Good afternoon. My name is Jonathan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology second quarter 2018 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question and answer period. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Shanye Hudson. You may begin your conference.
Thank you, Jonathan, and welcome to Micron Technology's second fiscal quarter 2018 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 being webcast from our investor relations website at investors.micron.com. In addition, our website contains the earnings press release, which was filed a short while ago. Today's discussion on financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures may be found on our website, along with a convertible debt and capped call dilution table. As a reminder, the prepared remarks from this call and webcast replay will be available on our website later on today.
We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we'll 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 file with the SEC, specifically our most recent Form 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 forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We're 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 you, Sanjay.
Thank you, Shanye. Good afternoon. During the second quarter, Micron once again set company performance records across multiple metrics, including revenue, gross profit, EPS, and cash generation. We are consistently delivering results that underscore our relentless focus on execution and solid progress on our strategic priorities. Specifically, we are evolving our product portfolio to a richer mix of high-value solutions, enhancing our financial performance, and cultivating deeper relationships with marquee customers across multiple mega markets. Our growing portfolio of managed NAND solutions and low-power DDR4 products boosted our mobile business to record revenue and profitability during the quarter. We also grew our SSD shares in our second quarter, with total SSD sales up 80% year-over-year, and sales of cloud and enterprise drives more than tripling over that same period.
Continued strong penetration of our highly competitive DDR4 products into cloud applications and our industry-leading high-performance graphics memory portfolio into gaming, graphics, and crypto mining applications contributed to a robust 15% sequential growth for our compute and networking business. Strong demand for our DRAM and NAND products delivered record second quarter revenues for us in the automotive market. We continue to execute well on our goal of introducing new products on our advanced technologies, delivering performance, quality, supply, and cost advantages to our customers. In NAND, we are transitioning from being a component supplier to becoming a solutions provider. We launched and began qualifications of the industry's first cloud and enterprise SATA SSD drive incorporating 64-layer 3D TLC NAND. We also introduced discrete UFS solutions targeted at flagship smartphones.
These solutions are also based on our 64-layer 3D TLC NAND, which has 50% higher performance and double the density of the prior technology. We have qualified a family of these products with a major chipset vendor, and we expect to complete customer qualifications in the coming months. In DRAM, our focus remains on enhancing our cost competitiveness and accelerating our product execution. We have qualified our 1x nanometer DRAM at three of the world's largest hyperscale customers, with other qualifications underway. We also garnered positive feedback on our 1x nanometer LP DRAM solutions and set industry benchmarks for power efficiency, which is particularly critical to our mobile customers. Our comprehensive and expanding portfolio of DRAM, NAND, and NOR solutions has enabled us to achieve record design wins for our automotive business in the first half of fiscal 2018.
We believe we are well positioned to continue to support our shared leadership in this rapidly growing market. These achievements illustrate our focus and ability to deliver value to both our customers and shareholders. I will now discuss some of the trends we are seeing across our end markets, which will continue to expand the significant opportunities for our business in the years ahead. At Mobile World Congress recently, phone manufacturers featured high-end smartphones with larger 4K displays, multiple high-resolution cameras, and 4K HDR video recording. Capabilities like these have driven increased memory and storage requirements in recent years. Perhaps most impressive were the multiple implementations of artificial intelligence and virtual reality. OEMs are building new artificial intelligence, augmented reality, and lifelike virtual reality capabilities into high-end smartphones, including facial and voice recognition, real-time translation, fast image search, and scene detection.
To support these data-intensive capabilities, flagship and high-end smartphones are migrating towards six gigabytes of LPDRAM, a trend that bodes well for Micron, given our leadership in LPDRAM power efficiency, which is essential for optimizing battery life. Average storage densities are also increasing across all smartphone classes, with new flagship models using 64 gigabytes of flash memory as a minimum. Micron's portfolio of managed NAND solutions is well-suited to address this growing demand, and we are leading the industry in TLC utilization with a portfolio that leverages the strong attributes of our 3D NAND technology. Of course, the growing adoption of AI is not limited to mobile. At the Consumer Electronics Show, several companies showed AI smart cockpits in new automotive models. These systems integrate the instrument dashboard, infotainment, and telematic systems with a centralized compute and storage architecture to create a data center on wheels.
Voice and gesture recognition, combined with driver alert monitoring capabilities, are making automobiles more intelligent and much more compute intensive, requiring higher capacity and more powerful memory and storage solutions. Micron is already working with automotive customers who will benefit from our highest speed automotive grade LPDDR4 solutions in the near term, and new memory technologies in the future, like our high bandwidth GDDR6 graphics memory. The new features in mobile, automotive, and other connected devices require rapid data analysis and storage in enterprise and cloud servers, including machine learning, training, and inferencing to complement the compute taking place at the edge. This is driving significant investments in the data center and growing demand for both memory and high-performance storage. Micron's broad technology portfolio and strong innovation engine position us well for these growth trends.
We continue to partner with our customers to ensure our technology and engineering roadmaps deliver the critical features for tomorrow's solutions. Now I will provide an update to near-term industry supply-demand dynamics. The DRAM market today is very different from the PC-dominated market of the past. This market now supports a healthy demand environment with several secular demand drivers that I have discussed earlier. More specifically, memory is making possible applications such as AI and VR and enabling new cloud-based business models, which deliver a fundamental value far in excess of a price per bit. Against this healthy demand backdrop, we project DRAM industry bit output to grow in the 20% range for calendar 2018, maintaining favorable industry fundamentals.
For the NAND market, we believe the ongoing transition to 64-layer 3D NAND creates the opportunity for a more balanced industry dynamic in calendar 2018 versus the constrained conditions we saw in 2017. We expect industry bit output growth to be somewhat higher than 45% in calendar 2018, providing incremental supply to address the increasing demand created with the further displacement of HDDs in client, enterprise, and cloud applications. From a Micron perspective, we continue to make significant strides to strengthen our competitive position through technology and cost improvements. In DRAM, we are focused on accelerating our technology transition cadence and ramped our 1x nanometer technology to mature yield faster than any of our previous technology nodes. We remain on track to achieve 1x nanometer bit output crossover relative to our 20 nanometer node by the end of calendar 2018.
We now expect Micron's calendar 2018 DRAM bit output growth to be in line with the industry's 20% range. In NAND, our 64-layer technology continues to ramp very well with yields somewhat ahead of plan. We continue to execute plans to achieve bit output crossover on our 64-layer 3D NAND technology relative to 32-layer in the second half of fiscal 2018. We believe we will be somewhat above industry bit output growth in calendar 2018 for NAND. We expect to deliver qualification samples to OEM customers of both our 1Y DRAM technology and our third generation 3D NAND technology by the end of fiscal 2018. We continue to expect to ramp initial volume for each of these new nodes in the second half of calendar 2018.
For some time now, industry participants have pointed out that the cost and complexity of DRAM and NAND scaling is increasing with each subsequent technology node. Additional space and equipment is required to manufacture the increasingly complex architectures of these leading technologies to maintain wafer capacity and meet market demand. Accordingly, we are executing plans to add clean room space in our NAND and DRAM fab network. With the support of the Singapore Economic Development Board, we have finalized plans to build additional shell space in Singapore adjacent to our existing NAND center of excellence. The primary purpose for this new clean room space will be to transition our existing wafer capacity to future 3D NAND nodes. This location will enable us to drive efficiencies of scale. We expect to build out this facility in phases aligned with our manufacturing requirements and market demands.
The first phase of this clean room is expected to be completed by the summer of 2019, with initial wafer output from the facility expected in the fourth quarter of calendar 2019. We are also building out incremental clean room space in our fab in Hiroshima, Japan, which will be available for production at the beginning of calendar year 2019. This clean room space will be used to continue our 1Y nanometer DRAM transition. For fiscal year 2018, we expect our capital expenditures to be in the upper end of our previously guided range of $7.5 billion ±5%. Long term, we target capital expenditures as a percentage of revenue to be in a low 30% range.
Before we move to the next section of our call, I would like to address a supply maintenance issue disrupting nitrogen supply to one of our Taiwan DRAM fabs, which occurred on Tuesday of this week. We expect this event will impact our DRAM production output by 2%-3% for the quarter. Our teams are working around the clock to recover from this situation. We expect to return to full production within the next week. Lastly, I would like to welcome Dave Zinsner as our CFO. Dave brings years of experience within the semiconductor industry, and we are happy to have him on board. Dave will now provide details on our second quarter results and third quarter outlook.
Thank you, Sanjay. I'm excited to be joining Micron at a time when the company is accelerating its focus on execution, including the delivery of more high-value solutions and the ongoing improvement of cost competitiveness. During my first few weeks at the company, I've been diving into the details of the business and operations, and I'm more convinced than ever that there is a fantastic opportunity to build an even stronger company while continuing to enhance shareholder value. For the second fiscal quarter, revenues were $7.35 billion, up 8% from the prior quarter and 58% from the prior year. The overall strength reflects a positive business environment and broad-based demand for our memory and storage solutions, particularly for cloud, enterprise, and mobile markets. non-GAAP gross margins for the quarter were 58.4%, up 300 basis points from the prior quarter and up from 38.5% in the prior year.
Our ability to drive a richer mix of high-value products, strong execution on our cost goals, and favorable market conditions contributed to the gross margin expansion. non-GAAP operating margin was 49%, up from 46% in the prior quarter and 25% in the prior year period. non-GAAP operating expenses were $666 million, up approximately 9% from both the prior quarter and prior year periods. The sequential increase is primarily attributed to expenses associated with shifting our portfolio to high-value solutions and accelerating our technology and product development. These expenses tend to fluctuate quarter to quarter. We're also beginning to incur the impacts of solely funding the development of our fourth generation 3D NAND technology. We continue to manage operating expenses tightly and are generally only increasing operating expenses for developing and qualifying new products and technologies. Turning to performance by business unit.
The compute and networking business unit grew revenue to $3.7 billion in the second quarter, up 15% from the prior quarter and 93% year-over-year. Cloud server revenues were up nearly 30% quarter-over-quarter as hyperscale customers continue to invest in data center infrastructure and broaden their service offerings. We also benefited from strong demand for graphics memory with cryptocurrency mining augmenting sales for gaming applications. Operating income increased to $2.3 billion or 63% of revenue, and reflects higher sales of our 1x nanometer DRAM solutions along with tight supply conditions. The mobile business unit achieved its highest-ever revenue and operating income in the second quarter of $1.6 billion and $680 million respectively. These results compare to $1.1 billion of revenue and $170 million of operating income for the same period last year. Our performance underscores our laser focus to meet customers' needs.
The embedded business unit reported revenue of $829 million in the second quarter, in line with last quarter, and up 41% year-over-year. The automotive business had a record quarter driven by strong sales of ADAS and in-vehicle experience applications. We also saw an increase in our industrial business driven by the growing industrial IoT markets spanning factory automation, transportation, and surveillance applications. Operating margins were 44% in the fiscal second quarter, expanding by 260 basis points compared with the first quarter. Finally, turning to the storage business unit, revenue was $1.3 billion, up 20% year-over-year, supported by record revenue in SSDs. On a sequential basis, SBU revenue declined by 9%, with the strong growth in SSDs offset by a reduction in components revenue. The sequential revenue comparison was impacted by a mix shift within our NAND component sales, which I'll elaborate on momentarily.
We're continuing to penetrate the SSD market and expand sales across each end market, consumer, compliant, client, enterprise, and cloud. The growth is most pronounced in the enterprise and cloud SSD portion of the market. Our sales at these end markets were up nearly 30% quarter-over-quarter, and more than 230% year-over-year. As we previously noted, product developments for 3D XPoint solutions is now underway. During the second quarter and over the next few quarters, we have incurred and will likely continue to incur costs associated with production capacity underutilization in advance of volume ramp of these new 3D XPoint products. These charges negatively impacted our SBU operating margins by approximately 500 basis points this quarter. Including these charges, second quarter operating margins were 20%, compared with 29% in the fiscal first quarter and 7% in the prior year period.
Moving to performance by product line, DRAM represented 71% of total company revenue in the fiscal second quarter. DRAM revenue in the quarter was up 14% from the prior quarter and 76% year-over-year. Sequentially, shipment quantities increased in the mid-single-digit percentage range, while ASPs increased in the low double-digit percentage range. DRAM non-GAAP gross margin was 66% in the second quarter, up four percentage points from the prior quarter and up 22 percentage points from the year-ago quarter. Revenue from trade NAND represented 25% of overall company revenue in fiscal second quarter. Trade NAND revenue in the quarter was down 3% sequentially and up 28% year-over-year. On a sequential basis, shipment quantities increased in the low double-digit percentage range while ASPs declined in the mid-teens percentage range.
The sequential ASP decline in NAND increased in part due to a meaningful last-time purchase of higher-priced MLC NAND in the fiscal first quarter. This is the mix shift in our SBU NAND components that I had referenced earlier. Trade NAND non-GAAP gross margins were at 47% in the second quarter, down two percentage points from the prior quarter, but up 16 percentage points from the year-ago quarter. Gross margins for both SSDs and managed NAND solutions increased quarter-over-quarter, offsetting the declines in component margins. This change in mix illustrates the importance of shifting our sales towards high-value solutions. I'd like to take a moment to update you on the impact of U.S. tax reform on Micron. The one-time impact related to the taxation of accumulated offshore earnings and cash was largely neutral for the company.
The impacts of this repatriation transition tax were largely offset by our accumulated tax losses and other tax credits. For the remainder of the year, we expect our non-GAAP tax rate to remain in the low to mid-single-digit percentage, since we are not yet subject to certain provisions of the new tax code. For fiscal 2019 and beyond, we expect our non-GAAP tax rate to settle in the low teens percentage range. Going forward, we'll benefit from having greater flexibility to access our worldwide cash deposits. Our non-GAAP earnings per share were $2.82, up 15% from the prior quarter and up over 200% from the prior year. As a result of our record performance, we generated $4.3 billion in cash from operations, which represented 59% of revenue. This compares to $1.8 billion in the year-ago period.
Capital spending, net of third-party contributions, was $2.1 billion, resulting in a very strong free cash flow, adjusted for these third-party capital contributions of $2.2 billion, or 30% of revenue. This compares to free cash flow of approximately $600 million in the year-ago period. As Sanjay mentioned earlier, we expect capital spending net of third-party contributions to be at the upper end of our fiscal 2018 guided range of $7.5 billion ±5%. As a result of the strong free cash flow, we ended the quarter with approximately $8.7 billion in cash, marketable investments, and restricted cash. The face value of our debt increased approximately $200 million to $9.5 billion. A $300 million reduction in debt due to scheduled debt repayments was offset by a $500 million increase in debt at our IMFT joint venture.
The first of our 3D XPoint products are expected to launch in calendar 2019, we chose to defer funding for IMFT. Our partner is contractually able to make the funding on our behalf and designated as debt on IMFT's balance sheet, and that debt is then counted as part of our debt for the purpose of GAAP reporting. We still expect to be in a net cash positive position in the fourth quarter, and possibly sooner, depending on the extent and timing of any future convertible note redemptions. This net cash positive position remains a significant milestone in the ongoing strengthening of our financial foundation. We continue to evaluate additional opportunities to accelerate our deleveraging actions that will provide a high rate of return. This strong financial profile is the result of consistent execution and focus across the entire company. Now, turning to the fiscal third quarter guidance.
As Sanjay mentioned, we had a maintenance issue at one of our Taiwan DRAM fabs this week, which is impacting production. We expect this event to decrease our total revenue by approximately 2% in the third quarter, which we've accounted for in our guidance. Having said that, we continue to experience a strong demand environment, we therefore expect fiscal third quarter revenue to be in the range of $7.2 billion-$7.6 billion, and non-GAAP gross margins to be in the range of 57%-60%. We expect to see an increase in operating expenses, again, associated with product and technology qualifications and the funding of our 4th generation 3D NAND technology, both of which primarily impact R&D. Considering these costs, non-GAAP operating expenses are expected to be $725 million ±$25 million.
We expect non-GAAP operating income to be in the range of $3.6 billion-$3.8 billion. Based on a share count of approximately 1.25 billion shares, these results should drive non-GAAP EPS of $2.83 ±$0.07. I'll now turn the call over to Sanjay for some concluding remarks.
Thank you, Dave. Micron will be celebrating our 40th anniversary this fall. Innovation has always been a key cornerstone to our success, ensuring that our technologies and products quickly adapt to serve the world's growing appetite for faster data. As we look ahead, we remain focused on nurturing and fostering an accelerated pace of innovation, and I know our team is fired up and ready for the challenge. The opportunity to create a dramatic impact on the world around us is undeniable, and I'm excited to be part of this team shaping that future. I'm looking forward to speaking with all of you at our analyst and investor event in May. You can expect us to provide more detail on how we see secular market trends creating new opportunities for memory and high-performance storage, and why we believe Micron is well positioned to win. We will now open for questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Rajvindra Gill from Needham & Company. Your question, please.
Yes. Thank you for taking my questions. I appreciate it. I was wondering, Sanjay, if you could talk a little bit about the changes in the DRAM industry that you've seen over the past year or so. I think in the past, you had mentioned that memory is becoming a strategic differentiator for high-performance computing. I was wondering if you could maybe elaborate on what specific end markets or behavior patterns that have been changing with some of your main customers in terms of how they consume memory.
Certainly. I think we are seeing the fastest growth for our DRAM memory at large scale in cloud computing and hyperscale data centers. This is where high-performance memory is absolutely becoming essential, along with fast storage is becoming essential for the trends such as AI, which are really driving new business models. Whether you go from education and training tailored toward individual levels of coaching or training to the individuals, or to millions of transactions processed real time in financial sector to detect fraud or going to diagnosing and treating life-threatening diseases. Bottom line is, we are barely starting with AI in cloud computing and data centers. To realize the full impact of these solutions and to truly provide new business models and services and applications to consumers and businesses alike. More and more data needs to be processed.
It needs to be real-time analytics, That requires more fast memory and more fast storage. That means flash as well as DRAM. We are seeing tremendous growth, and if you look at trends, we project that 2017, about 145 gigabytes per server, going to about 350 gigabytes per server by 2021. Similarly, if you look at flash storage, one and a half terabyte average in 2017, going to something like six terabyte average with each server by 2021 timeframe. These are massive secular demand trends in the cloud computing and hyperscale, for memory as well as for flash storage.
Similarly, going to mobile, I talked about in my script that at Mobile World Congress, several new phone models were introduced that leverage 4K HDR capabilities, that leverage AR and VR, even there are processors that are being introduced for mobile applications that actually have the AI unit built into it. Just imagine how much data-intensive applications are now being run in order to provide users smooth experience. That requires high performance and lot of memory, you are starting to see now six gigabyte phones, six gigabyte of DRAM in the phone. Mobile is another large driver of DRAM memory, of course, it is also a large driver with average capacities continuing to increase for flash as well. Autonomous driving is barely starting.
Industry pundits are talking about robo-taxis, intercepting the whole autonomous driving trend and maybe being introduced even in 2019, 2020 kind of timeframe. Autonomous driving means, as I said in my remarks, data center on wheels, requiring more fast memory to, again, make all real-time decisions, providing for a safe and comfortable and efficient driving experience. These are really massive trends, These are secular in nature, I believe will continue to drive strong demand for DRAM in the years ahead. Of course, there are other ones, continuing average capacity increases in PCs for DRAM, with more gaming features and VR features, of course, Industrial 4.0 initiatives. These are all multiple mega markets for DRAM.
We are very well-positioned with our product portfolio, focusing on cost competitiveness with our technology advancements, as well as what I indicated, low-power DRAM solutions, which are becoming increasingly important across multitude of these applications.
That's very helpful, Sanjay. Just want to follow up. Your SSD revenue was up 80% year-over-year. Can you talk a little bit about the attach rate for client SSD specifically? Last year, they were put on a temporary pause because of tightness in supply. I was wondering if you could talk a little about that, now that we're about a quarter into this year. Thank you.
You're right. Last year, flash was severely constrained, and that did somewhat slow down the attach rate of SSD in client computing as well as slow down the march toward higher capacities of SSDs in notebook computers. Attach rate for SSDs in client computing, around 35%-40%, maybe 40% in 2018, maybe going toward 50%, but over the next few years, this is expected to continue to go toward, by 2020, 2021 timeframe, to 85%+ attach rate for SSD. Again, this is a large growth driver for SSDs in client computing applications. We are focused on, of course, expanding our portfolio of SSDs. We talked about significant progress of all SSDs across the board in client enterprise as well as in the consumer market.
We look at opportunities to gain further share in all of these SSD markets in the future as we continue to execute on our product roadmap.
Great. Thank you. Congratulations.
Thank you.
Thank you. Our next question comes from the line of Chris Danely from Citi. Your question, please.
Hi, this is Wayne Loeb on the line for Chris Danely. My question is, when you talk about your plans for acquisitions, what would be the criteria that would make you buy something? And how does M&A fit into your plan in the context of Micron wanting to be a NAND solution provider?
We are not going to speculate on M&A matters here. We are very pleased with the portfolio of technologies and the initiatives we have with respect to continuing to advance our product solutions. Of course, we do not rule out, in the future, leveraging M&A toward any growth initiatives. Of course, we will always look for core capabilities to expand the market opportunities for Micron. Of course, we'll be focused on value in terms of any acquisition that we may entertain in the future. Again, not speculating on anything at this point. Of course, always looking for ROI kind of opportunities.
As a follow-up question, can you talk about what Micron's projected cost reductions are for NAND and DRAM this year?
We don't provide specifics on cost reduction, but what I can tell you is that we are making very good progress on our technology. As we indicated, in our 1x DRAM technology, we have achieved the fastest RAM To mature yield in the history of the company. Similarly, our 64-layer technology has ramped to mature yields rather well, and we are continuing, of course, to do very well on our 20 nanometer DRAM technology with yields as well. We are pleased with our continuing progress on costs at the technology levels and continuing to focus on advancing our next-generation technology nodes and products. Of course, also very much focused on non-memory costs in our products, such as SSD, non-memory costs. Making good progress, and all of that is baked into our gross margin guidance that we have provided.
Thank you very much.
Thank you. Our next question comes from the line, Mark Delaney from Goldman Sachs. Your question, please.
Yes, good afternoon. Congratulations on the good results, and thanks for taking the questions. First question, I hope you can detail a little bit more about that nitrogen issue you mentioned. Did you have to scrap wafers or just idle production? Can you help us reconcile the comment about a little bit less DRAM output for next quarter with the now full-year guidance about growing in line with the industry compared to last quarter? I think Micron was going to grow slightly before. Slightly below, excuse me.
This nitrogen maintenance issue has not caused scrapping of wafers. It has idled or slowed down production. As we said, it's impacting 2%-3% of our this quarter's DRAM production output. With respect to our expectation of our output growth for calendar year 2018, that remains in line with the industry estimate of 20%, and this effect is already included in that as well.
Is it fair to assume a better 1x nanometer yield? I mean, is that how Micron's now growing in line with the industry for the full year despite this nitrogen issue?
Yes, it is correct that our production output is expected to grow in line with the industry. That is, of course, as a result of our excellent yields on 1x nanometer node as well as the 20 nanometer node.
Okay. Then one other question from me, if I could. Sanjay, you commented about having a CapEx to sales target in the low 30% range. I don't want to parse words too closely. I think it was about 30% as of the last Analyst Day. The strategy for Micron, as I understood it, had been that the company was trying to keep its net DRAM wafer starts flat, and there's a lot of costs associated with getting to these new nodes because of all the extra factory space that you need and need for new clean rooms.
Just given your comments about CapEx coming in toward the higher end of the range this year and the comments about that ratio, is there any change about the strategy of Micron and how it's thinking about CapEx and really just enabling getting to those next nodes, which are getting more expensive, or is there a change we need to be thinking about in terms of how Micron's thinking about managing its net wafer starts in DRAM? Thank you.
I think if you look at last few years, you look at Micron's revenue, you look at Micron's CapEx, you will see that Micron's CapEx over the course of last few years is in the low 30% range of the revenue over those last few years as well. What we have said here today is fairly consistent with what actually has been the case at Micron over the course of last few years. In fact, if you look at the industry itself, you look at the revenue of the industry players, you look at their CapEx over the course of last few years, you will see actually that average for the industry as well is in that same range also. In terms of our own strategy for CapEx spend, it's absolutely focused on accelerating our technology transitions.
Our CapEx is geared toward realizing DRAM and NAND technology transitions toward more cost-effective advanced technology nodes for our products, and it is not about capacity, wafer capacity production increase for us.
Thank you.
Thank you. Our next question comes to the line, Karl Ackerman from Cowen and Company. Your question please.
Hi, good afternoon. Dave, welcome to the team. I have two questions, please. My first question is on DRAM demand. We all know that DRAM is more inelastic than NAND, but I was curious, what are some signs that you look for to assess if you are beginning to see demand destruction in DRAM demand from higher ASPs, particularly in mobile and PC environments that are more sensitive to price than hyperscale environments? I have a follow-up, please.
Can you clarify the question to me? I didn't totally get the question. I'm sorry.
Yes. I'm just curious, how should we assess the potential demand destruction in DRAM demand from higher ASPs in mobile and PC environments, over the next few quarters if there were to be an issue?
I think what we have to realize is that DRAM absolutely is essential to the experience and the business models that it enables. Whether it is the experience in mobile phones, I talked about those experiences, AR, VR, 3D gaming, multitude of applications and users absolutely expecting seamless experience. Such data-intensive applications require more DRAM. It is essential. I mean, it's not like you can offer a model with less DRAM in it, a high-end model with less DRAM in it, and expect that users will still have the same good experience. DRAM capacity has really become a key enabler and essential element of mobile. Same as I talked about earlier, for hyperscale data centers, when they look at what models that they can enable for their end customers, those are all being built on very data-intensive applications.
Imagine retailers, a consumer goes into a retail store and the retailer already knows about what are the needs of that consumer. All of that requires, for retail, real-time AI applications, which means lot of data that has to be processed fast, which means, again, it needs more DRAM memory. It is actually, when you look at hyperscale data centers, it's not about the cost of DRAM anymore. I think the value that it enables to these cloud applications and hyperscalers is far in excess of any aspect of DRAM price per bit. DRAM really has become an essential part. This is very different from any time in the past.
The best indicator of this is that DRAM pricing is strong and DRAM demand is strong right now.
Yeah, that's helpful. As my follow-up, I was hoping you could elaborate on your comments for OpEx, as we think about the trajectory of spending for the next few quarters. Specifically, do you plan on reinvesting the savings you expect to achieve from Micron and Elpida coming together for the first time on 1X development? How should we think about the timing of any planned pre-qualification expenses for maybe 1X DRAM or QLC 3D NAND deployment when we make assumptions for OpEx for the balance of 2018? Thank you.
Okay, that's fair. Let me go back to the commentary, make sure it's clear. In the second quarter, most of the increase we experienced was around qualifications of various technologies that all came together all in the second quarter, and it continues on into the third quarter. Those expenses vary over time. This just happens to be a couple of quarters in which that activity is pretty heavy, and we're experiencing a lift in expenses, and I would expect that portion of it to settle down and then when the next set of qualifications are required, it'll come back up again. The other piece of the expenses really relate to our fourth generation 3D NAND, where, as we announced earlier, we're taking that on ourselves. We had about half of that hit us in the second quarter.
We'll have the full quarter's effect in the third quarter, and that was about $20 million in a full quarter. About a $10 million lift in the second quarter and $20 million lift in the third quarter.
Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please.
Hi, good afternoon. Given the continued strong demand that you see in data center, how should we look at the initial supply-demand outlook in NAND flash for the second half of calendar 2018? Should we expect pricing to stabilize? Any commentary based on the trends that you see currently continuing for the rest of the year?
We are not going to comment on pricing trends in the industry. What I can tell you is that NAND industry does have certain aspect of its end market that, such as USB flash drive or imaging cards or retail, that tends to be somewhat seasonal in the first calendar quarter. As we go forward, that part changes. Most important thing to look at is that as more supply becomes available, it drives deeper penetration of SSDs in client devices as well as gives an even stronger value proposition in enterprise and data center applications. This is what we expect during the course of the year, and of course, average capacities of NAND in mobile phones, smartphone, continue to increase as well.
We are expanding our portfolio of multi-chip packages with DRAM and NAND, which is where Micron is uniquely well-positioned to expand our opportunities and increase our share with NAND flash and DRAM-based solutions in multi-chip packages, as well as discrete NAND solutions such as the UFS that I talked about that are in the stages of qualifications with our customers. We look ahead at the year with strong demand drivers for NAND in the industry and growing opportunities for our NAND business for the remainder of the year, calendar year here, and very focused on execution of all our new product introductions and qualifications with our customers because those will ultimately drive our success toward high-value solutions as part of our mix of NAND revenue.
Okay, that's useful. As a quick follow-up, is it fair to assume that a high double-digit growth rate in bits demand for NAND in data center is something that is possible again for this calendar year?
Yes, for this calendar year for data center, absolutely. NAND bit consumption in data center is expected to be in the range of 50% or higher. Basically, a data center is where demand will grow faster than the average of the industry. Keep in mind, same thing for client SSDs as well.
Great. Thank you very much.
Thank you. Our next question comes from the line of Mehdi Hosseini from SIG. Your question, please.
Yes, thanks for taking my question. Sanjay, I have a follow-up. You and others in the memory industry have been discussing opportunities in moving up the stack. At the same time, some of your enterprise customers are also trying to navigate their way and move up the stack. I'm just wondering, what's wrong with keeping the business as is? Your NAND gross margin is in the 45%-50%, DRAM gross margin is in the 65%-70%. Assuming that the industry is rational and we can avoid excess capacity, why not just focus on making the most cost-effective DRAM and bit and capitalize on the margin profile? I have a follow-up.
Let me be clear that we are very excited about the market opportunities for DRAM and NAND, all the things that we have been talking about so far over the course of the last 45 minutes here. Of course, our strategy is to continue to strengthen our cost competitiveness, as well as increase the mix of high-value solutions in our revenue. By high-value solutions in our revenue, we mean products such as SSDs, as well as managed NAND solutions, because we have both DRAM and NAND, and that gives us a unique opportunity to provide managed NAND solutions for today's smartphones that are needing more and more of such solutions. We are absolutely focused on leveraging our core capabilities to drive cost reductions, catch up on the DRAM cost with the rest of the competition, and in the NAND, strengthen our portfolio of these high-value solutions.
I have no doubt that there is nobody taking the eye off the ball, and we are relentlessly focused on strengthening the execution engine of the company and tremendous opportunity ahead in that regard for us. It's already been derived through the strong results we have demonstrated so far, but there is even greater opportunity ahead of us.
In terms of cost, you recently introduced a QLC 64-layer 3D NAND SATA SSD. Is there any way you can either quantify or qualitatively discuss the cost per gigabyte that this particular product offers you and how we should think about its ability, due to lowest cost, to penetrate and displace existing technologies?
What we introduced recently is a 64-layer-based TLC SATA SSD. As we have said before, QLC is certainly an exciting opportunity for Micron in the years ahead. QLC is in the development stages. It is not a 2018 phenomenon. That is something that's more like a 2019 opportunity, starting in 2019 timeframe.
Should we assume that this offers you, perhaps I'm just going to give you a number. Could this offer a customer less than $0.20 per gigabyte of cost?
We don't get into cost discussions. Our focus, of course, is to develop QLC solutions that will be, in the future, going toward applications that are very read-intensive and somewhat balanced in terms of more write applications. Of course, our goal would be to drive these, build value in these solutions, especially going toward high-capacity aspects of the storage market, build value in these solutions so that we can be selling them in a profitable fashion and bringing strong value to our customers as well. I'm not going to get into pricing or speculate on the pricing for QLC.
Great. Thank you.
Thank you. Our next question comes from the line of Hans Mosesmann from Rosenblatt Securities. Your question, please.
Sanjay, if you can just clarify, I think somebody asked the question before, I'll just make it more concise. Are you seeing any despeccing in the DRAM or NAND markets? Thanks, I have a follow-up.
We are not seeing any despeccing. If anything, again, given the nature of the application, the average capacity requirements continue to go up in all end markets that we are in.
Okay, another follow-up, more of a longer-term or midterm question. After 1Y in the DRAM world, how many more node transitions or half transitions do you expect you and the industry to have before you hit a wall, if you will?
We have talked about our 1Z technology node in DRAM, our engineers are working on that, engineers, of course, always continue to look at opportunities for further scaling. Similarly, we are working on other advanced technologies of the future as well.
Okay, there's no letter after 1Z at this point?
There is no letter in the alphabet after 1Z.
You can go to 1ZB. You can add a plus plus or plus plus plus. Anyway, thank you very much. You answered the question.
Thank you. We'll take you up on your suggestion.
Thank you. Our final question comes on the line. Vijay Rakesh from Mizuho. Your question please.
Hi, guys. Just on the NAND side, I was wondering what % of your NAND was SSD. I know you mentioned it grew 80% year-over-year and seeing good traction enterprise.
We don't give that breakdown.
Got it. I know you talked about 3D XPoint, there's a 500 pip drag on the margins. When do you start to see the drag go away? Just wondering, as you look at that ramp by year-end, what proportion do you think that would be of your NAND? Thanks.
3D XPoint products are expected to come out in sometime in calendar year 2019. Sometimes we'll have underloading charges. It's possible that our partner might take some of those wafers, so that would obviously help on the underutilization. Of course, as we start to release those products about late 2019, we start to build some of those wafers, and that will help out on the underutilization as well.
Got it. Great. Thanks.
I just want to comment on your earlier question regarding SSD. Of course, we don't provide the specifics, but clearly SSD is growing fast and is increasingly large portion of our revenue, and very pleased with the progress that we have made in increasing the mix of SSD in our portfolio.
Thank you. This does conclude the question and answer session. I'd like to hand the program back to management for any further remarks.
Thanks, Jonathan. As always, we appreciate your interest and support for Micron. I'd remind you that a copy of the prepared remarks as well as a webcast replay can be found on the investor relations section of our website later this afternoon. Thank you.
Thank you. This concludes today's Micron Technology second quarter 2018 financial release conference call. You may now disconnect.