Earnings Call: Q3 2018

Jun 20, 2018

Good afternoon. My name is Brian. I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technologies Third Quarter 2018 Financial Release Conference Call. Thank you. It is now my pleasure to turn the conference over to your host, Shanye Hudson, you may begin your conference. Thank you, Brian, and welcome to Micron Technologies' 3rd fiscal quarter 2018 financial conference call. On the call with me today are Sanjay Marocha, President and CEO and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including audio slides is also being webcast from our Investor Relations website at investors. Micron.com. In addition, website contains the earnings press release filed a short while ago. Today's discussion unless otherwise specified. A reconciliation of Call dilution table. Both the prepared remarks from this call and webcast replay will be available on our website later today. We encourage you to monitor our website at micron.com throughout the the matters we will be discussing today include forward looking statements. These forward looking statements are subject to risks and uncertainties that cause actual results to differ materially from statements 10 K and Form 10 Q for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the 4 looking statements are 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 you Sanjay. Thank you, Sheeny. Good afternoon, everyone. Micron continues to perform exceptionally well, achieving record revenue and profitability and generating strong operating cash comments. First, we are accelerating advanced technology development and rapidly deploying it into production to meet our supply to drive increased profitability and strengthen our customer relationships. And third, we announced a capital return program to repurchase up to 10,000,000,000 of our shares outstanding starting in fiscal 2019. These initiatives underscore our commitment to enhancing long term shareholder value. Turning to our businesses. We delivered strong results across the breadth of our end markets. We were particularly pleased with our mobile business where we increased revenue by 12% sequentially, setting a new company record. Revenue from high value mobile NAND nearly doubled quarter over quarter enabled by the ramp of EMC and EMCP products to multiple smartphone OEMs. 85 percent of managed NAND gigabytes that we shipped in fiscal Q3 were lower cost TLC NAND as compared to virtually no TLC NAND just 1 year ago. Memory and storage content phone continues to rise creating ongoing demand for our mobile solutions. We are strategically shaping our mobile portfolio to put us in the best competitive position, including the production launch of our 1 via nanometer, low power DDR4 memory and several new 64 layer TLC UFS and EMCP managed NAND solutions all later this year. Data Center trends are also driving momentum for Micron's DRAM and NAND solutions with combined revenue up 87% year over year. In the 3rd quarter, ongoing demand for our memory and storage solutions in Cloud Computing was a key highlight. Our DRAM and NAND revenue from cloud customers increased sequentially by 33% and 24% respectively. This performance was enabled by our improving execution, ability to expand share and strengthening relationships with key customers in this rapidly growing segment. We providers are making to build out 18. And as we shared during our investor event, analysts project this 21. We achieved record revenue across all market segments of our embedded business enabled by shifts to higher value products and continuing healthy demand. Growth was particularly robust in Consumer And Industrial Markets, driven by trends in home and industrial automation, drones and IoT. We completed qualification of 64 layer 3 d NAND surveillance grade micro SD card, which is designed for smart surveillance deployments that move AI capabilities to edge device is. We also had notable design in activity on low power automotive DRAM and C growing opportunities in the near term for our portfolio of infotainment, dashboard and ADAS solutions. We readied multiple new products for customer qualification this quarter, including the first 1 next nanometer low power automotive DRAM and the GDDR6 solution for ADAS and autonomous applications. These advanced new products extend an industry leading portfolio of unique, automotive, and industrial solutions that coupled with long term customer relationships has helped the embedded business unit deliver consistent profitable growth for Micron. Overall, we continue to strengthen our product portfolio as we shift our mix away from components and toward high value solutions. We are outpacing competitors in the high value graphics market and our graphics revenue more than doubled year over year. We also set another company record We began volume production shipments of our 64 layer 3 d NAND enterprise set ISSD and shipped the world's first QLC based SSD a high capacity drive ideal for reed centric applications like streaming media servers. This QLC SSD is built on our industry leading 64 layer 3 d NAND, utilizing the first ever terabit NANDI in the industry. As we continue to introduce new SSD solutions on lower cost next generation technologies, we believe that we can unlock new pools of demand the output crossover on our 64 layer 3 d NAND ahead of schedule. We still expect to have production on our 96 layer 3 d NAND in the second half of calendar year twenty eighteen. We are also making In DRAM, we are technology, both in the second half of calendar year twenty eighteen. As we noted at our analyst event, we have a strong product and process roadmap for DRAM with 1Z and 1 alpha development programs already underway. Turning to CD Crosspoint Technology, as you know, we are partners with Intel in the development and manufacturing of CD Crosspoint. As part of that ongoing relationship, we have been discussing the commercial terms of our future generation 3d Crosspoint collaboration. Our goal in these discussions is to ensure that Micron has a path to strong ROI for our investments and technology contributions. We will provide updates as appropriate as these discussions progress potential for 3 d Crosspoint technology to create a new tier of memory and storage between DRAM and NAND flash. We remain focused on our 3 d crosspoint product development and are on track to introduce our first products in late calendar 2019 with meaningful revenue in 2020. Due to the value these solutions provide in an economy where data and fast access to that data is increasingly important. Growing capabilities in the data center have enabled greater functionality at the edge, increasing users and creating more data and in turn, driving opportunities for expanded, higher value data services. We believe this virtuous cycle has driven the secular growth patterns We are currently seeing across nearly all of our markets and believe that it will persist into the foreseeable future. I will now turn 2018. Thank you, Sanjay, and good afternoon, everyone. Micron's relentless focus on execution is evident in our 3rd quarter results. We set new records for revenue, gross margin, operating income and earnings per share. In addition, $350,000,000 above GAAP debt position. History, allowing us to make investments that will capitalize on Our focus on growing high value solutions, including managed NAND and lower low power DRAM products for the mobile market, SSDs for the cloud market as well as graphics DRAM drove our fiscal third quarter results. We also saw the 6% from fiscal second quarter 40% from the prior year. Non GAAP gross margins for the period expanded to a record 61 percent, up 250 basis points from the prior quarter and up from 48% in the prior year. A robust business environment, more favorable mix and good execution on cost reductions drove significant gross margin expansion. It's important to note that we were able to achieve record gross margins while we continue to incur underloading charges in advance of volume ramp of our 3 d Crosspoint solutions, which will follow product introductions that are targeted for late calendar 2019. We estimate that these charges impacted gross margins by approximately 100 basis points Our record revenue and gross margin performance drove strong profitability grew to $4,000,000,000 the second quarter and 37% in the year ago period. Non GAAP operating expenses came in in. Moving forward, the development of new products and technologies. Now turning to the performance by business unit. We achieved record revenue for the compute and networking business unit of $4,000,000,000 in the 3rd quarter, up 67% year over year and 8% from the prior quarter. Every CMBU business contributed to this growth. Except the client business as we directed supply to customers and markets experiencing robust demand. We saw broad based demand for our memory solutions with sales of both cloud server and graphics memory products more than doubling year over year. Operating income for CNBU increased by 12 66% of revenue and more than doubled on a year over year basis. Revenue for the mobile this unit increased to a record $1,800,000,000, up 12% quarter over quarter and 55% year over year. We are experiencing ongoing momentum for We also continue to the dollars or 49 percent of revenue, up from $689,000,000 last quarter and $304,000,000 in the year ago period. The embedded business unit continues to deliver solid results with record revenue of $897,000,000 up 8% versus fiscal 2nd quarter and up 28% year over year. Growth was driven by demand consumer and industrial applications, including set top boxes, factory automation, and industrial drones. ADAS and in vehicle experience applications supported record automotive sales for the quarter. Fiscal third quarter operating income was $386,000,000, which translates to a healthy 43 percent of revenue roughly flat with the prior quarter and up by 600 basis points from the prior year. And finally, turning to the storage business unit, 3rd quarter revenue was $1,100,000,000, which is comprised of SSD, NAND components and 3 d Crosspoint sales. We continue to build momentum total SBE revenue. Consistent with our strategy and as we shared at our investor event, we're shifting more of our NAND supply away from component and to high value products such as managed NAND, which are targeted for our mobile and embedded markets, as well as SSDs. This shift in NAND supply and lower three d crosspoint sales to our partner resulted in a 9% sequential decline in our storage business unit revenue. The underutilization costs associated with 3 d Crosspoint production that I previously mentioned had a negative impact on SBU operating margins of approximately 700 basis points in the 3rd quarter. Our resulting SBU operating in fiscal second quarter. Today, a majority of our SSD sales are based on 32 layer 3 d NAND. As Sanjay pointed out earlier, we're starting to ramp SSD solutions built on consumer and cloud customers. Our SBU cost structure will benefit from this transition to lower cost 64 layer SSDs. Moving to performance by product line. DRAM represented 71% of total company revenue in the fiscal third quarter. DRAM revenue was up 6% from strategy and a robust market environment. ASPs increased in the mid to upper single digit percentage range supported by broad based demand and a richer mix of high value sales, including server and graphics DRAM products. Ship and quantities were relatively flat quarter over quarter and our resulting non GAAP gross margin was 69%, up 66% in fiscal 2nd quarter 54% from the year ago quarter. We achieved $1,900,000,000 in trade down revenue, representing 25% of total company revenue for the fiscal third quarter. Trade NAND revenue was up 8% quarter over quarter 14% year over year, reflecting healthy demand for our products. While on a like for like basis, NAND pricing declined modestly sequentially, our overall NAND ASP increased in the mid to upper single digit percentage range driven by a richer mix of high value solutions in our NAND portfolio. We ramped EMCP solutions to our mobile customers, which tend to carry higher ASPs relative to other NAND products. Trade NAND shipment quantities remained relatively flat compared to the prior quarter and trade NAND gross margins were 47% on a non GAAP basis, up 50 basis points from the prior quarter and up 600 basis points from the year ago quarter. Our solid execution and healthy industry environment led to a record non GAAP earnings per share of $3.15, up 12% from the prior quarter and 94% from the prior year. We generated $4,300,000,000 in cash from operations, representing 55 percent of revenue. Capital spending net of 3rd party contributions was $2,100,000,000 in the 3rd quarter. We expect the full fiscal year 2018 CapEx to be approximately $8,000,000,000, which includes previously discussed investments associated with our clean room $1,000,000,000, flat with the prior quarter and nearly double that of a year ago period. We ended the quarter in a net and $7,300,000,000 in GAAP debt, including approximately $300,000,000 of incremental debt incurred in third quarter by our jointly owned 3 d Crosspoint fab. We're very pleased to have achieved a net cash positive position 1 quarter earlier than we had originally submitted. We reduced our gross debt position by approximately expect to order to settle the debt convertible note redemptions in the third quarter, which we will cash settle early in the 4th quarter. Combined these convert notices equate to roughly a 20,000,000 share count reduction. This is a great start to our strategy of reducing our fully diluted share count, which we expect will continue in fiscal 2019 when we begin utilizing at least 50% of our annual free cash flow to repurchase shares under our $10,000,000,000 share repurchase authorization. The fourth quarter. We expect revenue to be in the range of $8,000,000,000 to $8,400,000,000, Gross margins to be in the range of 59% to 62%. Operating expenses are expected to be $750,000,000 plus or minus 25,000,000 dollars. And based on a share count of approximately 1,230,000,000 shares, these results should drive EPS of $3.30 plus or minus $0.07. I'll now turn the call over to Sanjay for some concluding remarks. You, Dave. We recently introduced our vision for the new Micron. We have been undergoing a fundamental transformation driven by changes in our markets our industry and within our company. Starting with our markets, data hungry applications are driving secular growth for memory and storage solutions. Importantly, our customers recognize the essential added value that memory and fast storage provide for the solutions they deliver to their end customers second, the industry we operate within is structurally different than in the past Technology transitions require more CapEx and provide less bit gain and the pace of those transitions has slowed given increased process complexities. The result is a more consistent and stable supply demand outlook. These structural changes have also resulted in improved ROI over the last several Finally, a laser sharp focus on executing our strategic business objectives has allowed Micron to better capitalize on our excellent technology portfolio product breadth, manufacturing scale, customer reach, and deep team expertise. We are creating a culture of increased urgency, crisp execution and accountability that will enable us to consist we deliver against these strategic objectives and create positive results for all stakeholders. We will now open for questions. Thank session. And our first question will come from the line of Ramitza with Nomura. Your line is now open. Okay. Thanks. And thanks for leaving the guidance at the end of the presentation. It really kept us on our seats here. Great results. I had a question about NAND pricing. The like for like pricing, you mentioned in NAND was was down modestly and based on guidance, it seems like, the NAND business as well as DRAM will be healthy again in August. There's been, I would say, several reports about your largest competitor seeing significant ASP weakness in their NAND business. And I'm just having a hard time trying to reconcile why Micron isn't seeing this weakness as well. Yes. I think, I won't comment on the fourth quarter guidance and what's built into it. But I think right now what you're seeing is a pretty healthy mix of the higher value solutions. We're getting increasingly a higher mix of that component into our NAND into our NAND business. And that's really helping, kind of keep the pricing healthy. You did say though that, even absent mix that it seems like NAND pricing was down far less than it was in the prior quarter, correct? Yes. Okay. So I guess, again, kind of the same question, how do we reconcile the the performance of the NAND business and pricing like for like, it seems like the ASP declines are fairly modest with what seems to be bigger and broader weakness from some of your competitors? Well, I think in one case, in the second quarter, when you looked at the price thing. There was a bit of an aberration, I guess I'd call it, given that we had, in the first quarter, a higher ASP lift as it related to kind of one time MLC sale. So I actually think when you strip that out, if we had done it like for like, I don't think we made a that in the second quarter, you would have found that those ASP declines were, relatively modest as well. Okay. And if I could just follow-up on I just want to point out that as Dave said in his remarks that the mix of our NAND business has improved substantially given successful execution on our strategy of shifting our products toward high value solutions and multi chip packages, which have both NAND and DRAM and carry higher ASPs on a sequential basis, we doubled our sales of those solutions in the market. And of course, we did well on SSD as well, which hit a record. So all that mix really drove, our strong performance on the ASP front for the NAND business. Okay, great. And then just as a follow-up, I noticed for both DRAM and NAND, there really wasn't much bit growth for you to those businesses. Are you still comfortable with your your bit growth targets for both DRAM and NAND for calendar 2018? Thank you. Yes, we are comfortable with our target as we said, we are proceeding well with our, 64 layer transition into production actually achieved bit output crossover 1 quarter earlier than planned. And on the DRAM side, continue to do well with our 1X nanometer technology transition, which we said will have bit output crossover by the end of the calendar year. And similarly, good progress in terms of our 1y nanometer DRAM. So yes, with respect to our overall bit growth targets, for the year. As we had said, that we believe that the industry will be in the range of 40% to 45% for NAND and will be somewhat higher. That remains the case. And with respect to DRAM, we had said in calendar year 2018, industry supply bit growth will be approximately 20% and will be in range and that stays the same as well. I'll just point out that in FQ3, our the supply, the shipment, the shipment growth being flat for DRAM and NAND, as you were questioning, that really is just related to the normal ebb and flow of the business in terms of qualifications of our products in those new technology nodes as well as ramp up in production of those technologies. All right. Terrific. Thank you. Thank you. And our next question will come from the line of CJ Muse with Evercore. Your line is now open. Yes, good afternoon. Thank you for taking my question. I guess first question on gross margins and if we take the midpoint down just a smidge Q on Q. And so curious, should we be thinking about changes to mix? On both DRAM and NAND as driving that or perhaps a slowdown in cost down given some of the challenges ahead with 6496 1 wide, etcetera. I would love to hear your thoughts on that. Yes, well, we probably won't get into too much detail about, our guidance other than to say, we did give a range, the high end of the range is 62%. So that would actually be in improvement, from this quarter. So that's certainly a scenario and that would encompass a more robust mix of higher margin products for sure. And this is somewhat mix dependent, the business. And so we factor in that that might happen and that creates a bit of a range for us. But I wouldn't look too much into the fact that the midpoint is slightly below. Okay. I was just trying to get more color on the mix. So thanks for that. I guess, larger picture question for DRAM, In the last few months, we've heard about real time push outs of select capacity which I think is the first when the industry is enjoying such margins as you are today. So I guess can you speak to I guess this new rational profitability focused market and would love to hear kind of your thoughts for the market today and and into year end and beyond? So we discussed that at length at our Investor Day. And as we had highlighted, the market today are structurally different compared to ever in the past. First, they are ever more diversified markets are not just about PC and DRAM. I mean, data center is driving large growth for DRAM. The AI trends which we are very, very early innings of. This requires more and more DRAM in order to really perform high performance computation that AI applications rely on. So driving, AI applications are driving growth in the data center as well as through more intelligent devices on the edge. And smartphones, certainly with features such as AR and VR and AI, getting implemented into these phones, along with all the high resolution cameras, they required more and more DRAM as well. So the demand drivers are diverse. They are secular in nature. Memory has become essential in terms of delivering the value proposition of the end market applications. So this is what is really driving the overall robust demand drivers for our industry. For DRAM. And whether it's in data centers or in mobile or in graphics or automotive applications, all of these need more memory and memory is now really enabling higher value as well. To the end market applications. So yes, this all bodes well for the long term, healthy industry fundamentals. And all of this reflects in our guidance as well, which speaks for itself. It's a very robust, strong, guidance that we have provided for the third quarter. Very helpful. Thank you. Thank you. And our next question will come from the line of John Pitzer with Credit Suisse. Your line is now open. Yes, good afternoon. Congratulations Sanjay and Dave on the strong results. Dave, I guess my first question just revolves around the profitability levels in the SBU. Just kind of curious, when you think about the underutilization charges for Crosspoint, have those now peaked on sort of a quarterly basis or how should we think about that? And then you mentioned in your prepared comments that the move from 32 to Q4 should help profitability there. And I guess just as we think longer term, notwithstanding what you're selling to Intel, at sort of cost, how do we think about the long term project operating margin trajectory of this business compared to your other business units? Great. Yeah, so just going back to the prepared remarks, the underutilization charge associated, with 3 d cross point was about 700 basis points, as a hit to the SBU operating margins. We sold, or we sold very little of 3 cross point to our partner. And so it certainly was at around high level. Hard to say, if this is indeed the peak, but it's certainly close to the peak, if not the peak, I think longer term, from an underutilization perspective, we could continue to sell wafers to our partner and that certainly would mitigate the underutilization charges. So I wouldn't dismiss, the likelihood of that happening. And then on top of that, as Sanjay mentioned earlier in the call, we are expecting 3 d XPoint products in toward the end of calendar year 2019 and they'll ramp into 2020. And that certainly will help, improve and improve the underutilization aspect of this thing and have that go away. Having said that, we're looking to try to improve the cost structure of the storage business unit. And, certainly as we transition more and more of, of the wafers from 32 layer to 64 layer that will have a meaningful improvement to the cost structure of SDU. And I'll just point out that it's only a very short period of time, just a few quarters. So we're which we have really driven a tremendous momentum in our SSD sales in SBU. And yes, they are mostly 32 layer driven, but 64 layer is starting to ramp. As we focus on bringing our next generation of products into the market with our such as NVMe solutions as well as more 64 layer based solutions for cloud applications. That will help improve the cost structure and certainly will bode well for the health of our SBU business moving forward. So we are very excited about the opportunities, about our very cost effect nAND dye and technology and very focused on continuing to accelerate our product introductions and get the benefit of advanced technology nodes as well as reduce the overall cost of SSD bills because you know that in SSDs, there is more than just memory that goes into building SSG. So we are extremely focused on all of those and, that bodes well for the cost structure of our SMB solutions as well as growth of the SSD business. That's helpful. And so, Ajay, as my follow-up, I know that you guys rightfully tried to get away from giving us quarterly big growth and cost down projections for DRAM and NAND, but a little bit more generically, you think about from DRAM, the transition to 1X and NAND, the transition to 64 layers, which quarter do you think you're going to get the maximum benefit is there more of a benefit in the August quarter or is it more of the November quarter? How should we think about that for both DRAM and NAND? In terms of cost, we are continuing to ramp our, in DRAM, our 1X technology into production. And as we said, in the, later half of this year, we will achieve the bid crossover. And then that one next technology node will continue to ramp into production even during the course of next year. Just like our 20 nanometer, interlammed over several quarters as well. So that will, on an ongoing basis, continue to provide us cost benefits And same story on the NAND side, right? We are focused on continuing to go beyond bed crossover with 64 year now to continue to increase. The mix of 64 layer technology into production. And then as we ready AR 96 layer technology, which in my prepared remarks, I said we will be having in the second half of this year. As we ramp that up, it will then continue to provide additional cost benefits on an ongoing basis. So you really can't say which quarter is the cost reduction peaking in general. This is gradual over the course of future quarters. Please do not forget. I mean, when I'm talking about NAND here, I'm talking about the NAND technology level cost reduction capabilities. Of course, NAND cost is also a function of mix. Right? I mean, MCP solutions tend to carry the cost of the DRAM in them as well. So they tend to be higher cost when you measure it as a cost per gigabyte of NAND and similarly SSD solutions because they have other bomb costs also tend to be higher cost. So don't confuse the reported cost changes quarter over quarter with the underlying technology capability of cost reductions. The mix plays a role in the reported, margin numbers that we talk about. Perfect. Thank you. Thank you. And our next question will come from the line of Joe Moore with Morgan Stanley. Your line is now open. Great, thank you. I wonder if you could talk about capital spending. You've talked about the low 30s as a percentage of sales. Obviously, sales are coming in a lot better than at least I expected this year, and you'll be in the sort of high 20s. It's a low 30s comment, meaning you think you're sort of spending less than you want this year and just any indications you can give us on what that means for next year? Well, I mean, the low 30s is more of a longer term model. Clearly, some years will be under the low 30s. Some years, we might be a little bit above the low 30s. This is a very robust year from a revenue perspective. And we had a plan of where we wanted to make investments, both DRAM and NAND plus cleanroom space as we talked about in Hiroshima and Singapore. And then also some investments, capital investments in our R And D organization. And so, I think the fact that we had a bit more revenue and We had an opportunity to make some more investments. We did take advantage of that this year, but clearly it's below our model. I'd tell you next year, which I'm assuming Joe is the real of your question is to try to figure out what next year might look like. I don't know the exact number yet. I mean, we're still working up the operating plan for next year. I think Sanjay and his, discussions with all of you at the Analyst Day made a great point about the capital intensity of these businesses going up, which is why we thought the low 30s as a percent of revenue made sense. And so I think if, if you wanted to make a guess, you'd certainly suggest that CapEx will be up next year. The magnitude of that and exactly how that would all break down, I think, is yet to be determined by us and we'll go through the process this quarter in a very granular fashion and make sure we're getting good ROI on number in terms of CapEx. Okay. That's helpful. Thank you. And then I wonder if you can there's been a bunch written about antitrust concerns here, it's not obvious to me that there would be any. I'm just wondering if you can provide any context around those articles or those things. We can't really comment much on it other than the authorities in China had visited our offices and had on May 31, I believe it was and had requested certain information. And of course, we are cooperating with that. And I would just like to point out that we absolutely do remain focused on, discipline and operating with highest integrity methods. Thank you. And our next question will come from the line of Blayne Curtis with Barclays. Your line is now open. Hey guys, thanks for taking my question. I was just curious, indeed, Randy saw a nice uplift in ASPs. I think you've seen the pricing in market or at least with spot pricing come down. Just curious a little more color on that mix that helped there. And I think you mentioned servers and graphics. Just curious your outlook for those segments as you look into the second half of the calendar year. I think servers and graphics, we continue to see a growth, strong growth in those areas. And again, these are long term trends as we described earlier with cloud and all the billions of devices on the edge, all of them becoming more intelligent and trends of AI. Are absolutely driving more and more demand. We have shared at the Investor Day, for example, AI driven AI training driven compute workloads, have like 2x the amount of DRAM and 6x the amount of SSD. So these trends are really secular in nature. We are at the very, very beginning in same way in mobile, in terms of our low power DRAM where we have a very strong position. DRAM content requirements are going continuing to increase. And certainly graphics in console and gaming, as well as some crypto driven demands. It continues to be an overall long term strong trend as well. Thanks. And then maybe just a question for Dave. I just wanted maybe a clarification. Just on the NAND side, ASCs were up with mix. It looks like costs were up. And I just wanted to make sure is that just a function of selling more higher value parts and modules and such. Just curious. Yes, you're right. Sanjay even mentioned that the mix of, multi chip products into mobile was very healthy this quarter. And they do have a NAND and a DRAM component there. The ASPs are very high. They're margin accretive, I would point out. But the cost is actually higher. So the cost and ASPs did both go up, but it did expand the margins on the NAND side by about 50 basis points. Thank you. And our next question will come from the line of Ernie Tajjuri with Macquarie. Your line is now open. Thank you. And let me echo my congrats as well. I guess, Sanjay, just a quick question on the server demand that you talked about, you said data center DRAM and NAND grew 87%. I can see why the NAND business is outgrowing the market. I'm just curious, you seem to be outgrowing DRAM overall server demand server market as well. So I'm just curious as to what's driving those share gains. I can comment on that, then I have a follow-up. I think our strong execution with our products is enabling us to really broaden and deepen our reach with our cloud customers. And over the course of last few quarters in cloud, where we used to be underrepresented with respect to our total share, when you look at our total share of the DRAM in industry and you look at cloud, we used to be underrepresented, but when strengthening execution, our share has increased and is in line with rest of the overall DRAM industry share. So it is really a shared execution on our product roadmap, our ability to work closely with those customers to understand their requirements in terms of the technology, in terms of the products and certainly understanding them in terms of supply as well. And being able to fulfill their requirements successfully. This is an important area of focus for us, and I'm very pleased with the performance of the company, both on the DRAM side as well as on the NAND side in this high growth market. Great. And then maybe for Dave, Dave, on the CapEx, the low 30% CapEx guidance that you talked about, You talked about expanding clean room both in NAND as well as in DRAM. I believe it was 10% in DRAM and 35% in NAND. I guess if you assume that the NAND and DRAM bit growth will sustain at the current levels, when do you think you'll need more cleanroom space? And whenever that is, what are the implications for the CapEx? When we would need additional cleanroom space. Obviously, these node transitions are requiring more footprint, more floor space, as we move increasingly to more and more higher technologies. And so I'm not sure I could predict exactly when we'll need that. What we're trying to do is carefully build supply, consistent with, as what Sanjay indicated as our long term expectations around industry growth rates. Question will come from the line of Amit Dariani with RBC Capital Markets. Your line is now open. Thanks a lot for taking my question guys. I guess 2 for me as well. First of all, the 100 basis point headwind that you mentioned from 3 d cross point that's impacting you in May quarter, how do I think about that number in the August quarter? What are your to your guide with regard to that number? And when do you see that getting to a neutral level essentially? As I mentioned earlier, it's roughly in the same range for next quarter, assuming that, we do not sell any 3 d cross point to our partner. I wouldn't rule that out, as I said before. And that could happen in any quarter or multiple quarters, quite honestly, where we do sell brought to our partner, and that would certainly reduce or mitigate that underloading charge. As since that, I think the expectation is that, as I mentioned, that, 3 d Crosspoint products would start to be to be introduced in late calendar 2019. And the expectation is they would start to ramp shortly thereafter and And we'll start to see, the benefits of that in terms of bringing our utilization charges down over time. Got it. And then if I could just follow-up on your cloud server demand, especially the hyperscale side has been fairly robust for you guys. I think it's across DRAM and NAND both. And I understand all the medium to long term dynamics that you guys have outlay, but in the near term, I guess, is there a concern that perhaps some of the strength you've seen these customers pre buying or buying ahead and you may see a period of digestion over the next couple of quarters as a use of the capacity that have taken up. So I guess from where you said, do you have visibility and comfort that what are you have shipped into these hyperscale OEMs is getting used and absorbed and not just pre buying on that from their end? So as I pointed out earlier, we worked closely with these customers and really are building strong relationships across the board. We do not see a trend of building or holding product. We don't see that mean, the demand in cloud applications has continued to increase. You have heard cloud operators, the major cloud increase their CapEx in Q1 calendar Q1 2018 over Q4 2017 by more than 20% And on a year over year basis in calendar Q1, CapEx spend by major cloud holders increased by cloud operators increased by over 100%. So at this end, of course, meaningful part of that total CapEx from cloud operators is certainly going toward compute and storage and memory. And we are playing a good role in terms of supporting the needs of those customers. So now we do not see these trends we work closely in assessing overall their demand requirements and expectations. And keep in mind that this is a global trend in terms of cloud datacentergrowth. And there are several large operators around the world. And we are well engaged with most of them. So if ever there is any pause from any one of them, but it doesn't overall matter because the total trend is one of a continuous growth Again, given the value that memory and fast storage brings to the end market application, that these cloud providers are enabling for consumers as well as for businesses. Perfect. Thank you and congrats on the quarter guys. Thank you. Thank you. And our next question will come from the line of our line Your line is now open. Good afternoon and good job on the quarterly execution and strong diversification in the business. Given the normalization in NAND pricing, is the team starting to see price elasticity effects starting to kick in? In other words, as you guys work your customers on their second half product launches. Are you seeing SSD attach rates and notebook PCs increasing And are you seeing more content per application in areas like smartphones and IoT devices? Yes. Certainly, we do see that average capacities of NAND continue to go up in smartphones. We discussed that at the Investor Day as well. And certainly for DRAM, keep going up as well. In the high end, smartphones, 6 gigabyte DRAM, is being used and that average capacity over time, even phones getting introduced in the with 8 to 10 gigabytes, even 12 gigabytes. And similarly, on the smartphone side, certainly, average capacity of NAND trend is continuing to increase nicely. I think at the investor day, we had pointed out that there is a smartphone introduced in China that has, in fact, a terabyte of flash content. So average capacities are continuing to increase. And yes, certainly with the benefit that 64 layer technology has brought to the industry in terms of enabling actioning cost, it certainly is enabling content growth, not only in the mobile market, but also in SSDs, And, last year on SSDs, somewhat as average capacity growth had somewhat stalled, given the supply constraints that existed last year. And now with the benefit of there, certainly average capacities are expected to continue to increase over the course of next several years. And yes, replacing HDDs as well both in client computing applications as well as in enterprise applications with increasing attach rates and average capacity increases as well. Great. Thank you for the insights there. And there's been some reports of competitors struggling on advanced DRAM node transitions. Sanjay, can you just confirm that the Micron team is you guys are hitting your cost per bit targets at the 1x nanometer node? What did the initial yields and manufacturabilities look for the team? And then as you ramp initial production volumes of 1Y in the second half of this calendar year, can you just talk about also your ability to hit your cost targets and manufacturability targets? Thank you. So we are executing very well on our one as well as 1y technology for DRAM. I think we had already indicated that how on One X DRAM technology we had ramped to, mature yields, much faster than the previous generation technology node. And we have talked about that on Onex, we are on track to achieve a bit output crossover in our supply in, second half of this year. We are absolutely on track there and very pleased with the progress on 1Y technology in node in DRAM as well. Which we will begin production of in the second half of this year, of course, following customer qualifications. Great. Thank you. Thank you. Our next question will come from the line of Karl Ackerman with Cowen. Hi, good afternoon, everyone. I had a follow-up to the last question. So is widely reported that one of your competitors is struggling with yields on not just 1x, but also 1y. So do you still expect to have 10% of wafers out on 1y this calendar year? And I guess would you expect to have a more measured pace of capacity expansion plans or perhaps is your guidance for fiscal 2018 capacity expansion plans in part, acknowledging some of this pause from the 1y yield ramps or yield learning on 1y. I have a follow-up please. So, I don't think we have stated before in terms of our one Y technology mix, what we have said is that in the second half of this year, we will begin production of this technology, following customer qualifications, of course, that will then ramp up gradually over period of time. And of course, we'll be then focused on ramping up the production yields of the technology as well. I think you are confusing the 10% with what we have said regarding the Hiroshima space expansion. What we have said is we are expanding the cleanroom space in Hiroshima by 10% in order to implement, the 1y transition of the installed capacity there. That does not mean that we will have technology. That is not the case. So I hope I clarified that with you. But as I said earlier, we are pleased with the progress that we are making with our 1 wide technology development. And really pleased with the execution focus of our entire team, on accelerating our technology development and focused on deploying these technologies into production in order to enable us to catch up on the cost competitiveness in the industry. Fair enough. I tried my luck on 1y. Perhaps more of a longer term discussion. So there are several new memory fabs announced in China and yankee memory, I think, seems to be the 1st furthest along. While it appears these indigenous fabs may struggle near term to access IP beyond lagging edge NAND Technologies, thus limiting any real impact on supply. I was curious to hear your thoughts on how you think about the opportunity to sell supply agreements to indigenous Chinese companies in exchange for perhaps large upfront prepayments that could be used for both investment and capital return? Thank you. Again, as we have said, we are focused on executing to our strategy in terms of accelerating technology development and cost competitiveness and executing well on our products, we see strong demand trends for our products in our end markets in the well diversified markets that we have talked about. So I think this is what we are focused on and this is the best way for us to focus on how high ROI return on our investments. And that's our focus here. Thanks very much. Thank you. Thank you. Our next question will come from Steven Fox across Research. Your line is now open. Thanks. Good afternoon. Just one question from me. You guys earlier in the call mentioned multiple qualifications were underway on the EMCP. Products. I was curious if you could put a little color around that and whether you're referring to the rest of this year into next year and maybe touch types of customers, geographic regions, etcetera that you may be seeing most demand from? Thanks. With respect to EMCP, we are engaged with a broad set of customers in terms of getting our products qualified. The shipments that we have made with respect to EMCP are with 32 layer. And as I mentioned in my prepared remarks, we are also focused on qualifying 64 layer based EMCP products. And just will like to point out that along with EMC products, we are, of course, also focused on qualifying our, 64 layer based UFS and MMC products with our customers as well and seeing good traction there. This is all part of our strategy of shifting our portfolio toward high value solutions. Having both DRAM and NAND in those EMCP solutions is gives us a unique capability to provide a strong value proposition to our customers. And of course, these solutions are also, as we pointed out in our edit markets, automotive markets. So there is a broad set of customers that we are engaged with for our, EMCP and discrete managed NAND solutions. Great. I appreciate the help on that. Congratulations on the quarter. Thank you. And our last question will come from the line of Vijay Rakesh with Mizuho. Your line is now open. Good quarter and good guide. Just one question. As you look at the 96 layer and 1x, can you talk about what kind of cost reduction you see once it gets to steady levels? We do not provide cost reduction for these technologies, right? I mean, for competitive reasons, we don't disclose that. But I can tell you that in NAND, if you look at our track record and Micron's capabilities of CMOS under the Ray, we have produced the smallest die in the industry with our 3 d NAND. And on the DRAM front, we are continuing to focus on bringing in next generation technology nodes to narrow the cost gap that we have currently in the industry and we are making very good progress. As you can see in our results of FQ3 as well as in our guide of FQ4, are making very good progress on all those fronts. Yes. Last question here. On the when you look at the second half, obviously, first half had been very strong. As we can see, where do you see inventory levels in both DRAM and NAND? So inventory, as you probably noticed, was up a little bit this quarter. I'd point out that finished goods inventory was actually down by about $50,000,000. It was all up in WIP and, that was driven by this 4 layer and the ramp up of the 1X technology that drove, the inventory up. Early to make a prediction on next quarter, but maybe what I tell you more holistically is, as Manish talked about in the Analyst say, we really are looking at inventory and intend to make good progress on just refining our ability to manage with lower days. So that's kind of our goal, but that will happen over time. Thank you. This will conclude our program and we may all disconnect. Everybody have a wonderful day.