Good day, welcome to Micron's post-earnings analyst call. At this time, all participants are in a listen-only mode. After a few brief opening remarks, we will be immediately going into our Q&A session. If you would like to ask a question, please press star one one. You will hear an automated message advising your hand is raised. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Farhan Ahmad, Head of Investor Relations.
Thank you. Welcome to Micron Technology's first quarter 2023 sell side call back. On the call with me today are Sumit Sadana, our Chief Business Officer, Manish Bhatia, our EVP of Global Operations, and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results, and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, including our most recent form 10-K and 10-Q, for a discussion of the 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 are under no duty to update any of the forward-looking statements to confirm these statements to actual results. We can now open the call.
Thank you. Today's first question will come from the line of Brian Chin with Stifel. Your line is open.
Hi there. Good afternoon, and thanks for letting us ask a few questions. First, you know, in the prepared remarks, there was discussion of an insurance recovery in the February quarter. Is it fair to assume that's at 100% fall through in the model? If I back that out of the guidance, that's what gross margins at around 5.5% plus or minus in fiscal 2Q?
That is correct.
Okay. Got it. Got it. It's helpful, just the clarification. Maybe while I'm on the clarification, thanks, Mark. I think to one of the questions you said planning for lower utilization to persist through the balance of the fiscal year. Are you thinking sort of a range for what that underutilization could look like a 10%-20% below full? Or is that sort of, you know, you'll do what needs to be done as you move along through the year? Any sort of additional clarification on that?
Sure. I could have been more specific, but it was a long answer as it was. I think on the back end, the utilization will improve in the second half of the year as volumes increase.
Okay.
On the front end, which is, you know, was the purpose of the announcement and of course is the larger effect, to your point, we're assuming 10%-20% through the balance of the fiscal year.
Got it. Okay. That's helpful. Then, kinda like, my follow-up, and this I think also relates to the question you were asked, but when you think about the transition to DDR5 next year, and it's tied, you know, in data center, it's tied in client PC, you know, the various platforms, products, et cetera, progress it sounds like in mobile as well. Doesn't that run the risk of impairing some DDR4 inventory at some point here? Also, kind of tied to that, when you get, where do you think you can get inventory days back to by the end of the fiscal year? What level does this need to be back to in order to regain pricing leverage in the industry?
Yeah, I can take that. In terms of the DDR4 versus DDR5, the DDR5 ramp is underway in the client space, and somewhat behind that in the server space will really start ramping in earnest through calendar 2023. The crossover with DDR4 doesn't occur in both segments, client and server, from our estimation right now till mid-calendar 2024. There is still substantial level of DDR4 runway in both segments for quite a while. We are not so concerned about that particular aspect, although the overall level of inventory is certainly something that we're focused on trying to improve. That's sort of the color that I just wanted to provide. What was the other question, sorry, you had asked?
Yeah. Yeah, thanks. The other part of that was just, you talked about the days inventory peaking in fiscal 2Q, but where do you think you can get inventory days back to by fiscal year-end? I think prior guidance was around 150 days. What level, you know, I know it's hard to answer it this way, but what level does it need to get back to in order to regain pricing leverage?
On the pricing part, you know, obviously, as the inventory improves over time, the pricing environment will improve. The rate and pace of that improvement is heavily dependent on what happens to the supply in the industry. We have provided you a view of what we are doing with supply. We have taken a lot of aggressive actions in 2023, reduced our CapEx, reduced our CapEx further on the WFE side in 2024, and also reduced wafer starts and highlighted that really the improvement can be accelerated if the supply growth in the industry becomes negative in 2023 calendar year in DRAM and flattish for NAND. What will actually happen to our inventory is obviously a function of what happens to the overall industry supply demand balance and not simply a function of, you know, what we do.
We continue to take appropriate actions, through the year.
Brian, on the, on the days, as Sumit said, it's that far out, it's really a function of how the market is recovering. You know, we expect days to peak in second quarter. You know, we're at 214 in the second quarter, so we'll be above that. Then we expect to remain at elevated levels, but down in days in the third quarter and then down days in the fourth quarter, closer to 150 than obviously we are today.
Okay. I appreciate all the color. Thank you.
Thank you. One moment for our next question. That will come from the line of Joseph Moore with Morgan Stanley. Your line is open.
Great. Thank you. I want to make sure I understand the mechanics of any kind of lower of cost or market inventory adjustment you may have to make. Is that a function of overall gross profitability, or do you evaluate that on a product-by-product basis where if certain products go negative on gross margin, you have to take a charge there?
Yeah. Joe, we look at a single pool of inventories. You know, and that's disclosed thoroughly in our 10-K filing.
Got it. Okay. In terms of the underutilization, is there any thought of pulling that cost forward in time by taking a charge, or that it sounds like it is just going to be kind of first in, first out on the inventory cost?
No. That charge will be a function of the inventory accounting on the lower of cost or net realizable value.
Got it. Okay, great. Thank you.
Thanks.
There's some period costs, Joe. I think I refer to that as well. The majority is in inventories, but there are some period costs that, you know, drop down in the period that they're incurred.
Helpful. Thank you.
Joe, just to be clear, you know, for our, you know, underutilization, we've, you know, we've taken actions to reduce both DRAM and NAND by 20%. Those are happening across, you know, all the nodes where we have meaningful output. We are, you know, kind of expecting to continue that until we see market conditions improve. The numbers that we're giving you are just, you know, sort of the estimates we have right now based on, you know, these actions that we've taken.
Helpful. Thank you.
Thank you. One moment for our next question. That will come from the line of Steven Fox with Fox Advisors. Your line is open.
Hi. Just to follow up that, on that one, in terms of if things got worse from here, is basically the actions from here mainly related to how you manage wafer starts? I would assume there's a point where you don't wanna cut it too far into, you know, future growth plans. Secondly, in terms of wild cards for a second half is, you know, you talk about some of the trends you're seeing positive in PCs and cell phones. I'm just curious, how would you sort of put a gaming those in terms of where you're most confident you're seeing improvements off of the bottom and where you still have question marks on end markets? Thanks.
I can-
Yeah, go ahead.
I'll take this. I'll take the first part just in terms of the, you know, future growth plans for CapEx or wafer utilization plans. I think you've seen, Steven, that we, you know, we remain flexible, right? At the last call, we had talked about some, you know, smaller underutilization actions in DRAM and NAND. As we saw conditions throughout FY 2023 get worse, we took action, and we, you know, kind of made this the public statement informed you back in November that we were gonna go to 20% utilization. We said then that we're reducing our CapEx view, -
you know, I think, you know, right now, based on the trajectory of recovery that Mark and Sanjay outlined, you know, this is our view, but I think we remain flexible to both, you know, adjust CapEx or adjust, you know, wafer start and utilization depending on the trajectory of the improvement in inventories and the recovery in our own inventory and as well as demand outlook that we see. Certainly trying to make sure we prioritize maintaining our technology learning for these new nodes, particularly 1β and 232-layer, which are really dynamite nodes.
In terms of end markets, different end markets will behave differently when it comes to the recovery process. We definitely stay very focused on each segment of the market, each customer, each geography. They all have their own individual dynamics, and we are appropriately planning for inventory as well as our overall projections for growth and support of that growth, based on the individual dynamics at each customer, in each segment, in each geography.
Fair enough. Thanks for all the color.
Thank you. One moment for our next question. That will come from the line of Vijay Rakesh with Mizuho Group. Your line is open.
Yeah. Hi, guys. Just a couple of quick questions. On as you look out to 2023, I'm just wondering if you look at your key markets, PC, handset and server, what you are thinking what you're estimating, I guess, in terms of unit growth or, and, you know, content growth, if you could parse that out.
Sure. Yeah. In terms of some of these end markets, we also mentioned some of this in our prepared remarks, but on the PC side, after a pretty sharp pullback in calendar 2022, we are estimating in calendar 2023 there's another low to mid single-digit % reduction in PC units in calendar 2023 that will take the total amount of PC units sold close to where it was in 2019 before the big run-up happened due to COVID in those PC units. Full retracement back pretty much to those levels. On the smartphone side, again, pretty sharp pullback in calendar 2022 in terms of units. Expecting a stabilization.
Right now we are modeling a flattish to very slightly up unit growth in handsets in 2023, largely driven by strength in the second half of the calendar year, especially as some expectations that China's recovery will start to regain its footing after it goes through some challenging time in the next few months as it recovers from initial phases of COVID through the reopening process. That's what we have modeled on that front. In servers, we do feel that the growth will continue in content both in DRAM and NAND. Of course, you know, even in PCs, we expect continued growth in DRAM and NAND content. PC, the penetration of NAND is mostly complete over 90%, but content growth should continue.
Smartphone content growth with 5G shift should continue. More handset percentage as a percentage of the total in 5G in 2023 versus 2022, that should help content. Server content growth should continue. Server unit growth as well. I mean, these trends in 2023 compared to historical trends will get impacted on the server side, especially in terms of units based on the expectation of some level of macroeconomic impact on enterprise demand, both enterprise and cloud. The data center demand will get somewhat impacted, we think, in 2023, content growth will continue. I think as we look at memory and storage demand, apart from all of these end market trends, there is obviously a pretty significant inventory component at the customers that comes into play.
The progress in improving inventories at customers is different by customer and different by segment. PCs and smartphones entered this inventory correction first and have made more progress compared to data center inventory, which is still at pretty high levels right now entering calendar 2023, which is why the DRAM and NAND demand from data center customers is heavily impacted in 2023 because of the level of customer inventory in that segment. There are these end market trends, and then there is the impact of inventory that ultimately the interplay between them determines the demand that we see and the industry suppliers see on the DRAM and NAND side.
Got it. Just a quick question on the DDR5 side. I think you mentioned exiting 2023 at 30%. That ramp seems to be a little bit slower. Is that because the price premium or to DDR4 or is it being gated by some of the new product ramps? Thanks.
There should be, there should be availability of DDR5 product. It's more driven by the rate and pace at which the DDR5 adoption in the industry happens based on the ramp of specific CPU platforms. The ramp is continuing on the client side, really 2023 is an important year for the server platforms to.
Really embrace and drive volume, and critical mass of some of the newer platforms that are critical for DDR5 adoption in the data center. It's a matter of the rate and pace of that more than the availability, from a supply perspective.
Got it. Thank you.
Thank you. One moment for our next question. That will come from the line of Sidney Ho with Deutsche Bank. Your line is open.
Yeah. Thanks for taking my question. Maybe just one more question on the underutilization charges in fiscal 2023, $460 million. Just wanna make sure I understand this. If utilization doesn't go up in the next three quarters, like Mark, you said 10%-20%, does that mean that call it $230 million a quarter will continue in the fiscal Q1, given that there seems to be a lack of when inventory is flushed through to through the income statement? If kind of is the $230 million a quarter the right number to think about, or there's different kind of linearity?
We are going to 20% underutilization. Let me make that clear. Those underutilization charges, some of them end up in period, but a minority of them. The majority of them, net of the cash costs, you know, the variable cost savings that we have. Those net costs, the majority of those are put into inventories. Those inventories clear, those higher cost inventories clear in the second half, primarily, for fiscal 2023. Some of those inventories will, because we're underutilized for the balance of the year, some of those charges for 2023 COGS will end up clearing in fiscal 2024.
you know, as I said on the call, to the extent that volumes are better than we think, more of those higher cost inventories will be pulled into 2023. To the extent that volumes end up being lower than we think, more of those higher cost inventories will be cleared in 2024.
Okay. That's clear. Thanks. My follow-up question is on free cash flow. I know for the first quarter you have negative one and a half billion dollars, if my math is right. How are you thinking about free cash flow for the remainder of the year, Q2, and then maybe for the full year?
Well, Sydney, can you repeat the question? Sorry.
Yeah, sorry.
Oh, free cash-
It's related to free cash flow for fiscal second quarter and the trajectory for the rest of the year.
Yeah. So, on free cash flow, you know, we did indicate for first quarter what we ended up incurring -$1.5 billion . Now, in the September quarter, we also said at that time that second quarter free cash flow would be challenged. Since we had that earnings call, the conditions have worsened, so income's, you know, down versus what we originally thought. The working capital build is worse in the sense that inventories are higher than we thought from the second quarter. The receivables drawdown that we enjoyed in the first quarter will pass and will be, you know, more flat on AR in the second quarter. CapEx, as we had mentioned before, remains elevated in the second half.
It's down versus second quarter, but it's still, you know, around $2 billion. We would expect second quarter to be more negative than the first quarter. Just as we said before, we would expect free cash flow to improve in the second half, relative to the first half as a function of the business environment improving, the volumes increasing, and then and the capital investment decreasing in the second half. You know, and that's the profile for the year.
Yeah. I think Mark mentioned that CapEx will be elevated in second half. I think he meant second quarter.
I meant second quarter. Yeah.
Second half, clearly the CapEx is down quite a bit.
Yeah, I did mean second quarter.
Yeah.
Yeah. Thank you.
For the full year, we should be thinking about, still thinking about negative free cash flow for the full fiscal year?
Full fiscal year will be free cash flow negative.
Okay. Thank you.
Thank you. One moment for our next question. That will come from the line of Pierre Ferragu with New Street Research. Your line is open.
Yes, hello. Thanks for taking our question. I just want to make sure that we have the correct COGS assumptions for DRAM and NAND. If we combine your, the assumptions on bit growth and on DRAM bit growth down, and NAND flattish, with cost per bit down, say low single digits for both DRAM and NAND, would it make sense to assume that DRAM COGS will be down, say mid to high single digits and low to mid single digits for NAND?
No, actually, because of these underutilization effects, Absorption or underutilization lower volumes and stuff on what we talked about on period costs and back end. You know, DRAM, you know, will be down slightly, and NAND will be up. Now if we were to strip all those effects out, then, you know, NAND and DRAM would be better, but in this year is gonna be a challenge year from a cost standpoint. Now it's, you know, the cost downs resume in the fourth quarter, but it's challenging in three of the quarters.
Okay, very clear. How should we think about 2024?
Haven't commented on 2024.
Okay, thanks.
Thank you. One moment for our next question. That will come from the line of Timothy Arcuri with UBS. Your line is open.
Thanks. Mark, I had two sort of sets of questions. The first is for fiscal Q2, it sounds like the story versus three or so months ago where you thought that, you know, it would be pretty flat versus fiscal Q1. It sounds like bits are still up, maybe they're up a little less than you thought, but the real delta is more pricing than bits in fiscal Q2, so I wanted to confirm that. On fiscal Q3, sounds like bits are, you know, gonna be up just like you thought they would be before. You know, fiscal Q3 revenue's up, but I think you had suggested that May quarter would see such a big snap back in bits that bits would be up year-over-year in both DRAM and NAND. Is that still the case?
It sounds like probably not, but I just wanted to ask that, and then I had a follow-up. Thanks.
Yeah, we're starting to do variances on old forecasts and stuff, which makes it difficult. Tim, to answer your question generally, I would take away that the profile is roughly the same that we had commented on before in that, volumes would improve first quarter to second quarter and then in, you know, and then further strengthen through the year. Then the, you know, you know, the market conditions are challenged in second quarter. As there's light at the end of the tunnel on, you know, inventories and supply-demand balance improving, that those conditions would moderate in the back half of the year.
You know, the profile stays about the same, but to your point, the volumes are a bit lower than we thought, when we gave that guidance in September, and the market conditions certainly are more challenging in the near term here.
Got it. Thanks. Just last thing. I know you're not giving CapEx for fiscal 2024 and just saying that it's lower than what you thought it would, that it was gonna be prior to this. The, the standing guidance is sort of you target like mid 30% of revenue. Is that still the way to think about it? Or because of these actions you're taking that fiscal 2024 CapEx could be below that mid 30% of revenue target?
Boy, Tim, it's early to be giving comments on that. You know, we do have higher construction spend, which pressures CapEx up. However, we are absolutely committed to free cash flow generation in 2024, so that's going to play a very important role in the level of CapEx spend we have, along with, you know, just the view on the market conditions and various other things, you know, short and long term. Difficult to make the call now.
As you're aware, you know, the funding, federal funding process is still working for the U.S. CHIPS grants, which, you know, will, you know, impact our reported CapEx for the construction projects that we've the target here in the U.S. will be, you know, kicking off some of it this year, but some of it in, for sure in fiscal 2024. Still early to comment on that, which is why we gave you some more color on the WFE part, which isn't really impacted by that in that timeframe.
Yeah. Okay. Thanks.
Thank you. One moment for our next question. That will come from the line of C.J. Muse with Evercore ISI. Your line is open.
Yeah, thank you for taking the question. I guess first, just a little modeling help for February. You know, I guess based on the comments around mobility, bits accelerating, can I interpret that as roughly bits for NAND growing perhaps roughly two times as fast as DRAM? Is that kind of the right way to think about it?
No.
No.
I would not just think of NAND growing 2x faster than DRAM. I think it's just, you know, definitely our mobile revenue is growing sequentially from FY1 to FY2. We're not providing further guidance on what part of that is really growing. As you know, the overall revenue is down quarter-on-quarter.
Okay, thank you. I guess maybe a deeper question on the inventory side. You know, I guess where do you think you'll see green shoots first in terms of things returning to normal? You know, as that occurs, you know, how do you see kind of the mix playing out for you guys?
We look at the overall business and the different parts of the market, the automotive market is the most resilient, but obviously it's a smaller part of the whole business. Industrial markets probably come next in terms of relative stability. The PC market and the smartphone markets were the ones that entered this downturn first, and those customers have made some progress on inventory.
We do expect that, you know, those customers will likely end up improving their inventories to a healthier place sooner than, for example, data center customers will, who do have high levels of inventory and have, you know, decided to start improving their inventory position aggressively, relatively late compared to, you know, the other segments, like PCs and smartphones, just based on the end market demand changes that have been occurring over the past several months. We do expect that the PC market is likely to show some stabilization. Just keep in mind that while we are talking about customer inventory and we are looking at bits of inventory at our customers, our customers are also looking at DIO inventory and how many days of inventory they have.
It's obviously compounding their challenge because the forward-looking sales, when it weakens due to macroeconomic environment and such, and individual segment trends, then the weakening end market trends does impact their view of, you know, what they can do on the inventory front. Even if bit inventory reduces, DIO inventory may still have more work to do. Those are the dynamics that are playing out and we do expect that, you know, these server customers will take longer to get to a healthier place, compared to the other segments.
Thank you.
Thank you. One moment for our next question. That will come from the line of Chris Caso with Credit Suisse. Your line is open.
Yes, thank you. just maybe a bit of a bigger picture question. Maybe you could give some comparisons to, you know, to last cycle and some of the prior cycles. You know, what you talk about is the supply-demand balance here is the worst in the last 13 years. you know, over the last 13 years, the industry has structurally improved. What do you think is the reason for the supply-demand balance that's occurred now? Is it, is it solely market conditions, or does anything to do with structural conditions? You know, what does that mean for future cycles, you know, in terms of, you know, how we read this for the bigger picture?
Tough to extrapolate based on one data point. Certainly, since the industry consolidated about a decade ago in DRAM, we have had relatively well-contained cycles and relatively healthy, very healthy through cycle profitability, certainly in DRAM across cycles, since that point. In this particular cycle, definitely there has been a demand shock and a set of exogenous factors that have come together in a way that is quite unusual. You know, you're seeing 40-year highs in inflation, very rapid increases in interest rates. Macroeconomic environment, certainly, one for the history books in terms of multi-decade, sort of, challenges on that front. You have a war in Europe that has not happened in many decades.
You have COVID impacts and big shutdowns in China, impacting demand in the second largest economy in the world. You have whole host of factors and individual companies and segments as a result of supply chain disruptions, et cetera. There's a lot of lot of moving parts that have hit the markets in these segments. There has been definitely a pretty significant demand shock. Also included in that demand shock is the other side of all of the inventory buildup that happened when so much of the business went into a shortage, probably the biggest set of shortages in the semiconductor industry in a long time, probably ever. Customers responded with building inventory in whatever areas they could get their hands on.
A lot of factors coming together, created that demand shock. I think on the supply side, which is now where the burden is on the supply side to respond to that demand shock and cut supply and bring the industry into a healthier place, we have definitely taken pretty aggressive actions. We have cut wafer starts in really fast order. We have dramatically reduced CapEx in 2023. We have signaled very clearly that we are also reducing WFE CapEx in 2024 from 2023. We have also responded to the changes in the market environment by lengthening the time between technology node ramps.
We've taken a lot of aggressive action from our side and, you know, as the rest of the industry hopefully does what it, what it will individually decide to do, we are hopeful that the industry will become healthier as time goes by through calendar 2023, and inventories will start to improve slowly, from the peak that we're seeing in fiscal Q2.
Got it. Thank you. Thank you. One moment for our next question. That will come from the line of Krish Sankar with Cowen. Your line is open.
Hey, guys. This is Eddie for Krish. You guys have impressive technological leadership, but your competitors have a bigger scale. Net-net, in terms of cost per bit, do you think you're at least at par with competitors? I'm asking because I'm wondering if there's a scenario where competitors become more aggressive on pricing, which will further elongate this down cycle. Thanks, guys.
Krish, I can just answer our competitive position. I had given some color on that at our investor day that, you know, we were certainly trailing in terms of cost competitiveness, you know, a few years ago. But by getting the technology leadership, even at our, you know, lower scale, we've become, you know, very competitive on our costs in both DRAM and in NAND. You know, I won't give specifics in terms of us versus others, but we're definitely, you know, very competitive now, thanks to the technology leadership that we have.
you know that, you know, having that technology leadership does give us, you know, now flexibility in terms of how we manage our business and being able to, you know, even as we made the decision to, and that we just explained, to delay the ramp of these new technologies, we expect they're still gonna be very, very competitive when they launch, when we ramp them as market conditions improve. they're gonna, you know, the yields are coming up really nicely on both of them right now. you know, we feel pretty good about our underlying cost competitiveness and technology competitiveness here and into the future.
You know, you know, the scale that we have, you know, we expect to, you know, maintain that, that share through the, you know, through the cycle, to be able to make sure that we can, you know, maintain the ROI on all of our investments, our R&D investments.
The one area that, I think you know that, there is an impact is related to foreign currencies exchange rates versus the dollar. Definitely the dollar has appreciated a lot versus the Korean won and has, also appreciated a lot versus the Japanese yen. We do have some manufacturing in Japan, not as much as, you know, some other competitors have, for example, in NAND. There is definitely some competitive impact on costs related to currencies. You know, we also feel like the dollar has already come off by 10%, in recent weeks from its peak.
Hopefully, with the future direction of the Fed, slowing down and ultimately stopping, we're hoping that the dollar will start a weakening cycle that will be reversing some of those impacts, on a competitive basis on cost, that is due to the currency itself.
Got it. Thank you. If I can squeeze one more in? How should we think about the OpEx savings of $150 million? Are they related to production? Should we expect them to come back once utilization goes back to normal?
No, they're not related to production at all, being COGS. It's related to R&D and SG&A activities. Clearly, the headcount actions are part of that. Very careful, specific program-related actions, work with vendors on renegotiating on rate and scope of activities, various other productivity projects and other items in the SG&A as well.
All right. Thank you.
We'll have usual transition, you know, from Q4 of 2023 to 2024, we'll have usual transition that happens in most companies where, you know, we have bonus coming back, salary increases, those sort of things. Other than that.
Thank you. Thank you all for participating in today's call. This concludes the program. You may now disconnect.