was $654 million down, 3% sequentially and down 7% year over year demand.
Demand continued to be below historical levels due to the impacts impact from cobot 19.
Actually during the quarter, we began to see a sharp recovery in auto and consumer market demand, while industrial markets remain lackluster.
For the fiscal year Edu revenue was $2.8 billion down 12% from fiscal 2019.
The consolidated gross margin for Q4 was 34.9% up approximately 170 basis points from the prior quarter.
Sequential gross margin improvement was driven by solid DRAM cost execution, which benefited from our one DRAM.
The impact of Underutilization at our Lehigh Fab was $135 million or approximately 220 basis points in Q4.
We expect underutilization to gradually decline through fiscal 2021, as we redeploy equipment and continue to right size our capacity.
Operating expenses were $809 million in Q4.
While we've taken actions over the past several quarters to control our operating expenses, we expect operating expenses to increase over the course of fiscal 2021, as we make several investments in R&D to fund technology spending and to further grow and improve our product portfolio.
Our Q4 operating income was $1.3 billion, resulting in an operating margin of 21.5% compared to 18% in the prior quarter and 14% in the prior year.
Net interest expense increased to $31 million compared to $24 million of net interest expense in the prior quarter.
The increase was due to the lower yields on our cash investments, which reduced interest income.
We expect net interest expense to increase modestly to approximately $35 million in Q1.
Our Q4 effective tax rate was 3.6%, which benefited from approximately $60 million of one time items.
Going forward into fiscal 2021, we expect our tax rate to be in the high single digit range.
Non-GAAP earnings per share in FQ four were one dollar an eight cents up from 82 cents in Q3, and 56 cents in the year ago quarter.
For the fiscal year, EPS was $2.83 down from $6.35 in fiscal 2019.
Turning to cash flows and capital spending we generated $2.3 billion in cash from operations in fiscal Q4, representing 38% of revenue.
For the fiscal year, we generated $8.3 billion in cash from operations down from $13.2 billion in the prior fiscal year.
Net capital spending was approximately $2.2 billion during the quarter and approximately $7.9 billion for the fiscal 2020.
Our future Capex plans have come down versus our previous expectations, we now let's.
We now expect fiscal 2021 capex of approximately $9 billion.
This this capex investment will support our one alpha DRAM and second generation replacement Gate NAND Rams.
NAND and backend equipment Capex will increase year on year, while DRAM equipment, Capex will be roughly flat year on year.
These investments will skew our capex spending towards the first two quarters of the fiscal year as it were.
As a result, we expect capital spending to outpace our operating cash flow in FQ, one and at Q2.
We expect to return to healthy free cash flow levels in the second half of the fiscal year as we benefit from improved market conditions declining costs and lower capital spending.
Free cash flow in the quarter was $111 million compared to $101 million in the prior quarter.
This represents the 15th consecutive quarter of positive create free cash flow.
For the fiscal year, we generated $361 million of free cash flow.
We repurchased approximately 824000 shares for $41 million in FQ four at an average price of $49.91.
In the fiscal year 2020, we returned $176 million of capital through repurchases, representing approximately 50% of our free cash flow.
Combining the convert premiums and share repurchases, we have used approximately $380 million were 105% of fiscal 2020 free cash flow toward reducing our fully diluted share count.
Ending Q4 inventory was $5.6 billion were 135 days versus 131 days last quarter. This is.
This is above our 110 day target due in part to elevated in inventory as we continue to transition to replacement gate.
We're also holding higher levels of raw material inventory during this period of supply uncertainty.
We expect inventory levels to normalize over the course of the fiscal year.
We ended the quarter with total cash of $9.3 billion and total liquidity of approximately $11.8 billion flat quarter over quarter.
At Q4, ending total debt was $6.6 billion.
Now turning to our outlook as a reminder, our fiscal first quarter will be a usual 13 week quarter down from the 14 weeks in fiscal fourth quarter.
We have started to see recovery in the mobile auto and consumer markets, but the pace of recovery has been moderated by the continued impact of the pandemic.
Shortages of certain non memory components in some end markets.
Enterprise demand is weak in some of our customers may be carrying higher inventory.
We continue to be disciplined on pricing walking away from certain deals that are below our profitability targets.
Compared to our fiscal Q4 results normalized to adjust for the extra week, we expect DRAM shipments to be relatively flat.
And NAND shipments to grow somewhat in the first half of fiscal 2021 due to market conditions and the impact of the wall way restrictions.
We face headwinds in our gross margins in the first half of fiscal 2021 due to a mix shift towards NAND revenue, our pricing assumptions in the near term driven by market conditions and temporarily higher cost related to our ramp of the first generation replacement gate node and yield learning on new DRAM products.
Such as graphics.
We expect improved financial performance in the second half of the fact that the fiscal 2021, as we benefit from improved market conditions and declining costs.
With all these factors in mind, our non-GAAP guidance for FQ. One is as follows we expect revenue to be $5.2 billion, plus or minus $200 million gross margin to be.
Gross margin to be in the range of 27.5% plus or minus 100 basis points and operating expenses to be approximately $825 million plus or minus $25 million.
Finally based on a share count of approximately 1.15 billion fully diluted shares we expect EPS to be 47 cents plus or minus seven cents.
In closing Micron continues to execute well despite continued market uncertainty and geopolitical challenges against the backdrop of a severe global recession caused by Cobot 19, Micron is delivered solid performance in fiscal 2020 with revenue, 70% higher and operating margins 12 percentage points higher than fiscal 2000.
16.
As we assess our cross cycle performance over the last four years, we have delivered average gross margins of 40%.
EBITDA margins of 50% and return on invested capital of 20% are.
Our cross cycle performance has benefited by the $9 billion in structural profitability improvements achieved from fiscal 2016 to fiscal 2019, and we intend to continue to improve our cost competitiveness in the coming years our stock.
Our strong technology dramatically improved product portfolio and financial strength position us well to capitalize on the long running demand trends driving the memory and storage industry.
I'll now turn the call over to Sanjay for closing remarks. Thank you, Dave the positive momentum in our financial performance and calendar year Twentytwenty has been interrupted by the unprecedented combination of a global pandemic and use restrictions on shipments duavive as.
As we look towards the second half of fiscal 2021, we expect that the underlying momentum in our product portfolio and secular industry divers such as Iot and Fiveg will drive materially better financial and business performance we had.
We are confident in the long term growth trajectory off of an industry memory and storage have become increasingly important across diverse end market applications spanning from the datacenter to the edge and from business to consumer.
Within this context micron is getting stronger not only financially as Dave indicated, but also competitively Mike.
Micron is transforming into a product leadership company natus trusted partner to our customers both for differentiated solutions and for continuity of supply.
We have confidence that our upcoming nodes transitions, our strengthening product portfolio and deeper customer engagements will further enhance our competitive position.
Microns transformation is taking place against global backdrop of unprecedented environmental challenges it is.
It is imperative that we had also environmentally responsible in our operations and Micron is playing a leadership role in this area.
Last month, we solidified our commitment to sustainability announcing specific and measurable environmental sustainability goals for calendar 2022 and 2030.
These commitments will be a milestone toward our aspiration of goals of reducing absolute greenhouse gas emissions by 40% from our calendar 2018 baseline transit.
Transitioning to 100% renewable energy we had available.
Serving 100% of our water use and sending zero waste to landfills.
Reaching our goals will require investment and as we have previously discussed we plan to devote approximately 2% of annual capital expenditures good environmental sustainability initiatives amounting to about $1 billion over the next five to seven years, we will.
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 we ask that you. Please limit yourself to one question to withdraw your question press the pound key please stand by while we compile the culinary roster.
Our first question will come from Toshiya Hari with Goldman Sachs. Please go ahead.
Good afternoon, and thank you very much for taking the question I'm sorry.
Sanjay in your prepared remarks, you noted your expectations for the DRAM market.
For the current conditions, there rather to improve in the second half of calendar 21.
I guess I'm curious of making that statement, what sort of assumptions, you're making on the demand side as well as the supply side over the next couple of quarters.
It appears as though you're seeing supply side cuts from not just ourselves, but also from your peers.
And if anything the demand outlook in the server space remains fairly muted today. So do you expect sort of demands remain weak and therefore, you're only expecting a recovery in the second half for what's what's sort of the key drivers in the timing of the recovery. Thank you.
Well first of all let me just point out you said recovery in the second half of calendar year 20, what we said is in the second half of our fiscal year 20, and introducing them of course.
He them of course, the long term drivers of growth are secular in nature trend of Iot and fiveg affords them be continuing diver of growth in the near term.
Got it.
From an industry point of view enterprise servers have been weak and that's impacting the demand outlook and you also have to remember the context of the first half of the year in the first half of calendar year 2020.
You know as we had entered the year, we were definitely looking at strong demand trends building up through the year. They mentalities by and large had normalized in the industry and then we got hit by a couple of it and that definitely impacted the demand outlook.
It accelerated in cloud for a while it accelerated in enterprise as well as financial and other factors invested in enterprise server site. However, enterprise has generally been beat cloud demand given the work from home and E Commerce and.
Assuming all of these kind of applications have driven a strong growth on the cloud side and we expect cloud to continue to be healthy in the second half of course, the first half of the calendar year Twentytwenty.
Saw a surge in demand in cloud in the second half, we expected to be somewhat moderated compared to the first half levels, but cloud will continue to be in healthy plays in.
Yeah, well what are the.
Got a few wanted at Q2 timeframe and it is a long term driver of growth as well.
For Fiveg phones will be a strong driver of growth in November.
Twentytwenty because of course event total smartphone unit sales got impacted and gotten or buy something around 10% on a year over year basis, but in Twentytwenty one.
Smartphone sales are expected to pick up in fact smartphone sales that already picking up in the marketplace right. Now so not only is it that's truly off increasing smartphone sales as we go through calendar Twentytwenty. One you know beyond the seasonally slow first quarter of the.
First quarter of the calendar.
But it is also the story in Fiveg have higher content, both for memory and storage. So these aren't the demand drivers that are driving that giving us optimistic outlook for DRAM demand.
In calendar year, Twentytwenty, one continuing to improve starting from the beginning of the year, particularly as we get past the seasonal calendar Q1 timeframe and of course as you pointed out the capex in the DRAM industry has been disciplined and.
And that would position the industry when we look at the backdrop of demand expectation of approximately 20% in calendar year 2021, 20% growth in DRAM and look at the Capex discipline that has existed in the industry.
We think that environment overall, these dynamics bode well for a healthy environment in our second fiscal half of Twentytwenty one.
For DRAM and of course, a four dollar sales you know our second generation DRAM.
Our vision outside north of which will begin production in fiscal year, Twentytwenty, one will position us very well and our underlying momentum of our product portfolio, both NAND and DRAM will position us well.
As we go through calendar year 2021.
Thank you.
Thank you. Our next question will come from John Pitzer with Credit Suisse. Please go ahead, yes.
Yes. Good afternoon, guys. Thanks for letting me ask the question Sanjay Dave I wanted to talk a little bit kind of does the margin profile for November and beyond gave you mentioned that with the wall waistband, you're going to see a mix shift towards demand. If it was roughly kind of 70 20 in the August quarter, how do you think that trends into November.
And February it and does it get worse again in February or not and I guess, just given that you guys are ahead of schedule on your move to higher value NAND.
How should we think about gross margin progression in NAND from here I know that the mix has been hampered by the lack of cost down with replacement gate, but I'm just kind of curious how we should think about gross margin.
Progression going.
Going forward in NAND, just given that you've already hit your mix of high value targets.
Okay. So it was a three part question and one good job John.
So, let's let's talk a little bit about the mix obviously mix.
It was pretty favorable in the fourth fiscal quarter.
DRAM jumped up quite a bit from the previous quarter up to low.
Low seventys as a percent of our total revenue, we'd expect that to come down modestly.
NAND to come up modestly I'm not sure it's going to be the most significant story around gross margins, but it certainly will be a headwind.
Tough to call on the second quarter, we do expect continued growth in NAND and probably flattish in DRAM. So there's probably a little bit more incremental mix headwind there, but as Sanjay indicated in the back half of the fiscal year. We're we're very bullish around.
A lot of the markets that that DRAM supports like cloud like the mobile space provide GE and so we do expect.
Healthy recovery in DRAM.
Beyond that.
You mentioned the high value solutions that obviously has been helpful and accretive to our business.
So far we are continuing to drive that.
We in fact actually now the story is even beyond NAND. It goes into the DRAM space for example, with Grafix I talked about that it was started out being a little bit of a headwind on our gross margin in the first fiscal quarter.
Because of the early ramp of the product, but as as that hits its stride as we go through this.
Fiscal and calendar 2021, we would it.
We would expect that to be very beneficial on the gross margin side you met.
You mentioned also replacement gate. So as you know replacement gate has kept our cost reductions on the NAND front.
Relatively flat in fiscal 20 about.
About the only three deliberate cost reduction we got in fiscal 2021 out of NAND was really that depreciation change.
Theres not a huge change in the fiscal first quarter around.
NAND.
The first generation fleet replacement it still is the main.
The major story, there, but as Sanjay you talked about we will be ramping second.
Second generation replacement gate.
Next year, and so that should be a benefit we do think that as cost reductions are quite positive and should be very helpful. In driving what we.
What we said in the prepared remarks is low single low double digit cost.
Cost declines on NAND and that.
And thats with mix being.
Being a factor in it and so it's even better without without that.
[music].
And also I would say on the DRAM front. We we are looking at our cost reductions next year, and even with mix should be pretty respectable.
And that includes all that increased cost in and higher margin products that will be.
Shipping next year, but also will include.
Also will include the.
Include the.
Graphics will also.
Benefit the gross margins as well sorry, I think I said on the NAND at that low mid teens cost, but is actually up double digit I should say cost reductions.
Our low to mid teen cost reductions at a low double digit cost.
Dave maybe another way to ask the question is when you take pricing out of the equation. So I know thats. The biggest driver are the other drivers of sort of gross margin progression are the headwinds, peaking in the November quarter would you expect them to stick around into February and beyond.
Now on the on the deal.
DRAM front.
Whether extends into the second quarter, it's possible, but I, but I think you know in the back half. They are certainly going to be a good story on the gross margin front.
You know as we get more mature yields on those on those products on the new.
On the NAND front, you know I think really I think the bigger driver is going to be this switch over to the second generation of replacement gate, and Thats, where really where we start to see that the cost improvement because we're at a pretty high level of.
Hi value solutions on the NAND front.
Thanks.
Thank you. Our next question will come from CJ Muse with Evercore. Please go ahead.
Yeah. Good afternoon. Thank you for taking the question I guess, Dave just to follow up to John's question. If we could isolate just on the DRAM gross margin side of things. It looks like it's an implied gross margin for November around 31% and just curious your that's below the fiscal 20 trough.
And so within that.
How much of that is conservatism around pricing in there or write down of while we inventory and I guess, what kind of snap back specifically to the mix around HCM and graphics.
Should we see in terms of the gross margins back into the second half of fiscal 21.
Yes so.
The wall way impacts that we had on the gross margin front were largely.
Accounted for in the fourth fiscal quarter, although there is potential for more.
Depending on how.
How the rest of the bits get consumed.
On the on the high value products within DRAM.
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Clearly.
The first couple of quarters.
The.
We'll be somewhat about kind of headwind to the gross margins, but it's simply kind of.
Kind of our ramp.
Timing challenge.
And it just so happens that way.
Where we're seeing pricing be.
You know a little bit more.
More negative that just so happens to coincide with a couple of quarters, where our costs are kind of running higher but I don't really think I mean this is somewhat of a.
A near term challenge that will correct itself over time, particularly as as.
As though again as those products get to more mature yields and and we get the mix going in the right direction for us I would tell you.
Just as it relates to what we obviously don't want to go into the details around the difference in margins between DRAM and NAND.
Specifically.
I would just tell you that your estimate of DRAM is low relative to what it is in reality.
Very helpful. Thank you.
Thank you. Our next question will come from Blayne Curtis with Barclays. Please go ahead.
Hi, Thanks for taking my question just curious on why we I just want to confirm I think you said, you're not shipping to them. There has been some stories about.
Companies getting licenses on the server side, just your perspective one.
Youre totally not shipping, we said, 10% I know it sounded like there was maybe some catch up before the fifteens just kind of curious how.
Elevated that was and then.
Any prospects on getting a license going forward.
So ask in fiscal fourth quarter of all of it was slightly under 10% of our total revenue and you don't.
Given that the order had come in from the Commerce pretty late in the quarter in terms. So if any upside from bavi in our fiscal fourth quarter. It was really very very small.
Now with respect to FQ, one, yes, we start shipments.
Effective September 14.
So what that means is that our revenue declined substantially with loss in fiscal Q1 and that clearly is a significant headwind to us while there has been a large customer to us not only in FQ four of Twentytwenty, but as we've reported before it has been.
Our largest customer for a significant period of time in prior several quarters as well so.
So the impact of Bavi.
As related Commerce Department ruling is.
Significant impact to our revenue and that Q1 and obviously it is.
Baked into our Q1 guidance here specific to the licenses we have applied for licenses, it's important to understand that our previous.
Licenses did not give us the ability.
Our previous licenses at this point do not give us the ability to shift away from our non us fabs, we need do new licenses for that which we have applied for and we do not know if and when those licenses would be granted.
Thanks, and then is there a way to think about it.
In terms of particularly mobile market customers positioning to try to take share from while waiting if you've seen any uptick in the mobile market is the role that.
So as we said in our prepared remarks that vintage effect to the lost unfortunately that involve a it will take us a while to shift.
To shift our production as well as.
Ill address the demand from other customers within the mobile ecosystem. There is no question that the end market mobile demand will be what it is projected to be and to the extent that quality is not able to fulfill that demand going forward that demand will be supply.
Slide by other smartphone manufacturers micron as well engaged with the entire ecosystem of smartphone manufacturers. We have had strong relationships with those customers. We have been a strong supplier to them our portfolio of solutions has only strengthened over time, making us.
Well you'd partner to the rest of the mobile ecosystem as well so as we shift.
From LAVIV toward those other customers it will take us some time it will have impact in FQ, one as I noted earlier it will have less impact in FQ, two but by end of Q2 and beyond.
We will be able to make up for any loss on the wall via front with other smartphone.
Manufactures.
Assuming that we don't get a license to evolve a in this timeframe.
Thanks.
Thank you. Our next question will comes from Harlan sur with JP Morgan. Please go ahead.
Good afternoon. Thanks for taking my question on your enterprise SSD business, it's been a obviously a big contributor to the value added mix shift.
Believe your share has grown about 200 basis points since the beginning of this year you guys are in a strong number three global share position is the momentum coming from your status of these portfolios or is it more growth and share gains in your newer MGM need based products and on the November guide are you seeing a slowdown in this segment given.
The weaker enterprise trends and just longer term as you look into next year. How is the team planning to maintain its share momentum in the.
In this segment.
So certainly our factor leadership has helped us in the.
The enterprise datacenter market add.
And.
Satire.
Phil is a meaningful portion of the enterprise SSD market, even though it is shifting rapidly to Nvme me and yes, we have growing presence in enterprise with our nvme solutions and we have.
Good progress, although we are in early stages of growing our Nvme me, Unfortunately, and yes for future quarters as we go through fiscal Twentytwenty, one and CAD calendar Twentytwenty. One we will continue to expand our portfolio of solutions with nvme meat products targeted for broader.
Set of applications in the enterprise space.
And as you noted we have done well with our SSD solutions compared to years past, we have continued to expand our portfolio and not only enterprise, but also on the client PC side and consumer SSD side.
In fact, our QFC is a good success story here as we noted in our remarks Victor.
With the broadest portfolio in enterprise Ssds, as well as client and consumer that disease.
So we will be bringing out exciting new products over the course of.
Twentytwenty and Twentytwenty, one timeframe and we certainly do our plan to increase our presence in the SSD market place.
With a broader and richer portfolio of solutions.
Thanks Sanjay.
Thank you. Our next question will come from Timothy Arcuri with FBR. Please go ahead.
Hi, Thanks, I guess I wanted to ask on the wall.
While way again, so obviously its public debt the processor companies have gotten the license.
So I certainly understand the you have to take this out of your guidance, but if they got a license I guess why Wouldnt you will be the first part of that question and then the second question is can you help us think about sort of handicapping. If you did get a license could we just add 10% back do you think it would go back to being roughly a 10% customer I guess.
I'm asking this because you know this has been going on for some time.
This has been going on for some time and you seem to always have the view that the bits will fairly fungible, but now it sounds like it's going to take six months. If you don't get a license I'm. Just wondering if you can sort of double click on that comment. Thanks.
So first of all we really cannot comment on other companies or.
Obtaining licenses as we noted that we have applied for licenses, but we cannot speculate if and when those licenses will be granted.
And.
With respect to.
If licenses are granted it will obviously it will depend on what is Javier demand at that point, we will of course always supplied to our customers and always make sure that we are meeting our commitments to our customers, while we along with other customers have been valued partner.
So if you have given up Fortunately licenses to supplier to all of it we will certainly be become apartment again, given the strong partnership we have enjoyed in the past with them, but it will really depend on what is their demand profile at that point and what have been our commitments to other customers already in place and we'll have to manage through.
So all of that but certainly.
If licenses are granted.
We both have grown.
Growing opportunity to engage again with Bobby and Beth remember that's our goal we always want to have a broad portfolio of products and our diversified set of customers. We have done well in this area over time and as you can see that you know even.
Even though the largest customer and involuntary.
Essentially in a very short period of time, our disappears for us in terms of revenue. Unfortunately, we are able to address it given our portfolio and given our customer engagements with ingest of the customers. Okay. Justine supply chain the nature of the semiconductor supply chain is that it does take a while to share.
Lift that production, even what other smartphone manufacturers in terms of filling any void created by while we it does take them to adjust things in the supply chain as well. So we will of course continue to work with the broad ecosystem of smartphone suppliers.
To address the future demand for smartphone.
Okay. Okay. Thank you.
Thank you. Our next question will come from Mitch Steves with RBC capital. Please go ahead.
Hey, Thanks for taking my question I had one wanted to meet the technical side. So I think we've seen xeighty six and arm more and more on the server side of this debate point, Ken just curious if we do see a future brings more arm based servers does that change the overall demand for DRAM our memory in general is that no real change if we move on arm based environment.
No I mean, regardless of the kind of compute architecture, whether it is X 86 days or so.
Hold on being I mean, the need for memory and storage is there in all those architectures in all those applications. The need is being driven by trends like AI AI relies on more and more data and do naive.
Great that intelligence and greater value for business and consumer experiences so regardless of how the.
You know the hardware platform is built all applications requires a more memory and storage and.
For example in mobile that is a great deployment of arm processors today and Micron has a strong suppliers and mobile is a large market for memory and storage application.
Basically.
Yes that just creates an unfortunate unity for more choices for customers and you know just.
The only difference in five auto applications and our end.
End market Unfortunately, probably in storage.
Okay. Then just one small one you guys mentioned that you are having trouble getting certain components, but it was unclear to me whether datacenter smartphone related could you maybe just give us an idea of what's going on what type of components. You guys are unable to divide that create some of these products.
To be clear that we were not referring to components that we are not able to procure I was referring in my prepared remarks that in the PC.
Segment, you know, particularly.
Particularly with the surge in demand in notebook, particularly chromebooks that have been in the PC supply chain there have been certain component shortages.
That PC manufacturers have frankly talked about.
In their own earnings calls so it's not any component shortages for micron supply chain. If you were just referring to the end market component shortages in the PC supply chain that you know that has some impact on the demand there.
And they are not able to procure and all the component of the need for their nor booking chromebook bills.
Okay understood. Thank you very much.
Thank you. Our next question will come from Ambrish Srivastava with BMO. Please go ahead.
Hi, Thank you very much I had a question on the cost side.
Dave I just wanted to make sure I understood that so when you started fiscal 20.
On the DRAM side, you had talked about high single digit cost down, but then I think in the middle of the year you had said that it would be low single digit. So question is what did.
The cost on end up being for the fiscal year and then for fiscal 21, you are saying low single digit again.
It is that partly because of the Walgreens impact in fiscal one Q.
In fiscal one Q or is that the new normal or is there the impact of lower yielding just trying to understand that and then a follow up Sanjay you seem to have leased the flag on NAND industry profitability for the full year could you.
And if I caught that correct could you give a little bit more details around that comment you made in your prepared remarks. Thank you.
Okay. So on the cost front just to be clear and rich.
The cost of clients and therefore 20 were on DRAM, we're in them.
Mid single digits.
And the expectation would be they would be somewhat in the mid single digits again and if by 21.
On slide 20, there wasn't really much mix that impacted it so that was legitimately what the cost was.
There are a few things that we probably could have execute a little bit better on that drove a little bit of it I'd also say, we had a lotta cobot mitigation expenses run and over time in different areas and tariffs when higher than we expected. So there were some things that kind of went against us as it relates to coal bed and that kind of muted our cost improvement for up by 20.
I would say on 21.
This mid single digit cost decline.
Includes the impacts of mix. So if you strip that out we'd actually be quite a bit above the mid single digit figure and more in line with kind of the numbers. We're trying to drive so I think we're in very good shape on the cost side for applied.
Slide 21, it's just it starts out a little rough just because we got to ramp these newer products, but for the year. It should be really good and and once we really hit our stride on one alpha where we're really.
Bullish about the cost reductions there so that's probably not.
Not until the following year, but that will that will start to help.
Further.
So on the second part of your question related to NAND profitability. So as you know NAND profitability in the industry today is.
No I mean, we have offered to.
Profitability is significantly better than than profitability deed.
DRAM industry is certainly exercising good discipline with respect to capex and that bodes well for as we said earlier.
For.
The industry environment as we go through calendar year Twentytwenty one.
On the NAND side, but yet highlighting is that.
Given the low profitability levels that it's at risk to improving the profitability of the industry and.
Unless you know demand ends up being higher than.
Then our estimations off approximately 30% demand growth next year.
Our capex.
Capex this trend.
The supply side in the industry gets managed betters of course, you know it is too early to comment.
Well, it's typically on 2020 industry supply growth, but with the current estimation that we have we believe that discipline on the capex side is needed in the NAND industry.
[music] restore the healthier profitability levels off NAND of course on microns part as we highlighted.
Our strategy always is to focus on growing our.
Supply in line with demand that means we plan to have.
Glad to have supply growth CAGR to be in line with industry demand growth CAGR, both for DRAM and NAND and on.
On NAND this.
This year that means in calendar year 2020.
Our NAND.
Supply growth will be significantly less than the industry demand given the RG transition and next year also.
We are continuing to exercise.
Our capex discipline on NAND.
Dollar supply growth next year into the calendar year Twentytwenty one.
Somewhat less than the expectation of the industry demand of course in terms of shipments capability in calendar year 2021, we'll be able to fulfill that in line with industry demand using the inventory the high levels of inventory that we have been getting in NAND. So we are certainly exercise.
Being the same.
Discipline in managing our transition here.
On floating gate to replacement gate as well as add just saying the NAND opportunities in a disciplined fashion and all I was pointing out was that.
That capex discipline.
As needed on the part of the NAND industry as well to the store a strong.
Stronger levels of profitability versus the current low levels that exist in the industry.
Okay. Thank you thanks for the clarification I appreciate thanks.
Sure.
Ladies and gentlemen, thank you for participating in today's question and answer session as well as today's conference call.
You May now conclude.
And Justin.
Okay.
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