Earnings Call: Q2 2017

Mar 23, 2017

Good afternoon. My name is Latif, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies Second Quarter 20 17 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, Ivan Donaldson, Sir, you may begin your conference. Thank you, Latif, and welcome to Micron Technology's second quarter fiscal 2017 financial conference call. On the call with me today are Mark Durkin, CEO and Director and Ernie Maddock, Chief Financial Officer. This conference call, including audio and slides, is also being web cast from our Investor Relations website at investors. Micron.com. In addition, our website contains the earnings press release filed a short while ago, and supplemental information, including quarterly operational and financial metrics and guidance, GAAP to non GAAP reconciliations, slides used during today's conference call, and a convertible debt and CAPCall dilution table. Today's call will be approximately 60 minutes in length. A webcast replay will be available on our website for 1 year. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences 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 statements made today. We refer you to the documents the company files with the SEC, specifically our most recent Form 10K and Form 10Q, for a complete discussion of the important risk factors and other 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 after today's date to conform these statements to actual results. I'll now turn the call over to Mark. Thanks, Ivan. For fiscal Q2 2017, Micron posted total revenue of $4,650,000,000 with non GAAP gross margin of 38.5 percent and net income of $1,030,000,000 or $0.90 per share. Revenues at the top of our guidance, while gross margin operating income and earnings per share exceeded projections. Operating cash flow was $1,800,000,000. Last quarter, we provided detailed insight on industry pricing dynamics explaining how the significant increases over trough pricing for PC DRAM far exceeded what we had seen in other segments, which typically react more slowly. This quarter, we saw continued gains in client DRAM pricing, but also benefited from increases in mobile, cloud and enterprise pricing as well. All these segments showed meaningful quarter over quarter increases. These gains, combined with outstanding progress on cost reductions, led to a significant increase in our DRAM margins. In NAND, we were able to capitalize on an increasing percentage of low cost 3 d TLC NAND by more fully participating in the SSD market. As a result, while blended ASPs were down slightly due to a higher density product mix Our NAND margins improved substantially over last quarter. As we noted in our February analyst conference, we continue to see broad industry trends, placing increasing value on the memory and storage technologies we develop and the features those product those technologies can provide. In the most recent quarter, you can see that reflected in significant increases in cloud and enterprise businesses, both in bids shipped and value of products going to those segments, and in an ongoing preference for SSDs over HDDs in storage platforms. We'll comment more on this when we walk through the specific business details in a moment. From a supply and demand perspective, we continue to be comfortable with market dynamics given the capacity plans we're aware of today. I'll now provide a high level overview of each of the business units, and Ernie will follow on with more details on their financial performance. In the compute and networking business unit, we experienced continued revenue growth as a result of strength across all market segments with particular strength in cloud and enterprise. We began enablement of our 1x nanometer products and extended our lead in graphics technology with the announcement of our next generation GtdR5x product which is the fastest discrete memory available. In our mobile business as in other segments, broad market tightness has resulted in increased ASPs across all types of mobile memory. Our customers continue to be focused on increased memory and storage density per smartphone, nicely placed a Micron strategy to focus on MCP markets. We plan to introduce more than 20 new MCP designs over the next 12 months to address the highest growth mobile applications. Customers prefer these solutions because they simplify design, validation and supply chain processes. MCPs also provide Micron with an opportunity to strengthen our relationship with key market enablers, providing a path to increased market share. Our embedded business grew revenues this quarter through increased DRAM shipments in automotive as well as consumer and connected home applications, and we achieved record automotive revenues for the 4th quarter in a row. Increased NAND shipments to industrial multi market customers helped offset this quarter's anticipated decline in NOR shipments Japanese gaming applications. Design and activity continues to be strong for our 20 nanometer DDR and LPDDR products in automotive, consumer connected home, and internet of Things gateway applications. In addition, designing activity for our latest generation of automotive grade managed NAND continues to increase with new design wins up significantly over the prior quarter. Our storage business performance this quarter was driven by continued shift to cost effective 3 d NAND TLC products and increased traction for our SSD portfolio across the OEM cloud and enterprise market, Winds with OEM customers enabled a record number of SSD shipments during the quarter. Customer focus on larger capacity and tailored storage solutions led to a dramatic growth in our enterprise and cloud segments, which were fastest growing part of our SSD portfolio. The trend toward tailored solution drives greater opportunities for Micron to an age, engage and customers on future IT investment planning. As we pursue these opportunities, our flexible feature oriented portfolio has been well received by our customers. The storage market has broadly adopted 3 d TLC products, and we are well positioned to take advantage of this trend. We're seeing the ongoing demand for high performance, reliable, power efficient storage, driving greater SSD adoption across multiple markets. We anticipate to grow Our technology transitions are on track and we'll continue to provide benefit to the company over the next several quarters. We are driving deployment of 1x DRAM with meaningful output expected by the end of the fiscal year. We expect 1x nanometer DRAM to build on our success with 20 nanometer DRAM is deployed throughout our portfolio and rated number 1 in quality by multiple enterprise OEM customers. Likewise, We are aggressively proliferating 32 layer 3 d NAND throughout our product lines, while also driving the deployment of 64 layer 3 d NAND, with meaningful output expected by the end of the fiscal year. Micron's unique integration of CMOS circuitry under the array will enable the industry's smallest die size on our 64 layer designs. As we look toward the end of our fiscal year, we are currently on track to have more than 75% of our NAND bits on 3 d, Of course, certain segments require legacy NAND Technologies and will transition much more slowly, embedded markets, for example. As we previewed for you at our Analyst Day, we believe our NAND bit growth in fiscal 2018 will approximate the aggregate market growth This will take 3 d NAND to 90 percent of our total bid output for fiscal 2018. We continue to work on developing new memory technologies, are enabling our 3 d Crosspoint technology. We will be shipping 3 d Crosspoint memory for revenue later in 2017. We believe these innovative solutions offer unique value to enterprise customers and will be an important contributor to Micron's future success. Now I'll turn it over to Ernie. Thank you, Mark. The business environments in fiscal Q2 continued to be positive with our results favorably impacted by product mix, progress on our cost improvements and the sustained positive pricing environment. I'll begin my remarks today with an overview of the fiscal Q2 results by technology and business unit followed by our corporate 4% of our total revenue with the following segmentation. Mobile was in the high 20% range. PC represented 25% Server also represented 25%, up from the high teens of the prior quarter and specialty DRAM, which includes networking, graphics, auto and other embedded technologies was in the low 20% range. In our nonvolatile memory business, trade NAND represented 30% of our revenue with the following segmentation. Consumer, which includes memory cards USB and components, represented approximately 40%. Mobile represented 20% and as a reminder, AMCPs are primarily in the mobile segment. SSDs were in the mid-twenty unit reported fiscal Q2 revenue of $1,920,000,000, up 30% sequentially due to firm demand in a robust pricing environment. Non GAAP operating income was $736,000,000 or 36 percent of revenue, up from 14% the prior quarter, enhanced by the pricing environment of our first generation 20 nanometer DDR4 products. Additionally, we are beginning shipments of our 2nd generation product optimized for the industry's newest service platform. Graphics saw modest revenue growth despite what is traditionally a seasonally weak period, and we began shipments of our next generation G5X to NVIDIA for the new Gforce 1080ti. Further solidifying Micron's technology leadership in the high performance graphics memory segment. Networking saw increased shipments in revenue driven by the continued growth of 20 nanometer 4 gigabit DDR3 and 8 gigabit DDR4 products at key OEMs, especially in Asia, and client revenue growth was primarily driven by the continued strong pricing environment. The mobile business unit delivered fiscal Q2 revenue of $1,080,000,000, up 5% sequentially, driven by a stronger pricing environment. Non GAAP operating income was $170,000,000 or 16 percent of revenue as pricing strength combined with improved costs. The Embedded Business Unit delivered fiscal Q2 revenue of $590,000,000, up 2% sequentially. Non GAAP by increased automotive unit shipments and increased average selling prices of DDR3 and NAND on a like for like basis in our consumer and connected home segments. The storage business delivered fiscal Q2 revenue of $1,040,000,000, up 21% sequentially. Non GAAP operating income was 71000000 dollars or 7% of revenue. The results were primarily driven by strong growth in clients and cloud SSD shipments and lower costs. Our 5100 Cloud Drive, which was introduced in December continues to be well received and is in Revenue for the fiscal second quarter was $4,650,000,000, up 17% sequentially and driven primarily by DRAM pricing strength and increased NAND volume shipments in a stable to rising pricing environment. Non GAAP gross margin for the quarter was 38.5%, up from 26% in the prior quarter, driven by product mix, cost reductions and the strong pricing environment. Non GAAP net income was $1,030,000,000 or $0.90 per share. Turning to results by product line DRAM revenue increased 22% compared to the prior quarter as a result of a 1% increase in bit shipment and a 21% increase in ASPs. DRAM gross margins for the 2nd quarter increased 16 percentage points sequentially, to 44% driven primarily by the strong pricing environment and cost declines. As we look at the next couple of quarters, we that second half fiscal year 'seventeen bits out will exceed first half fiscal year 'seventeen bits out by about 10%. Our nonvolatile trade revenue NAND revenue increased 11% compared to the prior quarter reflecting an 18% increase in bit shipments. ASPs were down 6% from the prior quarter on a blended basis, primarily as a result of a higher density product mix. Gross margin increased as cost per bit was down 15%. We were seeing like for like price increases across nearly all segments and looking forward We expect that second half fiscal year 'seventeen bits out will exceed first half fiscal year 'seventeen bits out by about 30 $612,000,000 at the midpoint of the guidance range. The company generated operating cash flow of $1,770,000,000 representing an increase of $628,000,000 we reflected approximately $350,000,000 of the Inotero purchase price as a reduction to operating cash flows. As a result, our financial statements reflect operating cash flow with cash, marketable investments and restricted cash of approximately $4,600,000,000. In the 2nd fiscal quarter, capital expenditures, net of partner contributions, were approximately $1,200,000,000. Moving now to our guidance for the third quarter. On a non GAAP basis, we expect the following: revenue in the range of $5,200,000,000 to $5,600,000,000 gross margin in the range of 44 percent to 48 percent, operating expenses between $560,000,000 $610,000,000 operating income ranging between $1,800,000,000 $2,000,000,000 and EPS ranging between $1.43 and $1.57 per share based on 1,155,000,000 diluted shares. In closing, we remain focused on achieving the technology transition and cost reduction targets we outlined in our Analyst Day. Currently, we are tracking to deliver free cash flow in excess of the $1,500,000,000 we shared with you at that event and continue to view de levering as an important priority. With that, I'll turn it back over to Mark. Thanks Ernie. In summary, we're heading into execution and we continue to press forward together on technology, operational and product enablement targets. Our continued progress towards these goals will enable us to further enable further cost reductions and the opportunities to address higher value added market segments. Looking to the market as a whole, we see increasing customer interest in Micron play in more operative role in solving design challenges and plan to use this environment to strengthen our relationships with industry partners and customers. As you all know at our analyst conference in February announced my retirement. While the Board and I worked to identify my successor, I remain fully committed and engaged in leading Micron through exciting and dynamic period. We'll provide further updates on the CEO search as appropriate. Operator, we're now ready to begin Q And A. Thank you, sir. Our first question comes from the line of Harlan Sur of JPMorgan. Your question please. Thank you for taking my question and congratulations on the solid quarterly execution and strong outlook. There's despite the very optimistic and positive pricing environment, there's been some growing concern around the notion of demand given the strong pricing environment and availability of both DRAM and NAND to a point where I think there's a view forming that there's the potential for PC and server de specking on the DRAM side, less DRAM per box. On the mobile side, less DRAM per smart phone and on the NAND side, less uptake of SSDs and more uptake of HDDs. I guess the question is, do you see this happening and how does it impact the dynamics of the supply demand environment going forward? Harlan, this is Mark. Today, we've seen no of that at all really in any segment. It's true that in cycles from time to time, That does happen late in a cycle. But today, we see continued strong group growth across almost every end market segment, and no real indication of that occurring anywhere in particular, not in specialty, not in mobile certainly not in the enterprise and server area. Great. Thank you for that. And then, solid results in the NAND business, your margins up, I think it's 800 basis points in the quarter. As we think about the cost curve on a go forward basis and the ramp of your 64 layer, 3 d can you just give us an idea on how your yields and performance of the products are doing either relative to your internal targets or relative to the same time last year in the ramp of your 32 layer products? Well, this is Mark. A year ago, Harlan, I can't say that I even call where we were on 3 d NAND yields, but I'll tell you, we're very happy with, where they are. For 32 layer NLC and TLC. And again, TLC is the big piece of that where we thought we ought to be and at very mature yields. 64 layers we talked about is material piece of our bit output late in the year. And we're very happy with the progress we're making there and the yields we're seeing on that technology as well. Great. Thank you. Our next question comes from Steven Fox of Cross Research. Your line is open. Thanks. Good afternoon. Just two questions for me. First of all, if you could talk a little bit more color around the I believe you just talked about bit growth of about 30 percent half over half. Maybe qualify or quantify as much as you want to the growth drivers, how much from SSDs versus mobile, etcetera? And then, secondly, can you talk a little bit about the auto growth in the quarter and what's driving that and how that looks into the second half as well and what's the key contributors there? Thank you. Sure. So relative to bit growth within that was more a statement around what our output profile is going to look like. And of course, we'll deploy that output to the end markets that we feel will provide the best opportunity for the company here as we see the back half of the year unfold. Relative to automotive, very similar to what we've been consistently talking about driver assist systems, infotainment, a lot of what is required as we move up that autonomous driving food chain and as what are today considered to be advanced features in automotive, the automotive business penetrate mid and lower end cars. So, that, there's nothing particularly unique about what continues to drive that. It's the same unfolding story relative to memory deployment in the automotive sector. Yes, and I think I think if the question is, do we participate in all the various pieces of automotive and demand? The answer is yes, we're in the in the drivetrain, we're in the ADAS systems, we're in the infotainment systems and continue to maintain strong market share on all those pieces. Thanks very much for that. And just real quick on the first comments on the just as it applies to cloud SSDs, that you're own cloud SSDs that you're launching. Can you give a little more color on how broadly we should see those deployed maybe during the fall of this year? Yes. I think you're going to see them very broadly deployed as we noted the initial uptake. So that SSD was announced in the early part of December of last year, the uptake has been, very strong and we continue to see that growing at a significant rate here as we progress through the calendar year along with some new features. We have a 5100 SADA Drive with PCIE and NVMe coming soon as well. So we think that will help with the proliferation and the expansion of the of the demand. Our next question comes from Timothy Arcuri of Cowen. Your question please. Thank you very much. I guess, Mark, I'm just looking at the guidance and you guys are guiding to a quarterly earnings number that's like 50% higher than you guys did in the last cycle. Yet your stock is still $5 below or at peak last time. And I know that there's some changes in the, in the, in the cap structure and whatnot, but I guess the question really is, what's the concern you hear from investors when you've been out there on the conference circuit this quarter? Are people worried about the sustainability of the cycle? And like what is a big concern from your point of view and is that valid? Well, you know, it's a good question Tim. I mean, I think people are are looking at the cycle and wondering is are we getting long in the tooth, etcetera? We'd start to read stuff about that. We're not seeing that at all. As mentioned, we're not seeing Really, what's driving this cycle when you think about it is, broad based demand across multiple market segments And in particular, it's content growth in all those segments as opposed to particularly strong unit growth in one segment or the other. And so, we as we look at the market today, it looks very robust from an end market demand. And maybe a much broader and less unit driven than we've seen in the past. We also see that the supply, as best we can tell seems in control relative to demand. And, and I think if you think about this cycle versus last cycle, what you saw What you saw last cycle was a big chunk of supply come off with the Hynix fire and then reaction. With more supply to replace it. And so maybe a little less stability than we're seeing this time around. So that's all on the DRAM side. On the NAND side, this HDD replacement cycle is big. It's, we're well into it in client. It's it's not going to stop in the cloud and enterprise. Mobile storage demand continues to accelerate. And so Again, it's broad based, content growth, in all those end applications and it's, And it's supply on the NAND side that's relatively capital intensive to put in place with complex technology. And so there again, that all seems like it's in pretty good shape. Okay. I guess just to follow on to that, so it looks like based upon the guidance that the gross margin in DRAM is going to be in excess of 50%. Usually that doesn't last for long and people are obviously worried about Samsung adding a bunch of wafers. Why would that not happen this time? Based upon what you know, why would that not happen and sort of what's your, I mean, obviously, they have to add some wafers, but what's your base assumption for what the competition will do sort of in terms of big growth this year? Thanks. Well, again, I think last cycle was a little different with that instability supply created by the Hynix Fire. I don't know why they would intentionally repeat a mistake from last cycle. They probably enjoying, making good margins. And our view is we just go out and we look at, what's what information is available relative to all the various additions people are making and might be making and what the timeframe that might occur in. And then we give you what we think that big growth looks like and it looks like it's you know, probably actually Samsung's actually probably on the low end, over the next couple of years relative to what's going on in the industry. As a whole. And that the industry as a whole is probably a little bit south of where we think demand growth is. So could it happen? Yes. Why would it happen? I can't forecast that for you. Tim, this is Ernie. I think the important thing to bear in mind is in the estimates that we've provided for, supply growth this year, 15% to 20% you would have to add some wafers to get into range based on everything that we know. So it is, not a surprise that wafers are being added given the forecast that we believe exists from a supply side. So, and again, the other thing to keep in mind here is there are some natural impediments that technology is getting more expensive to deploy. It's getting more difficult. And, as we look to the future, we do see trends towards new technologies that might come into place out in time. And And that may be somewhat of impediments people as they think about. So I really want to add incremental significant new wafers to goose supply. When there may be competing technologies coming. Thank you. Our next question comes from Chris Donnelley of Citi. Your line is open. Thanks guys. I didn't know I went from Jewish to Italian. Anyway, congrats. It feels like we have stepped into a time machine and got off in 1995. Can you just go through your price assumptions for the gross margin guide And then also maybe list the gross margin drivers in order of importance for beyond the make order? Yes. So, Chris, this is Ernie. You and I've been around each other long enough to know that you're not going to get an answer to your first question. We don't give, underlying pricing assumptions. To derive our gross margin guidance. Our gross margin guidance stands on its own for what it is. Relative and can you repeat the second half of your question, please? Sure. Just list the gross margin drivers in order of importance or weight for beyond the make order. Yes. So, to do that would be predicting a pricing curve, which I also think is is troublesome business. I mean, as we've talked about right now, the pricing curve is much flatter than you typically see it and the normal sort of rolls of thumb as you look at segments, continue to be a little bit inverted as we experienced this in environment that we're in. So we have, we never predict that things go up into the right for an infinite period of time. You would expect that we would be thinking cautiously as we do our internal business planning, which we do. We do apply a very consistent methodology to how we look at things, but, we aren't in a position to tell you when we think that the pricing curve would return to any sort of more normalized perspective that we would have from historical reference. That's fine. Since I left on my first question, maybe you'll allow me another follow-up. You talked about de levering now that cash flow is pretty good. Maybe give us any insight into what would be or what would trigger you to start raising capital or restructure the debt would be the options out there? I think we're pretty consistent with what we said at our Analyst Day. We talked then about 50% to 75% of of a $1,500,000,000 number. We're on track for that. We'll do that at a time and at a pace of our choosing based upon a wide variety of business circumstances, but we do, as I said in my script, remain committed to this and think that it's an important priority for us. Great. Thanks guys. Thank you. Our next question comes from Mark Delaney of Goldman Sachs. Your line is open. The first question was a follow-up on just the broader pricing environment, not looking for any absolute number, but just hoping you could help us understand if the contract prices that Micron has seen are still below spot prices, obviously spot prices rallied pretty significantly, but there's timing before contract can catch up? And just with what you're guiding at, do you think contract pricing is still below a spot in your assumptions? Well, certainly that's the case today. And don't forget, we've also talked in the past about how some of our other segments have contracts of longer duration. So you'd get the impact of a renewal of those contracts. And generally speaking, that those renewal that renewal pricing environment would continue to be favorable as well. Okay. That's helpful. And then for a follow-up question, the company talked a bit in the prepared remarks about certain mix shifts that it's been executing on doing more in areas like SSDs and moving more towards server DRAM increase. And I was hoping you could just help us understand how much more you think you can achieve in those areas through the rest of this fiscal year? Sure. So on the SSD side of the house, as we mentioned, I think in to an earlier question, we think we're at the early days of what we're seeing in terms of penetration on our cloud and enterprise SSDs. I think we do have fairly good momentum and traction in clients and OEM. So that, that's how we are looking at or thinking about what the opportunities are on the D side of the house. And then, you also saw an increase in the percentage of the DRAM output that went into the server and cloud segment. And we see those continuing to increase here or the demand side of it continuing to increase here with all of the new data center deployments and a pretty strong demand environment for those. Thank you. Our next question comes from Tristan Gerra of Baird. Your line is open. Hi, good afternoon. You mentioned that your 3 d mix would exceed the 75% by year end in NAND. Could you remind me, are you decommissioning 2 d capacity or is that 3 d capacity all incremental in and what kind of longer term ratio should we expect between 3 d and 2 d beyond this year? Well, it's a it's a transition primarily from Planner to 3 d. If it were 100% transition, which is not that ratio on a, on a square footage basis might be something north of 2 to 1, but but we have incremental space as well. So it's not exactly like that. Okay. And then could you remind me, as you transition from 2 d to 3 d, for the same wafer capacity, what type of bit growth do you get, with 64 layer? From a 2 d Plainer NAND from a planer NAND wafer to a 64 layer 3 d NAND wafer, Correct. Yes. It might be, it's north of 300%. Thank you. Thank you. Our next question comes from Jagadish Iyer of Summit Redstone. Your line is open. Yes, thanks for taking my question. 2 questions. First, in terms of the DRAM bit supply, Given that you have had Inotara under your belt, I'm curious why your bid shipments were only in the low single digits. And then I have a follow-up. Well, in Anatera has always been part of our output and measured in our bid shipments. So that the transaction, the formal closing of the transaction really did not represent an incremental addition to the company's bid supply. Okay, fair enough. Then, on the pricing environment for DRAM, what contributed to the 21% increase? Was there any specific sub segment of DRAM that you saw strength And do you think that this is a one time event or how should we think about it? I know you would not give more clarity on pricing going forward, but any color specifically on the 21% increase would be helpful. So we've all been able to read every week about what's happened in DRAM exchange with respect spot pricing. And certainly that trend has influenced every single other segment. So I think as Mark mentioned in his script, while last quarter, the pricing was more focused around what was happening in the client and, and OEM markets this quarter, the impact of that, having extended over time and consistent with our earlier comments, been subject to some of these contract renewals. Are starting to manifest themselves across mobile, across enterprise, and really the full breadth of the DRAM product portfolio. Thank you. Our next question comes from John Pitzer of Credit Suisse. Yes, good afternoon guys. Thanks for letting me ask the question. Congratulations, Mark and Ernie. Ernie, I know you're not going to talk about kind of forward pricing assumptions in the May guide. But when you look at the May guide and just how significantly above investor expectations it were, I was wondering if you could just help us quantify or qualify a little bit to what extent is this being driven by cyclical leverage like like for like pricing versus things that might have a little bit more longevity like your ability to mix into better end markets or your ability to cost down or just operational efficiencies. And as you answer the question, be curious just to see your view on whether or not you believe you're starting to close that cost gap with some of your peers out there? Yes. So I think, one, to reiterate something we said earlier, but it is very important. We're really consistent quarter to quarter with how we think about our guidance. So there was no dramatic change from a methodology point of view in that. And I think, John, you actually hit on many of the points that are contributing to that, to that nice uptick in margin. So first, we do have a broad profile, and that allows us to move between segments and really maximize the opportunity between those segments. And as you saw this quarter, we are tilting more to cloud and enterprise, which we think represents some good long term opportunity for the company. We have system level solutions that utilize the breadth the company's product portfolio and things like MCPs and build on the capabilities of the company with things like SSDs, You have a better technology execution or strong technology execution in terms of where we have been in the past. So the gap is closing. We've been consistently telling you that we think it will close and we're going to continue to make progress in that regard. And then you do have, leverage that comes from the scale that we have achieved over the course of the last 2 or 3 years as we've made these technology transition. So really, I think to the point you're making, this is not only about pricing. It's about pricing and everything else that we've been working on collectively as a team to deliver broad operational capability into all of our end markets. That's helpful. And then maybe as my follow-up, Mark, in your prepared comments, you talked about having meaningful 1x volume by the end of this fiscal year. I'm wondering if you could quantify what you mean by meaningful. And I guess from my perspective, that seems like a little bit earlier than I would have expected. Is that true And if so, are you just finding it an easier ramp? And can you remind us sort of the cost downs you expect to get with the move to 1x? Yes. I don't want to put too much specificity around exactly where we will end up at the end of the year on a bit mix John, but I will tell you that, you'll recall at the Analyst Day, we shared with you that we believe we're making very good progress on our 1x nanometer, yield ramp at that time and that continues to go really very smoothly with good progress in both Taiwan and Japan. And so we're very happy with the way it's going. And we'll continue to monitor that. And drive it appropriately. I will say also that the there's a pretty good suite of products that penetrate a number of different end market segments and those qualifications are are going well and those products are looking very robust and we're happy with the way that's coming along. From a cost perspective, I think greater than 20% is what we've indicated in the past. And that's probably a good place to leave it for now. At the end of the day, it'll depend on on mix. We've got a lot of different products doing a lot of different segments. Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question, please. Great. Thank you. Wonder if you could touch on the NAND prices being down. Sequentially, I was a little surprised to see that relative to what we're hearing. Yes. It's primarily around mix, Joe. We're shipping a lot of high density, a TLC3d product versus previously, we had some lower density products hanging out in some pretty small niches as our volumes gone up. And as we've, begun to drive more towards, some of these higher density cloud type applications, We're doing more of those types of products. And although the pricing is down, they are driving some pretty significant cost improvements for us as well. And so from a margin perspective, that's definitely where we want to be moving through time here. Okay, great. That's helpful. Thank you. And then, your inventory picked up a little bit. And I was surprised to see that because I know how much customers want product. Can you just talk about that and did that sort of is that the ramp in NAND or what are we seeing there? Yes. Well, consistent with, some of the ambitious plans we have around the SSD market, I would say that the majority of that was attributable to, to that buildup. And in addition to that, if you're doing a quarter on quarter compare, In Oterra on the DRAM side was not considered part of the inventory in the December quarter or sorry, in the in the prior quarter, whereas it's currently part of our inventory. So that was really a significant part of the increase on the DRAM size. So it's those 2 things. Thank you. Our next question comes from Ramesh Shah of Nomura. Your line is open. Hi, this is Kristen Shaka in for Ramesh Thanks for letting me ask this question and congrats on the great quarter guys. My first question, you gave some helpful commentary about the bit growth for the second half of twenty seventeen versus the first half of twenty seventeen. I was just wondering if you could give some color about how we should think about the cost, declines for the second half versus the first half. I'm not looking for anything really any concrete numbers. Just anything qualitative would be great. I think the best way I'd guide you there is we've actually provided what we thought was going to be a fiscal year a fiscal year cost down target for both technologies. And we've now sort of given you all the pieces that you need to compute that. So that's how I guide you to, to come up with your estimate of what you think our cost downs are going to be. Okay, great. Thanks. And then, we're still seeing a lot of the picking up trends for Chinese smartphones. Especially in DRAM, with the strong pricing that we've seen in DRAM over the past few months, do you see that trend changing or do you see that trend continuing? Any color there would be great. Sorry, the question around Chinese phones was content or? Yes. Yes. Content mainly in DRAM content. Yes. We continue to see, in the lower end and mid tier phones, we continue to see pretty good content growth. Yes, there is more of a concern at the high end in terms of when eventually will people stop taking densities up there. But even at the high end, we I think we anticipate some continued growth with 6 to 8 gigabits at the top. But in the lower tier, and mid tier smartphones, we still see pretty robust growth. And so in aggregate, when we look at mobile, we're thinking in terms of 30% take growth there this year. Great. Thanks guys. Thank you. Our next question comes from Mimi Hosseini of Susquehanna. Your line is open. Hi, thanks for taking my question. This is David Ryzhik for Mehdi. Just two if I can. Just how can we think about contract discussions with customers? Are you seeing more long term of duration, negotiations? And just had a quick follow-up. Thanks. Well, as it's very different segment to segment customer customer. So I wouldn't say that there's a huge sea change, although Although, clearly, there are some customers in this kind of environment that are, interested in Linkier relationships. Great. And for 3 d NAND, any update on timing of QLC introduction and would you introduce it at the 64 layer, density? Thanks. Yes, we're not going to be too specific yet about our QLC plans, but we will confirm that we're happy with the way that technology is progressing. And, and that's probably all we got to say for now. Thanks so much. Thank you. Our next question comes from Robert Mertens of Needham And Company. Your question, please. Hi, thank you for taking my question. Just two quick questions on behalf of Raja Gill. You spoke a little bit towards the yields with 3 d NAND on the 32 layer. Could you just talk a little bit about your competitive advantage going forward on the 3 d NAND side? And then also just give a little bit more color on your gross margin trajectory and how we should think about that throughout the year? Thank you. Well, we're not going to give you gross margins, as Ernie's already indicated, unfortunately, and we're just not going to, we're not going to go there. But relative to, to our competitive position on 3 d NAND, we feel very good about it. I would direct you back to the comments we made in the slides we showed at the analyst conference a couple of months ago. We we're very happy with our 32 NAND and our 32 layer yields. We're very happy with how we're progressing on our 64 layer stack. And, we think we're in the lead position relative to our cost effectiveness and our density and our ability to deliver. Products that all the various segments want. Thank you. Our next question comes from CJ Muse of Evercore. Your line is open. Yeah, good afternoon. Thank you for taking my question. Can you guys first question update us on your thoughts in terms of DRAM supply demand for this year, and are we to assume that tightened the shortages should continue through the calendar year? And then Assuming the wafers that you already have baked in that 15% to 20% supply, if we don't see new wafers next year and we just think about a world which shrinks, how should we think about supply into calendar 2018? Yes, we really don't have an update for you. It's still, in our view, it's 15% to 20% supply growth this year. Could actually be less than that if there's if there's less new wafers than we have in our plan. Demand is still 20% plus. Next year would be in the teens if we don't get new wafers. Great. And as a follow-up, You talked about second half DRAM bits being 10% higher than first half. I'm assuming that's production. Can you hit that on a sales basis or should we assume slightly less given the timing of 1x? No, that was a representative of what we will ultimately be reflected in Thank you. And our final question comes from Stephen Chen of UBS. Your line is open. Great. Thanks for taking my questions. Had a question on the first of all for the NAND Flash business with mobile, the only 20% of the sales there. I was wondering just given the relatively low exposure there currently relative to the overall market, is that implying that for the second half of the year, you're expecting to still see a lot of seasonality that's helping to drive some of the second half, 30% half on half growth? Well, again, the 30% Steven was a function of our output and we would direct that output into the various outlets that we have, whether it be the C business, the mobile business, etcetera. And so we'll sort of wait and see how that plays out here as we get to the back half of the year. Okay. That's fair. And as my follow-up, in terms of the gross margin guidance, can you talk a bit about the implied cost reductions on both DRAM and Flash for this quarter's guidance. And just given the relatively high output for your 29 nanometer DRAM and also, I guess, still ramping nature of 32 layer 3 d. Is there still a lot of cost reduction in the current quarter from both of those technologies? Again, I kind of refer you back to the the full year guidance that we've provided, which was rather specific, we've now completed 2 quarters of that year. And we've given you a view of the back half big growth. So I think we've given you all the building blocks that you need to derive a gross margin profile and that's not something that we typically share. And operator, I think we have time for one more question. Yes, sir. We have a question from Mark Newman of Bernstein. Your line is open. Hi, thanks. Congrats on great results. I have a question around, your supply growth given there's such strong pricing out there in the market. So firstly, can you talk about what the underlying wafer capacity trend is doing for Micron in both DRAM and NAND this year? And related to that, how much flexibility given how strong pricing is today how much flexibility does Micron have to add more, either this calendar year or next not saying that you will, just how much flexibility do you have to add more if for whatever economic reason you can make the calculation that doesn't make sense to add more? Thanks. Yes. Well, I think the best way for, as much as we're going to characterize wafers, Mark, would be to say, it's pretty stable. We're very focused on technology transitions. We're not focused on adding more supply. So we're just, utilizing the existing capacity and transitioning it to advanced nodes. We do have white space in both, our Fab 16 in Taichun as well as Fab 10x. But, we're not planning any capacity additions this year. And if we were to decide we wanted to, which I think is unlikely, it would, as for us, as for our competitors, there's a significant lead time at the moment for equipment. It would take quite a while to bring that on the, in the marketplace. Is it possible to quantify, how much it would be in terms of wafers? Again, not saying you're going to add it, but just how much it would be, how much capacity you have the ability, how much do you have the ability to add in both DRAM and NAND? No, and again, it's kind of moved. So, thanks for the question though, Mark. Okay. Thanks very much. All right. This is Ernie. And before we close, I want to share with everyone that Ivan is going to be transitioning out of his IR role, into another role here at Micron. And I wanted personally expressed my appreciation to him, for his support of the company during his tenure in IR, including bringing me up to speed, which was quite challenging, I'm sure. We will miss him very, very much. We are in the process of determining how best to fill his shoes. But in the interim, Liz Morales will be the primary IR contact point. And with that, we'll say thanks again for your participation and we'll talk to you next quarter. Thank you, everyone. Call. You may now