Earnings Call: Q2 2016

Mar 30, 2016

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 16 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, and welcome to Micron Technologies second quarter 2016 financial release conference call. On the call today is Mark Durkin, CEO and Director and Ernie Maddock, Chief Financial Officer. This conference call, including audio and slides, is also available on our website at micron.com. In addition, our website has file containing the quarterly operational and financial information and guidance, non GAAP information with reconciliation slides used during the conference call and a convertible debt and capped call dilution table. If you have not had an opportunity to review the second quarter 2016 financial press release. It is also available on our website at micron.com. Our call will be approximately 60 minutes in length, will be an audio replay of the call access by dialing 4045373406. With a confirmation code of 67709190. This replay will run through Thursday, April 7th, 11:30 pm, Mountain Time. A webcast replay will be available on the company's website until March 2017. We encourage you to monitor our website at micron.com financial conferences that we will be attending. You can also follow us on Twitter at Micron Tech. Please note the following safe harbor statement. During the course of this meeting, we may make projections or other forward looking statements regarding future events or the future financial performance of the company and the industry. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to the documents the company files on a consolidated basis time to time with the Securities And Exchange Commission, specifically the company's most recent Form 10 k and Form 10 q. These documents contain and identify important factors that could cause the actual results for the company on a consolidated basis to differ materially from those contained in our projections or forward looking statements. These certain factors can be found in the Investor Relations section of Micron's website. Although we believe that the expectations we affected 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 the date of the presentation to conform these statements to actual results. I'll now turn the call over to Mark Turpin. Thank you, Ivan. For our second fiscal quarter of 2016, Micron posted total revenue of $2,930,000,000 with gross margin of 20%, non GAAP net loss of 48,000,000 and a non GAAP loss per share of $0.05, all within our guided range. Operating cash flow was $763,000,000. Our results were impacted by continued weakness in the PC market, seasonality and timing of product launches in certain market segments. We are continuing we are simultaneously ramping, qualifying and delivering several leading edge products, including 20 nanometer DDR4, low power DDR4, and 3 d NAND based solutions. Our progress has been strong, but it's always challenging to precisely align technology conversions and fab output with customer patient cycles and market seasonality. Today, I'd like to provide a high level overview of our progress in each of the business units and have asked Ernie to cover business unit metrics and financial performance. In our compute and networking business unit, we recently achieved initial customer qualifications of our 20 nanometer 8 gigabit DDR4 products. These are now ramping in volume. In the enterprise, we have qualified an innovative NV dim solution at major OEMs. In the graphics segment, we are enthusiastic about the early success of our GDDR5X a discrete solution for increasing data rates above 10 gigabits per second. We have several major design wins and expect to have the products available by the end of the current fiscal quarter. In the networking segment, we are seeing early signs of demand recovery in China, where we believe our broad portfolio and strong customer engagements position us well for the future. Turning to our mobile business unit, results have been negatively impacted by the timing of product qualifications as we transition customers to 20 nanometer versions of LP DDR4 products. We do expect to finalize 20 nanometer low power DDR4 qualifications with most customers by the end of this quarter, And this, coupled with our expectation that memory demand across the smartphone categories, will continue to expand, leaves us confident that our mobile business is well positioned for financial growth by the 4th fiscal quarter of this year. In our embedded business unit, automotive design and activity remains strong, particularly with 20 nanometer DDR3 and low power DDR4 products. We are seeing growth with automotive customers in Greater Asia and continuing to build upon success with European and U. S. Manufacturers. We are also generating strong designing activity for our industrial SSDs, and we are delivering a broad portfolio of differentiated nonvolatile memory DRAM and MCP solutions to the consumer and connected home segments. Finally, our storage business unit has been positioning its product portfolio to take advantage of our high performance 3 d NAND technology. We are currently sampling Tier 1 OEMs with early versions of our 3 d NAND enabled PCIE NVMe client SSDs. Over the next two quarters, we will be shipping crucial branded low cost 3 d NAND client SSDs high performance drives targeting gaming enthusiasts and a 2 terabyte client OEM drive. In summary, The leading edge technology deployment is progressing well across manufacturing for both DRAM and NAND and our bit growth and cost reduction targets are on track. We believe the combination of new products with more efficient manufacturing on advanced nodes will drive significant improvement in Micron's relative competitive position in the second half of twenty sixteen and beyond. Turning to the memory industry more generally. We believe that DRAM industry bit supply will decrease to the low supply growth and no incremental way We continue to believe that longer term DRAM bit demand growth in the low to mid-twenty percent range will result in healthy market fundamentals. For NAND, we estimate 2016 industry bit supply growth in the mid to high 30% range as early three d conversions create some temporary supply constraints. We continue to expect the cost and performance advantages of 3 d NAND will drive enhanced adoption rates and densities across key stores markets and we are confident in Micron's roadmap in 3 d NAND in terms of timing, performance and relative cost position. Internally, and from an operations perspective, Micron remains focused on a few key operating priorities. For DRAM, we continue ramping 20 nanometer. This technology node will represent more than 50% of our fab bit output in the current fiscal quarter. We are enabling 1x DRAM in manufacturing and recently began transferring this technology to our Taiwan fab in Taichung. We expect to ramp 1x nanometer in volume starting in fiscal 2017. We're still forecasting our own fiscal year 20162017 DRAM bit growth CAGR in the 20% to 30% range. This is likely above the market. Our current year bit growth will be weighted to the second half of fiscal year twenty sixteen with substantial bit production output gains in fiscal Q3 and Q4. We currently have no plans to Growth in DRAM will be the result of technology deployment. For NAND, we are ramping Gen 1-three d NAND in Singapore and expect to have more than 50% of our NAND bit fab bit output on 3 d by the fall of 2016. We are also enabling Gen 2, 3 d in manufacturing and expect to be in early production starting this summer. We are forecasting Micron's fiscal year 2016 27 NAND fit growth CAGR in the 30% to 40% range. We expect to be below the market in 2016, but well above the market in 2017. Most of this growth will be related to 3 d and TLC conversions, which will begin to deliver more substantial bit growth and cost reductions starting late in fiscal year 2017 2016. Are planning for incremental capacity with our Singapore fab expansion and are beginning tool installations this quarter. As always, we continue to be mindful of market conditions as we contemplate our investment decisions. Relative to 3 d Crosspoint, we are working with market enablers and continue to believe this innovative technology will be a strong contributor to Micron's future success. We continue to augment our controller and subsystem capabilities and have made good progress in aligning this roadmap with our 3 d NAND ramp. We expect to substantially expand our vertically integrated solutions over the next 12 months. Now, I'd like to turn it over to Arne. Thank you, Mark. Before sharing our normal financial summary, I'll cover more technology and business unit details. DRAM represented 54% of our total revenue with the following segmentation. Mobile was in the low 20% range, The PC segment was in the mid-twenty percent range. The server business was in the low 20% range and specialty DRAM which includes networking, graphics, auto and other embedded technologies was in the high 20% range. In our nonvolatile memory business, trade revenue represented 37% of total revenue with the following segmentation. Consumer, which includes our memory cards, USB, and components, represented more than 50%. Mobile, including MCP, was in the low teens percent range, while SSDs were in the mid teens percent range. Automotive And Industrial Multimarket segment and other embedded applications were in the mid teens percent range. Moving on, I'll share a brief operational summary of each of our business The computing network business unit posted fiscal Q2 revenue of $1,050,000,000, down 8% from the previous quarter, impacted by lower average selling $55,000,000 or 5 percent. Our high value solutions to enterprise networking and graphics markets helped to offset some of weakness. In the enterprise and cloud segment, we continue to see significant demand for our DDR4 solutions. Specifically within the cloud segment, we had record DDR4 shipments increasing our market share with key hyperscale customers in Asia Pacific. Within the enterprise segment, demand for our 32 gigabyte DDR4 RDEIM also gained significant traction with key customers. In graphics, we continue to see demand softness. However, second half demand looks stronger for products such as our 20 nanometer 8 gig DDR Gddr5 solution. In networking, we also saw a slowdown in demand as a result of lower LTE shipments during the quarter, but we successful enablement and volume ramp of our 20 nanometer 4 gigabit DDR3 solutions. Also, we shipped samples of our 20 nanometer 8 gigabit DDR4 solution to all major OEMs and began high volume production. Micron's mobile business unit posted fiscal Q2 revenue of $503,000,000, down 40% from the prior qualifications and pricing pressure in the EMCP market. Our non GAAP operating loss was $21,000,000 or 4 percent of revenue. We expect some continued challenges fiscal quarter. Bit shipments of EMCPs were down approximately 25% as we redirected bits to higher value homes. We saw strong LP DDR3 demand from China in mid tier phones and expect this demand will continue into next year. Looking forward, our mobile portfolio continues to position us for growth and success. While we had some missteps in our mobile qualifications in FQ2, We expect this situation to progressively improve during the calendar and high end segments, and we'll be introducing our innovative 3 d NAND into flagships and some higher end phones in the second half calendar 2016. The embedded business unit posted fiscal Q2 revenue of 460,000,000 down 4% from the previous quarter with a non GAAP operating income of 87000000 dollars or 19% of revenue. The results were primarily impacted by softness in demand from the consumer and industrial multi market segments offset by continued strength in the automotive segment. Looking ahead, we continue to see increasing demand in both DRAM and eMMC for automotive application that includes infotainment, instrument cluster, and advanced driver assistance systems. In addition, our NOR Extreme Flash product introduced last quarter continues to gain adoption with key vendors within the automotive ecosystem. Our industrial multi market segment, we are seeing good design in activity of our M500 IT industrial SSDs and specialty DRAM and in the connected home segment, we are seeing increased DRAM demand from key set top box customers in both Asia and North America. Micron storage business unit posted fiscal Q2 revenue of 901,000,000 2% from the previous quarter We continue to optimize our product mix to address market challenges, particularly in the client and data center SSD segments. Our trade NAND component bit growth was up 16% quarter over quarter and we see demand increase driven by OEM enterprise solution providers and webscale customers who want to leverage the energy savings and performance gain enabled by Micron Flash. In our client and consumer SSD segment, consecutive quarter bit growth reflecting accelerated SSD adoption in OEM, ultrabook and Ultrafin TCs. In our enterprise SSD segment, we are starting to ship our S600 Series SaaS Drive, Micron's first product produced through our strategic partnership with Seagate. We expect to realize revenue from this new product line in Q3 as we move into volume production Finally, the data center SSD market segment saw significant downward pricing pressure, driven by TLC enabled competitors and aggressive competition for high scale business. Micron's participation in this market has been measured, and in the second quarter, we strategically shifted bit supply from this segment to more favorable margin opportunities. Looking at the company overall, As Mark noted earlier, revenue for the second quarter was $2,930,000,000, which is at the low end of our guided range. Our revenues were impacted by seasonality, timing of product launches and DRAM and NAND pricing pressure, driven primarily by the PC end market. Gross margin for the quarter The non GAAP net loss for the 2nd quarter was $48,000,000 or $0.05 per share at the favorable end of our guided range. Gross margin reflects the pricing environment noted earlier as well as the timing of our leading edge technology migrations. As we've noted before, these migrations will generate more substantial cost per bit reductions starting in FQ3 for DRAM and FQ4 for NAND. As a reminder, Micron includes both amortization of acquisition intangibles and stock compensation expense in our non GAAP reporting. Taken together, these two items represent $0.06 per share for the recently completed quarter. Looking at results product line, DRAM revenue decreased 18% compared to the first fiscal During the second quarter, DRAM bit inventories increased as a result of the 20 nanometer ramp and the timing of with certain mobile customers. We also expect an additional inventory The further market adoption of DDR4 products continued in the 2nd quarter and represented approximately 26% of total DRAM volume sales. As a result of decreases in average selling prices, DRAM gross margin was lower than in our previous quarter at approximately 20% while bit costs remain relatively flat. Our nonvolatile trade revenue decreased 6% compared to the first quarter as a result of a decrease selling prices, points as improvements in per bit costs nearly offset the decrease in selling prices. Non GAAP operating expense dollars. $1,000,000 during the second quarter and we ended the quarter with cash and marketable investments of approximately $5,100,000,000. Expenditures for PP and E during the quarter were $1,200,000,000 and we continue to expect our fiscal 2016 capital expenditures to be in the $5,000,000,000 range net of partner contributions. During the second quarter, we borrowed approximately $425,000,000 with equipment financing and also repaid the 3rd installment on the former LPDA credits or debt, bringing the total repayment to approximately half of the total debt. Moving now to our 3rd consolidated revenue 15.5 percent to 19 percent, operating expenses between $560,000,000 $610,000,000, operating income ranging between a loss of $70,000,000 and income of $10,000,000 and an EPS range between a loss of 12 dollars per share Operationally, we are on track to achieve the bit growth and cost per bit reduction targets outlined in our recent Analyst Day. Along these lines, we expect strong double digit bit growth and related cost reductions for DRAM in fiscal Q3 as a result of the deployment of our 20 nanometer technology. These trends will continue and further progress on our bit growth and cost reductions starting in fiscal Q4. Thank you, Ernie. There is one additional thing I would like to mention before opening up the call for questions. As you know, Mark Adams resigned for health reasons at the beginning of the year. Rather than directly replacing his role, we have decided to make and are in the process of implementing some changes to our organizational structure that we believe will effectively ensure our ongoing competitiveness. To summarize, we continue to navigate challenging market conditions and we are working to match the timing of our leading edge output with the right mix of customers and end markets. We remain confident in the long term health of the industry and our strategy to improve our relative competitive position. Operator, we're now ready to begin Q and Our first question comes from the line of Mark Delaney of Goldman Sachs. Your question please. Yes, good afternoon and thanks for taking the question. First question is on the inventory, which an order you talked about increasing this quarter and then potentially again next quarter. Can you just talk about how you expect to work down inventory going forward? And if you need to do anything on the utilization in order to manage the inventory levels? No, we don't expect to do anything on the utilization front and we think the substantial majority of the inventory will be worked through in the 4th fiscal quarter, with maybe a little bit carrying over into Q1, but we don't foresee anything beyond that. Okay. And then for a follow-up on the gross margin outlook for next quarter, can you just help us better understand some of the mechanics that are driving the decline? And if any color between the different segments of how gross margins might trend? I think, if you you accept that the cost reductions are on track with what we articulated in our Analyst Day, really it sort of boils down to what your assumption is relative to the pricing environment. And certainly, we've embedded certain assumptions in our guided range, and really want to make sure that we're communicating that the issue relates to, an assumption around the pricing environment and not the realization cost reduction of the company. Our next question comes from Steven Fox of Cross Research. I was wondering if you could just provide a little more color on the qualifications on the mobile side. Any issues as to why you sort of miss a window and why it won't penalize you maybe for more than a couple of quarters? And then secondly, just on the client SSD business, If I look at numbers in terms of pricing in the last 3 months or so, you're seeing pretty sharp ASP declines on average. For client SSDs. And I'm just curious given I know I understand the cost basis is going down, but relative to those costs declines, how close are you to coming to acceptable margins once you get through the technology transition? Thanks. Yes. So first, relative to the qualifications, obviously, when you're ramping, multiple new FAS on new technology nodes, and simultaneously transitioning to new densities and new IOs And it's a complicated thing to keep everything completely aligned with all the various customer requirements and customer product rollouts particularly in a design in sort of more sticky environment like we experienced in the mobile segment. So really what we experienced is more of a timing issue relative to some of those products and some of those customers. And we're very confident, that the product meets their needs. It's just a matter of now getting them queued up and through the qualification cycle. So I'm very, very confident that, that we have a good handle on the timing and that's why we continue to build those products and are confident holding an amount of inventory to cover that. Relative to the to client SSDs, you're right. There's been significant pressure there. We have talked about strong double digit growth in terms of our bid growth on NAND on a go forward basis. And given that, significant cost reductions that come with that, as well as the strong ability to ramp TLC as we move the end of the year with our 3 d NAND. So generally speaking, we feel pretty good about where our NAND business goes as we move late into this year and into the next year. Okay. So just to be clear, that costs you still feel like the cost reductions can obviously those margins aren't be above average, but you feel like you can get it into an acceptable range and ramp volumes in there by the 4th fiscal quarter. Is that fair to say? Well, I'm not going to predict anything relative to ASPs or margins. But I do feel very confident that our 3 d NAND ramp and our TLC Ramp TLC ramp or as predicted with the associated cost gains that you would expect and that we previously discussed. Great. That's very helpful. Thank you. Thank you. Our next question comes from Meta Hasini of SIG. Your line is open. Yes, thanks for taking my question. Mark, as you look into the second half, especially with the mix shift, the shifting more towards mobile and server DRAM. How should we think about the Die penalty and increase DRAM bits that are coming from your migration to 20 nanometer. You do get a better cost decline, but there's also a mix shift that carries a die penalty I'm just trying to better understand those dynamics. And I have a follow-up. Yes. So you're correct that some of these new IOs have, have a nice size penalty associated with them. It's a mix of anywhere between 0% 8%, 9%, 10% -ish, depending on the density and the form factor. I would say that the mix shift that we see is, yes, we will continue to see as we move through the year. Some increase in the growth in the mix relative to these mobile IDs. Generally speaking, we're also going to see growth in the server segment as well. So, generally speaking, we've given you this, all in, big growth guidance of 15% to 25% CAGR over the next couple of years. And that includes the mix effects that we currently anticipate in our business. And I think we're fairly confident in terms of our ability to understand. Sure. And then one question for Ernie. As you go through these inventory adjustments, is there any color you can provide on how we should think about the free cash flow I know you don't want to comment on margin, but your working capital requirement is going up. Should we assume the cash burn is going to decrease or increase from the just reported quarter or any other color that you can provide? If you look at the guidance we provided for FQ2 and what we've provided for FQ3, they're not too dissimilar to one another. And if you look at the CapEx discussion we just had where we're saying we're still on track to spend about $5,000,000,000. And clearly, we've reported on first half of the year in terms of CapEx spend. I think you have all the information you need to understand within a reasonable estimable range what the cash flow environment will likely look like for the 3rd fiscal quarter. But you just said that your inventories are going to go higher. I'm just would that imply that your operating cash is going to be less compared to the February quarter? No, because if you think about the reverse, let's say they weren't going higher, you would have expected those to sell through into the revenue line, which would have effectively increased the cash flow vis a vis the prior quarter. So the fact that we the guidance does really contemplate if you sort of follow the guidepost of provided to you, they'll get you to a pretty good estimate of what is likely to happen on cash flow for the quarter. Thank you. Our next question comes from the line of Kevin Cassidy of Stifel. Thanks for taking my question. It seems the automotive market has some good growth in it. Can you give us an idea of what content what DRAM content can be in the automobile over the years? Well, I'm probably not, varies greatly depending on model, obviously, you would kind of think in terms of all in memory growth And we think it can be, up to 9800 bucks a car. Okay. And would this be above corporate average gross margin or where does it fit in on the gross margin curve? Yes. The automotive business has been pretty strong for us. And it's also we view it as an attractive business because the sockets are pretty sticky. The lifetimes of the products are are longer. And so from a total return, it's a very positive market for us. Okay. Thank you. Thank you. Our next question comes from Rajvindra Gill of Needham And Company. Your line is open. Yes, thanks for taking my questions. I'm just trying to get a better understanding of the gross margin guide. I'm trying to reconcile the fact that as we progress throughout the year, you should be getting higher yields on 20 nanometer and 20 nanometer should represent a higher percentage of capacity, yet the margins are coming down 300 odd basis points, And so if you could maybe help me reconcile that, the gross margin guide was relative to the cost reductions, improving as you go throughout the year, that would be helpful. I think it's very similar to the answer of one of the earlier questions, which is we are very confident and provided some pretty clear visibility into what we think is happening with the cost structure. And as I said earlier, we all have an assumption set around what's going to happen in the pricing environment. And so depending on your assumption about that, And we certainly have taken a view that suggests that you're going to continue to see some of the pressure that we've seen over the recent quarters So the gross margin guide is very, very centered around an ASP assumption versus any doubt about our ability to achieve our cost reductions. So why would you in the second half, calendar second half, what makes you kind of optimistic that the pricing is going to or the overall DRAM environment is going to get better and somehow lead to better DRAM pricing. And along those lines, Can you talk a little bit about, why has the pricing been so weak the last several quarters and why would it somehow abate going forward, if that's the case? I'm not sure I said that I thought it would improve. At all. So I don't think I went there. And, as a result of that, I think I said we expect to see continued pricing pressure. And certainly, if you think about our discussion around our inventory build and that being in the mobile business and the mobile business typically being at the upper end of the gross margin continuum rather than the PC segment, it does help explain some of the thinking that went into our gross margin guide for the comment that you're going to improve your competitive position as you move throughout the second half of twenty sixteen, if as you just acknowledged that the pricing environment we don't know what's going to happen. It could get worse, it could get better. Why would your competitive positioning improve in the 2nd half? So there's always a mix piece of the equation that may vary from competitor to competitor. But if you set that aside, I think we've outlined that we think our bit growth and our cost downs, particularly in DRAM starting in Q3. And in NAND later in the quarter are going to be, significant relative to what you would expect for an industry average. And that's really what drives the fundamental equation relative to relative competitive position irrespective of what market conditions might look like. All right. Thanks, sir. Thank you. Our next question comes from John Pitzer of Credit Suisse. Your question, please. Hi, this is Farhan Ahmed asking a question on behalf of John. Thanks for taking the question. My first question is regarding the cost reductions you just reported for DRAM and NAND, it seems like the NAND cost reductions were pretty significant and they came in at 12% quarter on quarter, whereas DRAM was somewhat less than what I would have thought like the cost per bit actually went up. Can you talk about what drove the bid cost reduction in NAND and also on DRAM, like why are we not seeing any benefit from the 20 nanometer transition yet? Well, we had, we had significant bit growth in NAND in the quarter. And typically, you would expect the cost reduction associated with that. On the DRAM side, While we did, I think, experience a measured success relative to the progress we made on our 20 nanometer and the placement of those products, with customers. There is a mix impact that is somewhat of a headwind related to the, the, the type of memory, and in particular LPDDR4 and DDR4 versus LPDDR3 and DDR3, that there's a headwind relative to bit growth. We will overwhelm that as we move through the next couple of quarters as we've talked about. But that has been a little bit of a headwind. And when you layer on top of that, some of the inventory growth, in high margin products or what are higher margin products, typically the mobile piece of the business, that was somewhat of a headwind relative to the cost reduction for DRAM in the current quarter. Got it. And then one question related to your inventories, like you're holding a little bit longer inventory. And given that the mix is such a big factor in like on the mobile side, it seems like it's very specific to the products that you are designed in. Should we assume like most of the inventory that you are holding mostly is going to be in the PC? Or can you hold inventory in other segments of the market as well? No. In particular, inventory that we're holding has primarily been around timing of product qualifications. And while there is a mix of different types of products in that inventory, I wouldn't direct you to the compute market in particular. In fact, I would say that mobile is more significant piece of that. Thank you. That's all I have. Let me just add additionally, it's we're not taking what we think is any significant risk here. These are products that we have high confidence they're going to sell through and are pretty fungible among customers. Thank you. Our next question comes from Tim Arcuri of Cowen And Company. Your line is open. Hi, thanks a lot. I had a question on gross margin as well, but I guess I'm just want to make sure that I have the right message from what you're saying. And it sounds like that you're saying that, look, from the gross margin guidance that it would appear that maybe you're not getting the cost downs, but in fact, you are, it's just that pricing is basically overwhelming the cost downs in the May quarter. Is that the message? We're not going to forecast the May quarter pricing for you. No matter how many times you, how many different ways we go at it, Tim, unfortunately, we can't tell you that. But But we can tell you we're pretty comfortable with our cost downs and our bit growth, being along the lines of what we previously forecasted to you. We're very comfortable with the way everything's progressing in manufacturing. So yes, you've got to take that last little piece and plug it in yourself. And I'd add to that, Tim, that it's important to remember that we've always sort of looked at NAND cost reduction as more of a Q4 event with DRAM in Q3. And if you again, couple that with the color would provided around inventory and that being predominantly attributable to one of the higher margin segments. I think you'll find that If you triangulate around all of this, it's pretty easy to understand that what we're saying around cost reduction is in fact reality. Got it. Thanks, Ernie. And then I guess just one more. So can you talk about Innovara? May is the 1st full quarter of the new agreement. Of course, you're in the process of buying them, but the market dynamics have changed a lot since you last talked about the impact. So Can you maybe help us a little bit about, handicapping what the impact of the change in the agreement is on the May quarter guidance? Sure. So obviously with the change in the market since the time when you've talked about the acquisition, the benefits whether you assume it's the new arrangement or the full consolidation are actually more muted we still believe that they are positive, but significantly more muted than the time when we originally announced things. And we would expect, from a handicapping point of view, FQ1 would be the first time you'd see the big uplift and the impacts that we have previously talked about relative to margin accretion starting in third quarter, have obviously changed as a result of the change in the market environment. Okay. Thanks. Thank you. Our next question comes from CJ Muse of Evercore ISI. Your question please. Hi, this is Ada calling in for CJ. I was wondering if you could talk a little bit about the timing of the 1x nano ramp and also the required CapEx there? Not a whole lot to communicate on that yet other than we have started early silicon in the fab in Taichung. And it's a it's a process that we don't believe will result in any significant volume on 110, I only call 110 are a 1x nanometer node until we get into 2017. Thank you. And in terms of the financing for for the Unitary acquisition. Any updates there? That's, that's moving along as we expected. So there's no new news from the last time we we shared things publicly. Thank you. Thank you. Our next question comes from the line of Joe Moore of Morgan Stanley. Your line is open. Great. Thank you. I wanted to clarify one thing. On the slides, it says the capital expenditures is $5,300,000,000 to $5,800,000,000 net of partner contribution. Is it still $5,000,000,000 net of partner contribution, is that right? It is still $5,000,000,000 partner contribution. Okay, great. And then with the mobile issue, Is that something that you were able to anticipate? Did you know that 3 months ago when you talked about the quarter, when you plan the fab, or did that surprise you over the course of the quarter? And what happened for kind of like for like pricing in the mobile space outside of that issue? We ended up in a slightly different place relative to, what we sold through relative to mobile. That is, fair to say. Relative to mobile pricing, is down mid single digits in the quarter we finished. Great. Thank you very much. Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open. Yes, hi guys. Just looking at the make quarter softness in the gross margin side, when you as you ramp your 20 nanometer LPDDR4, once it gets qualified, let's say, and 3 d NAND, Do you expect the margins to improve once they start shipping? Obviously, most of it is going to be inventory now. Can you give us some color there? We, we continue to focus around our cost and our cost competitiveness. We really don't get in the business of forecasting margins, because there's a pricing environment piece of that, which we have very little control over. So we can talk clearly about what we think is going to happen on the cost front. We've done that. I'm happy to reiterate that, but margins, is not something we're in the business of doing. Got it. And on the 3 d NAND side, I guess, just being a 3 d NAND and LPDDR4, what do you expect the mix what is that mix here and what do you see the mix, let's say, by exiting calendar 2016? Well, we've talked about being in being over 50%, three d NAND in the fall. And, so it you want more precision than that, probably not ready to go there yet, other than to say, continue to be, very happy with the way that technology is rolling out in manufacturing. We're very satisfied with the quality and the and our ability to apply TLC versions of our 3 d NAND, And, that will provide an added boost, really later in the fall and into the beginning of 2017. Thank you. Our next question comes from Justin Lee of Robert Baird. Your line is open. Thanks for taking my question. This is Justin calling on behalf of Tristan Gara. My first question would be Could you share your view on the recent memory investment from China? Well, I don't think I've got anything really new to say about that. I think we've said before that We anticipated, that, that clearly China was interested in being in the memory market and that they would look for ways to find partners or to grow organically. We've now heard about significant investments in organic growth But we would remind everyone, I guess, that, we believe that there are significant technology hurdles and intellectual property requirements in terms of being a major player in the memory space. And we think it's going to be a challenging road for the organic, and we'll take some time. Okay, thanks. My next question is regarding the 3 d cross point that you will start to sell next year, which customers are you going to sell to and how much cannibalization do you think it will bring to DRAM and NAND? Yes, it's well, first of all, you're right. This year, we're sort of in enablement mode and we're working with a number of different end market segments, some customers in have significant interest in mobile, some customers in enterprise for big data applications, some in mobile for low power. Some of the low power benefits. Early on, as we ramp this technology, we expect cannibalization to be low to 0. Over time as, the technology matures and, drives to significantly higher volumes. I would expect some of that volume to come out of what otherwise would have been, DRAM and maybe even eventually what otherwise would have been other types of nonvolatile memory. But Generally speaking, this is a differentiated technology that will grow the size of the overall memory market, at least over the next 2, 3, 4 years. Thank you. Question comes from Jagadish Iyer of Redstone. Your line is open. Yes, thanks for taking my question. Two questions, Mark, First, on the you had on the DRAM side, the bit growth was substantially less in the last quarter. And you did say that in the fiscal third quarter, you're going to have significant chunk of it. What gives you the confidence that you're going to be ramping successfully on that, given that the historically, they have had some challenges on that. Can you just elaborate your conviction level on what kind of step up on the bit growth are we going to see in the second half between calendar third quarter 4th quarter and then into 2017? So we don't give you bit growth projections for either production or sales anymore since we're now guiding. All the financial, question is, why are we confident we're going to have the big growth that we're baking into our models? And the answer there is, we're now a month end of the quarter. So, a significant part of the output is already out And another significant part of the output is already running in the fab. We've seen, a month of yield data already. And I would just reinforce what we said in our last, Analyst Day presentation that the ramp is really at that time was and continues to outperform any previous new technology ramp in terms of yield maturity. And so, we we just really like the way it's going. We're, seeing strong progress, in 2 fabs in parallel, And we're highly confident that we're going to deliver on the big growth and associated cost improvements that we forecasted previously. Okay. Just on the cost reduction, how should we be thinking about in terms of is it going to be, how is the cost reduction curve for 20 nanometer going to be different from the cost reduction at the 25 nanometer? Can you just elaborate on that, or is it going to be similar? Well, what we've said is that over a, the CAGR that we provided, which is 16 and and 2017 that we are looking at somewhere in the realm of, 25% cost down versus 20 nanometer. That's more of a cash cost down. And that you take total costs all in, including depreciation, which we will encounter to a higher degree at 20 nanometer versus what we encountered at 25. We're looking at somewhere between 15% 25%. So it'll obviously in the early days, it'll be less, but as we get and ramped to mature yields, expect to see something right in the center of that range. Our next question comes from Stephen Chin of UBS. Your line is open. Great. Thanks for taking my questions. I had a couple on NAND flash I could. First is, I just wanted to review real quick the cost reduction strategy for SSD products in particular. There are a couple of mentions of TLC. I just want to make sure, is that TLC through D NAND or were you referring to, 2 d planar TLC as well? As part of the lower cost NAND that's going to go into SSDs later this year? So we have planar TLC NAND in the market place today, but we I think we commented earlier that the SSD, the client SSD and consumer SSD market has been fairly challenged from a pricing perspective. And so we've been measured in terms of how we approach that end market. I think the more important thing is that, yes, We believe that as we move to 3 d NAND, a very significant percentage of our output will eventually become 3 d and that just drives significant cost reduction above and beyond the conversion to 3 d itself. Got it. Thanks, Mark. And just as my follow-up, for the Gen 2, 3 d NAND process that you mentioned will be going into, I guess, going through the fabs a little bit later this summer. Can you comment on whether the toolset for this Gen 2 will be identical to Gen 1 that's that you're already updating in your fabs or require some incremental spending on top of that? Thanks. So we actually already have Gen 2 in a manufacturing fab. What I commented on was that we would start sort of early production, in the summer. So we have we actually have product running through a manufacturing fab today on Gen 2, and obviously like the way that's going as well. As to the equipment set, it's, it's not identical, but it is, similar equipment, in some cases, more of it, but very, very similar tools. Got it. Thank you. Thank you. Our next question comes from Ramesh Shah of Nomura. Your question please. Yes, thanks. Just back to inventories, it just seems from my perspective that unless demand gets a lot better, pricing is going to continue to be weak until Micron and the DRAM industry overall cuts production. So I guess my question is, what will it take for that to happen? We don't have any plans to cut production today. Marc, you can see if others do. I don't know. I mean, is your point that it's got to come from the market share leader first? Well, I think, well, first of all, We're not going to do it unless we see negative cash margins, because we haven't added any incremental capacity. And we think we would be foolish to be the first one to take capacity off given that tax hit? Yes. It's important to remember how much of our cost structure is fixed. And so to Mark's point, as long as we're getting a contribution to that cost structure, that fixed cost structure, it's it's a really ill advised move to be unilaterally cutting production. So the other thing I think just to sort of temper the assumption in your question, DRAM CapEx is going to be down about 30% this year. So I don't think is necessarily all doom and gloom. As we look at what we think supply growth is going to be going forward and what we think demand growth is segment by segment. We kind of already gave you our opinion, which is, it's going to take a little bit of time, but we think that this is going to be a healthy environment again. I guess the prevailing view a year ago was that all the players in the DRAM industry we're focused on maximizing profits. But today, the focus seems to be on market share. And Mark, maybe you could just give us your perspective on what you think is happening in of competitive dynamics? Yes, our focus is on market share. Our focus is on, making sure that we have deployed equivalent advanced technology, at least equivalent advanced technology to our competitors so that we're not in we're not incentivizing, others to play for market share. And we think that that's just really a prudent thing to do as managers of our business, that we should, we should make sure that we're putting in place efficient manufacturing production capacity and that's what we're very, very focused on. Thank you. Our next question comes from Ian Ng of MKM Partners. Yes, thank you. So in your prepared comments, you talked about early signs of a demand recovery in China. Could you talk more about that? I'm assuming it includes mobile given some of the qualification issues? Yes, that comment was really specific to the networking, segment of our of our CMBU business. And, we're starting to see, a little bit more activity there, maybe early early parts of, of next generation infrastructure rollout. And we would expect that to continue for a number of years. Okay. So largely networking then. Okay. My follow-up is, expectations for DRAM bit growth in fiscal 2017 under 20%. I mean, has that thinking changed since the Analyst Day? Because you did provide that 2 year CAGR 20 to 30% over 2 years? I mean, do we go to the low end of the range or could you go under that? No, we still think that the range that we provided is accurate over that timeframe. The industry, we think, will will be less than 20% in terms of industry pit growth. Thanks for the clarification. So you're implying you could outgrow in fiscal 2017 equity industry? That's as a result of deploying advanced technology, not adding wafers or targeting some specific market share. Okay. Thank you. And operator, looks like we've got one more question that will be done. Yes, sir. And the question comes from the line of Neal Mehta of KLS. Your line is open. Hey guys, same question. Few for me, 1st, sort of on the end markets. Seems like PCs were pretty weak in the first quarter, just from sort of all the data points. It seems like that came through your numbers. Just want to see what you guys are thinking going forward when you guys are seeing from your customers on the PC side? And also on the mobile side, it sounds like you guys have some inventory build. I just want to get a little bit of color on sort of what caused that inventory build and how you guys see that playing out? And then my last question is on, at the end of tariff financing. I know you said there's no updates, but given where your stock is right now. Would you contemplate doing the equity portion in debt given, again, where your stock price is now in the amount of shares you guys have to issue to finance that $1,000,000 piece? Thanks. All right. So I'll take the first 2 and then I'll let Ernie come back to the Innovara financing. Relative to PCs, yes, it continues to be weak. We think it may be down mid single digits for the year. DRAN content maybe up about 10% for the year. We're not expecting any big things out of PC demand when we give you our view as to the demand growth for the year across all the various segments. But once you get outside of PCs, growing obviously slower than overall, market supply for DRAM and mobile growing, maybe right around the market supply for DRAM. You got all these other segments that we think will outstrip supply growth servers, automotive, etcetera, etcetera. So generally speaking, we do believe that in aggregate, things are going to take care of themselves. Relative to mobile inventory, again, it's primarily, there's a mix of things in inventory, but we did indicate that, yes, a chunk of it is mobile. And a lot of that just revolves around timing and product qualifications that we have a high confidence in. We're just building inventory in advance of of those qualifications and so that we're prepared to ship that product out when the qualifications come through. And Ernie, do you want to take that? Sure. So again, similar to what we said for, we're looking at a wide variety of options for that remaining $1,000,000,000. And, as the time close approaches, we'll be looking at the alternatives that make the most sense to us given where we are at the time. All right. I want to thank everyone for their participation on the call today and for their continued interest in Micron. Obviously, still bullish on the memory industry. I like the way we're executing. And with that, I'm going to turn it back over to Ivan this up. Thanks, Mark. If you'll just bear with me, I have to read the Safe Harbor language real quickly. I need to, let's see, during the course of this call, we may have made forward looking statements regarding the company and the industry. These particular forward looking statements and all statements that may have been made on actual results may differ materially. For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC, including the company's most recent 10Q10K. Thank you again. Thank you. This concludes today's Micron Technology Second Quarter 20 16 Financial Release Conference Call. You may now disconnect