Earnings Call: Q1 2019

Dec 18, 2018

Good afternoon. My name is Brian, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron's first quarter 2019 Financial Release Conference Call. Thank you. It is now my pleasure to turn the floor over to your host for Han Ahmed, Head of Investor Relations. You may begin your conference. Thank you, and welcome to Micron Technologies First 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 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 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 the convertible debt and capped call dilution table. As a reminder, the prepared remarks on this call and webcast replay will be available on our including information on various financial conferences that we will be attending. You can also 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 10K and Form 10Q 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, Ricar cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward looking statements after today's date to conform these statements to actual results. I'll now turn the call over to Sanjay. Thank you, Farhan. Good afternoon, everyone. In the first quarter, we demonstrated solid execution, further improved our balance sheet and began executing on our $10,000,000,000 share buyback program. We delivered strong profitability despite revenue headwinds from the inventory adjustments at several customers and industry wide CPU shortages. Our results also reflect our success in further diversifying our business as evidenced by record sales in our mobile, automotive, and industrial businesses in the quarter. As we enter calendar 2019, we are seeing weakening demand from our customers. A result, we are taking decisive actions, including a meaningful reduction in our fiscal 2019 CapEx plan, in both DRAM and NAND that will materially reduce our supply bit growth. I'll provide more details on these items later in the call after first reviewing the highlights of the quarter. I'll start with our execution progress. We are focused on improving our cost structure and increasing the mix of high value solutions in our portfolio. Both of which provide immediate benefits and strengthen Micron's ability to drive long term profitable growth. Our cost reductions in DRAM and NAND have meaningfully outpaced the industry over the last 3 years. Our progress on advanced technology gives us confidence that we will deliver healthy year over year cost declines in DRAM and NAND in fiscal 2019, even after taking into account the supply and CapEx changes, which I referenced earlier. In the first quarter, we achieved crossover of 1x nanometer DRAM shipments and started revenue shipments of 1y nanometer products. Our 1y yield ramp is ahead of schedule and we remain on track for meaningful production by the fiscal third quarter. We are also making excellent progress on our 1Z technology, which leverages our leadership in advanced materials and cost effective lithography techniques. In NAND, we continue to lead with our QLC product offerings and have introduced both consumer QLC NVMe SSDs and enterprise QLC SATA SSDs. In the first quarter, we started shipping 96 layer NAND products. Yields on 96 layer are ahead of plan. We remain focused on increasing the mix of high value solutions in our portfolio and investing in differentiated products for our customers. In DRAM, we introduced our 1y nanometer 12 gigabit low power DRAM, which offers the highest density available for the mobile market. In NAND, High Value solutions now represent over 50% of our NAND bits, which is an important milestone for us. The improving mix of high value solutions increases our gross profit opportunity and provides better margin stability. The strength of our high value solutions this quarter, which was driven by managed NAND products helped us maintain overall gross margins above 45% despite industry oversupply. We strengthened our number one share position in SATA Enterprise SSDs gaining about 3 percentage points of market share sequentially according to industry reports. In addition to the QLC Consumer NVMe SSD mentioned earlier, We also introduced the industry's first 1 terabyte TLC NVMe Automotive SSD in the first quarter. We are working to further expand our NVMe product portfolio and plan to introduce SSDs targeting client, enterprise and cloud markets through the course of calendar 2019. Looking ahead, we expect the SSD market opportunity will continue to shift from SATA to NVMe. Fiscal 2019 will be a year of transition for our SSD portfolio and we expect our SSD share gains to resume fiscal 2020. In the meantime, the growth of our high value NAND solutions in fiscal 2019 will be driven by our mobile managed NAND products where we believe we have significant opportunity to increase share. In the first quarter, we shipped multiple high capacity, high performance UFS solutions nearly tripling our bit shipments quarter over quarter. We continue to make good progress in developing high value solutions using our 3 d Crosspoint technology and plan to introduce differentiated products towards the end of calendar 2019, as previously discussed. Our conviction in the opportunities ahead is reflected in our October announcement we intend to exercise our option to acquire Intel's interest in the IMFT facility in Lehi, Utah early in calendar 2019. I will start first with mobile where we set records for revenue, gross margins and operating margins in the 1st fiscal quarter. In addition to strong seasonal sales, we benefited from major product wins with several customers which is driving our managed NAND share gains. We are seeing strong demand elasticity in this market and within our MCP portfolio, our average NAND density was up over 25% sequentially and over 150% year on year. Content growth also continues to do well in mobile DRAM with more than 20 We expect content growth to continue in mobile devices driven by broader use of artificial intelligence and the increasing number of cameras while the industry ready for 5G implementation. In data center markets, we saw reduced revenue coming off a record setting fiscal fourth quarter due primarily to inventory adjustments at our customers. We expect this headwind will persist for a couple of quarters. We are seeing some cloud customers go through our digestion period following very strong growth over the last 2 years. And long term end customer demand trends remain strong in this market. Our engagement with our customers continues to be deep and now includes collaboration on our 3 d Crosspoint product roadmap. Higher density DRAM products are seeing stronger demand across the data center market. Revenue from our high density 64 gigabyte DRAM modules grew more than 50% quarter over quarter. We are focused on the upcoming industry transition from 8 to 16 gigabit DRAM and expect to start sampling our new 16 gigabit DRAM by our fiscal third quarter. In graphics, we started volume ramp of our high performance GDDR6 memory and are working closely with our key customers in this segment. Higher than normal inventories in gaming cards and a falloff in crypto related demand created revenue headwinds which we expect to continue for AI enablement in segments like datacenter And Automotive. Our product leadership in GDDR6 is already creating new opportunities in these segments. Turning to markets requiring our long lifecycle products, In the fiscal first quarter, we had record revenue in auto and industrial markets with a sequential expansion in gross margins. Strength in automotive continues to be driven by increasing demand for in vehicle infotainment and advanced driver assistance systems. As a result, we see strong demand In November, we announced a collaboration with BMW to define and validate next generation automotive solutions. This is another proof point of Micron's leadership in automotive and the growing criticality of memory and storage to Leading Edge Automotive Applications. Turning to our DRAM Industry outlook. As I have mentioned previously, DRAM demand weakened through the course of our fiscal first quarter. Since the start of this fiscal second quarter, The weakening demand trend has continued and our near term visibility is limited. Due to a lengthy period of rising DRAM prices, we believe some of our customers had decided to carry higher than normal inventory levels. As DRAM supply caught up with demand, these customers are bringing down their inventory levels. Smartphone unit demand is also continuing to weaken, particularly at the high end in what is seasonally slow quarter for mobile. Lastly, we are continuing to see cloud, enterprise and client compute is healthy, this inventory adjustment period will contribute to weaker demand conditions in DRAM that will likely persist through the expect DRAM bit demand growth for the industry in calendar 2019 at approximately 16% compared with our prior expectation Kurt's publicly announced across the industry DRAM supply growth is tracking above our view of demand growth in calendar 2019. Given this supply demand dynamic, we are taking decisive actions to lower our DRAM bit output growth to approximately 15% for calendar 2019 versus our prior plan of around 20% bit growth. These actions include a significant reduction to our capital expenditures based on our current demand estimates, our DRAM bit shipments for the fiscal second quarter will decline sequentially. But more importantly, are likely to be flat to down on a year over year basis as well. Consistent with a weak quarter for the memory industry and significantly below the long term demand growth rate This shows that inventory adjustments by our customers borrowing weaker macroeconomic conditions, we expect our DRAM pitch demand to grow sequentially in our fiscal third quarter. Looking beyond fiscal Q3, as we enter the second half of calendar twenty nineteen, We expect a healthier demand environment alongside an improved industry supply picture which should contribute to improved financial performance. In NAND, while the inventory levels that customers are in better shape, NAND suppliers appear to have elevated levels of inventory. The transition from cleaner to 3 d NAND in the industry and successful ramp of 64 layer across the NAND manufacturers has resulted in oversupply in the market over the last several quarters. We currently expect calendar 2019 NAND industry build demand growth to be approximately 35% with ongoing impacts due to client compute CPU shortages and weaker high end smartphone unit demand. Even after taking into account recently, publicly announced NAND CapEx reductions for calendar 2019. Our assessment is that the NAND industry supply growth will exceed industry demand growth in the coming calendar year. We are therefore lowering seeing our fiscal 2019 NAND CapEx. We now expect our calendar 2019 NAND supply build growth to be meaningfully reduced from prior expectations and expect our bit shipment growth to be in line with the industry demand at approximately 35%. We also expect NAND demand to accelerate in the second half of the calendar year as demand elasticity kicks in for the mobile enterprise and client markets. Given our attractive cost structure on Leading Edge NAND and DRAM, in this market environment, we will manage pricing and carry inventory as necessary to optimize our profitability. We are taking decisive action on the supply side to manage our business Our actions will significantly reduce our fiscal 2019 CapEx and allow us to continue delivering strong profitability and healthy free cash flow, while investing in our strategic priorities as we position Micron to capitalize on the exciting growth opportunities for the company. I'll now of our fiscal first quarter and guidance for the second quarter. Thanks Sanjay. Micron delivered strong results in our fiscal first quarter, including double digit year over year growth While our near term outlook has become more challenging, the actions taken to improve our cost structure and increase our mix of high value solutions will ensure that our profitability profile remains strong. Moreover, Micron's financial position remains healthy with an improved total fiscal 1st quarter revenue was $7,900,000,000, up 16% from the prior year and down 6% from the record fiscal fourth quarter. Revenue was adversely impacted by inventory adjustments at key customers in the cloud graphics and enterprise markets. Offsetting these headwinds we delivered record DRAM represented 68% of total company revenue in the fiscal first quarter. DRAM revenue increased 18% year over year, and declined 9% high single digits percent compared to the prior quarter, while shipment quantities were relatively flat. Trade NAND revenue represented 28 percent of total company revenue in the fiscal first quarter. Trade NAND revenue increased 17% year over year and declined 2% quarter over quarter. Our overall NAND ASP declined in the low to mid teens percent and shipment quantities increased in the low to mid teens percent compared to the prior quarter. Revenue for the Compute And Networking business unit was $3,600,000,000, up 12% year on year and down 17% quarter on quarter. The sequential decline was driven by the impact of inventory adjustments at some of our customers in the graphics enterprise and cloud markets. The mobile business unit delivered a strong quarter with record revenue of $2,200,000,000 Revenue increased 62% year over year and 17% from the prior quarter. Revenue growth was driven by with several leading handset customers. Embedded business unit revenue of $933,000,000 was up 12% businesses had record revenue driven by strong sales of our DRAM and NOR products. And finally, turning to the storage business unit or SBU, fiscal first quarter revenue was $1,100,000,000, down 17% year on year and 8% quarter on quarter. The sequential decline in revenue was driven by weaker pricing, and the ongoing transition from SATA to NVMe SSDs. The impact of this transition will continue through calendar 2019. Our strategy to move bits from SBU components to high value solutions in mobile is also contributing to a decline was 59%, up 360 basis points from the prior year and down approximately 2.30 basis points from the prior quarter. This includes a 120 basis point impact from 3d Crosspoint underutilization costs. During the last few months, to less than 50 be able to mitigate approximately 90% We believe that Micron will not be directly impacted by any Operating expenses were $783,000,000, slightly above our guidance, mainly due to higher than expected prequalification expenses associated with new product introductions. Looking forward, As our joint development work with Intel comes to a conclusion around the end of this fiscal year, the R and D cost sharing between the company's will naturally reduce and come to an end. Was approximately $30,000,000. We expect that due to the combination of these declining R and D contributions from Intel, as well as increased investments in future technologies and high value solutions across our portfolio. We continue to drive strong profitability in the fiscal first quarter with operating income of $3,900,000,000, representing 49 percent of revenue. This margin is up 3 percentage points year over year and down 3 percentage points from the fiscal 4th quarter. As previously mentioned, the improvements that Micron has made over the prior several years have resulted in structurally higher margins. The tax rate for to be around 11%. Non GAAP earnings per share in the fiscal first quarter totaled $2.97, up from $2.45 in the year ago quarter, and down from $3.53 in the prior quarter. We commenced our capital return program in the fiscal first quarter with the repurchase of $1,800,000,000 of common stock, representing a reduction of approximately 42,000,000 shares or about 3.5 percent of shares outstanding. We expect to remain active with our stock buybacks in the fiscal second quarter as we continue to make of our ongoing In the fiscal first quarter, we generated $4,800,000,000 in cash from operations, representing 61% of revenue. Capital spending net of 3rd party contributions was $2,500,000,000, up from $2,100,000,000 in the prior quarter. Up about $600,000,000 from the year ago quarter We deployed approximately 80% of the quarter's free cash flow towards our share repurchase program. Even with a substantial outlay for share repurchases, we ended the fiscal quarter in a record net cash position of $3,100,000,000 with approximately $7,200,000,000 in cash marketable investments and restricted cash and $4,100,000,000 in debt. While we largely completed our deleveraging activities in fiscal year 2018, we further reduced our debt balance $60,000,000 and other scheduled payments. Overall, strong cash flow and robust liquidity put us in an excellent position to execute on our capital returns program. Prior to issuing our fiscal second quarter guidance, I'd like to provide some context for our outlook. Due to the weaker demand environment, we expect fiscal second quarter sequential bit shipments to be down meaningfully for both NAND and DRAM. Given the weaker near term outlook, we are lowering our CapEx plans to a range of $9,000,000,000 to $9,500,000,000 for fiscal 2019. At the midpoint, this represents a $1,250,000,000 reduction from our prior guidance and our front end equipment CapEx is now down year With that in mind, to be in the range to 53%. Operating expenses are expected to be $800,000,000 plus or minus $25,000,000. As we execute on longer term growth investments, we're actively managing OpEx by implementing expense controls across the company, including tighter controls on headcount, holiday work schedule slowdowns and reductions in discretionary spending. Based on a share count of approximately 1,150,000,000 fully diluted shares, we expect EPS to be $1.75 plus or minus $0.10. In closing, Micron continues to deliver solid financial results on a stronger performance foundation. We are making progress on all of our key initiatives, including our high value solutions product portfolio, our cost profile, capital return program, and financial structure. With a record net cash position and $9,700,000,000 of liquidity at the end of the fiscal first quarter. While near term market conditions are challenging, we are taking appropriate steps to manage production and spending in order to deliver healthy profitability and cash flows. There is no doubt Micron remains in the strongest financial position in the company's history as we transition to next generation technologies and products. I'll now turn the call over to Sanjay for some concluding remarks. Thank you, Dave. While we ended 2018 on the heels of unprecedented profitability, and revenue for both Micron and the industry, we do believe we are entering a period of weaker market conditions. We are taking prudent actions adapt our manufacturing plans to the changing demand environment. While we are implementing expense controls, We are also continuing to invest in our technology and cost competitiveness as well as strengthening our portfolio of high value solutions. Memory and storage have become essential ingredients to the value created by the data economy, and it is this added value that is driving a virtuous cycle of long term growth and innovation. We continue to believe that the memory industry is structurally stronger with more diversified demand drivers and moderating supply growth capability. Micron is better positioned than ever before to win in this environment with our strong balance sheet and the structural improvements we have made to our operating model in the past several years. We believe 2019 will be a year of solid profitability and I look forward to sharing our results over the quarters ahead. We will now session. And our first question will come from the line of Timothy Arcuri with UBS. Your line is now open. Thank you. Sanjay, I was wondering if you could help quantify the inventory at your big hyperscale customers. It sounds like in aggregate, it's maybe 2 months. So I'm wondering if you can help with that number. Thank you. So inventory at our customers, and this is, customers in various segments of our market, some of those customers are carrying higher levels of inventory. And that inventory levels varies from customer to customer, we believe, And our assessment is that inventory adjustments will take couple of quarters for it to be corrected. For it to work through the system entirely. And of course, we continue to work with our customers in the meantime in terms of understanding their longer term demand requirements. And certainly our customers are indicating optimism toward the demand requirements in the second half of the year. And especially as inventory adjustments work through the system. And as supply cuts, the effect of those come through the industry As well as second half of the calendar year tends to be seasonally stronger compared to the first half of the year, We do expect that by the second half of the year, we'll have an environment that will be improved stronger compared to the first in our end markets of cloud, client, enterprise, graphics, all of these end markets, the trends continue to be strong, needing more memory and more storage ultimate We are just going through an air pocket here related to, primarily inventory adjustments as well as some seasonal weak mobile demand, including mobile demand on the high end smartphones that is impacting some of our near term visibility as well as the near term outlook. Thank you for that. And then I guess just as a quick follow-up, Dave, I think maybe the surprise in the guidance is that the bit shipments are down. I think you said meaningfully for both NAND and DRAM. I'm wondering, what that means for inventories? Are you going to ship out of inventory or are you cutting utilization? Can you sort of walk us through that? So we are reducing our production for both DRAM and NAND As Sanjay indicated, from a DRAM perspective, we're bringing bit supply growth down to 15% approximately in calendar year 2019. For NAND, we're also bringing the production down meaningfully. And we did indicate that we would ship close to demand for NAND, and we think that demand is about 35%. So obviously, there will be periods time where we do have inventory increasing for some period of time. And then of course, it'll adjust down through the years as we as those demand and supply numbers get more aligned. In the first quarter, we had days of inventory up to 107 days and very comfortable with 107 days. This is very low cost product that we're putting on the balance sheet. There's no risk around obsolescence. It's it's very likely that we'll go up again next quarter. Again, I'm very with that. But I think over the long term, we'll have it more aligned with ultimately where we want it to be. And our next question will come from the line of John Pitzer with Credit Suisse. Your line is now open. The question. Dave, I just relative to the guidance for OpEx in February quarter of $800,000,000 plus or minus $25,000,000, does that now reflect what we should think about as a fully burdened OpEx as you kind of move away from the shared costs with Intel. And relative to the $6,000,000,000 operational efficiency gains you talked about at the Analyst Day this past summer. How does that fit in with this OpEx guide? Because this is about $200,000,000 more OpEx per quarter than we saw at similar revenue levels back in sort of 16 17. And it's about $300,000,000 above per quarter, what we saw kind of in the 15 sort of correction. Question. So, we did guide $800,000,000 for OpEx in the 2nd quarter, plus or minus $25,000,000 That's probably that's certainly not fully burdened. We had about $30,000,000 of benefit in the fiscal quarter related to Intel's contribution to R&D expenses. It'll be a little bit less in the second quarter. But over the course of the rest of the year, we'll kind of phase down. So that certainly will elevate the OpEx in the 3rd fourth quarter relative to the 3rd quarter. And also, we're not while we're certainly managing expenses prudently and we are taking steps in terms of reducing discretionary spending just very monitoring our headcount very closely. We still are making the necessary investments on the product side and the technology technology side. This is, as Sanjay mentioned, an air pocket. We don't want to, in any way, impact our long term strategy for some sort of near term event. So OpEx will likely go up a little bit. It's a fair point on the OpEx. I would say if you look at the guidance for the second quarter, even with the revenue guidance we gave, relative to what the first quarter was like. If you take the kind of midpoint of the earnings number and the midpoint of the revenue guidance number, you'll get kind of 38% plus operating margin. So that is a really good number, obviously. It's a number of in my previous company we were kind of aspirationally trying to get to. So It's a very good operation, our operating margin number. And I think it reflects the fact that we achieved the $6,000,000,000 of improvements, that we said we would make at the Analyst Day. We still think we have more work to do in terms of driving the mix towards high value solutions in terms of improving our cost competitiveness, both on the front end and on the back end side. So there's more to come. There's another $3,000,000,000 that we committed and we feel, very good about that. And then as my follow-up for Sanjay, can you just walk us through the strategic puts and takes of building inventory into the February quarter as opposed to trying to let those bits out into the marketplace and let elasticity sort of take over. Is this sort of intangible reflection of your view that This will be relatively short lived a couple of quarters. And what would you need to see before you would think that inventory build was too risky? So I think our inventory, our cost structure is very good both on DRAM as well as on the NAND side. And so we are definitely prepared that in terms of managing our overall profitability, which is absolutely our primary focus that we'll manage pricing and manage inventory accordingly. If we as necessary, if inventory has to be carried over, we will carry it over because the demand in NAND will kick in with elasticity in DRAM, the inventory consumption if our customers will occur, supply cuts will be driving return to stronger demand environment compared to in the half compared to first half. So we will be using inventory as a lever to ultimately manage for the best profitability of the company and certainly be prepared, use that inventory as necessary to also capitalize on the second half opportunities. And our focus really will also remain that, in terms of our CAGR, in terms of output growth to be aligned, with the demand CAGR. And we'll, of course, from time to time, use inventory as a lever to manage the profitability of our business and of course, manage our customer's requirements as well. And our next question will come from the line of TJ Muse with Evercore. Your line is now open. Yes, good afternoon. Thank you for taking my question. I guess first question Can you talk about what you're thinking in terms of cost down efforts both for DRAM and NAND particularly as you move to higher value solutions changing mix, including 1Y1Z as well as 96 layers in the 2019 timeframe? With respect to the cost structure, we continue to be in very good position as we said that for our fiscal year 2019, we'll have healthy cost reductions, both for NAND as well as DRAM. And you're of course right to note that as we increase the mix of our high value solutions, for example, over the longer term as we increase our SSD mix or increase our managed and solutions. Those do tend to incur higher cost, but they also bring higher margins, higher profitability, higher pricing associated with them as well. So cost wise, we are in good shape. That's helpful. And I guess as a follow-up, a question for you Dave. I think in the past, you've talked about wanting to have liquidity including gross cash and revolver of roughly 1 year CapEx, which would basically put you on the screws here. So the question is how to think about incremental free cash flow generation, and what percentage of that would be used for buybacks? Yes, good question. C. J, so we contribute let's start with the we're at about $9,700,000,000 of liquidity when you count the cash that we have on the balance sheet. Plus the $2,500,000,000 revolver we have. So we're in, as you point out, very good shape relative to where our targeted liquidity would be You saw a pretty healthy return of cash to shareholders in the first quarter, about 80% of our free cash flow went to shareholders in the form of the buyback. And really, the rest went to further deleverage the balance sheet. There's not a ton of deleveraging that will go on through the rest of the year, quite honestly. And so I would expect us to be continued to be good buyers of the stock, so to speak, through the next three quarters. And contribute a high portion of our free cash flow in the form of a buyback. Very helpful. Thank you. Thank you. And our next question will come from Mark Newman with Bernstein. Hi, yes. Thanks for taking my question. First question really, I'd like to ask on the supply adjustments you're making you're taking down the guidance for both DRAM and NAND production. You mentioned about some of that being inventory, but you also mentioned some of that being some production adjustments Is it useful to understand a bit more about that? For example, is that reduction of utilization is that a no more capacity additions or what is that? Because some of your competitors have been pushing out some of their capacity additions. And so it'd be useful to understand what Micron is doing here, on the capacity adjustments to get to this slightly lower bit growth that you're forecasting for calendar 'nineteen? So certainly, we are taking actions, the range of actions, and we won't really get into any specifics here, in terms of what actions we are taking to reduce our output. You earlier mentioned about inventory. I mean, of course, we will carry inventory as necessary to manage the profitability But important thing to understand is that we are taking decisive actions in terms of reducing our production output, both in NAND as well as in DRAM. And that's the contributor to the $1,250,000,000 reduction in CapEx compared to our prior guidance. And of course, our intention here is to align our supply output in line with the industry demand trends. And we feel very good about the actions we have taken. In DRAM, we have pointed out that compared to our prior expectations of 20 2019. We have taken actions now to reduce our output to provide a 15% supply output growth on a year over year basis. And in DRAM as well, we have taken actions to adjust our output so that our shipments will match with our demand that we expect to be around 35% in 2019. And I just want to also be very clear as we have always said, that we are not adding any new wafer capacity. We are the CapEx that we discussed today, the lowered CapEx that we discussed, which on a wafer equipment basis is a reduction from fiscal year 2018 CapEx is all going toward technology transition only. And that of course is the best way to achieve the ROI on those investments. So does that mean slower technology migration or does it perhaps mean slightly lower utilization for a temporary period? So Mark, I'm not going to get into the specifics. Most important thing is we have managed our CapEx lower. And we continue to take actions to manage our production output lower to align our supply with our demand expectations. And, I think the effect of these actions will, in fact, some of these will start showing as early as this quarter. Okay. Go ahead, David. I was just going to say, if you look at our gross margin guidance, it would reflect that we have a very good cost structure for our products. And the reduction in the output that we are talking about, our cost structure will remain in very shape even with that. And in fact, in terms of costs, on a year over year basis, we actually are cost reductions we believe both in DRAM and will be above the industry. My follow-up question is on the demand. You talked about this a little bit of an inventory correction amongst cost some of your competitors have talked a bit about that as well. But you seem to be reasonably confident that demand is going to come back second half of calendar 'nineteen, which also suggests that the inventory should have been burned up by then. The customer's inventory should have been used up mostly by then. Just be helpful, do you have any, any data points to explain how you get that confidence that demand will come back? Is it perhaps on the NAND side more about demand elasticity? Is it on the DRAM side, anything about the kind of magnitude of the inventory level that our customers have today to give us some kind of sense that confidence that that would have been used up within a couple of quarters, for example. That'd be great. That'd be very helpful. Thanks. So, first of all, I think we should realize that the end market demand trends, by and large, really remain quite healthy and our customers also are absolutely continuing to show to us the optimism around the long term demand trends. And as we noted, in my remarks that in our fiscal second quarter, the bits for DRAM, let me first talk about DRAM here, the VIS4 DRAM will be down on a year over year basis. And this needs to be compared with the long term DRAM demand CAGR of 20% high teens to 20% range. So when in FQ2, on a year over year basis, you have a reduction and you contrast it with the long term demand trends of 20% kind of demand growth, then it tells you that during fiscal second quarter, a lot of the inventory adjustments will certainly be occurring. And that's why we say that it will take couple of quarters for inventory adjustments to occur. So again, the point about year over year reduction in, by our customers is well underway. And all of this, while the end market demand drivers of cloud as you see from all the data is absolutely continuing to be healthy. Then market demand driver in terms of average capacity increases of flash in smartphones as well as DRAM content in smartphones driven by AI and machine learning continues to be on the upward trend. And of course, applications like automotive and industrial IoT with more AI and more machine learning. All of these are continuing to drive the demand trends to our need for more storage and more memory. And we laid out some of these opportunities at our Investor Day and all of those opportunities very much stay intact and at the end market level continue to be vibrant. So I think these couple of points that the November quarter, it self was in terms of overall, shipment was below seasonal. As well as the first quarter on a year over year basis, really showing a reduction points to inventory adjustments are well under And of course, you have to look at this in the backdrop that the output in the industry is coming down as well. We have announced our decisive actions here today. And we had provided the outlook in terms of our output growth in calendar year 2019, both for NAND as well as DRAM. So these hands in, as I said before, that second half of the year tends to be a seasonally stronger part in terms of demand compared to the first half. So these all are definitely pointing to our confidence, and built upon inputs from our customers in terms of second half of the year being stronger than the first half of the year in terms of, demand trends and the industry fundamentals as well. And let me just point out one more thing here that when you look at industry, I mean, compared to the past cycles, really the CapEx cuts are at much, much earlier level, in the cycle. And, really in terms of happening even at much higher levels of profitability than ever in the past. So all this, overall, I believe bodes well, for the long term fundamentals of the industry as well as certainly for Micron. Alright, great. Thank you very much. Appreciate that. Thank you. And our next will come from the line of Aaron Rakers with Wells Fargo. Your line is now open. Yeah, thank you for taking the questions. I was wondering if I could build on that last comment You've talked a lot about your own plans in terms of curtailing your capacity expansion this year. But given that you're an off off quarter, off calendar quarter. I'm just curious of how you would characterize maybe the competitive landscape, maybe what you've seen change over the last month and a half or so relative to some of your competitors in the context of both DRAM and NAND. And I have a follow-up. I think in that regard, you know, as much as I do, you know, and over the course of, last couple of months, there have been reductions that have been discussed, In the industry, the deductions that you have heard about that manufacturers have talked about, but also several analysts has indicated those as well. And of course, the near term outlook has also as we said, continued to weaken through the course of our FQ1 timeframe. And even since our FQ2 has started, those demand weakening trends have continued as well. So I think that this is the information that is out there is what we are using, but we can only talk about ourselves and we can we certainly have taken here decisive actions in terms of managing our output growth in line with our demand expectations. Okay. And then as a quick follow-up, just thinking about your product portfolio, particularly around the enterprise SSD market, I'm curious, it sounds like possibly you're seeing maybe even a quicker ramp towards NVMe than what you previously have seen. So I mean, Is there a way to kind of quantify how much of maybe the enterprise SSD market is kind of moving away from you until you get your product into the market in the latter part of this calendar year or calendar at 2019? Certainly, as we have been speaking for a while, the transition from SATA to NVMe is taking place at a fast pace in enterprise as well as in cloud applications. And we have been focused on developing our own products. And that's why we have said that in calendar year, our fiscal year 2019, as we bring out our new NVMe products to the market, our 2019 calendar year ends up being more a year of transition for us, but there is no question that the market certainly is moving from SETA to NVMe applications across the board. And we have just introduced some of our early NVME products for consumer SSDs and I talked about, how we have introduced NVMe product for automotive applications as well. And, during the course of calendar 2019, we'll first be bringing out client NVME products to the market. And then later in the year, we'll bring enterprise and cloud, NVMe SSDs. And that's why we look at calendar year 2020 will be the one time frame when we start gaining share again, in our SSD some of that SSD market. Okay. Thank you. Thank you. And our next question will come from the line of Ramit Singh with Nomura. Your line is now open. Sanjay, I heard you indicate that you that you expect above average cost declines. But I guess my question is, aren't the Act that you've announced today probably more of a hit to cost per bit in 2020 versus 2019. How do we think about that? I think what we have shown you today is that we are able to take decisive actions and we are able to take them fast. I mean, just remember that FQ4 was a record year for the company. And, FQ1 is when we first saw signs of inventory adjustment. During the course of FQ1, we have been able to react in terms of cutting down our CapEx as well as manage our output growth. So point is we can react fast to the changes that are needed in the marketplace. And we remain with this as something we review very, very closely on an ongoing basis, very focused on making sure that we are maximizing the long term profitability and long term growth opportunity for Micron. So this is something that in terms of cost, we feel very good about our position for 2019 and beyond going beyond that, we of course continue to make very good progress on our technology nodes. As I discussed with you, our technology on 1Z is progressing well. We feel good about that roadmap and continue to be a good progress on our NAND roadmap as well And that will all position us well for 2019 as well as for 2020 time frame. I just want to point out that our focus also is on shifting our portfolio to high value solutions and those will also strengthen our profitability profile. I guess as my follow-up, on CapEx, it, you're cutting your forecast for the year, but CapEx is still up on a year on year basis. I'm curious if this downturn ends up being longer than any of us sort of anticipate, is there is there a leverage to reduce CapEx even further from current levels? So I will just touch on CapEx on your question on cost. I also wanted to point out that on the cost side, we are making tremendous progress on the back end, assembly and test cost reductions as well as managing transforming our supply chain operations, which will give us significant cost benefits as well. So all in all, 2019 and beyond feel very good about our technology roadmap, manufacturing roadmap capability as well as, overall cost. Capabilities. In terms of, on the CapEx side, just keep in mind that we have said that with the adjustments that we just have made, Our wafer equipment CapEx actually is coming down in fiscal year 2019 versus fiscal year 2018. As we have discussed before, Micron over the last few years has significantly under invested in cleanroom shell CapEx in the facilities and the buildings that are needed to really implement ongoing future technology transitions. And a big part of our CapEx as we have shared with you in the past actually is going toward buildings and facilities cleanroom that will be needed for future technology transitions as well. All of that CapEx does not contribute to a bit growth. And similarly, we have a significant increase in our CapEx in fiscal year 2019. Over fiscal year 2018 on back end, test and assembly operations as well. And that is again intended to reduce costs, and not, it doesn't go toward any bit growth. And we have the flexibility as we have shown already in in terms of managing CapEx, we will continue to look at this carefully. And if any, factors require us to change our CapEx outlook in, we will absolutely address it in a timely and prudent fashion. We always continue to evaluate market environment as well as our own status of technology transitions, production requirements, and we are making real time adjustments as needed. I mean, it seems like the actions you guys are taking are very prudent, but I the part that's confusing for me is, if you're slowing your process migration, then there should be some impact to cost per bit. And I'm just I guess I'm just not quite I just don't quite understand, what that impact is. Again, in terms of cost base, there are a lot of details that have to be looked at. We are not going into going to get into all of those details here. Key message here is that we are bringing our production output in line with our demand expectations 2nd, we feel very good about our technology position and our cost position and we'll continue to do very well in this regard. Cost position, of course, includes wafer level die cost position, but also includes the benefits of assembly and test cost improvements that we are making. And third is we absolutely stay focused on our, high value solutions strategy, and we are executing well in the Yeah. We talked about how in mobile, even, in a market environment of significant NAND oversupply, we actually have delivered strong gains in our mobile high value solutions for you as well. Thank you. Ladies and gentlemen, this concludes our question and answer session for today. Thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.