Earnings Call: Q1 2016

Dec 22, 2015

Good afternoon. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome you, sir. The speakers' remarks, there will be a question and answer period. Thank you. Is now my pleasure to turn the floor over to your host, Ivan Donaldson. Sir, you may begin your conference. Thank you, Jonathan. Welcome to Micron Technologies first quarter of 2016 financial release conference call. On the call today is Mark Durkin, CEO and Director Mark Adams, President 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 a file containing the quarterly operational and financial information and guidance. Non GAAP information with reconciliation slides used during the conference call financial press release. It is also available on our website at micron.com. Our call will be approximately 60 minutes in length. There will be an audio replay of the call accessed by dialing 4045373406 with a confirmation code of 867-seven thousand two hundred and six. This replay will run through Wednesday, December 30th, at 11:30 pm, mountain time. A webcast replay will be available on the company's website until December 2017. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we might be able to attend. You can also follow us on Twitter at MicronTech. Please note the following safe harbor statement. During the course of this meeting we may make projections or other forward looking results 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 deteriorally. We refer you to the documents the company files on a consolidated basis from 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 result 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 reflected in the forward looking statements are reasonable, we cannot guarantee future results levels of activity 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. Thank you. I'll now turn the call over to Mark Durkin. Thank you, Ivan. For fiscal Q1 2016, Micron posted total revenue of $3,350,000,000 with gross margins of 25 percent, non GAAP net income of $249,000,000 and non GAAP earnings per share of $0.24 all within our guided range. In addition, our non GAAP operating income was 246,000,000 and our operating cash flow was $1,100,000,000. Our results were primarily impacted by continued weakness in the PC DRAM segment. In addition, pricing pressure was We are on track with the qualification of several new technologies, including 20 nanometer DDR4 and low power DDR4 as well as our 3 d NAND products. These products and technology transitions can be disrupted to the manufacturing environment in the short term, but we believe they will pay dividends going forward as our product portfolio will be better positioned to address market demand. While current market conditions and our financial results have been challenging, we remain confident and we are focused on deploying our advanced technology in order to drive enhanced operational leverage for the company. Taking together, expected market conditions and new product the of fiscal 2016. These advancements in our technology deployment as well as the new system level solution products we are developing and deploying will improve our long term competitive position and drive enhanced financial results. Reflecting on market conditions, We believe that DRAM industry bit supply growth will be in the low 20% range in 2016 in line with demand and that industry fundamentals will remain healthy over the long term. Demand continues to diversify driven by the mobile cloud server and embedded segments, which together balance maturing PC demand. The DRAM industry consists of only 3 technology developers based on current long term outlook, we foresee technology driven supply growth slowing and can envision a future in which no additional DRAM wafer capacity is required. Turning to the NAND market. As I noted earlier, we've seen price competition in client SSDs and EMCPs during our 1st fiscal quarter. While we expect some of these trends to continue into fiscal Q2, we've also seen some positive signs in other segments and we'll continue to monitor market conditions carefully. Industry wide, we see relatively muted NAND supply growth in 2016 as planar fabs are converted to 3 d, creating short term headwinds to supply. We estimate industry bit supply growth As the cost advantage of large scale 3 d NAND deployment is realized, we expect solid state drives will see accelerated adoption in the client data center and enterprise segments. This adoption combined with higher densities should form the basis of a healthy, long term demand environment. These trends will likely be complemented lead to additional back and we currently expect to ramp into it starting in the second half of calendar twenty sixteen. Our capacity ramp will be driven by market conditions and expected ROIC. Micron is focused on the deployment of advanced technology to drive manufacturing efficiency and enable innovative new products. Specifically, in 2016, this focus is on 3 key areas: ramping 20 nanometer DRAM and enabling 1X DRAM and manufacturing ramping 3 d NAND and enabling 2nd generation 3 d NAND and manufacturing. And finally, a accelerating the development of advanced controllers to enable growth in SSDs and other system level solutions. In terms of pit growth, for DRAM, we still expect Micron to be above the market for calendar year 2016 based on a market growth assumption in the low 20% range. The majority of Micron's growth will occur in the latter half of fiscal 2016 with continued progress in fiscal year 2017. For trade NAND, we expect our bit growth to be below the market in calendar 2016 as we proceed with 3 d conversions, which will limit output in the first half of the year. Our Fab 10x expansion and 3 d conversions position us to significantly outgrow the NAND market in fiscal 2017. Turning to Innoterra. As you heard us announced last week, we entered into agreements for Micron to acquire the remaining outstanding equity of Oterra. We believe this is a compelling combination for the companies, our shareholders, our customers and our employees. Micron has a solid history of integrating memory assets, and we believe this acquisition will prove to be successful. Separately, we've also entered into an agreement granting Nanya an option to license 2 future DRAM technology notes, in exchange for our royalty and equity arrangement. These agreements form the basis for a continued strategic partnership with Nania and the Formosa Group. I'll turn the call over to Mark Adams now, who will summarize our operational and business unit results. Ernie Maddick will then cover Q1 financials, I will conclude with a couple of thoughts prior to Q And A. Mark? Thank you, Mark. I will begin by reviewing our DRAM and non volatile businesses followed by an update on each of our 4 business units and close with commentary on our operations and technology deployment activities. Let's begin with DRAM, which represented 58% of our total revenue in fiscal Q1. While PC DRAM average selling prices remained under pressure, we saw more stable pricing in other market segments where demand remained relatively healthy. We continue to ramp 20 nanometer DRAM technology and move production to DDR4 and LP DDR4 to meet customer demand. As a percentage of DRAM revenue in fiscal Q1, mobile was in the low 30% range similar to Q4, The PC segment was in the mid-twenty percent range, up slightly from the prior quarter. The server business was in the high teens percent range from the low 20s last quarter, and specialty DRAM, which includes networking, graphics, automotive and other embedded technologies, was in the low 20% similar to last quarter. In our non volatile memory business, trade revenue represents 34% of total revenue in fiscal Q1 performance was consistent with our expectations, making early progress on our 3 d ramp and customer qualification As a percentage of trade nonvolatile memory memory cards, USB and components was approximately 50% up from mid-40s in Q4. Mobile, including MCPs, was in the high teens percent range from the low 20s last quarter. SSDs were in the mid teens percent range, similar to last quarter. In automotive and industrial multi market segment, or AIM, and other embedded applications were in the mid teens percent range similar to Q4. Moving on to our business units. Micron's compute networking business unit posted fiscal Q1 revenue of 1 point $14,000,000,000, down 12% from the prior quarter, with non GAAP operating income of $21,000,000 or 2 percent of revenue. CMBU was impacted by lower average selling prices, driven by continued softness in demand from the PC segment. While we anticipate this demand to remain relatively soft in Q2, we are encouraged by growth opportunities in other areas of the market in including enterprise and cloud segments and remain focused on optimized optimizing our product mix and fast growing high value segments. On the technology front, We successfully executed go to market activity on our 20 nanometer DDR3, our G DDR5 and 8 gigabit DDR4 products. Our enterprise and cloud segment saw strong growth for our DDR4 products, driven by increased cloud demand from several of our hyperscale customers. We are making good progress deploying our 20 nanometer 8 gigabit components, which will drive future cost improvements. Looking forward, We anticipate year over year bit growth of 40 plus percent, driven by increased memory requirements to support virtualization and real time analytic workloads. Our DDR4 portfolio and innovative non volatile dim products have us well positioned to benefit from these strong growth trends in the future. The Graphic Card segment experienced softness in demand as customers rebalanced inventory levels of GDDR5 earlier in the quarter. We anticipate demand to increase returning to normal levels within potential increase in shipments during fiscal Q1, and we are well positioned to capitalize on growth in system DRAM content in the future. The Networking segment was impacted by seasonal weakness in demand and the delay of China LTE build out. However, market feedback suggests that that demand should regain momentum in the coming months. In Q1, we doubled DDR4 shipments quarter over quarter in the networking segment. In the client PC segment, we shipped our first 8 gigabit DDR4 samples to major OEM customers and are well positioned for mass production later this quarter. Looking forward, as PC form factors continue to evolve, Micron's broad offering in DDR3, DDR4 and low power DRAM will enable us to meet the changing needs of this market and deliver greater value. My Brown Storage Business Unit posted fiscal Q1 revenue of $884,000,000, up 4% versus the prior quarter, with a non GAAP stable average selling prices in our storage business for the 4th consecutive quarter. SBU continues to focus on optimizing our product portfolio to mitigate actual market exposure, while serving higher value segments. Our 3d vertical NAND technology has 3 times of density, of existing Planner solutions. We are actively sampling and developing our own SSD product portfolio based upon 384 gigabit 3 d TLC and 256 gigabit 3 d MLC NAND and expect to make products available for broad marketplace adoption the second half of fiscal year twenty sixteen. In the Components segment, we delivered our first 3 d NAND die to the market in Q1, shipping 256 gigabit MLC 3 d NAND components to nearly 20 third party USB and consumer SSD manufacturers. Shipments to additional customers are continuing this quarter. In client and consumer SSD's bid growth increased by double digits sequentially as decreasing SSD prices continues to accelerate adoption in OEM, Ultra book and Ultra thin PCs as well as consumer upgrades. Lower density consumer SSD will continue to narrow the cost gigabyte parity gap with hard drives, increasing their attractiveness. Our enterprise business saw quarter over quarter demand growth with strong OEM component sales growing 47% sequentially. Enterprise SSD revenue was up 13% sequentially driven by market pull for enterprise server cloud storage and flash array solutions. We began sampling our new S600 series of SaaS based SSPs in fiscal Q1, having qualified these drives with OEM customers, and engaging in qualifications with numerous end users and channel integrators. This SSD series is the 1st product family developed as part of Micron's strategic agreement with Seagate combining Flash Innovation and SaaS expertise from both companies. These drives are scheduled to begin shipping commercially in the first half of the fiscal year. Data center SSD bit shipments were down quarter over quarter amid competitive price pressure, Despite the market competitiveness in the SS Data Center SSD segment, we received orders for M500 DC and M510 DC SAT based SSDs from multiple hyperscale customers and cloud customers and continue to ramp these encryption enhanced SSDs with end users who require enterprise level data encryption and end markets such as medical, banking and government. Micron's mobile unit posted fiscal Q1 revenue of $834,000,000, down 13% versus the prior quarter due to lower volumes and pricing pressure from the EMCP market. Non GAAP operating income was $136,000,000 or 16 percent down from Q4, reflecting the higher cost of 20 nanometer product during the early systems architectures that steadily increased memory density requirements at all product levels. Demand in the quarter moved over the high end and value segments, both which continue to show rapid growth in memory content. We started to see seasonally soft demand in line with our expectation towards in the for discrete package on package low power DDR4 and higher density EMCPs. We will be completing a number of LP 420 nanometer Tier 1 OEM qualifications this quarter and expect LP4 volume to surpass LP3 by fiscal Q3. The embedded business unit posted fiscal Q1 revenues of $479,000,000, slightly up from the previous quarter. Non GAAP operating margin increased to 24%, which is a 2% improvement from the previous quarter, driven by better overall cost and growth in the automotive segment. Automotive revenue increased 5% quarter over quarter and 12% year over year. These results were driven by solid growth in DRAM and EMMC in applications that include infotainment, instrument cluster, and advanced driver assistance systems. We recently announced our Extreme Flash, a new NOR Flash solution with an octal sequential interface that boasts industry leading read throughputs with ultra fast random exit times. We also continue to make good progress in next generation design wins with key automotive customers in Europe and in Asia. Following a strong fiscal Q4 2015, our industrial and multi market business declined primarily due to reductions in NOR volumes. We launched our first SSD, the M500 IT, targeted for industrial customers in the quarter, and we are making positive strides with DDR4 validations in low power DRAM design wins. Our consumer and connected home revenue increased 10 percent quarteroverquarter with significant increases and unit volume demand for DRAM partially offset by pricing declines. We anticipate continued share increases in DRAM. Our MCPs, NOR, EMLC, SPINAND and high endurance EMMCs provide a strong baseline portfolio in addition to DRAM and low power DRAM products in the consumer and connected home market. Key trends include the growth of wearables, cloud based DVR, and instant on applications, including graphical man to man interfaces in multi function printers and home automation products. I'd like to close with a few updates on our operations and technology deployment activities. As is evidenced, from my comment about prior design wins and qualifications. Micron remains on track both the 20 nanometer DRAM and 3 d NAND Technologies. We continue to expect 20 nanometer to represent more than half of our DRAM output in the May quarter and 3 d NAND is on track to be a majority of our NAND output by the end of calendar 2016. Our 1x DRAM and Gen 2, 3 d NAND Technologies are also progressing well in R&D, we are focused on transferring the technology to production fabs before the end of fiscal 2016 seen. We are also very excited about the opportunity to simplify our operations and business model as a result of the announced acquisition of Innoterra. The fab will be 100% converted to our 20 nanometer technology by the time we expect to close the deal in mid-twenty 16 helping drive significant cost reduction for Mike Brown thereafter. In addition, we will increase our flexibility to drive capital investment decisions as well as product and technology mix going forward. Now to continue our commentary on Q1 results and Q2 guidance, I will turn the call over to Ernie. Thanks, Mark. Consistent with the direction that we shared last quarter, commentary around the P and L will focus on our non GAAP results. Please refer the non GAAP reconciliation slides posted on our website. As Mark Durkin noted earlier, revenue for the first quarter was $3,350,000,000 coming in at the low end of our guided range. Overall, our revenues were impacted by declining pricing, particularly in the PC DRAM segment partially offset by volume increases in both the DRAM and nonvolatile trade segments. Gross margin ended the quarter 25.3 percent consistent with our guidance and non GAAP net income for the first quarter was $249,000,000 or $0.24 per share slightly above the midpoint of our guided range. During the quarter, we benefited from a better than anticipated tax provision as well as favorable Micron includes both amortization of acquisition intangibles and stock compensation expense in our non GAAP reporting. Taken together, these two items represent additional $0.04 per share for the recently completed quarter. Now let's look at the results by product line. DRAM revenue decreased approximately 10% compared to the fourth quarter of fiscal 2015 primarily as a result of lower average selling prices. During the quarter, we saw further market adoption of DDR4 DRAM products in both mobile and non mobile segments. DRAM gross margin was in the upper 20% range, lower than our previous quarter as Our nonvolatile trade revenue decreased slightly compared to the fourth quarter of 2015 due to decreased average selling price that outpaced as decreases in per bit cost offset selling price changes. Non GAAP operating expenses for the quarter came in at approximately $600,000,000 in line with the midpoint of our guided range. The company generated operating cash flow of approximately $1,100,000,000 during the first quarter and we ended the quarter with cash and marketable investments of approximately $5,400,000,000. Expenditures for PP and E in the first quarter were $1,000,000,000 and we continue to expect fiscal 2016 capital expenditures in the $5,300,000,000 to $5,800,000,000 range with expected third party contributions of between $300,000,000 $800,000,000. During the quarter, we repurchased $57,000,000 in face value of vertible notes for $94,000,000 and approximately 7,000,000 shares of our common stock for $126,000,000. Moving now to $900,000,000 to $3,200,000,000 gross margin in the range of 17.5% to 20%, operating expenses between $565,000,000 $620,000,000, operating income ranging between a loss of $20,000,000 and income of 20,000,000 I'm sorry, operating income ranging between a loss of $60,000,000 an income of $20,000,000 in an EPS range between a loss of $0.12 per share and a loss of 0.05 dollars per share based on 1,030,000,000 diluted shares. As we've discussed on the call, we intend to acquire the remaining interest in Inotera not owned by Micron. This transaction will result in the full consolidation of Inotera into Micron's financial statements after closing of the acquisition, which is expected to occur mid calendar year 2016. I'd like to spend 2nd, and equally important, we expect to generate significant reference under the to realize approximately 20 After closing, we will receive the full benefit of this cash flow. Over the last 12 months, this would have generated and approximate $1,400,000,000 of incremental operating cash flow output to be well above the capital expenditures required In Otterra's operations should, on average, generate north of $600,000,000 of incremental free cash flow per year for Micron. Micron a $2,500,000,000 of debt sourced in Taiwan at an expected interest rate of around 3%. In addition, we have the option to finance up to $1,000,000,000 worth with Micron Stock sold to Nania and we will fund the remaining $500,000,000 with cash from our balance sheet. Separately, we have entered into agreements granting Nania an option to license 2 future DRAM technology nodes continuing our strategic relationship. These license agreements may generate a future royalty stream for Micron in addition to a small equity ownership in Nania with timing dependent on the technology deployment. At the capacity footprint and terminates upon change of control of Nanya. Now I'll turn the call back over to Mark Durkin. Thank you, Ernie. As many of you know, Kippeward will be transferring out of the Investor Relations leadership role over the next few weeks. So I wanted to take just a minute today to thank him for all his contributions to the team over the last 32 years. Kipp has not only been a great leader of Investor Relations for Micron but a selfless team member whose contributions internally through the years rival is well recognized to excellence externally. I've always been able to count on Kipp's honesty and thoughtful input on all manner of issues facing the company. And in good times and bad, He is and always has been all about Micron and the team. I think it's fair to say that Micron would not be the company it is today without Kipp. So we will truly miss our good friend. Mark, thank you very much for the kind words. It's been my honor and privilege to represent you and the entire Micron team. Into the public markets over the past 3 decades. For that, opportunity and experience, I am truly grateful Thank you all for a very exciting and fulfilling career. Thank you, Chip. Let me finish on this topic by saying We're very fortunate to have a very capable Ivan Donaldson in house and ready to step into the lead IR role. I think most on the call already know Ivan and that he too as a thorough understanding of the company, the industry, along with the skills to excel in this role. I certainly expect that if he steps in, he'll hit the ground running And though Kipp is leaving behind some very big shoes to fill, Ivan's preparation and dedication, making them an easy choice for this role. To summarize our call today, we're in the midst of some challenging market conditions, but we remain confident in the long term health of the industry and in our strategy to succeed. This confidence drives our long term investment perspective and we expect to see stronger bit growth and cost reductions starting in the second half of the year. Operationally, we're laser focused on execution related to the deployment of leading edge DRAM and 3 d NAND as well as advanced controller development. Ready for Our first question comes from the line of Kevin Cassidy from Stifel. Question. And, you know, gross margins coming down again quarter over quarter, even with you point to transition to 20 nanometer and DDR4. I guess if you could help us with some of the moving parts gross margins for those products at 20 nanometer or how much lower costs are you expecting as that becomes 100% of the in Oterra output. And also what is DDR4 versus DDR3 costs and gross margins? So first of all, I think it's important to recognize that Although, in Otterra's output will be the wafer starts will be about 80% by year end, it takes a while to sort of move those through the overall system and deliver them into the marketplace. And so you wouldn't get the full benefit of that 20 nanometer cost reduction as we move into our fiscal Q2. In terms of overall other overall factors, there is clearly continued pressure in PC DRAM. And as we've talked about, for some time, 20 nanometer doesn't get you to lower costs immediately whether for Minotera or out of any other fab as a result of startup costs and getting those ramped to scale. And then finally, DDR4 costs, which is getting to be an increasingly important part of the mix are clearly a little bit higher than DDR3 and that creates some pressure as well. So those are the general characteristics of the the margin trends there. Okay. And just as a follow-up, also on NAND flash, there was a conversion to TLC or can you say what percentage of your output was TLC versus MLC and Is that expected to help gross margins going forward? Our TLC output is about 10% plus or minus. We have more capability for upside volume if we so chose. That portion of the market has been super competitive, both in components and in TLC based client center SSDs. So we've moved some of our capacity that we initially targeted TLC toward some higher value sockets, which really has allowed us insulate against pricing pressure a little bit better than the market? I think longer term, though, fair to say that as we ramp 3 d, we would expect that penetration to begin to increase again. Okay, great. And all the best to Kipp and congratulations to Ivan. Thanks, Kevin. Thanks, Kevin. Thank you. Our next question comes from the line of Harlan Sur from JP Morgan. Your question Please. Hi, good afternoon. Thanks for taking my question. Assuming another year of relatively muted demand trends in DRAM in 2016, I mean, does it make sense to accelerate your move to 1x DRAM technology to drive acceleration in your cost curve? And I guess the same question potentially accelerating the move to TLC and 3 d NAND transitions within your NAND business because it just it seems like the team is continuously fighting this uphill battle on the cost front? We have said for some time that really it's absolutely imperative that we not necessarily have an identical technology profile to others in the market, but certainly now are the gap relative to the deployed advanced technology. That enables a couple of things. One is to make sure that we have timely introduction of the right products for our customers. But additionally, it makes sure that we don't have a situation in the marketplace that the competitors can take advantage of and drive increased market share due to a different profile relative to manufacturing efficiency So yes, we think it's strategically important that we narrow this gap. We're focused on it. And we believe that with demand growth, that we see in the marketplace, it can absorb that incremental capacity as we make those transitions as long as Others in the marketplace don't add too many incremental new wafers. Okay. Thanks for that. And then a better mix of enterprise and data center SSD. I think would drive a nice offset to the price aggressiveness you're currently seeing on the client side. So if you could just give us an update on your enterprise SSD progress. I know you talked about rolling out your data center M500 series. You also talked rolling out your 600 series with Seagate, how big is enterprise flash as a percent of your total NAND business? Can you just give us any view on the growth outlook for enterprise looking into calendar year 2016? Well, let me kind of set the baseline from where we sit today. Enterprise is relatively small, but the growth trajectory is pretty big. The 3 areas of investment we're driving today are continued focus on enterprise level controller and firmware. Obviously, driving the seagate product line to market in the SaaS category. And we're also investing very heavily in 3 d NAND drives for enterprise, which we will be sampling soon. The final piece for us is, I mentioned briefly in my comments Our components that we market to other enterprise players are probably the highest margin products we have in NAND because of the quality of NAND we manufacture. When you combine all that out, we're pretty bullish about enterprise going forward, and we will continue to invest as such. Okay. Thank you. Thank you. Our next question comes from the line of Monica Garg from Pacific Crest. Your question please. Hi, thanks for taking my question. I just want to delve deeper into the margin guidance for next quarter. The gross margins are guided like 600 to 700 bps lower Q over Q. Maybe could you walk on in detail it mainly on the DRAM side, the margins are going lower or in the NAND side? I would say it's more or on the DRAM side for all the reasons we've talked about on the course of the call. We expect NAND to be relatively similar to what we're seeing this quarter maybe a little bit sequentially lower, but it's DRAM is where the most significant movement is. And in the DM, is it mainly PC side or are you seeing that going now moving into mobile and the server as well? There's a continuum of performance. And as you might imagine, if you look at things that are closest to PCs, the enterprise space, maybe some of the cloud spaces that look a little bit more like PCs, those may be subject to some increasing price pressure as well. If you go to the mobile side, which is a little bit more specialized, that tends to be buffered somewhat. But generally speaking, as we talked about, the call, you see pressure throughout that whole sector. Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question please. Yeah, good afternoon guys. And my congratulations to Kipp and much. Thanks Ernie, I guess, from my perspective, I'd like to go back to the gross margin guidance for the February quarter. I think you did a good job kind of talking about the puts and takes. Do you think that the February quarter kind of represents the maximum quarter of pain on the cost side? And has improved there? And can you help me understand, as you look at 30 nanometer-twenty five nanometer DDR3 to 20 nanometer DDR 4, at equivalent yield, what's the cost down you would expect in that transition? Yes. So I do think from a cost perspective, that we've been talking for some time, about the fact that the 1st couple of quarters of this fiscal year were going to be the most challenging for us as we got everything lined up relative 20 nanometer and also on the NAND side. So, I think that without certainly providing guidance beyond Q2, I would say our expectation is that with increased bids out, we're going to see cost down that will be very helpful to us in the back half of the year. DDR4 has a bigger die size than DDR3, but the shrink gets you closer to parity. And also the production of 8 gig is also a big cost driver. So it's really hard to say specifically, but you're in the certainly in the same zip code, based on that comparison. That's helpful guys. And then, Mark, maybe as my follow on relative to the implied guidance for February, it doesn't look like interterra would be a accretive on February numbers. And maybe Ernie answered the question already, is the expectation by the time the Innoterra acquisition closes that some of these cost headwinds will become tailwinds. And hence, this is an accretive acquisition, or can you help me walk through kind of that dynamic? Yes. I think, and maybe Ernie wants to comment on this too, John, but I think the key point is that as we get a little further into the year. That 20 nanometer transition is driving some pretty significant improvements at Innovara. And And we expect it to be quite accretive to us right out of the chute once we close. Yes. And the only thing I'd add to that is that the bought of the CapEx spend for there 16 will already be completed. So, certainly, from a cash flow perspective, there's a lot of leverage there as well. Thanks guys. Thank you. Our next question comes from the line of Daniel Amir from Ladenburg. Your question please. Thanks a lot and good luck in your next life. Couple of questions here with regards to the EMC and the client SSD. Looks like those were areas of weakness here this quarter. Can you give a bit more clarity kind of where we stand at this point in the quarter and, specifically the EMCP given that the shipments were down 14% I mean, is this an area that you're going to still be focusing on as well? Thanks. Sure. On the EMCP category, there's really two dynamics going on. One of which is some market softness in mobile, which we identified earlier in my comments. The second piece is that is consistent with some other DRAM segments, the 20 nanometer transition puts us in a position where this was a heavy focus on qualifying at major OEM customers. Having said that, there's also one area of mix issues that relates to the high end and the low end doing better than the mid range segment of the market. So you combine all those 3 together and there's some pressure on EMTP demand, we're continuing to feel that as a place for our products focus, but, again, weighing that against mix and other opportunities. And the client, this is D side? That for us, as I mentioned earlier, we saw a very heavy competition in client SSDs driven by, low cost TLC products, both in the consumer and OEM market. And, we chose to move some of our capacity out of that market to higher value sockets and that allowed us to get kind of the most out of our capacity. And is that a trend that you're doing this quarter as well? I would say that without forecasting, it's something that, yeah, we see pretty consistent quarter to date. And we would as Mark commented, we're going to watch that while we position our 3 d NAND TLC out longer term because of the and cost advantages there. But today, we see other opportunities, as I said, for our NAND capacity, more high performing MLC capacity, that allows us to make that shift. Thank you. Our next question comes from the line of Steven Fox from Cross Research. Your question please. Thanks. Just a follow-up on those details. I was wondering if you could just sort of step back if we look big picture around some of your comments about the PC market as a whole stabilizing. What gives you sort of confidence on that happening over the next several months? And then similarly, given some of the weakness you're seeing in the mid range, especially in China, mobile market, again, what do you think that improves as you get further to next calendar year? Thanks a lot. Well, I'm not sure we send forecast out on either one of those as stated. We think that the PC market, the signs are that, gel inventory are leveling off bit better. Obviously, the inventory was low. If you look at it more specifically to our business, DRAM inventory in the channel with the exception of one player, one larger player, DRAM inventory across our channel is pretty low. So The demand seems to be flowing through and replenishment of inventory seems there seemed to be a dynamic in the PC space. So that's where that's behind our view world in terms of PC shipments. If you look at the data, while not stellar growth, certainly better than the first half of calendar year 'fifteen. On the mobile side, we still believe that these same dynamic goes on with smartphones, inventory is relatively low. And the other side, if you look at the configurations that are coming out for holiday and beyond, the memory content per unit is going up nicely in our favor. Yes. So it's all about for the mobile phone place market segment, it's really all about what's the weighted average content. And we still see notwithstanding some of the weakness in pretty reasonable growth in aggregate for the smartphone business. Great. That's very helpful. And then just a quick follow-up. Similarly on just sort of enterprise side. I think you talked about a little bit of competitiveness. You're not the only ones to talk about that on SSDs in the last couple of months. Is there a reason to believe that that sort of is temporary in nature from a demand side, putting aside some of the supply issues? I think overall, we the penetration in enterprises is so low that we think It's likely that there that tends to be a better market going forward. And we're going to invest as such, some of our competitiveness comments are really more around value segment consumer and channel SSD type products that are really driven by kind of a cost approach in that performance approach. Thank you. Our next question comes from the line of Doug Freeman from Stern AG CRT. Your question please. Great. Thanks for taking my I guess a lot of questions have been asked on the gross margin side, but if I could get a little bit of color around the revenue we're looking at a revenue decline quarter on quarteror9percent@themidpoint. What are the pieces that are driving that I'm looking at sort of the bit growth side here and just struggling to come up to see to align your longer term bit growth outlook with what's going on in the near term. So if you could help me understand what are the pieces to the top line, that would be helpful. So I don't think it's too dissimilar story from the discussion we had about margins, which is, for the 1st couple of quarters of this fiscal year, our bid growth is going to be limited. Now we are growing bids. However, the face of some of the pricing pressures that we've seen in PCs or PC DRAM space, etcetera, that is not enough to overcome, the bit growth doesn't quite overcome the pricing and that leads to the revenue circumstances. As you heard, both Mark and Mark speak about today, in terms of those things that are going to drive our bit growth in the second half of this fiscal year and into fiscal 2017. Those are still well on track which would be the full deployment of 20 nanometer throughout the DRAM space as well as the 3 d NAND conversion. Yes, Doug, let me just add, as we do this substantial ramp of 20 nanometer, we have a lot of new products to qualify as well And so getting complete certainty as to exactly when all those products are going to qualify and when we will ship that product, is difficult, although we have complete confidence, that we will qualify them and that they will be delivered. There's that dynamic in that aspect as well, which is, associated with ramping a lot of new products simultaneously. I guess for my follow-up, if I could, a little bit of a 2 parter. I just want to make sure I understood. You said your DRAM bit growth would be above industry average of low 20s, was that for the calendar year or your fiscal year? And then when I look at these transitions that you're going through like 20 nanometer. One of the things I think investors struggle with is that your results tend to we're seeing a much greater oscillation at Micron and sort of the financial performance than we do in your peers over at Samsung or Hynix. And yet they go through these same transitions why is it that we're seeing such a greater impact to the financials here than we see at your peers? So, a 2 part question. I, relative to the first part, yes, it's a calendar reference and it's weighted in the back half of the calendar year. Although we've told you that fiscal Q3 should be a significant step up. Relative to the impact on financial performance, I'm going to let Mark comment on that in just a second, but I would make the point that this just sort of reinforces, why we need to accelerate, the introduction of these tech notes because we have fixed operation and operating expense and in an environment where we're generating less gross margin because we're deploying less advanced technology that takes a bigger bite out of the, out of the net picture. Mark, do you want to Yes, just one other comment. We've communicated all along for many years that as a percentage of our capacity, we sell and market our products into much higher value segments. If you look at ASP per gigabit in DRAM, for example, We've been a market leader in that for as long as I can remember. And when you're not in that model, meaning you're in ramp stage and you're driving these products into lower value segments, the volatility and pricing will have a much bigger impact on margins during that time phase. So, Doug, just In summary, we look at all of this as opportunity. And, certainly, we think we can do better and we intend to do better. Great. Thanks guys and congratulations, Kipp, on a very long lasting career. Thanks, Doug. Thank you. Our next question comes from the line of Timothy Arcuri from Cowen and Company. Your question please. Thanks a lot. I had 2. I guess, the first question is on the Don Leon, and that's from Intel. I think that happened on the 20th October. So you really haven't talked publicly too much since that. And there's still a bit of confusion out there. I guess we understand that you're basically ramping the fab there. And for all intents and purposes, you're sort of operating it. I guess my first question is, do you have any rights to the output of the fab and do you have the option to invest in the fab? And then I had a follow-up. Thanks. So, Tim, we are not operating the fab. We are not ramping the fab. Intel is our partner and we are helping facilitate the deployment of the technology to that fab. So, that relationship remains healthy. And we we would expect, that as Intel progresses with their ramp of the manufacturing technology there. At some point, we will have more discussions about whether it makes sense for increased collaboration at that site, we're not involved today. Okay. Thanks for that, Mark. And then I guess the second question, I think John asked a question previously about cost and whether the headwinds start to wane after the after this current quarter. And it sounds like they do. And you should get a little bit better TC pricing environment per, I think, Mark, your comments well. So I guess my question is, is it fair to say that the February quarter is the bottom in gross margin if you sort of assume those two factors? Thanks. Well, yeah, again, we got to stay away from or we are going to stay away from projecting ASPs for you. But in terms of our internal operational leverage, we think things get a lot better in Q3. Thank you. Our next question comes from the line of Vijay Rakesh from Mizuho. Your question, please. Yes, hi guys. Thank all the help and Ivan, congratulations. I had a question in Oterra here. What percent of the 20 nanometer output at the in Oterra STDR3 was DDR4 today? And at 20 nanometer also, is the DDR4 cost still higher than DDR3? I don't have the DDR3 DDR4 mix by fab. And I think we want to stay away from giving you that fab specific information anyway. And sorry, the second part of the question was DDR4 crossover? Yes, is there any time that DDR4 cost higher than DDR3? 20 nanometer DDR4 cost. Yes, we commented on that a little bit earlier, not at 8 gigabit, but, we would expect that as we ramp up and crossover that we will be at parity and actually see some reductions. But if present, it's fair to think about it as a headwind for us. Got it. And on the 3 NAND side, I know you mentioned 2nd gen 3 NAND kind of in second half 16. Is that kind of a 64 layer, 39? And just as a background, what percent of output today is on 3 d? I know you said you shipped some here. We haven't said, what our Gen 2 technology looks like exactly, but you can count on it being a significant improvement in both good density and cost. And sorry, the second part of the question percent of 3 d. Oh, percent of 3 d. It's relatively small today, but ramping fairly aggressively. And again, as we get into, the second half of next year will actually be into the new fab expansion as well. So it'll really take off then. Got it. Thanks a lot. Appreciate it. Thank you. Our next question comes from the line of Hans Mosesman from Raymond James. Your question please. Thanks. A question on the 3 d Crosspoint. Can you give us a little more flavor? I forget if you actually commented so far on the call regarding this, but can you give us a sense on the ramp and is there a change in the and the nuance of the opportunity as being used in, as main memory or as storage? Thanks. Well, I think it targets both, main memory and storage applications over time. Probably a higher value, in the near memory than in the storage applications, but could be targeted at both. We're really more than enablement mode as opposed to a significant production ramp today, but we think the revenue does become significant out in 2017 and more so in 2018. Okay, great. And K Kipp, we're going to miss you. Comes from the line of Mark Newman from Bernstein. Your question please. Hi, thanks a lot. I wanted to ask a question again on 20 nanometer ramp. So it seems like from the comments that schedule is ramping pretty much in line with what you were saying, about half of production within the May quarter. But based on this gross margin guidance, again, it's coming down quite a lot. It seems like the cost isn't quite performing at least not in FQ2 yet. So I'm wondering is this because of, poor yield than expected on 29 nanometer. Is there any difference in the yields on 29 nanometer than your expectations? Versus previous nodes? Or is it just that the 20 nanometer that you are starting to produce, which I assume should be a should be fairly significant portion in FQ2, is really being held more in inventory and so really impacting the top line and the cost? There is a dynamic that ramp new technologies, you have to get those products qualified. So they don't necessarily always flow out to the customer quite as quickly. So there is an inventory dynamic that you're referencing. I think the bigger issue is that when you're ramping new technologies, it just takes a while to get the tools ramped and loaded and get that output out. The and the cost reductions do come. They just don't come quite as quickly as people anticipate. We are on track or slightly ahead of where we expected to be from a yield perspective. So everything is progressing nicely there. Obviously, ASPs are a lot lower than we thought they were going to be. So as we look forward to the back end of the fiscal year. So if you look forward to FQ3, the May quarter, then we should see a much we should see some of this cost decline when it happens. I think that's probably fair to assume. And can we assume that the previous guidance for the cost decline from 20 nanometer that you guided as earlier, what is still intact, but just more back end of this as fiscal year and rather than the front end? Yes. Yes. I think we've said for quite a while, Mark, the fiscal Q3 is when you should really start see the impact between an animated ramp. And all the guidance we've given, over previous quarters, I think, is still on track and intact. Okay. Thanks very much and a special thanks to Keith and congrats to Ivan. Thanks, Martin. Thank you. Our next question comes from the line of Ian Ng from MKM Partners. Assumptions on keeping mobile DRAM in supplied demand balance this next year. I mean, there's a lot of unit variability at the big OEMs that give how that plays out, would you ever consider not trying to overship the industry? Well, certainly, look at that dynamic. Our view of the world is that even with that variability that you're projecting, there's a content increase per device that we feel comfortable mutes that out. And so we think over the long run, mobile is solid. And again, we're taking a look at all of market segments and there's a networking, we think will continue to be a good market for us. Hyperscale servers as well. So there's some balancing we'll do in general, but all in all, we think mobile's a good place over the long run. Okay. Thanks. And then in the DRAM server market, I mean, you talked about some pricing pressure. Could you talk more about the sources of demand and service side the next few quarters. There are some mixed signals out there. You've got some suppliers talking about enterprise being stronger than cloud customers. I mean, any workloads that you're excited about the next few quarters? All in all, I'd say the enterprise market of the 2 appears to be more favorable for us. Data Center is a little bit more commoditized. Some of the data center materials sometimes can be consumed with high end PC grade material. But overall, we think that the projection for the market and servers gets us into a pretty good growth environment. And, as we look at that server, again, like mobile, we have a good market for us. We're not, we don't think it's it's a challenge for us as far as adding growth in the bits to that segment. Thanks. And Kipp, congratulations. And thanks for helping us all out in your career. Thanks. Yeah. Thank you. And operator, we've got time for just one more question, please. Certainly. Our final the line of Rajvindra Gill from Needham And Company. There have been some recent reports that a major competitor of yours could have 18 nanometer DRAM by the 2nd quarter calendar second quarter of next year. Given the transition to 20 nanometer this year and next year, how do you think this impacts your competitive position in the overall market from a supply demand perspective? That's a relatively, muted step from 2018. And relative to that particular competitor, think there are also some architectural changes that will cost them some array efficiency. So we believe that notwithstanding the fact that other competitors will continue to migrate their technology at a more muted pace on a go forward basis. We will continue to narrow the gap. And it's just switching gears to the Innovara. How does the, the Innovero buyout affect your CapEx plans? And will the company plan utilize Inotero's cash flow for non DRAM products such as 3 d X point. Is that also one of the purposes is a bit difficult? What we talked about in the announcement that was on average, you'd expect to see, in a terra add somewhere around $800,000,000 a year to our CapEx that we've previously discussed. And the reality is cash is fungible. So it will add cash flow into the company and the company will direct that cash flow where it sees best. So the idea of specifically saying that cash flow would be used for 3 d cross point as sort of a mute issue. And unfortunately, we're out of time today, so we'd like to end the call now. Thank you everyone for your participation. If you please bear with me, I need to repeat the Safe Harbor projection language. During the course of this call, we may have forward looking statements regarding the company and the industry. These particular forward looking statements and all of our statements that may have been made on the call that are not historical facts are subject to a number of risks and uncertainties, and 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 ten Q and 10 K. Thank you, everyone. Thank you. Thank you. This concludes today's Micron Technology First Quarter 20 16 Financial Release conference call. You may now disconnect.