Earnings Call: Q2 2018

Mar 22, 2018

Good afternoon. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome everyone to Grand Technology Second Quarter 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question and answer period. Thank you. It is now my pleasure to turn the floor over to your host, Shannon Hudson. You may begin your conference. Thank you, Jonathan, and welcome to Micron Technologies Second Fiscal Quarter 2018 Financial Conference Call. On the call with me today are Sanjay Marotta, President and CEO and Dave Zinsners, 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 dotmicron.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 and table. As a reminder, the prepared remarks from this call and webcast replay will be available on our website later on today. We encourage that we'll be attending. You can also follow us on Twitter at micron.tech. 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 have 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, 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 to record revenue and profitability during the quarter. With total SSD sales up 80% year over year and sales of cloud and enterprise drives more than tripling over that 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 projects 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 1st cloud and enterprise SATA SSD drive incorporating 64 layer 3 d TLC NAND. We also introduced Discrete UFS solutions targeted at flagship smartphones. These solutions are also based on our 64 layer 3 d TMC NAND, which has 50% higher performance and double the density of the prior technology. We have qualified a family of these projects 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 3 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 the first half of fiscal twenty eighteen. These achievements illustrate our focus and ability to deliver value I will now discuss some of the trends 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, but perhaps most impressive were the multiple implementations of artificial intelligence and virtual reality. OEMs are bundling new artificial intelligence augmented 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 6 gigabytes of LPD RAM, a trend that bodes well for Micron given our leadership in LP DRAM 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 at the minimum. Micron's portfolio of managed and 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 3 d NAND technology. Of course, the growing adoption of AI is not limited to mobile. At the Consumer Electronics Show, several companies showed AI smart cockpit and new automotive models. These systems integrate the instrument dashboard infotainment and telematics 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 blade LP DDR4 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'd like to wait an update to near term industry supplydemand 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 60 4 layer 3 d 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 Onex 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 least continues to ramp very well with yields somewhat ahead of plan. We continue to execute plans to achieve better output crossover on our 64 layer 3 d NAND technology relative to 32 layer in the second half of fiscal twenty eighteen. 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 3rd generation 3 d NAND technology by the end of fiscal 2018. And we continue to expect to land initial volume for each of these new nodes in the second half of calendar twenty eighteen. For some time now, industry participants have pointed out that the cost and complexity of DRAM and NAND scaling is increasing with each subsequent the increasingly complex architectures of these leading technologies to maintain wafer capacity and meet market demand. Accordingly, we are executing plans to add cleanroom 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 cleanroom space will be to transition our existing wafer capacity to future 3 d 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 1st 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 cleanroom space in our fab in Hiroshima, Japan, which will be available for reduction at the beginning of calendar year 2019. This cleanroom space will be used to continue our 1y nanometer DRAM transition. For fiscal year 2018, we expect our percent. 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 apply 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% to 3% for the quarter. Our teams are working around the clock to recover from lastly, I would like to welcome Dave Zinstlinger 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 2nd 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 1st 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 was a fantastic opportunity to build an even stronger company while continuing to shareholder value. 8% from the prior quarter and 58% from the prior year. The overall strength reflects a positive business environment broad based demand for our memory and storage solutions, particularly for cloud, enterprise and mobile markets. Non GAAP gross margins for and up from 38.5 percent 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 Non GAAP operating expenses were $666,000,000, up approximately 9% from both the prior quarter and prior year periods. The sequential increase is primarily attributed to expenses associated with shifting technology and product development. These expenses tend to fluctuate quarter to quarter. We're also beginning to incur the impact of solely funding the development of our 4th generation 3 d NAND technology. We continue to manage operating expenses tightly, and are generally only increasing operating expenses Turning to performance by business unit. The compute and networking business unit grew revenue to $3,700,000,000 in the 2nd 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 Graph memory with cryptocurrency mining augmenting sales for gaming applications. Operating income increased to $2,300,000,000 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 $1,600,000,000 $680,000,000, respectively. These results compare to $1,100,000,000 of revenue and $170,000,000 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 $829,000,000 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 2nd quarter, expanding by 2 storage business unit, revenue was $1,300,000,000, 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 We're continuing to penetrate the SSD market and expand sales across each end market, consumer, compliance, client, enterprise and cloud. The growth is most pronounced in the enterprise and cloud SSD portion of the market. Our sales of these end markets were up nearly 30% quarter over quarter and more than 2 30% year over year. As we previously noted, product developments for 3 d Crosspoint solutions is now underway. During the second quarter and over the next few quarters, we have incurred and will likely to continue to incur cost associated with production capacity underutilization in advance of volume ramp of these new 3 d Crosspoint products. These charges negatively impacted our SBU operating margins by approximately 500 basis points this quarter. Including these charges, 2nd 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 2nd quarter, DRAM revenue in the quarter was up 14% from the prior quarter and 76% year over year. Sequentially, Shipland 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 2nd quarter, up four percentage points from the prior quarter and up 22 percentage points from 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 Ps declined in the mid teens percentage range. The sequential ASP decline in NAND increased in part 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 2nd 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 I'd like to take a moment to update you 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, since we are not yet subject to certain provisions of the new tax code. For fiscal 2019 and beyond, we expect our having greater flexibility 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 $4,300,000,000 in cash from operations, which represented 59 percent of revenue. This compares to $1,800,000,000 in the year ago period. Capital spending net of 3rd party contributions was $2,100,000,000, resulting in a very strong free cash flow adjusted for these 3rd party capital contributions of $2,200,000,000 or 30% of revenue. This compares to free cash flow of approximately $600,000,000 in the year ago period. As Sanjay mentioned earlier, we expect capital spending net of 3rd party contributions to be at the upper end of our fiscal 2018 guided range, of $7,500,000,000, plus or minus 5 percent. As a result of the strong free cash flow, We ended the quarter with approximately The face value of our debt increased approximately $200,000,000 to $9,500,000,000 a $300,000,000 reduction in debt due to scheduled debt repayments was offset by a $500,000,000 increase in debt at our MIFT, IMFT joint venture. Since the first of our 3 d Crosspoint products are expected to launch in calendar 2019, we chose to defer funding for IMMT. Our partner is contractually able to make 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 This strong financial profile is the result 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 in the third quarter, which we've accounted for in our guidance. Having said that, we continue to experience a strong demand environment and we therefore expect fiscal 3rd quarter revenue to be in the range of $7,200,000,000 to $7,600,000,000, and non GAAP gross margins to be in the range of 57% to 60%. We expect to see an increase in operating expenses Again, associated with product and technology qualifications and the funding of our 4th generation 3 d NAND technology, both of which primarily impact R And D. Considering these costs, non GAAP operating expenses are expected to be $725,000,000 plus or minus $25,000,000. Be in the range of These results should drive non GAAP I'll now turn the call over to Sanjay for some concluding remarks. Thank you, Dave. Micron will be celebrating our fortieth anniversary this fall. Innovation has always been a key cornerstone to our success, ensuring that our technologies and products quickly adapt serve the world's growing appetite for faster data. As we look ahead, we remain focused on nurturing and fostering 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 shipping that future. I'm looking forward to speaking with all of you at our Analyst an 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 Our first question comes from the line of Rajvinde Gill from Needham And 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 can 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? Currently, I think we are seeing the fastest growth for DRAM memory at large scale in cloud computing and hyperscale data centers. And 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 individual or to millions of transactions processed real time in financial sector to detect fraud or to die or going to diagnosing and healing light setting diseases. Bottom line is we are barely starting with AI in cloud Computing And Data Centers and to realize the full impact of these solutions and to truly provide this new business models and services and applications to consumers and businesses alike. More and more data needs to be process, it needs to be real time analytics, and that requires more fast memory and more fast storage. That means flash as well as DRAM. So 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, 1.5 terabyte average in 2017, going to something like 6 terabyte average where each server by 2021 time frame. So 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 a script that as Mobile World Congress, several new phone models were introduced that leverage 4K HDR capabilities leverage AR and BR. And even there are processors that are being introduced for mobile applications, that actually have the AI unit built into it. So just imagine how much data intensive applications are now being run-in order to provide users smooth experience. That then requires high performance and lot of memory And you are starting to see now 6 gigabyte phones, 6 gigabytes of DRAM in the phones. So mobile is another large driver of DRAM memory. And of course, it is also a large driver with average capacity is continuing to increase for Flash as well. And then autonomous driving is barely starting. I mean, industry pundits are talking about robot taxis, intercepting the whole autonomous driving trend and maybe being introduced even in 2019, 2020 kind of timeframe, And autonomous driving means, as I said in my remarks, data center on deals, acquiring more fast memory to, again, make all real time decisions providing for a safe and comfortable and efficient driving experience. So these are really massive trends. And these are secular in nature, and I believe will continue to drive strong demand, for DRAM in the years ahead. And of course, there are other ones, you know, continuing average capacity increases in PCs for DRAM, with more gaming features and VR features. And of course, industrial 4.0 initiatives, I mean, these are all multiple mega markets for DRAM. That 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. It's my follow-up. Your SSD revenue was up 80% year over year. Can you talk a little bit about the attach rates for client SSD specifically? Last year, they were put on a temporary pause because of tightness in supply, I'm wondering if you could talk a little bit about that, now that we're about a quarter into this year. Thank you. So you and I, I mean, last year's Flash was severely constrained and that did somewhat slow down the cash rate of SSD in client computing as well as slowed down the march toward higher capacities of SSDs in notebook computers, and, attach rate for SSDs, in client computing, around 35% to 40%. Maybe 40% of the 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% plus a tax rate for SSD. So again, this is a large growth driver for SSDs in client computing applications. And we are focused on, of course, expanding our portfolio of SSDs. We talk about, significant progress of all SSDs across the board in client enterprise as well as in the consumer market. And 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 Daneley. My question is, can you talk about your plans for acquisitions? What would be the criteria that would make you buy something And how does M and A fit into your plan in the context of Micron wanting to be a NAND solution provider? Are not going to speculate on M And 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 solution, but of course, we do not rule out in the future leveraging M and A toward any growth initiatives. And of course, we will always look for core capabilities to expand the market opportunities for micron. And 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. And of course, always looking for ROI kind of opportunities. It's a follow-up question. Can you talk about what the Micron's projected cost reductions are for NAND and DRAM this year? So 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, I mean, in our 1X DRAM technology, we have achieved the fastest ramp to mature yield in the history of the company. And similarly, our, 64 layer technology, it has ramped to mature rather well. And we are continuing, of course, to do very well on our 20 nanometer DRAM technology with ease as well. So 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. And of course, also very much focused on non memory costs in our products. Such as SSD, non memory costs. So 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 of Mark Delaney from Goldman Your question please. Yes, good afternoon and congratulations on the good results and thanks for taking the questions. First question, I hope you can detail a little bit more about that an issue you mentioned. Did you have to scrap wafers or just idle production? And can you help us reconcile the comments about, a little bit less year in 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. Fully below? Excuse me. So this nitrogen maintenance issue has not caused scrapping of the it has, idled or slowed down, production. As we said, it's impacting 2% to 3% of our discord DRAM production output. And 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. Now growing in line with the industry for the full year despite this nitrogen issue? Yes, it is correct. Production output is expected to grow in line with the industry. And that is, of course, as a result of our excellent yields, on 1x nanometer node as well as the 20 nanometer node. Okay. And then one other question for me, if I could. Sandra, 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. But the strategy from Micron, as I understood, it had been that, the company was keep it net DRAM wafer starts flat and there's a lot of costs associated with getting to these new nodes because of all the extra factor space that you need and need for a new clean room Just you've 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, 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 microns think about managing its net wafer starts in DRAM? Thank you. I think if you look at last few years and you look at Micron's revenue and 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. So 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. And in fact, if you look at the industry itself and you look the revenue of the industry players and you look at their CapEx over the course of last few years, you'll see actually that that average for the industry as well is in that same range also. So, in terms of our own strategy for CapEx spend is absolutely focused on accelerating our technology transitions. So our CapEx is geared toward realizing DRAM and NAND technology transitions toward more cost effective technology nodes for our products. And it is not about capacity in a wafer capacity production increase for us. Thank you. Thank you. Our next question comes from the line of 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 they're were to be an issue? So 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 that requires such data intensive applications require more DRAM. So it is essential. I mean, it's not like you can offer a model with a less DRAM in it, a high end model with a less DRAM in it and expect that you will still have the same good experience. So DRAM capacity has really become a key enabler and essential element of mobile. And same as I talked about earlier for, you know, hyperscale data centers, you know, when they look at what models that they can enable for their end customers, those are all being built on very data intensive applications. I mean, imagine retailers, you go consumer goes into a retail store and, you know, the retailer already knows about what are the needs of that consumer. All of that requires real time for retail, real time AI applications, which means lot of data that we process fast, which means, again, it needs more DRAM memory. So it is actually, when you look at, you know, 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. So DRAM really has become an essential part. This is very different from any time in the past. And the best indicator of this is that, DRAM pricing is strong and DRAM demand is strong right now. That's helpful. As my follow-up, 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 Alpida coming together for the first time on 1x development? And how should we think about the timing of any planned pre qualification expenses for maybe 1x DRAM or QLC 3 d NAND deployment when we make assumptions for OpEx for the balance of 20.18? Thank you. So, let me go back to kind of commentary, make sure it's clear. So in the second quarter, most of the increase we experienced was around qualifications of various technologies that kind of all came together, all in kind of the 2nd quarter. And it kind of continues on into the 3rd quarter. Those expenses kind of vary over time. And so, this just happens to be, kind of a couple of quarters in which that activity is pretty heavy. And so we're kind of experiencing kind of a lift in expenses. And I would expect that portion of it to kind of settle down. And then when the next, set of, the qualifications are required, it'll come back up again. The other piece of the expenses, really relate to our 4th generation 3 d 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, quarters effect in the 3rd quarter, and that was about $20,000,000 in full quarter. So about $10,000,000 lift in the 2nd quarter and, $20,000,000 lift in the 3rd quarter. 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 supplydemand outlook in NAND flash for the second half of calendar 'eighteen, should we expect pricing to stabilize any comments already based on the trends that you see currently continuing for the rest of the year? So we are not going to comment on pricing trends in the industry, but what I can tell you is that NAND industry does have certain aspect of its end markets such as USB flash drive or imaging cards or retail that tends to be somewhat seasonal in the 1st calendar quarter. And as we go forward with that, that part changes. But 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, end. Gives an even stronger value proposition in enterprise and data center applications. So this is what we expect during the course of the year. And of course, average capacities of NAND in mobile phones, smartphones continue to increase as well. And 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 market share packages, as well as discrete the 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 are, they'll ultimately drive our, success toward high value solutions. As part of mix of managed revenue. Okay. That's useful. And then as a quick follow-up, is it fair to assume that a high double digit growth rate in the bit demand for managing the 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 50%, in the range of 50% or higher. Basically, data center is where our demand will grow faster than the average of the industry. Keep in mind, same thing for client SSDs as well. Thank you. Our next question comes from the line of Maddi Hosseini from SIG. Your question please. Yes, sir. Thanks for taking my questions. 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. And I'm just wondering what's wrong with keeping the business as is? Your NAND gross margin is in the 45% to 50% Giram gross margin is in the 65% to 70%. And 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 and capitalize on a margin profile? And I have a follow-up. So let me be clear that, we are very excited about the market opportunities for DRAM and NAND, all the things that, you know, we have been talking about so far over the course of last 45 minutes here. And 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. And by high value solutions in our revenue, we mean products such as SSDs, as well as, managed NAND solution 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. So 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 AIU solutions and have no doubt that there is, nobody taking the eye off the ball and we are relentless focus on strengthening the execution and general of the company and tremendous opportunity ahead in that regard for us. It's already been described through the strong, the else we have demonstrated so far, but there is even greater opportunity ahead of us. In terms of cost, you recently introduced a Q see 64 layer 3 d 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 a lowest cost to penetrate and displace existing technologies? So what we introduced recently is a 64 layer based TLC SATA SSD. And, as we have said before, QLC is certainly, exciting opportunity for, in the years ahead. And QLC is in the development stages. And, it is not a 2018 phenomena. I mean, that is something that's more like 2019 opportunities starting in 2019 time frame. But could we should we assume that this offers you perhaps I'm just going to give you a number, could offer a customer less than $0.20 per gigabyte of costs We don't get into cost discussions. And our focus, of course, is to develop QLC solutions that will be in the future, going toward applications that are very lead intensive, and somewhat balanced in terms of more right, applications. And of course, our goal would be to drive these with their 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 profitable fashion and bringing strong value to our customers as well. I'm not going to get into pricing of or speculate on the pricing for see. Great. Thank you. Thank you. Our next question comes from the line of Hans Mosesman from Rosenblatt Securities. Your question please. Sanjay, if you can just clarify, I think somebody asked the question before, but I'll just make it more concise Are you seeing any de specking in DRAM or NAND markets? Thanks. And I have a follow-up. You're not seeing need de spacing. If anything, again, given the nature of the application, the average capacity requirements continue to go up all end markets, Sabrina. Okay. And then a follow-up, more of a longer term or midterm question. After one Y in the DRAM world, how many more node transitions or have transitions do you expect you and the industry to have before you hit a wall with you, if you will. We have talked about our 1C technology. No in DRAM and our engineers are working on that. And engineers, of course, always continue to look at opportunities for further scaling. And similarly, we are working on other advanced technologies of the future as well. Okay. But there's no letter after 1Z at this point? You know, there is no letter in there for a bit after the You can go to 1 ZP. Or you can add a plus plus or plus plus plus. Anyway, thank you very much. We'll take you up on this edition. Thank you. And our final question comes from the line of Vijay Rakesh from Mizuho. Your question please. Yes, hi guys. Just on the NAND side, I was wondering, what percent of your NAND was SYS? I know you mentioned it grew 80% year on year and seeing good traction in enterprise? We don't give that breakdown. Got it. And I know you talked about Credi Crosspoint. There's a find a bit drag on the margins. When do you start to see that the drag go away. And just wondering, as you look at that ramp by the end of by ye/ar end, what proportion do you think that would be of your NAND? Thanks. So 3 d crosspoint products are expected to come out in sometime in calendar year 2019. We will have, sometimes we'll have under loading charges. It's possible that, our partner might take, some of the, of those wafers. So that would obviously help on the underutilization. And of course, as we start to release those products, move out late 2019, start to build some of those wafers, and that will help out on the underutilization as well. Got it. Great. Thanks. And I just want to comment on your earlier question regarding SSD. Of course, we don't provide this effects, but clearly SSD is going 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. And as always, we appreciate your interest and support for Micron. I'd remind you that a copy of the prepared marks 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 Microd Technology Second Quarter 2018 Financial Release Conference Call. You may now disconnect.