Earnings Call: Q3 2017

Jun 29, 2017

Good afternoon. My name is Karen and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technologies' Third Quarter 2017 Financial Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. Thank you. It is now my pleasure to turn the floor over to your host, Cheney Hudson. You may begin the conference. Thank you, Karen, and welcome to Micron Technologies 3rd fiscal quarter 2017 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO and Ernie Maddick, Chief Financial Officer. This conference call, including audio and slides, is also being webcast from our Investor Relations website, at investors. Micron.com. In addition, our website contains the earnings press release, which was filed a short while ago, and supplemental information including a reconciliation of GAAP to non GAAP financial measures, slides for today's conference call, and a convertible debt in capped call dilution table. The prepared remarks from today's call will also be added to our website later today. Today's call will be approximately 60 minutes We encourage you to monitor our website at micron.com throughout the quarter for most current information on the company including information on the various financial conferences that we'll be attending. As a reminder, the matters we will be discussing today include forward looking statements based on the environment as we currently see it. 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 that the company files with the SEC, specifically our most recent Form 10 K and Form 10 Q for a complete discussion of these reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or other achievements We're under no duty to update any of the forward looking statements after today's date to conform these statements to actual results. And with that, I'll turn the call over to you Sanjay. Thank you, Sheeny. Good afternoon, everyone. I'm pleased to be speaking with you for my first Micron quarterly earnings call. And I'm particularly fortunate to be joining at a time when we are able to report record revenues and non GAAP EPS. These results reflect healthy industry fundamentals, the strength of Micron's diversified technology and product portfolio, and our broad customer reach. Micron also continues to make progress in improving its technology and product competitiveness. The current industry dynamic and the growing strategic importance of Micron's technologies and capabilities made this an exciting time to join the company. The unprecedented amount of data being created, stored and processed presents tremendous opportunities for Micron. Applications like autonomous driving, machine learning, and big data analytics all promise to make an enormous impact on our lives memory and fast storage are the critical and increasingly strategic elements in every one of these applications. Market leading companies from a broad array of industries to provide data center services, automotive applications and mobile solutions Just to name a few, are eager to partner with innovative companies like Micron that can provide leading edge technology and system solutions. Micron is uniquely positioned with the right technologies and capabilities to take a leadership position. And I'm delighted to have the opportunity to help the company maximize this potential. I will now share some details from each of our business units followed by technology and operational highlights for the quarter. Finally, I'll share our perspective on current industry supply and demand dynamics. We had record revenues in all business units this quarter, nearly doubling our company level year over year revenue performance. In the compute and networking business unit, all segments posted significant gains from year ago levels. Revenue from cloud customers was more than 4 times higher year over year, and we saw increased enterprise demand as analytics workloads are driving more use strong position in graphics and high performance memory technology with shipments of our 12 gigabits per second G DDR5X the industry's fastest discrete DRAM, which we successfully ramped to high volume during the third quarter. Most CMP revenue came from 20 nanometer DRAM products and we also recognized initial revenue on our next generation 1X DDR4 products. Looking forward, we believe that we are well positioned to effectively serve both our traditional OEM customer base as well as evolving opportunities around tailored solutions for large data center customers. Our mobile business unit revenue increased slightly quarter over quarter with significant margin expansion driven by lower costs associated with the continued shift to 20 nanometer LP DRAM and a favorable pricing environment. We expect increased demand ahead of the anticipated flagship smartphone introductions planned for the fall. Requirements for multi camera systems, augmented reality applications, and high resolution displays now decayed 4 and 6 gigabyte LPD ramp density for a great user experience. This demand aligns well with our 20 nanometer and 1x offerings where we plan to introduce nearly 20 new 1x package on package variations in the next 12 months. We are focused on developing and diversifying our AMC and Discrete NAND device offerings, which will position us well to address the full range of smartphones from basic entry level smartphones to address their memory and storage requirements as MCPs provide a single source for DRAM memory and NAND storage simplifying system design, validation and supply chain considerations. We continue to sample our 32 layer MLC NTL see 3 d NAND MCP, Discrete E UFS and EMMC devices to both chipset partners and handset OEMs. Revenue shipments of these products will following completion of qualifications by customers. Our embedded business unit recorded a 44% increase in revenue year over year, driven by strong demand growth across all segments and a better pricing environment. We achieved record quarterly revenue for each of the automotive, consumer and connected home and industrial segments. We saw continued strength in automotive DRAM and E MMC NAND with infotainment and instrument cluster applications driving this record level. We continue to maintain our strong market share leadership position in automotive enabled by our focus on high quality and deep customer relationships and support. Industrial And Consumer Connected Home revenues were led by increased shipments into rapidly growing applications such as voice activated home assistance and set top boxes. We continue to transition our non automotive DRAM portfolio onto 20 nanometer designs. Our storage business unit delivered record revenues as sales of our SSD products grew 33% quarter over quarter. Sales to cloud and enterprise SSD customers grew appreciably on a combined basis and exceeded revenue from client customers for the first time. The most significant growth came from our cloud customers where revenue doubled quarter over quarter. Our SSD sales in the quarter were driven primarily by our SATA SSD solutions using our 32 layer TLC in the 3 d NAND. During the quarter, we had first revenue shipments of our 8 terabyte SSD enterprise class SSD, which is an industry first. Several new OEM and hyperscale customer qualifications are underway for our SATA drives and in calendar year 2018, we plan to introduce NVMe PCIE offerings using our 64 layer TLC 3 d NAND. On the manufacturing operations front, we continue to make good progress towards achieving meaningful output by the end of our fiscal year on both our 64 layer 3 d NAND and our 1X DRAM. Both of these technologies have already begun revenue shipments and are advancing well in their production yield ramp. We also continue to execute our plans to outfit our assembly operations as part of our DRAM center of excellence in Taiwan. This DRAM center in addition to our NAND Center of Excellence in Singapore will be essential to our ongoing efforts to optimize costs and improve our flexibility and speed to meet customer needs. On the technology front, we continue 3 d NAND and our next generation 1y DRAM Technologies. Our 3rd generation 3 d NAND will continue to be based on our innovative CMOS under the array architecture. This architecture pioneered by Micron provides the benefits of smaller die size and lower cost. We expect our 1Y DRAM to further improve our competitive position in the industry. Looking at the industry broadly, Micron continues to see a healthy supply and demand environment that creates opportunities across both memory and storage markets. For calendar 2017, we expect DRAM industry bit supply growth of between 15% 20% slightly below our view of demand growth. For NAND, we expect 2017 industry supply growth in the high 30 to low 40% range, constraining what would otherwise be higher demand. We expect healthy industry demand to persist into 2018, supported by continued strong growth in both DRAM and NAND demand reflecting broader trends in the data center and mobile markets as well as increased adoption of SSDs across enterprise, cloud and client PCs. Finally, after my 1st 2 months at Micron, I would like to share some of my priorities. Particularly accelerating the ramp of new technologies into volume production and introducing new products quickly. Both of which are essential to delivering innovative solutions at lower costs and strengthening Micron's business fundamentals. Micron has a tremendous portfolio of technologies and core capabilities. Our goal is to leverage these to provide high value products and solutions that improve our revenue mix. We will target high growth opportunities and seek out partnerships with leading companies in the ecosystem to position Micron for long term success. We are off to a good start. Our execution and the current business climate are creating more flexibility which we are leveraging to solidify our foundation through technology, product and manufacturing investments, while also strengthening our balance sheet. I believe that through focused and solid execution, Micron can capitalize on the world's increasing reliance on memory and storage solutions. I'll now turn it over to Ernie, who will walk through the specifics of our financial performance this quarter. Thank you Sanjay. We had a strong quarter with record revenue, non GAAP EPS and operating cash flow, driven by the continued positive industry environment additional bit growth from our current technologies and progress on deploying our next generation technologies into manufacturing. I will provide an overview of the fiscal and guidance for FQ4. DRAM represented 64% of our total revenue with the following segmentation Mobile was in the mid-twenty percent range, PC was in the low 20% range, down from the prior quarter, Server represented approximately 30%, up from 25% the prior quarter and specialty DRAM, which includes networking, graphics, automotive, and other embedded technologies was in the mid-twenty percent range. Our trade man revenue represented 31% total revenue with the following segmentation Consumer, which consists primarily of component sales to partners and customers, was approximately 40%. Mobile, which includes managed NAND Discrete solutions and the majority of our MCPs, was in the mid teens percent range. SSDs were in the mid-twenty percent range, up slightly from last quarter and automotive, industrial and other embedded applications were in the high teens percent range. Turning to performance by business unit, the Compute And Networking Business Unit reported fiscal Q3 revenue of 2 $400,000,000, up 25 percent sequentially due to increased bit shipments, ongoing success in penetrating growing segments like enterprise, graphics and high performance memory and cloud and a stronger pricing environment. Non GAAP operating income was $1,200,000,000 51% of revenue, up from 38% the prior quarter. 20 nanometer products were greater than half of CNDU revenue and were shipped primarily in the enterprise, cloud and client segments. Revenue growth in the enterprise segment was driven by the continued expansion of DRAM content per server and in the cloud space, we experienced good sequential bit growth. Both segments also benefited from the current pricing environment. We saw ongoing growth of our 20 nanometer DDR4 products with particular strength coming from the latest industry server platforms. In networking, we saw shipment and revenue growth bolstered by the continued transition to 20 nanometer 4 gigabit DDR3 and 8 gigabit DDR4 products. We also continue to see strong interest in our high performance memory portfolio. This strength was primarily evident in data center networking equipment. Double digit client revenue growth was driven by a continued firm pricing environment and product mix optimization resulting in modestly declining bit shipments. Our 1xnanometer revenue was predominantly in this segment. Graphics also saw double digit revenue growth driven by strength in the game console market as well as new PC graphics card product launches including the G5X based Titan XP from NVIDIA. The mobile business unit delivered fiscal Q3 revenue of $1,100,000,000, up 4% sequentially, driven primarily by a stronger pricing environment and our non GAAP operating income was $304,000,000 or 27 percent of revenue, up from 16% the prior quarter. The Embedded Business Unit delivered fiscal Q3 revenue of $700,000,000, up 19% sequentially. Non GAAP operating income was $256,000,000 or 37 percent of revenue up from 33% the prior quarter. The results were driven by strong bit demand and increased average selling prices of DRAM combined with record shipments of SLC and MLC NAND in the consumer and connected home segments and record shipments of DRAM and E MMC NAND into the industrial and automotive segments respectively. The storage business unit delivered fiscal Q3 revenue of $1,300,000,000, up 26% sequentially. Non GAAP operating income was $276,000,000 or 21 percent of revenue, up from 7% the prior quarter. Results were primarily driven by strong unit growth of SSDs and a stronger pricing environment. Moving to overall company results, revenue for the 3rd fiscal quarter was $5,600,000,000, up 20% sequentially and driven by primarily stronger DRAM ASPs and higher NAND bit volumes. On a year over year basis, revenue increased 92% primarily due to a stronger DRAM pricing environment and our focus on higher value add solutions to improve our product mix. Examples of this improved mix includes SSDs were year on year revenue tripled, while in DRAM bits embedded in high value solution for enterprise, cloud and graphics customers together grew at a rate twice our overall DRAM bid output for the same period. Non GAAP gross margin for the quarter was 48% up from 38.5 percent in the prior quarter driven by increased DRAM ASPs and cost per bit reductions in both DRAM and NAND. On a year over year basis, non GAAP gross margin increased 30 percentage points driven by a stronger DRAM pricing environment a better product mix $1,900,000,000 or $1.62 per share. Turning to results by product line, DRAM revenue increased 20% compared to the prior quarter as a result of a 5% increase in bit shipments and a 14% increase in ASPs. DRAM non GAAP gross margins for the 3rd quarter increased 10 percentage points sequentially to 54 half fiscal year 2017 DRAM bid output would be about 10% higher than first half fiscal year 2017. As we look forward into fiscal 2018, the timing of the 1x technology transition is expected to result in our bit growth at or slightly below industry growth rates over the same period. We considered this bit growth pattern when we provided our 2 year bit growth CAGR earlier this year. Trade NAND revenue increased 21% compared to the prior quarter, reflecting a 17% increase in bit shipments and a 3% increase in ASPs. Non GAAP gross margin was 41%, up 10 percentage points driven by a 12% cost per bit reduction and better product mix. Growth would be about we foresee relatively muted bit growth in the first half of fiscal twenty eighteen followed by stronger growth in the second half. Consistent with DRAM, we considered this bit growth pattern when we provided our 2 year bit growth CAGRs earlier in the year. Non GAAP operating expenses for the quarter were $600,000,000 down $12,000,000 from the prior quarter. The company generated operating cash flow of $2,400,000,000 in During the quarter we deployed $1,300,000,000 for capital expenditures net of partner contributions and free cash flow for the quarter was $1,100,000,000 as we retired approximately $1,000,000,000 of debt via a tender offer for certain of our high yield notes. We currently expect fiscal year 2017 free cash flow of approximately $3,000,000,000 and continue to prioritize the deployment of our cash flow toward advancing our production technology capabilities and reducing our debt. For fiscal year 2017, we are trending to the upper end of our indicated net CapEx range of 4.8to5.2 $1,000,000,000. We will provide a fiscal year 2018 CapEx perspective later this year. We ended the 3rd quarter with cash, marketable investments and restricted cash of approximately $4,900,000,000. Our guidance for fiscal Q4 is informed our ongoing work around cost reduction and the improvement of our product mix. On a non GAAP basis, we expect the following: Revenue in the range of $5,700,000,000 operating expenses between $575,000,000 $625,000,000 and operating income ranging between 2.2 and $2,400,000,000. EPS will range between $1.73 $1.87 per share based on 1,179,000,000 diluted shares. At our Analyst Day in February, we outlined how our production technology execution and the resultant bit growth and cost reductions have enabled us to significantly strengthen our cash flow and financial performance in any market conditions. We've been reporting our incremental progress each quarter. However, I wanted to share the tremendous progress we've made over the 12 month period ending in fiscal Q3. During that time, our bid output has been above industry average for both DRAM and trade NAND and our cost per bit has declined approximately 25% 30% in those technologies, respectively. In addition, we continue to improve our competitiveness by successfully delivering solutions to deliver higher value add opportunities. Our ability to deliver these results has enhanced our energy and excitement to make further progress and we look forward to sharing that with you. With that, I will turn it back and Chief Business Officer, a role that unites our 4 business units and our strategy and business development team into a single organization. This structure will better equip us to align our product strategies to market trends and customer demands. Simmons brings nearly 3 decades of industry experience. He's a proven leader in driving strategy and building businesses with a focus on high value profitable growth. Simmons has a successful track record at multiple large technology companies and his perspective and expertise make him an ideal fit for Micron. Earlier this week, we also Jeff has extensive experience in leading the development of advanced semiconductor products, including flash system level solutions. I look forward to Jeff's contributions in advancing Micron's roadmap of Flash Memory Technology and value added products. We welcome both Smith and Geoff to Micron. Finally, I would like to express the attitude to my predecessor, Mark Durkin. His dedication and leadership had positioned Micron well for his next chapter for this next chapter of success. As I had toward Micron's facilities, met with leaders and teams throughout the company and have begun to engage with some of our customers. I have been impressed by the strength of our technologies, scale, customer reach and the innovative, hardworking spirit of our global team. My experience since joining Micron has reinforced what I have known for a long time. This company has tremendous potential and can become one of the world's most successful semiconductor companies. I'm proud to be part of this iconic company. Our first question comes from the line of Harlan Sur with JP Morgan. Good afternoon. Thank you for taking my question and congratulations on the solid quarterly execution. Sanjay, welcome to the team. Our first question is for you. At the time that Sanddys was acquired by Western Digital, Santas had a number 2 position in the global SSD markets, strong number 3 position in enterprise SSD. I think you were growing that business about 15% to 20% year over year. If I look at the most recent market share stats, Micron is sitting at about a number 5 market share position in both total SSD and enterprise SSD market share. So what areas does the Micron team really have to focus on in order to drive a leadership position in SSD, especially enterprise? Is it systems capability, firmware controller OEM and cloud relationships? And more importantly, what are you going to do to start to enable this? Well, Micron team actually has already been, as we said in our remarks, working on driving higher value solutions mix to greater levels in its portfolio. The company has made strong progress over a couple of quarters in client SSDs as well as enterprise and cloud SSDs. And if you look at some of the market share numbers, you will see that the market share over the last couple of quarters has increased meaningfully. The market share in enterprise cloud stands at sub-ten percent levels and in client markets for SSDs, the market share is in high single digits at this point. So all this definitely points to much greater opportunity for the company in the times ahead. And key things that we have to focus on. This is absolutely an area of my priority here is to increase the mix of system level solutions in the NAND portfolio of the company. Things that have been going well, continue to build on them, but expand diversify our capabilities, our product portfolio, and deepen our customer engagements. The thing that's really, really powerful for Micron here is that Micron has strong position in DRAM as well as NAND. And basically on the continent, this is the only company that has these strong capabilities. Therefore, customers are very much engaged with us in helping us drive the strength in the system level solutions on the NAND side. In the areas where we have to focus on to answer your question further are certainly continue to strengthen our controller capabilities as well as firmware capabilities. Today, some of them most of them are based on external controllers and we have a roadmap of both external and internal controllers going ahead. So these will be an important area of focus for the company going forward. Great. Thank you. And then, earning for you on the gross margin front, solid job over the team by the team over the past few quarters. Going forward, you're looking for about another 100 basis points of improvements. The demand environment is shaping up to be stronger second half over first half supply outlook still seems pretty disciplined and the team is doing a great job on driving the cost curves. It seems like your gross margin expansion should be greater than the implied 100 basis points you're guiding to. Are there any mix related impacts in Q4 which is holding back the margin profile? I don't think so. I think it's a function of the pattern of our bit growth over the course of this year. So while we will continue to enjoy cost reduction in the final quarter of this fiscal year. It's going to be likely at a bit of a slower rate than you've experienced for the the 1st part of the year. And also as we look at the pricing environment, we continue to view supply and demand in a favorable way But bear in mind, we've now had several consecutive quarters of nice quarter over quarter step ups. And it isn't always advisable to bank on continued aggressive quarter on quarter pricing increases as you think about the business. Thank you. And our next question comes from the line of Chris Danely from Citi. Hello. This is Wayne Loeblin for Chris Danely. Thanks for taking my question and congratulations on the quarter. Can you talk about, any changes you're seeing in server demand trends is it possible that we'll see allocation or lead time expansion in this market? The server demand definitely continues to be strong for DRAM. If you look at the growth for DRAM content, combined with the unit server increases, the growth bid growth rate that we are looking at for the industry is about 40% on a year over year basis. So this is really high value segment of the market. And certainly, as we know that industry in 2017 is experiencing overall tightness on the DRAM side driven primarily by the strong growth on markets such as server as well as other markets like mobile continuing to be very strong where the average capacities of DRAM content is increasing given all the features that the phones are implementing and even markets like automobile, where DRAM content continues to increase nicely. So the demand trends are being driven by multiple markets. Certainly, server is the highest growth trend in the marketplace today. And that's all for the DRAM side of the business. Okay. Can I ask you for a little bit more color what you're seeing on as far as handset demand trends, what has the impact been from China inventory correction? And also, what do you anticipate the impact will be of high end skews of a flagship phone being delayed? So I think, when you look at the content of DRAMs in the mobile market, it really continues to increase nicely going in value smartphones from about little over, gigabyte per phone to about doubling by 2018 timeframe. So continued strong growth in terms of average capacity. And the same trend is certainly happening on the high end phones to where you are starting to see 46 gigabyte DRAM content. And certainly, On the multi chip packages also, we are seeing a high DRAM content as well as high NAND content being driven in the mobile phone market. So overall, when you look at year over year trends, in 2017, as well as when you look at the trajectory in 2018, mobile does continue to be a strong market. Certainly there can be periods where there can be some inventory adjustment in certain parts of the market. But important thing to focus on is really the long term trend. And that trend, due to all the features that are being implemented, even in the entry level smartphones and certainly on the high end smartphones are tending to drive higher average content and demand growth for DRAM as well as for NAND. Thank you very much. Thank you. And our next question comes from the line of Mark Delaney from Goldman Sachs. Yes, good afternoon. Thanks very much for taking the questions. The first question is on DRAM ASPs. On the last earnings call, the company commented about how some of the contracts that had been in place for a while hadn't caught up with the substantial increase in spot pricing. And I'm wondering to what extent you expect a similar dynamic to play out as you think about the August quarter? I think as I mentioned in my earlier remark, we are still seeing some adjustments upward in certain segment of the market, certainly in terms of both frequency and magnitude, those are a little less than we've experienced in the prior few quarters, Mark. Okay. That's helpful. And then for a follow-up question, the, the NAND gross margins expanded very significantly and the company very well on the cost per bit reductions down 12% quarter on quarter. I know already you said we shouldn't expect cost reductions to come every quarter at those sorts of rates, but it seems like companies on track to exceed 20% to 25% cost, cost target that had guided to for the NAND business for this year. And I'm just wondering to what extent you think you have the ability to to exceed that, that prior guidance given how much you've already accomplished? Or is there maybe other factors like mix that we need to keep in mind for the August quarter and business on cost? Yes, I think it's important to remember that that cost reduction was a 2 year CAGR and certainly you'd expect with the kind of bit growth that we've experienced in our fiscal 2017 that you would be at the upper end or above the upper end of that range. And if you go back and look at our fiscal 'sixteen, we were below. So it's important to blend those 2 years together, but the answer would would get you to a fairly significant cost reductions this year commensurate with the type of bit growth that we've spoken of. Understood. Thanks very much. Thank you. And our next question comes from the line of David Wong with Wells Fargo. Thanks very much. Can you give us a bit more detail on 3 d NAND the 3rd generation versus the 2nd generation? You've somewhat answered it in terms of the cost, but just looking specifically at 3rd to 2nd generation, how much cost savings? Do you get reduction in cost per bit? And does that generation have more layers or a narrower line width for both? Regarding the 3rd generation, we will provide you more details as we get closer to production of that technology, obviously, for competitive reasons. Thank you. And our next question comes from the line of Kevin Cassidy with Stifel. Thanks for taking my question and congratulations on the great results. Can you say what's happening with your contract periods? It used to be PCB rounds were negotiated every 2 weeks. And I'm sure customers are asking for extensions on those contracts. Can you just say in general what's your average contract time now? So there hasn't been a significant change during this period of time. Typically, as you noted, PC DRAM contracts are the shortest that we would actually say maybe a little longer than 2 weeks, but certainly roughly in the realm of a month or so. And then the other technologies tend to go up from there, but we haven't seen any material change in the duration as a result of the current market environment. Although there may be some requests for that, it's typically not something that gets, that gets changed very much over the course of a cycle. Okay. Great. And maybe just if you could give us your views on adding more DRAM wafer capacity, what would stimulate that or what would be your decision to ever add wafer capacity on DRAM? Our focus in DRAM is to continue to advance our technology and to ramp the new technology nodes into production as rapidly as we can. Keep in mind, our customer requirements and there, of course, qualification of products built using those technologies. And we always keep an eye on overall demand and supply balance and our own demand and supply balance as well. So basically prudent focus on supply growth management. But the primary focus, the one that provides highest return on investments is around technology transitions. And that's where really all our priority will be. In terms of any potential of our technology transition capability in manufacturing. And then we'll have to certainly see that there is a projection of stained demand growth in the years ahead before we consider adding new capacity. Okay, great. Thank you. Thank you. And our next question comes from the line of Srini Pajjuri with Macquarie. Thank you. Hi guys. Question on the PC segment, Ernie, I think you said PC is down. I just want to make sure it's not down in absolute terms. It doesn't look like we just want to make sure. And then if you can comment on what sort of demand trends you're seeing in PEC and also pricing trends last quarter? Sure. So, Sanjay and I team up for this, but relative to, to gigs shift or the volume shift into the PC segment as we said in our prepared remarks, We did have a slight decline in unit volume. It wasn't very significant at all, but that was part of our plan to address higher value added markets. I don't think it was reflective of a decreased demand environment any way, shape or form. We don't typically comment on the going forward pricing environment other than the general statement that we see a fairly good balance between supply and demand. And we're going to continue to monitor that segment quite carefully from a bit growth perspective. I think We're thinking that that segment would be somewhere in the range of, plus low to mid single digits in aggregate for us in fiscal 'seventeen. And I think that that addresses the three points you raised, but if not, please, please let us know. Yes, that's great. That's helpful. And then, in terms of the cash you say, Jeremy, I think in the past you said it's more your top priorities to pay off the debt or at least reduce the debt load. And obviously, in a very strong free cash flow here. And then Given Sunjay's comments about the enterprise SSD focus, etcetera, I'm just curious as to if and where M and A might come in, if I kind of take a longer term view here? Thank you. In terms of driving our growth ahead, of course, we have several tools available to our technology and product capabilities, our engagement with customers and our ability on the manufacturing side in terms of implementing the new technologies into production. We would never rule out any M and A if and when appropriate we will absolutely consider it, but it would have to be something that does provide ROI So we just want to make sure that we focused on our priorities and our priorities at this point are to strengthen our technology and product execution and increase the mix of high value solutions in our portfolio mix while engaging with customers on defining the future generation architectures. So again, I don't rule out any M and A, but it, of course, always has to be considered in the context of what value it brings and what ROI it brings. Great. Thank you. Thank you. And our next question comes from the line of Rohit Shah with Nomura Instinet. Yes. Thank you. Ernie, just an OpEx that's been coming in lower than anticipated, think for a few quarters and in light of kind of your new product strategies and the upcoming fiscal year. Can you give us, just some advice on how to think about OpEx We've mentioned earlier in the year that one of the biggest variables in terms of the quarterly level of OpEx is something we call prequal expense. So as we are going through the process of qualifying either new packages or new technologies for customers, those carry with them significant expenses. When we went into this fiscal year, we suggested that it would be more heavily weighted toward the front part of the fiscal year and you've seen that play out here as our operating expenses have flattened out as we look forward. We're considering OpEx as part of our fiscal year 2018 planning process and we're not quite through that. So I think we'll be in a position to share a little bit more color on that. With you on the next progression. So we're taking a very close look at that. Okay, great. Thanks. And then Sanjay, when the announcement was made that you were joining. I think some of us at least initial reaction was that there was a lot of potential to improve the mix within NAND. And So sort of seeing consumer at 40 percent of the business, SFCs kind of the mid-20s, where do you think you can take the the mix of business within NAND and how long would it take for you to get it where you want So at this point, we are not prepared to really lay out mix targets for the future. But I can certainly tell you that indeed there is great opportunity over time to strengthen the mix of the managed NAND solutions. That means, SSGs as well as in the mobile space, things like, eMMC and UFS and MCP. And again, I would like to point out that there is a large part of mobile market, which, demands MCP. And, Micron is very well positioned with this mix of DRAM and Flash. So we will definitely focus on bringing up solution more MCP solutions using our eMMC and UFS capabilities in the future. I would like to point out that these kind of transitions do take a period of time. Micron is I would say still in the early days of implementing this transition, over extended period of time, we definitely will be driving the mix, but it really has aggressive focus of the entire leadership team here. And with the hire of Jeff Verhul, we have certainly doubled down in the area in terms of focusing further on system level solutions for NAND. Thank you. Thank you. I will also just add that in terms of the component side of things that includes some of the sales that the company makes to Intel, which, as you know, is our partner. In terms of development. So that's part of that component mix that you were talking about as well. Thank you. Our next question comes from the line of Blayne Curtis with Barclays. Thanks for taking my question. Ernie, I just wanted to go back to a prior answer you had. When you look obviously, I feel bad asking your cash flow obviously has grown hugely over the last couple of quarters. I mean, when you look at the use of cash in the next fiscal year, it wasn't that long ago people were asking how you're going to pay for CapEx and now your flushed with cash. So just kind of curious to your thought process. You pulled in a little in terms of transitions, but it's only $200,000,000. Just kind of can weigh those options in terms of faster transitions, capacity add, buybacks as well as the debt retirement which you did this quarter? Sure. So consistent with one of the earlier answers. We are in the middle of our planning process for fiscal 2018. And certainly, as we look at some of the priorities of the company, they have always been highly centered around continuing to drive our costs down. So despite the fact that we have been, to some degree, mindful of that in the context of the cash flow of the company in the past, We're going to continue to do the right thing and be prudent and disciplined in that regard. We have ample opportunity to reduce the debt profile of the company So I appreciate you thinking we're flushed with cash. We're still not as flushed as I would like to be. So that's going to continue to be a priority of both generating that free cash flow as well as reducing the debt. So consists of our prepared remarks. Those are the two things we're focused on and you will continue to see us be very thoughtful in how we pursue both of those here as we enter our fiscal year 2018. Excellent. I just want to follow-up on the computing strength in terms of the next platform from Intel has more maybe talk about that as a demand driver. And did that contribute? Did you see anything in terms of builds ahead of that launch, which is more second half of this calendar year? We certainly do think that that will as it gets launched, it will be driving a greater demand certainly for this, yes. Is that more did you see any contribution yet or is that something that be more, next fiscal year? I would expect it to be increasing over time. Thank you. Our next question comes from the line of Joe Moore with MS. Great. Thank you. Just following on the last question, in terms of CapEx trajectory, you've talked about a long term number that sort of it will be centered around 30% of sales, I believe. And I'm just curious with Sanjay maybe changing some of the priorities and things like that. Is that still the without getting into the 'eighteen plan that's not done yet, is that still the ballpark we should be thinking about long term? I think it's important to remember that was a long term target and that there are years when we've been below. There are other years when we've been above. And so, I don't know that relative to a long term target that we would be prepared to be making any changes at this point, but, by the same token, and if we do, certainly, as we did, earlier last year, we'll share that with you. But at present time, that target remains the same, bearing in mind that it is a long term target. And I would agree with Ernie that the long term target here is definitely, I think, very appropriately placed. Great. Okay. Thank you for that. And then, the growth that you saw in your compute and networking, when you talk about quadrupling year on year in cloud, I guess that number surprised me a little bit. And how much of that do you think is sort of Micron improving penetration versus things like memory content going up? Just help us to understand how that number is so good year on year. Thank you. I think at it's obviously a combination of both, but we've been saying for some time, Joe, that this is a priority of the company to really become stronger in segments where we have the opportunity to develop deeper relationships, offer higher value add, more sustained customer relationships. And I think we've done a great job at executing on that strategy So while there is absolutely a benefit for pricing, absolutely, we enjoyed the same benefit that others did from the average content increase I think we enjoyed a disproportional benefit by executing on our strategy of addressing these markets in ways that allow us to get deeper penetration. Thank you. And our next question comes from the line of John Pitzer with Credit Suisse. Yeah, good afternoon guys. Thanks for letting me ask the question. Sanjay, my first question is, when you think about sort of the consensus view on long term NAND demand. It's fairly bullish, which makes sense given the SSD story when you think about the long term view of DRAM demand, I think it's less sanguine. And I think the view is sort of PC units aren't really growing. Handset units probably not growing all that much. I'm just kind of curious though, when you think about these new applications like data analytics, AI, maybe level 4, level 5 autonomous driving. Is there a bottoms up argument to have a more bullish long term view on DRAM demand? And then be kind of curious because the consensus is sort of 15% to 20% might be the long term bit growth, which would be well below sort of the historic level. I'd love to get your view if it's greater than 15% to 20%, is that something that's going to require more than just technology transitions to support? Certainly, we have, I believe, strong opportunities in technology transitions to meet the future growth expectations. As I said in a response to an earlier question as well that we definitely will have to be, exploiting that fully before you would ever consider any capacity additions. And you are certainly right that the demand drivers, certainly are with AI, with machine learning, with so much data being generated and all of that data required to be processed fast to provide, experience to consumers as well as bring great value to businesses to enable and unleash new applications. This is all AI in technology space is just extremely early days and extremely dynamic and definitely memory and storage will become, I believe, a key enabler for the capabilities that AI technology would be able to enable in multitude of applications, whether it is autonomous driving or it is cloud computing, you know, variety of applications here. So yes, I mean, the demand outlook here certainly is very interesting. But again, we just do not want to be getting ahead of ourselves, I think it is important that we stay focused on continuing to drive the business with a focus on prudent supply growth here. That's helpful. And then Ernie, as my follow-up, I know you don't want to give us quarter by quarter mix targets, but I'm kind of curious as you sort of exit the back half of this fiscal year where you're outgrowing industry bits in both NAND and DRAM and you move into the first half of next year, we will be under growing Can you help us just kind of frame is there enough sort of mix up opportunity during the first half of twenty eighteen where even though you might be losing some bit share you might not be losing sort of profit share in the industry or how do we think about where you are on that mix optimization curve? Well, I think as we noted, we are making progress every single quarter with penetrating higher value add solutions and we would expect if we are successful in continuing to execute on that, that we would be in a position to to have greater revenue from those segments, which may, depending on the pricing environment, to some degree, mitigate a little bit, the bit growth profile. But bear in mind, John, that we talked about our bit growth in the context of an industry that we're estimating, but, we also use the words at or slightly below, not materially below. So I do think it's important to keep that in mind. And on the NAND front, we just simply said we'd have a little slower growth in the first half of the year versus the second half of the year. I wouldn't expect that we were going to be, dramatically different or so underperforming the industry that it would disadvantage the company. Thank you. And our next question comes from the line of Jagadish Iyer with Summit Redstone. Yes. Thanks for taking my question. Two questions. Ernie and Sanjay first, if you go from 20 nanometer to 18 nanometer in the case of DRAM and as well as 32 to 64 layer in case of 3 d NAND, we just want to understand what kind of cost reduction should we be thinking about and how is the trajectory as we look through calendar 'eighteen? And then I have a follow-up. So as we look through calendar 2018, we will certainly be continuing to ramp our 1X DRAM technology as well as our 64 layer technology during the course of that, of that timeframe, we are still in early stages, as we said, we'll be achieving meaningful output of both 1X as well as 64 layer this quarter here. But we'll continue to be ramping it during the course of next several quarters. In terms of the bit growth, 20 nanometer provided something like, let's say, 40% slightly greater than that, in terms of bit growth compared to the prior note and give us a cost reduction of more than 20%. And when we look at 1x, compared to 20 nanometer, that's also above in that same range, although 1X gives us somewhat greater cost reduction than 20 nanometer node gave us over the prior, 25 nanometer node. And when we go from to 32 layer compared to the planar NAND that we had, that we have here at my on the last generation of PlannerDAN. 32 layer gave us a bit growth in volume die of about 100% or so. And give us a cost reduction of greater than, in the range of maybe sub-thirty percent And going from 32 layer to 64 layer, Biscayne is also about 100% and cost reduction going from 32 layer to 64 layer is also at mature yields, comparing mature yield to mature yield and high volume wafer product to high volume product, 32 layer to 64 layer will also give us about a 30% cost reduction. So Micron has been really well positioned in NAND with the 32 layer technology, which has given it a meaningful cost reduction over our last planar node and 64 layer continues that trend ahead as well. And Jaggerty, just to add to that, I would refer you back to some of the 2 year cost reduction CAGRs we provided at our Analyst Day, which gives you a view of fiscal 2017 2018 together. So that might be helpful to you as well. As you think about that. Okay. That's very helpful. And finally, I just want to understand your thoughts on the DRAM channel inventory level at this point of time. Thank you. We think that channel inventories are well within the range that we consider to be normal. Certainly, they have improved from a quantity point of view over the 1st part of this year where they were extremely extremely short. But in aggregate, I think that we think that channel inventory levels are still within a healthy healthy ranges. And I just want to add a comment to my response before to you. Your question was very specific in terms of cost reductions between technology nodes. On high volume products essentially. And that those numbers should not be confused with year over year cost reductions because year over year cost reductions on the overall blend of the business are very much a function of the technology mix that is in production. And as I indicated, these technologies will be gradually ramping up for us in production over the course of next several quarters, while the older technologies will still continue to be in production to meet our overall diversified customer requirements for a diversified mix of technology and product and solutions. Thanks so much for that. Thank you. Thank you. And we have time for one more question. Our final question for today comes from the line of CJ Muse with Evercore. Please go ahead. Good afternoon. Thanks for squeezing me in. I guess first question, could you share your initial thoughts on what your outlook for DRAM supply for the industry in calendar 2018. And as part of that, for 1x, when do you expect to reach a crossover point? CJ, we think the industry for calendar 2018 could be slightly higher than the range of growth in calendar 2017, which was 15% to 20%. So maybe add a couple of percentage points to either end of the range. And we haven't shared yet a big crossover for the 1X node who said we'd have meaningful output by the end of the fiscal year. We're clearly on track to do that and we'll provide more perspective on that as we more fully describe our 2018 plans. That's helpful. And then I guess a quick follow-up on CapEx. You said you're going to spend towards the higher end of the range, so roughly $300 plus give or take, 1,000,000. Is that more DRAM or NAND? Can you share where that spending is And is that translating into more bits or does it relate to rising capital intensity? So just to make sure we're on the same page, we have given a range this year $48,000,000,000 to $5,200,000,000. And we said we were trending toward that $5,200,000,000 range. So it's just $100,000,000. And I would say that, really there is no specific area that I point you toward. It's just doing what we need to do to make sure we're well set up here as we exit the end of the fiscal year. Very helpful. Thank you. Thank you. This concludes today's Micron Technology Third Quarter 2017 Financial Release Conference Call. You may now disconnect.