Q2 2022 Micron Technology Inc Earnings Call
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Thank you for standing by and welcome to Micron technologies fiscal second quarter 2022 Financial conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your <unk>.
The phone.
Please be advised that todays call may be recorded should you require any further assistance. Please press star zero I would now like to hand, the call over it so fond of Mod head of Investor Relations.
Thank you and welcome to Micron technologies fiscal second quarter 2022 financial conference call.
On the call with me today are Sanjay Mehrotra, President and CEO , and so lets odonnell, our chief business officer and interim CFO .
Today's call is approximately 60 minutes in length and is being webcast from our Investor Relations site at investors Micron dot com, including audio and slides.
In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call.
Today's discussion of financial results is presented on a non-GAAP financial basis, unless otherwise specified.
A reconciliation of GAAP to non-GAAP financial measures, maybe found on our website.
We encourage you to visit our website at micron dot com throughout the quarter for the most current information on the company, including information on the financial conferences that we will be attending.
You can also follow us on Twitter at my contact.
As a reminder, the matters. We're discussing today include forward looking statements. These forward looking statements are subject to risks and <unk>.
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 10-Q for a discussion of risks that may affect our future results.
Although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future results levels of activity performance or achievements.
We are under no duty to update any of the forward looking statements. After today's date to conform these statements to actual results.
I'll now turn the call over to Sanjay.
Thank you Farhan good afternoon, everyone.
<unk> delivered an excellent performance in fiscal Q2 with results above the high end of our guidance.
We grew revenue and margins sequentially, while driving favorable mix and cost reductions amid ongoing global supply chain challenges.
We saw broad based demand for our products without SSD products, achieving record revenue and our auto market revenue also reaching an all time high.
Execution was outstanding with our industry, leading one outside of DRAM and 176 layer NAND technology node ramps.
<unk> strong cost reductions.
Our portfolio transformation continues to gain momentum as we lead the industry on the DDR five transition and grow our mix of Nvme data Center Ssds.
Following a solid first half we are on track to deliver record revenue and robust profitability in fiscal 2022 and remain well positioned to create significant shareholder value in fiscal 'twenty two and beyond.
In fiscal Q2, <unk> and one alpha DRAM combined represented the majority of our DRAM bit shipments, while 176 layer NAND represented the majority of our NAND bit shipments.
Our one alpha DRAM and 176, new <unk> NAND products at achieving excellent yields providing us with solid front end cost reductions and contributing meaningful revenue.
We qualified additional progress on these advanced nodes with a broad set of customers, which sets us up for continued strong revenue ramp in the second half of the fiscal year.
We are tracking several quarters ahead of the industry in ramping products based on these leading edge process technologies.
We are also investing to maintain technology leadership for the next decade, and making good progress in the development of future technology nodes.
Micron is not only a technology leader, but also the industry leaders in quality with the majority of our customers ranking us number one.
Our leadership in quality is an important differentiator for micron, particularly in fast growing data center and automotive markets, where our quality scores are excellent.
We have also strengthened our position as a strategic supplier to our customers as demonstrated by our commitment to supply continuity amid ongoing semiconductor supply chain challenges this past quarter.
In late December our government mandated COVID-19, lockdown impacted production output at our back end facility in Xian China.
The micron team executed with tenacity to return the Xi'an site back to normal output levels post lockdown.
As a result of this outstanding effort, we mitigated the lost output from Xi'an and delivered on our customer commitments for the quarter by leveraging our global manufacturing network.
Additional COVID-19 related lockdowns in the region present, a risk to the global electronics supply chain and we continue to monitor the situation closely.
The global semiconductor supply chain is experiencing pressure due to impact of ratios envision of Ukraine.
<unk> is an important source for the global supply of noble gases and other critical minerals that are used in semiconductor manufacturing.
We have strategically diversified our supply chain over the last several years and maintain the appropriate inventories of materials and noble gases.
We currently do not expect any negative impact to our near term production volumes because of the Russia, Ukraine War, but we do expect an increase in our costs as we secure supply of certain raw materials that could be at risk.
We also remain vigilant in this dynamic situation and are engaged with our key suppliers to ensure continuous availability of materials to support our operations.
Now, let's review our end markets demand for memory and storage is broad extending from the data center to the intelligent edge and to a growing diversity of user devices.
Memory and storage revenue has outpaced the rest of the semiconductor industry over the last two decades, and we expect this trend to continue over the next decade, thanks to ongoing advancement of AI, <unk> and EV adoption.
Our team's execution on strengthening our product portfolio has been outstanding with several new product launches and customer qualifications in fiscal Q2 achievements that we are very proud of.
Last year data center became the largest market for memory and storage eclipsing the mobile market.
Looking ahead, we expect data center demand growth to outpace the broader memory and storage market over the next decade fueled by a secular drivers in cloud and healthy enterprise it investment.
Memory and storage share of server Bom costs already exceeds 40% and this number is even higher for servers optimized for AI and ml workloads.
This growth is supported by new heterogeneous computing architectures, they increase and data intensive workloads and ongoing displacement of hdds by Ssds.
In the fiscal second quarter data center revenue grew more than 60% year over year supported by robust demand across our DRAM and SSD portfolio.
We have broadened the qualifications for our one alpha DRAM products and are well positioned to support the datacenter DDR five transition driven by new CPU platforms, which are targeted to begin ramping later this calendar year and gained momentum in 2023.
Following the introduction of our 7400 SSD in fiscal Q2, we introduced the $74 15, which is the industry's first 176 less vertically integrated data center Nvme SSD.
These gen four nvme datacenter drive are generating an enthusiastic response from our customers.
We are making robust progress in our qualifications of these drives with datacenter customers, which has contributed to a doubling of our fiscal Q2 datacenter SSD revenues year over year.
We expect strong growth of data center SSD revenues to continue for the remainder of this fiscal year.
In fiscal Q2, we saw the company and our clients revenue driven by strength in enterprise species.
Which more than offset softer consumer and chromebook demand.
We expect that calendar 'twenty, two PC unit sales will be flattish versus last year sales, but we expect solid growth in DRAM and NAND content driven in part by infusing mix of content rich enterprise desktops and laptops.
We are leading the industry has climbed to DDR five transition and our <unk> revenue continues to increase as multiple PC customers launched next generation notebooks.
Trying to <unk> five demand continues to outstrip supply and we are seeing meaningful price premiums over DDR for alternatives.
Building on our Q Youll see leadership in fiscal Q2, we also launched our 2400 nvme SSD the world's forests client SSD built on 176 layer <unk> NAND.
Micron maintains a leading position in the fast growing graphics market.
We have a broad product portfolio, featuring industry, leading product performance and deep partnerships with leading GPU suppliers.
In fiscal Q2 revenues grew year over year, driven by strong demand for the latest generation of gaming consoles and graphics cards.
Our advanced <unk> <unk> continues to lead the industry in performance and in fiscal Q2, we began revenue shipments of our next generation <unk> <unk> solutions.
Fiscal Q2 mobile revenue grew slightly year over year as the <unk> transition continues in smartphones.
We see some weakness in the China market as the local economy slows smartphone market share shifts and some customers take a more prudent approach to inventory management.
Mobile memory and studio demand continues to be supported by content hungry applications and the ongoing transition from <unk> to <unk>, which is driving 50% higher DRAM content and a doubling of NAND content.
<unk> smartphone sales are expected to grow to $700 million units in calendar year 'twenty two.
In fiscal Q2, we achieved the first qualification of our one asphalt LP five DRAM, which delivers more than 15% power improvement over the previous generation, enabling our customers to offer an improved <unk> experience with better battery life.
We are also seeing a very strong revenue ramp for our 176 layer NAND uff's products, which are now qualified in nearly 50 different OEM platforms.
The automotive and industrial segments are expected to be the fastest growing memory and storage markets over the next decade.
Today more than 10% of our revenue comes from these end markets and we are exceptionally well positioned as a market share leader.
In fiscal Q2, our auto revenue set a new record driven by robust demand for memory and storage auto.
Auto unit production remains below demand constrained by numerous supply chain challenges, including logic and analog semiconductor component shortages.
The Russian invasion of Ukraine has also impacted auto bills. Nevertheless, the demand for memory and storage demand strong driven by auto content growth.
New Evs are becoming like data center on wheels, and we expect over 100, new EV models to launch worldwide in this calendar year alone.
These new Evs include advanced Adas and in vehicle infotainment features that have significantly higher memory and storage requirements.
Some of these level three autonomous evs have about $750 and memory and storage content, which is 15 times higher than the average car.
In industrial Iot, we saw approximately 60% year over year revenue growth fueled by the continued ramp in applications, such as factory automation and security systems.
Turning to the market outlook, our expectation for calendar 'twenty two industry demand is largely unchanged from our last earnings call.
We expect calendar 'twenty, two industry bit demand growth to be in the mid to high teens for DRAM.
And at approximately 30% for NAND.
We anticipate underlying demand in calendar 'twenty two to be led by data center ongoing adoption of <unk> smartphones and continued strength in automotive and industrial markets.
Currently we see a healthy supply demand balance across both DRAM and NAND given these demand trends supply discipline across the memory industry.
Non semiconductor manufacturing equipment lead times and reduced NAND supply from some of our competitors that experienced a contamination issue in their fab.
Non memory component shortages are improving and we expect that further improvements should support memory and solid demand growth for rest of this year.
However, there are some pockets where semiconductor shortages have not improved as fast as we had expected and these shortages are likely to continue into calendar year 2023.
We are mindful of increased macroeconomic uncertainty and remain vigilant of any changes in market conditions.
Turning now to micron's bit supply growth expectations for the year consistent with the rest of the industry, we are experiencing a challenging environment for equipment and material suppliers.
Due to strong execution by Mike Transportations team, our calendar year 'twenty two bit supply growth for DRAM and NAND remains unchanged from prior expectations and will be in line with industry demand we.
We are on track to deliver record revenue with solid profitability in fiscal year 'twenty, two and we continue to expect strong bit shipment growth in the second half of the fiscal year.
We expect our cost reductions to outpace that of the industry. This year driven by the exceptionally well executed ramp of our world class, one Alpha DRAM and 176 layer NAND nodes.
However across the industry there are cost challenges stemming from supply chain and inflationary pressures, which will limit cost reduction this year for the industry.
We remain confident in our long term technology roadmap and our ability to drive competitive cost reductions for years to come.
I will now turn it over to Sumit.
Thanks Sanjay.
Micron delivered excellent fiscal Q2 results marked by record revenues across multiple products and markets.
Strong profitability and generation of over $1 billion in free cash flow and.
I am, particularly excited by the execution of our industry, leading one alpha DRAM and 176 layer NAND technology ramp and the accelerating momentum of our product portfolio transformation.
Fiscal Q2 revenue was approximately seven 8 billion up 1% quarter over quarter and up 25% year over year revenue was particularly strong in client and cloud markets.
Fiscal Q2, DRAM revenue was $5 7 billion, representing 73% of total revenue.
DRAM revenue increased 2% quarter over quarter and was up 29% year over year.
Sequentially bit shipments increased in the high single digit percentage range, while asps declined in the mid single digit percentage range.
Fiscal Q2, NAND revenue was $2 billion, representing 25% of Micron's total revenue.
<unk> revenue increased 4% quarter over quarter and was up 19% year over year.
Sequential bit shipments were flat.
Asps increased in the mid single digit percentage range due to a stronger mix of ssds more than offsetting like for like price declines.
Our ongoing portfolio transformation and a solid front end cost reduction.
Drove sequential gains in gross margin in NAND, despite sequential price declines in most products.
Now turning to our fiscal Q2 revenue trends by business unit.
Revenue for the compute and networking business unit was $3 5 billion up 2% sequentially and up 31% year over year cloud.
Cloud generated record DRAM revenue and client DRAM revenues also performed well in the quarter.
Revenue for the mobile business unit was $1 $9 billion down, 2% sequentially and up 4% year over year.
<unk> business continues to perform well building on our leadership in managed NAND and mcps as well as our strong relationships with all smartphone customers.
Revenue for the storage business unit was $1 2 billion up 2% sequentially and up 38% year over year, we achieved record SSD revenues, which were up approximately 80% year over year.
Storage business is gaining momentum growing revenue as well as profitability as we become the first in the industry to ramp several 176 layer <unk> NAND ssds from QL seed and TLC client products, two vertically integrated data center Ssds.
Finally revenue from the embedded business unit was $1 3 billion up 5% sequentially and up 37% year over year.
Our embedded business unit saw strong demand across automotive and industrial markets with auto revenue hitting a new record.
The consolidated gross margin for fiscal Q2 was 47, 8% up approximately 80 basis points quarter over quarter.
Gross margins benefited from improvements in our portfolio mix as we ramped several high value solutions.
And from manufacturing cost reductions.
Operating expenses in fiscal Q2 were $974 million near the midpoint of our guidance range.
Fiscal Q2 operating income was strong at $2 8 billion, resulting in an operating margin of 35% flat quarter over quarter and up from 20% in the prior year.
Fiscal Q2, adjusted EBITDA was $4 $5 billion, resulting in an EBITDA margin of 58% up from 57% in the prior quarter and upfront 45% in the prior year.
non-GAAP earnings per share in fiscal Q2 were $2 14.
Down slightly from $2 16 in fiscal Q1 and up more than 100% from the <unk> 98 in the year.
A year ago quarter.
The sequential increase in fiscal Q2 tax rate.
Q2, EPS by <unk> <unk> per share.
Turning to cash flows and capital spending we generated $3 $6 billion in cash from operations in fiscal Q2, representing 47% of revenue.
Net capital spending was $2 $6 billion during the quarter.
We continue to expect fiscal 2022 capex to be in the range of 11 billion to $12 billion with the capex being roughly even between the first and second half of the fiscal year.
Our free cash flow for fiscal Q2 was strong at slightly over $1 billion, we remain confident in our ability to generate significant free cash flow in the second half of the fiscal year substantially higher than that in the first half.
<unk> completed share repurchases of $408 million or approximately four 8 million shares in the quarter.
Including our dividend payment, we returned around $520 million to shareholders in fiscal Q2.
From the inception of the share repurchase program in fiscal 2019, we have deployed $4 $7 billion towards repurchasing 94 million shares at an average price of $50 per share.
In addition, we have deployed approximately $800 million towards settling the converts premiums, which reduced our diluted share count by 19 million shares.
Combining the share repurchases convert premiums and dividends, we have returned to shareholders five $8 billion or 64% of our cumulative free cash flow in this timeframe.
We remain committed to returning more than 50% of the cross cycle free cash flow through a combination of dividends and buybacks as.
As we have mentioned before we will be opportunistic in share repurchases and more aggressive in the shares are trading at larger discounts to intrinsic value.
Our board of directors approved a quarterly dividend of <unk> 10.
To be paid on April 26 to shareholders of record on April 11.
Our ending fiscal Q2 inventory was $5 4 billion.
And average days of inventory for the quarter was 113 days.
Our fiscal Q2 <unk> increased.
Sequentially due to an increase in raw materials and whip to support demand for the second fiscal half.
Finished goods inventory declined quarter over quarter in both DRAM and NAND.
We ended the quarter with $11 9 billion of total cash and investments and $14 4 billion of total liquidity.
Our fiscal Q2 total debt was $7 1 billion.
Now turning to our outlook for the fiscal third quarter.
Our overall business is tracking ahead of our plan a quarter ago and demand is strong across most end markets with some regional challenges that Sanjay referenced earlier.
Near term supply and pricing trends are constructive.
Our improved fiscal year financial outlook is increasing our variable compensation expenses, which will impact our costs in fiscal Q3.
We're also seeing cost impacts from continuing inflationary pressures.
And from supply chain mitigation actions, resulting related to industry wide shortages.
Additionally, due to the pull in of cost reductions in Q2, we expect more modest front end cost reductions in Q3 on a sequential basis.
We do expect both DRAM and NAND gross margins to increase sequentially in fiscal Q3.
A higher mix of NAND revenue in our consolidated total will affect our consolidated gross margin as our DRAM gross margins are substantially higher than NAND gross margins.
With all these factors in mind, our non-GAAP guidance for fiscal Q3 is as follows.
We expect revenue to be $8, 7 billion, plus or minus $200 million, which will represent a new record for quarterly revenues.
Gross margin to be in the range of 48% plus or minus 100 basis points and operating expenses to be approximately 1.05 billion plus or minus $25 million.
We expect our non-GAAP tax rate to be approximately 10% for fiscal Q3.
Based on a share count of approximately 1.14 billion fully diluted shares we expect EPS to be $2 46.
Plus or minus 10.
We remain on track to deliver record revenue and solid profitability and free cash flow in fiscal 2022.
In closing Micron continues to deliver strong cross cycle performance.
Revenue growth has significantly outpaced the broader semiconductor industry gross margins have averaged over 40% and operating margins have averaged around 30%.
Micron's financial Foundation and outlook have never been stronger as we build on the momentum created by our portfolio transformation leadership technology roadmap and manufacturing excellence.
I will now turn it back to Sanjay.
So Matt I am proud to note that earlier this month Micron was named one of the world's most ethical companies by the Ethisphere Institute. This recognition reflects our global team's dedication to holding our sales the highest ethical standards. Both in how we operate and how we pursue environmental and Soc.
<unk> responsibility.
We continue to manage our business with discipline and foresight that is driving industry, leading technology dams, improving our product portfolio and strengthening our customer relationships are strong.
<unk> first half performance and our guidance for an all time record quarter Shaw, our continued progress towards delivering record fiscal 'twenty, two revenues and robust profitability.
Given our technology leadership Micron is in an excellent position to capitalize on the broad trends that are driving demand for DRAM and NAND solutions solutions that transform data into better customer experiences and greater business value.
I look forward to seeing you at our Investor Day presentation on May 12 in San Francisco, where we will discuss the technology drivers behind these trends in greater depth and detail Micron's strategy is to seize the opportunity ahead.
Thanks for joining us today, and we'll now open for questions.
As a reminder to ask a question you will need to press star one on your telephone.
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 of Evercore. Your line is open.
Yes. Thank you for taking the question I guess first question as I look at your results mix and operational.
<unk> X.
Excellent and then as you look ahead to the second half.
Did talk about a pull in of course.
Costs.
February quarter.
But would be curious to hear how you're thinking about.
Mix both.
Like for like in DRAM and NAND into into the second half of the fiscal year and how we should think about kind of the gross margin trajectory from here.
Alright, so in terms of.
The gross margins and the mix.
I'll just point out that for FQ. Two for example, we had exceptionally strong performance in gross margin due to the ramp of our one alpha and 176 million land in our portfolio mix and on NAND gross margins actually.
Two due to mix effects alone and of course, we had good cost reductions.
And 170 <unk>, so that momentum is continuing so as I look forward to F Q3 you'll have seen that the gross margin guidance at the midpoint is sequentially higher. So we are very positive on our <unk>.
Gross margin trajectory going forward.
I want to point out a couple of things that are important here. So both NAND and DRAM gross margins are expected to improve sequentially.
In Q3, and as you highlighted.
We have spoken about some cost improvements that got pulled into Q2, so that's going to have.
Little bit of a dampening effect on the cost improvements, we will see sequentially, but.
There are a couple of important factors that are going to affect our F Q3 gross margin by about 100 basis points.
The first one is that our variable compensation accrual is increasing sequentially from Q2 to Q3, because our overall profitability forecast for the year for the fiscal year.
Is quite a bit higher than we were expecting originally so.
That is increasing our bonus accrual that impacts cost and the following quarter, we have already taken that impact in the opex for Q2, but it will impact costs in F Q3 .
So thats an impact.
On gross margin sequentially in Q3, and the other aspect is that our land business in F Q3 will grow faster than our DRAM business in F Q3 so that has a little bit of an impact on the consolidated gross margin so both NAND and DRAM busy.
Businesses will have sequential improvement, but land will grow faster. So mathematically it will just have a little bit of an impact. So the two of these issues.
The bonus accrual and the NAND mix has about just over 100 basis point impact.
On gross margin going from Q2 to Q3 and in spite of that 100 basis point impact we are forecasting improvement in gross.
Arjun and going from Q2 to Q3, so overall really strong margin performance I feel and you asked a question about mix.
You see that our data center SSD revenue is improving substantially.
Sanjay mentioned in his prepared remarks that in F Q2 revenue doubled year on year.
In the data center, we expect continued growth in the data center in the next couple of quarters as well. So that's a positive for our gross margins.
We also have leadership in DDR five.
That kind of mixed improvement is also good for us because we.
We do have.
Good gross margins there. So overall, we feel positive about the trajectory into Q3 and very constructive about F Q4 profitability as well of course, we are not going to guide for F Q4 so.
So we'll leave it at that for now.
Thank you Sir.
Thank you. Our next question comes from Vivek Arya of Bank of America Securities. Please go ahead.
Thanks for taking my question interesting to see the strong the outlook and you're maintaining the full year kind of industry view unchanged also even though there have been some recent kind of software data points and deceleration in PC and smartphone demand is this just the case of data center strength overpowering.
Headwind and what are you doing to make sure that you don't oversupply to the data center.
So certainly let me take this question regarding PC, where they would like to point out is that in PC enterprise and desktops are strong chromebooks and consumer Pcs have had some weakness as is well known but enterprise and desktops are strong and that's a favorable.
Next for us because enterprise and desktops take higher content of both DRAM and NAND. So while we look at PC unit growth.
On a year over year basis appears to be flattish the enterprise and desktop mix is favorable in terms of DRAM and flash content requirements there.
Data centers, certainly a strong market for us.
First half of calendar year 'twenty, two should be strong for data center because of new Cpus that are expected to be launched which will be driving greater content.
And the servers so.
So data and you have heard about various.
The Hyperscale is talking about their investments their capex investments in data centers as well and again, all the workloads related to AI ml.
Just driving greater content within the data center space, but it's not just about data center or the aspects of <unk> that we just discussed of course, <unk> smartphones continuing to drive strong DRAM and NAND content as we mentioned.
And automotive market strong growth driver as well. So the point is that the demand is broad based and demand we expect to be strong going forward as well and of course on the aspect of supply of course, the supply is contained in the industry because of the discipline on capex that has been exercised.
By the various players and of course on the NAND side the aspect of.
The contamination issue that impacted our competitors fab and impacted the supply and NAND in a big way there too. So overall healthy environment that you see for in terms of DRAM and NAND supply and demand balance through the year.
Thank you.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Please go ahead, yes. Good afternoon, guys. Congratulations on the strong results and thanks for letting me ask the question Sanjay you've spent.
Last several years trying to reposition the NAND portfolio to higher value products I'm kind of curious relative to the May guide of NAD growing faster sequentially. The DRAM can you help us better understand what products and end markets are really driving that and is this really the fruits of some of your.
Qualification labors and as you answer the question I'd be curious when you think about NAND gross margin whats the.
The impact as the mix continues to improve how much of the gap between NAND and DRAM do you think you can close over time or how much more upside do you think there is in the NAND gross margin business over time as you optimize the portfolio.
So certainly in NAND I think our team has done a great job in leading the industry by several quarters with 176 layer NAND technology and now deploying it into.
<unk> products, we talked about in our prepared remarks, some of the ssds that we have introduced now for data center as well being the first ones to introduce datacenter Nvme Ssds.
<unk> hundred 76 layer <unk>, NAND technology with vertically integrated solutions, including our own controllers, our manufacturing ramp has been excellent as well.
Really exceptionally executed in terms of our yields in terms of production ramp in terms of quantity and all the work that we have been putting in over the course of last several years, absolutely is coming to fruition here we have had.
We have enjoyed already the gains in share with respect to mobile managed NAND solutions.
Both on the MCP side that contained DRAM and NAND solutions as.
As well as on the discrete NAND side.
And you have seen how we have grown our share from low single digits few years ago to now in.
In the high teens in terms of our share in the markets are strong performance already enjoyed on the mobile NAND side of the business and now SSD is getting absolutely into high gear here, our client Ssds, our introduction of <unk> 176 layer in SSD, our datacenter Nvme SSD.
These all of the work that they are vertically integrated solutions with our own controllers. All of this work that we have been doing for quite some time.
Hitting the market now and we are well positioned to gain share in the SSD space and the client as well as on the datacenter side and all of this being built on a foundation of leading highly cost effective 176 layer NAND technology positions us well for improvements.
Our revenue outlook for NAND as well as for our profitability outlook for NAND and in terms of the differences between DRAM and NAND of course.
So people are just earlier highlighting that there are significant differences in that.
Industry margins of DRAM, as well as NAND and certainly for micron as well, but the point is that our margins in NAND on improving given the accelerating portfolio momentum we have.
Our ability to really.
The address.
Wide range of end market applications.
From smartphones to client Ssds to data center ssds as well as strong position in the.
Channel markets as well.
Thank you.
Thank you. Our next question comes from Timothy Arcuri of UBS. Please go ahead.
Thanks, a lot.
I just had a quick question on cost as well so if I look at the slide Sanjay.
Talking about the current outlook the verbiage changed to basically reflect the fact that your costing down better this year than the industry and of course there are.
Headwinds on cost for the industry this year, but I'm wondering whether your ability to outpace the industry's costs down will also extend into next year, because if I look at the verbiage on this slide last quarter. You. You said that you think that youll be competitive with the industry over the.
Longer term so I'm just wondering whether you think that this is a one year thing where you are cutting down better than the industry or is this cannot be sustained into next year. Thanks.
We feel really good about our technology roadmap and.
Just like we have led the industry with a runner for DRAM as well as with our one.
176 layer NAND.
Certainly plan to lead the industry with our future generation nodes as well and we are making good progress on those and those nodes will be introduced sometime in calendar year 'twenty three time frame as well so really it's our technology.
Our leadership position and our ability to successfully ramp it into production across a broad range of products is key to our strength and continuing our cost position in the industry. So we feel very good about our cost position versus our competitors going forward as well.
Got it got it. Thank you. Thank you so much.
Thank you. Our next question comes from Pierre <unk>, New Street Research. Your line is open.
Hey, Thanks, very much about taking my question.
First very quick simple one on the mobile market. So.
Is it slowing sequentially now.
What kind of visibility do you have there do you think we are.
It seems like.
Kind of like.
Plateau in terms of increase in the <unk>.
Kind of growth.
Great Thats five generated in that market or is that something different and more temporary.
And then at having like a broader question for you guys.
No Jake.
Keith.
On the.
Geopolitical fronts investing in the U S and in Europe .
To create a more balanced manufacturing footprint in the world and we don't hear much about that in the memory.
Markets and so I was wondering if you could get to.
Exactly.
Is that something that.
Micron at some points.
So it's a great position to be in today that we have sumit here as interim CFO as well as our chief business Officer. So I will actually let him address the first question of Yours, and then I will take the second question go ahead with the first one Sunday. So thanks for that question. So in terms of the model.
Average capacities now we don't see this anywhere close to a plateau of any kind we are very positive on average content growth in mobile.
The five G transformation in the industry continues in the handset portfolio. So if you think about.
In industry of about one 4 billion smartphones approximately being sold on an annual basis about 500 million or so in calendar 2021 was sold as <unk>, we expect a 40% growth to $700 million being sold as <unk> handsets this year and a <unk> handset.
Typically.
50% more DRAM content more than doubled the NAND content for <unk> handsets. So that trend has a lot to run Phil.
And I think on the.
Even beyond that we do expect.
Applications to come up that take advantage of <unk> in ways that are going to continue to drive the average capacities.
For both DRAM and NAND higher so there's plenty of room to run there.
Yes.
<unk>.
Smartphone business.
We do expect low single digit sort of unit volume growth in this calendar year overall for the smartphone volumes consolidated volumes overall and average capacities then on top of that so the overall growth is going to still be robust and keep in mind, we are going to enter.
After a seasonally stronger period, when new handset get introduced in the fall.
For the mobile business, so that's going to be another catalyst as well so with that I will pass it over to Sanjay.
Thank you Samantha and Peter regarding your second question.
So of course as you know Micron has made investments over the course of last few years in our clean rooms in the U S and Taiwan, and Singapore as well as Japan in terms of clean room expansions in these locations again, leveraging our globally diversified manufacturing footprint.
These clean room expansions position us to implement the technology transitions in our production and we have not added new wafer capacity, but we have invested very prudently over the course of last few years and clean room expansion positioning us well to deliver on technology transitions vishal.
Which is what is positioning us to drive our cost reductions as well as good growth in line with the demand growth.
As we look ahead, we have now.
In October of last year that we would be looking at investing more than $150 billion over 10 years, and leading edge memory manufacturing and R&D.
Global basis, So of course, we.
We had also as part of that highlighted that in 'twenty five 'twenty six timeframe, we would be needing to add new infinite capacity for DRAM in order to continue to meet the.
<unk> and demand for the later half of this decade through the 2030 timeframe.
In that regard of course, we are evaluating the new expansion on a global basis and certainly in the U S. The discussions that have been proceeding related to chips and the Fabs acts.
About upfront support for investments.
Our new manufacturing capacity as well as ongoing investment tax credits.
These are important aspects to help US bridge the gap with Asia operations and these are the things that we will of course continue to monitor and we will be making our decisions regarding future expansions. Once again that is more about the second half of this decade, because until then we are <unk>.
Well positioned with our clean room situation and our diversified footprint in various countries, including the U S. Today.
And in this regard we are very much engaged with the U S government.
Weighted too.
Passage of chips and investment tax credits.
Sure.
Thanks.
Thank you very much.
Thank you. Our next question comes from media has seen it.
Your question please.
Yes. Thanks for taking my question one follow up for Sanjay how should I think about this year.
<unk>.
Hum.
Contribution, especially the operating profit.
This year, which it seems to me most is driven by the PC end market versus next year.
The.
Application picks up.
So I think we mentioned.
Prepared remarks that DDR five of course.
<unk> died because of the effect of <unk> by the way that had an effect in terms of moderating the supply bit growth in the industry as well as <unk> continues to ramp and client and in the future in the data center space as well. So <unk> noted in our remarks that has price.
<unk> premium and the industry as well and micron actually is leading in terms of DDR five supply capability in the industry today as well.
So it is a positive contribution to our overall DRAM margins.
DDR five and certainly we are getting pricing premium for <unk> five in the industry and as <unk>.
New processors get deployed widely in the datacenter space that can make use of BDSI, which are expected to begin later. This year you will see DDR five continuing to ramp rapidly during calendar year 2003, as well, we are well positioned with our DDR five roadmap for client as well.
For data center market.
But there will be a pricing premium for server application versus desktop correct.
But <unk> as you noted has I think premium yes.
Okay. Thank you.
Thank you. Our next question comes from Chris <unk> of Citi. Please go ahead.
Hey, Thanks, guys.
So just specifically to DRAM can you just talk about how the three main end markets did relative to your expectations.
And then on the guidance how they did you expect them to do relative to the expectations as far as PC server and data center and mobile.
Alright, so Chris Yeah, I can take.
I'll take that so in terms of our end markets F Q2 was.
Really good quarter.
And we think about Pcs Pcs performed well.
Model performed well Dave.
Data center continues to be strong.
And in fact, a lot of the gross margin upside that we experienced in Q2 came from pricing improvements.
That was driven out of actually both on.
DRAM and NAND, but definitely definitely in DRAM as well versus our expectations, but those markets have been strong in FQ, two and as we look ahead in F Q3 .
Most of our sequential growth in FQ, three is being driven out of.
The compute market, which is mostly DRAM and then the storage market, which is mostly NAND. So our storage business unit and our compute and networking business unit. These two business units are going to be the primary drivers of growth. All four business units are likely to grow well, but these two are going to be exceptional.
<unk>.
Growth drivers sequentially in Q3, so we do expect.
Continued strength in BC that Sanjay mentioned, the average capacities are increasing because of.
The mixed improvements and Pcs due to the shift towards corporate Pcs and laptops.
Away from northern consumer so that's helping their data center continues to be robust. We expect the rest of calendar 'twenty two to be robust for data center because.
A lot of demand growth there at our customers, who are allocating significant capex increase and the.
Mobile five G shift continues to be positive for average capacities.
And.
Even though mobile is not going to be a.
Big driver of growth sequentially in Q3, we do expect it to pick up.
Sequentially in Q4 because of seasonality in these continued trends.
Great. Thanks, guys.
Absolutely.
Our next question comes from Joe Moore of Morgan Stanley . Your line is open.
Great. Thank you.
You touched on the impact of the contamination issue in NAND that your competitor can.
Can you talk about how much of a change that was how tight do you think the NAND market, maybe because of that in.
We expect that the impact of that to be durable beyond the current period.
Certainly brought down the year over year.
Supply growth for the industry. It has brought it down based on some of the estimates that are out there by a couple of percentage points in terms of again the year over years industry.
Supply growth.
Certainly.
That's in terms of the demand supply dynamic in the industry, that's favorable because the demand for all the reasons that we just discussed.
Data center or in the client applications or.
On the mobile phones or even in the automotive market as the demand for <unk>.
And along with demand for DRAM continues to incur.
<unk> and <unk>.
We fully expect a healthy demand supply balance for the NAND industry.
We look ahead.
Okay. Thank you.
Thank you. Our next question comes from CRE.
Goldman Sachs your.
Your line is open.
Great. Thank you so much.
Had a question on NAND asps.
And how to think about the evolution going forward.
I think in the February quarter. Your Asps were up mid single digits sequentially. Despite the industry environment still being relatively soft from a pricing perspective.
Jay just given you.
Your comments around your success in data center, Ssds and winning some of those important designs is it fair to assume that your sequential ASP expansion going forward should outperform the industry throughout the year is that a fair assumption to be making and then separately you talked about.
The headwinds associated with inflationary pressures and the supply chain mitigation actions I think you said 100 basis points at what point could that reverse I know thats a hard question to answer but.
Should we expect those headwinds to persist for a couple of quarters or could those headwinds turn into a tailwind potentially thank you.
Some of it related to go ahead.
Yes in terms of.
Our cost pressures certainly if you look at the overall environment out there.
<unk>.
Our continuing to be challenging and this is an industry wide statement. So whether you look at.
The price of oil and natural gas that are important commodities.
That impact even in the price of electricity to a lot of the other raw materials and commodities that we purchase noble gases and a lot of these things.
Even the pricing of <unk>.
External sub con services.
And of course, Youre seeing inflation and even foundry logic.
So there are lots of vectors and then of course, we are also seeing wage inflation happening so that a lot of vectors through which inflation is.
Getting transmitted into.
Into the business and of course, we are.
I believe doing a really extraordinary job of containing our costs, but of course these.
Inflationary pressures are there. So we are planning for these pressures to persist for several quarters. We are not thinking that these will lead up anytime soon.
And so our work is focused on continuing to find efficiencies continuing to ramp our new technology as fast as we have been doing in.
In an excellent way so the rest of it comes from.
Cost considering.
These costs as we think about how we price our products and of course driving stronger mix of products. So we can get.
Not only good.
Asps, but also have positive.
Gross margin benefit of products that have.
Higher ASP better high value mix in our portfolio and that mix improvement is happening on the land side. It's also happening on the DRAM side with examples like DDR five so with that I'll turn it over to Sanjay.
So I think somebody touched on the mix aspect, which was the first part of your question.
Yes, I think so method highlighted in his prepared remarks that for NAND, even though there was a like for like price decline. Our overall due to the mix our pricing went up in F Q2 and again. This is just highlighting that how mix is playing an important role the new product that we're launching.
With ssds as well as our mobile managed NAND solutions and shifting of AA.
From components into greater and greater mix of high value solutions positions us well for continuing to improve the profitability of the business here.
Very helpful. Thank you.
Thank you. Our next question comes from Ambridge Srivastava BMO. Your line is open.
Hi, Thank you for squeezing me in.
Little bit confused I, just wanted to make sure I understood the headwind.
My question.
I thought the cost headwind 100 bps, you called out that was from the variable comp and had nothing do with that.
The mitigation cost cutting going going on which should continue for the next several quarters is that the case.
Yes.
Yes Catherine.
Alright.
Yes. Your understanding is correct the 100 basis points impact to sequential gross margin in Q3 versus Q2 stemmed from the variable comp increase that I mentioned.
That's going to impact Q3, as well as the NAND revenue mix that is going to increase in FQ, three and cause an impact to the consolidated gross margin just mathematically. So the sum of the two is over 100 basis points and and the gross margin on the gross margin side Thats right.
Got it got it. So then the question is just starting on taxi because you've talked about inflationary costs.
And that will feed into neuro homes, but.
As you look at the business you also said that some of the component availability is improving and that has been a headwind.
To the backend cost so I'm just trying to unpack. These comments so on the one hand, you have and then you also having to secure raw materials I'm, assuming neon is part of that so.
So can you just help us understand kind of what's the right way to think about these costs.
Sustained for the next level.
Quarters.
So that was my first question. The second one is thanks for providing that commentary on the inventory that was very helpful.
The finished goods being down quarter over quarter for both DRAM and NAND that was very helpful. The question is is that seasonal.
Is there something going on.
Thank you so much.
Sure. So in terms of the first.
Question about costs.
Yes, we do expect that the availability of components is going to improve the overall shortages that we have been experiencing quite significantly over the last several quarters. The situation is improving and as Tom just said in the prepared remarks, it's not <unk>.
Proving to an extent that all of those issues will be gone. This year, we expect continuous improvement through the course of calendar 'twenty, two and we expect that because of those improvements in availability the full demand.
Will be experienced in terms of memory and storage because our customers can now order match sets of products. They can get their hands on all of the components that are sure. We can get our hands on more components to build our products and so that is improving through the calendar year, but that is going to be some.
<unk> that will shift into <unk> and calendar 'twenty three in terms of when we expect further improvement there'll be still some shortages and even though the availability of some of these components is improving there is.
Level of cost pressure across the supply chain and these cost pressures are coming across a range of commodities that we buy a range of input costs.
We operate our Fabs and back end facilities. So it's industry wide pressure across a range of issues and they will continue despite the improvements of availability of some components and now switching to your question about inventory.
We have been managing our inventory tightly so our finished goods inventory is down quarter on quarter by design.
Have higher levels of web mainly staging for a pretty robust growth in F Q3 sequentially and you can see that in our guidance. We are growing very robustly in F Q3 compared to Q2. So we do expect inventory to come down in F Q3 end.
And to end up in <unk>.
Pretty much the normal range.
That we have for the for the year at the end of Q4. So we do still have that expectation that we would as we had mentioned last quarter as well we would build inventory.
Ending of Q2, and then reduce inventory in F Q3 F Q4 so that team that is continuing to be the plan and that's the set of numbers that youll see.
And just one last point I would make there just one last point is.
Part of the inventory increases to just ensure supply continuity right. I mean this has been a challenge.
In terms of getting our hands on all the components, we need so part of it is just ensuring that we have adequate supply on hand to meet our customer demand as we ramp revenue.
And so <unk> has been going up consistently the last two three quarters.
Yes, exactly yes.
That's very helpful.
Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may disconnect.
Okay.
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