Q3 2022 Micron Technology Inc Earnings Call
Thank you for standing by and welcome to Micron technologies fiscal third 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 telephone. Please be advised that today's conference maybe recorded should you require any further assistance. Please press star zero I would now like to hand, the call over to Bob.
<unk> Vice President Investor Relations.
Thank you and welcome to Micron technologies fiscal third quarter.
<unk> thousand 22 financial conference call.
On the call with me today are Sanjay Mehrotra, President and CEO .
Mark <unk> our CFO .
Today's call is being webcast from our Investor Relations site at investors, <unk> 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 Micron Tech.
As a reminder, the matters. We're discussing today include forward looking statements regarding market demand and supply are expected results and other matters.
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.
Evidence of activity performance or achievements, we're under no duty to update any of the forward looking statements to conform the statements to actual results.
I'll now turn the call over to Sanjay.
Thank you for Ron Good afternoon, everyone Micron delivered record quarterly revenue with strong profitability and free cash flow enabled by our team's excellent execution and our industry, leading technology and product portfolio.
Micron achieved revenue records in the auto industrial and networking markets and in Ssds for both data center and client our <unk>.
<unk> business delivered record quarterly revenue and our embedded business unit and storage business unit NAND revenues also hit all time highs.
Our one <unk> and 176 layered NAND ramps or several quarters ahead of the industry and progressing well as we continued to qualify new products that use these nodes.
The micron team delivered these excellent results despite supply chain challenges and COVID-19 control measures in China, which impacted our business on both the demand side and the supply side.
We are a consumer demand and inventory related headwinds impacting the industry and consequently, our fiscal Q4 outlook.
However, we remain confident about the secular demand for memory and storage the attractiveness of our market opportunity micron's excellent competitive position and strong execution capabilities and our cross cycle financial model.
Micron is leading the industry in both DRAM and NAND technology, and we are also well poised to continue this lead into calendar 2023.
In DRAM, our one alpha node ramp is several quarters ahead of the industry and in fiscal Q3, one alpha represented the largest DRAM node in our shipment mix.
Our newest snowed one beta is on track to ramp in manufacturing by the end of calendar 2022.
In NAND, our industry, leading 176 layered node continues to grow and mix of sales, having previously leached the majority of our NAND bit shipments in fiscal Q2.
This technology node is contributing to a competitive cost structure across our product portfolio and in FQ. Three we achieved several important 176 layer product qualifications.
We are also making excellent progress on our 232 layered node and expect to ramp production by the end of calendar 2022.
Across the industry there are cost challenges stemming from supply chain and inflationary pressures. However, we continue to expect our cost reductions to outpace those of the industry. This year driven by excellent productivity improvements in our Fabs and the well executed zapped offer world class.
One <unk> and 176 layered NAND nodes.
Despite COVID-19 control measures in China that created challenges for the global electronics supply chain Micron's strong execution enabled record assembly output in fiscal Q3 supporting record quarterly revenue.
However, these COVID-19 control measures in China impacted our outsourced assembly and test subcontractors and led to some impact to fiscal Q3 results.
Now turning to our end markets.
Hi, ongoing cloud adoption Evs and the ubiquitous connectivity offered by five G are strong secular demand drivers, enabling the memory and storage industry to outpace the broader semiconductor industry.
Microns product portfolio has become significantly stronger and we have established product momentum in several attractive growth markets.
We are also driving a portfolio mix shift toward higher growth and more stable markets.
Fiscal 2021, 55 to 45 revenue split in favor of the more mature mobile PC and consumer markets is expected to shift by fiscal 2025 to <unk> 38 to 62 split in favor of the higher growth data Center.
<unk> industrial networking and graphics markets.
Several of these end markets also exhibit more stable profitability.
Our fiscal Q3, new product launches and customer qualifications reflect solid execution toward this portfolio transformation.
Data center is the largest market for memory and storage today and the rapid growth of AI and memory intensive workloads ensures that it will sustain strong growth through the end of the decade.
Corporations around the world are investing in Digitization and extracting more value from data and this approach remains one of the primary ways of improving efficiency and driving competitive advantage.
Datacenter fiscal Q3 revenue grew by double digit percentage sequentially and well over 50% year over year.
Data center and demand is expected to remain strong in the second half of calendar 2022, driven by robust cloud capex growth.
Despite the strong end demand, we are seeing some enterprise OEM customers wanting to pare back their memory and storage inventory due to non memory component shortages and macroeconomic concerns.
In fiscal Q3, we achieved several product and customer milestones.
We began volume shipments of <unk>, one of the fastest growing product categories, driven by the growth in AI and machine learning workloads.
<unk> continues to lead in <unk> five however delays in the rollout of new server CPU platforms has slowed the industry DDR five ramp versus prior expectations.
In data center Ssds, we more than doubled revenue year over year and achieved a new revenue record in the fiscal third quarter.
We are excited by the strong reception of our industry, leading 176 layers datacenter nvme Ssds, which are already in volume production and then fiscal Q3, we completed qualifications with three Oems.
We recently launched the world's first 176 layer datacenter, SATA, SSD, which will help sustain our industry leadership in this product category.
In fiscal Q3, we achieved client revenue growth in the mid teens percentage range sequentially, driven by DRAM shipments and shared gains in client SSD.
A number of factors have impacted consumer PC demand in various geographies.
As a consequence, our forecast for calendar 2022, PC unit sales is now expected to decline by nearly 10% year over year from the very strong unit sales in calendar 2021.
This compares to an industry and customer forecast of roughly flat calendar 2022, PC unit sales at the start of this calendar year.
We expect DCF per unit memory and storage content growth trends remain healthy in calendar 2022, driven by a mix shift towards enterprise species, and the increasing content and new architectures, such as apples and run ultra platform, which features up to one <unk>.
<unk> hundred 28 gigabyte of DRAM.
Micron has a strong product portfolio and is well positioned in this market.
We are leading the DDA DDR five transition and expect our DDR five revenue to continue to grow as multiple client customers launch next generation notebooks.
Increased availability of non memory Bill of materials will also improve our ability to ship DDR five based modules.
In addition, we continue to lead the industry and client TLC SSD technology, and expect <unk> to increase as a percentage of 176 layer bit output in fiscal Q4 and beyond.
In fiscal Q3 graphics revenue grew at a strong double digit percentage rates sequentially and year over year, driven by the strength of micron's products and customer relationships.
Micron continues to be the industry performance leader in graphics we.
Announced volume shipments of our new <unk> Z 16 gigabit <unk> in fiscal Q3, which features twice the capacity and up to 15% higher performance than the previous one y generation.
The 2040 gigabit per second peak bandwidth of DDR six X is made possible.
Possible by Micron's groundbreaking Pam four signal transmission technology.
No other memory vendor offers this capability our level of performance.
We also began volume shipments of our newest one Z 16 gigabit <unk> product to our largest graphics customers.
Fiscal Q3 mobile revenue declined slightly year over year, but grew quarter over quarter due to strong customer partnerships and project execution.
Smartphone unit sales expectations have declined meaningfully for calendar 2022.
We are now projecting smart phone unit.
William to decline by mid single digits percent range year over year in calendar 'twenty two.
Well below the industry and customer expectation earlier in the year of mid single digit percentage growth.
<unk> unit sales are expected to grow and reach approximately 50% penetration of the smartphone unit Tam this year.
The growth of <unk> units will also drive higher DRAM and NAND content.
We continued to deliver key mobile customer qualifications and strong mobile product ramps on our leading nodes.
In fiscal Q3, we expanded our one Alpha LP DRAM leadership with the industry's first of Enel LP DDR five.
In addition, 176 layer NAND made up over 90% of our mobile NAND bit shipments.
Micron is the market share and quality leader in the fast growing auto and industrial end markets and in fiscal Q3, we achieved record revenue in both.
These markets also exhibit higher stability in the gross margin profile through the cycle.
Auto growth has been driven by robust demand that remains constrained by auto unit production.
We see robust auto content growth as Oems adopt significant architectural changes to support Adas infotainment and electric vehicles.
In fiscal Q3 railroad announcements of several new Evs, featuring content rich Adas, including the Ford F 150, Lightning <unk>, EQM, SUV and EQ E sedan, and BMW IX one.
We expect the auto market to have a strong long term bit growth CAGR in DRAM and NAND that is roughly twice the CAGR of overall, DRAM and NAND markets and consequently, our strength in this market will become increasingly important.
Industrial Iot achieved record revenue in fiscal Q3, demonstrating broad based growth with various end market applications.
We continue to see tail winds from secular growth drivers as industrial customers invest in <unk> factory automation and Digitization.
Turning to the market outlook.
Our expectations for calendar 2022 industry bit demand growth have moderated since our last earnings call.
Near the end of fiscal Q3, we saw a significant reduction in near term industry bit demand, primarily attributable to end demand weakness in consumer markets, including PC and smartphone.
These consumer markets have been impacted by the weakness in consumer spending in China, The Russia, Ukraine War and rising inflation around the world.
COVID-19 control measures in China have exacerbated supply chain challenges for some customers and the macroeconomic environment is also creating some caution amongst certain customers.
Several customers primarily in PC and smartphone are adjusting their inventories and we expect these adjustments to take place mostly in the second half of calendar 2022.
While end demand in the mobile PC and consumer markets has weakened.
Networking automotive and industrial markets are showing resilience.
Due to weaker demand in the second half of calendar 2022, we now expect year over year calendar 2022 industry bit demand growth to be below the long term CAGR of mid to high teens percentage for DRAM and high twenties percentage for NAND.
Despite the near term weakness secular demand trends remained strong and our view of long term DRAM and NAND bit demand CAGR remains unchanged from prior expectations.
Turning to supply given the change in market conditions, we are taking immediate action to reduce our supply growth trajectory.
To protect profitability, we will maintain pricing discipline manage capacity utilization and used inventory as a buffer to navigate through this period of demand weakness.
Additionally, we are planning for the reduced level of bit supply growth in fiscal 2023, and will use inventory to supply part of the market demand next year.
This approach will enable us to reduce wafer fab equipment capex for fiscal year 2023 versus our prior plans and we now expect our fiscal 2023 wafer fab equipment capex to decline year over year.
Overall industry supply is also being impacted.
Manufacturing equipment shipment delays challenges for some in the industry in ramping new nodes of technology and DRAM supply discipline evident in the industry are all expected to limit supply growth over the next few quarters.
These supply reductions will help offset some impact of the weaker demand.
I will now turn it over to Mark Murphy, Micron's, Chief Financial Officer.
Thanks Sanjay.
Micron delivered strong results in fiscal Q3 marked by record quarterly revenue and $1 $3 billion of free cash flow.
Total fiscal Q3 revenue was $8 6 billion.
Up 11% sequentially and up 16% year over year.
Growth was strong across most end markets.
Fiscal Q3, DRAM revenue was $6 3 billion.
Representing 73% of total revenue.
DRAM revenue increased 10% sequentially and was up 15% year over year.
Sequentially pet shipments increased by slightly over 10%, while asps declined slightly.
Fiscal Q3, NAND revenue was $2 3 billion.
Representing 26% of Micron's total revenue.
And revenue increased 17% sequentially and was up 26% year over year.
Sequential bit shipments increased in the high teens percent and.
And Asps declined slightly.
Now turning to our fiscal Q3 revenue trends by business unit.
Revenue for the compute and networking business unit was $3 9 billion up 13% sequentially and 18% year over year.
Data center graphics on networking contributed to both year over year and sequential growth.
Revenue for the mobile business unit was approximately $2 billion.
Up 5% sequentially and down 2% year over year.
Strong execution in our product momentum allowed <unk> to deliver sequential growth in a challenging smartphone market demand environment.
Revenue for the storage business unit was $1 $3 billion.
Up 15% sequentially and up 33% year over year.
We achieved record SSD revenue with both data center and client SSD revenues, reaching all time highs.
Data center SSD revenue more than doubled year over year.
Finally, we achieved record revenue for the embedded business unit at one 4 billion.
Up 12% sequentially and up 30% year over year.
Both automotive and industrial revenues set records in the quarter.
The consolidated gross margin for fiscal Q3 was 47, 4% down approximately 40 basis points sequentially.
An increasing mix of NAND contributed to the decline.
Operating expenses in fiscal Q3 were approximately $950 million.
Below the low end of the guidance range and down approximately $20 million sequentially.
Opex benefited from the timing of our technology and product qualifications and from lower variable compensation.
Although we are taking actions to reduce opex in light of current market conditions, we expect opex to increase sequentially due to the timing of technology and product qualifications.
Fiscal Q3 operating income was $3 $1 billion, resulting in an operating margin of 36, 4% up approximately 110 basis points sequentially and up 450 basis points from the prior year.
Fiscal Q3, adjusted EBITDA was approximately $5 billion.
Resulting in an EBITDA margin of 57, 4%.
Down approximately 40 basis points sequentially and up over 400 basis points versus the prior year.
non-GAAP earnings per share in fiscal Q3 were $2 59.
Up from $2 14 in fiscal Q2 and up from $1 88 in the year ago quarter.
Turning to cash flows and capital spending we generated $3 $8 billion in cash from operations in fiscal Q3, representing 44% of revenue.
Capital expenditures for $2 $5 billion during the quarter.
We expect fiscal 2022 capex to be approximately $12 billion.
Our free cash flow for fiscal Q3 was $1 3 billion.
During the quarter, we completed share repurchases of $981 million or approximately $13 8 million shares.
Including our dividend payment, we returned $1 $1 billion to shareholders in fiscal Q3.
Since the share repurchase program's inception in fiscal 2019 through the end of fiscal Q3.
We have deployed $5 $7 billion towards repurchasing 108 million shares at an average price of approximately $53 per share.
As we discussed at Investor Day, we are committed to returning to shareholders all of the free cash flow generated over the cycle through a combination of dividends and share repurchases.
Share repurchases will be both programmatic and opportunistic.
And we expect to purchase more as the stock trades at a bigger discount to intrinsic value.
On dividends, our board of directors approved a quarterly dividend of $11 five per share.
15% increase over the prior dividend.
To be paid on July 26 to shareholders of record on July 11th.
Our ending fiscal Q3 inventory was $5 6 billion.
And average days of inventory for the quarter were down to 109 days from 113 days last quarter.
We ended the quarter with $12 billion of cash and investments and $14 $5 billion of total liquidity.
Our fiscal Q3 total debt was $7 billion.
Now turning to our outlook for the fiscal fourth quarter.
Long term demand trends remain constructive however, select market weakness and macroeconomic uncertainty are impacting our near term outlook and visibility.
Currently we do project sequential bit shipments to be down for both DRAM and NAND in fiscal Q4.
We intend to maintain pricing discipline and walk away from business, which doesn't meet our pricing objectives.
While we are taking proactive steps to control Opex and Capex.
We expect the impact of these actions to be limited in fiscal Q4, and they become more material in fiscal year 'twenty three.
With all these factors in mind.
Our non-GAAP guidance for the fiscal Q4 is as follows.
We expect revenue to be $7 $2 billion, plus or minus $400 million.
Gross margin to be in the range of 42, 5% plus or minus 150 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 9% for fiscal Q4.
Based on a share count of approximately $1, one 3 billion fully diluted shares.
We expect EPS to be $1 63.
Plus or minus 20.
We remain on track to deliver record revenue and solid profitability and free cash flow in fiscal year 2022.
In closing we delivered strong results in our fiscal Q3.
But near term headwinds are impacting our fiscal Q4 outlook.
Beyond the near term, we project secular growth drivers such as data center automotive and other areas to support robust DRAM and NAND growth and strong cross cycle financial performance by Micron.
At our Investor Day event last month, we laid out our cross cycle financial model for the company that reflects the key attributes of our business.
A strong revenue growth CAGR of high single digits.
Robust cross cycle operating margins of approximately 30%.
And healthy free cash flow margins that exceed 10% of revenues.
Given our long term financial outlook and the strength of our balance sheet.
We see the current share price as very attractive.
And at these levels intend to repurchase shares more aggressively in fiscal Q4.
I will now turn it back to Sanjay.
Thank you Mark the memory and storage Tam is expected to grow to $330 billion by 2030 and become an increasing portion of the semiconductor market.
The near term market environment, notwithstanding we are executing extremely well on all aspects of the business that are within our control.
Micron's, continuing technology product and manufacturing leadership puts us in an excellent position to capitalize on the long term opportunity and to extend the frontier of what is possible with memory and storage. We will continue to exercise supply discipline and take appropriate actions to navigate through the near term headwinds.
And we remain focused on creating value for shareholders and generating healthy free cash flow cross cycle.
Thanks for joining us today, we will now open for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Harlan sur of Jpmorgan. Your line is open.
Good afternoon.
Noon. Thanks for taking my question on the data Center business. As you guys mentioned I mean enterprise Cio's are concerned on the macro outlook and pulling back on their spending budgets.
Remained strong but within that we've heard that.
Continued there's continued strength from the U S cloud service providers.
Pullback in spending from the China cloud customers are you guys seen these dynamics within the cloud segment and then on the supply side again within your cloud business can you discuss the level of inventories in the channel and at customers that feed into the cloud segment, because we are hearing that.
Similar to the enterprise that inventory and the cloud channels are also pretty elevated but wanted to get your views.
Thanks, Harlan for the question and before I answer the question I just wanted to note here that we have some mix of Diana <unk> Executive Vice President and Chief business Officer here as well as you may recall from <unk> with us in the last earnings call and in the given environment.
It will be good to have him here to add any color to the market environment related specific questions.
With respect to the question you asked regarding the enterprise.
<unk> side of the business.
Yes, as we noted that we have seen some inventory adjustment, particularly given the concerns on the macro environment as well as.
Second supply chain shortages that they may be experiencing however on the enterprise server OEM side. The end market demand continues to be healthy as well and same thing on the cloud side as well that the end market demand for cloud is healthy cloud demand to us as well.
Relatively healthy as well.
Of course cloud also can.
Elevated levels of inventory versus the pre COVID-19 level of investments.
The <unk> cohort level of inventory and of course, the cloud investments in Capex continued to be at a strong clip and their infrastructure and that bodes well for memory and storage and I think what's important is that the overall trend of digitization and use of data to help drive greater productivity.
<unk> and efficiency and businesses, particularly in the backdrop that the world is facing today with the macro economic uncertainties is helpful in driving greater technology adoption.
Across industries, and Thats, where our memory and storage plays out well as well and then specifically with respect to China and U S of course in China.
As we pointed out earlier, we are seeing overall weakness and 13, the weakness on the consumer demand side from China as well as some other parts of the world, but we are not really breaking it down between China and U S.
At this point, but again the overall cloud trends continued to be healthy in terms of the end demand.
Okay. Thank you.
And so maybe you want to add any comment on China customers in terms of inventory.
Yes, I mean I think the.
Inventory level as Sanjay said.
Is higher on the cloud customer site and generally on the datacenter side compared to where it was pre COVID-19.
The channel business.
On the cloud side.
Is relatively in a better place compared to the.
The consumer business challenges that Sanjay highlighted but of course different customers have different strategies on how they manage their particular inventory and the smaller customers in the channel that focus on data center products have had more challenges getting their hands.
On some of these products that are in shortage like Nic cards to complete several bills and the smaller customers are getting more impacted there than some of the bigger customers.
And Harlan I will tell you that ive worked closely with our customers.
The team here myself immediately engage very closely with our customers across.
Our ecosystem partners here in Shanghai as well as here in the U S and worldwide. So of course, we are keeping close tabs on how the business environment is evolving.
Great insights thank you.
Thank you. Our next question comes from C. J Muse of Evercore. Your line is open.
Good afternoon, and thank you for taking the question I guess first question.
Can you speak to.
Magnitude of the correction for.
For both DRAM and NAND, how do you see.
That playing out with.
I'm assuming here that.
It is a much larger impact on the DRAM side for you and should be thinking maybe down got it.
Low teens is that the right way to think about it.
So certainly on the.
In terms of inventory adjustments that are primarily happening in the smartphone and the PC market of course, those inventory adjustments that happening in NAND as well as in.
In DRAM.
And.
Clearly as we have said that in terms of overall demand projections for this year, we definitely see it below.
DRAM below the.
Guidance, we had provided earlier.
Earlier as well as the longer term CAGR for DRAM mid teens to high teens, so we see that below that trajectory and in terms of <unk>.
And same thing that earlier, you had said that the cabinet is high twenties, and we see that in calendar year 'twenty two coming in below that again adjustments that are happening with respect to inventory.
Both in smartphone and PC market and just keep in mind that compared to earlier in the year estimation for VC growth. We now are projecting that PC year over year in calendar year 'twenty, two will be down nearly 10%. Similarly smartphone at the start of the year.
It was expected to grow in mid single digits in terms of total unit sales worldwide year over year and now one.
One is looking at a decline of mid single digit so a swing of 10% in smartphones as well if you were to translate it into units that amount like 130 million units reduction versus expectation earlier in the year for smartphone and similarly for BC.
Let's say 30 million kind of reduction in terms of total units versus the projections earlier in the year and of course, PC and smartphone combined represent.
Half of the memory and storage worldwide demand in terms of bits right. So this adjustment primarily happening in the second half of this year in these two markets clearly that is resulting in.
Year over year change versus prior expectations, and DRAM as well as NAND.
Demand growth.
Very helpful as a follow up Mark.
You talked about WSB trending lower in fiscal 'twenty. Three can you give an idea of the magnitude there and then how should we think about overall capex spending.
Plugging into into fiscal 'twenty three thanks, so much.
Yes.
Jay.
As mentioned on the prepared remarks, we expect to end fiscal 'twenty two around $12 billion. So.
On total capex, so that would be an uptick in Q4.
And thats consistent with previous statements.
Now with bit supply growth assumptions coming off versus previous group. The view, we're actively working to bring spend down.
And as you say, we're confident that as we sit here today, Debbie <unk> spend will be down in fiscal 'twenty three.
We're also evaluating construction and other large areas of spend.
Yes, we're looking to reduce utilization on some older nodes to may.
<unk> maintained supply and drive Capex reuse and shift production to.
More cost effective nodes.
Doing a number of things in the market dynamics. So this is real time.
Yes, im not going to size the reduction next year just at this point because it is still moving but at this point, we're confident that <unk> will will decline year over year.
Thank you.
Thank you. Our next question comes from Chris Shankar of Cowen <unk> Company. Your line is open.
Yeah, Hi, Thanks, a lot for taking my question two quick ones first one.
And then how you're feeling about the cloud question.
You mentioned mobile and PC as well.
But it seems like data the next shoe to drop but yet you seem optimistic about data centers remain strong in second half 2022, but you also said clouding entries like.
Seems like if consumer spending flow.
I think the Capex.
I would love to hear your thoughts on why you think overall the cloud Titan one drop in the second half.
I want a quick follow up question for maybe Marc.
The impact will be China, Shanghai, Covid, 19, lockdown and sort of way to quantify what is welcome to make water and what it needs is picking up output for Michael Thank you very much.
Yeah.
So Elliot I provided some color regarding our view on cloud.
I think I will estimate just to add some further color on that and some of it maybe you can just take the China question as well, yes sure. So so Chris very quick on the on the cloud discussion as Sanjay mentioned the.
Capex trends.
For our customers in the cloud space continue to be.
It is strong and the end demand for cloud services and the growth in those cloud services continues to be robust.
And so of course like.
Like you also pointed out I mean, the inventory levels are higher compared to where they were pre COVID-19.
Now it remains to be seen how the macroeconomic environment is going to.
Cause the cloud spending trends to modulate over time, but if anything we think that the cloud spending trends.
Are going to be pretty secular pretty strong.
Even if there is some kind of an impact.
It will come back strongly as <unk>.
<unk> stabilized and even companies that do.
Focus on tightening their belt in this macroeconomic environment will continue to look for ways to become more efficient and become more profitable.
Improve their competitive positioning and that means extracting more value from data digitization trends to continue so those kind of things, we feel are going to be well sustained through.
The environment that may happen, but of course.
A lot depends on how the macroeconomic environment evolved and Thats why we are staying very close with customers.
Switching to your China question.
China has been a pretty significant impact to our F Q4 trajectory.
This time last quarter, when we were contemplating our FQ4.
<unk> compared to that to our latest guidance that we have provided.
Our view for China revenue has come down by approximately 30%.
And that reduction in the China revenue has caused roughly a 10% reduction in our consolidated company wide revenue.
So thats the impact to the Q4, it's pretty substantial and the China impact is largely driven by of course smartphone weakness PC weakness the general consumer environment. There has been weak due to the COVID-19 shutdowns and that has spoken related to different parts of the economy.
The economic environment is weak now we do feel like given the.
Weakness in that economy, as you know China does tend to.
Provide stimulus to improve the financial and economic conditions, and we are hopeful that.
That kind of stimulus and improvement in the economy will be forthcoming in the quarters ahead all.
The timing of that and how it plays out with further COVID-19 related issues in China is unclear.
But we remain optimistic that over time, the consumer demand will come back and improve things.
Super helpful. Thanks, a lot.
Sure.
Thank you. Our next question comes from Timothy Arcuri of UBS. Your line is open.
Thanks, a lot I guess.
Two questions. The first one is for you Mark.
The.
Buyback this quarter was great, but I guess and you.
Did you say that youre going to buy back more.
Yes.
But I guess I had a bigger picture question around sort of you'll have an opportunity now with the stock where it is you have leadership in terms of technology.
Would you be willing to take cash balance.
To take advantage of this of this price weakness I mean is there a sort of a minimum cash balance that we can think of where you could sort of awkward.
Municipally buyback.
Australia, a significant piece of the company.
Yes, Kevin I'm not going to comment.
Yes.
Yes, definitively about our rate and pace.
Yes, as you point out the balance sheet stronger than ever.
And I think what's most important there is we're in a great position to sustain long term investments is that as the.
Market is a bit softer here.
Yes, we've got $14 5 billion of liquidity that you point out $12 billion of that in cash and that is above our liquidity target that we had incentive about 35% or 10 points over that.
Leverage is low point for on gross.
And we're in a net cash position so.
No near term maturities average debt maturity at 2031.
So we're in great shape.
Yes, I think we want to maintain our balance sheet to be able to focus on the long term of the business.
As you point out we did return historically high levels to shareholders and third quarter at these share price levels, we project opportunistic repurchase to increase.
And then from there we're just focused on.
Free cash flow growth.
Returning excess cash to shareholders.
And importantly, maintaining an investment grade rating.
So I would say we have ample liquidity now.
<unk>.
Yes.
Repurchase at a higher rate.
This quarter.
Cool.
Thanks for that and I guess second question also Mark for you.
The guidance.
Assume for your inventories.
How do you think about.
Sort of the balance between.
Holding some inventory.
If you believe that data center will stay strong and sort of how should we think about inventory in August and sort of your bigger picture strategy around around keeping some inventory on the on the bad debt.
Does remain strong.
It's a good question, Tim and you heard Sanjay to talk about this briefly in his prepared remarks, our strategy is to manage supply.
Inventory as a buffer.
And we did talk about reducing bit supply growth assumptions a bit.
We are starting this sort of softer period in a pretty good place. We we ended the third quarter of $5 $6 billion of inventories 109 days down from 113 days into Q.
So we do expect inventories to go up this quarter.
And that will build in some flexibility is as we work to optimize price on our products I want to note. It's cost effective inventory much of it built on leading nodes and so it will be competitive for a long time.
And then we will also use this inventory build to.
Revisit some capex decisions and defer capex optimize the manufacturing footprint, where we can and to <unk> earlier question. It gives us more confidence that we can lower <unk> spend.
Next year.
So in the.
We expect it to go up a couple of weeks and days.
Yes.
Fourth quarter.
From there we.
We will have to see how the market develops and which way it moves.
We we are we do have more complex wafer processing and more complex module products that are that are sort of adding some pressure on the days, but we're also offsetting that with better cycle time lower stock levels and so forth. So I think the days that we.
Would be uncomfortable with.
Is that is a number that we've talked about in the past around 150 days, where we start to.
That's too high levels so.
We would we would definitely go up in the in the fourth quarter, and then we'll see where inventory levels go from there.
Helpful. Thank you very much.
Thank you. Our next question comes from Vivek Arya of Bank of America. Your line is open.
Thanks for taking my question Sanjay I'm curious do you think this Q4 outlook is the bottom of the cycle or do you think the risks can extend into Q1, because you mentioned that the consumer headwinds could continue to play out during the second half of the calendar year and ultra because cloud inventory is at elevated levels. So I guess my.
Specific question as much as I realize you don't guide out more than a quarter is do you think Q1 sales and margins are more likely to be flat up or down sequentially.
So clearly we don't guide to Q1 here, but as I pointed out in the prepared remarks.
Got it.
We expect these inventory adjustments.
Do we have.
To be working themselves out over the course of second half of the year.
We have pointed out that the inventory adjustments, primarily taking place in PC and the smartphone market and I would just point out that from the vast history as well that once inventory adjustments began in a certain part of the segment then.
A couple of quarters for them to work out.
And here we of course have.
Macro economic uncertainties as well.
It has been a rapidly changing and uncertain environment and this is what we have to keep in mind. When we look at then does normalcy return in terms of demand and that's why just like Mark pointed out here.
Without question, we will be using inventory to address the demand next year and we will continue to work closely with our customers to understand their overall demand environment, we think that sometime in fiscal 'twenty three.
In our fiscal 'twenty three is when demand will rebound, but more importantly, it's really about the supply demand balance and with respect to supply demand balance you can see that we are taking actions immediately in terms of curtailing our supply growth for fiscal year 'twenty three.
By sharing our plans with you that we are bringing down our capex versus our estimations earlier.
Okay.
That's an important step and of course industry.
He has shown in DRAM that it has capex discipline as well we believe all the actions will also contribute toward returning the industry held sooner. So I would expect that sometime in our fiscal year 'twenty three demand will rebound as well as <unk>.
<unk> demand supply environment visit a store to a healthy level, but again I will point out that look this is a highly uncertain.
Currently changing environment to be out of course, responding fast and.
In terms of any changes we see so we're not pinpointing to any specific quarter at this time and again I think what's also important is that micron execution continues to be really strong.
Whether you look from technology product manufacturing customer relationships and of course, our strong balance sheet, we are well poised to emerge stronger on the other side of this.
In terms of really executing well working closely with our customers to understand.
The latest demand trends in various end market segments, and adjusting our plans as necessary and as fast as we can and really position.
Turning the company for overall healthy growth in the long term and again the long term trend estimate also pointed out earlier and I shared with you the long term trends absolutely board, whether for memory and storage.
How much is cloud inventory above a normal level of $100 million $200 million any kind of rough estimation of how much of incremental headwind is that so we can take that into account. Thank you.
Look I mean, it really varies by customer to customer right. So I mean, we can't exactly give you some of those details yet.
Thank you.
Thank you. Our next question comes from Ambridge Srivastava BMO. Your line is open.
Okay.
Good to see.
So then the Capex discipline.
Just let the supply growth.
And you are ramping down.
That growth heading into <unk>.
For fiscal 'twenty, what's the right way to think about demand growth and so within the.
Supplier meeting demand how much do you think will be production growth production.
Lie versus coming from the inventory from.
From the industry because I think.
The industry seems to be consistent in that at least would be heard.
To go from one of your large competitors is also lowering capex. So that's the good part but.
How should we think about inventory on.
On the balance sheet of the three participants adding to the.
Two the production supply growth and then I had a quick follow up for market itself.
So look I mean, we are in the process of firming up our plans and when we have Q4 earnings call in September of course, we will share with you some more details.
Around calendar year, 2003 that will be more appropriate time for us to be talking about it as well as our fiscal year 'twenty three but again the important thing to note is that our inventory is.
Highly cost effective I mean, micron is leading the industry with our DRAM and NAND production nodes right. Several quarters ahead. So this is a highly cost effective inventory at manufacturing operations are running well. So we will be using this inventory in fiscal year 2003 and of course continue to adjust our plan.
As necessary on the Capex front end wafer technology ramps et cetera.
Bring balance into demand and supply and which is what I pointed out earlier that you know.
Overall, the combination of our inventory as well as new production growth. That's how are we positioned to bring back into balance to meet that.
Demand sometime in fiscal 'twenty three.
Mark a quick one on the on the Wuxi versus non VC whats the percentage.
Then just one follow up.
Plans are still in flux as you can give us a number for <unk>.
What's the number.
Got it to be for this year. Thank you.
I'm, sorry, I'm British I Couldnt hear the question.
Sorry, My question was what.
The window for them.
Non wafer front and spend the capex for this year.
Oh, Okay, I got the mix of spend.
I won't give an.
The exact number because of the mix varies from year to year and depends on product cycles availability of fab space and fill facilities and other factors.
Over over half of Capex generally is.
Manufacturing Wf fee and then the.
Other half is split between development Capex and construction.
So when you think you could take down construction.
And as well.
That mean construction as well as development, what's the right way to think about the kind of the playbook, that's what everybody's looking for.
Things continue.
And just to be specific we're talking about Wi Fi.
For manufacturing and that's what I was addressing would go down year over year, we did not commit to going down year over year on cap on construction nor on <unk>.
Technology development.
I did say that.
Depending on how the market plays out here in inventory levels and supply that growth and so forth.
We continue to look at our footprint, that's a continuous process to optimize the amount of spend.
So again just to make sure Thats clear Wi Fi over half and then the rest is.
Construction.
Spurn equipment for R&D and Assembly and test.
Got it thank you and again I apologize if I misinterpreted your comments. Thank you.
Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Please go ahead.
Yes, thanks for taking the question.
I just wanted to ask you in this environment. These last couple of quarters and at the Analyst day, you emphasized how much of your business you had kind of line of sight in terms of kind of the long term agreements that you have established I'm curious as we've gone through this kind of correction or downturn.
How would you characterize your discussions on those long term commitments have they changed at all have customers push back on taking the amount of previously.
Committed supply from you guys how has that changed at all as we go through this kind of correction right now.
That's a great question and I will have summit to address it.
Yes happy to talk about that so the long term agreements.
Generally we go out for quarters talk about volume in each quarter and as I have pointed out in the past. These are not meant to be take or pay agreements, but more meant for planning and share assumptions and so on we have had extensive discussions we keep having ongoing dialogue with.
Our customers about the environment.
Honestly continue to press our customers too.
To stick with the agreements and the quarterly skew et cetera, as much as possible, but when there are.
Such significant extraneous events that are happening.
Exogenous shock sometimes to the environment.
And such unpredictable type of situations that Sanjay was highlighting fast changing environment that is causing impact to the end demand, especially given some of the consumer spending shifts that are happening in the world that are causing.
Reductions in purchasing of certain electronics products species smartphones et cetera than it is.
Not possible for our customers to purchase based on the Lps that were established when the assumptions around the industry were very different and so.
Our goal then is to work with our customers to come up with the best approach.
And.
And figure out how best to position ourselves in terms of the forward looking views of their purchasing patterns and this is where I feel like the product momentum that we've had has played out really well.
We just mentioned that our data center SSD.
Revenue doubled in the most recent quarter year on year.
We have tremendous product portfolio momentum across all of our products. We are shipping in volume HBM products, we have the world's fastest graphics DRAM product.
Two market with low power DRAM and mobile.
And really strong capability in automotive number one share in auto industrial and networking. So these all play to our strengths with our customers. So NDA areas, maybe do want to improve our portfolio position improve our share because they are more stable segments in the market are the more profitable portions of the.
The industry profit pool.
That's where we focus on and then our portfolio strength really helps.
Enable that transition with customers to make our own business mode. Optimize then more profitable more steady over time. So that's the engagement that we have with customers and we use those Lps to then.
Drive those longer term goals that we have with customers.
That's great. Thank you very much.
Thank you ladies and gentlemen.
When you start time that does conclude today's conference call. Thank you for participating you may now disconnect.
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