Well, good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets, and we are pleased to have Mark Murphy, CFO, and Samir Patodia, IR, from Micron. Welcome, guys.
Thanks, John.
Thanks, John.
Good to be here.
Hey, Mark, maybe, you can kind of kick us off by just kind of giving us an update of just demand trends that you're seeing across your key end markets for now.
Sure. Maybe I'll just start with a general, general opening, cover the market. First, start with safe harbor. I'll be making forward-looking statements. Those statements have risks and uncertainties associated with them. I refer you to the risk factors disclosed in our public filings. You know, our current quarter, let's say August or Q4 , is tracking consistent with what we communicated in our June earnings call. Pricing and volume trends are, are generally, consistent with our expectations. Growth is happening in bits and bytes across DRAM and NAND, as we said it would, sequentially. We continue to execute well, and that's, and that's with both good cost and CapEx discipline. On the outlook beyond the quarter, it's also, there's no update from our June earnings call.
Industry demand, we expect to increase through the calendar year. Customer inventories continue to improve. Supply cuts have been made across the industry and, you know, our call and subsequent calls in the industry have all pointed to continued supply discipline, which is a positive. The supply-demand balance is improving. Supply is slowing, and, and demand continues to increase. As a result of this improvement, we do expect price to inflect in the second half of, of the calendar year. We're seeing pockets of that already. You know, putting HBM aside, you know, you're seeing that in, in DDR5 products and some other areas. You know, and we have said that, you know, we do believe that recovery will occur, you know, over the next-- you know, steadily over the next period.
Then we expect to have, you know, record TAM for the industry in CY '25, with more normal levels of profitability. Now, you know, Micron specifically, given the CAC ban on the use of Micron products in critical information infrastructure in China, that ban is weighing on our results. You know, we are not updating our disclosure and, or our exposure, and also we just continue to work to mitigate that risk. You know, so the market is bottoming out. There are certainly signs of improvement.
John, I was here last year, and we had, we had done an 8-K, you know, with a guide down, as a result of, you know, the early stages of the downturn, and if you remember, we were one of the first. Certainly, at that time, the worst was ahead of us, and we, we were saying that. This time is different. I mean, the signs now going forward is it's, looks like a recovery, and, you know, we're gonna continue to monitor supply, as we've done, and manage our costs prudently, as we've done. We've continued to innovate, of course, and position ourselves well for the recovery. We've been doing a lot of work around data center. There were 2 announcements we did just in the past few weeks.
One was related to some CXL technology, the CZ120 memory expansion modules that we did for CXL. We provided more color and did a release on our HBM3 Gen2 product, which, you know, is gonna be... You know, both those products highlight our position and technology and importance to the market. Also around data center, as we talked about on the call, we're introducing LPDDR into the, into the data center, which is a novel application given the power intensity of the, of the, of the markets. We're also doing high-capacity DIMMs, so got a good product portfolio progress there. As market conditions continue to improve, Micron is very well positioned.
In fact, we've, we've never been better positioned. We've got leading technology, and our 1 beta process node is a great example at, you know, we're gonna build on our DDR5 leadership. HBM will be built on that. It's very strong node. That technology leadership has allowed us to develop great product breadth and the best products in the business. HBM, we believe, is by far and away the best product that will hit, you know, will be in the market when it, when it ramps. Then our manufacturing excellence is clear. Our yield's very good. On 1 beta and 232, we achieved mature yields faster than any other time in the company's history. It shows the efficiency of our operations. Good shape.
We, we, as we look to this recovery, again, we couldn't, couldn't be in a better position, we believe, and we have great confidence in our through cycle model, growing above the broader semiconductor industry and free cash flow margins over 10%. As far as, you know, John, your, your comment about the markets, yeah, really no update. You know, we did say that, we saw smartphones being down, mid-single digits in the calendar year. There have been some reports of smartphones being a bit weaker. We're not adjusting our numbers, but we, we do see the, the, the weakness in that market. We were, we were clear that, you know, it's gonna take some time, you know, more time for the inventories to clear in the data center market.
You know, you know, we expect those inventories to be cleared by the end of the year or soon thereafter. You know, it's just a case principally of, of, you know, the inventories are in good shape in PC and smartphones, so it's just a case of demand coming back. In the case of data center, it's, you know, working down those inventory levels. There's been some crowding out of spend, probably related to the training server activity, but that'll pass, and that demand will broaden out. We think that, that, that we're gonna see things in a good place near, near the end of the calendar year into early next year. Some other markets are, are doing well. Automotive is doing well still.
We had a very good position there. Really no update from, from our June call.
Great. Well, thanks for that overview, Mark. Maybe you can touch on supply. You know, obviously, I think you had predicted kind of early on this year that it was just a matter of time before the industry would have to cut back on capacity, just given the oversupply situation. I think you're absolutely kind of dead on there. Given that both of your peers have announced reductions in capacity, you guys have also announced reductions in capacity. Is that enough to kind of support kind of the recovery that you guys are envisioning, or does there still need to be more capacity taken offline here?
It, it all depends on, on how the, how the market develops, of course. But I will say that it's been encouraging that there's been broad-based supply actions at this point. As you mentioned, we led the industry. We acted very early on supply, taking action, you know, around your conference last year. And we've steadily increased the supply response through the year. Again, it's been encouraging to see the whole industry doing it because it fundamentally, the industry is not in a healthy place at the moment. You're seeing, as a result of that broad-based supply response and recent indications of continued discipline around that, you are seeing the, the, the, you know, early signs of a, of a, of a recovery.
I mean, we're seeing price declines have begun to slow, and we're, as we said on the last call and this morning, we're seeing price inflect in our outlook. We don't, do not expect any more inventory write-downs. You know, I think it's just important that, you know, there's still, there's still a decent amount of inventory to work down in the, in the system, or, you know, by, by the, producers. Select parts of the supply chain have still got inventory, so we need to work those inventories down. Utilization still needs to be brought back up, so there's ample supply ready.
It's just important that, you know, that we all, you know, that there's an awareness that the supply, response needs to be, you know, continue as it's, as it's been done.
Great. Maybe we can touch on China. I think on your last call, you had updated the potential exposure from the China CAC ban to be kind of low double digits. I know Sanjay said that, you're aware that, the government in China and some of the telcos were having conversations with some of the China smartphone OEMs. I just wanted to clarify, does that low double-digit exposure contemplate that some of the Chinese smartphone OEMs are buying memory away from you? You'd also talked about potentially finding kind of a new home outside of China for your capacity. Maybe just give us an update on, on how that's progressing?
Sure. Not much has changed here since we did an 8-K prior to earnings on, on the CAC exposure. As you mentioned, we've identified what we believe is at risk, equates to about half of our China direct and indirect headquarter company sales. You know, so that yields about, you know, 12.5% or so of what we view as a risk. We're managing that best we can, working closely with our customers, and, you know, monitoring the situation. It, it continues to evolve, and it's challenging, of course, 'cause the market's not tight. You know, but we, we will, we will continue to work that.
That, you know, our, our view of the exposure, or what, what is, you know, being realized in our results, is reflected in our guide, and our comments. We've, we've had, you know, we've had no update since, since, since the 8-K. There's nothing to update. You know, as you mentioned, on smartphones, we did call out smartphones specifically in that 8-K, so we're seeing some activity there. Again, I think, you know, it took us a bit of time to get a good read on the exposure and how, how we're gonna mitigate that and how it may play out. I think you'll see that we just- we've not updated that disclosure since, since that 8-K.
We don't see any difference from that view at this time.
Great. Are there any questions? What have you learned in, I think, this last year? It seems like there's just been a lot more. It's been softer than you might have thought it would be. Is it just your competitors have not cut back on capacity yet, or is it just there's just way more inventory out there than anybody thought in the system? Secondly, what had happened to HBM and stuff? Why aren't you guys are behind there, and what are you actually doing to catch up? What this new product, what is the advantage here?
Sure. Good, good questions. I think that, you know, on, on the first one, you know, if you go back to last summer, it was an extremely unusual period. You know, you had this demand shock, you know, related to, you know, the fact that demand had been sort of overstated or, or unusual during COVID. That fell off very dramatically as consumer spending shifted and as the economy weakened. You had an extreme demand shock that was then amplified and additional supply chain turmoil through, you know, the war in Europe and China, you know, reopening and it was just a lot of, a lot of effects at that time. The industry got out of balance and severely so.
I think, you know, the, the sort of direct response as well, that, that shouldn't have happened, but the fact of the matter is, is it was an extremely unusual period. I think the, the interesting thing to think about is that the is that the industry, in a downturn, responded very differently than it would've, you know, in previous severe downturns. If you go back 15, 20 years, the industry would have shed inventories, would have continued to invest in the latest nodes because they needed the cost downs, and, you know, and that would have, you know, and that had disastrous consequences on the, on the, on the industry.
What's happened this time is that all the players built inventories because the cost downs on products are harder to achieve, the inventories will last longer. Building up of the inventories allowed all of the competitors to, or all the, the producers to drop their supply, and cut CapEx and, and, and fix structurally the supply issue. That's happened, and it's happened broad-based.
I actually think it's encouraging how the industry responded, and it's, I think it bodes well for the future, because in the end, if you've got more ability to be thoughtful and circumspect about capital spend, and you can, you know, flex inventories, and you can be mindful of your CapEx spend, and you can actually modulate nodes, node advancement a bit, that provides more flexibility on the supply side than there used to be. That's also especially helpful because the demand side is broadened out. And that'll get to the HBM question. In previous spent big downturns, it, you know, it was largely a consumer-driven market. Well, consumers on consumer-driven markets are well under 50% now.
You've got data center that's growing, you've got automotive is, you know, you know, is over 20% of our business at this point. You've got more durable and broader growth in memory than you've had before. You know, and, and, and, and so, yeah, that's, that's I think what was-- you know, it's been-
In the future, prices are going down, the inventory is at this dynamic happening, the downturn won't be as deep as it might be longer because everybody's building inventory.
Well, I, I don't think you can necessarily conclude that. I think, I think ultimately what you get is a better supply-demand matching, and you get better capital returns over time. Ultimately, that's what matters: better capital returns, better free cash flow generation over time. On HBM, we're really excited about this product. You asked specifically how we got here. Micron, actually, it's not that we couldn't do the product. We actually, you know, had gone down a different path. We had created a product called Hybrid Memory Cube, and this goes back, I think, five to seven years ago. Some would argue it was the better product, but in the end, the standard ended up going to HBM, and we found ourselves behind.
Now, we have an HBM2 product, and that has revenue, and we've learned a lot in that product. We've really focused our efforts on, on the HBM3 Gen2 that we're sampling now. Yeah, this product is built on our, you know, fundamentally our 1 beta node, which is a exceptional node. You know, over 35% greater bit density than, than 1 alpha. Over 15% better power consumption than 1 alpha. It's a fantastic node, and our HBM Gen 2 is built on that. Now, our HBM Gen 2, it's got, you know, 2.5 times the performance per watt improvement versus what's out in the field now. The bandwidth is 1.2 TB/s pin speed, and pin speed is 9.2 Gbps.
That's 50% better than what's in the, in, in the industry now. Then the product can lead to reducing train times 30%. There's a, a very strong, you know, total cost of ownership benefit for, for the customer. We've got excellent customer engagement. We, you know, we believe we're going to have a groundbreaking product when it, you know, when it ramps, then we are working on the next product. We are, you know, I think we're in very good shape to take advantage of this. I think it's important. We've a lot, you know, folks focus on HBM for data center, but let's keep in mind, data center is, is sucking up a lot of different products.
There's HBM, of course, which is very high profile, and that has a specific need in, in certain, you know, AI-related data center servers. You've got still a lot of DDR5. You've got now LPDDR being introduced into data centers, given the better power efficiency. Of course, we've got high-capacity DIMM. You've got a lot of silicon that's gonna be going into, you know, data center servers for both traditional servers eventually, 'cause you need to offload this compute. At some point, it's gonna generate more workloads, traditional servers will pick up at some point again. Of course, training is hot now, but eventually, you know, there needs to be an inferencing build-out. We're really excited about the market and feel great about our position in the market.
Great. Thanks, Mark. Just to follow up on that, what revenue contribution could HBM be for you next year as it's kind of ramping? You obviously sound very confident about your position there. What market share expectations do you have when it's fully ramped? Obviously, you know, a lot of investors really want to better understand kind of your positioning in AI once you've got these products in the market. How, how does the content of an AI server compare to a traditional server?
Yeah, a lot of questions there. Maybe take the last one first. The because of the processing requirements in these AI servers, there's a lot more memory required. The exciting thing is, as the number of parameters increase, which they will, because the parameters determine the accuracy of the application, you know, as those number of parameters increase, there'll be a correlation with the amount of memory required. You know, there's gonna be more and more memory required, and right now we've said that, versus a traditional server, it's six to eight times-
Yep.
For DRAM and 3 times NAND. You know, we expect HBM revenues to ramp through, you know, increasingly through the back half of next year, and we think it'll be material revenues. We believe that we will get more than our fair share of, of, you know, HBM. In other words, we, we believe our share will be greater than our share of the DRAM market.
Mm-hmm.
Yeah, and I think that follows, given that, you know, we do believe that we will have the, the greatest you know, the best technology in the space, that's built on the best process technology in the space. You know, these are, these engagements with customers are very intimate and, you know, require a lot of close collaboration, so we feel very good about our position next year and in the future.
Great. Looks, looks like we're out of time. Thank you, Mark.
Thanks, John.
Thanks, Mark. Thanks. Thanks, Mark.