Hello. Thank you for standing by, and welcome to Micron's post-earnings analyst call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Farhan Ahmad, Vice President of Investor Relations. Please go ahead.
Thank you, and welcome to Micron Technology's sell-side analyst call back. On the call with me today are Sumit Sadana, Micron's Chief Business Officer; Manish Bhatia, Micron's EVP of Global Operations; and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 45 minutes in length. 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 the statements made today. We refer you to the documents we filed with the SEC, specifically our most recent Form 10-K and 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, level of activity, performance, or achievements.
We are under no duty to update any of the forward-looking statements after today's date to confirm these statements to actual results. Operator, you can now open the call for questions and answers.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from Ambrish Srivastava with BMO. You may proceed with your question.
Hi, thank you. Dave, I actually had a clarification on the supply-demand side. When you gave the days of inventory guide for the fiscal year, you mentioned that Micron would be tight. I think last earnings call you had said for fiscal 2022, you would be below the supply that the industry would be churning out. I just wanna make sure I understood that. Would you be ceding some bit share if you would be tight and the industry would be healthy? I just wanna make sure I had clarity on that.
Yeah. We expect to be in line with the industry in terms of shipments. You're right, the industry should be in balance. All I'm saying is, you know, we will have, you know, built up some inventory. You know, we're already up to 103 days this quarter. We're likely to be higher than that in the second fiscal quarter. Then we'll be bleeding into that, you know, inventory in the fourth quarter. We're staging our, you know, our build plans to, you know, to be able to manage through the demand for the, you know, for the calendar year.
Got it. A follow-up is on free cash flow. You've been pretty positive about the ability to generate. I think you've characterized it as healthy free cash flow. You've given a backdrop of the industry being healthy, demand driver. I just wanted to delve in and drill in a little bit more. Is the underpinning of the confidence is also on a structurally more profitable company, i.e., more profitable product portfolio combined with the LTAs and leading to better visibility that you have? Is that kind of factoring in besides the industry dynamic that is leading you to be so confident about the free cash flow for the year? Thanks.
Good question. I think there's several dynamics. First of all, we come into the first fiscal quarter, generating good free cash flow. We generated $670 million or so of free cash flow. That's part of the confidence. Also, when you look at our margins for the first fiscal quarter, which was, you know, perhaps a tougher quarter, from a revenue perspective, given the PC shortages in the PC industry, you know, we still generated 35% operating margins. So we are, you know, obviously a different company than we were five years ago, in terms of our ability to generate good profitability through cycle. That has a lot to do with the confidence.
You know, when you look into the second fiscal quarter and take the midpoint of the guidance, our operating margins are about 33%, so also very healthy. We do expect to generate a free cash flow again in the second fiscal quarter. And then as Sanjay mentioned, you know, we go into the third and fourth fiscal quarter with strong demand drivers, which gives us confidence. Now, granted, we, you know, we're gonna invest $11 billion-$12 billion of that cash flow from operations back into the business, but even with that, we think we'll have a very good year from a free cash flow perspective.
Got it. Thank you.
Thank you. Our next question comes from Aaron Rakers with Wells Fargo. You may proceed with your question.
Yeah. Thanks, guys, and also congrats on the results. I wanna go back to the inventory discussion, Dave. I know you just clarified that you expect to exit the calendar year or maybe fiscal year with less than 100 days. How would you characterize, you know, in that context, the company's ability or willingness to kinda, you know, leverage that inventory tightness on your own side, you know, from a pricing perspective? Have you seen, you know, situations where you've, you know, stepped away from some price discussions? How do you think that materializes as the inventory, you know, days kinda trends lower to the back half of fiscal year? I have a follow-up.
That's a good question. We're always willing to hold inventory if we don't think we're capturing the right value for the products. We allowed our inventory to go up into the 130s. I think at one point, we were even as high as the low 140s in terms of days of inventory. We feel very comfortable going to those levels, particularly as cost declines have, you know, become more modest, particularly in DRAM. That allows us to have more flexibility in terms of holding inventory. You know, as you point out, we test the pricing all the time. Sumit can probably talk a little bit more about this in a second, but we're testing the pricing all the time with customers.
You know, I think this circumstance where we are in terms of inventory is that we won't be in that position. We won't see inventory trending up to those levels. When it's down below 100, it's actually at a fairly lean level for us, you know, based on how things have played out over the last 12 months. You know, I think ideally, we'd like to be closer to the high end of our optimal range of 105 days, really, to effectively operate. It's gonna be tight, but yes, if we need to, we can always hold inventory if we don't like what the returns are for those products. But I don't know, Sumit, if you have anything to add.
Yeah. I think, Dave, you mentioned this well. I mean, I agree with the sentiment that, you know, we feel like being closer to the higher end of the inventory range is just a better place to be in this type of an environment where lead times are long for all sorts of parts that we need to procure, our customers need to procure. It becomes more challenging to respond to mix changes if the inventory is very low. I think, you know, we have definitely been having discussions with customers when pricing doesn't meet our targets and what we think is the value we are providing in those products to our customers.
We would much rather hold inventory, but even then, you know, we have found that there are other customers who are willing to pay up and take the product that we want to step back from selling to a customer who may have more aggressive views on pricing. That's part of the reason why our gross margin performance has been pretty robust and we continue to focus on ensuring we get the right value for our products.
That's great. On a follow-up question, I'm just curious, you know, there's going to be an increasing focus on DDR5 as we move through calendar 2022, along with some other architectural things going on in the data center side. Just when I think about a server with DDR5, you know, looking into the back half of the calendar year relative to today, you know, with DDR4, how would you characterize the amount of gigabytes of DRAM capacity expansion we would expect to see, you know, as that transition starts to play out on a per server basis?
Yeah, I can talk to that. Really the server transition to DDR5 is just starting in late 2022, and it's going to be a multi-year trend. What we will expect to see is roughly a 20% increase in overall average capacities per server. On top of that, you know, the whole industry is going to move to higher density of memory die in order to support larger module capacities of DRAM as well. The reason this is important is because the core count in these newer architectures is going up pretty significantly, sometimes, you know, 30%-40% increase in core count. The memory per core that is needed is going to require those higher capacity DDR modules.
Consequently, DDR5 additionally helps by increasing the bandwidth, increasing the performance of the memory module, and the average capacity is the other important aspect that customers will be looking for beyond the improved performance itself. The average capacity trend continues to improve the overall. If you look at some of the AI and machine learning, you know, specific servers that are purpose-built for AI and machine learning type of applications, you will see that DRAM and NAND content is going to be 50%, 60% of the BOM cost. The single largest portion of the BOM is going to be just DRAM and NAND. Everything else, including CPUs, GPUs, networking, everything, will be 40%, 45%. It's a very big step up in the cloud for DDR5.
That's great. Thank you very much.
Sure.
Thank you. Our next question comes from Harlan Sur with JP Morgan. You may proceed with your question.
Yeah, good afternoon, guys. Thanks for taking my question. Your data center business was up fairly strongly. It was up 70% year-over-year. Was it up sequentially? You guys talk about enterprise and data center being the largest market for memory and storage. Is data center and enterprise the largest part of your DRAM business now, even bigger than your mobile DRAM business?
Sumit, you want to take that?
Sure, yeah. As we look at it from a quarter-to-quarter trend perspective, definitely we do have some mixed changes in terms of the different segments because when we have strong demand, it does become, you know, a discussion of how much of the demand goes into which segment. Generally, it is definitely true that the data center market is the biggest market for our TAM. When we look at memory and storage together, the data center market is the biggest portion of the TAM, and it is also one of the fastest-growing. Now, the fastest-growing segment is automotive and industrial, but a close second beyond that is data centers, particularly if you include networking in there. Networking is growing very fast as well.
Data center is both the biggest portion and one of the fastest-growing segments. Within the data center, you know, we look at the cloud and hyperscaler type of customers growing faster than the traditional OEM customers, right? With that having been said, as we look forward to 2022 and beyond, I just want to call out that, you know, part of the confidence that we have in terms of our second part of the fiscal year and second part of the calendar year's growth is really driven by, you know, very robust capital spending plans from some of these cloud companies.
If you look at, you know, how they have been talking about their investments, and you see some of their plans, they have a pretty substantial step-up of investment in cloud infrastructure and server infrastructure, in FY 2022. You know, for example, just look at Meta as an example. They said, you know, they're gonna be spending $19 billion CapEx in calendar 2021, but in 2022 they are expecting that number to be in the $29 billion-$32 billion range. You know, very material step up. That's part of the reason why we feel like, you know, that segment is going to grow strongly for us, and we have a very strong value proposition in that segment. Our product portfolio there is really strong.
We have leadership in DDR5. We have leadership in quality. Two out of three customers rank us number one in quality, and so they prefer that in a big way. Our data center SSDs, you know, we're looking forward to a really good year there because we just introduced our vertically integrated platform there after years of working on it. Another very exciting part of our portfolio transformation. The last piece I'll mention is you have seen a lot of graphics growth in the data center and our graphics memory with the G6X, GDDR6X memory is the world's fastest performing graphics memory bar none. You know, we have a great partnership with NVIDIA to drive that for further gains as well.
A lot of legs to this story in many different aspects and really exciting time for us for our product portfolio in the data center.
Yeah. No, I appreciate the insights. Maybe sort of as a follow-up, 'cause you brought this up. It looks like I've been tracking your guys' SSD business. It looks like even before the launch of the 7400 platform, I think your enterprise and data center SSD business is about the same size as your client SSD business. Is that about right? Then how do you see the momentum going into next year? You guys talked about introducing the new 7400 data center platform in October, strong ramp in fiscal Q2. Is this with multiple cloud titans?
Sorry, I didn't catch the last word of your question. What? Is this multiple what? Sorry.
Yeah. Is the 7400 ramp in Q2, is that being driven by multiple cloud titans ramping?
Yeah. I think there is no doubt that, you know, if you look at our high-value NAND mix, we have been on a very steep trajectory to improve the percent of our NAND output that is being sold as high-value solutions. In that, increasing our mix of SSDs is very critical. We have a really strong portfolio for both client SSDs that go into PCs as well as data centers. We have a strong product cycle going on, both 176-layer NAND-based SSDs for client, as well as our vertically integrated platform for data center, which we have just launched.
We are seeing interest from all size customers, the cloud companies, as well as traditional OEMs, as well as channel partners for this vertically integrated platform because they believe it's a. All of the early testing they have done, they find that product to be very attractive. Between this product and future generations of this product, we are pretty confident that we'll be able to build a pretty strong momentum. The data center SSD business, as you know, is the most profitable portion of the NAND portfolio. As we finally start to ramp this over the course of next several quarters, it should be a tailwind for us in our financial performance.
You know, I feel pretty good that over the next year and two, we will end up with much improved share in data center SSD than what we've had in the past couple of years.
Yeah, perfect. Thank you.
Thank you.
Thank you. Our next question comes from Srini Pajjuri with SMBC. You may proceed with your question.
Thank you. Dave, on the balance sheet inventory question, just based on your guidance, it seems like you're guiding for bits to be kind of flattish in the second quarter, fiscal second quarter. My question is, you said your inventory might still go up, so I'm just wondering, even if bits are flat, do you think your inventory actually goes up on that?
Well, I mean, we're not expressly guiding bits for the second fiscal quarter, but I would say I'd stand by my comment that we expect our days of inventory and our absolute inventory to be up a bit in the second fiscal quarter.
Okay. Fair enough. Then, there was a comment about LPDDR5 penetration in the PC market being about 20%. Obviously, you're really well-positioned in that market. But my question is, are there any implications that we should be aware of for either pricing or margins or anything else as, you know, LPDDR5, you know, becomes a bigger portion of the PC market?
I'll let Sumit comment on that.
Yeah. No, I think that's more of a comment we provided to just provide some color on some fundamental shifts that were taking place in the client market and the PC market. We are very strong in both DDR compute products as well as low power. Some of our low power products have really good capabilities that our customers appreciate, but we have, you know, world-class quality in both and very good performance in both. Not really much of a financial comment there as much as just color on the industry trends.
Got it. Thank you.
Thank you. Our next question comes from Tom O'Malley with Barclays. You may proceed with your question.
Hey, guys. Thanks for taking my question. Dave, let me try to attack the bit question in a different way. Previously, you had talked about difficulty growing bits in the first half, and that any upside would come with the transition to 1α. Obviously, to get to your target for the year, it implies a substantial back half ramp. Can you talk about has that transition happened a bit better than expected? Given that, do you think that it's, you know, a bad assumption to maybe see some of that bit growth come in a little earlier in the year, just given the amount of strength you see for the entire calendar year?
Good question. Let me let Manish take that since he's in charge of ramping it.
Hey, Tom, thanks for asking. Yeah, no, 1α and 176 are actually doing better. They're ramping really well, better than maybe we expected a quarter ago in terms of how they're yielding, how much output, you know, the productivity we're getting out of those tools and that are dedicated there. When you're, you know, asking your question specifically about, you know, DRAM, I think we made a comment that, you know, we now have 100%, 176 layers is now the majority of our NAND production, and that 1α and 1Z combined is, I think we said 60% of our total DRAM output. And I would expect that 1α, as we continue to ramp it to...
Actually, both 1α and 176 to continue to ramp and grow as a portion of our mix as we go through the year. As Dave mentioned about, you know, we could see inventory growing a little bit in this next quarter, but that just positions us well for a strong second half of the year ramp and getting more of the 1α and the 176 costs capability into our P&L and the results that drop to the bottom line in the second half of the year.
Yeah. I would go so far as to say we have to build this inventory ahead of our strong demand expectations for the back half of the fiscal year. Otherwise, we will be challenged. This is actually part of the strategy, really.
That's helpful. Thanks. In your commentary, and then I think in the deck as well, you talked about some strategic supply agreements that you guys have entered into, just to help on the supply side. You mentioned UMC, but can you talk about any other parts or strategic agreements that you've gone into that kind of help with that supply as the year goes along?
Manish, you probably strategic supply agreements.
Yeah. For you know, for example, we've said publicly that we entered into a strategic supply agreement with UMC recently to be able to provide supply of controllers that are important in particular to our automotive business and some of the other businesses in our NAND portfolio. We have other agreements on you know other components. You know, the analog space is definitely an area that has been challenging for you know the entire industry.
We're also doing things with back-end materials like substrates and other materials that go into assembly and test processes to make sure that we have sufficient supply to be able to meet our plans for the rest of the year and meet that supply with We know with the varying mix of supply or demand that Sumit was referring to earlier.
Thanks, guys. Nice results.
Thank you. Our next question comes from Karl Ackerman with Cowen. You may proceed with your question.
Yes, thank you. Good afternoon. Clarification and a question. Dave, first one's for you. Would I be wrong to conclude your November results witnessed DRAM cost improved low singles on a year-over-year basis, and NAND improved low teens on a year-over-year basis? I guess I'll just ask the follow-up question for Sumit or Manish. I guess I was a bit surprised that Sanjay indicated you have mid-single digit share in automotive, and that would certainly lag your overall share in the market. I'm curious, why is that? Maybe what, more importantly, what steps have you taken or can you take to improve your competitive position within this market that is certainly gonna be a growth driver, not just for this year, but next, the next couple years? Thanks.
Probably, we should address the second part first. Sumit, I think there's a misunderstanding. Do you wanna explain that?
Yeah, maybe I'll-
Yeah.
To add on to the comment that Sanjay said on the call. I think what Sanjay implied was that our revenue, that exposure maybe like, you know, in auto and industrial is 10%. At no point did he say that we have a mid-single digit share. In the call, in the prepared remark, we said that we have market share leadership, and we have said it many times. With that, I'll let Sumit comment more on our proposition.
Yeah. I think there is some level of miscommunication or misunderstanding. Just to be clear, on the automotive side, Micron is number one in the world in automotive share. In fact, our automotive share is so high that the next three competitors combined have less share than we do. We are number one by a large margin. If you also look at the automotive plus industrial share, we are number one in the world in automotive and industrial together. Independently in industrial as well, we have an extraordinarily high share, much higher in both cases for industrial and automotive than our supply share in the industry. You have seen already that we mentioned that our industrial IoT growth in Q1 was over 80%, year-over-year.
Our automotive growth, in spite of flat unit shipments at the car companies, our automotive growth was very strong. We've been setting records, in quarterly performance in automotive, in spite of our end customers being severely constrained in their unit shipments. All of that is testimony to the, you know, strong amount of growth of average content. We have been investing in automotive for decades, and we have a long history of high quality, product, assurance of supply, through multiple technology generations and a lot of good, capabilities that we bring to that market, long history of support to our customers there. We are very, very well positioned in automotive.
Since automotive and industrial are the fastest growing segments in memory and storage over the next decade, this number one share far higher than our supply share should position us really well to profit from that.
On the cost side, in DRAM, maybe just level set. We think that cost declines in the industry for DRAM are mid to high single digits. I'd say in the first quarter, our year-over-year cost declines were more on the lower end of that. On the NAND front, we think cost declines generally run in the mid-teens, and we were a bit below that in terms of our cost declines. But it's partly influenced by mix, and also I think we just have a bigger chunk of expenses associated with COVID mitigation and so forth that's impacting us in the first quarter, that we weren't seeing nearly that level in the first quarter of last year. That's been somewhat of a headwind to the cost declines year over year.
Yeah. Very helpful. Appreciate it. Thank you.
Thank you. Our next question comes from Chris Caso with Raymond James, and you may proceed with your question.
Yes, thanks. I guess first question is what you think about customer inventories right now. Are there any areas that you think may be higher or lower that you'd wish to call out? I guess with some of the supply tightness that you expect in the second half of the year, I guess, you know, might your customers be expecting that as well? Might they have some incentive to take some inventory just as you guys are building some inventory now?
Okay. Sumit.
Yeah. In terms of inventory at different customers, you know, I would say the overall inventory picture is a mixed picture. There are some customers who have, you know, below target inventories, and there are some who have been carrying inventory a little bit higher than their target. One example of the latter is phone companies, smartphone companies that are based in China have generally a little bit higher level of inventory than their target. Now, the other aspect of this whole inventory issue is that customers have had a tough time with inventory, getting enough parts, having adequate supply of semiconductor inventory. Over the last 18 months, they've experienced a lot of challenges.
Their overall target levels of inventory could be higher strategically and for extended periods of time, we don't know. That's one aspect. The other is always the geopolitical aspect of you know what happens with inventory. You know, some companies have chosen to have higher levels of inventory to manage all of the supply chain risks that occur due to geopolitical or other aspects. I think with all of that said you know we feel like the demand environment is still very good and very robust. The overall level of end demand is still not being fully reflected on the memory and storage side because there are shortages in the semiconductor supply chain that are constraining demand.
As that supply improves through calendar 2022, we should see more of that inventory consumed, and we should also see more of that demand show up into memory and storage industry broadly. So that's sort of a quick summary I just wanted to provide.
Okay. Very helpful. Thanks. As a follow-up, you know, in your prepared comments, you talked about your expectations for a healthy supply-demand balance in calendar 2022, especially in DRAM. Maybe you could expand a little more on those comments as it pertains to industry supply growth and kinda what you're expecting there. You know, with that, the equipment lead times are very long. So, you know, to what extent do you think that those equipment lead times are serving to constrain these capacity additions, even if some of your competitors wanted to add more?
Manish, you wanna take that?
Yeah, Chris. Sure. Thanks. Yes. Thanks, Chris. I think there's a few different factors, you know, contributing. I mean, we talked about the demand side a fair bit, you know, looking at all the end markets looking healthy, except for this air pocket we just hit in PCs, and now we see PCs improving. With all of them coming together, we see strong demand for the second half. In terms of supply, there's a couple of things to think about. First, keep in mind that last year was a very strong year for inventory depletion at all competitors in the industry, right? The comparison as we look ahead to 2022 is based on a very high inventory depletion in addition to natural new supply output.
That's one thing. The second is that technology transitions are continuing to get harder and harder for everyone, and we're not getting as much big growth out of each generation as an industry as we used to. The third one is the part that you asked about, which is the lead times for equipment. I think you've heard from all competitors that we are actually being prudent with our CapEx spending. For example, we said that we're investing less in DRAM manufacturing in FY 2022 than we did in FY 2021.
You've heard equipment vendors say similar things about lower, you know, targeted DRAM investment from, you know, from their, from all of their customers together. The lead times with regard to equipment, you know, that extension, it just, you know, kinda keeps a overall lid on how much when new capacity could come online. You know, the extension there, you know, does kinda help make sure that the supply-demand balance, you know, remains stable through 2022. I mean, we're even seeing having to work with our suppliers into 2023 now as well, in order to make sure that we're securing all the slots that we need. I'm sure, you know, the other competitors are doing the same. That's just the nature of the equipment industry dynamics, right now.
It's helpful. Thank you.
Thank you. Our next question comes from Rajvindra Gill with Needham & Company. You may proceed with your question. If your line is on mute, please unmute, Rajvindra.
Oh, hi. I'm sorry about that. I was on mute. Thanks for taking my questions. Question on the gross margin. The margin is guided to be about 46%, down sequentially. That's in part due to seasonality. I wanted to get a little more clarity on kinda the near-term outlook for margins. As we progress throughout the FY 2022, at a high level, is it fair to assume that the margins should start to inflect higher as you see kinda more moderate ASP deceleration as well as a more of a better cost structure? Just thoughts on how you think about margins as we kinda ramp into this stronger fiscal second half.
Yeah.
Near term as well.
We tend not to obviously comment on margins beyond the first or one fiscal quarter out. I guess what I would say is there's some things that are going in our favor. One, we'll be continuing to ramp 1α DRAM and 176-layer NAND. They have good cost structure. The more they become of the mix, the better, I think, we are from a cost perspective. And two, as Sanjay mentioned, we have, you know, the introduction of the 7400 SSDs. But just in general, the move both in DRAM and NAND to higher value products, I think is beneficial to us in terms of driving, you know, better profitability, better profits, and so forth. Those two things are, you know, in our favor.
You know, pricing, we'll have to see how that plays out. On the only negative thing I think we have in front of us from a cost perspective is really just, you know, the cost associated with managing the supply chain, you know, that's coming in the form of COVID, but also just in the form of, you know, lots of pressure on the supply chain that we're experiencing incremental cost, and that is a headwind. I think, you know, maybe the only other thing to say is that, you know, these margins that we're operating in are quite healthy.
If demand is strong like we believe it will be in the back half of the fiscal year and into the back half of the calendar year, I think we have, you know, we're in a good place. The only other thing I'd add is, you know, which I failed to mention before, but, you know, the expenses we're experiencing, these headwinds that we're experiencing, our competitors are experiencing, the entire semiconductor industry is experiencing. This won't be something that's unique to Micron in any way. This is something that everyone is seeing.
For my follow-up, on the 5G smartphone business, the mobile business, I'm wondering how you're characterizing the overall end market as we close out the year. As we go into next year, you talked about, you know, I think nearly 700 million 5G smartphones. Obviously, 5G as a percentage of the overall handset market is increasing. Wanted to get your thoughts on kind of some of the DRAM or the NAND content drivers in 5G as you go into next year. Is there gonna be higher dollar content there? Or is it just more about that the unit as a percentage of the overall end market is gonna be representative of higher content per phone?
I'll let Sumit address that one.
Yeah. I think the 700+ million unit view of calendar 2022 gives us roughly 40%+ growth of units from calendar 2021 to calendar 2022. That's a positive. The reason it's a positive is because these 5G phones have higher average capacities of both DRAM and NAND. DRAM, typically 50% higher average capacity. NAND is almost double average capacity. You know, if you see some of the phone models from Apple and Samsung, you'll see the strong improvements they have made from 4G phones to 5G phones or LTE phones to 5G phones. That 5G trend is very good. Keep in mind that these are just being driven out of existing known applications with a lot of AI usage when you take pictures, that's happening in the background.
That's driving a lot of content of DRAM. When you save in 4K video, et cetera, or even raw data on the photos being captured now for post-processing of these images, a lot of that requires large file sizes. These are just known existing applications. As you know, at the start of any new technology, when new applications come up that take advantage of 5G, overall bandwidth increase, lower levels of latency, et cetera. You'll see all of these being rolled out in the years ahead, including augmented reality type of applications for phones, including more usage of phones for gaming. You will see the average capacity trend continue beyond the initial burst of just going from 4G to 5G. That's how we see the progression happening, driven by applications.
That is still very early in the 5G cycle. That's going to be a decade-long trend. We are just right now seeing the benefit of just the jump from 4G to 5G and then, you know, future average capacity growth beyond that through applications.
Very helpful. Thank you.
Thanks.
Thank you. Our next question comes from Steven Fox with Fox Advisors. You may proceed with your question.
Hi. Good afternoon. Thanks for taking my question. Just following up on all the mixed commentary for the second half of the fiscal year. Dave, if we just isolate around mix, it seems like with data center and maybe even content on mobile and then auto, that the mix story in the second half is pretty strong for gross margins. Can you just explain or just maybe walk that back a little bit? What would be the major offsets to thinking you get some decent margin expansion in the second half? And then I had a quick follow-up.
Yeah. We're not gonna predict gross margins, but you know, clearly that will be beneficial. As I said, clearly the process technology cost structure will be beneficial. The offsetting Negative would generally be, from a cost perspective, these supply chain costs that we'll experience. We're not prepared to guide for a third or fourth fiscal quarter. I think all I can say is stay tuned for the 2Q earnings call, and we'll give you guidance as to where we think things are gonna shape up to in the third fiscal quarter.
Fair enough. Just real quick on the improvements you're seeing in the supply chain, like how would you describe those in terms of how they start to layer in? Is it pretty straight line starting after this quarter? Is it we're still, you know, do you get a bulk of it as you get to the fourth quarter? Any other color around that would be helpful. Thanks.
Sorry. The improvements in supply chain, is that what you're saying?
Yeah, the improvements in your own supply chain that you talked about.
Sure. You know, I think, you know, as we've gone through, you know, this year, we've seen shortages across a few different end components. I mentioned analog. That's primarily the primary driver, some other logic components. We've been able to, I think, mitigate most of those pretty well, and we've taken actions across those areas to make sure that we'll see improving supply as we head into calendar year 2022.
Having said that, you know, this kind of environment is such that there are, you know, while we address certain issues, new areas of challenge pop up, and we're working aggressively to make sure that we can, you know, build inventory on those across all the different components that we source so that we're able to address all the demand that we see for next year. You know, we're in a pretty dynamic, you know, situation, but with these long-term strategic agreements, we'll gradually build inventory on the parts that we need such that we can meet the demand that we have.