Q2 2021 Micron Technology Inc Earnings Call
Good afternoon, My name is Latif and I will be your conference facilitator today.
At this time I would like to welcome everyone to Micron second quarter 2021 financial release conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker remarks, there will be a question and answer period.
If you would like to ask a question. During this time. Please press 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.
It is now my pleasure to turn the floor over.
Bose Farhan Ahmad Vice President of Investor Relations you May begin your conference.
Thank you.
And welcome to Micron technologies fiscal second quarter 2021 financial conference call.
On the call with me today are Sanjay Mehrotra, President and CEO, and Dave <unk> Chief financial.
For two year old.
Today's call will be approximately 60 minutes in length.
This call, including the audio and slides is also being webcast from our Investor Relations website at investors Micron Dot com.
In addition, our website contains the earnings press release and the prepared remarks filed a short while ago.
Losses 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 can be found on our website.
As a reminder, a webcast replay will be available on our website later today.
We encourage you to monitor our website.
Good day Micron dot com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will get Inc.
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As a reminder, the matters we will be discussing today include forward looking statements.
These forward looking statements are subject.
Right at two 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, our most recent form 10-K, and 10-Q for a discussion of risks that may affect our future results.
Although we believe the expectations reflected.
Subject to 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 day to confirm these statements to actual results.
I'll now turn the call over to Sanjay.
Thank you for time Micron delivered strong.
<unk> in the Q2 results above our original projections, driven by solid execution and higher than expected demand across multiple end markets. The D.
For the end market has been severe shortage in the NAND market is showing signs of stabilization in the near term.
Execution from the Micron team and these gen 10 conditions.
<unk> enabled us to set revenue records for mobile mcps, and automotive products and to reach normal levels of inventory ahead of schedule.
Following last quarter's introduction of 176 layer NAND into volume production in Q2, we began volume production on our one alpha DRAM.
Note solidifying our technology leadership in both DRAM and NAND.
We are in an excellent position to capitalize on the strong demand for memory and storage driven by artificial intelligence and <unk> across the data center, the intelligent edge and user devices.
I.
I'll start with an update on our operations.
For Micron team is doing everything we can to meet customer demand. Despite the challenges of the pandemic non memory component shortages in the electronics industry and disruptions that occurred in our Taiwan Fab in December.
We are confident that our COVID-19 safety protocols.
Protocols will allow us to continue at full production levels and we are encouraged to see vaccines to become increasingly available around the world.
Micron has been able to mitigate the impact of broad electronics industry shortages to our production output through our proactive supply chain and inventory management strategy.
<unk>.
Investments made over the last several years and facilities infrastructure allowed us to minimize lost output caused by the power outage and earthquake at our Taiwan operations in December.
Recently due to the drought in central Taiwan, There has been a reduction in the water supply.
For one of our DRAM fab sites.
To mitigate the water shortage, we are accelerating our water conservation efforts and have secured alternative sources of water.
At this time, we do not see an impact to DRAM production output. However, this is a developing situation that we are monitoring closely.
<unk> for the next several months.
Now turning to technology and products.
We continue to make solid progress on our key goals first to deliver industry, leading technology and improve our cost structure.
To bring differentiated products to market and improve our product mix.
And third to grow our share of industry profits, while maintaining stable bit sure.
I am proud to report that Micron was one of the top 20 U S back into just trends in 2020.
This achievement attests to the brilliant innovation of our teams.
And as proof of the tenacious focus we have placed on technology and product leadership over the past several years.
Our industry, leading one <unk> and 176 layered NAND nodes are in volume production and are ramping on plan.
We expect these nodes to be our workhorse.
For fiscal year, 'twenty to fueling our bit growth and contributing to our long term cost reduction goals.
Across both the DRAM and NAND, we target our long term cost reductions that are in line with the industry.
And products Micron is on track to support customers as they begin.
Begin to introduce DDR five in the fiscal second half of 2021.
We are also driving an increased mix of <unk>, NAND, which helps to make ssds more cost effective and accelerates the replacement of hdds with ssds.
<unk> adoption continues to grow and we achieved a record.
Record high <unk> mix in FQ2.
Earlier this month Micron took a decisive step to exit <unk> Cross point development and manufacturing.
As mentioned on our <unk> Cross point update call Micron is prioritizing investment toward other memory solutions that.
Use the compute express link or CSL and get excited about addressing this market opportunity with differentiated products.
Most of the R&D teams previously working on CD Cross point have already been transitioned to other programs, including accelerating introduction of EXL enabled.
<unk> memory products.
This change will allow micron to better address future needs of our data center customers and also drive higher ROI and shareholder value.
We are running an open process to identify the best acquirer for the Lehigh Fab, which provides an excellent location.
<unk> for advanced foundry logic, and analog semiconductor manufacturing and expect to finalize the fail within calendar 2021.
We anticipate that the overwhelming majority of the highly skilled Lehigh manufacturing team will find strong career opportunities with the buyer.
Turning to end markets in data center, AI and data centric workloads will drive long term growth with memory and storage, becoming an increasing portion of server Bom cost.
Micron is positioned for success in this market with a broad portfolio of high quality and quality efficient.
Products.
Enterprise demand, which had been anemic for the last few quarters is starting to improve as it budgets increase in anticipation of economic recovery.
Enterprise DRAM bit shipments grew sharply quarter over quarter, but was still down year over year.
Cloud DRAM.
<unk> shipments also grew quarter over quarter, and we anticipate robust demand from U S hyperscale customers, especially as we enter the second half of calendar 2021.
In data center Ssds revenue declined sequentially as customers in certain segments reduced their higher than average.
Inventory levels.
We are continuing to expand our data center nvme SSD portfolio with internally developed controllers and have new product introductions planned in the coming quarters.
In PC, we continued to benefit from the remote work and learning trends that drove healthy notebooks.
Book and Chromebook demand in fiscal Q2.
Micron delivered record PC DRAM bit shipments despite buckets of non memory component shortages experienced in the PC OEM supply chain.
We also began sampling one alpha based DDR for products.
And clients.
Ssds, we are on track to begin customer qualification of our next generation client Ssds using 176 layer NAND in the fiscal second half of 2021.
By the end of calendar 2021, we expect to cover multiple segments of the market, including consumer value OEM.
Jim and premium OEM with our 176 lead based client portfolio.
In graphics revenue declined quarter over quarter from an exceptional fiscal first quarter, which benefited from the launch of new gaming consoles never.
Nevertheless, fiscal second quarter revenue grew significantly year over year.
Micron has an excellent position in this market with a broad product portfolio and deep customer partnerships.
And mobile revenue grew 21% sequentially driven by strong execution, coupled with better than seasonal demand due to continuing recovery and smartphone volumes.
We achieved record MCP revenue and nearly tripled our LP five revenue sequentially.
We have also begun sampling the industry's first one alpha LP DRAM and 176 layer NAND with mobile customers.
Smartphone unit sales in China have been robust and <unk>.
Momentum is continuing.
In auto we delivered a second consecutive record revenue quarter as auto manufacturing that covers around the globe and as memory and storage content per vehicle continues to grow.
We have more demand than we can supply and we are working diligently with our.
Our customers to address their memory and storage needs.
We are also advancing our product portfolio targeted for automotive applications.
In FQ2 we completed qualification of our auto grade LP five and began sampling the industry's first automotive LP five that is hardware evaluated.
To meet the most stringent automotive safety integrity level equal D.
Turning to the market outlook calendar 2021 is shaping up to be a solid year and our overall outlook across DRAM and NAND has improved since our last earnings call with broad strength.
Length across nearly all end markets.
The pandemic has driven changes in our economy that we believe will not only benefit us this year, but also serve to accelerate the digital transformation of the economy and drive new opportunities for micron.
Recovery from the pandemic and pent up demand are expected.
Strong demand growth in markets, such as enterprise cloud desktop Pcs mobile auto and industrial.
Data center demand is expected to be strong in calendar 2021, particularly in the second half of the calendar year due to a combination of factors.
Two <unk> enterprise demand has started to come back as the economy recovers and is expected to further strengthen through the calendar year.
Second our opportunity at cloud service providers will continue to strengthen through calendar 'twenty, one driven by robust demand for their solutions and offerings as well as secular growth.
For the AI and data centric workloads.
And finally, the introduction of new Cpus will support more memory channels and higher density modules contributing to increases in server memory content across both cloud and enterprise.
Forecast for calendar 2021.
Any unit sales have increased from three months ago and are expected to approach an average of 1 million units per day.
There is robust demand in notebook Pcs, especially chromebooks.
We also expect the desktop market to improve as workers gradually returning to the office this year.
Mobile unit sales that are expected to show robust growth. This year and we also expect to benefit from higher content and <unk>, which are forecast to double in calendar 2021 to more than 500 million units.
Auto unit sales are expected to grow significantly from last year, while secular.
Memory and storage content growth trends remained strong as evs proliferate.
The strong demand across various end markets combined with disruptions at certain logic and foundry semiconductor producers has resulted in a shortage of these non memory Ics for our customers and we believe memory demand.
And would have been even greater without these shortages.
In DRAM due to the stronger demand, we now expect calendar 2021 bit growth at 20% above our prior forecast of high teens.
This growth builds on calendar 2020 bid growth, which was in the lower twenties.
<unk> percent range.
As a result of disciplined capex investments since the start of the pandemic, we expect industry DRAM supply to be below demand.
As a result of the strong demand and limited supply. The DRAM market is currently facing a severe under supply which is causing DRAM pricing.
To increase rapidly.
We see the DRAM market tightening further through the year.
In NAND, we now expect calendar 2021 bit growth to be in the low to mid 30% range above our prior expectation of 30%.
While we are seeing stabilization in.
In near term pricing the elevated levels of industry capex or a cause for concern and more capex cuts are needed to allow for healthy NAND industry profitability.
Long term, we expect that DRAM bit demand growth CAGR of mid to high teens, and our NAND bit demand growth CAGR.
Of approximately 30%.
Turning to micron supplier, we target our long term 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.
In.
In both the DRAM and NAND, we expect our calendar 2021 bit supply growth to be below the industry demand growth and we have used inventory to add to our bit shipment growth. This year.
We are targeting fiscal 2021 capex to be approximately $9 billion.
To support our long term goal of maintaining a stable share of industry bit supply.
I will now turn it over to Dave.
Thanks Sanjay.
Micron delivered very strong fiscal second quarter results with solid revenue growth margin expansion and positive free cash flow.
Market conditions improved throughout.
For quarter, and DRAM, and NAND volumes as well as DRAM pricing, we're above our original expectations.
Before discussing the details of our fiscal second quarter results.
I want to discuss the financial impact of our decision to cease <unk> Cross point development and manufacturing.
As a result of this decision we wrote off.
$49 million of three D Cross point inventory and our F Q2, GAAP financial results.
This inventory exceeded our needs to fill customer commitments.
We remain committed to fulfilling our customer commitments to manufacture three D Cross point wafers and currently expect modest revenues consistent with recent history.
At the end of calendar 2021.
Our Lehigh Fab was re categorized at the end of Q2 as held for sale on our balance sheet and beginning in Q3 depreciation expense for the building and related equipment will stop.
As a result F Q3, gross margins will benefit from approximate.
Approximately $75 million of lower depreciation expense.
The remaining costs will continue until the closing of the sale of our three D Cross point fab in Lehigh Utah.
As we discussed on our three D Cross point update call Micron will continue to maintain our current R&D investment level and redeploy the three D Cross point R&D.
R&D teams to work on technologies and products that align with our vision for memory and storage.
We have already made progress on this front since our update call.
Now moving onto our results for the fiscal second quarter.
Total Q2 revenue was approximately $6 to $4 billion.
Up 8%.
<unk> quarter over quarter, and up 30% year over year.
We saw solid growth in most of our end markets, notably in the data Center mobile PC auto and industrial markets.
F Q2, DRAM revenue was $4 4 billion representing.
Representing 71% of total revenue.
DRAM revenue increased 10% sequentially and was up 44% year over year.
Bit shipments grew in the high single digit percentage range sequentially, and Asps were up slightly quarter over quarter.
F Q2, NAND revenue was approximately $1 7 billion.
Representing 26%.
Percent of total revenue.
NAND revenue increased 5% sequentially and was up 9% year over year.
Bit shipments increased in the high single digit percentage range sequentially, while asps declined in the low single digit percentage range quarter over quarter.
Showing an improvement in trajectory in the NAND pricing.
Wing environment.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was approximately $2 6 billion.
Up approximately 4% sequentially and up 34% year over year.
Revenue growth was broad based and driven by a combination of volume and pricing across.
Across data center networking and client.
Revenue for the mobile business unit was $1 8 billion.
Up 21% sequentially and up 44% year over year.
Mobile demand remains strong as <unk> momentum increases and the mobile market continues to recover from the impact of the pandemic.
Revenue for the storage business unit was $850 million down approximately 7% from the prior quarter and down 2% year over year.
Both SSD revenue in component revenue declined sequentially.
We expect our storage revenue to increase as we introduce our 176 layer client ssds.
Into volume production.
And finally, the embedded business unit generated record revenue of $935 million.
Which was up 16% sequentially and 34% year over year, driven by strong industrial demand and record auto revenue as demand recovered from pandemic related shutdowns.
The consolidated gross margin for Q2 was 32, 9% up 200 basis points from the prior quarter.
DRAM price increases and cost declines drove the margin expansion in FQ2.
For fiscal 2021 due to product mix changes, we now expect that our DRAM cost reductions.
Will be somewhat higher than our prior expectations of mid single digits, while our NAND cost reductions will be somewhat lower than our prior expectations of low to mid teens.
Operating expenses were $797 million in Q2.
Operating expenses were slightly lower than our expectation as.
As pre qual expenses were less than we had anticipated.
We continue to expect operating expenses to increase in the second half for the fiscal year as we incur increased pre qualification and labor expenses as always we remain committed to tightly managing expenses.
F Q2 operating income was $1 three.
<unk> 3 billion.
<unk> and an operating margin of 20% compared to 17% in the prior quarter and 11% in the prior year's quarter.
F Q2, EBITDA was $2 8 billion.
Resulting in an EBITDA margin of 45% compared to 43% in the prior quarter and 40% in.
In the prior year.
Net interest expense improved to $24 million and we expect it to be approximately $25 million in Q3.
Our F Q2 effective tax rate was 10, 1%, we expect our tax rate to be in the high single digits for fiscal 2021.
Non-GAAP earnings per share in Q2 were <unk> 98.
Up from 78 in Q1 and up from 45 in the year ago quarter.
EPS included <unk> <unk> 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 $3 $1 billion in cash from operations in Q2, representing 49% of revenue.
Net capital spending was approximately $2 $9 billion during the quarter.
Through the first six months of the fiscal year, we have deployed approximately five.
$7 billion or slightly less than two thirds of our expected annual capital spending.
As we look ahead to the second half for the fiscal year, we expect capital spending to decline from the first half and continue to target approximately $9 billion.
In total for FY 'twenty one.
As a result of our strong cash.
<unk> from operations of $3 1 billion.
We generated positive free cash flow of $174 million, despite the relatively high level of capital spending in the quarter.
The increased cash flow was driven by strong revenue growth and efficient working capital management.
We expect free cash flow to continue to improve in the second.
Half of the fiscal year, driven by continued revenue growth higher margins and lower capital spending.
While we did not have share repurchases in FQ. Two we will begin repurchasing shares in the third quarter and remain committed to returning at least 50% of annual free cash flow to shareholders in FY 'twenty one.
Ending Q2 inventory was $4 7 billion.
For 99 days, which reflects the inventory reporting changes, we announced on last quarter's earnings call.
We ended the quarter with total cash of $8 6 billion.
And total liquidity of approximately $11 1 billion.
F Q2, ending total debt was $6 6 billion.
Now turning to our outlook day.
<unk> prices have started to strengthen and we expect the market to remain under supplied this calendar year.
In addition, <unk>.
NAND conditions are stabilizing.
These improving market.
Combined with our significantly stronger competitive position set us up to generate stellar financial results in the second half of the fiscal and calendar year.
While demand is strong across both the DRAM and NAND markets. Our supply is now constrained as our inventories are very lean, particularly in DRAM.
<unk> this restricts our ability to serve potential upside to demand.
On the cost side, we're facing additional headwinds due to foreign exchange rates and drought mitigation impacting our Taiwan operations and as a result, our FQ3 DRAM costs could be sequentially up.
We're also assuming that there is no.
No impact to our production output due to the Taiwan drought.
With all these factors in mind, our non-GAAP guidance for FQ. Three is as follows we expect revenue to be $7 1 billion, plus or minus $200 million.
Gross margin to be in the range of 41, 5%.
<unk>, plus or minus 100 basis points.
And operating expenses to be approximately $875 million plus.
Plus or minus $25 million.
Finally based on a share count of approximately one $1 6 billion fully diluted shares we expect EPS to be $1 62.
Plus or minus.
Kevin.
In closing as we reflect on our financial performance for FY, 'twenty, which was a trough year for micron in this cycle and compare it to the prior trough in FY 2016, Im amazed by how far we've come.
From FY <unk> to FY 'twenty, we substantially improved our EBITDA margin.
Revenue grew by more than 70%.
During this time, we delivered average gross margins of 40%.
EBITDA margins of 50% and return on invested capital of 20%.
We believe micron strong performance will continue cross cycle and outperformed the broader semiconductor industry.
I will now turn.
And our rate on Jay.
Thank you, Dave Manav I'll, let achievements at possible without the great work of our World class Micron team.
To recognize and reward team member performance and to do so a fairly last week, we announced that we achieved comprehensive global pay equity in total employee compensation across.
Turn it back to pay bonuses and stock awards for women and all underrepresented groups at Micron.
Pay equity is a key pillar of our diversity equality and inclusion strategy and core to creating an environment that attracts and retains the best talent.
We continue to strengthen micron's include.
OSB values, driven culture, which is an integral part of our broader transformation.
We have come a long way since micron's founding as a startup in Boise, Idaho more than 40 years ago and today, we are a global technology and product leader.
As a United States, only remaining memory and storage manufacturer.
We welcome the U S government's commitment to enhance <unk> long term technology leadership and competitiveness in semiconductor manufacturing.
This emphasis on our industry, which is reflected by governments globally is the recognition of the critical role we play in today's digital economy.
So these represent approximately 30% of semiconductor industry revenue today up from 10% in the early two thousands and DRAM and NAND are growing in importance as a critical enabler of the most advanced technologies, driving economic growth and well being.
Micron is innovation over decades.
<unk> has created a strong foundation and we look forward to delivering value for all our stakeholders as the data economy accelerates.
Thank you for joining and for your support of Micron, We will now move to Q&A.
<unk> as a reminder to ask a question you will need to press star one on your telephone again Thats Star one on your touched on telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of C. J Muse.
Thanks for Evercore. Your line is open yes.
Yes. Good afternoon Sanjay. Thank you for taking the question I guess I was hoping you could compare and contrast, what you are seeing this cycle versus previous cycles on the DRAM side Youre talking severe shortages yet.
We're really not seeing anyone.
Uptick on Capex and if you ordered a tool today you wouldn't get it until Q1 next year at the earliest.
So I guess, how are you thinking about things as well as what kind of changes are you seeing in terms of customer behavior and how might that affect.
Your business.
Going forward. Thank you.
Thank you Jim and in terms of how we see.
The demand environment today versus what you referred to a few years ago.
No question that at that time, the demand was driven.
The increases in cloud, primarily and today the.
And drivers are much more diverse we are seeing shortages across all end markets. The demand is strong across all end markets. When you look at cloud <unk> cloud may have gone through some digestion over the course of last couple of quarters. When we look ahead.
Cloud demand is expected to be healthy given the refresh with the new Cpus that are driving greater content in the servers. Similarly mobile with five G is driving much greater content.
As for <unk> and on a year over year basis, the number of smartphones being.
The demand I would expect it to increase on a double digit basis as well so a strong driver of growth on mobile phones as well automotive.
<unk> experienced of course big declined last year, but on a year over year basis mid double digit range growth in automotive number of unit sold so automotive is also driving greater.
So an increase as well as unit increases. So overall the industry is experiencing strong demand virtually across all end market segments. The capex has been disciplined particularly in DRAM over the course of last couple of years and that environment is one of severe under supply.
Content. So we are very excited about the opportunities ahead, and we absolutely believe that micron in this environment in terms of demand and supply considerations and our own execution from a technology point of view, having industry, leading edge <unk> or the industry's first.
Supply as well as having industries for US 176 layer node, we are well positioned to drive our growth ahead.
And really well positioned to deliver stellar financial results over the course of next several quarters and in terms sell Fowler customers.
A question.
First as you asked as well.
I mean, the customers across the board.
Seeing that memory DRAM is in short supply and that does affect some of the lead times that we expect from those customers and by and large those customers are supportive of those.
Question for lead time considerations and in this environment of extremely tight supply.
Flexibility that is available for customers to switch between products is also becoming more limited.
And then does it acquired customers who have longer lead times as well.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.
Yes, Sanjay Dave Thanks for letting me ask questions. Congratulations on strong results Sanjay just sticking on the Capex side Youre characterizing the D var market is a severe shortage.
NAND market is stabilizing which is sort of an uptick of how you've been characterizing the.
The market over the last couple of quarters, you are undergoing industry bits and you've got sort of an industry, leading cost position, especially in DRAM with one alpha and yet when I look at your full year Capex versus what you've spent fiscal year to date, you're going to be down over 40% in the second half of the year why not get a little bit more aggressive.
Save on Capex, what would you need to see.
At these levels can you can you maintain your goal of being in line with industry bit share.
These capex levels.
So I think it is important to understand that we do remain disciplined with respect to Capex, we wanted to make sure we.
We manage it prudently.
Our goal is that over a longer term in terms of supply growth CAGR to be aligned with industry demand growth CAGR and we have made prudent decisions over the course of last few years in terms of Capex investment. If you look at our fiscal year 'twenty one capex.
Thats.
Only $9 billion. This is really almost the highest capex that the company has spent and it's.
History, and we are putting that into positioning us well for the future in terms of of course.
Creating more clean room expansion, but also investing in leading edge technologies.
<unk>, which has worked as we look ahead, we'll drive our supply growth with our one alpha node in DRAM as well as with our 176 near NAND node. So.
Even last year vials.
For the industry was growing through a trough period micron actually took the steps.
To invest for building for the future strength of the company. So all in all we believe that our bit share in the industry would stay.
<unk> and overall it is a good environment for us to operate and where our demand growth and our supply growth.
On the cabinet basis aligned yes from quarter to quarter, there can be variations, but most important thing is that long term.
Supply growth Gallagher is managed in a disciplined fashion and this is what is micron focus and we believe we are well positioned as I said before we're well positioned to deliver stellar results over the course of.
And in quarters.
Thanks, Matt next question comes from Timothy Arcuri of UBS. Your line is open.
Thanks, a lot I guess I also had a question on Capex.
Dave given what you are guiding the back half of the year to youre going to basically.
Next up is hitting the year like you know annualized and roughly $6 billion in capex or something like that.
So it requires a pretty big ramp just to get to that like 30% capital intensity number for next year that you've been kind of talking about so is that still the right number to think about that you can get to like low thirties capital intensity for fiscal 'twenty two.
The X because theres just not a lot of slots that you can get right now even if you decide that you want to spend more money. There was tool shipments lots aren't even really free until starting next year or so.
Right yes.
Yes, I mean keep in mind that capex can be a little lumpy. So there are times, where we need to make the investments.
Ahead of.
No transitions and so sometimes can get.
More.
Holidayed it into a couple of quarters and I think thats essentially what youre seeing in fiscal 'twenty, one we're not ready to.
Talk to numbers about fiscal 'twenty two yet we haven't got finished fiscal 'twenty, one and we need to do that before we kind of formulate the plan.
But I would tell you over the long term, we feel very comfortable with our target capex spend.
Low <unk> or 30% to 35% of our revenue in terms of Capex. Sanjay you talked about we take a very long term view of Capex and align that capex investment to make sure that supply.
Rmi and demand are in balance for us.
And.
We will continue to approach it that way.
Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question. Please.
Great. Thank you.
If I look at the.
Sort of quarter on quarter bit growth for DRAM in <unk>, given the last four quarters.
Get to 40% plus type growth in February versus supply that youre sort of talking about less than 20% I think so.
Obviously, there's some deceleration implied there.
You unwound inventory a little bit in February.
February I know you talked about that a little bit after the pre announcement, but maybe just give us a little bit of color on how you got to that bit growth and how that effects for the next couple of quarters.
So of course.
If you look at lost last year.
We had said that our supply growth was somewhat greater.
Last year compared to the industry supply growth.
And.
Demand growth as well, so that positioned us well in terms of using up our inventory this year.
And our supply growth. This year is expected to be less than the industry demand growth industry demand growth for you've just raised.
Our estimations to approximately 20% in calendar year 'twenty one.
Supply growth to be somewhat less than the industry and of course, we have used up in DRAM, our inventory to supply to meet the.
Growing customer's requirements as we look.
Ahead, it will be our supply growth will be driven by our one alpha technology in DRAM.
We will be ramping it over the course of next few quarters. It will be the workhorse of technology for us in terms of bit growth in.
'twenty, two as well and of course as we bring out our products in this technology node, we have to get them qualified with our customers and Thats. What we are focused on in terms of getting the ramp up of this technology vanilla for technology getting products qualify it in time for.
For to position us to drive our.
Supply bit growth to meet the ultimate customer demand growth requirements during the rest of the calendar year.
Okay. So that makes sense, but am I right in thinking that there is an implied kind of decline in kind of sequential bits. As you you moved a lot of inventory in February.
Where you don't have that inventory to moving in May.
So again, our inventory in DRAM is really very lean at this point.
And going forward.
It will come from our bundle for node and I think what's again important is that.
There can be fluctuations from quarter to quarter.
But long term it is really about having a stable market share driven by technology transitions, which is our focus in which we have delivered successfully whether you look at our <unk> node in DRAM that was the first one day northern the industry now one alpha node is the first.
One final word in the industry as well for technology transitions as what we are focused in terms of driving our long term demand and supply bit growth CAGR to be in line with the demand growth CAGR and from quarter to quarter, depending upon the timing of the technology transitions there can be fluctuations second half.
In terms.
So far year to year over year growth will be lower than the first half yes.
Great. Thank you.
Thank you. Our next question comes from Chris Danley with Citi. Your line is open.
Hey, Thanks, guys, just a bit of a longer term question.
So sanjay.
Sanjay Slash days, if things continue to be strong for hopefully several quarters. Like you guys were talking about your cash pile, it's gonna grow fairly substantially so theoretically speaking for sitting here a year year and a half out.
What are you thinking about as far as the usage of that cash going forward.
Okay.
Could we see a dividend potentially in the future.
Yes, we will sell our.
Current obviously.
Broached towards returning cash to shareholders through the buyback we mentioned in our second fiscal quarter, we didn't buy back stock nor did we buyback stock in the first quarter.
That's really a function.
<unk> of the fact that cash flow was negative and we were protecting our.
Cash our net cash position, but as you say suggest and as we've talked about we do expect to have good cash flow in the back half for the fiscal year end.
So I think primarily you can.
Look to us to.
To buy back stock.
We're going to return at least 50% of our free cash flow in.
In the form of buybacks.
And we have in the past returned more than that so potentially we could do that in the future. There's a few things on the balance sheet as it relates to.
Converts and debt.
Some of that cash as well as far as the dividend, we haven't talked with the board about that.
Certainly a possibility, but I think we need to get through this year and.
Discussed with the board with D. A.
That makes sense.
Great. Thanks, guys.
Okay.
Thanks, Brian next question come from.
<unk> Hari of Goldman Sachs. Your line is open.
Great. Thank you for taking the question.
Dave you're guiding gross margin up about 900 basis points sequentially for the May quarter.
You talked about the exit from <unk> Cross point, driving lower depreciation I think it was $75 million.
<unk> talked about DRAM costs, essentially being up due to FX and the drought in Taiwan, but outside of those two items. How are you thinking about costs in your NAND business given the transition for a second John replacement.
And what are your thoughts on pricing for both DRAM and NAND I think for DRAM most of us are expecting 10% 15%.
London pricing increases.
On the downside, perhaps up low single digits, but how are you guys thinking about pricing and how are you thinking about sustainability of pricing for the second half. Thank you.
Okay. Thanks, So as you pointed out we do get the.
$75 million tailwind in the third fiscal quarter due.
Due to the stoppage of the depreciation expense and Lehigh that certainly will be beneficial and will help.
The following quarter, it actually may be a little bit better than that and so.
That will be a tailwind again for the fourth fiscal quarter we.
We talked about DRAM costs, we are affected by a few things I mentioned, the drought mitigation that is causing a little bit of.
Of a headwind on our costs on DRAM.
We are.
Because of the significant tightness in our supply chain.
We are seeing some.
Some increased spending as it relates to the back end.
That's certainly a factor as well and also as I mentioned in the prepared remarks, FX has been a bit of a headwind for us in particular, it's Taiwan dollar, which had about a 5% appreciation.
Jason This year. So those things are driving a little bit of a little bit of a cost increase I would say that's probably.
Kind of a one or two quarter type.
Effect.
We're pretty excited about the one alpha node. It does have a great cost structure it will be.
Workhorse node.
In fiscal 'twenty, two and so we would expect that.
Certainly help on the cost side on DRAM.
On the NAND front, we are expecting cost to improve.
Next quarter.
Aligned with our.
Kind of annual cost reduction assumptions, which suggests there will be in the low double.
Digits year over year so.
That will certainly be a little bit of a benefit on the.
On the gross margins as well.
Rest of the gross margin guidance, it's obviously a function of assumptions around pricing and mix.
And we avoid specifics around that suffice it to say that.
We feel very good about the pricing environment in DRAM given.
The very tight supply situation, we're in and DRAM.
And.
We're cautiously optimistic on the NAND front, given the stabilization we've seen more recently, but outside of that I prefer not to comment more on the pricing side.
Okay.
Okay.
Thank you. Our next question comes from Harlan sur.
J P. Morgan your line is open.
Good afternoon, and great job on the quarterly execution, just given the DRAM tightness in what appears to be tightening.
Tightness in literally all of your end markets.
Is the team we allocating your production mix, let's say from <unk>.
Mobile towards more higher growth higher margin segments of the market like enterprise and cloud and gaming as you move towards the second half of the year, especially especially on your view of strong cloud demand in the second half improving enterprise trends.
<unk> improving.
<unk> trends in the second half of the are there any is there any reallocation on the product mix in terms of wafer.
Wafers that you guys are starting today.
So remember the lead time the cycle time of day for us in the fab.
Tends to be in the two to three month range.
And the wafers that you start today by the time they are shipping to their customers that time ends up being including the time for the assembly and test ends up being three to four months later, so in this environment or really tightness across all end market segments planning, our wafer starts and dedicating them toward various.
<unk> end markets is really critically important. So this is the kind of act.
Activity that our team is always engaged in in terms of working closely with customers and understanding their demand mix. So not just total demand, but the mix of that demand between various product types because.
It's extremely important that we start our wafers.
In line with expectation of our customers demand few months down the road given again the cycle time considerations. So we are always managing this mix, but again, we would point out that we are seeing.
Supply shortages for us across.
For all end market segments and across all nodes of DRAM as well and in this environment.
This is why as I mentioned earlier the <unk>.
Lead time with customers is important and it is an environment where flexibility.
In terms of.
For customers to switch between one product type to another prototype is more limited now than we had more inventory in DRAM before that was easier to manage now that the inventory is running at these lean levels.
Managing.
Our supply mix, keeping it aligned with the customer.
Mix. This is an ongoing activity here at micron and our team has done I think a great job.
Why chain team, our business units and our sales teams have done a great job working.
With our customers understanding the market requirements and managing our business well.
And you see the result in.
Well, we have been able to bring inventory both in DRAM as well.
And of course, we are.
Moving to push for Ssds, and multi chip packages toward our.
Higher density solutions as well because again all of those considerations are important.
In this environment of.
Tight supply in the tightness in terms of supply only increasing as we go through the year. So this is getting larger focus Harlem.
Alright, thanks for the insight Sanjay.
Thank you our next question comes from.
From Aaron Rakers.
Wells Fargo. Your line is open.
Yes. Thanks for taking the question also congratulations on the strong execution I wanted to ask you a little bit about the longer term secular growth drivers in the server DRAM market. How do you see kind of content growth on a per server basis progressing.
I know you've talked about CSL whats the thoughts on what <unk> means to that equation and when that starts to matter. Thank you.
And so in terms of server content as we mentioned in the prepared remarks.
The new compute platform architectures and.
The processor that are being introduced that all leading toward more chat more course more channels and greater usage of higher density modules and of course, the end market applications. When you look at those workloads are becoming more and more data intensive mod.
AI driven.
And.
Ultimately driving for greater need for data and greater attach rate and greater content on a per server basis. So.
Enterprise and cloud combined.
<unk>.
When you look at CAGR in terms of demand growth expected to be a stronger track CAGR in terms of big demand growth versus the average of the market. So this is definitely one of high growth areas and the average.
Content growth.
Continues.
To be very strong and at a strong clip in terms of.
Gigabytes for.
CPU.
When you look at it for DRAM that is more like in on a CAGR basis more like 20% average capacity growing on a per server basis going.
To be from something like 200, gigabyte for CPU to growing to 300 gigabyte per CPU over the course of next two to three years. So DRAM has strong growth and of course same for SSD.
As well in terms of.
Cost of ownership benefits that <unk> provided.
Doing well and.
CSL is the new emerging trend and this will create greater opportunity for differentiated solutions and as we mentioned earlier that these are opportunities that we believe will be very well positioned to capture with our emerging.
Emerging technology solutions that.
For wider working on which we believe will provide higher ROI as well as high performance solutions for our customers.
So its EXL is again, a development, where micron will be well positioned.
<unk> address the memory hierarchy needs of our customers as they evolve over the course of next few years.
Thank you.
Thank you. Our next question comes from maybe Hossein.
Your question please.
Yes.
Couple of follow ups for me.
I'm going to go back to inventory.
Obviously youre coming.
For the supply and demand environments suggest that prices are under rise, but perhaps you want to lean your inventory or you wanted to continue to reduce because that inventory is not really fungible for new application that youre going to be shipping to in the second half is that the right way to think about this.
As it relates to our inventory, it's pretty lean at this point I mean, all the inventory that you are seeing is either a whip or raw materials theres a bit of finished goods, but it's just the amount of finished goods, we need to stage to meet.
Customer demand so that.
I think we're not in a position to lean it out anymore. We are.
Are quite lean.
Okay.
Got it so there's no fungibility question and then just moving on to NAND and Sanjay I see the same demand dynamics.
Making you're very bullish on DRAM also applied to NAND as matter of fact CX.
Sell could be a material catalyst for NAND.
What is it with your underlying assumption that is still keeping your long term NAND bit growth to 30%. There is a ton of data created in some of these.
Textural changes could actually be good for our storage, especially SSD and I'm just curious.
Why are you not as upbeat as in market data point, which suggests.
So the long term CAGR for DRAM. We have said is approximately 30% and of course. This is something that we constantly evaluate with working with our customers and we do analyze this and.
As and when needed we update these but at this point in all of our estimation for long term D.
<unk> CAGR is approximately 30% I would like to point out that overall when you look at the price elasticity trends in DRAM and certainly when you look at post pandemic growth and as I mentioned.
Again, the cost of ownership benefit for DRAM for NAND in the data center market and of course, <unk> driving greater content growth.
With respect to our feature rich increasingly feature rich smartphones as well so the demand trends for NAND are robust.
<unk>.
And I think the important thing too.
We monitor is the supply to be managed in alignment with.
The demand expectations and this is where as we have said before that.
<unk> Capex can be managed better in terms of supply growth.
And with longer term demand competition, and you know I may have misspoken here.
They have said that approximately 30%.
Yes.
In terms of the CAGR for.
Demand growth I may have said.
<unk>.
Context of course, I was speaking about NAND. So I just wanted to correct myself that that 30%.
<unk> growth CAGR that I referred to is for NAND.
Of course, as we have said for DRAM, the long term demand growth CAGR, we see.
D high.
High teens.
Mid to high teens.
Clear thanks.
Thank you. Our next question comes from Tom O'malley.
Barclays. Your line is open.
Good afternoon, Sanjay and Dave and Thanks for taking my question. This one is more related to day you talked about.
In DRAM costs in the may quarter, potentially being up because of a couple of factors, but you also took the full year guide for cost and so that they could be a bit better is that a comment on the august cost accelerating and being a bit better there or can you just walk me through the dynamics of how you are seeing cost up in May and then the full year, a little bit better in terms of overall costs.
First of all good question Thomas So really.
We saw much better cost in the second fiscal quarter for DRAM.
And that really was the trigger to get the overall full year cost to be higher now that was more a function of mix.
Anything but.
But that is what drove.
<unk>.
Kind of the upside on the cost side.
<unk>.
Yes, I'd say higher I'm, sorry, I meant lower costs look to be lower.
The.
The higher number for a minute.
Yes.
Doug may quarter, or the August quarter than us.
We're not yet ready to provide some expectation, but I think the likelihood is that it wouldn't be.
Certainly shouldnt be a step up in terms of the sequential cost and likely will be will be slightly down.
Thank you.
Our next question comes from Ambridge server power.
Your line is open.
Hi, Thank you for squeezing me in Sanjay I had a question on the shortages.
And then how are you reacting to you talked a little bit about the difficulty in planning and allocating wafers. So some of the semi companies.
We are hearing companies.
You talked about changing the order cancellation policy from 45 days to 90, and some companies talking about absolutely no cancellation sell out.
So how are you.
Youre welcome.
The arrangement is changing with some of the key customers as a result of this.
So that it enables micron to plan better.
Can you just help us provide.
Your perspective on how micron is dealing with that.
Certainly working very closely with our customers and customers across all our end markets as I mentioned earlier.
Certainly lead times with our customers.
In terms of supply commitments are increasing the flexibility I think our customers by and large I understand that the flexibility in terms of mixing of their bit demand is getting more limited as well given that not only our supply.
<unk> is in.
Tight situation, but overall the industry.
Semiconductor industry with respect to materials and capacity is also in a tight position and our supply chain team has done an excellent job over the course of last year in terms of really procuring.
Materials and capacity.
Leon so that even though we are running tight we are able to meet our customer requirements, but yes, we had less flexibility than before and as Dave mentioned earlier that some of this.
Procurement of capacity.
That puts some cost pressures in terms of our second half outlook as well and sell of course for FQ3 that's baked into our guidance. So our customers understand that this is an environment, where we need to work closely with them and.
And then overall our teams are doing.
A very good job in managing this.
In this environment of tight supply and we see this close collaboration that is going to be needed as we go through this year and as we go into 2022 as well because we really we have confident in 2022 demand as well as the world to cover some of this pandemic.
Technology.
Economies across the globe.
I would expect it to be in a strong growth spurt mode and of course technology demand will increase and.
Investigations that are happening here in the U S. First rest of the globe coming in during the later part of the year. So the growth will.
B.
<unk> 'twenty, one as well as 'twenty, two and we feel good about our outlook in terms of demand drivers even in 'twenty two timeframe. So this.
Working closely with customers to help manage.
The mix of their products and their supply requirements.
Inc seem to be an important consideration not just for next quarter or two I believe well into 'twenty two timeframe as well.
Thanks.
And this is a great position for us.
To be in in terms of.
Particularly when you look at how we remain focused on our technology.
As good Florida leadership execution.
First with one alpha northern DRAM as well as for Smith, 176 layer NAND and remaining focused on bringing those technology nodes into production and customer qualifications over the course of next several quarters.
Thank you Sanjay.
And thank you and ladies and gentlemen that does conclude today's conference call. Thank you for participating you may now disconnect.
Okay.
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