Earnings Call: Q4 2016

Oct 4, 2016

Good afternoon. My name is Abigail, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Micron Technologies 4th Quarter 2016 Financial Release Conference Call. All lines have 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, and welcome to Micron Technologies 4th quarter 20 team fiscal year financial release conference call. On the call today with me are Mark Durkin, CEO and Director and Ernie Maddock, 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 an 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 capped call 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 order for the most current information on the company, including information on the various financial conferences that we will be attending. You can also follow us on Twitter at Micron Tech. As a reminder, the matters we will be discussing today include forward looking statements 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 10 K and Form 10 Q, for a complete discussion of these important 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 call to conform these statements to actual results. I'll now turn the call over to Mark. Thank you, Ivan. For fiscal Q4 2016, Micron posted total revenue of $3,200,000,000 with gross margin of 18% and a non GAAP net loss of $56,000,000 or $0.05 per share. Both revenue and gross margin were at the high end of the guidance range and together generated earnings per share that exceeded guidance. Operating cash flow was $896,000,000. On While we were seeing signs of improvement in selected markets, we were uncertain of the extent and the duration of the improvements. During the quarter, we continue to see market conditions improve, driven by both supply and demand fundamentals. Industry inventory appears lean and the current market outlook for both NAND and DRAM continues to be positive. Currently, prices are increasing in number of segments, stabilizing in others, and we're seeing fewer segments showing residual declines. This environment framed our thinking in the guidance that Ernie will provide a little later on. We made significant progress on a number of key initiatives in the quarter, including the completion of the mobile product qualifications that we have been discussing and our early 1x nanometer DRAM deployment. We were also seeing the benefits of the 3 d NAND yield ramp, which generated stronger than expected NAND bit growth in the quarter. I'm going to provide a high level overview of each of the business units and Ernie will follow with more details on each business's financial performance. In our compute and networking business unit, we experienced accelerating revenue growth in the face of moderating pricing environment. Revenue growth was driven by continued increases of 20 nanometer shipments as well as a significant transition to DDR4 in the cloud and client segments. Where shipments exceeded DDR3 for the first time. We saw ongoing strength in graphics driven by our GDR5 and 5x products. Supported NVIDIA's introduction of the 5x based Titanx, the highest performance consumer graphics card in the market. In the enterprise segment, Micron was recognized at the Flash Memory Summit as the innovation leader in nonvolatile dims, an important solution for high performance servers. Turning to our mobile business unit, China is becoming a more significant growth driver in mobile devices. Most of these devices are differentiated by large amounts of memory, including up to 6 gigabytes of low power DRAM. Additionally, the top of the line Apple and Samsung models now shipped with 2.56 gigabytes of NAND and we see mid range Chinese handsets heading in the same direction in order to compete. Although there is a moderating pace of smartphone unit growth, significant content increases of both NAND and DRAM will generate strong overall bit growth. During the quarter, we introduced 4 new mid to high density mobile 3 d NAND products with positive reviews from the press and from our customer base. Mobile DRAM and EMCP price declines moderated in the quarter with more recent signs of stabilization and increases. Revenue growth in our embedded business unit has been driven by a record automotive business and increased performance in the Consumer And Connected Home segment as well as a strengthening industrial multi market business during the quarter. We have maintained our leadership position in automotive through strong customer support and the introduction of new products that meet the fast growing memory content requirements for infotainment ADAS and instrument cluster applications. High temperature DRAM and automotive grade NAND products are enabling a strong design win pipeline. The introduction of several new industrial solutions has positioned us to grow our share within IMM and retain our high market share in machine to machine communication modules as the industry migrates from 2G to 4G and LTE. We've also been successful in achieving strong market share positions in consumer applications, from action cameras and home automation to high volume markets, including digital TV and set top boxes. Finally, our storage business unit is continuing to transition its product line to our leading edge 3 d NAND technology. We've seen positive response from customers this quarter related to our refreshed SSD portfolio which offers a breadth of solutions to meet diverse application requirements. We're finalizing qualification with 8 major OEMs on our 1100 client drive, are engaging with cloud customers on future designs. In the enterprise, we're seeing companies begin to retrofit HDD infrastructures with SaaS SSDs as they modernize existing investments. Our customers in demanding sectors like Financial Services And Energy are moving stores closer to the server. We've seen significant interest in our PCIe NVMe drives in these applications due to their ability to deliver very consistent high performance. We are actively extending TLC3d NAND across our cloud and enterprise portfolio and expect to introduce our first TLC3d SADA Drive for these markets later this year, followed by a server focused version early next year. We expect to see positive supply and demand dynamics in the SSD market for 2017. Turning to the memory industry more generally. We've seen further evidence that DRAM wafer output is declining as a result of lost throughput related to the 20 nanometer and 1x nanometer conversions. As for some replacement of these wafers, we could see industry supply growth as low as mid teens in 2017. As some of the lost wafer output is replaced, industry supply growth could be in the high teens percent range. This compares to our long term bit demand growth forecast in the low to mid-twenty percent range. For NAND, we estimate 2017 industry bit growth in the high 30% to low 40% range, which is in line with 2016. This compares to our long term bit demand Despite significant investments in 3 d conversions across the industry, we believe that 2017 supply growth will be relatively balanced with demand given the disruption in the fab output related to these conversions. For our operational priorities for fiscal 2017, or our operational priorities for fiscal 2017 continue to be targeted at ramping Advanced Technologies with an added focus on building out a more robust product portfolio in particular for nonvolatile memory products. For DRAM, we begin the 1X nanometer ramp and expect to have meaningful output by the middle of 2017. At our winter Analyst Day, we shared 2 year We were slightly below the range in fiscal 2017 and expect to be above the range in fiscal 2017. All of the DRAM bit growth will come from technology transitions, and we currently have no plans to add wafer capacity. We expect our fiscal 2017 DRAM cost per bit to decline 20% to 25% as a result of completing the 20 nanometer migration and initiating the 1x nanometer conversion. Our cash cost per bit declines will be meaningfully higher than this range. For NAND, we will continue to focus on As we updated at our last analyst meeting, 3 d bit output will exceed 2 d output in the current quarter, ahead of our initial target. We will also be working on deploying 2nd generation 64 layer 3 d technology. Similar to DRAM, our 2016 NAND bit growth came in below the 2 year CAGR share of our analyst event, and we therefore expect 2017 to be above that range. We are forecasting our fiscal 2017 NAND cost per bit to decline 20% to 25% as a result of the 3 d and TLC conversions. This cost per bit includes the impact of our planned build out of SSDs, EMCPs and managed NAND solutions, all of which carry additional bill of materials costs, but will also enable a richer ASP mix. On a like for like basis, cost per bit will decline more substantially. Relative to 3 d Crosspoint technology, we are working with market enablers on adoption of our QuanTech solutions continue to believe this innovative technology will be an important contributor to Micron's future success with initial revenue later in 2017. Now, I'd like to turn the mic over to Ernie. Thank you, Mark. We had a solid end to our fiscal year as our continued focus on execution coupled a more favorable business environment resulted in improved financial performance. I'll begin my comments today with some technology and business unit details followed by an overview of the company's results DRAM represented 60% of our total revenue with the following segmentation. Mobile represented about 25% similar to the prior quarter, The PC segment was in the upper 20% range, up slightly from the prior quarter. Server business was in the high teens percent range, down from the prior quarter. And specialty DRAM, which includes networking, graphics, auto and other embedded technologies, was in the low 30% range, up from the prior quarter and primarily driven by an increase in graphics, which represented more than 10% for the quarter. In our nonvolatile memory business, trade revenue represented 31% of total revenue with the following segmentation. Consumer, which includes memory cards, USB, and components, represented about 50% down slightly from the prior quarter. Mobile was in the high teens percent range, up from 13% in the prior quarter, as we began to see the impact of our completed SSDs represented 13% similar to last quarter and the automotive industrial multi market and other embedded applications were in the high teens percent range delivered fiscal Q4 revenue of $1,250,000,000, up 14% sequentially, primarily driven by 20 nanometer shipment growth accompanied by strengthening demand in a moderating pricing environment across all segments. Percent of revenue. In the enterprise segment, conversions to DDR4 are now largely complete and we are focused on enabling our solutions for the next generation server platform. We are seeing continued interest in both higher density R dims and LR dims as well as NVDIMs solution. The cloud component of the enterprise segment is growing quickly, driven by continued growth in density across both DDR3 and DDR4 solutions. In graphics, we saw growth well above typical seasonality driven by our GDDR5 and GDDR5x products. There are additional G5X based product announcements from Nvidia in both the graphics and workstation segments during the quarter. In networking, we enjoyed double digit revenue growth with strength across all regions and growing interest in applying the high bandwidth capabilities of GDDR5 and GDDR5x to the networking segment. Finally, within the client segment, we saw market demand, which exceeded our expectations as well as a continued transition to DDR4, which for the first time represented a majority of client shipments. The mobile business unit delivered fiscal Q4 revenue of $671,000,000, up 20% sequentially driven by a strong quarter in was partially impacted by the consumption We saw significant growth in the recently qualified higher density MCPs and as smartphone OEMs are positioning their products based on higher memory density specifications, which is helping to accelerate adoption of smartphones with richer memory content. The embedded business unit delivered fiscal Q4 revenue of $513,000,000, up 5% sequentially. Non GAAP operating income was $133,000,000 or 26 percent of revenue. The results were primarily driven by record automotive, and increasing consumer business, combined with some recovery in our industrial multi market business. The automotive business delivered solid results with revenue up 6% sequentially, driven by strong and increasing demand for both DRAM and EMSense EMMC solutions for infotainment, instrument cluster, and advanced driver assistance systems applications. European, Korean and Japanese customers continue to fuel this growth and our portfolio of Leading Edge Automotive Great Solutions is continuing to enable platform design wins. The industrial and multi market business increased 16% sequentially, primarily driven by the ramp based MCP is used in machine to machine sequentially with solid demand for MCPs used in action cameras and home automation applications. We continue to this demand pattern continue in the current fiscal quarter, which typically sees strong seasonal demand. Our 20 nanometer DDR4 product continue to ramp into set top boxes and I'm applications. The storage business delivered fiscal Q4 revenue of $758,000,000, dollars of revenue. During the quarter, we entered production and OEM qualification of TLC 3 d NAND based SSDs in client and consumer segments, providing customers with a refreshed three d based portfolio of storage products that span the demand spectrum in these markets. In the enterprise SSD segments, consecutive quarter bits sold were up 45% based on higher sales of our Planer MLC based cloud drive. We are deploying 3 d TLC across the enterprise and cloud portfolio with several product launches over the next two quarters. Moving on to overall company results, revenue for the 4th fiscal quarter was $3,200,000,000 at the top end of our guided range and up 11% sequentially. Fairly significant increases in volume shipments for DRAM were offset by moderating ASP declines while trade net shipments increased as a result of early success of our 3 d ramp and we experienced generally stable ASPs. Gross margin for the quarter was per share significantly better than our guidance. And memory market pricing pressure, achieving non GAAP net income of $66,000,000 or $0.06 per share. As a reminder, Micron included both amortization of acquisition related intangibles and stock compensation expense in our fiscal Q4 non GAAP results. Taken together, these two items represent $0.04 a share in the 4th fiscal quarter, and $0.20 per share for the full 2016 fiscal year. Turning to results by product line, DRAM revenue increased 13% compared to the prior quarter as a result of a 20% increase in bit shipments, partially offset by a 6% decrease in ASPs. DRAM gross margins for the fourth quarter increased two percentage points to 20% primarily driven by strong cost reductions as a result of the continued 20 nanometer ramp. Our non volatile trade revenue increased 12% compared to the prior quarter, reflecting a 13% increase in bit shipments, partially offset by a 1% decrease in ASPs. Gross margin decreased a couple of percentage points to 16% as cost per bit was up related to the 3 d ramp and build out of higher for the quarter were $559,000,000. This was below our guidance, primarily due to continued expense control and the timing of prequalification expenses for the fourth quarter, some of which will now occur in fiscal Q1. The company generated operating cash flow of $896,000,000, which included a strong quarter for collection activity, and we ended the quarter with cash and marketable investments of approximately $4,800,000,000. In the 4th fiscal quarter, capital expenditures net of partner contributions were approximately $1,700,000,000. Before we move on to our guidance schedule for our DRAM capital equipment. Previously, this equipment had been depreciated over 5 years. However, Given the longer intervals between technology transitions, we've changed the depreciable life of our DRAM capital equipment from 5 years to 7 years. This change will reduce depreciation by approximately remains unchanged. Additionally, and to be consistent with the majority of semiconductor companies who report non GAAP results, Micron will exclude stock based compensation and the amortization of acquisition related intangibles from our non GAAP reporting. These expenses on average are approximately $50,000,000 per quarter. We developed in the context of the market environment that Mark described earlier on a non GAAP basis, we expect the following. Consolidated revenue in the range to 25.5 percent operating expenses between $600,000,000 $650,000,000 due to the resumption of variable compensation expense and the higher prequel expenses that we spoke of earlier. Taken together, these items represent a sequential increase of approximately $80,000,000, of which $25,000,000 resulted from the timing of pre fall between fiscal Q4 and fiscal Q1. Operating income in the range of 245 to $330,000,000 and EPS ranging between $0.13 and $0.21 per share based on $1,046,000,000 diluted share. Relative to our capital spending $4,800,000,000 $5,200,000,000 net of partner contributions. Between 40% 50% of the total will be allocated to DRAM, between 30% 40% to nonvolatile memory and between 15% 25% to technology and product enablement. Consistent with our public comments, this level of CapEx allows us to appropriately fund our technology investments while achieving neutral to positive free cash flow generation in fiscal 2017. Operationally, we are on track to deliver the bit growth and cost per bit reduction targets that we previously shared as we complete the 20 nanometer DRAM conversion reach crossover of 1st generation 3 d NAND this quarter and commenced the ramp of 1x nanometer DRAM and 2nd generation 3 d NAND in 2017. For FY 2017 specifically, we expect DRAM and NAND cost per bit reductions between 20% 25%. Finally, relative to the Innoterra transaction, Micron and Innoterra have concluded that sufficient progress has been made in Innoterra addressing the issues that caused the delay in closing. An Innoterra Board meeting has been scheduled for October 11, and the directors of Innovara are expected to set a share swap record date at that meeting. We anticipate that the share swap record date will be set for the first half of December, 2016. With that, I'll turn it back to Mark. Thank you, Ernie. To summarize, we faced challenging market conditions in fiscal 2016 in addition to going through a transition period for our technology migrations. Despite these headwinds, we ended the year with positive non GAAP EPS. Compared to prior cycles, this represents a material improvement in our performance and further reinforces our belief in structural industry improvements. We are now experiencing a more positive and improving environment, and Micron is committed making even further improvements in our relative performance with enhanced growth and cost reductions and expanded capability to deliver value added products to enable our customer Okay, operator, we are now ready to begin Q And A. Our first question comes from CJ Muse with Evercore. Your line is open. Yes, good afternoon. Thank you for taking my question. I guess first question, Ernie, for you on the pricing front, I know you don't want to go into specific details, but curious as you think about November, what you're embedding in terms of, I guess, changes to mix, and perhaps any, flow through of lower margin inventory And any any other kind of factors that we should be thinking about as it relates to DRAM ASPs? This is Mark. Maybe I'll take that one, CJ. Certainly relative to the sell through of inventory, there is an impact there. Given some of the inventory we've built up over the last couple of quarters relative to the qualifications we mentioned. Relative to to market assumptions, we're not going to get into the detail as always of the embedded margin because we don't want to to forecast the ASPs for you. But I think it's fair to say that we're seeing some early signs of significant price movements. And as we've done in the past, we want to wait before we get ahead of ourselves in projecting what may come as we move further out into the quarter. But I do think that the the trend is positive and the bias is positive. That's very helpful. I guess as my follow-up, how do you think about channel inventory today. And I guess this is another DRAM question. And then as part of that, how do you expect customers to act as you look into 2017 in an environment where bits supply is sub-twenty percent and demand presumably higher than that. How do you expect the kind of changes in behavior there? Thank you. Yes. Well, certainly, If we think about inventory in the marketplace, certainly channel inventory, I think, is very, very tight. Maybe, 1 to 2 weeks or less than a week At the major customers, we have less precision relative to that, but I'd say it's certainly down and there's a sense of urgency at the large OEM customers as well. In some cases, we may be looking at allocation of certain products in certain markets. And certainly, the customers are beginning to ask for longer term price commitments, which is, in my mind, always a good thing. We'll look at those on a case by case basis and potentially take customers up on that where appropriate, but obviously always keeping the long term interest of the shareholders in mind. Very helpful. Thank you. Thank you. Our next question comes from Ramit Shah with Nomura. Your line open. Yes, I just want to come back to the guidance because, it's something that people are trying to sort of gauge given that last quarter, at least relative to how you originally guided, you guys came in a lot better. And I know at the time that, there was a lot of moving pieces and you guys wanted to give yourself cushion. So could you talk a little bit about visibility and at least on the pricing front, if we could get a sense just directionally how you're thinking about ASPs in the November period? And then I have a follow-up. Sure. This is Ernie. I think it's important to acknowledge that although we beat our EPS guidance, we actually were well well in the ranges of both our revenue and our gross margin guidance. And so we did think about the opportunity that was ahead of ourselves we were giving the guidance for last quarter. And we've done the same thing in essence this quarter as well. So I think you can look at the range of our guidance and it generally contemplates the outcomes that we see. And obviously, if things continue on a strong and favorable momentum, it's reasonable to think that you'd end up at the upper end of both pieces of the range, which would generate a result similar to this quarter. And I think consistent with Mark's prior comments, we are continuing to see positive momentum. I do think it's important to understand that that momentum, has has existed and has started to strengthen. And so as a result of its actual impact in our fiscal quarter with part of it already completed and we're in negotiations for others. I think that the trap we want to avoid is presuming that whatever the latest pricing news is gets retroactively applied across the entire quarter because that's certainly not the environment that we're living in. But I do think we were pretty thoughtful about the revenue range. And obviously, we're going to work hard and try to do as well as we can, but we put a lot of thought behind the numbers we've just shared with you. Yes, that's helpful. And then Mark, I have a strategic question for you, which is You talk about, one of the priorities being to just ramp advanced products in nonvolatile memory But at the same time sort of implicit in the fiscal 2017 free cash flow guidance is that you at least the way I'm interpreting it is that you'll you'll continue to burn cash in NAND. And so I guess my question is, at what point do you consider a partnership to lessen the period expense and the CapEx burden associated with running this business? Yes, we're always looking for ways to improve our relative competitive position. And we've used partnerships strategic relationships extensively in the past, we'll continue to evaluate that. And again, always with the long term, in mind, we're, there's sort of an embedded, assumption in there that there are lots of opportunities out there today. And I think I would I would not try to dissuade you of that view of life. I would just caution you that we're going to be pretty careful and deliberate about making sure we take a long term view relative to, the relationships and the partnerships that we engage in and that we're doing something that really drives a long term strategic benefit, for the company as opposed to a short term fix, more supply into the marketplace. Helpful. Thank you. Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open. Yes, good afternoon and thanks very much for taking the questions. First question, I was hoping you could update us on the Anotero transaction. And if that were to close, if you can help us understand the potential accretion or dilute from that transaction? And then related to it, to what extent is an Oterra closing already embedded in any of the financial guidance that you gave for fiscal 2017? So as we had in our prepared remarks, we do expect the transaction to close at this point in sometime in the middle of December, we did contemplate that timing in our, in our guidance. So it doesn't really have a dramatic impact on our FQ1 guide at all. And certainly, the transaction will continue to be accretive to gross margins. It will continue and continues to be accretive to free cash flow. And essentially, the EPS accretion is really dependent on how we choose to finance that last $1,000,000,000 component, which we don't have to make a decision on until about 30 days or so prior to closing. So As we said before, we have the option of using equity or a convert or cash or a combination of those. So the specific EPS accretion will really be dependent upon what we finally decide for those things. That's helpful. And then a clarification on your comments that Micron will be above the CAGRs that have provided for DRAM and AMBIC growth. Fiscal 2017. I just want to clarify, you would expect to be above the high end of your guidance for both DRAM and NAND. So, I think it was over 30% in DRAM fiscal 2017 and over 40% in NAND for fiscal 2017? Well, what we said, Mark, was that we had given these 2 year CAGRs and we were slightly below for both NAND and DRAM in fiscal 2016. So it's reasonable to think that we'd be slightly above the range that we provided in fiscal 2017 so that we over the 2 year CAGR, fulfill the commitment that we made around those bit growth CAGR. So yes, that's a reasonable thing to assume. That's very helpful. Thank you. Thank you. Our next question comes from Timothy Arcuri with Cowen. Your line is open. Thank you. I had 2 Ernie, I'm still a little confused on the guidance. If I, try to adjust for the changes in the reporting, it sounds like you're excluding about $150,000,000 per quarter now. So on an apples to apples basis, the guidance is actually like $0.13 or something like that lower than what the headline number is or more like $0.04 at the midpoint? Am I not thinking about that right? Yes, that's a reasonable way to that's a reasonable way to think about sure, Tim. Okay. And then I guess that leads me to the question about OpEx because It seems like some of that's related to the OpEx. I guess if you add the stock comp back and you assume that it's mostly OpEx, you're guiding to like $650,000,000 to $700,000,000 but it sounds like maybe $80,000,000 of that is really one time in nature. So maybe the baseline is more like $600,000,000 going into next quarter. Is that or sorry, going into the, fiscal Q2. Is that the right run rate headed into the January quarter? So let me sort of try to frame that for you a little bit. We had a couple of things that are impacting this quarter's OpEx. The first was, that about $25,000,000 give or take of prequal expenses that we had planned to spend in FQ4 are appearing in FQ1. And then secondly, we have we had, even prior to this rollover, the highest point of prequal expenses for the entire fiscal year was actually occurring in Q1, plus we have the resumption variable compensation given the new pricing environment. And so what we try to try to frame for folks is sequentially between the variable comp being reinstated as well as the pre fall expenses. That's a sequential increase of about $80,000,000 from FQ4 to FQ1. So that predominantly explains the change to the OpEx. And then certainly, we're hopeful that the variable compensation piece continues because we're hopeful that the business environment is, is favorable. And we would expect prequel expenses to moderate such that we should be in that range of 600 plus or minus. So we'd probably midpoint around 600 a few quarters, maybe a couple of quarters higher, a couple of quarters a little bit lower. Under the new framework for recording OpEx. So those numbers would still exclude stock based comp, but you would expect to see a pretty meaningful moderation of OpEx as we go forward throughout the year as a result of this prequel situation being being resolved from the rollover. Our next question comes from Ian Ng with MKM Partners. Congrats on the guidance. DBM question here, you've got favorable contract pricing. You didn't quite get the bid output acceleration in Q4 to wanting to understand that a bit. And are there any shortages in terms of, meeting customer demand at this point? I think part of, part of the explanation of Q4 bit growth being slightly below, I think what we had previously talked about was in fact that as we watched the market evolve, we made some choices around where we'd like that output to be. And the result is that our Q1, fiscal Q1 bit output is now going to be higher than what we had expected it to be. So obviously that did play into our thinking as we saw the market evolve. Relative to, specific shortages, I'm not aware of any. I don't know, Mark, if you are, but certainly, all of our customers are being very attentive to making sure that their supply needs are taken care of. And we are seeing certain segments and certain customers where the possibility of allocation is present? Yes, I don't think we want to call those out today on this call, but there's certainly that that risk. Yes. Okay. Thanks. And for my follow-up here, server as a percent of DRAM, that is down sequentially in August is what's happening here, perhaps enterprise is offsetting the cloud. And shouldn't this be a pretty attractive market to serve? I think pricing in server typically tracks PCs with a little bit of lag? Yes, I think it'll reaccelerate relatively quickly. It has been a little bit more of a lumpy business here over the last year or so, but, we like the trends there. Thank you. Our next question comes from Ravindra with I'm sorry, Rajvindra Gill with Needham And Company. Your line is open. Yes, thanks and congrats on good execution. Just a question on the inventory increase on a year over year basis. Relative to the revenue increase year over year, based on your guidance. So it seems like the It seems like that the inventory is increasing at a faster clip than revenue. So I just wanted to get a sense in terms of any concerns you see there? Sure. I'm sorry. Go ahead. So with inventory outgrowing revenue on a year over year basis, Yes, I think you have a couple of things. First, as we've talked about in the last quarter or so, as we are ramping on the new technologies predominantly because of these delayed mobile calls, we had some inventory built up that is now flowing through. However, We absolutely still continue to get more and more output from the factory and it's going to be a couple of quarters before that inventory actually starts to decline, but we have a very clear view of an ability to decrease inventory meaningfully over the course of fiscal 17. I'd also remind you, that we are also building supply chains for SSDs and MCPs, which take longer in terms of, their aggregate end to end cycle time than selling components. So we have that effect as well. That will cap out here in the next quarter or so. And then you'll see a normalization and a flow through of that as well. So we're not we're cognizant of the inventory position. We'd like to think that we anticipated that and shared that with you. And we're equally confident that the inventory will decline, nearly every quarter in fiscal 2017. To be honest, we feel pretty good about where we sit given the trends in the marketplace as well. And we don't feel quite as much urgency, as we might under different market conditions. Okay. That was helpful. And just last question for me on the cash flow. And obviously, you can't talk a little bit about fiscal year 2017. But if you kind of take your CapEx guidance and your depreciation add back. It does seem like it'd still be kind of difficult to generate a meaningful free cash flow next year, assuming a fairly big ramp in gross margins and revenue. Gross margins maybe continue to increase above and beyond the what you're guiding for November. So I just wanted to get a sense of how you're looking at free cash flow and the Innovator agreement, how much free cash flow does that add to the company if we were to add that back on? On average, the Innoterra transaction is going to add somewhere between 3 and $600,000,000 of cash flow on a free cash flow basis. But I'd really stress that that's an average amount, which would be sort of the free cash flow net of the incremental depreciation, I'm sorry, the incremental CapEx. But I think that the best way I could guide your thinking there is that we've prepared a pretty conservative plan and we have a free cash flow neutral position in the context of that conservative plan. Obviously, Q4 was a little bit stronger It's fair to say that Q1 was a little bit stronger, as we look at it now versus our conservative plan. And so we would expect to be able to accumulate cash over the course of 2017, if in fact, this current market environment continues, anytime we use words like significant, it kind of gets hard to determine what's significant to you or significant to me. But, trust me, every dollar is significant to us. And so we're being very careful and monitoring that very carefully. Good afternoon. Thanks for taking my question. NAND cost per bit was actually up slightly in Q4. It was most of this mix related. Maybe you could tell us what cost per bit declines were on a like for like basis? And should we anticipate an acceleration of cost per bit starting here in the first quarter, especially I think as you mentioned, you get 3 d bit crossover over 2 d But it seems like to me as gross margins for NAND should be inflecting up here in Q1, but I'm just trying to get a sense for that. Yes, a lot of moving pieces, Harlan. I think just to get to the crux of your question, yes, you should anticipate cost per bit, start coming down nicely with with the 3 d ramp as we start flushing those wafers through the back end and out of the marketplace, costs are coming down nicely this quarter. And she continued roadmap ahead for that as we move through the year. Yes. We've provided a cost per bit reduction forecast for the year, to you and I think everything, Mark said is absolutely true and counterbalancing that just a bit. Is this supply chain build up that I talked about because those MCPs and, those SSTs have a a higher COGS component theoretically. They are also generating more margin, but, if we're only looking at the cost perspective, that will have a tendency to dampen the cost per bit reduction because the mix has changed. Great. Thanks for the insights there. And then on the 1x DRAM ramp that you highlighted in your slides, when does that ramp actually commence? Is it, end of this year, beginning of next calendar year, And you mentioned also that you expect significant output by middle of next year. Maybe you can just be more specific on when you expect big crossover 1x versus 20 nanometer Thank you. Yes. So we have, we actually have wafers in manufacturing fabs in both Hero Xiamo and Taiwan that are yielding. The output today is insignificant. We'll continue to run engineering pilot line loss And by the time we get to the middle of next year, you should see it be significant in terms of our overall output. I think probably going to wait another quarter before we give you, a little bit more precision on what the when the big crossover might be. Great. Thank you. Thank you. Our next question comes from Steven Fox with Cross Research. Two questions for me. Just following on that prior question regarding NAND cost per bits and all the mix issues. Can you just take that one step forward and talk about maybe how the storage business unit starts to recover in terms of profitability. Is there a path to turning profitable this fiscal year? And then secondly, can you just talk about seasonality this year, maybe last year in terms of what kind of unit, shipments you're seeing versus content shipments from some of your core markets and whether stronger or weaker than a year ago? Thanks. Sure. So let me address the, the question about the storage business. We are certainly hopeful, that we can exit the year, at least with a profitable note storage business. I think, it's dependent on a few things. Obviously, we're in the middle of a very significant portfolio sort of change out and we have to execute on those. So far, our record has been good with respect to the client and consumer segments, but we have some big product launches with respect to both data center and enterprise coming up here toward the end of this calendar year and in early calendar 2017. And those would be really pivotal to us, in completing that transition. I think that, again, track record has been good. The SSDs have been well reviewed. And we're very optimistic that our subsequent product launches will be equally successful. I also think it's important to keep in mind that, we also are seeing the benefit of 3 d in the memory I'm sorry, in the mobile business unit as well. We saw that we had the mobile percentage of our NAND business this quarter moved from the low teens essentially to the high teens as a result of more and more quals there. And the increasing importance of the MCP portfolio. So we are seeing the benefit of that, really across multiple business units. Let me just add to that on the seasonality question. Q4 obviously typically is a very strong quarter for NAND. It's hard to know for sure, but our sense is that the demand picture probably has has more staying power than just the typical seasonality that you would see given the strong growth in the end applications. Thanks very much. Thank you. Our next question comes from Kevin Cassidy with Stifel. Thank you for taking my question. And your guidance for 1st quarter is a significant increase over 4th quarter. Can you give us a ranking of the end markets or the end products that are driving the increase? Yes. I'll take that. So obviously, as has been the case, the sort of the specialty markets, the embedded markets, whether it's, automotive, industrial, medical, probably top of the list, within the computing networking segment. Graphics has been quite strong. A server probably next and then followed up with mobile and client. Okay. And are you seeing a significant increase with 3 d NAND versus the planer NAND? In terms of gross demand, sorry. No, gross margin. It's a very quickly moving dynamic right now. So yes, we're seeing that happen sort of real time as we sell through the early production. And move more and more of the products into the TLC format. Yes, and certainly more of that opportunity is ahead of us than it is behind us given that we're just going to hit bit crossover for 3 d in this quarter. And as Mark said, we're continuing to transition, which adds cost because it suppresses output. But with more significant bit growth ahead, we'd expect the cost reduction opportunity to accelerate a little bit here throughout fiscal 2017. Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is open. Yes, good afternoon guys. Thanks for letting me ask the question. I guess I want to go back to cost side of the equation guys. I guess just given the change in the depreciation schedule for the November quarter, I would have thought your ability to get gross margins to kind of the high 20 percent range, especially in this pricing environment would have been fairly easy. So I'm just kind of curious as to what the offsets are in the November quarter. Is this all about the calls on mobile? And if it is, what do you estimate that to be a hit to gross margins and when might that be done? And then Ernie, I know you gave full year cost targets on a per bit basis. Did you give them for the fiscal first quarter, if you did, I missed them? I think, John, actually, it's really a little bit more about the lag that you typically see as pricing starts turnaround in some of these things. Yes, there is an inventory effect relative to some of these products that we've built up in inventory. That we're early production on either 20 nanometer or 3 d NAND, etcetera, as we sell through, that's a little bit of a headwind until that's flushed out. But it's really more around as ASPs turn around, they don't turn around instantaneously. And they didn't turn around until we were into the quarter last quarter. So remember, we had a pretty significant be relative to the midpoint of our guidance last quarter, which gives you an indication that the pricing was starting to accelerate then. It takes a little while to play out and to flush through as we see these things happen. So the trends are all in place I think we're heading where you think you are, where we ought to be, but it can take a little while to play out through the financials. Yes. And I didn't provide a cost specific cost per bit, target for, FQ1. Okay. And I guess as my follow-up, Mark, just on the Innovara acquisition, if you go back and look at what you guys have tried to accomplish over the kind of 7, 8 years. It's actually been to try to mitigate the cyclicality of the industry within your financials by setting up some of these JVs, buying in Oterra kind of reverses that. I'm kind of curious, is this purely a financial decision on your part you mentioned in your prepared comments that this downturn troughed at much higher levels than past downturns. So is that giving you the confidence? Or is there actually a fundamental reason to own the asset, will this allow you to kind of ramp 1x or 1y or 1Z more quickly owning a new tariff. You just give a justification, that'd be great. Yes. There's a lot of components to it. I think you put your finger on a piece of it. Which is that the volatility in this business, I think we can conclude, is going to be less going forward. This certainly seems to have been borne out as we move through this last cycle. It doesn't mean the cycles are gone. It just means that the volatility is less. And so that is is less of a defensive driver, so to speak. An important thing for us in this whole picture is operational flexibility and control. We think about our ability to drive new technologies, either into manufacturing or or to transition technologies with the Innoterra assets, having ownership of that asset and the ability to mix and match different technologies, as well as potentially more value add products and capture that value as significant. Notwithstanding the fact we had a good operating relationship with Innoterra, we believe that there is more value we can bring as sole owners than as than as, board members and operational partners. And, at the end of the day, it gives us the ability as well to take cash flow that's going to be generated within Enercare and deployed across our network, where we find that most useful. So a number of different factors playing into it, all of which I think, point in the direction that we're moving Thank you. Thank you. Our next question comes from Mehdi Hosseini with SIG. Your line is open. Yes. Thanks for taking my question. Ernie, just going back to your CapEx for the next fiscal year, it sounds like you're incrementally more confident in the tariff deal. And in that context, how should we think about the incremental CapEx requirement for Inroterra in the context of your comment that in Natera would help with, free cash flow accretion. I'm just trying to reconcile everything, and I have a follow-up. Sure. So when we provided that CapEx guidance of essentially contributions. We did say it included, contemplated investments for Natera. So that's an all in number. And as you know, we don't break out specific CapEx by fab. So, we don't plan to start doing that now. But, that $5,000,000,000 midpoint with a little range around that is inclusive of anticipated investments at Inotera. Got it. Got it. Thanks for clarification. And then was it through the NAND and a crossover with cleaner NAND, it's Should I assume that all the 3 d NAND capacity coming online is TLC or is it still any MLC left in the mix? No, the first out three d was MLC, but we very quickly introduced, TLC and as we said in our prepared remarks, most of our client consumer SSDs are now out on TLC and we're qualifying TLC into mobile app patients as well. And we will be, majority TLC by the middle of fiscal 'seventeen. Here as we go forward. So that's part of the engine of the significant bit growth that, that we've contemplated and forecast. Thank you. Our next question comes from Joe Moore with Morgan Stanley. Your line is open. Great. Thank you. Wonder if you could talk about the decision to move to 7 year depreciable life, on DRAM. I guess that strikes me as a long time. And I look at your CapEx ratio to PP and E sort of a third. What was the thinking behind 7 years? And can you remind us the depreciation life of the NAND equipment? So it's depreciation life and the NAND equipment. It's about 5 years. And really, we conducted quite an extensive study around how long the technology transitions existed or took in the DRAM world, how long they were contemplated to take on a going forward basis. We looked at the practices of others, both competitors and partners. But really the substance of the decision was related to, what we anticipate and what we've been saying for some time is a, sort of, a slowing of the technology transitions. And therefore, the longer usability of that equipment as those technology transition times change And the reality is there's a range of answers you come up with when you do a study like that. And much like the midpoint of a guided range in 7 years fell to us like it was not overly aggressive. But not overly conservative either. So you could assume that we could have gone a year or 2 on either side of that. And we chose a position that we thought was reasonable given, what we know and understand about the pace of technology transition. Okay, great. Thank you for that. And then as a follow-up, have you given or can you give an absolute number for depreciation for either the quarter or for the fiscal year? We expect depreciation to be somewhere in the range of $4,000,000,000 for the year. Give or take. Great. Thank you very much. You. Our last question comes from David Wong with Wells Fargo. Your line is open. Thanks very much. Ernie, noted that you might be able to generate cash over the some point next few quarters. Can you give us any idea of what you would do with any net cash generated? Would you be able to pay down debt or the other uses for cash? Certainly, first thing we're going to be focused on is actually accumulating the cash. So that's my first priority because I have to have some of it to be able to decide what to do with it. And certainly at that point in time, We would certainly look at the opportunities that were available to de lever and we would look at those in the context of everything else that's going around and it's really impossible to say specifically what we would decide to do in the context of a future that's not yet here. But I can tell you that de levering is an important priority. And depending on how much cash we generate, we may choose to deploy $100,000,000 of that or so, back into CapEx if that's the right decision. But de levering is certainly nearest and dearest to our hearts at the moment. Thank you. This concludes today's Micron Technology 4th Quarter 20 16 Financial Release Conference Call. You may now disconnect.