Earnings Call: Q2 2020

Mar 25, 2020

Ladies and gentlemen, thank you for standing by, and welcome to Micron Technologies' Fiscal Second Quarter 2020 Financial Conference Call. At this Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, Head of Investor Relations at Micron Technologies. Fahan Ahmad. Sir, please go ahead. Thank you, and welcome to Micron Technologies' fiscal second quarter 2020 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including the audio and slides, is also being webcast from our Investor Relations website at investors. Micron.com. Filed a short while ago. Today's discussion of financial results will be presented on a non GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non GAAP financial measures can be found on our website. As a reminder, a webcast replay will be available on our website later today. We encourage you to monitor our website at mitroton.com throughout the quarter for the most current information on the company including information on the various financial conferences that we will be attending. You can follow us on Twitter at MicronTech As a reminder, the matters we will be discussing today include forward looking statements. These forward looking statements are subject to risks and uncertainties that can cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10 K and 10 Q. For a discussion of risks, that may affect our future results. Although we believe 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. I hope all of you and your families Safe. These are unprecedented times, and I'm calling from home today. In Micron's fiscal second quarter, we delivered strong results, including revenue at the high end of our guided range, even as the COVID 19 crisis began to unfold halfway through our quarter. We have now achieved positive free cash flow for 13 consecutive quarters. This performance represents a marked improvement from historical cycles and is evidence of the strength of the new Micron. The emergence of the COVID-nineteen pandemic has created both operational challenges and macroeconomic concerns. Micron has more than 37,000 team members in 18 countries around the world. Since the earliest signs of the outbreak in China, we have taken proactive measures to safeguard our employees. Where possible, Micron employees are working from home, and we have suspended all local and international business travel globally. We implemented health screenings at all micron locations. We were among the 1st in the industry to implement physical separation protocols all our manufacturing sites globally to mitigate the risk of community spread with blue teams and red teams that operate on alternate schedules. We have been requiring sales declaration and sales quarantine measures as this crisis has spread, whereby team members, contractors, and their immediate families observe 14 days of work from home after any air or sea travel. As of yesterday, we medical attention. At the two sites where we have confirmed cases, we have used contact tracing to quarantine individuals who were in close contact with either infected team member. We have also implemented more restrictive controls of on-site access social distancing and service protocols. As a result of stringent preventative measures in place, these events have not impacted our operations thus far. We have also taken measures to protect our raw material supply and increase our supply chain flexibility. First, we have been in close ongoing communication with our suppliers to ensure continuity and identify supply gaps. 2nd, we have increased our on hand inventory of raw materials and have begun to store more of that supply on our sites to minimize the impact of any logistics delays. 3rd, we have increased our focus on multi sourcing of parts to reduce supplier dependence risk. And 4th, we have added assembly and test capacity at both our captive and contract manufacturing sites to provide redundant manufacturing capability reads, we are complying with all government orders at our global sites. These orders may result in a temporary or prolonged shutdown of our sites, which could impact our shipments this quarter. Movement order, resulting in the closure of borders and most businesses in Malaysia. Subsequently, the Malaysian government added semiconductors the list of essential services, and we were able to resume operations. Our assembly and test facilities in Muir and Penang, primarily used for packaging, high value NAND, but briefly shut down and have since been able to return to production on a very limited basis. In compliance with local regulations. We are using our global supply chain network and increased flexibility to try mitigate this production impact, and we are working to keep our commitments to our customers. Turning now to COVID nineteen's effect, on demand. COVID-nineteen is significantly impacting China's economic growth in the calendar first quarter reflected in the sharp decline factory shutdowns in China, but headwinds for us late in our fiscal second quarter. In China, lower consumer demand was offset by stronger data center demand due to increased gaming, e commerce, and remote work activity. Looking to the third quarter, as these trends also take shape worldwide, data center demand in all regions looks strong and is leading to supply shortages. In addition, we are seeing a decent increase in demand for notebooks used in the commercial and educational segment to support work from home in China increasingly returning to full production, and we have recently started to see China smartphone manufacturing volumes recover. Nevertheless, as the world deals with outbreak of COVID 19, we expect that overall demand for smartphones, consumer electronics, and automobiles will be below our prior expectations Once the U. S. And other major economies have demonstrated containment of the virus's spread, we expect a rebound in economic activity. Much depends on potential government stimulus and the rate, pace and effectiveness of containment efforts. We are modeling an improvement in the trajectory of economic activity later into the second half of calendar twenty twenty with a further rebound economic momentum into 2021. This is a very fluid situation, and we will learn more about the virus it spreads its economic impact over the next few weeks months. Anticipating changes to our customer demand, we have been moving supply from smartphones to service the strength in data center markets for both DRAM modules as well as SSDs. Just like we have increased our raw materials inventory in these uncertain times, it is possible that certain customers are similarly increasing their inventory of DRAM and NAND products. We will manage our business with prudent and proactive action and continue to work closely with customers to understand their latest demand outlook. Will adjust to the most recent demand requirements. Once we emerge from this low visibility environment that is impacted by COVID-nineteen, We expect the industry to resume its long term growth trajectory with a DRAM demand growth CAGR in the mid to high teens and NAND in the 30% range. For both DRAM and NAND, we expect our multi year supply growth CAGR to be in line with the industry's demand growth CAGR. Focusing on 2020, we returned our DRAM operations to full utilization at the beginning of the calendar year, and our NAND operations continue to run with reduced wafer starts as we deploy capital efficiently through our conversion to replacement gate. While we returned our DRAM utilization to full production, We remain flexible to adjusting these levels depending on No transitions and industry supply growth in calendar 2020 could be impacted by disruptions to equipment company's operations including travel restrictions, hindering field service and engineering support. Recently, some equipment companies have also indicated delays in equipment deliveries due to the impact of various government actions to combat COVID 19. The situation with coronavirus is rapidly evolving and disruptions could be and execution, combined with our rock solid balance sheet, puts us in an excellent position to navigate this period of uncertainty and capitalize on the long Stepping away from the COVID 19 discussion, I want to spend a few minutes talking about the tremendous progress we have made on our technology and products. This progress is contributing to the underlying strength of the new Micron and this is a source of excitement for us as we look to technology, manufacturing and supply chain excellence. Our objective is to have leading process technology so that we can deliver differentiated products to our customers and maintain a competitive cost structure. In DRAM, we were the first to introduce 1Z in volume production and expect over half of our bit production to be on 1Y and 1Z by the summer of 2020. We are managing the construction schedule of our new Taiwan cleanroom expansion care fully and currently remain on target for 1st output in calendar 2021. In the fiscal second quarter, we began sampling 1Z based DDR5 modules and are on track to introduce high bandwidth memory in calendar 2020. We are also making good progress or RG transition and expect to begin volume production We expect replacement gate production to be a meaningful portion of our total NAND supply by the end of this calendar year. Micron continues to lead on QLC NAND, which lowers costs for SSDs and helps us target market segments that are currently served by HDDs. QNC SSD bit shipments rose by 60% sequentially in our fiscal second quarter with a meaningful portion of our consumer SSDs now shipping with our QLC technology. We expect QLC to continue growing in the second half of the fiscal year as market adoption increases In the fiscal second quarter, we made significant progress on increasing the mix of high value NAND beds to over 70% of total NAND beds, and we remain on track to drive this figure to around 80% in fiscal 2021. Despite normal seasonal weakness in COVID-nineteen, mobile MCP products had record revenue in the quarter and showed strong sequential growth. SSE revenue also grew approximately 20% sequentially, led by greater than 50% growth in data center SSDs. The resolution of the assembly and test constraints we experienced in the fiscal first quarter combined with market share gains drove strong growth in these product lines. This mix improvement increases our profitability reduces the volatility in our margins. Now let's turn to 3 d Crosspoint. As the only company in the world with a portfolio of DRAM, NAND and 3 d XPoint Technologies, Micron is uniquely positioned in the marketplace. We are encouraged by the customer of our first CD Crosspoint product, the X100, which is the fastest storage device in the world. It is a great start to our portfolio of differentiated 3 d crosspoint products built in collaboration with our customers. As we mature this X100 solution, we look forward to engaging a broader set of customers this year and delivering the value of 3 d XPoint to the data center market. Previous agreements. Intel has been an important partner over the years, and this new agreement ensures a continuation of our tools relationship. Now turning to highlights new assisted by growth of our QLC NVMe Consumer SSDs. We expect strong sequential bit growth in our NVMe product portfolio in fiscal third quarter as we continue the transition from SATA to NVMe. In SATA, we achieved several customer qualifications for our newest 96 layer setup based data center SSD. In the fiscal second quarter, we became the 1st company to deliver LP5 mobile DRAM products to customers, including Xiaomi, which is using our LP5 in a 5G capable need 10 smartphones in 8 and 12 gigabyte configurations. More recently, we have begun sampling the world's 1st LP5 DRAM based UFS MCPs. These LP5 DRAM products will enable longer smartphone battery life and high performance image processing. They are great examples of how Micron is innovating for our customers to enhance the end user experience. We are encouraged that LP5 and UFS will become even more important as 5G adoption accelerates reigniting smartphone unit sales and driving content growth. In just two short years, we have gone from trailing the competition in our mobile product folio to leading the industry with innovative first of a kind products, consistent with our new Micron strategy. In the data center market, we benefited from driven in part by ongoing strength in cloud markets, increased use of online properties such as e Commerce, and the surge in remote work requirements due to COVID-nineteen containment measures. In the graphics market, GDDR6 bit shipments increased more than 40% quarter over quarter, and we anticipate strong growth with the launch of new gaming consoles that are expected to also deploy SSDs in place of hard drives for the first time. In the PC market, DRAM bit shipments and revenue declined sequentially, driven by slow seasonal demand and continued CPU shortages. Our client SSD sales also declined sequentially. Despite soft global automobile unit sales as content growth remains strong in this market. Micron continues to lead the auto market with industry's highest quality products. Power efficiency is increasingly important in the auto market, creating an opportunity for Micron to leverage of our auto DRAM revenue. End. In the longer term, we expect secular growth in the industrial IoT market as 5G rolls out and increases the importance of AI machine learning and compute at the edge. I'll now turn it over to Dave to provide our financial Thanks, Sanjay. We executed well in the fiscal second quarter, and our reported financial results largely came in at the high end of our guidance ranges, despite the uncertainty and impacts related to COVID-nineteen. Prior to the advent of COVID-nineteen, we had outlined our expectations FQ2 would mark the low point of our financial performance in this cycle, and our business trajectory has been consistent with those expectations. While we still expect improvements in our financial results, these expectations now need to reflect the evolving impacts of The situation remains fluid, and we continue to assess our plans and make real time changes to adapt and optimize our operations. Total FQ2 revenue was approximately $4,800,000,000, the high end of the guidance we provided for the quarter, Revenue was down 7% sequentially and down 18% year over year. FQ2 DRAM revenue was 3.1000000000 percent sequentially and 26% year on year. Bitch shipments were down by approximately 10% sequentially and up more than 20 FQ2 NAND revenue was approximately $1,500,000,000 or 32 percent of total revenue. Revenue increased 6% sequentially and was up 9% year on year. Bit shipments declined in the low single digit percentage range sequentially and increased approximately 20% year on year. ASPs increased in the upper single digit percentage range sequentially. Now turning to our revenue trends by business unit. Revenue for the Compute And Networking Business Unit was approximately $2,000,000,000, down approximately 1% sequentially and down 17% year over year. We have now started to include all three d crosspoint revenue in CMBU reporting as the use cases for 3 d Crosspoint technology are more closely aligned with memory expansion and this business is being managed by CMBU. Excluding 3 d Crosspoint, CMBU would have been down 7% sequentially, primarily driven by weaker sales down 14% sequentially and down 22% year over year. By seasonality in certain products, as well as our decision to walk away from some business due to our concerns regarding pricing. Revenue for the storage business unit in FQ2 was $870,000,000, down 10% from FQ1 and down 15% year over year. Without 3 d Crosspoint, SBU revenue was up 9% sequentially. Operating profit margins for SBU improved sharply in the quarter and were at approximately breakeven levels. And finally, revenue for the embedded business unit was $696,000,000, down 5% sequentially, and down 13% year over year. The consolidated gross margin for FQ2 was 29.1%, exceeding the high end of the guidance range. And NAND pricing and approximately $50,000,000 of benefit came from the NAND appreciable life change we made in the prior quarter. The impact of underutilization at our Lehigh Path was approximately $142,000,000 or 2 ninety five basis points in FQ2. We expect underutilization to be approximately $160,000,000 in FQ3. We're continuing our efforts to reduce spending in our Lehigh fab, which we expect will begin to materialize to fiscal 2021. Operating expenses were $856,000,000 in FQ2. Given the increased uncertainty, we have taken additional steps to control our OpEx. These actions include freezing our near term hiring and cutting back significantly on discretionary spending as a result, we expect OpEx to decline sequentially in FQ3. For modeling purposes, our FQ4 will be a 14 week quarter. As a result, we expect an uptick in operating expenses for Q4 that is consistent with the extra week in the quarter. FQ2 operating income was $542,000,000, representing 11% of revenue. Operating margin was nearly flat compared to the prior quarter. Net interest expense was $6,000,000 compared to $7,000,000 of net interest income in the prior quarter since the Federal Reserve has cut short term interest rates We anticipate we expect net interest expense Q4 with a full quarter impact of the lower interest income. Our FQ2 effective tax rate was 3.2%. For the remainder of FY2020, we expect our tax rate to be approximately 5%. We expect our long term Non GAAP earnings per share in FQ2 and $1.71 in the year ago quarter. Turning to cash flows and capital spending. We generated $2,000,000,000 in cash from operations in FQ2, representing 42% of revenue. During the quarter, net capital spending We're continuing to project FY20 CapEx in the range of $7,000,000,000 to $8,000,000,000, including some increases for assembly and test flexibility that Sanjay mentioned. Free cash flow in the quarter was $63,000,000 compared to $86,000,000 in the prior quarter. This marks the 13th consecutive quarter of positive free cash flow. Our ability to generate cash consistently through the cycle is largely the result of the structural improvements made to Micron's profitability, which has led to more than $1,500,000,000 of operating cash flow improvement and more than 25 percentage points of operating cash flow improvement compared to the top quarter of the prior cycle. We were purchased approximately 785,000 shares for $44,000,000 in 2020, we've returned $94,000,000 of capital through repurchases, representing approximately 65% of our free cash flow. Ending FQ2 inventory was $5,200,000,000 or 134 days. The increase was expected and largely due to the seasonally weaker demand experienced in FQ2 combined with our strategy of holding more NAND inventory as we approach our transition to replacement gate later in the calendar year. We have also increased our raw material levels as a precaution given increased uncertainty in the supply chain with these materials. As we had outlined on our prior earnings call, we continue to walk away We ended the quarter with total FQ2 ending total debt was $5,400,000,000. To preserve ready access to our liquidity, a period of macroeconomic uncertainty. Early this quarter, we drew $2,500,000,000 from our revolving credit facility. Now turning to our outlook. Based on our conversations with our customers, the demand for our products remains strong, and the pricing trends are favorable. However, it is important to note that we are a lagging indicator relative to in demand and macro projections have significantly weakened in the near term. It is also currently unclear the extent to which inventory bills related to COVID supply concerns might be masking weakness in in demand. To government actions, labor and material shortages, and to travel and border restrictions. Given these unusual uncertainties, Our guidance ranges are wider than usual. However, these wider ranges do not reflect the magnitude of all the risks and results could vary significantly from these ranges. Our guidance ranges also include expenses for COVID 19 mitigation efforts. With all these factors in mind, our non GAAP guidance for FQ3 is as follows: We expect revenue to be in the range of four 0.6 to $5,200,000,000, gross margin to be in the range of 31 percent, plus or minus 150 basis points and operating expenses approximately $825,000,000, plus or minus $25,000,000. Finally, based on a share count of approximately 1,140,000,000 fully diluted shares, we expect EPS to be $0.55 plus or minus $0.15. In closing, notwithstanding the near term uncertainty, we are pleased with Micron financial execution exiting this cyclical downturn. FQ2 revenue was approximately 65% higher and gross margins 11 percentage points higher than in the prior trough, which occurred in FQ3 of 2016. This revenue growth far outpaced the growth of the overall semiconductor industry in this period. As we assess our cross cycle performance from the last trough to this trough, we have delivered average returns as follows: gross margins of more than 40%, EBITDA margins 50%. CapEx to revenue in the 30s and return on invested capital exceeding 20%. While the near term business environment is uncertain, we believe that long term demand trends for Micron remain robust. Our focus on execution, our strong product portfolio and our solid balance sheet ensure that Micron is in the best position to capitalize on the secular trends driving our business. Thank you, Dave. I want to close by thanking our extraordinary Micron team around the globe. These recent weeks have placed unforeseen challenges on business but more importantly, on people and families. Micron's team has responded with professionalism and care during this period. And our team members are the reason we can execute our business plan and deliver the strong results we have reported today. To assist during this period, we are offering US team members earning less than $100,000 per year a special one time payment of $1000. These figures are adjusted for market rates worldwide and 68% of our global team is eligible. In addition, we are establishing an emergency relief fund employees facing financial hardship. We are also focused on assisting the communities in which we operate through this difficult time. As part of team on top of what we have already donated in China, Italy and the U. S. We are also working with local officials to make space our facilities available if needed for emergency services as well as providing support through our supply chain operations to help source needed screening and protective equipment. Finally, we are accelerating our payment terms to small business vendors to help with their liquidity. I've said many times that the new Micron is stronger than ever, and we are showing that strength today. Micron is leveraging our core expertise to drive leadership and technology, products and manufacturing delivering differentiated solutions that enrich life or end customers around the world. While the near term environment creates uncertainty for all of us in our daily lives, the long term fundamentals of our industry are strengthening and opportunities are expanding. With these opportunities in front of us, will continue to execute with tenacity and resilience as we make demonstrable progress towards our vision. We will now open you. Our first question comes from the line of Joe Moore of Morgan Stanley. Great. Thank you. David, in the prepared remarks, you talked about inventory accumulation potentially masking weakness of customers. What, where specifically might you have that anxiety? And it seems like in compute, bank conditions are pretty strong and your customers don't seem to have a lot of at least end product inventory. So when you, is that just a precautionary mark on your side or is there any sense of anything you're seeing there that creates anxiety Well, we I mean, sorry. Yes, sure. I'm sorry. Was just going to say, let me address that first, and then I will definitely have Dave expand on that. So it is an environment where there can be supply shortages And of course, underlying demand trends in the markets we are participating continue to be strong. There can be supply shortages given the fluid situation related to the spread of coronavirus in various countries, the rate and pace is different. And ultimately, it will depend upon the rules and regulations that different governments may impose that can potentially impact supply supply in the industry. So just like we are accumulating some inventory ourselves to make sure that we don't have supply disruptions it is legitimate to think that our customers can also be building some inventory to make sure that their supply chain is under control. So I think this is the part that we are just mindful of. Although, when you look at work from home economy and steady from home economy for students that is certainly driving greater demand in the enterprise PC side and certainly placing, it addresses quite a bit of constraints and stress on the infrastructure. So the cloud infrastructure, the enterprise infrastructure definitely is driving increased demand as well. So in that backdrop, I think we are just being mindful in terms of making those comments. But I will let Dave further elaborate on it. Yes, I think what you covered Sanjay is Is that good? The only thing I'd add is, I think we believe, the strength in the data center market is real and that the inventory levels are normal in that market. Question comes from Timothy Arcuri of UBS. Your line is open. I guess Sanjay, there was some language in the release that, and you guys have talked about the fact that you're lagging indicator relative to demand. Can you just help parse through that? I guess, it sounds like maybe you're suggesting that the fiscal fourth quarter could be maybe down sequentially, which it's typically up. I know that's very a public tell what's going on right now. But maybe can you just help us walk through what the puts and takes look like into Q4? I know you don't want to guide Q4, but but it sounds like it's possibly down. So can you just help us think about that? Thanks. Certainly, as you know, TEGI are not guiding to Q4 here. And of course, the environment is fluid. These are unprecedented times in terms of anybody dealing any business, any vertical or any country dealing with the situation and the spread and containment of coronavirus. But what I would say here is that with respect to our own assessment of the demand trends, I think underlying demand trends definitely continue to be healthy. And when we look at, what we supply to our customers, customers build it into the product if there has to be any macroeconomic weakness. And we know that in the environment of coronavirus, pandemic, there will be some impact on some aspects of the consumer demand the consumer demand, there's a lag between the consumer demand getting impacted to the demands from our customers are building the product in their supply chains getting impacted. So that's what we mean that sometimes there can be a lag between what we are supplying to our customers. Versus the impact on the demand, in the marketplace. So we are not guiding to, 4th quarter, I think what's important is that it will depend on, the spread of the virus, the containment of the virus, different countries may have their containment at different rates. So while we have seen for example, last fiscal quarter, our FQ2 demand in China and the consumer demand and the smartphone demand decline, We have also seen that China has contained this. And in fact, production is coming back in China and the demand is being restored in China. Same thing will happen in other parts of the world as well that while there may be some impact on smartphone demand, in different countries. Eventually, as the containment happens, the consumer demand will be back. And the long term trends, certainly for our business, are strong. The trends of 5G, driving greater content and smartphone, when we come back, on the other side of this pandemic, there will be a re the demand drivers will re assert themselves. Similarly, clouds demand continues to do well. As I mentioned, the COVID-nineteen scenario may actually be accelerating some of that demand in cloud that is driving greater demand for memory and storage. So point is, the situation is fluid, and we are really not prepared to guide you to a few fold at this point. Okay, Sanjay. Thank you so much. Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open. Yes, guys. Thanks for all the details, especially given how uncertainty environment is. I'm just kind of curious Sanjay and Dave is it possible to quantify what the impact of COVID was in the February quarter? And more importantly, Is there a number in mind for May? It's clearly uncertainty is increasing the range for the May guide, but is it also bringing down the midpoint, any sort of guidance of how you're thinking through that would be very helpful. So, I mean, the Dave address there? Okay. Yes, sure. So, maybe without throwing out a number because it's difficult to estimate. Clearly, we would have been above the high end of the range. On revenue, if not for COVID-nineteen. And there were some mitigation expenses already in both cost of sales and operating expenses that impacted us a bit in the fiscal second quarter as well. We would have likely been more skewed to a higher growth number for fiscal third quarter, if not for COVID-nineteen. And of course, if it's somewhat unusual for us, we widened the range by $100,000,000 also to account for the uncertainty as it relates to what might happen not only from a demand perspective, but from a supply perspective, either one has some risk to it. Additionally, we have built in more costs associated with COVID mitigations for us, Sandeep, and I already talked about the fact that we're carrying higher levels of of inventory of raw materials, but we're also having to flex our supply chain, that and have some redundancy that can drive up. Some expenses on the cost of sales side. In addition, we may see an increased level of tariff expense in an effort to mitigate some supply disruptions that might occur. And also there's a fair amount of expense associated with just the work from home model. And allow enabling our employees to be able to do all the work they do in the offices now in their homes. And so there's some etcetera, but it's that. So our expense might likely would have been down even more, particularly with all the actions we've taken to reduce expenses not for the fact that we have a bit of this offset, or headwind associated with the mitigation expense in the third quarter. Thank you. Our next question comes from CJ Muse of Evercore. Your line is open. Yes, good afternoon and thank you for taking the question and great to hear that but you're safe and well. I guess my question is regarding the supply side, particularly for DRAM. You talked about some issues related to equipment installation and part availability. You've also talked about switching over some of your capacity for mobility to server. So curious as you think that through, what does big production look like now either for you or for the industry here in calendar 2020. I think we were all thinking kind of 6% to 8% coming in Is that still the right number or is there a change there? Thank you. So I think what we had said before the COVID-nineteen, scenarios that in calendar year 2020, the DRAM demand growth would be in mid teens around mid teens and that supply, it would be somewhat less for the year. Supply growth would be somewhat less for the year than the demand growth. And of course, as we look at the scenario of supply growth, a technology transition, the node transition, in the industry perhaps can be impacted by tool deliveries or the engineering or the service support in the industry. It's too soon to tell this. But the point is that there could be some impact to supply and not just related to the wafer out put, but there could be some impact to the supplier, as I said before, depending upon the, rules and regulations and the orders in various countries where the supply chain for memory and storage exists, if those orders impact, any production, there could be some, supply growth impact there as well. It's hard to tell at this point? And we certainly, when we look at our current, supply growth, our current supply growth at this point is intact, but we are mindful of the changes that could occur due to the COVID environment And of course, we continue to watch the demand as well. And on the supply side, we will take action. Today, we have shortages in supply as we have mentioned for, server, DRAM, as well as for cloud, overall, there are shortages. For DRAM. And therefore, we are shifting some of the supply from mobile to the DRAM side. But of course, you know, we'll continue to keep track of what the demand looks like. And as we said, we will evaluate making reductions in our production utilization or in terms of any CapEx that space to manage the supply growth during the calendar year 'twenty. But it's too soon to really give you any specific projections from that. Thank you. Our next question comes from Mehdi Hosseini of SIG. Your line is open. Yes, sir. Thanks for taking my question. David or Sanjay, can you please tell me how you think of the mix of revenue from China, especially going back to what Sanjay said earlier. China is resuming operation. They're also providing other incentives for 5G adoption. And I'm just curious how China Canada for your revenues in the February quarter and how you see it trending for the remainder of the year. So I will let Dave answer that. Yeah. So, I think, cumulative revenues, I'll have to go back and look at the exact statistic, but it was somewhere in the kind of 30%. I think it was China revenue in aggregate. Clearly, as you said, there's a there is a comeback to work kind of phenomenon going on in China and there is economic stimulus So that certainly will benefit. But we're also the customers in the U. S. Are a lot of them are in the cloud space. And of course, that's a big, driver of our business today given that Sanjay mentioned, the move to work from home and e commerce and so forth. So I'm not sure that the mix, as we project it, is likely to around significantly. Thank you. Our next question comes from Ambrish Srivastava of BMO. Seeing cost per bit. What percent of your CapEx is flexible? And I appreciate that things are so fluid. It's very hard for you to tell us how much you're going to, you would flex, but just as a ballpark, what percentage? And then is the cost down going to change based on what you know as of now versus what you had told us last quarter for both NAND and for DRAM? Thank you. In terms of CapEx, we, for our fiscal third quarter, it is we won't be impacting the CapEx for fiscal third quarter. However, for the rest of the calendar year 'twenty, we certainly will be, as I said before, evaluating our CapEx as well as our production utilization to make sure that renewable supply stays in line with our demand expectations. Demand expectations, of course, we laid out working closely with our customers. So just like in 2019, we made changes to CapEx fairly rapidly and we reacted fast as well as we manage our production. We will of course be doing the same thing here. Just keep in mind that the situation with respect to coronavirus escalation across the globe just has really evolve rapidly over the course of last couple of weeks. So we will, of course, keep those steps with our customers' demand expectations and we will, make sure that we make any adjustments to our CapEx if needed accordingly. We are absolutely continuing to look at that. And in terms of cost reductions, of course, cost reductions are a function of technology transitions that are being made in the fabs. And So far, we are on plan with respect to the cost guidance that we had provided to you for our fiscal year 'twenty. I would add that on the NAND front, as you've seen, we've gotten a fair amount of benefit from the change in the depreciation in the first half of fiscal twenty twenty. So that, in that sense, kind of pulled ahead, as you remember, probably, we mentioned that as we transition to replacement gate, FY 2020 would show minimal cost decline and really FY 2021 was where we would see it. But with the depreciation change, in reality, what's happening is we're kind of pulling ahead some of that improvement into fiscal 2020. So when you look at the percentages a bit better in FY 2020 and maybe not as good as we have originally kind of telegraphed in FY 2021. And in addition, what we continue to drive this mix to the high value solutions. They generally carry higher costs and we hope to continue that. Our goal is to get to 80%. That certainly will also be an impact on the cost side as well. But if you step back and then look at how we do over a multiyear period in terms of NAND improvement. Once we're really running on the 2nd generation replacement gate and good momentum, we're up to the right yields with running through the inventory. And and showing up in cost of sales. And you see that over a multi year period, you'll see that, arc decline in costs over the over a multi year period is actually very good, very healthy, very it. And I would just add that due to COVID 19, as we said, that we are enabling greater flexibility in our supply network by adding captive capacity as well as adding capacity on part of our subcontractor to give us opportunity and resilience in the supply chain, in case there are rules and regulations in various countries that impact our production So some of those aspects certainly do have a headwind on the cost side, but by and large, I think those are being managed well and, overall, our cost targets for fiscal year 2020 at this point are on track. Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Your question please. Yes. Thanks for taking the question. Also congrats on the great execution. I want to go back to the customer inventory dynamics and trying to understand or appreciate how you think about that potential buildup of inventory. Can you help us understand whether you've implemented anything differently or have different lines of visibility into those customers? How you exactly plan on managing seeing any kind of inventory build, particularly at some of the cloud customers? I mean, we certainly work closely with those our relationships over time have only deepened with those customers. We have become more valuable partner to them as well as we have expanded our product offering. For example, on the SSD side, we have brought out NVMe SSDs. Those are getting qualified in data center. On the DRAM side, we have been a strong partner with highest quality with those customers. And on the cloud side, still in the very, very early innings of all the growth for memory and storage in cloud. So compared to the last cycle, our relationships with those months have only expanded, have deepened. We continue to work closely with them in terms of understanding their demand requirements. And this is what the best that we can do in terms of working closely with those customers to understand the requirements. And I would like to once again point out that we are in an environment, even before COVID-nineteen, that CapEx investments in cloud were on a strong growth trajectory. A lot of that CapEx going toward the infrastructure for memory and storage requirements. Of course, new CPU architectures with more course in them as well as more channels giving you greater attach rates for memory and storage. And of course, the workloads that are demanding, more DRAM memory for memory intensive compute applications as well as for faster access driving more SSG. So those demand trends, pre COVID were already strong. And with COVID, if anything, we are seeing that work from home, this economy is driving greater demand on that structure and is accelerating some of that demand. So we, of course, as we work through the memory shortages, we continue to work closely with our customers. And while the smartphone demand may be somewhat down, for example, in China and FQ2, but that demand is coming back in China. And we will continue to monitor these trends in the other parts. And it just requires continuing to work closely with the customers' understanding the requirements and us applying our own judgment and remaining mindful in terms of how we manage overall art supply. So it's really customer relationship, in terms of managing our supply growth and understanding the demand expectations. Thank you. Our next question comes from Harlan Sur of JP Morgan. Strong memory demand driver in the second half of this year, as you pointed out, is the new game console refresh. I think there's 35 to 1 percent more GDDR DRAM memory versus power generations platforms and the move to SSD storage versus HDD Given your leadership in graphics DRAM, we know that the Micron team will be participating here on these new consoles. But given you're a good NVMe client, SSD positioning? Is the team also participating in the console refresh with either your NAND or your SSD products? Certainly, as we expand our portfolio of SSDs, yes, previously we just had SATA. Now we have NVMe SSDs as well. And we are broadening our reach with those NVMe SSDs into the end market applications as well as the customers. Certainly, it is a growth market opportunity for us, not only in DRAM, but also in SSDs, but as you know, these take product qualifications with the customers. And then we are able to realize the benefit of sales and revenue growth in those areas. I want to highlight here that as we have expanded our product portfolio, both, on the SSD side as well as in mobile on market share packages and bringing out discrete UFS products for mobile applications as well. That really has enabled, as I mentioned in the script opportunity for us to gain share in the marketplace. We have gained share in NAND, managed NAND solutions in mobile, we have gained share in SSDs as well that's enabling us to deliver, healthy results in FQ2 And our gain in share and expanding product portfolio also positions as well, to navigate through these choppy waters related to COVID-nineteen, And we remain very focused on continuing to expand the product portfolio and, broaden our customer relationships in the kind of applications that you just talked about in gaming consoles. Both for DRAM and NAND as we look forward to the future long term secular demand centers, demand trends and addressing those requirements by our customers. Thank you. Our next question comes from Mitch Steves of RBC Capital Markets. Your line is open. Yes, thanks for taking my question. So impressive guidance there, One of the questions that did have though was just the offset of kind of commercial PCs coming back because obviously more people are working from home. Offset by kind of the smartphone unit demand. So how are you guys thinking about that for the rest of the calendar year? Obviously, there's a lot of moving parts, but just How do you guys track kind of the lower expected sales problems in the hands of time versus a commercial PC upgrades and people working from home? So yes, that's correct. I think there is near term surge in demand with respect to commercial PCs. I mean, if you look at just Micron itself, Micron itself, bought something like 5000 notebook computers to really provide it to our team members in terms of enabling them to work from home and we implemented those really, very, very fast. So yes, surge in demand related to enterprise PCs and that bodes well for both SSDs as well as for, DRAM. And as we noted, also with respect to virtual learning and, you know, students learning from home That also drives, demand in notebook. How long this trend lasts? And of course, it is global in nature. But how long does it last? We will have to see, but overall, yes, I mean, we do see that while, there may be some smart phone, the weakness outside of China, while China is recovering on the smartphone front, certainly, as I said, enterprise PCs and other PCs for virtual learning, along with greater demand in the data center world is a tailwind for us. Thank you. Our next question comes from Rajee Gill of Needham And Company. Please go ahead. Yes. Thank you. Just another question on the demand conditions. I think David had mentioned in his prepared remarks that the macro conditions had weakened in the last couple of weeks. And you talked about some of the moving pieces of that. If we try to quantify that the impact, DRAM is about 70% of your revenue NAND is 30%. What percentage of DRAM is coming from PCs hyperscalers mobile and likewise on the NAND side. So we can just kind of get a sense of where the potential strengths and weaknesses could be. So we don't break it down specifically in terms of percentage, but I think what's important is that, we are a very well diversified supplier and we have a broad portfolio and end market applications are well diversified as well, all the way from data center to PC to smartphone, networking, for DRAM and Micron is well positioned in these markets. And certainly, some of these markets are seeing some shortages today, such as, on the side of, data center, DRAM requirements And while others, we are continuing to monitor the overall demand trends, but we don't break it out, but important thing is that the underlying vectors for demand are good. And as we go through the uncertainties related to COVID-nineteen when we come out on the other side, I'm very confident that with our broad portfolio and deep customer engagement and the technology and product capabilities. I think we will overall do just fine. By and large, our mix is fairly similar to the industry in terms of, overall mix. If you look at the industry, I think you'll see that server is in the 25% to 30% range. The mobile tends to be around 25%. PC is 20%, give or take some. And of course, then is all the others, which we can call like specialty, which includes, automotive, includes industrial and other applications. In that, you can, I think, put down around 20%? So I think, roughly speaking, I think that's the kind of mix. And you can, as you can see, it's well diversified across these various end market segments? Thank you. Our next question comes from Chris Daneley of Citigroup. Please go ahead. Hey, thanks guys. I guess just to follow-up on some other folks questions. So talked about the demand forecast or things changing in the last couple of weeks. Can you just give us a sense of what you've seen in the last couple of weeks and then also for your sort of your forward forecasting, whether it's internal or what you're giving us, are you shaving down what your internal forecast is? Patient of some more weakness or is this kind of like what we see as what we have? So I think as Dave mentioned in his prepared remarks that we see a strong demand and favorable price trends, but we had also seen that in China, as is well known, that during the time frame of our fiscal second quarter, in line with, the COVID-nineteen spread in China, starting from around mid January kind of time frame, it had impacted smartphone demand in China, while it grew the demand in the cloud infrastructure in China. So as now, over the last couple of weeks, you see the spread of coronavirus across the globe and various actions being taken in various countries to contain the spread of coronavirus We do expect that there will be some impact on the consumer demand, but it is really too soon to quantify that. And again, having said that, we also see increasing demand coming from the cloud side as well as from enterprise PC application. So we are seeing acceleration of demand on that front. So we are continuing to really manage that. And This is all escalating over the last couple of weeks and we will, of course, continue to work closely with our customers to understand their increases in demand as well as their demand outlook, for example, in the consumer devices and then manage our business accordingly. The only thing I'd add is, in the prepared remarks, leading up to it. I did say that, pricing and demand trends were favorable, and that included all the way up until today, but there's a higher degree of uncertainty and that's kind of why we got to the range we did. That does end our session. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.