Q1 2021 Micron Technology Inc Earnings Call
[music].
Ladies and.
Hello, and thank you for standing by welcome Jim Micron Technologies fiscal first quarter 2021 financial conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
If you're acquiring further assistance please press star zero.
It's now my pleasure to introduce Farhan Ahmad Vice President Investor Relations.
Thank you and welcome to Micron technologies fiscal first quarter 2021 financial conference call.
On the call with me today are Sanjay Marietta, President and CEO.
And Dave just sell Chief Financial Officer.
Today's call will be approximately 60 minutes in net.
This call, including the audio and slides is also being webcast from our Investor Relations website at investors Duck Micron dotcom.
In addition, our website contains the earnings press release and the prepared remarks fight a short while ago.
Today's discussion of financial results will be presented on a non-GAAP financial basis, unless otherwise specified.
A reconciliation of the GAAP to non-GAAP financial measures may be found on our website.
As a reminder of webcast replay will be available on our website later today.
We encourage you to monitor our web site at Micron Dot com throughout the quarter for the most current information on the company, including information on the various conferences that we will be attending.
You can follow us on Twitter at Micron Tech.
As a reminder, the matters 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 the statements made today.
We refer you to the documents, we filed with the SEC specifically.
Specifically, our most recent form 10-K, 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 results 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 will now turn the call over to Sanjay.
Thank you for Han good afternoon, and happy new year to everyone.
Micron delivered strong revenue and earnings in the fiscal first quarter.
Im proud of the micron team for continuing our business momentum and putting micron and a better technology and product position than ever before despite the ongoing challenges posed by the pandemic.
We began shipping the industry's most advanced NAND with 176 layers.
And then D. Nam we made good progress on our one Alpha note and are on track to begin volume production in the first half of calendar 2021.
We believe D them is past the bottom of the industry cycle and expect improving trends through calendar 2021, as the day stagnation of the global economy continues fueled by artificial intelligence cloud fiveg and the intelligent edge, including smart vehicles.
Against this backdrop micron is poised to doing much stronger and get excited about our future.
I will start with a quick update on our manufacturing operations.
In early December two separate events affected our Taiwan D them operations.
The first event was a power outage at our Italian facility, which occurred on December 3rd the last day of our fiscal first quarter.
The second event, a 6.7 magnitude earthquake off the northeast Gustav Taiwan occurred on December 10.
Duck Creek was felt at both our alteon anti channels locations then.
The investments we have made over the last few years in facilities redundancy and Cleanroom control substantially mitigated the impact of these two events.
However, these disruptions have reduced our available fiscal second quarter D Nam supply and negatively influenced our costs in the short term.
Expected impact of these events is factored into our outlook.
Micron continues to be excellent progress on our key goals first to deliver industry, leading technology and improve our cost structure.
Second to bring differentiated products to market and improve our product mix and third to grow our share of industry profits, while maintaining stable which share.
For fiscal year 16 to fiscal year, two end team, we substantially improved our EBITDA margin for our combined DRAM and NAND business, while the rest of the industry in aggregate was roughly flat.
And over the last few years, we have accelerated our technology roadmap in both DRAM and NAND.
As a result for the first time in our history Micron has technology leadership in both DRAM and NAND simultaneously.
Now that we are leading the industry and technology capability going forward, we expect to maintain this competitive position through a more typical cadence for node transitions consistent with the rest of the industry.
And D them, we are making good progress on our one alpha note. This.
This will be an outstanding technology node for micron, delivering a 40% improvement in beds per wafer over our vanzee.
A substantial portion of this improvement comes from our chip design concepts that provide greater memory or the efficiency.
Following the extraordinary improvements of our of announced footnote, we anticipate lower gains in bits per wafer growth as more complex interfaces, such as DDR five are introduced and as DRAM technology scaling challenges continue.
We are also making progress with differentiated D NAND products, such as Gd, our six and six X for Grafix.
In the fiscal first quarter, we saw strong growth in bit shipments for these products.
We also began revenue shipments of HBM to eat products.
In NAND in early November we began volume production of our second generation replacement Gate note, which is the most advanced in the industry combining our replacement gate architecture Cmos under the name and advanced charge, Jeff process technology.
It also features double the power efficiency and ride performance of Micron's 96 layer Threed NAND.
These improvements are essential for addressing future at high end mobile applications.
We began shipping 176 layer consumer ssds in the fiscal first quarter and we'll be introducing products built with this technology across the rest of our product portfolio over the course of next several months.
We had also driving product innovations and cost reductions through an increased mix of Q, we'll see NAND and we are leading the industry with the broadest portfolio of Q Lcs as these across client consumer and data center markets.
QLT helps to make ssds more cost effective and accelerates the replacement of hdds with ssds.
QFC SSD adoption continues to grow and our bit mix of Q Lcs as these increased further in FQ one.
Turning to end markets.
In data center cloud Nei will drive long term growth with memory and storage, becoming an increasing portion of server bomb cost.
New compute architectures that enabling more memory channels and higher density modules contributing to increases in server memory content.
Micron is positioned for success in this market with a broad portfolio of high bandwidth high quality and poverty efficient products.
The ongoing enterprise market weakness.
In FQ one.
We began revenue shipments for our ultra bandwidth HBM too he memory, which is used for data center.
Turning an inference.
We are making progress on the DDR, five transition, which will double bandwidth and reduce power consumption and we plan to start the transition in the second half of fiscal 2021.
In data Center Ssds, we continue to make progress on our nvme knee portfolio and completed several customer qualifications in FQ one.
We also continue to maintain our leadership position in Santa.
Datacenter SSD revenue declined sequentially, but was up year over year as cloud growth offset a decline in enterprise.
We remain focused on strengthening our datacenter nvme SSD roadmap that internally developed controllers and have new product introductions planned in the coming quarters.
Our FQ one mobile revenue was up sequentially, driven by solid execution and improved handset demand a.
Our better than expected transition of microns mobile business from Harvey to other mobile customers also contributed to our revenue upside in FQ one.
Micron is well positioned to win in the Fiveg with our industry leading product portfolio.
We had several key achievements in our mobile business in FQ one.
We maintained a healthy five solutions leadership and grew our LP five shipments were the first to market with you MCP five and achieved record MCP revenue.
MPC the continued remote work and learning chant growth strong notebook and chromebook demand in the quarter. Despite pockets of non memory component shortages in the supply chain.
We delivered strong sequential growth in PC DRAM shipments driven by demand in.
In client SSD Nvme media presented over 90% of the client SSD beds with nearly half of those net the EMEA SSD beds being Q LC.
Consumer Ssds had a second consecutive record quarter for bed shipments and we ship the world's first 176 layer based consumer ssds.
In graphics, we achieved strong GDR, six and six x. bed shipment growth driven by new game console and PC graphics product launches.
Micron has a strong position in this high growth market with a broad product portfolio and deep customer partnerships.
We had a record quarter revenue quarter, resulting from the resumption of auto manufacturing around the globe and the continued growth of memory and storage content per vehicle.
We also achieved qualification of our runs the LP for D. Nam and began sampling our 96 layer based USS NAND.
Electric vehicles have higher semiconductor content and Ltvs continue to proliferate, we expect our auto business to continue to excel.
In addition, as autonomous driving features advance this content growth trend will escalate further.
Microns quality and market share leadership uniquely positions us to not just benefit from this growth, but also to drive innovative solutions for next generation vehicles in collaboration with our ecosystem of customers and industry partners.
Now turning to a review of calendar Twentytwenty industry demand.
During Q1 overall demand was strong across most end markets. Despite shortages of non memory components in PC mobile auto and graphics.
Cloud demand was healthy while enterprise demand was weak due to the economic environment.
As a result of the stronger than expected demand at the end of the year. We now estimate that calendar 2020 industry D them better demand growth was slightly above 20%, while NAND bit to demand growth was in the mid twentys.
Now for our calendar Twentytwenty one outlook.
Indeed, Jim we're past the bottom and the industry is in tight supply across major market segments.
As a result, we had already seen our calendar Q1 pricing starting to increase in several parts of the market.
16, gigabit adoption and client and datacenter modules has increased causing the same supply tightness that was previously seen in eight gigabit to also now be visible in 16 gigabit.
We expect calendar Twentytwenty, one D them industry bit demand growth of high teens.
With D Nam industry supply to be below demand.
Stronger than expected industry demand has reduced supplier D them inventory's.
Low inventories combined with disciplined industry capex in Twentytwenty and the vaccine driven recovery from the pandemic should result in a further tightening of the D them market through calendar 2021.
In addition, we will also benefit from higher content in Fiveg phones, which are forecast to double in unit sales and 2021 to around 500 million units.
We anticipate healthy unit growth in the PC market and graphics should continue to benefit from new gaming consoles and from new gaming cards launched in the second half of last year.
We expect the cloud market to grow at a healthy pace and enterprise market recovery will be driven by the timing of the broader economic recovery.
Calendar Twentytwenty, one industry NAND bit demand growth is expected to be approximately 30% with supply potentially higher.
The net market is challenging in the near term. However, we believe that as the year progresses elasticities, coupled with pandemic recovery should lead to improving demand we.
We believe the market can stabilize over the course of 2021, if suppliers moderate their production growth.
Long term, we expect DRAM bit demand growth CAGR of mid to high teens, and the NAND bit demand growth CAGR of approximately 30%.
Turning to micron supply, we target our long term bit supply growth CAGR to be in line with the industry better demand growth CAGR for both DRAM and NAND.
However, there can be year to year variability caused by a node transition timing.
In both DRAM and NAND, we expect our calendar 2020, one bit supply growth to be below the industry demand growth and we plan to use inventory to support but shipment growth that is in line with industry demand growth.
For fiscal 2021, we expect D them cost reductions in the mid single digit percent range with somewhat higher levels of cost reduction on a like for like basis.
We anticipate NAND cost reductions in the low to mid teens percent range.
We're targeting fiscal 2021 capex to be approximately $9 billion to support our long term goal of maintaining a stable share of industry bit supply.
If demand expectations change, we remain flexible to adjust our capex.
As we look ahead, we are excited about the growth and health of our diverse end markets, which continue to benefit from powerful secular technology trends, including AI cloud Fiveg and the intelligent edge.
These trends are already enabling the data economy, and increasing the importance of DRAM and NAND.
Memory and storage industry revenues have grown faster than the broader semiconductor industry from approximately 10% of semiconductor industry revenues in the early two thousands to now approaching 30%.
We expect that our Tam growth will continue to outpace the rest of the semiconductor industry over the next decade.
Microns focus on technology and product leadership operational excellence and deep customer partnerships positions us well to grow our relevance and profit share in the industry.
I'll now turn it over to Dave to provide our financial results and guidance.
Thanks, Sanjay Micron delivered very strong fiscal first quarter results with revenues and earnings coming in well above the guidance range provided in our last earnings call.
We saw an improving business environment through the quarter and demand and pricing were better than expected for both DRAM and NAND.
Total Q1 revenue was approximately $5.8 billion down 5% quarter over quarter, but up 12% year over year.
Adjusting for the extra week in the prior quarter revenue increased 3% sequentially driven by strength in a broad set of markets, including auto graphics client mobile and consumer.
FQ, one DRAM revenue was $4.1 billion, representing 70% of total revenue.
DRAM revenue decreased 7% sequentially, but was up 17% year over year.
Pitch shipments were down in the low single digit percentage range sequentially and Asps were down in the mid single digit percentage range quarter over quarter.
F Q1, net revenue was approximately $1.6 billion, representing 27% of total revenue.
Net revenue increased 3% sequentially and was up 11% year over year.
Bit shipments increased in the high teens percentage range sequentially, while asps declined in the low teens percentage range quarter over quarter.
Half of the decline was attributable to a change in mix, which included a greater portion of components.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was approximately $2.5 billion down approximately 16% sequentially, but up 29% year over year we.
We had solid sequential growth in graphics and client revenues, while datacenter revenues declined sequentially coming off a particularly strong quarter for cloud the loss of the extra week and continued weakness in enterprise.
Revenue for the mobile business unit was $1.5 billion up 3% sequentially and up 3% year over year.
Mobile demand remained strong as fiveg momentum increases and the mobile market recovers from the impact of the pandemic.
Revenue for the storage business unit was $911 million roughly flat from the prior quarter and down 6% year over year as.
As a reminder, Threed cross point revenues are now reported in the compute and networking business unit.
Excluding Threed cross point from the prior year's quarter, SPG revenues would be up 14% year over year.
Finally revenue for the embedded business unit was $809 million up 24% sequentially and up 10% year over year.
Eric revenue was the highest since Q1 fiscal 19, driven by a record auto revenue as demand recovered from pandemic related shutdowns.
The consolidated.
Today to gross margin for Q1 was 30.9% down 400 basis points from the prior quarter.
Our gross margin was impacted by pricing declines and a greater mix of NAND.
Operating expenses were $811 million in Q1, as we continue to tightly manage expenses.
We're expecting to increase operating expenses in the second half of this fiscal year as the previously delayed fiscal 21 salary increases take effect at the beginning of Q3, and we incur additional prequalification related expenses in Q3 and Q4.
As a result, we anticipate that our Q3 expenses will increase approximately 10% sequentially from Q2, but of course, we remain flexible to reduce operating expenses from those levels should business conditions warrant.
F Q1, operating income was $973 million, resulting in an operating margin of 17% compared to 21% in the prior quarter and 12% in the prior year's quarter.
Net interest expense was flat quarter over quarter at $31 million.
We expect the net interest expense to be approximately $35 million in Q2.
Our Q1 effective tax rate was 7.4% we.
We expect our tax rate to be in the mid to high single digits for the remainder of fiscal 21.
Non-GAAP earnings per share in Q1 were 78 cents down from one dollar an eight cents in Q4 and up from 48 cents in the year ago quarter.
EPS included two cents of non operating income related to gains from investments in our venture arm Micron ventures.
Turning to cash flows and capital spending we generated approximately $2 billion net cash from operations in Q1, representing 34% of revenue.
Net capital spending was approximately $2.8 billion during the quarter we.
We expect approximately $9 billion in capital spending for fiscal 21 with spending weighted towards the first half of the fiscal year.
Free cash flow in the quarter was negative $816 million we.
We expect free cash flow to remain negative in Q2, but to improve from the Q1 level driven by increased cash flow from operations.
As we said previously we expect to generate healthy free cash flow during the second half of fiscal 21.
Although we didn't repurchase shares in FQ, one we remain committed to returning greater than 50% of our annual free cash flow to shareholders through share repurchases.
We made significant improvement on our days of inventory and ended up Q1 with $5.5 billion of inventory or 125 days versus 135 days last quarter.
As we look ahead to Q2 I want to share some changes to our upcoming inventory reporting.
Starting in Q2, we will be using a FIFO or first in first out approach to inventory valuation as opposed to the average cost method cost method that we have historically used.
Concurrently we are introducing a new costing methodology that uses standard costing.
These changes will help us improve our business reporting by valuing inventory at the most recent production cost and aligning with general semiconductor industry practices.
While we expect no material impact to our non-GAAP results from these changes we do expect to record a one time non cash charge of approximately $300 million, which will impact our Q2, GAAP results and reduced the carrying value of our inventory.
Unlike certain valuation adjustments or write downs to inventory. This is a permanent methodology change that will not result in a material impact to our future costs or margins.
Concurrently with these changes we will also reclassify spare parts from inventory to other current assets, which also better aligns with the rest of the industry.
This new representation will return to reduce our inventory balance and consequently, our days of inventory will decline by approximately 10 days versus the old methodology.
Applying this 10 day decline our Q1 days of inventory would have been approximately 115 days and our new days of inventory target is approximately 95 to 105 days.
We expect to reach our days of inventory target in the second half of fiscal 21.
We ended the quarter with total cash of $8.4 billion and total liquidity of approximately $10.9 billion.
At Q1, ending total debt was $6.6 billion.
Now turning to our outlook.
We are seeing improving conditions across multiple DRAM end markets with strong demand and cloud client auto and mobile.
This demand recovery would be even stronger if it weren't for the shortages of non memory components in several markets.
On the supply side as Sanjay mentioned, a power outage and an earthquake have limited our DRAM supply and we are rapidly drawing down on our inventory across DRAM and NAND.
From a gross margin perspective, the power outage in earthquake impact will be a headwind to our DRAM cost reductions in Q2.
Additionally, the timing of new DRAM and NAND node ramps also limits our cost reductions for Q2.
With all these factors in mind, our non-GAAP guidance for Q1 is as follows.
We expect revenue to be $5.8 billion, plus or minus $200 million.
Gross margin to be in the range of 31% 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 earnings per share to be 75 cents plus or minus seven cents.
As we look beyond Q2, we anticipate that a vaccine driven economic recovery combined with secular trends such as Fiveg adoption and I and AI will result in stronger demand.
In the second half of fiscal 21, we expect improved financial performance driven by strengthening market conditions, and a stronger cost reduction across DRAM and NAND.
In closing, we're confident in microns ability to deliver strong long term revenue growth and cross cycle profitability over.
Over the last four years Micron has delivered average gross margins of 40% EBITDA margins of 50% and return on invested capital of 20% we.
We believe micron strong performance will continue cross cycle as we look to the expected upturn in the DRAM business in calendar 2021, microns relentless focus on execution positions us well to generate solid returns for our shareholders.
I'll now turn the call over to Sanjay for closing remarks.
Thank you Dave over the last year Micron delivered strong performance in the face of significant challenges from Covance Im thankful to the micron team, whose tenacity and resilience enabled us to navigate this challenging period and maintain production at normal levels, while continuing to advance our technology and.
Our debt portfolio.
Micron is poised to emerge stronger in calendar 2021 at the oil recovers from the vendor mix.
We are confident in our roadmap to further enhance our competitive position, while emphasizing supply discipline.
We are in a better position than ever before and this has been recognized by our customers recently Micron received supplier awards from multiple customers, including from tier one China smartphone Oems.
We also continued to make great strides in advancing our cartridge responsibility agenda.
In November Micron published our fiscal year 20 annual diversity equality and inclusion report detailing our progress over the year and our commitments for fiscal year 2001.
And Twentytwenty, we increased our female Borgia presentation, and also made investments to improve the presentation of all under represented groups, including blacks, and let nx and technical and leadership roles.
We expanded our pay equity initiative beyond gender to also include other other underrepresented groups and to consider total compensation across pay and equity awards.
We are working with industry organizations to establish best practices and supplier diversity and to support the inclusion and competitiveness of diverse suppliers in the semiconductor industry.
And finally, we leveraged deposit growth microns influence in the communities, where we live and work to advocate for greater social Justice and safety globally.
We're also proud to report net in November we would add it to their Dow Jones sustainability index, joining the ranks of the most to sustainable American companies.
We aim to build on this recognition as we advance on our sustainability goals this year.
Thank you and now we will open the call for questions.
Thank you.
As a reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
Our first question comes from the line of Chris Danley with Citigroup.
Hey, guys Mary New year, and thanks for let me ask a question.
In terms of whats.
Impacting you I guess you can.
Sort of control or fixed the power outage in the earthquake, but you also mentioned that there is shortages of non memory components out there that are impacting you as well are impacting the memory industry.
Can you maybe quantify those and.
Is that is that issue getting any better or could it get any worse and could this I guess hinder any sort of upturn in DRAM this year.
So let me be clear that view is referring to non memory component shortages, we've been referring to those in our end markets our customers experiencing certain end market shortages and yes without those end Mark did all those non memory component shortages, yes, the overtones.
Demand could have been even somewhat higher and these non memory component shortages at some of our customers are experiencing these related to enogen growth tightness in the foundry space.
Logic, eight and 12 inch nodes.
There is some of our customers and their end market hardware are experiencing theres been shortages. So thats. What we are referring to of course, you with respect to our own supply chain. This is an area you know given some of the foundry shortages at an existing today.
We are continuing to manage our supply chain today, we do not see for this quarter any specific shortages in terms of our ability to supply any non memory shortages with respect to our ability to supply product to our customers of course as we highlighted in our script reduce the.
Editing shortages in memory, particularly in DRAM across several parts of the market and expect to our own supply chain aspects. We have factored those in the outlook that we have provided and our supply chain has really excellent operations team and we continue to work with ours.
Suppliers with our partners to make the best assessment in terms of managing our own supply chains, so again to be clear.
We're not pointing to any non memory component shortages in this quarter for our own manufacturing supply chain veeva, referring more to our customers end markets. We are they are experiencing certain non memory component shortages of course from the point of view of our own supply chain, we continue to monitor.
Some of the trends that are there in the text supply chain with the you know.
Certain parts of the supply chain running tight we continue to monitor those in terms of any impact on our business as well as work closely with our customers to understand those demand trends.
Great. Thanks, guys.
Thanks, Thanks, Chris.
Thank you and our next question comes from the line of John Pitzer with Credit Suisse.
Yes, good afternoon, Sanjay Dan. Thanks, Let me ask the question Sanjay I wanted to go back to your comments you made about your expectation for DRAM demand. Both this year of high teens and longer term of mid to high teens Im just kind of curious if you can give us a little bit more insight of how you're building up those models and I'll push back a little bit because we've got a very strong gaming console this year.
Sure we've got the move to Fiveg as ice Lake ramps, we're going to go from six to eight channels in the server market. It seems like the risk to that forecast on demand is to the upside. This year and then Conversely, as you think about server as a percent of your DRAM business over the last five years, it's gone from 15 to 30 approximately.
And given what we see around DRAM densities going into next generation computing, especially around AI workloads I would think that that the historic 20% growth in DRAM demand should be something the industry should be able to maintain I'm just kind of curious as to why you don't believe that.
So John I mean, we are giving you our best estimates with respect to the demand assessment and you are absolutely right to point out that the end market demands are certainly the demand trends are strong the trends the secular trends of AI, a fiveg cloud and Intel.
Agent edge.
Including smart vehicles is absolutely strong growth driver for memory and storage in the years to come keep in mind for calendar year Twentytwenty, particularly in the late part of calendar year Twentytwenty. The demand ventev strongly so when we look at DRAM demand growth for calendar year Twentytwenty be said.
That it is somewhat above 20% in calendar year, two and be on a year over year basis. So thats largely has really adjusting some of our assessment for calendar year 21 in terms of high teens.
For their DRAM demand growth in terms of you know how the come about these numbers, we had always working closely with our customers. We mark market intelligence team is assessing the end market demand trends, what we see is over the course of next few years for D them, that's stronger than that.
Average of the market would be mobile fiveg will be a long term growth driver in Twentytwenty. One we do expect that fiveg phones will be twice of what dealer interest in calendar year Twentytwenty going from 250 million units to 500 million units and no question that average.
DRAM content.
In the Fiveg phones increases substantially as well that minimum D them in Fiveg smartphones being six gigabyte, yes graphics gaming consoles, new gaming consoles, New gaming graphics cards also a strong driver and stronger than the average in Twentytwenty one off the D.
Jim growth throughout.
So how would we expect to be healthy and strong and Twentytwenty, one as well based on all the the fourth net you have seen from various cloud suppliers about their capex investments and then workloads moving more towards the AI and machine learning and driving greater demand and ortho certainly in Twentytwenty, one auto unit sales and we believe long.
Rebounding and all of these and also of course, the new ahead vacancies are becoming more intelligent also.
Also driving greater content all of these markets that I just mentioned mobile graphics cloud auto we believe this growth was stronger than the average of the market and Twentytwenty one.
Weaker than the average of the market would be the PC, although BC overall, we'll have unit growth in Twentytwenty, one and micron is well positioned with DC market deserve BC market as well all I'm, saying is that compared to the average of the industry. The DRAM bit growth in DC I believe will be somewhat less than the average.
Page and enterprise continues to be somewhat weak as well.
And David the.
Secondly, the bond from the pandemic, we would expect during the course of the year enterprise will decode as well. So these are all this is how we look at the end markets and Twentytwenty one and this is what leads us, particularly on the heels of a very strong above 20% bed growth in.
Calendar year Twentytwenty. This is what leads us to project.
Hi, teens kind of number for Twentytwenty, one and when you look beyond that.
As you noted we see that.
Overall D them CAGR multi year CAGR will be the high teens mid teens to high teens, some years may be little bit less some years little bit more but we are talking about the general CAGR there and of course, we work closely with our customers. We work closely with understanding their demand and we also have and low.
Supply agreements with several of our customers and last part so the market. This is all what helps us build the intelligence that led us to the numbers and John we look at these numbers from on a very regular basis, we assess them and of course, we made make adjustments as necessary and.
Well, you make adjustments and those projections, we of course make adjustments and notable and expectations of how to manage our supply because our goal is to manage our supply growth to be in line with the industry demand growth on a CAGR basis.
Thats great color. Thanks, Sanjay congratulations for the good start to the year.
Thanks, John.
Thank you and our next question comes from the line of CJ Muse with Evercore.
Yes, thanks for taking the question Sanjay gave happy new year I guess.
I'd like to focus on cost downs.
And you talked about.
Down mid single digits.
In fiscal 21 and curious.
Kind of impact.
Is embedded in that number for the disruption that.
You have seen in the last month and then as you think about the ramp of one alpha in the 40% increase in bit output.
Versus one Jay.
I would love to hear your thoughts on what kind of acceleration, we should see in cost downs on the DRAM Scott.
And August and you know when we really see.
That uptick in savings.
Through your one alpha ramp thank you.
Okay ill take that CJ. So on the cost downs for this year as you mentioned DRAM were expectation is that we see mid.
Single digit cost downs this year.
That is our feet to the cost impacts of the disruptions we experienced.
At the beginning of this quarter and late last quarter are embedded in that for sure.
You know as you look into.
More.
As I said I should say as we progress through this year and into next year.
One alpha will become more and more of our volume that should bode well for our cost declines.
And Thats one of the reasons why we think most of the cost declined we'll see in DRAM is really backend back half of 520 21 loaded, but we do expect to see.
That lead to further cost improvements in flight 22 as well.
Next question.
Our next question comes from the line of Karl Ackerman with Cowen.
Yes, good afternoon, gentlemen, thanks for taking my question.
Maybe just to follow up on CJ question on DRAM cost declines I'd like to move on to NAND.
I appreciate the commentary.
Our net cost improvement, which you called out low to mid teens is there a way to quantify the cost headwind from your transition to replacement gate.
Kevin advantage to that would be a fairly sizeable even in fiscal 2021, and I had a quick follow up.
Yes.
So yes, so I think if you looked at last year, if why 20, our cost declines were pretty negligible actually.
On NAND because of the transition to the first generation of replacement gate.
And really the only area, where we got any sort of cost declines was in the changeover in depreciation.
For NAND from five to seven years.
As we move into the second generation as we talked about we this 176 layer has a particularly good call.
Cost structure and.
And so that will obviously be the big factor in terms of driving our cost declines.
In the low teens for this year and again, we're going to be ramping this through the year and into next year. So we do feel like this will be a tailwind for our cost reductions as well.
You didn't ask about this but on top of that we have mark as we talked about on the call. We have good momentum in Q LC that should be also a good tailwind for for NAND cost as well.
Got it thanks, thanks for that.
You recognize a record graphics DRAM quarter.
Just kind of curious of graphics are now closer to 20% of the segment now.
And then I guess, what sort of Grafix DRAM demand are you seeing from Gpus used for cryptocurrency mining now that those currencies are now at an all time high. Thank you.
So with respect to graphics that is in single digits overall.
As part of the industry as well as as part of our business if anything micron actually leads in the graphics segment of.
With respect to our leading edge high performance vomit efficient D. Hams RGB, our six allergy DDR six X products are very well positioned with industry, leading specification in the graphics market you know about GDR six Eric that we introduced with the Pam four.
Interface with twice the data transfer rate of the traditional DRAM memory. Before then so we are very proud of our leadership in the graphics market and certainly some part of the graphics market addresses the crypto mining applications as well so thats embedded video.
Within our graphics revenue that we talk about and basically some of the graphics cards that have been using GDR saics NDRC execs memory and other graphics memory that we supply are used in crypto mining applications and kept our mining is just pointing to yet another country.
Doing digitization of the economy, yet another application it will be an important.
Cryptocurrency will certainly be very important in the future and.
That data mining needs there if the winding means definitely needs high performance memory.
Memory, and Micron DRAM memory, Matt Micron graphics products are well positioned in that part of the Mark there.
I think we can go to the next question.
Your next question comes from the line of Timothy Arcuri with you vs.
Thanks, a lot I guess I had two first Sanjay I wanted to double click on a prior question.
So I understand that the demand was better during the during the late part of last year, but you also took down your forecast for this year you were picking up 20, and now you're up more like high teens. So is there any component of that.
Yes, Jim that you're hearing in mobile is that part of the two or is it just the Matt that you had the same number of bits off with a higher base last year, and then I had a follow up on for David. Thanks.
Simply is Tim the lack thereof, what you just said that it is.
The order demand and Twentytwenty, one we absolutely based on on the demand drivers that we see that we described in our Scott we see really continuing strong trend of demand in Twentytwenty. One. So it is what you said that 2020 has a higher base because 2020 demand for DRAM vent above 20%.
With that higher base compared to our Brian expectations, We just said that high teens. Nonetheless, let there be no confusion I mean, 2020, one overall, Jim DRAM demand trend across the board across our markets, except for the enterprise, where we have fed enterprise weakness will go away once the pandemic recovery takes hold.
Fully on the economies, but whether it is auto Arctic as smartphones sold it is cloud or graphics.
All of these end markets are pointing to strong demand.
Both units as well as strong demand for average content increases into.
In 2021, so we are very excited about the demand opportunities and keep in mind. This is in the backdrop of capex.
Management disciplined Capex management in the DRAM industry, leading really to supply environment, where we think that the supply growth will be less than the industry demand growth in 2020, one which sets up 2020, one very nicely for the D them fundamentals and.
Back to innovative micron's execution on technology and products continuing to strengthen our position there really very proud and excited of our microphones position with industry, leading one alpha ignored now which of course over the course of next seven quarters, we'll be ramping into production.
Okay. Thanks, Thanks, much Dave Super Super quick you Didnt buyback any stock and I know that you bring more cash than maybe you thought because in some working capital that was a little bit sort of worked.
Against you, but why not gill why not buy back stock given the improving outlook and obviously are going to generate a lot of free cash flow during the fiscal back half of the year and your stock seems to buy a tire so why why not buyback any stock during fiscal Q1. Thanks.
I wouldn't read too much into it I mean if.
If you look back over the last couple of years.
I think we generated.
At $4 billion levels of cash flow and.
The combined the converts and the buybacks, we spent probably closer to $4.7 billion or sell.
On all of that so we're definitely committed to the buyback.
I would expect.
Our target is certainly Jeff to generate free cash flow for the year and I think you can expect us to remain committed in terms of returning at least are more than 50% of the free cash flow in the form of buyback. The one other metric that we do to try to.
Focus on is our net cash our cash excess of our debt.
And of course, when we're when we were not generating cash margin Datacash b.
We eat into that a bit and sell I think.
Just to be cautious we wanted to make sure that we didnt eat into that net cash balanced too much but not really reflective of any view on the stock price and we remain.
Buyers over time of the stock sell.
Okay. Thanks.
Sure.
Thank you and.
And our next question comes from the line of Harlan sur with JP Morgan.
Good afternoon. Thanks for taking my question on your cloud business remain relatively healthy through calendar year, 2000, and I know that the team is expecting strength this year, but any more from a near term perspective. It does seem to be some growing indications that data center spending is going to start to reaccelerate here in the first half of this calendar year.
On top of that you have some of the new processor ramps that are coming to the market as well as the teams seeing the strength here in Q2 and in your forward orders or customer forecast and then can you just give us an update on your DDR five silver products are you guys finished for the qualification.
All of these new products ahead of the second half adoption cycle.
So with respect to cloud, yes, I mean compared to our peak over expectations Twentytwenty was a strong year for cloud.
And you know we did well it was good for the industry and it was good for us as well and yes, we definitely in Twentytwenty, one as well can continue to see strength in.
In cloud a healthy business environment healthy demand for.
For cloud and continuing to work with.
Robert leading edge technology nodes as we get that ready into production with one alpha to get that qualified with our customers. So yes clouds is low.
Long term secular demand driver for our industry and again it is the trend of AI and ammo and the workloads that Doug gliding more memory and you are absolutely right to note that.
Companies are in 2021, introducing new.
The CP use and.
Compute architectures, which will have more course, which will have more channels more DRAM attach rate and with the end market appetite of need for more memory and the compute architectures and processors, enabling greater D them or to actually in the servers, yes. This trend.
Of more memory.
On the cloud environment will continue in this trend is here to stay for a considerable period of time, even beyond Twentytwenty one timeframe this effect to DDR five.
That is really in the very early innings at this point.
We are happy with dollar product position, there and the DDR fibers start picking up in terms of revenue opportunity later on in 2021.
Thank you Sanjay.
We'll sell into qualification phases, and with the become revenue apportion debugging better position.
Thanks, Andy.
Thank you.
Next question comes from the line of Joe Moore with Morgan Stanley.
Great. Thank you.
You guys continue to have this kind of negative.
Leaning language on NAND.
But you did inject it could improve over the course of this year as people moderate their plans like what it seems like the spending is fairly front half loaded and will moderate over the course of the year.
What are you looking at there to sort of gauge whether that could get better or worse over the course of the year and what's the you know.
Am I right to sort of say that there's a little bit more optimism in the way that you phrase that.
So certainly NAND as traditionally has been the case has elasticities that as an important part of the net market and.
Justice it even continuing to drive greater content in the various end market applications from.
The smartphones to client notebook computers to datacenter applications as well and both the pandemic, we definitely expect that general across the tech space that will be pentair release of pent up demand.
And that it sell for a couple of years is going to drive increasing demand.
Overall, when we look at Twentytwenty, one we expect the demand growth in NAND to be approximately 30% and our estimation as that supply, perhaps somewhat above demand and as Dan elasticities kicks in as the post Corbett.
Our spend to make and while demand environment Bill.
Well as well as with greater focus from the industry in terms of management of the supply than we do believe that NAND fundamentals can strengthen asset at micron is concerned I mean, we definitely are extremely focused on managing our supply growth with discipline.
Bedard 176, net NAND, we are very excited about our industry for us to position this technology.
But we manage our supply growth and we expect that micron supply overall supply growth will be below the industry demand growth and of course, we will supplement that that some of the inventory so that in terms of our shipment growth in 2020. One it will be in line with the industry demand growth expectation, but manish.
Net of the supply I think is an important factor in the industry in terms of overtime returning.
To the.
The the healthier levels of the NAND industry, along with the Leicester City, and Posco that NAND demand environment.
Great. Thank you.
Thank you.
Your next question comes from the line of Toshiya Hari.
With Goldman Sachs.
Good afternoon. Thanks, so much for taking the question.
I wanted to ask about Capex and Im curious what the internal debate as to.
Today at Micron.
You know obviously Doug.
Any changes to your full year budget of 9 billion, but on the DRAM side Sanjay is it fair to say given given the outlook over the next year or so if there is a bias internally the bias to the upside from us spending perspective, and Conversely on the NAND side you've you.
Jim to Joe's question, you've struck this cautionary note.
Over the past couple of quarters.
Realize you guys are being fairly prudent and focusing on on your transition, but what would you need to see for you to churn constructive sorry conservative.
From a spending perspective and then thank you.
So again, I think bullets for D Nam and for NAND I think.
It is extremely important for us at micron on an ongoing basis to stay disciplined with respect to supply growth with respect to investments in capex to manage our supply growth to be in line with the industry demand growth expectations on a CAGR basis and.
This is where our focus is because that's the best way to generate ROI on our.
Investments, we feel very good about our capex discipline, and our focus on really driving profitability of the business through increasing our share not just chasing bed share, but increasing the profit share of the industry and this is where our focus on differentiated.
Solutions, both in NAND as well as an D them to strengthen our position to strengthen the mix of the product portfolio is an important part of our strategy, but with respect to the capex discussions that always is about really disciplined on supply growth staying in line with the demand growth.
Thank you.
Thank you Mark and our final question comes from the line of Mitch Steves with RBC capital markets.
Hey, guys. This is taking my question I wanted to double click on line and you're going to get that some of these call back. So when you talk about the DRAM impact for Q2 or sorry, the second quarter guide.
Can you walk us through like kind of the magnitude of the impact.
How much of that 31% kind of midpoint is being negatively impacted by DRAM any sort of qualitative answer there would be very helpful. And then secondly, as it relates NAND. It sounds like you guys are going to cautious there can you talk us through what do you guys expect to see from the smartphone market given the fact that we're going to see kind of elevated Q1 due to the change in product cycles, but then.
And how should we think about kind of to reach challenger to H smartphone demand as you guys see it right now.
Okay. So I'll take the first one and Sanjay will take the smartphone question. So yes of course, there there was a cost impact or will be a cost impact in the second quarter associated with this disruption I wouldn't say it's.
A massive its.
Measured in tens of basis points, not hundreds of basis points that we factored in court.
And with respect to smartphone content growth certainly avail fiveg. The average content will continue to increase in smartphones, we have talked about in the past that tower D them content in smartphones is eight gigabyte to 12 to 16 gigabyte, even in certain phones and average content increase.
In the smartphone market will be in the double digits and again in the smartphone I think it's important to understand that not only is it about the fiveg in number of units increasing more than doubling during the calendar year 21 calendar year 21 going from $250 million Fiveg smartphones and 22.
500 million plus in Twentytwenty mine, but the average content of Bienaime is increasing in these fiveg phones as well so thats a multiplicative impact with respect to the DRAM demand growth in the smartphone market and if you look at the CAGR of D them content over the course of net.
A three years or so that CAGR of average content growth in the smartphone market is in the double digits range. So smartphone will continue to be a strong market and we are very well positioned with our NAND and DRAM combination to address the growing opportunities in the smartphone markets we mentioned in the.
Earnings call prepared remarks that our MCP revenues and Cps with multi chip packages that include D them as well as NAND, we are extremely well positioned being the manufacturer aboard DRAM and NAND that AD revenue. It MCP revenue hit a record in our fiscal Q1 time.
Jim So smartphone.
Continues to be strong and the largest mark.
Market for DRAM, and NAND, and we are really well positioned there and quite excited about the opportunities here.
Including introduction of our.
As the DDR five and GMC.
Five industry leading solutions.
Understood. Thank you so much.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
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