Earnings Call: Q4 2019

Sep 26, 2019

Good afternoon. My name is Sherry, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's 4th Quarter 2019 Financial Release Conference Call. All lines have please limit yourself to one question. Thank you. It is now my pleasure to turn the floor over to your host, Mr. Farhan Ahmad, Head of Investor Relations. May begin your conference. Thank you, and welcome to Micron's Micron Technologies 4th fiscal quarter 2019 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. In addition, our website contains the earnings press release and the prepared remarks filed a short while ago. Today's discussion of financial results will be presented on a non GAAP financial basis, unless otherwise specified. A reconciliation of GAAP to non GAAP financial measures can be found on our website, along with the convertible debt and CAP call deletion table. As a reminder, a webcast replay will be available on our website later today. 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 may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10K10Q. For a discussion of the risks that may affect our future results. Although we believe that the expectation reflected in 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. Fiscal 2019 was another solid year of execution as we continue to transform the new Micron. Despite the challenging industry environment, we achieved the 2nd best year in our history of revenue free cash flow and earnings, which underscores the strength of the new Micron. We improved structural profitability by further reducing the technology gap with competitors and by strengthening our product portfolio. We also made progress on our $10,000,000,000 share repurchase program by returning $2,700,000,000 to resulted in financial performance exceeding our guidance ranges. Market trends were broadly consistent with our expectations discussed on the last earnings call. DRM demand bounced back as the factors that impacted calendar first half demand largely dissipated. NAND elasticity is driving robust demand growth causing industry inventories to improve rapidly. While the demand recovery in DRAM and NAND is encouraging, we remain mindful after the review of progress on our key strategic objectives. Since 2016, the actions we have taken to reduce our cost structure increase our mix of high value solutions and enhance our customer engagement and go to market strategy have significantly improved our profitability relative to our peers. In fiscal 2019, our DRAM cost per bit declines led by industry and exceeded our internal plans, despite the headwinds from our announced reduction in wafer starts. In the fiscal fourth quarter, we began mass production and volume shipments of the industry's first 1Z products, giving Micron feature 5 leadership for DRAM. We are also making good progress migrating more of our production to leading edge nodes. While we entered fiscal 2019 with more than half of our bit production, on 20 nanometer or older nodes, we ended the fiscal year with approximately three quarters on 1X and beyond. With a meaningful portion on One Y. As previously announced, we are expanding cleanroom space in our Taichan Taiwan site to support future node transitions of our existing wafer capacity, and we expect output from this facility in calendar 2021. In NAND, we continued to outpace industry cost declines during fiscal 2019. 96 layer 3 d NAND is continuing to increase as a portion of This milestone further reduces the risk for our RG transition. As a reminder, our first RG node will be a 128 layers and will be used for a select set of products. We don't expect RG to deliver meaningful cost reductions until fiscal 2021, when our 2nd generation RG node is broadly deployed. Consequently, we are expecting minimal cost reductions in NAND in fiscal 2020. Our RG production deployment approach will optimize the ROI of our NAND capital investments. In addition, we announced a grand opening of our Singapore cleanroom expansion in August, which will enable the transition of our existing NAND wafer capacity to future generations of 3 d NAND technology. We are continuing to make solid progress with our 3 d Crosspoint product development remain on track to launch our initial products in calendar 2019. Now turning to highlights by Marcus. In SSDs, the industry transition from SATA to NVMe in fiscal 2019 continued at a rapid rate. While we have been late to the NVMe market, our progress positions us to gain share starting in fiscal 2020. For OEMs bundling on for OEMs building on strong growth last quarter, we more than tripled revenue shipments of our NVMe client SSD sequentially with sales penetration in multiple tier 1 PC OEMs. Our QSE based NVMe consumer SSD was the best selling SSD on Amazon Prime Day in North America. Our Consumer SSD segment achieved record revenue and unit shipments with Vets posting triple digit percentage growth year over year. Driven by our strategy to pursue channel expansion that extends our geographical Price elasticity is driving an increase in attach rates and capacities, leading to solid demand growth across client and consumer SSDs. We are also making solid progress on advancing our roadmap of NVMe SSDs for the enterprise and cloud markets. In fiscal 2019, we introduced the high performance 9300 line of NVMe products targeting high end data center applications and are looking forward to increasing adoption of this product. In mobile, our portfolio featuring the industry's lowest power and highest density products is enabling our customers to bring differentiated capabilities to the market and helping us deliver outstanding financial performance In fiscal 2019, we delivered mobile revenue that was down only 3% from 20 eighteen's record performance despite a significant drop in market pricing and the impact from the addition of Huawei to the entity list. Our mobile margins were resilient and our managed NAND bit shipments in fiscal 2019 more than tripled year on year driven by growth of MCP and Discrete NAND, EMMC and UFS products. In the fiscal 4th quarter, we started volume shipments of a new leading edge UFS based MCP that uses our 1 Z LP DRAM. This new UFS MCP will bring flagship like performance and densities to mid and high end smartphones. We are also leading the industry in power efficient, high bandwidth, LP5 DRAM, which positions as well as 5G begins to accelerate in 2020. In data center, customer inventories for DRAM have reduced significantly driving solid sequential demand growth for server solutions in both cloud and enterprise markets. New processor platforms are also creating an uptick in demand for higher density and higher performance DRAM modules. In graphics, we saw strong sequential bit growth with increases for graphics cards and gaming consoles, as normal buying resumed following inventory reductions in DRAM. In the PC market, DRAM module and SSD shipments continued the growth trend from last quarter as CPU shortages further subsided. In automotive, we continued to increase revenue year over year despite weak auto industry unit sales and a challenging DRAM industry environment. Our growth was supported by secular content increases, our superior quality and well established customer relationships, LP4 shipments in the fiscal fourth quarter were over 5 times higher year over year as lower power DRAM becomes increasingly important for new infotainment and ADAS systems. We continue to have leading industry share in automotive. Before talking about the market outlook, I want to provide an update on our business with Huawei and the ongoing impact of trade uncertainties. As we noted last quarter, we started shipping some products to Huawei that are not subject to export administration regulations, and entity list restrictions. In the fiscal 4th quarter, sales to Huawei declined sequentially, and were down meaningfully from the levels we anticipated prior to the addition of Huawei to the entity list. We have applied for licenses with the Department of Commerce that would allow us to ship additional products, but there have been no decisions on licenses to date. We see ongoing uncertainty surrounding U. S.-China trade negotiations. If the entity list restrictions against Huawei continue, and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters. Now turning to our market outlook which assumes that the macroeconomic environment doesn't materially deteriorate from current levels. I'll begin with our industry outlook and then turn to Micron's outlook for DRAM and NAND. The DRAM and NAND industry demand growth in the second half of calendar twenty nineteen compared to the first half is primarily being driven by a normalization of inventories at most customers and secular growth trends in various end markets. In recent months, we have seen increased demand from customers headquartered in Mainland China, Some of whom could be making strategic decisions to build higher levels of inventory in the face of increased trade tensions between the U. S. And China as well as Japan and Korea. Our view of calendar 2019 DRAM Industry bit demand growth remains unchanged at mid teens. With supply exceeding demand due to previously discussed factors that impacted first half calendar twenty nineteen demand. Based on our early view of calendar 2020, we expect the industry to see bit demand growth of high teens to 20% above supply growth of only mid teens, which should help normalize supplier inventories and enable a healthy industry environment. We expect the long term DRAM bit demand growth CAGR to be mid to high teens. Turning to NAND industry outlook, demand elasticity and industry supply reductions are resulting in improving market conditions and declining industry inventory. On the supply side, CapEx and wafer start cuts across the industry are leading to supply reductions. Our power outage at a competitor's fab also reduced industry supply and inventory. We now expect calendar 2019 industry bit demand growth the low to mid 40% range, which will exceed industry bit supply growth of approximately 30%. Based on our view of calendar 2020, we estimate industry bit demand growth of high 20s to low 30% range, with supply growing somewhat below demand. We believe that NAND industry margins, which are at the lowest levels in the last 10 years, should start increasing for the rest of the Specific to Micron's DRAM outlook, we are seeing solid demand from customers across multiple segments. This is improving our inventory and we have started to see pockets of tight supply, particularly in leading edge nodes. However, we still have elevated inventory levels on older nodes. As a result, we are continuing with the previously disclosed DRAM wafer start reductions of 5%. We expect Micron's calendar 2019 bit supply growth to be slightly below industry demand growth of mid teens and expect our calendar 2020 DRAM bit supply growth to be close to the market demand growth. We also As we have said before, the increasing complexity of more advanced DRAM nodes is resulting in slower pace of cost declines for the industry. As our DRAM inventory improves, we are committed to maintaining price discipline. While we are having to respond to some aggressive market pricing, we have started walking away from some transactions as we look to optimize our profitability. Turning to Micron NAND outlook, we expect our calendar 2019 bit growth to be slightly above industry supply growth and in calendar 2020, we expect Micron's bit supply growth to be significantly below the industry demand growth as we transition a limited portion of our wafer starts to our 1st generation replacement gate node and use inventory to support customer demand. Supply growth will also be impacted by our previously announced wafer start reductions of approximately 10%. We are seeing some capacity tightness in our backend manufacturing operations due to significant increases in demand for high capacity NAND products. This is another data point of elasticity kicking in on high value NAND solutions. While NAND and DRAM market conditions are showing some promising signs, In order to bring to be reduced by more than 30% from fiscal 2019. Our CapEx decision is also influenced by macroeconomic uncertainty and low industry profitability. Our front end CapEx outlook reflects our strategy for limited ramp of our first RG node. While we are reducing front end equipment CapEx, we are spending significantly more on shelf space to enable future node transitions, and also investing in a new SSD packaging facility in Penang, Malaysia. As always, we will maintain flexibility and discipline while investing appropriately for Micron's long term success. I want to emphasize that CAGR in line with industry demand. As we catch up on the technology and cost gaps to best in class competitors in DRAM, and transition to RG Technology in NAND, our supply growth may fluctuate, but we expect the medium to long term growth rate of our supply to approximately equal the focused on maximizing the ROI of our CapEx investments. And for this reason, we are not emphasizing wafer capacity growth but instead focusing on bit growth driven by technology transitions. In addition, some of our CapEx is dedicated to increasing our internal capacity for assembly and has good ROI. I'll now turn it over to Dave to provide our financial results and guidance. Thanks, Sanjay. As Sanjay mentioned, Micron delivered resilient performance throughout a challenging year for the industry, highlighted by fiscal Q4 results that exceeded our guided ranges for revenue and earnings. We curtailed our planned operating expenses and capital expenditures, allowing us to preserve margins and generate healthy free cash flow. We achieved our 1st corporate investment grade rating, strengthened our balance sheet and meaningfully reduced our share count. All in all, fiscal 2019 was a year of stellar progress that sets Micron up for attractive growth as industry conditions recover. Turning to our recent financial results. Revenue was up 2% sequentially and down 42% year over year. Revenue exceeded our guidance range largely due to better than expected demand. Down 23% year over year. Fiscal Q4 DRAM revenue was $3,100,000,000, representing 63% of total revenue, DRAM revenue increased 1% sequentially and declined 48% year on year. Bitch shipments grew approximately 30% sequentially and in the mid teens percent range year on year, as customer inventories improved significantly. ASP declined approximately 20% sequentially. For full fiscal 2019, DRAM revenue was $15,200,000,000, down 28% from fiscal 2018, as bids grew in the low single digit percent range and ASP declined approximately 30%. Fiscal Q4 NAND revenue was approximately $1,500,000,000 or 31 percent of total revenue. Revenue was up 5% sequentially but declined 32% year on year. Mid shipments grew in the low to mid teens percent range sequentially. ASP declined in the upper single digit percent range. We're starting to see supply tightness Full fiscal 2019 NAND revenue was $6,900,000,000, down 12% from fiscal 2018, as ASP declines of mid-forty percent range more than offset strong bit shipment growth. Now turning to our revenue trends by business unit, Revenue for the Compute And Networking business unit was $1,900,000,000 in fiscal Q4, a decline of 8% sequentially and down 56% year over year. ASP declines across most segments continue to be the leading cause of lower revenue. For the fiscal year, revenue Revenue for the mobile business unit in fiscal Q4 was $1,400,000,000, up 20% sequentially and down 26% year over year. Both DRAM and NAND bits had strong growth driven by seasonality and continued content growth in smartphones. Our mobile business gained share in the year driven by a stronger product portfolio. For the full fiscal year, MBU revenue was $6,400,000,000, down only 3% from fiscal 2018. Revenue for the storage business unit in fiscal Q4 was $848,000,000, an increase of down 32% year over year. For the fiscal year, SBU revenue was $3,800,000,000, down 24% from fiscal 2018. And finally, revenue for the embedded business unit was $705,000,000 in fiscal Q4, up 1% from fiscal Q3 and down 24% from the prior year. For the fiscal year Ebu revenue was $3,100,000,000, down 10% from fiscal 2018. The consolidated gross margin for fiscal Q4 was 30.6%, above our guidance range due to our strong execution improving demand and slightly better pricing. Q4 gross margins included approximately 200 basis point negative impact were approximately $100,000,000 due to the underutilization charges at IMFT. Starting in fiscal Q1 and continuing for the foreseeable future, we expect to incur per quarter, with about half the impact consisting of non cash items. Over time, As our 3 d Crosspoint business ramps, this underutilization impact will be mitigated. But as you can expect, it takes time and will provide updates on material progress over time. With respect to U. S. Tariffs on imports from China, with continued mitigation, we were able to contain their impact on our consolidated gross margin in fiscal Q4 to less than 20 basis points. Operating expenses were $797,000,000 and included some one time expenses. We continue to control our expenses fiscal Q4 operating income was $694,000,000, representing 14% of revenue. Operating margin was down 38 percentage points year over year and down 9 percentage points from fiscal Q3. Our full fiscal 2019 operating income was $7,800,000,000 or 33 percent of our fiscal year revenue. Our fiscal Q4 effective tax rate our effective tax rate was approximately Going forward, we expect our tax were $0.56, down from $1.05 in fiscal Q3 and $3.53 in the year ago quarter. For full fiscal 2019, our non GAAP earnings per share was $6.35, down from $11.95 in fiscal 2018. Turning to cash flows and capital spending. Fiscal Q4, representing 46 percent of revenue. For full fiscal 2019, Cash from operations was $13,200,000,000, representing 56 percent of revenue, down from $17,400,000,000 or 57 percent of revenue in fiscal 2018. Cash flow margins remained almost flat due to effective working capital management. During the quarter, net capital spending was approximately $2,000,000,000, down from $2,200,000,000 in the prior quarter. For full fiscal 2019, up from $8,200,000,000 in fiscal 2018, but down meaningfully from the $10,000,000,000 to $11,000,000,000 plan we originally had entering fiscal 2019. We expect our fiscal 2020 net CapEx to be in that CapEx for buildings and backend manufacturing will increase significantly from last year, while the front end equipment CapEx will decline more than 30% year on year. Looking at cash generation we generated adjusted free cash flow of approximately $260,000,000 in fiscal Q4 compared to $500,000,000 in fiscal Q3 and $3,100,000,000 in the year ago quarter. Adjusted free cash flow for fiscal 2019 was $4,100,000,000, down from $9,200,000,000 in fiscal 2018. We received notice for approximately $180,000,000 of convertible note redemptions in the quarter. Which will remove approximately 4 million shares from our ongoing share count in fiscal Q1. For full fiscal 2019, we returned approximately $2,700,000,000 to shareholders in the form of buybacks, representing 65 percent of free cash flow. At an average purchase price of $40. Including these share repurchases and our convertible note reductions, We reduced our average diluted share count by 80,000,000 shares in fiscal 2019, representing 7% of shares outstanding. We remain committed to returning at least 50 percent of our annual free cash flow to shareholders in Days of inventory was 131, down from 143 days in fiscal Q3. Inventory ended the quarter at $5,100,000,000, increasing from $4,900,000,000 at the end of fiscal Q3 We will continue to focus As mentioned before, we are seeing pockets of tight supply in certain parts of our business. Our long term normalized inventory target has increased over time to above 100 days as a result of greater process complexity and the broadening of our product portfolio to high value solutions such as SSDs that require longer assembly and test cycle time. Total cash ended the quarter $75,000,000,000 investment grade debt issuance. Our total debt increased to $5,900,000,000. Total liquidity ended fiscal Q4 at $13,000,000,000. We are holding approximately $1,400,000,000 of liquidity for the acquisition of the IMFT joint venture expected in fiscal Q120. This acquisition eliminate approximately $700,000,000 of member debt financing and will be funded by drawing down $1,250,000,000 from our term loan facility secured in fiscal Q4. Before moving on to guidance, I want to share some expected changes to our upcoming reporting. We continue to evaluate planned technology node transitions, capital spending and reuse rates for NAND equipment. Based on our preliminary assessment, we anticipate changing the depreciable life of our NAND equipment from 5 to 7 years beginning in fiscal Q1 2020. This change will reduce our depreciation expense included in cost of goods sold for Q1 by approximately $80,000,000 and increasing to approximately $100,000,000 to $150,000,000 per quarter for the remainder of fiscal 2020. As a reminder, deployable life for DRAM equipment is already 7 years. Also starting in Q1, we expect to change how we report MCP revenue, which we currently include within NAND revenue. We will begin disaggregating MCP revenue into DRAM and NAND, which will reduce our reported NAND revenue and margins in FQ1, while increasing our DRAM revenue. Now turning to our financial outlook. As our portfolio strengthens and we improve our share and high value segments, We're seeing growing demand for both DRAM and NAND, and this is creating pockets of supply shortages, particularly in some leading edge nodes and back end manufacturing. However, the market remains competitive and industry inventories continue to adjust to economic and geopolitical uncertainties. Notwithstanding these challenges, we expect bit shipments for both DRAM and NAND to grow in fiscal Q1, while NAND with NAND increasing more than DRAM. With that in mind, our non GAAP guidance for fiscal Q1 is as follows: We expect revenue to be in the range plus or minus 150 basis points and operating expenses to be approximately $780,000,000, plus or minus $25,000,000. Based on a share count of approximately $1,130,000,000 fully diluted shares, we expect EPS to be $0.46 plus or minus $0.07. Despite a variety of industry and trade related challenges in fiscal 2019, Micron delivered strong financial results. At our 2018 Analyst Day, we laid out how we believed Micron was structurally improved and able to weather execution and we have moved throughout as we while we are not out of the woods, we are proud of our execution as we have moved through the current cycle. We are exiting the fiscal year with a stronger product portfolio, deeper customer relationships and our highest liquidity and net cash position to date. And we have also made good progress on our share buyback program. We are well positioned to emerge from the current cycle ready to capitalize on the secular growth trends driving our men's for the new Micron as we continue to focus on structural improvements across a range of functions in the company to take our performance to new heights. While we have made dramatic progress over the last couple of years, there is significant opportunity ahead of us to further improve our operations drive product cost reductions, further improve engineering execution, build on our go to market strategy and initiatives, deepen customer engagements and enhance the core competitiveness of the company to best in class levels. As we look ahead, the long term opportunities are exciting and we are extremely enthusiastic about the momentum we have established at the new Micron. On October 24th, we'll be hosting our second annual Micron Insight event, which will bring together leaders from across the industry to discuss how a world activated by data can transform the way we use information to enrich life and how memory and storage are vital to these efforts. We will be webcasting Micron Insight live from San Francisco, and I encourage you all to tune in. You. Our first question comes from Mark Delaney with Goldman Sachs. Yes, good afternoon and thanks for taking the questions. So, I'm going to talk a little bit about your customers' inventory levels and what were the big concerns or the financial community at the moment is whether the pickup in memory volumes that I think Micron has seen. Is that mostly being driven by fundamentals or is this just potential inventory stocking because of some of the trade concerns. And Sanjay, I think you maybe talked about a bit of both factors in your prepared comments and some potential inventory stock, but also inventory coming down at some important markets like data center. So maybe you can just kind of level set and put those things together and do you think to pick up in your business? Is it primarily driven by fundamentals or how much of this is maybe some of that inventory stocking because of trade concerns? Thank you. I think certainly the pickup in business is being driven by the industry fundamentals. I would just like to remind you that in the first half of calendar twenty nineteen, because of the inventory that the customers has built, had built up, the demand to the producers was low, yet the end market demand for all applications continue to be robust. And now as the customers have worked down their inventory to normal levels, the demand is coming back to the producers. And as a result, you saw in our calendar Q4 I mean, fiscal Q4 results, a strong growth in DRAM bit as well as NAND. And in the second half, is the demand is back, the customer demand is back. And yes, there may be some level of inventory build in China due to the reasons that I mentioned by certain customers, but I'll tell you that we do not think that that inventory build has anywhere close to the kind of inventory build that had gone on in the second half of last year. So nowhere materially close to that level. So overall, the industry environment in terms of demand return is certainly solid. Certainly in DRAM, there is still some supply, excess supply with the producers, but the inventory is improving fast. We talked about our inventory actually improving faster than what we perhaps anticipated some time ago And our overall, we even see some shortages in some leading edge products, particularly on the DRAM side. So overall, we think that industry inventory at the producers is being consumed at the rapid clip The demand trends are back to normal levels. And especially when you look at the trends of, through next year, 5G, you look at smartphone average capacity is continuing to increase both for NAND and DRAM and cloud demand drivers continuing to be solid, new platforms, new CPU architectures being used that allow greater use and higher use of DRAM capacities as well as AI applications driving more DRAM and NAND. So, the demand trends, when I look at 2020, I believe that the industry demand supply environment will be in a lot earlier place. Yes, maybe calendar Q1 may have some cyclicality, but the industry fundamentals overall from demand supply point of view, I think in 2020, will be in a much healthier place. Another way to look at this and kind of back it up mathematically is if you look at the year over year bit growth, in the fourth quarter, it's only in the kind of 14% kind of range. So that kind of backs up the idea that this is really about industry fundamentals more so than it is about Suisse. Yes, good afternoon guys. Congratulations on the solid results given the macro uncertainty. I guess I have several questions just around the guided gross margins for the fiscal first quarter. If you look at the incremental hit your ticketing from IMFT, that's more than offset by kind of the change in depreciation. And yet, you're still kind of getting sort of a 400 basis point drop sequentially in gross margin on kind of flattish to revenue. And I know you guys don't comment about future pricing, but can you talk about other puts and takes around mix that might be negatively impacting kind of the gross margin. And I guess given that the incremental cost of IMFT is probably driven by you taking receipt of the whole joint venture in the month of November, why wouldn't that hit get higher as you go into the fiscal second quarter and have it for the full quarter. Okay. So, yes, let me kind of walk through a little bit of the puts and takes. Obviously, pricing is a factor in the expectations around gross margins for the 1st fiscal quarter. And of course, we don't talk necessarily about forward pricing, but The second piece is cost. And as Sanjay mentioned, our cost declines for fiscal 2020 in total will be kind of high single digits. That's lower than the cost declines we got in fiscal 2019 versus fiscal 2018. And so we are seeing a slower rate of cost declines for DRAM and that's, of course, something we've indicated was coming given the complexities that we face in as we migrate nodes And as we talked about, obviously, on an NAND side, we're going to have very minimal cost declines as we kind of transitioned to replacement gate. So, those are certainly factors in that And I would tell you that the first quarter cost declines are very minimal. The 3rd piece is mix, if you look at the mix, from just a move to high value solutions that, of course, is positive, but what is overshadowing that is the mix of NAND and DRAM. And of course, NAND has a lower gross margin than DRAM. And we are we will see likely a higher mix of NAND next quarter, which will affect gross margins negatively. And then as you pointed out, there's 2 kind of unusual items, I guess, in the quarter. One is the change in the useful life of NAND equipment, that will be positive, but more than half of that will be offset by underutilization expense is associated with, with IMFT. So those are kind of all the puts and takes of gross margins. I think it's likely that it will be a little higher from Q1 to Q2 in terms of underutilization expenses. But it was somewhat in the noise. We might be a little bit lower than $150,000,000 $150,000,000 of unutilization expense in fiscal Q1, and we might be a little higher than that in fiscal Q2. Hey, guys. Thanks for taking my question. I just wanted to kind of poke again around the gross margin questions at that, but one of the bigger questions I have is just your commentary about pricing getting better, but then you're talking about gross margins going down on a higher revenue base. So if you offset that with depreciation as well, And is that implied that November quarters should be the bottom for gross margins? Or are you guys implying that February could also be down sequentially? Well, I think, clearly, we're talking about NAND getting better. And we are seeing the early signs in DRAM of kind of the fundamentals getting better. Demand is coming back. Inventories on our balance sheet and on the industry's balance sheets are coming down. Of course, that hasn't gotten completely to where it needs to be. And also Sanjay mentioned in his prepared remarks, the market continues to be a bit competitive. And so we'll have to see when that all those things come together and supply kind of aligns with demand to drive a more healthier market for healthier market for DRAM. Thank you. Our next question comes from Harlan Sur with JPN. Good afternoon. Thank you for taking my question. On your fiscal 2020 DRAM outlook, for high single digits cost reductions versus fiscal 2019. Is that how we should think about your longer term annualized cost down profile given the higher complexity, capital intensity that you outlined or are there some impacts from the pullback and utilizations drawdown of your own inventories and and or maybe a slower 1Z transition that's impacting the cost down profile as well? We definitely have some underutilization expenses in DRAM. Certainly, we have that built into our expectations for the 1st fiscal quarter. It may last into the 2nd fiscal quarter. And so that certainly is an impact. But I would tell you that over time, as complexity of these nodes, goes up and as capital intensity goes up, the cost declines are going to become more challenging. So the high single digit will probably not be something we can routinely do year to year. And I'll just add that we are certainly narrowing the cost gap in terms of DRAM, production cost overall. 1Z node is a good example of Micron's leadership being the first one to introduce the 1Z node with the smallest feature size in the industry. And the result of cost improvements that we are making on DRAM as well as of course, the high value solutions that are driving higher mix on the NAND side is a major improvement, 2500 plus basis point improvement in our EBITDA margins versus the competition, compared to the past 2016 timeframe. Thank you. Our next question comes from Mark Newman with Bernstein. Hi, thanks for taking my question. You talked about inventory down quite a bit, Q on Q, you gave some numbers on that. Do you have any bit more breakdown on how that compares DRAM versus NAND? And then looking forward to the to, next year in technology. You've got this quite difficult transition to replacement gates. And can you give an update on the timing for that where you are on the 96 players? For your current generation in terms of percentage of the, output and where, you know, what little more details on the timing to the brand replacement deadline so much. But let me just address your question on the 96 layers. As we had said before, 96 layer execution has gone very well with the company in terms of yield ramp 96 layer technology has given us the fastest yield ramp of other any other NAND technologies in the past. So we are very proud of that accomplishment and 96 layer is continuing to ramp during the course of our fiscal year 2020. In fact, 96 layer will be the major driver of our NAND bit growth, in fiscal year 2020. As I mentioned in my prepared remarks with respect to replacement gate, we have seen now functionality and yielding dies We are certainly quite encouraged by that and continue to work on technology and product development. In fiscal year 2020, The 64 layer 96 layer will continue to be the workhorse technologies end, our replacement gate technology, of course, will have a small mix in fiscal year 2020 for us as well. Keep in mind, our first replacement gate node, which will have, small production in fiscal year 2020 will be a rather limited node because we'll be deploying it across select set of products. It's our 2nd generation node, which will, of course, come in the subsequent, fiscal year that will give us, position us well for, and resume the year over year strong cost reductions for us. But basically, the 96 layer will continue to ramp during fiscal year 'twenty. Photos? Okay. So on the inventory question, if you so we had 143 days of inventory in the 3rd quarter. That came down to 131 days in the 4th fiscal quarter. You kind of break that out between DRAM and NAND, DRAM was meaningfully below that and NAND was meaningfully above that. I would say in terms of days, obviously in absolute dollars DRAM has more inventory than NAND. I would say that was you got to remember there are two reasons why inventory was building for NAND. It was building as we kind of slowed down our supply, but customers were working down their inventory. Now we've the adjustments we've made to our supply both in terms of capital spending reductions and in terms of utilization adjustments we have brought our inventory down pretty meaningfully this quarter. We expect to bring it down again meaningfully next quarter. On the On the NAND side, we have elevated levels of inventory, but that's more strategic. What we're trying to do is have some build up inventory in fiscal 2019 that we can use in fiscal 2020 to support the RG transition because the replacement gate transition will not drive a lot of growth. And so in order to support the increased demand next year, we will have to utilize this inventory for that purpose. Thank you. Our next question comes from C. J. Muse with Evercore. I guess wanted to hit on your commentary around DRAM and under growing industry in calendar 'nineteen. Within that, is that largely driven by Huawei, perhaps more aggressive competitors in certain markets change in mix. I'd love to hear your thoughts on that. And then as we move into calendar 'twenty, what are your expectations vis a vis the market for your market share? Thank you. So in terms of overall beds, with respect to DRAM growth in terms of revenue. I mean, it has primarily been impacted by the customer inventories that were built up last year for the first half. And our overall DRAM shipments are in line with overall the industry in this regard. And I think what we said is that, the industry demand mid teens and our overall supply growth during the calendar 'nineteen to be slightly below the industry. Of course, as a result of some of the underutilization actions that we have taken, And of course, there is an impact of Huawei in terms of our overall business we have said before that compared to the levels that we anticipated before Huawei's placement on the entity listing our revenue is lower. And of course, we are very much focused on continuing to diversify our revenue base But yes, I mean, the Huawei entity listing does have an effect on some of our shipments to the customer. I mean, some of our overall shipments in the market. Our next question comes from Rajee Gill with Needham And Co. Yes, thanks for taking my questions. You had mentioned that you did see some elevated inventory levels in the lower process nodes. I was wondering if you could kind of elaborate on that particular comment. This is really related to some of our overall production and mix and some of the older nodes have, lower demand compared to our total supply available. And therefore, that where we are primarily running under utilization on the DRAM side. So it really is about the overall demand and this is good inventory that will overall will get consumed over time. Thank you. Our next question comes from Aaron Rakers with Wells Fargo. Yeah. Thanks for taking the questions. I was wondering if you could help me parse out the CapEx guidance a little bit more in detail. I know last quarter relative to the $9,100,000,000 you did for the full year, you talked about roughly $2,000,000,000 for kind of clean room and facility kind of CapEx. Was that the case? And I think on the basis of that, what is that kind of CapEx spend specifically, embedded into your fiscal 2020 guidance? Yes, it was a little bit lower than the $2,000,000,000 number, certainly a meaningful part of our spend. And you could probably parse out from what Sanjay said. We expect that number to increase in fiscal 2020. And the opposite is we expect the front end equipment spend to decrease in fiscal 2020 versus fiscal 2019. We also are we'll obviously make another investment in the back end and we're expecting that to be roughly similar to what we're spending in or we spent fiscal 2019. Thank you. Our next question comes from Vijay Rakesh with Mizuho. Yeah, hi guys. Just wondering on the same CapEx line, I know you guys about CapEx being down. Equipment CapEx being down 30%. So, looks like what close to $5,000,000,000 for fiscal 2020, just wondering what the split would be on NAND DRAM? Thanks. We don't tend to break that out. But I guess I would just tell you that our plan is to reduce front end equipment spend in both Deepgram and NAND. Next year. And our next question comes from Mehdi Hosseini with SIG. Yes, sir. Thank you for taking my question. 2 follow ups. We talked about the demand trends that are positive, but I want to get a better assessment of how do you see data centers? There has been some conversation industry that data center demand is seasonal. Some argue that it is better than seasonal. And Sanjay, I want to get your view. How do you see the data center demand for both SSDs and server DRAM is tracking. And in that context, I'm surprised with your NAND bit demand projection for next year. This is well below, historical trend of near 40%. What do you attribute this NAND demand trend into 2020, which in my opinion is well below trend line? So with respect to the NAND demand trend in calendar year 2020, I mean, just keep in mind, that in calendar 2018, the industry grew by approximately 45 in calendar year 'nineteen, again, by about 45% or so, low 40s to 45% And that then definitely, I mean, when you look at a multi year CAGR, I think it does lead to calendar year 'twenty to be approximately in low 30s or in that range. 20s to low 30s kind of range in terms of calendar year 2020. And I think what you have to realize is that with such existed pricing decline that had occurred in NAND over 2018 2019 time frame, elasticity definitely has kicked in substantially. And as we said, pricing environment actually has started improving in NAND. And some of the average capacity growth that you perhaps would have seen next year actually has been pulled in faster into this year as a result of some of these aggressive price declines that have occurred and have driven the usage of higher capacities in terms of increasing average capacities of SSDs, increasing the attach rate of SSDs as well as continuing to drive higher average capacities in the smartphone market as well. So these are some of the factors that are absolutely paying an important role in terms of our assessment that for calendar year 2020, the year over year bit growth will be high 20s to low 30s range. Again, keep in mind that we still are a few months away from next calendar year, and we, of course, will continue to assess the overall industry demand trend, but this is our latest projection on that. Your first question was around cloud. And let me just point out that cloud depth basically demand grew nicely for us on the DRAM side in FQ4, strong demand increases. And yes, the cloud demand from time to time can be somewhat lumpy. However, overall demand growth trends on the cloud side continue to be solid. In fact, DC cloud, demand consumption, both for DRAM as well as for SSDs, continue to be higher than the average of the respective DRAM and the NAND industries. So overall, cloud, again, new architectures, new CPU platforms that are really enabling more channels as well as usage of higher density of DRAMs as well as gain, as I spoke earlier, the trend of AI applications, all of this is driving greater usage of memory and storage in cloud. So cloud, we see as, absolutely strong cloud customers inventories have normalized and it's back to normal levels. Other than any aspects, perhaps in China, as I talked about, of maybe some element of strategic inventory build by certain customers. But overall, the cloud demand trends are solid. Our next question will come from Ambrish Srivastava with BMO. Hi, thank you. I just wanted to get back to NAND for fiscal 2020 and I just wanted to reconcile the comments you have made wanted to make sure I'm walking away with the right takeaway, is that you have limited cost down, and then you also talked about very low gross margin and then you're also selling from already built inventory. So what's the what's the trade off between all these factors as I compare your profitability in NAND versus competition in fiscal 2020? So, I think in fiscal 2020, the main focus for us on NAND will be to continue to increase the mix of high value solutions. I think in mobile, you have seen us increase management solutions in terms of share gains substantially on and I reported in my prepared remarks on the tremendous progress that we have made with, our mobile business and most of it driven by the progress on the managed NAND side. And we plan to continue to increase that part of the business in fiscal year 2020. I also spoke about SSDs. SSD was certainly a headwind in terms of share opportunities for us in fiscal year 'nineteen And as we now have expanded our portfolio of NVMe solutions, actually have introduced our first NVMe solutions during fiscal year 'nineteen now, we can leverage those solutions to expand our opportunities in fiscal year 2020, and we certainly look forward to gaining share in assuming gaining share in, SSD on fiscal year 2020. So I think that those are important pieces of our strategy of continuing to drive healthier revenue mix of NAND in fiscal year 2020. And of course, we are extremely focused on cost reductions on assembly test and non memory balm in well, which are important factors, particularly when it comes to products like SSDs or multi chip packages, etcetera. And we are making good progress on cost reductions on non memory part of the bomb as well. So, these are all opportunities for us. In fiscal year 'twenty. But no question that at the die level, our cost reduction capabilities will be overall limited in terms of the cost reductions. Due to the RT transitions that we talked about earlier. Thank you. And our final question will come from Joe Moore with Morgan Stanley. Mr. Moore your line is open. Hi. Can you hear me? Yes. Sorry. Yes, I wonder if you could talk about what's your forecasted demand will accelerate next year on the DRAM side. Can you kind of break that down between units and content and just generally what's your expectation for DRAM content for smartphones and servers next year? I think on the smartphone side, the average DRAM content, if you look at it this year, it increased by nearly 25%. Slightly above, 3 was the average 3 gigabytes of the average capacity last year, expect to be in calendar year 2019 around 4 and pretty similar double digit gains continuing 5G. If you look at Mobile World Congress, phones that were introduced there were 8 gigabyte and 12 gigabyte, DRAM density in those phones. So as 5G phones start selling in the marketplace, some of those phones are already introduced in the market today in some parts of the world and This will continue to build momentum during calendar year 2020 years beyond. And those bonds will also require more DRAM And again, the phones are becoming more and more feature rich, more AI applications are being built into the smartphones today, enrich video and imaging capability and lot more intelligence behind all those applications, they require more DRAM as well. So, looking at next year, we would certainly be seeing continuing average capacity increases next year as well. In fact, in calendar year 2020, if you look at industry projections, average capacity is expected to increase another 20% next year going to something closer to a 5 gigabyte per smartphone. Thank you. As I said before, the DRAM is not only about smartphone. It's other applications related to servers as well, where the average content continues to increase as well as average content continues to increase in PCs as well with applications such as gaming, driving higher need for more DRAM. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect.