Q4 2021 Micron Technology Inc Earnings Call
[music].
Yes.
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's fourth quarter 2021.
<unk> financial release conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time. Please press 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 to your host Farhan Ahmad Vice President of Investor Relations you May begin your conference.
Thank you and welcome to Micron technologies fiscal fourth quarter.
2021 financial conference call.
On the call with me today are Sanjay Mehrotra, President and CEO.
And Dave Denton, Chief Financial Officer.
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 earnings press release, and the prepared remarks filed 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 GAAP to non-GAAP financial measures may be found on our web site.
As a reminder, a webcast replay will be available on our website later today.
We encourage you to monitor our website at micron dot com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending.
You can follow us on Twitter at my content.
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, our most recent Form 10-K and 10-Q for a discussion of the 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 level of activity performance or achievements.
We are under no duty to update any of the forward looking statements. After today's date to conform these statements to actual results.
I will now turn the call over to Sanjay.
Thank you for Ron Good afternoon, everyone.
We delivered outstanding results in fiscal Q4, achieving robust profitability and the second highest quarterly revenue in micron's history.
Strong execution drove healthy results across segments, including record quarterly revenue in NAND as well as in our embedded business.
Fiscal 2021 was a year of many records for micron.
We achieved our highest ever mobile revenue driven by all time high managed NAND revenue and MCP mix.
Our embedded business had a tremendous record breaking year with auto and industrial businesses, both had substantial new hires.
And our crucial branded consumer business and overall QL C Max and NAND All hit records in fiscal 2021.
Through the year, we successfully navigated multiple obstacles brought on by the pandemic and reached several key milestones.
For the first time in Micron's history, we established technology leadership concurrently in both DRAM and NAND.
<unk>, one alpha DRAM, and 176 layer NAND or the industry's most advanced nodes and high volume production and.
And we further strengthened our product leadership by becoming first to introduce <unk> DRAM and <unk> five managed NAND in mobile and the industry's first functional safety capable LP five for automotive applications.
The secular demand for memory and storage combined with micron's focused execution and a rock solid balance sheet position us well to deliver strong financial performance and create significant shareholder value in fiscal 2022 and beyond.
Demonstrating our confidence in our business trajectory, we initiated a quarterly dividend that we aim to grow over time.
Okay memories at the leading edge of semiconductor manufacturing and Micron has leadership in both DRAM and NAND technology.
This quarter, we reached maturity yields in our ramp of one alpha DRAM and 176 layer NAND, 20% to 30% faster than prior nodes and delivered performance and feature improvements that will help unleash customer innovation.
We believe we are several quarters ahead of the industry and deployment of these process technologies.
Additionally, through deeper customer collaboration we added further accelerated the time to market for value added solutions built using these nodes.
One alpha and one Z DRAM nodes combined now represent the majority of our DRAM bit production driven by a strong growth of one alpha production and.
And by the end of the calendar year 176 layer NAND will make up the majority of our NAND bit production.
Looking beyond <unk>, DRAM and 176 layer NAND, we are investing to sustain scaling in both technologies for the next decade.
Adding momentum to our years of R&D and <unk>. We recently took delivery of the industry's latest <unk> system Nx E 3600 at our Boise headquarters, where we operate one of the world's most advanced centers for semiconductor research and development.
The delivery of this tool is an important milestone toward our previously disclosed plan of implementing <unk> in high volume manufacturing in the 2024 timeframe.
We expect that the integration of <unk> with our existing multi patterning immersion lithography expertise will help us maintain DRAM technology leadership for many years to come.
In addition to being a technology leader and an innovation partner, we are uniquely positioned as a strategic supplier to our customers.
Micron is the only U S based memory company and our strong global manufacturing network provides us with a diversified source of supply which has become increasingly critical to ensure that we continue to deliver product reliably to our customers.
The advantages of this unique position had been proven throughout the past 18 months as we have successfully navigated the challenges of COVID-19 across our global manufacturing network, while maintaining continuity of supply to our customers.
Now, let us review our end markets.
The demand for memory and storage has evolved dramatically from the PC centric era.
Today demand for memory and storage is driven from diversified end markets that extend from data center to the intelligent edge and to a growing diversity of user devices.
As a result of growing memory and storage content per device DRAM and NAND now account for an ever increasing portion of the bill of materials for our customers.
DRAM and NAND Tam share of semiconductor industry has steadily grown over the last two decades from around 10% to approximately 30% today.
The AI and <unk> evolution is only in its infancy and as these secular growth drivers gain further traction we expect new data intensive applications to continue to fuel significant increases in DRAM and NAND Tam.
In the fiscal fourth quarter data center revenue grew sequentially and year over year fueled by a secular drivers in cloud demand and the resurgence of enterprise it investment linked to improving economic growth.
Data center has become the largest market for memory and storage driven by the rapid growth in cloud.
With our broadening portfolio of differentiated products across memory and storage. We are in a strong position to drive strong growth and profitability in this important segment.
We have been engaged on DDR five from initial specification development and are well placed to support customer transitions to <unk> enabled platforms. Starting later this calendar year.
We are also enhancing our nvme SSD portfolio and will soon introduce pcie Gen. Four data center Ssds with Micron designed controllers and leveraging the full benefit of vertical integration.
These ssds will strengthen our market position over the course of the coming quarters and years in the fast growing data center nvme storage market.
Work and learn from anywhere trends are driving our second consecutive year of double digit PC unit sales growth in calendar 2021.
In the fiscal fourth quarter, PC DRAM revenue was up significantly year over year.
We are making strong progress transitioning our PC DRAM two hour, one alpha node, which represented a meaningful portion of our FQ4 BC bit shipments.
Client TLC SSD EBIT mix hit a new record and made up the majority of our client SSD bit shipments in FQ4.
Our Q, we'll see leadership, enhancing our best supply capability and product profitability.
We also have continued momentum ramping 176 layer NAND products for the PC market.
And we qualified our 176 layer NAND based Gen. Four nvme client ssds with several PC Oems during the quarter.
In graphics revenue increased sequentially and year over year, driven by a continuation of last quarter's strong next generation game console and graphics card shipments.
Micron holes in excellent position in the fast growing graphics market with a broad product portfolio, featuring our proprietary GDR six X product line and deep partnerships with leading GPU suppliers.
F Q4, mobile revenue increased more than 25% year over year, driven by continued unit sales and content growth.
We expect overall smartphone unit sales to grow this year with sales of over $500 million <unk> mobile phones forecasted.
These content rich.
<unk> featured more than 50% higher DRAM and double the NAND content than for <unk> phones.
We expect <unk> and AI to drive new innovation in applications, such as AI optimized video capture and editing that will fuel DRAM and NAND content growth for years to come.
Our one <unk> filed before 16 gigabit design is now fully qualified and ramping at multiple Oems.
While our 176 layer NAND achieved its first uff's three one qualifications at two Oems.
These wins demonstrate micron's leadership in the mobile market and our continued strength in managed NAND products, we had MCP sales surpassed $1 billion for the third straight quarter.
We are continuing to see strong demand in our edge markets, which includes automotive and industrial Iot.
We expect automotive and industrial markets to be the fastest growing memory and storage markets over the next decade.
As the number one player in these markets micron is exceptionally well positioned to benefit from these secular growth trends.
Our automotive business delivered a fourth consecutive record quarter, driven by continued recovery in auto manufacturing and the growth of memory and storage content driven by in vehicle infotainment and driver assistance applications.
Industrial Iot revenues also set records in the fiscal fourth quarter benefiting from the continued growth of applications such as point of sale devices factory automation and surveillance.
We expect industrial demand trends to accelerate further as <unk> speeds that adoption of data intensive applications powered by intelligent edge infrastructure.
We are also seeing an acceleration in our consumer Iot business driven by rapid growth in devices, such as VR headsets smart exercise equipment and smart speakers.
Turning to market outlook calendar 2021 is shaping up to be a strong year, we expect calendar 2021 industry DRAM bit demand growth to be in the low 20% range and industry NAND bit demand growth to be in the high 30% range.
Overall, our preliminary view is that calendar 2022 industry bit demand growth will be consistent with long term industry bit demand growth CAGR.
In the mid to high teens for DRAM and approximately 30% for NAND.
We anticipate the underlying demand in calendar 2022 to be led by increasing data center server deployments <unk> mobile shipments and continued strength in automotive and industrial markets.
Additionally, non memory supply shortages that are constraining customer bills across various end market segments and that are pushing out some demand should ease throughout 2022 supporting demand growth during the year.
Given prudent industry, Capex and very lean supply of inventories, we expect healthy industry supply demand balance and robust profitability for both the DRAM and NAND in the year.
In the near term our FQ, one bit shipments will decline modestly in both DRAM and NAND from very strong levels in Q4.
Some PC customers adjusting their memory and storage purchases due to shortages of non memory components that are needed to complete the PC bills.
We expect this adjustment in our PC customers to be largely resolved in the coming months.
We had also seen constraints within our supply chain for certain IC components, which will somewhat limit our bit shipments in the near term.
Shipment growth will resume in the second half of the fiscal year and we are planning to deliver record revenue with solid profitability in fiscal 2022.
Our calendar year 'twenty, two bit shipment growth for DRAM and NAND will be in line with the industry.
However, due to the strong shipments in fiscal year 'twenty, one and are below normal current inventory level for fiscal year 'twenty, two our bit shipment growth for DRAM and NAND will somewhat lag the long term CAGR.
In fiscal year 'twenty two the continued ramp of one alpha and 176 layer NAND should provide us with good front end cost reductions.
Our efforts to increase supply chain resilience and provide business continuity to our customers will cause headwinds to our assembly and packaging costs consistent with the trend in the overall industry.
Overall, we expect annual cost per bit reductions to be competitive with the industry in fiscal year 'twenty, two and over the long term.
Turning to capital expenditures, we expect fiscal year 'twenty to capex in the range of $11 billion to $12 billion.
The year on year increase in Capex is driven by our continued 176 layer NAND transition pilot line enablement for next generation NAND, and DRAM and continued infrastructure and <unk> payments to support the introduction of <unk>.
Fiscal year 'twenty, two DRAM equipment Capex for manufacturing will decline from fiscal year 'twenty, one as we benefit from the capital efficiency of our mature one alpha node.
For fiscal year 'twenty, two our bit supply growth will be achieved through node transitions alone as we had a few years away from needing wafer start additions to keep up with the industry demand.
We also expect to increase fiscal year 'twenty, two R&D investment by approximately 15% from fiscal year 'twenty, one to deliver bold product and technology innovations designed to fuel the data economy as well as to expand our portfolio to capitalize on opportunities such as high bandwidth.
Memory and <unk> solutions.
Our leadership portfolio product quality supply chain, agility, and deep customer relationships make us a preferred partner in many of our markets and we are confident in our ability to continue to create long term sustained profitability and returns built on that leadership.
I will now turn it over to Dave.
Thanks, Sanjay Micron delivered excellent Q4 results highlighted by our second highest quarterly revenues strong gross and operating margins and our substantial positive free cash flow.
Total F Q4 revenue was approximately $11.0 billion.
Up 11% quarter over quarter and up 37% year over year.
As a reminder.
Q4 of last year was a 14 week quarter and impacts our year over year comparisons.
<unk> revenue growth was broad based with solid demand and price increases in both DRAM and NAND.
Our robust growth in our Q4 contributed to strong performance in FY 'twenty, one with revenue of $34.0 billion.
Which was up 29% from the prior fiscal year.
At Q4, DRAM revenue was $7.0 billion.
Representing 74% of total revenue.
DRAM revenue increased 12% sequentially and was up 39% year over year.
Bit shipments increased in the lower single digit percentage sequentially and Asps increased in the high single digit percent range quarter over quarter.
For the fiscal year, DRAM revenue increased 38% year over year to $20 billion.
Representing 72% of total fiscal year revenue.
Yeah.
F Q4, NAND revenue was approximately $2 billion, an all time high and representing 24% of the total revenue.
NAND revenue increased 9% sequentially and was up 29% year over year.
But shipments increased by low single digit percentage sequentially, while asps increased in the mid single digit percent range quarter over quarter.
For the fiscal year, we achieved a new company record for NAND revenue of $7 billion, an increase of 14% year over year.
NAND revenue represented 25% of our total fiscal year revenue.
Now turning to our FQ4 revenue trends by business unit.
Revenue for the compute and networking business unit was $11.0 billion.
Up 15% sequentially and up 26% year over year.
Growth was led by the data center and graphics markets.
Revenue for the mobile business unit was $10.0 billion.
Down, 5% sequentially and up 29% year over year.
Mobile demand remained healthy in the quarter with continued momentum from the rollout of <unk>.
<unk> revenue for fiscal 'twenty, one exceeded $7 billion.
And set a new record.
Revenue for the storage business unit was $3.0 billion.
Up 19% from the prior quarter and up 32% year over year.
Data Center Ssds had strong growth in the quarter, driven by enterprise and cloud strength.
<unk> shipments set a new record in the fiscal year in terms of percentage of our NAND shipments.
Finally, the embedded business unit generated record revenue of $5.0 billion.
Which was up 23% sequentially and more than doubled year over year.
We continue to experience strong demand across the automotive and industrial markets.
For the fiscal year, EBU revenue easily exceeded $4 billion.
Setting a new revenue record.
The consolidated gross margin for Q4 was 47, 9% up 500 basis points from the prior quarter.
Pricing increases across DRAM, and NAND as well as strong execution and our ongoing product portfolio transformation drove margin expansion in the quarter.
Operating expenses in Q4 were $891 million on the lower end of the range. We provided in last quarter's earnings call.
F Q4 operating income was $4.0 billion, resulting in an operating margin of 37% up from 32% net Q3 and up from 21% in the prior year.
F Q4, EBITDA was $11.0 billion.
Resulting in an EBITDA margin of 57, 1% compared to 53, 3% in the prior quarter and 47, 4% in the prior year.
For the fiscal year total EBITDA was $14 billion up from $9 billion in the prior fiscal year and represented 54% of revenues.
Non-GAAP earnings per share in Q4 were $44.0
Up from $89.0 in Q3 and up from $1 <unk> in the year ago quarter.
EPS included approximately <unk> <unk> of gains from investments in our venture arm Micron ventures.
For the fiscal year total EPS was $6 six.
More than 100% from the $85.0 achieved in the prior fiscal year.
Turning to cash flows and capital spending we generated $12.0 billion in cash from operations in Q4, representing 47% of revenue.
For the fiscal year cash from operations totaled $17.0 billion.
Up from $11.0 billion in the prior fiscal year.
Net capital spending was $2 billion during the quarter and $16.0 billion in fiscal 'twenty one.
We generated positive free cash flow of $10.0 billion in Q4 and over $10.0 billion for the fiscal year.
The increased cash flow was driven by strong revenue growth increased profitability and efficient working capital management.
As Sanjay mentioned, we expect our fiscal 'twenty, two capital spending to be between $11 billion 12 billion.
Like fiscal 'twenty, one we expect our capital spending to be weighted more to the first half of the fiscal year, which will constrain free cash flow in F Q1 and Q2.
We do expect to generate healthy free cash flow in fiscal 'twenty, two but weighted towards the back half of the year.
We also expect to close our Lehigh fab sale within Q1, and we will receive approximately $900 million in proceeds from the sale.
We completed share repurchases of $2.0 billion or approximately $22.0 million shares in Q4.
For the fiscal year, we repurchased $3.0 billion were approximately $21.0 million shares.
From fiscal 2017 to fiscal 'twenty, one we generated over $20 billion of free cash flow.
During this period, we used approximately $5 billion of that cash flow to retire debt and $7 billion towards buying back stock and eliminating the dilution from convertible debt, reducing our share count by 148 million shares.
We also improved our total cash and investment position by $10.0 billion.
We expect that we will continue to generate strong free cash flow in the future and as we discussed on our capital return strategy call. In early August we are committed to returning more than 50% of cross cycle free cash flow to shareholders through a combination of buybacks and a quarterly dividend that we expect we can grow over time.
The first dividend payment of <unk> 10 per share will be paid on October 18th to shareholders of record as of October one.
The initiation of a dividend is an important milestone that reflects the structural transformation micron has undergone over the last several years and it shows our confidence in the sustainability of our cash flow generation.
Our ending Q4 inventory was $9.0 billion.
On average and average days of the quarter were 94 days Bill.
Below our normal range of 95 to 105 days.
F Q4 finished goods inventory ended at the lowest level since the Elpida acquisition in 2013.
We ended the fiscal year with $15.0 billion of total cash and investments and $13 billion of total liquidity.
Our FQ4 total debt was $14.0 billion.
Now turning to our outlook and demand across our major markets remained strong as Sanjay mentioned our bit shipments are expected to decline modestly in Q1, as we normalize our inventory position and work with PC customers as they manage through their supply chain challenges.
And on the gross margin side, our outlook is similar to how we viewed at Q4.
While we will benefit from our node transitions on both DRAM and NAND, we will continue to see near term headwinds from Covid related expenses and assembly and packaging.
As a result, we expect the gross margins in Q1 to be largely a function of the mix.
With all these factors in mind or.
<unk> non-GAAP guidance for Q1 is as follows we expect revenue to be $72.0 billion, plus or minus $200 million.
Gross margins to be in the range of 47% plus or -100 basis points and operating expenses to be approximately $915 million plus or minus $25 million.
Excluding the impact of any potential new tax legislation, we expect our non-GAAP tax rate to be approximately 10% for Q1.
Based on a share count of approximately $1. One 4 billion fully diluted shares we expect EPS to be $12.0
Plus or -10.
In closing fiscal 2021 with a year of considerable growth and success for micron looks.
Looking at four year average metrics reveals the sustained cross cycle performance of our business.
Over the last four years, our gross margins have exceeded 40% and our operating cash flow margins have been approximately 50% despite the.
Challenges stemming from the ongoing pandemic, we have continued to generate significant positive free cash flow, while making substantial investments to grow our business.
Our technology product and financial position provides strong momentum as we enter the new fiscal year I'll now turn it back to Sanjay.
Thank you Dave.
I would like to share the recent accomplishment that makes me, especially proud of our company. Our strong Micron culture has played a significant role in driving our results alignment to our broader vision to transform how the world uses information to enrich life for the auto.
Our company culture community leadership and business performance as being recognized globally, earning multiple industry awards and recognition this year.
This month, we were named by Fortune as one of the top 20 best places to work in manufacturing and production the only semiconductor company to earned this recognition.
Fiscal 'twenty, one was an excellent year for micron as our fourth quarter results clearly demonstrate we are delivering strong financial results.
We're planning to deliver record revenues and solid profitability in fiscal year 'twenty two.
Demand for memory and storage is solid across market segments industry.
Industry trends like the broad integration of artificial intelligence into all computing proliferation of the intelligent edge continued data center growth and deployments of <unk> networks create new and expanding opportunities for micron.
Importance of semiconductors to these markets is underscored by government initiative to invest in domestic semiconductor production. Both here in the U S through the chips Act and in other countries around the world.
We are focused on building our technology leadership to deliver bold new solutions that offer unique value to our customers.
Our business is robust and we are energized to seize the opportunities ahead of us at a truly exciting time in the semiconductor industry.
We will now open for questions.
Okay.
Okay.
Okay.
Operator can you. Please open the line for questions.
Okay.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad again that is star one to ask a question star one.
We have your first question from Harlan sur with Jpmorgan. Your line is open.
Okay.
Good afternoon. Thank you for taking my question there are a lot of concerns on inventories and all of your end markets, especially Pcs just given the non memory component shortages that are limited notebook and desktop shipments in the second half of the year can you guys, just qualitatively describe customer and channel inventories and PC server.
Smartphone segments of your business and also as you normalize your inventories through the first half of this fiscal year do you guys anticipate normal level of inventories on your balance sheet as you enter the second half of the fiscal year.
So I will have Dave comment on the second part of your question and on your.
The overall inventory question I would say that by and large inventory among our customers is in decent shape of course, we talked about the PC market, where due to semiconductor component shortages or Tc customers. Some of them are not able to fulfill all of their end demand and therefore they have.
Made some adjustments in their purchases impacting some of our demand in the near term into the PC market and we think this is short lived and over the course of next few months. This will work itself out.
And on the smartphone side of course, you know that new phone cycle of new phone launches that are coming up and this tends to be seasonally strong.
Quarter, four is a new smartphone shipments as well.
And while some customers made because of geopolitical considerations or.
Through the lessons learned during the pandemic or their own supply chain consolidations, our supply chain shortages may be having a strategy of carrying more inventory than some other customers overall.
Smartphone market continues to be driven.
Driven by a five <unk> transformation and transition.
Smartphones.
Over the course of calendar year, 'twenty, two with <unk>, increasing by 50% from the 2021 levels and on the data center side.
Of course.
The investment cycle is strong on the data center side and.
Of course, there are.
The pandemic has driven a strong acceleration in digital transformation and that certainly extending into their cloud cloud services video streaming E. Commerce all of these trends along with new architectures, new processors that are being introduced that actually enable greater AI <unk>.
Ability into the workloads and greater usage of data attach of memory in the servers all of these also.
Getting new demand. So overall data center inventory levels also in decent shape. So inventory in our markets today is in much better shape than it was.
Back in the 2018 timeframe again, some customers may have higher levels due to their strategic considerations and they may choose to continue to do so in the longer term as well given.
The challenges faced by.
By the supply chain during the pandemic as well as given and geopolitical considerations. So this is what I would like to share with you on inventory and Dave you can add the second policy session. So just as a reminder, when we look at our optimal level of inventory, we'd like to see it be a 100 plus in terms of days we can operate.
<unk> slightly below that we are definitely below the optimal level at 94 days I would say, though.
So we never like to see it goes below 95 days.
And so we think we will make a little bit of improvement next quarter on in terms of data that will probably be up a few days.
But I think it's going to be still below that 100 day figure.
As we look through the year, assuming we can make some progress on.
On inventory, we think we can get it more into the what we would call. The optimal state, which is 100 to 105 days of inventory probably going to exit the year somewhere in the 100 days of inventory.
As we already talked about finished goods inventory is really where we're particularly ringing and we do have to make some progress in that space to get ourselves into a better position, but overall I'd say the back half of the year will probably be in the optimal range.
Yes. Thank you for the insights there and you mentioned in your prepared remarks seeing constraints within your supply chain.
<unk> IC components, which is going to limit Colombia. Good shipments also here in the near term can you just give us. Some examples of some of these IC components, both in DRAM and NAND I assume for example, you have some NAND controller controller constraints, but what about in DRAM.
So harlan.
You are right to note that some of the controller shortages are there with respect to.
SSD and particularly impacting the data center SSD. We also have certain shortages of analog Ics and these kind of shortages are impacting our ability to ship to the Florida demand level that we are seeing from the customers.
And so.
If you look at controllers some of the analog Ics as well as in general overall supply chain is running tight.
And we are.
Have you have done a great job by our supply chain team in addressing these needs in the past and we continue to work on securing the supply for the future and we would expect that over time this will get better.
Thank you Sanjay.
Thank you. Our next question comes from the line of C. J Muse of Evercore. Your question. Please.
Yes. Good afternoon. Thanks for taking the question I was hoping to drill in.
To your gross margin is pretty impressive.
The top line guide.
So I guess a couple of parts here first.
In terms of the costs down within the November quarter, I'm, assuming more DRAM than NAND can you speak to that can you also speak to mix shift in the quarter and then for all of fiscal 'twenty, two how should we be thinking about.
The type of cost downs across both DRAM and NAND.
Should we.
Take 10 plus percent is sustainable year on year for DRAM in.
Similar type number if not higher unmanned or how should we think about that thank you.
Okay. So let me start with the near term outlook.
I'd say the cost declines for the November quarter are going to be pretty minimal. We obviously are getting a benefit from both our one alpha node in our 176 layer.
Node in NAND, but we are running into some cost headwinds as it relates to the backend mostly a function of the pandemic and the disruptions that's cost of the supply chain and so forth.
And and Thats actually both NAND and DRAM comment quite honestly, so no specific.
Direction, either way on DRAM and NAND.
As it relates to mix, obviously, we have a range.
It can go a couple of different ways obviously.
But there could be a little bit of a mix shift between DRAM and NAND that could impact.
Where the gross margins end up also by business unit, we could see some mix shifts within the business units, which could impact.
Our margins as well.
And even down to the product level. So.
It's hard to call within a couple of hundred basis points. So that's why we gave this range as I've mentioned in the prepared remarks, it's pretty similar to the range. We gave that is exactly the same as we gave in the prior quarter. So we're roughly seeing things pretty similarly to what we saw in the fourth.
Quarter and I agree with you these are great gross margins.
We're pretty happy with them the operating margins that this generates.
Mid to high Thirty's, we're expecting something similar for the first fiscal quarter, So where we.
I think we're executing very well on the profitability side of the business on fiscal 'twenty two.
We do expect really good cost declines on the front end side for both DRAM and NAND again, a function of one alpha in DRAM and 196 layer NAND.
When we look at kind of longer term cost declines buffer for DRAM, we see them as being mid to high single digit percent cost declines for the industry.
We think from a front end perspective for DRAM, we will do better than that.
Next year on the NAND front, we see cost declines over time being more in the mid teens.
And we think the 170 declare next year will drive.
Cost declines in that range next year as well.
Obviously Q1 Q2, we'll likely have these these cost headwinds.
As it relates to the pandemic and the supply challenges so those things.
<unk>.
Might impact us in the first couple of quarters, but hopefully.
Over time that starts to go away and we'll start to see the benefit also on the back end. We've made a lot of investment on the back end to improve our cost structure and I think once we get behind that.
Behind this or get this behind us I should say as.
As it relates to the pandemic.
We will start to experience a lot of the cost benefits that we've put in place on the backend as well I'd also note that when we look at our cost structure today and as we're looking into next year all the way through the year, we think.
The cost reductions that we're seeing are very competitive with the industry and the cost headwinds. We're seeing are very similar to the cost headwinds that others within the industry not only in memory, but also across the entire semiconductor space.
Seeing so we think this sets us up for as Sanjay mentioned very good profitability for next year.
And.
And I think that pretty much covers it.
Okay.
Thank you. Our next question comes from Shannon Cross of Cross Research. Your line is open.
Thank you very much. The first question I had is with regard to pricing can you talk about some of the pricing dynamics, especially with the pullback in demand from the PC vendors.
Are you expecting to see any more aggressiveness from your competitors, although given your comments on gross margin I'm guessing the answer may be now.
And then my second question is just with regard to your PC OEM partners how are you tracking.
Confidence that they're going to actually see the demand come through in second half of the year.
Because I get a lot of questions from people about double ordering even just from their end customers.
So I'm just wondering if you've changed any methodology and how youre tracking I'll, let your partners or seen or how you're providing guidance as you look out. Thank you.
So with respect to pricing, we do not provide.
Comments on pricing, but you can look at our Q4 results and of course, we reported that both for DRAM and NAND in FQ4 pricing in cheese and you are right to note that gross margin guidance for FQ. One is strong in fact same as Dave earlier pointed out as <unk>.
Q4 guidance was at the time of our June call.
And.
As you look at and not only just at Q1 for fiscal year 'twenty. Two we are projecting a record year for the company with solid profitability for the full year as well and just remember that pricing is always a function of the mix.
Overall, as well and with respect to your questions around PC.
Again, as I mentioned, the PC customers have been impacted by their own semiconductor shortages in their supply chain constraints, there and demand their end user demand is very strong in fact, they have unfulfilled.
Backlog generally among these customers, which is quite extensive and you know that even in the PC industry, while prices have gone up.
If the customers are able to maintain a strong backlog that speaks to the and strong demand. It really it's all driven by work from home learn from home that demand acceleration that has taken place through the pandemic will continue to support healthy environment for PC in calendar year 'twenty, two as well of course.
In 2020 in 2021, BC has gone through a double digit.
Unit growth on a calendar year basis, we expect that to moderate in calendar year 'twenty two.
Perhaps from flat to low single digit year over year growth in terms of PC unit sold yet it will be a healthy market and again driven by the trends such as the economies opening businesses opening workers coming back that drives a greater mix of enterprise Bce's commercial Pcs so while some.
The consumer PC.
Such as Chromebooks.
Compared to last year, maybe less than demand today, but the commercial PC demand is getting stronger as well. So overall PC continues to be a healthy market and we work closely with our customers and today. They are really constrained by their supply chain shortages and that's what is adjusting their purchases.
And as I said before we believe this is going to be short lived.
And we look forward to continuing to support our customers with our products and as we highlighted our new technologies new products, one alpha transitions EPC customers are qualifying them fast and we are focused on delivering doors in calendar year 'twenty, two as well as fiscal year 'twenty two timeframe.
Thank you.
Thank you. Our next question comes from <unk> Hari of Goldman Sachs. Your line is open.
Hi, good afternoon. Thanks, so much for taking the question I was hoping you could provide a little bit more context around your fiscal 'twenty, two capex guidance of $11 billion to $12 billion.
If you can kind of speak to that.
W are for you within that number for fiscal 'twenty, two and then differentiate between DRAM and NAND that.
That would be Super helpful. And then just remind us what kind of bit supply growth.
Are you expecting purely from transitions in both DRAM and NAND.
Think about calendar 'twenty two thank you.
Okay. So.
<unk> I will go through the Capex burden so.
As Sanjay mentioned and as I reiterated we expect capex to be in the 11% to $12 billion range, we were roughly a little bit less than 10 billion $16.0 billion.
In fiscal 'twenty one.
If you look at it by the elements of Capex, we are going to invest more in pilot enablement. This year last year was it was a relatively low year for us in terms of pilot enablement, so thats going to be a reasonably a reasonable step up in our capex spending we feel capex equipment in DRAM.
We will be down year over year.
We think we've made a good investment in fiscal 'twenty, one and we don't need to invest as much in fiscal 'twenty. Two so that will be down NAND will actually step up pretty meaningfully in fiscal 'twenty two versus 21. If you remember we took capex way down in fiscal 'twenty boost it up a little bit in 'twenty. One now we're up to kind of a full investment level.
In 'twenty two to support 196 layer.
And that was caused because of this transition from floating gate to replacement gate. When we made kind of a pause in terms of our capex investment to get the first line out at relatively minimal levels.
Backend, we should be up a bit and backend spend as we make continue to make investments on the backend to put that cost structure into better places.
To me that before we've been making investments to improve our cost structure there.
Clean room will be down a little bit.
Little modestly and of course, we have a UV spending that also will impact our capex.
In fiscal 'twenty, two as well.
The one other thing just to remind you. So we will be kind of like 60% of our capex kind of weighted to the first half probably 40% in the second half.
This was similar to what we saw in fiscal 'twenty, one we're likely to see in fiscal 'twenty two.
Which is kind of our haven't been our typical pattern over the last couple of years.
And Dave the transitions.
You guys talked about calendar 'twenty two.
It's growing mid to high teens on the DRAM side, and approximately 30% of the NAND side in line with the industry.
What portion of that growth.
Are you guys expecting purely from from transitions to to one alpha.
Alright forget that again, yes, so it's all from node transitions were not adding wafers.
We don't see for the foreseeable future, adding wafers in either DRAM or NAND in the next few years, we might be adding wafers in DRAM as Sanjay mentioned.
But NAND, we think we can continue with no transitions to support the growth.
Thank you.
Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Your question. Please.
Yes, Thanks for taking my question I wanted to ask about.
Little bit more about the end demand dynamics.
Particularly around the data center I'm curious as we move forward how are you thinking about the bit demand profile of the data center in the server market and what are you seeing as far as kind of the progression.
Kind of the progression of memory to compute ratio as we move forward to next generation CPU. So I'm just curious.
Are you rolling forward the expectations over the next year and that growth profile from a debt perspective.
Within the data center, both for DRAM and NAND demand trends would be strong and in fact data center today has become the largest market for DRAM and NAND and we will continue to grow faster than the average of the industry, both for NAND and DRAM and <unk>.
The foreseeable future as well, so it's really being driven by the trend of AI driving greater.
Need for memory and addressing data intensive workloads.
Bomb is going from about.
Memory and storage part of the bomb.
And the servers and data centers is going from about 13% few years ago to around 40% now and going to 50% and few years timeframe as well and new architectures new processors.
Enabling more cores and that had more course means more memory attached per core therefore, greater gigabytes per server for DRAM as well as for NAND DDR five is our transition that will be occurring over the course of next couple of years as well as new Cpus.
Launched into production and DDR five is a higher bandwidth solution of course enable us more value higher performance in the applications. So that adoption will be going on in over the course of the years of course CSL and <unk>. These are ultra bandwidth solutions. These will also be.
Continuing to grow in the data center space, So average content.
Our server bullets, DRAM and SSD will also be growing over 20% on a CAGR basis in each of these applications. So strong opportunity ahead and micron is very well plays with respect to all of our own product portfolio in terms of ssds displacing HDD.
<unk> in terms of us providing higher density memory modules for server and data center applications.
As cloud gets bigger the data center market gets bigger for us and we are very well positioned and this is an area. We are focused on and continue to focus on expanding our product portfolio, particularly on the side of the data Center Ssds. So if you look at this as a strong growth opportunity for the industry as well as for Micron.
On the value that memory and storage solutions provider in this space is really critical for the services that our cloud customers are providing and just keep in mind that the enterprises as well while it grows.
At a lower rate compared to the cloud.
We are seeing a resurgence in.
Enterprise applications as well driving for an overall healthy demand trends in data center in calendar year 'twenty, two fiscal year 'twenty, two as well as beyond.
And then as a quick follow up Dave I'm, just curious as you start to notice last quarter implement some share repurchases. How do you think about the liquidity on the balance sheet are managing the company from a from a cash on hand perspective versus continuing to lean more in on share repurchases.
How much cash do you need operationally to comfortably run the company.
So we roughly are holding about did <unk> as a percent of revenue in terms of liquidity.
But $7.0 billion of that liquidity is our unused revolver. So cash is obviously less than that we're obviously have more liquidity than we need which of course.
As a good opportunity as it relates to the buyback.
As I mentioned, we're also going to receive $900 million from the sale of our Lehigh Fab that also can be utilized for.
Returns to shareholders and we are expecting healthy free cash flow in fiscal 'twenty, two as well and so we will be able to leverage that we've committed to return at least 50% of it in a form of dividend and buyback most of the buyback.
And we could obviously go.
Go higher than that are authorized plan, we still have $6 billion.
Left in our authorized plan for repurchases.
If we see the stock.
The weak which courses how we viewed it in the fourth quarter, we will be aggressive about buying back stock.
Perfect. Thank you.
Thank you. Our next question comes from Joe Moore of Morgan Stanley. Please go ahead.
Great. Thank you I Wonder if you could address with transitions going on in both DRAM and NAND to one alpha and arch <unk> are there any issues that that creates from a mix standpoint in terms of it seems like there's quite a bit of demand for the older products, where are you in terms of getting qualified and the newer products how is that affecting you guys.
Actually we are doing very well with respect to ramping up these new nodes in production.
Right on our plan in fact in terms of yield ahead of our plans I highlighted that the yields in these 196 layer NAND as well as one alpha DRAM have ramped 20% to 30% faster than our file one Z generation node and the.
Pliers FG node the lost energy node, so and customer qualifications actually are going very well with these nodes as well as I mentioned earlier that we are already shipping <unk> alpha in the PC space as well as broadening its.
Shipments to other parts of the markets as well in fact customers are working closely with us and qualifying these products.
One of our 176 layer <unk> NAND based mobile product went from.
Just introduction to 1 million unit shipments in a record time fastest ram and the history of the company. So overall these nodes in production.
As well as in terms of deployment in the marketplace are doing very well for us and of course. This is all baked into our guidance that we have provided in terms of revenue as well as our cost expectations.
Great. Thank you very much.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.
Yes. Thanks, guys. Thanks for let me ask the questions. Congratulations on the solid execution Sanjay you sort of characterize the current environment as relatively short lived.
Supposed to read into that that as we go into the February quarter, your business might normally kind of buck normal seasonal headwinds and I guess importantly, upturn to date. This memory cycle has been very different than prior memory cycles. Typically you had sort of eight quarters of unabated ASP.
ASP growth and margin expansion were kind of.
At least plateauing here three quarters into it.
What's different about this cycle and I guess, what makes you confident this is just a pause and not something more to areas.
So with respect to the comment on the short lived just to be clear what I was mentioning was that with respect to PC part of the market, where our customers some of our customers in the PC market have experienced semiconductor shortages impacting their decisions on purchases of memory, that's what I was mentioning shortly.
Because their end user demand on Pcs is still very strong and lot of unmet demand.
Actually stretches the demand overtime and makes the demand longer stronger for longer.
But my comment regarding.
Short lived and addressing it in the next few months was related to the BC part of the market and outside of that in other markets. As we discussed earlier, we see strong demand trends and strong.
And user demand trends and of course, the supply chain shortages that are being experienced in BC are also being experienced in other parts of our markets as well by our customers, but of course different customers on handing them, an overall different fashion, but.
Underlying demand trends driven by AI and <unk> from data center to the intelligent edge. The user devices are strong they are secular in nature Covid further accelerated semiconductor supply chain shortages on only stretching that demand out as because some of the demand gets pushed out so.
As I said, making those demand growth drivers actually stronger for longer as well. So you can call. It pent up demand, but that's what I'm, referring to so on the demand side things are here.
Overall strong.
On the supply chain aspects of course. This is something that you know that the lead time in the semiconductors is long and this will take.
Several quarters to continue to improve part of the semiconductor supply chain have already seen improvements.
Our expectation is that these will continue to improve as well over the course of the coming quarters.
Also keep in mind that.
The industry the memory industry over the course of last couple of years has tapped into the inventory to ship beyond the supply growth and this is a phenomenon that has occurred across the industry. Certainly you have seen that how micron has broad its inventory to the leanest level in many.
Years in fact below our target inventory levels. So this is something that is common to all suppliers in the memory industry and as we look ahead.
The supply growth will not only have to meet the customer requirements, but it will also have to replenish the inventory that has been taken to such low levels inventory has to be replenished in order to make sure that we are able to service our customers and meet their demand requirements, which sometimes.
<unk> change. So these are all factors as well very lean levels of inventory by the suppliers.
As well as needs to replenish that inventory will drive four ahead of the demand supply balance in calendar year 'twenty two timeframe as well so yes some of this.
In terms of our own supply chain shortages and some that are being experienced by our customers. We expect to be addressed over the course of time and some of these shortages on the semiconductor ecosystem may take through 2022 timeframe by the end of 'twenty two maybe some of them will be relieved Hollywood, we expect them.
To continue to be improving through the course of time, all the way through calendar year 'twenty, two but the demand dynamics of the underlying strong drivers and the supply dynamics that I discussed, including the prudent capex investments that have gone on in the industry and the lean supply all of this will lead to healthy.
Supply and demand environment in the industry. So it's really the combination of the demand drivers and data suppliers.
Supplier capabilities and shipment capabilities that combination I think really sets us up well as an industry four <unk>.
Our revenue growth and strong profitability in 'twenty, two and of course, we have projected.
Projected based on our expectations that we will have record revenue in fiscal year, 'twenty, two and solid profitability as well.
Sanjay there was inventory commentary very helpful. I'm, just kind of curious as a quick follow on your guidance for bids to be down in the November quarter. How much is that a conscious decision by you to hold bits off the market.
To help maybe pushing pricing and how much of that is just be driven by buy there is no demand for those bits and thats why benches down.
Well again, I think keep in mind that our inventory is very lean it is at the leanest level and below our target levels and that is impacting some of our ability to meet the demand as well and all in all.
Our projection of bids with respect to FQ, one is really a function of our own.
Our supply chain capabilities in terms of where our inventory is and what we can shift at this point to their customers certainly impacted by some of the component shortages non memory component shortages that we're seeing in the marketplace as well and our assessment of overall demand and the maintained nearly is.
Round.
PC word.
Some of the demand is impacted but overall when you look at our guidance for FQ1.
It takes into account remaining aspects of seasonality as well but.
Guidance for FQ, one at its midpoint is about 32%, 33% higher than the same quarter last year. So.
Our inventory capability is also overall impacting some of the ability for our customers in terms of what we can ship.
Perfect. Thank you.
Thank you. Our last question comes from the line of Timothy Arcuri of UBS. Your line is open.
Thanks, a lot.
I appreciate that data I guess I had a question on gross margin I wanted to go back to a question asked earlier.
On the 100 basis points on your guidance sounds like an 8% down revenue quarter and it sounds like bits are only down modestly in both DRAM and NAND. So it sounds like the Delta is probably pricing I would say more on the DRAM side and then somebody asked you about costs and you said well costs aren't coming down very much. So I guess I'm trying to figure out how gross margin is.
So good is this going back to some of the mix comments that you made last quarter. It seems like a more sustainable <unk>.
<unk> that maybe people are missing so I'm wondering if you can kind of.
Flip that for us.
Yes sure Tim.
Yes, so cost.
Declines are going to be relatively muted.
Remember that.
There will be some mix changes that might impact gross margins to bring it down.
Somewhere within the range that we gave.
Obviously, the rest is a function of pricing.
And you have to infer what you what you cannot have pricing obviously.
Mix is the predominant factor in driving gross margins pricing and cost will not be.
Major factors in driving gross margins, maybe that's the best way to say it.
Got it got it okay.
And then I guess just.
Last thing so just on the cost curve. So you reached you said you reached production crossover on 176 and on one alpha and.
<unk>, so how much like what's the lag effect in terms of when that really starts to bend.
Cost curve in a favorable direction given that you've hit production crossover around those things.
Yeah, well to be clear, one alpha and one Z we've hit crossover once every six weeks.
At the end of the year, they're already by the way benefiting us from a cost perspective, it's hard to see it.
Maybe as.
As much just because we're getting a little bit impacted obviously on the backend, which is which is impacting the cost declines.
But next year, we do anticipate that both of them will drive good cost reductions for us on the front end side. So they will be good.
The good news for us in terms of in terms of cost structure and I think we will see that from a front end perspective every quarter again I think the first couple of quarters. It may not be as noticeable in our cost per bit calculations because of this work more of a headwind on the back end side of the cost structure, but after we get behind that I think youll see.
You'll see that show up on the cost per bit basis as well the only other factor, we will obviously be mix as well and we're going to drive like heck to get.
Our mix to be more to be a richer mix of higher value products.
Which is always our goal and of course with higher value products, you get higher cost, but higher profitability higher gross margin. So.
That's a good strategy, but that also kind of distorts the picture and will distort the picture over the course of the year as well.
Perfect Awesome.
Okay.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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