Micron Technology, Inc.

Good afternoon.

My name is Brian. I'll be your conference facilitator today. At this time, I would like to welcome everyone to Micron's first quarter 2019 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer period. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host Rahat Ahmad, head of Investor Relations. You may begin your conference.

Thank you. And welcome to Micron Technologies first fiscal quarter 2019 financial conference call. On the call with me today are Sanjay Mehrotra, president and CEO, and Dave Zinsnow, chief financial officer. Today's call will be approximately 60 minutes in length. This call, including audio and slides, is also being webcast from our investor relations website at .micron.com. In addition, our website contains the earnings press release filed a short while ago. Today's discussion of financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website, along with the convertible debt and GAAP call dilution table. As a reminder, the prepared remarks on this call and webcast replay will be available on our website later today. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on various financial conferences that we will be attending. You can also follow us on Twitter at microntech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, specifically our most recent form 10-K and form 10-Q for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after today's date to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. In the first quarter, we demonstrated solid execution, further improved our balance sheet, and began executing on our $10 billion shared buyback program. We delivered strong profitability despite revenue headwinds from the inventory adjustments at several customers and industry-wide CPU shortages. Our results also reflect our success in further diversifying our business, as evidenced by record sales in our mobile, automotive, and industrial businesses in the quarter. As we enter calendar 2019, we are seeing weakening demand from our customers. As a result, we are taking decisive actions, including a meaningful reduction in our fiscal 2019 CAPEX plan in both DRAM and NAND that will materially reduce our supply-based growth. I'll provide more details on these items later in the call after first reviewing the highlights of the quarter. I'll start with our execution progress. We are focused on improving our cost structure and increasing the mix of high-value solutions in our portfolio, both of which provide immediate benefits and strengthen Micron's ability to drive long-term profitable growth. Our cost reductions in DRAM and NAND have meaningfully outpaced the industry over the last three years. Our progress on advanced technology gives us confidence that we will deliver healthy -over-year cost declines in DRAM and NAND in fiscal 2019, even after taking into account the supply and CAPEX changes which I referenced earlier. In the first quarter, we achieved crossover of 1x nanometer DRAM shipments and started revenue shipments of 1Y nanometer products. Our 1Y yield ramp is ahead of schedule and we remain on track for meaningful production by the fiscal third quarter. We are also making excellent progress on our 1Z technology which leverages our leadership in advanced materials and cost-effective lithography techniques. In NAND, we continue to lead with our QLC product offerings and have introduced both consumer QLC NVMe SSDs and enterprise QLC SATA SSDs. In the first quarter, we started shipping 96-layer NAND products. Yields on 96-layer are ahead of plan. We remain focused on increasing the mix of high-value solutions in our portfolio and investing in differentiated products for our customers. In DRAM, we introduced our 1Y nanometer 12 gigabit low-power DRAM which offers the highest density available for the mobile market. We are seeing strong demand for this product as the market continues to move toward higher densities. In NAND, high-value solutions now represent over 50% of our NAND bits which is an important milestone for us. The improving mix of high-value solutions increases our gross profit opportunity and provides better margin stability. The strength of our high-value solutions this quarter which was driven by managed NAND products helped us maintain overall NAND gross margins above 45% despite industry oversupply. We strengthened our number one share position in SATA Enterprise SSDs, gaining about three percentage points of market share sequentially according to industry reports. In addition to the QLC consumer NVMe SSD mentioned earlier, we also introduced the industry's first one terabyte TLC NVMe automotive SSD in the first quarter. We are working to further expand our NVMe product portfolio and plan to introduce SSDs targeting client, enterprise and cloud markets through the course of calendar 2019. Looking ahead, we expect the SSD market opportunity will continue to shift from SATA to NVMe. Fiscal 2019 will be a year of transition for our SSD portfolio and we expect our SSD share gains to resume in fiscal 2020. In the meantime, the growth of our high-value NAND solutions in fiscal 2019 will be driven by our mobile managed NAND products where we believe we have significant opportunity to increase share. In the first quarter, we shipped multiple high capacity, high performance UFS solutions, nearly tripling our bid shipments quarter over quarter. We continue to make good progress in developing high-value solutions using our 3D cross-point technology and plan to introduce differentiated products toward the end of calendar 2019 as previously discussed. Our conviction in the opportunities ahead is reflected in our October announcement that we intend to exercise our option to acquire Intel's interest in the IMF-T facility in Lehigh, Utah early in calendar 2019. Now turning to end markets, I will start first with mobile where we set records for revenue, growth margins and operating margins in the first fiscal quarter. In addition to strong seasonal sales, we benefited from major product wins with several customers which is driving our managed NAND share gains. We are seeing strong demand elasticity in this market and within our MCP portfolio, our average NAND density was up over 25% sequentially and over 150% year on year. Content growth also continues to do well in mobile DRAM with more than 25% growth in density per unit shift on a year on year basis. We expect content growth to continue in mobile devices driven by broader use of artificial intelligence and the increasing number of cameras in the average smartphone. These elements will become pervasive while the industry readies for 5G implementation. In data center markets, we saw reduced revenue coming off a record setting fiscal fourth quarter due primarily to inventory adjustments at our customers. We expect this headwind will persist for a couple of quarters. We are seeing some cloud customers go through a digestion period following very strong growth over the last two years. We believe we are still in the early innings of cloud growth and longterm and customer demand trends remain strong in this market. Our engagement with our customers continues to be deep and now includes collaboration on our 3D cross point product roadmap. Higher density DRAM products are seeing stronger demand across the data center market. Revenue from our high density 64 gigabyte DRAM modules grew more than 50% quarter over quarter. We are focused on the upcoming industry transition from eight to 16 gigabit DRAM and expect to start sampling our new 16 gigabit DRAM by our fiscal third quarter. In graphics, we started volume ramp of our high performance GDDR6 memory and are working closely with our key customers in this segment. Higher than normal inventories in gaming cards and a fall off in crypto related demand created revenue headwinds which we expect to continue for a couple more quarters. Looking ahead, we see broadening interest in high performance graphics memory for our customers and we are looking for AI enablement in segments like data center and automotive. Our product leadership in GDDR6 is already creating new opportunities in these segments. Turning to markets requiring our long life cycle products in the fiscal first quarter, we had record revenue in auto and industrial markets with a sequential expansion in gross margins. Strength in automotive continues to be driven by increasing demand for in-vehicle infotainment and advanced driver assistance systems. As a result, we see strong demand for our latest generation of automotive products. In November, we announced a collaboration with BMW to define and validate next generation automotive solutions. This is another proof point of Micron's leadership in automotive and the growing criticality of memory and storage to leading edge automotive applications. Turning to our DRAM industry outlook, as I have mentioned previously, DRAM demand weakened through the course of our fiscal first quarter. Since the start of this fiscal second quarter, the weakening demand trend has continued and our near term visibility is limited. Due to a lengthy period of rising DRAM prices, we believe some of our customers had decided to carry higher than normal inventory levels. And as DRAM supply caught up with demand, these customers are bringing down their inventory levels. Smartphone unit demand is also continuing to weaken, particularly at the high end in what is seasonally slow quarter for mobile. Lastly, we are continuing to see the impact of CPU shortages. While our customers end market demand in segments like industrial, cloud, enterprise, and client compute is healthy, this inventory adjustment period will contribute to weaker demand conditions in DRAM that will likely persist through the first half of calendar 2019. We now expect DRAM bid demand growth for the industry in calendar 2019 at approximately 16%, compared with our prior expectation of approximately 20%. Even after factoring in the recent capex cuts publicly announced across the industry, DRAM supply growth is tracking above our view of demand growth in calendar 2019. Given this supply demand dynamic, we are taking decisive actions to lower our DRAM bid output growth to approximately 15% for calendar 2019, versus our prior plan of around 20% bid growth. These actions include a significant reduction to our capital expenditures in fiscal year 2019. Based on our current demand estimates, our DRAM bid shipments for the fiscal second quarter will decline sequentially, but more importantly are likely to be flat to down on a -over-year basis as well, consistent with a weak quarter for the memory industry and significantly below the long-term demand growth rate. This shows that inventory adjustments by our customers are well underway. Barring weaker macroeconomic conditions, we expect our DRAM bid demand to grow sequentially in our fiscal third quarter. Looking beyond fiscal Q3, as we enter the second half of calendar 2019, we expect a healthier demand environment alongside an improved industry supply picture, which should contribute to improved financial performance. In NAND, while the inventory levels at customers are in better shape, NAND suppliers appear to have elevated levels of inventory. The transition from planar to 3D NAND in the industry and successful ramp of 64-layer across the NAND manufacturers has resulted in oversupply in the market over the last several quarters. We currently expect calendar 2019 NAND industry bid demand growth to be approximately 35%, with ongoing impacts due to client compute CPU shortages and weaker high-end smartphone unit demand. Even after taking into account recently publicly announced NAND capex reductions for calendar 2019, our assessment is that the NAND industry supply growth will exceed industry demand growth in the coming calendar year. We are therefore lowering our 2019 planned NAND bid growth and further reducing our fiscal 2019 NAND capex. We now expect our calendar 2019 NAND supply bid growth to be meaningfully reduced from prior expectations and expect our bid shipment growth to be in line with the industry demand at approximately 35%. We also expect NAND demand to accelerate in the second half of the calendar year as demand elasticity kicks in for the mobile, enterprise, and client markets. Given our attractive cost structure on leading edge NAND and DRAM, in this market environment, we will manage pricing and carry inventory as necessary to optimize our profitability. We are taking decisive action on the supply side to manage our business in a prudent fashion with an eye towards delivering a robust return on our investments. Our actions will significantly reduce our fiscal 2019 capex and allow us to continue delivering strong profitability and healthy free cash flow while investing in our strategic priorities as we position Micron to carry out our investment strategy. We are also capitalizing on the exciting growth opportunities for the company. I'll now turn it over to Dave to provide financial details of our fiscal first quarter and guidance for the second quarter.

Thanks, Sanjay. Micron delivered strong results in our fiscal first quarter, including double digit year over year growth in revenue, gross profits, and earnings per share. While our near term outlook has become more challenging, the actions taken to improve our cost structure and increase our mix of high value solutions will ensure that our profitability profile remains strong. Moreover, Micron's financial position remains healthy with an improved net cash position and with total liquidity reaching our target levels. Total fiscal first quarter revenue was $7.9 billion, up 16% from the prior year, and down 6% from the record fiscal fourth quarter. Revenue was adversely impacted by inventory adjustments at key customers in the cloud, graphics, and enterprise markets. Offsetting these headwinds, we delivered record revenue in the mobile, industrial, and automotive markets. DRAM represented 68% of total company revenue in the fiscal first quarter. DRAM revenue increased 18% year over year and declined 9% from the prior quarter. On a blended basis, DRAM ASPs declined high single digits percent compared to the prior quarter while shipment quantities were relatively flat. Trade NAND revenue represented 28% of total company revenue in the fiscal first quarter. Trade NAND revenue increased 17% year over year and declined 2% quarter over quarter. Our overall NAND ASP declined in the low to mid-teens percent and shipment quantities increased in the low to mid-teens percent compared to the prior quarter. Now turning to our revenue trends by business unit. Revenue for the compute and networking business unit was $3.6 billion, up 12% year on year, and down 17% quarter on quarter. The sequential decline was driven by the impact of inventory adjustments at some of our customers in the graphics, enterprise, and cloud markets. The mobile business unit delivered a strong quarter with record revenue of $2.2 billion. Revenue increased 62% year over year and 17% from the prior quarter. Revenue growth was driven by the continued strength of our low-power DRAM offerings and share gains in our mobile managed NAND business with several leading handset customers. Embedded business unit revenue of $933 million was up 12% year on year and up 1% quarter on quarter. The automotive and industrial businesses had record revenue driven by strong sales of our DRAM and NOR products. And finally, turning to the storage business unit or SBU, fiscal first quarter revenue was $1.1 billion, down 17% year on year and 8% quarter on quarter. The sequential decline in revenue was driven by weaker pricing and the ongoing transition from SATA to NVMe SSDs. The impact of this transition will continue through calendar 2019. Our strategy to move bits from SBU components to high-value solutions in mobile is also contributing to a decline in revenue for SBU. The consolidated gross margin for the fiscal first quarter was 59%, up 360 basis points from the prior year and down approximately 230 basis points from the prior quarter. This includes a 120 basis point impact from 3D cross point underutilization costs. During the last few months, we successfully leveraged our global supply chain to mitigate the impact of the China trade tariffs to less than 50 basis points to our consolidated fiscal first quarter gross margin. We expect to be able to mitigate approximately 90% of the impact from tariffs starting in January 2019. We believe that Micron will not be directly impacted by any expansion of trade tariffs to additional product categories. Operating expenses were $783 million, slightly above our guidance, mainly due to higher than expected pre-qualification expenses associated with new product introductions. Looking forward, as our joint development work with Intel comes to a conclusion around the end of this fiscal year, the R&D cost sharing between the companies will naturally reduce and come to an end. In the fiscal first quarter, Intel's share of joint R&D expenses was approximately $30 million. We expect that our R&D expenses will continue to increase in the coming quarters due to the combination of these declining R&D contributions from Intel, as well as increased investments in future technologies and high value solutions across our portfolio. We continue to drive strong profitability in the fiscal first quarter with operating income of $3.9 billion, representing 49% of revenue. This margin is up three percentage points year over year and down three percentage points from the fiscal fourth quarter. As previously mentioned, the improvements that Micron has made over the prior several years have resulted in structurally higher margins. The tax rate for the fiscal first quarter was 10% and we expect our fiscal year 2019 tax rate to be around 11%. Non-GAAP earnings per share in the fiscal first quarter totaled $2.97, up from $2.45 in the year ago quarter and down from $3.53 in the prior quarter. We commenced our capital return program in the fiscal first quarter with the repurchase of $1.8 billion of common stock, representing a reduction of approximately 42 million shares or about .5% of shares outstanding. We expect to remain active with our stock buybacks in the fiscal second quarter as we continue to make progress on our $10 billion repurchase program by returning at least 50% of our ongoing free cash flows to shareholders. Turning to cash flows and capital spending, in the fiscal first quarter, we generated $4.8 billion in cash from operations, representing 61% of revenue. Capital spending net of third party contributions was $2.5 billion, up from $2.1 billion in the prior quarter. In the fiscal first quarter, our free cash flow was approximately $2.3 billion, up about $600 million from the year ago quarter and down approximately $750 million from the prior quarter. We deployed approximately 80% of the quarter's free cash flow towards our share repurchase program. Even with a substantial outlay for share repurchases, we ended the fiscal quarter in a record net cash position of $3.1 billion with approximately $7.2 billion in cash, marketable investments and restricted cash, and $4.1 billion in debt. While we largely completed our deleveraging activities in fiscal year 2018, we further reduced our debt balance in the quarter by approximately $500 million through the settlement of outstanding convertible note redemptions of $160 million and other scheduled payments. Overall, our solid balance sheet, strong cash flow, and robust liquidity put us in an excellent position to execute on our capital returns program. Prior to issuing our fiscal second quarter guidance, I'd like to provide some context for our outlook. Due to the weaker demand environment, we expect fiscal second quarter sequential bid shipments to be down meaningfully for both NAND and DRAM. Given the weaker near-term outlook, we are lowering our capex plans to a range of $9 to $9.5 billion for fiscal 2019. At the midpoint, this represents a $1.25 billion reduction from our prior guidance, and our front-end equipment capex is now down year on year. We'll continue to remain flexible with capital spending to respond to market conditions. With that in mind, our non-GAAP guidance for the fiscal second quarter is as follows. We expect revenue to be in the range of $5.7 billion to $6.3 billion, and gross margins to be in the range of 50% to 53%. Operating expenses are expected to be $800 million, plus or minus $25 million. As we execute on longer-term growth investments, we're actively managing OpEx by implementing expense controls across the company, including tighter controls on headcount, holiday work schedule slowdowns, and reductions in discretionary spending. Based on a share count of approximately 1.15 billion fully diluted shares, we expect EPS to be $1.75, plus or minus $0.10. In closing, Micron continues to deliver solid financial results on a stronger performance foundation. We are making progress on all of our key initiatives, including our high-value solutions product portfolio, our cost profile, capital return program, and financial structure, with a record net cash position and $9.7 billion of liquidity at the end of the fiscal first quarter. While near-term market conditions are challenging, we are taking appropriate steps to manage production and spending in order to deliver healthy profitability and cash flows. There is no doubt Micron remains in the strongest financial position in the company's history as we transition to next-generation technologies and products. I'll now turn the call over to Sanjay for some concluding remarks.

Thank you, Dave. While we end calendar 2018 on the heels of unprecedented profitability and revenue for both Micron and the industry, we do believe we are entering a period of weaker market conditions. We are taking prudent actions to adapt our manufacturing plans to the changing demand environment. While we are implementing expense controls, we are also continuing to invest in our technology and cost competitiveness, as well as strengthening our portfolio of high-value solutions. Memory and storage have become essential ingredients to the value created by the data economy, and it is this added value that is driving a virtuous cycle of long-term growth and innovation. We continue to believe that the memory industry is structurally stronger with more diversified demand drivers and moderating supply growth capability. Micron is better positioned than ever before to win in this environment with our strong balance sheet and the structural improvements we have made to our operating model in the past several years. We believe 2019 will be a year of solid profitability, and I look forward to sharing our results over the quarters ahead. We will now open for questions.

Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question over the phone, press star and then one on your telephone keypad. We ask everyone who is participating in today's Q&A session, kindly limit yourself to one question and one follow-up, and then you may re-queue. If your questions have been answered and we should move yourself in the queue, simply press the pound key. And our first question will come from Timothy O'Coury with UBS. Your line is now open.

Thank you. Sanjay, I was wondering if you could help quantify the inventory at your big hyperscale customers. It sounds like, in aggregate, it's maybe two months. So I'm wondering if you can help with that number. Thank you.

So inventory at our customers, you know, and this is, you know, customers in various segments of our market. Some of those customers are carrying higher levels of inventory, and that inventory level varies from customer to customer, we believe. And, you know, our assessment is that inventory adjustments will take a couple of quarters for it to be corrected, for it to work through the system entirely. And, of course, we continue to work with our customers in the meantime in terms of understanding their longer-term demand requirements. And certainly our customers are indicating optimism toward the demand requirements in the second half of the year. And especially, you know, as inventory adjustments work through the system and as supply cuts, the effect of those comes through the industry, as well as, you know, second half of the calendar year tends to be seasonally stronger compared to the first half of the year. We do expect that, you know, by the second half of the year, we'll have an environment that will be improved stronger compared to the first half of the year. And just keep in mind that the long-term demand trends in our end markets of cloud, client, enterprise, graphics, all of these end markets, the trends, continue to be strong, needing more memory and more storage ultimately. We are just going through an air pocket here, you know, related to primarily inventory adjustments, as well as some seasonal weak mobile demand, including mobile demand on the high-end smartphones that is impacting some of our near-term visibility as well as the near-term outlook.

Thank you for that. And then I guess just as a quick follow-up, Dave, so I think maybe the surprise in the guidance is that the bit shipments are down, I think you said, meaningfully, for both NAND and DRAM. I'm wondering what that means for inventories. Are you going to ship out of inventory, or are you cutting utilization? Can you sort of, you know, walk us through that? Thank you.

So we are, you know, reducing our production for both DRAM and NAND. As Sanjay indicated, from a DRAM perspective, we're bringing its supply growth down to 15% approximately in calendar year 2019. For NAND, we're also bringing the production down meaningfully. And we did indicate that we would ship close to demand for NAND, and we think that demand is about 35%. So obviously, you know, there will be periods of time where we do have inventory increasing for some period of time. And then, of course, it'll adjust down through the years as we, you know, as those demand and supply numbers get more aligned. You know, in the first quarter, we had days of inventory up to 107 days. I'm very comfortable with 107 days. This is very low-cost product that we're putting on the balance sheet. There's no risk around obsolescence. It's very likely that it will go up again next quarter. Again, I'm very comfortable with that. But I think over the long term, you know, we'll have it more aligned with, you know, ultimately where we want it to be.

Thank you, Dave.

Thank you. And our next question will come from the line of John Pitzer, the CRET Swiss. Your line is now open.

Yeah, good afternoon, guys. Thanks for letting me ask the question. Dave, I just, relative to the guidance for OPEX in February quarter of 800 million, plus or minus 25 million, does that now reflect what we should think about as a fully burdened OPEX as you kind of move away from the shared cost with Intel and relative to the $6 billion of operational efficiency gains you talked about at the analyst day this past summer, how does that fit in with this OPEX guide? Because this is about $200 million more OPEX per quarter than we saw at similar revenue levels back in sort of 16, 17. And it's about 300 million above per quarter what we saw kind of in the 15 sort of correction.

Yeah, good question. So we did guide 800 million for OPEX in the second quarter, plus or minus 25 million. That's probably, that's certainly not fully burdened. You know, we had about $30 million of benefit in the first fiscal quarter related to Intel's contribution to R&D expenses. It'll be a little bit less in the second quarter, but over the course of the rest of the year we'll kind of phase down. So that certainly will elevate the OPEX in the third and fourth quarter relative to the second quarter. And also, you know, we're not, you know, while we're certainly managing expenses prudently and we are, you know, taking steps in terms of reducing discretionary spending and, you know, just very monitoring our head count very closely, we still are making the necessary investments on the product side and the technology side. This is, as Sanjay mentioned, an air pocket. We don't want to, you know, in any way impact our long-term strategy for some sort of near-term event. So OPEX, you know, will likely go up a little bit. You know, it's a fair point on the OPEX. I would say, you know, if you look at the guidance for the second quarter, even with the revenue guidance we gave relative to what the first quarter was like, you know, if you take the kind of midpoint of the earnings number and the midpoint of the revenue guidance number, you'll get kind of 38% plus operating margin. So that is a really good number, obviously. It's a number of, in my previous company, we were kind of aspirationally trying to get to. So it's a very good operation or operating margin number. And I think it reflects the fact, you know, that we achieved the $6 billion of improvements that we said we would make at the analyst's day. We still think we have more work to do in terms of driving the mix towards high-value solutions, in terms of improving our cost competitiveness, both on the front end and on the back end side. So there's more to come. There's another $3 billion that we committed, and we feel very good about that.

And as my follow-up for Sanjay, can you just walk us through the strategic puts and takes of building inventory into the February quarter, as opposed to trying to let those bits out into the marketplace and let elasticity sort of take over? Is this sort of tangible reflection of your view that this will be relatively short-lived, a couple of quarters, and what would you need to see before you would think that inventory build was too risky?

So I think, you know, our inventory, our cost structure is very good, both on DRAM as well as on the NAND side. And, you know, so we are definitely prepared that in terms of managing our overall profitability, which is absolutely our primary focus, that, you know, we'll manage pricing and manage inventory accordingly as necessary. If inventory has to be carried over, we will carry it over because, you know, the demand in NAND will kick in with elasticity. In DRAM, the inventory consumption, if our customers will occur, supply cuts will be driving return to stronger demand environment compared to, in the second half compared to first half. So we will be using inventory as a lever to ultimately manage for the best profitability of the company. And certainly be prepared, use that inventory as necessary to also capitalize on the second half opportunities. And, you know, and our focus really will also remain that in terms of our, you know, CAGR, in terms of output growth to be aligned with the demand CAGR. And we'll, of course, from time to time, use inventory as a lever to manage the profitability of our business and, of course, manage our customers' requirements as well.

Thank you.

Thank you. And our next question will come from TJ Muse with Evercore. Your line is now open.

Yeah, good afternoon. Thank you for taking my question. I guess first question, can you talk about, you know, what you're thinking in terms of cost down efforts both for DRAM and NAND, particularly as you move to higher value solutions, changing mix, including 1Y1Z as well as 96 layers in the 19 timeframe?

With respect to the cost structure, we continue to be in very good position, as we said, that for our fiscal year 19, we'll have healthy cost reductions both for NAND as well as DRAM. And you're, of course, right to note that, you know, as we increase the mix of our high value solutions, you know, for example, over the longer term, as we increase our SSD mix or increase our management solutions, you know, those do tend to incur, you know, higher cost, but they also bring higher margins, higher profitability, higher pricing associated with them as well. So cost-wise, we are in good shape.

That's helpful. I guess there's a follow-up. A question for you, Dave. I think in the past you've talked about wanting to have liquidity, including gross cash and revolver of roughly one-year capbacks, which would basically put you on the screws here. So the question is how to think about, you know, incremental free cash flow generation and what percentage of that would be used for buybacks?

Yeah, good question, CJ. So, you know, we contribute, let's start with the, you know, we're at about $9.7 billion of liquidity when you count the cash that we have on the balance sheet plus the $2.5 billion revolver we have. So we're in, as you point out, very good shape relative to where our target of liquidity would be. You saw a pretty healthy return of cash to shareholders in the first quarter. About 80% of our free cash flow went to shareholders in the form of the buyback. And really the rest went to further deleverage the balance sheet. There's not a ton of deleveraging that will go on through the rest of the year, quite honestly. And so I would expect us to be, you know, continue to be good buyers of the stock, so to speak, through the next three quarters and contribute, you know, a high portion of our free cash flow in the form of a buyback. Very helpful.

Thank you.

Thank you. And our next question will come from Mark Newman with Bernstein. Your line is now open.

Hi, yeah, thanks for taking my question. First question really I'd like to ask on the supply adjustments you're making, you're taking down the guidance for both DVAM and NAND production. You mentioned about some of that being inventory, but you also mentioned some of that being some production adjustments. Is it useful to understand a bit more about that? For example, is that reduction of utilization? Is that a, you know, no more capacity additions? Or what is that? Because some of your competitors have been pushing out some of their capacity additions. And so it would be useful to understand what Micron is doing here on the capacity adjustments to get to this slightly lower big growth that you're forecasting for Canada 19.

So certainly we are taking actions, a range of actions, and we won't really get into any specifics here in terms of what actions we are taking to reduce our output. You earlier mentioned about inventory. I mean, you know, of course we will carry inventory as necessary to manage the profitability. But the important thing to understand is that we are taking decisive actions in terms of reducing our production output, both in NAND as well as in DVAM. And that's the contributor to the 1.25 billion reduction in CAPEX compared to our prior guidance. And of course our intention here is to align our supply output in line with the industry demand trends. And we feel very good about the actions we have taken. In DVAM we have pointed out that compared to our prior expectations of 20% supply big growth in calendar 2019, we have taken actions now to reduce our output to provide a 15% supply output growth on a -over-year basis. And in DVAM as well we have taken actions to adjust our output so that our shipments will match with our demands that we expect to be around 35% in 2019. And I just want to be very clear, and just want to also be very clear as we have always said that we are not adding any new wafer capacity. We have the CAPEX that we discussed today, the lowered CAPEX that we discussed, which on a wafer equipment basis is a reduction from fiscal year 18 CAPEX is all going toward technology transitions only. And that of course is the best way to achieve the ROI on those investments.

So does that mean slower technology migration or does it perhaps mean slightly lower utilization for temporary periods?

So Mark, I'm not going to get into the specifics. Most important thing is we have managed our CAPEX lower and we continue to take actions to manage our production output lower to align our supply with our demand. And I think the effect of these actions will in fact some of these actions will start showing as early as this quarter. And if you look at

our gross margin guidance,

go ahead, sorry Mark.

Okay, you go ahead David.

I was just going to say if you look at our gross margin guidance it would reflect that we have a very good cost structure for our products.

And the output that we are talking about, our cost structure will remain in very good shape, even with that. And in fact, you know, in terms of cost, you know, on a year over year basis we actually, our cost reduction, we believe both in DRAM and NAND will be above the industry. Cost reduction. Great, great.

And my follow-up question is on the demand. You talked about this little bit of an inventory correction amongst customers. Some of your competitors have talked a bit about that as well. But you seem to be reasonably confident that demand is going to come back second half of Can-Am to 19, which also suggests that the inventory should have been burnt up by then, the customer's inventory should have been used up mostly by then. It would just be helpful, do you have any data points to explain how you get that confidence that demand will come back? Is it perhaps on the NAND side more about demand elasticity? Is it on the DRAM side? Anything about the kind of magnitude of the inventory level that customers have today? To give us some kind of sense that confidence that would have been used up within a couple of quarters, for example. That would be great. That would be very helpful.

So, you know, first of all I think we should realize that the end market demand trends, by and large, you know, really remain quite healthy. And our customers also are absolutely continuing to show to us the optimism around the long-term demand trends. And as we noted in my remarks, that in our fiscal second quarter, the bits for DRAM, let me first talk about DRAM here, the bits for DRAM will be down on a -over-year basis. And this needs to be compared with the long-term DRAM demand cager of, you know, 20 percent, high teens to 20 percent range. So when in FQ2, on a -over-year basis, you have a reduction and you contrast it with the long-term demand trends of 20 percent kind of demand growth, then it tells you that during fiscal second quarter, a lot of the inventory adjustments will certainly be occurring. And that's why we say that it will take a couple of quarters for inventory adjustments to occur. So again, the point about -over-year reduction in our DRAM shipments is an important point in understanding that the inventory adjustment by our customers is well underway. And all of this, while the end market demand drivers of cloud, as you see from, you know, all the data is absolutely continuing to be healthy. The end market demand driver in terms of average capacity increases of flash in smartphones as well as DRAM content in smartphones driven by AI and machine learning continues to be on the upward trend. And of course, applications like automotive and industrial IoT with more AI and more machine learning, all of these are continuing to drive the demand trends to our need for more storage and more memory. And we laid out, you know, some of these opportunities at our investor day and all of those opportunities very much stay intact and at the end market level continue to be vibrant. So I think these couple of points that the November quarter itself was, you know, in terms of overall, you know, shipment was below Seasmill as well as the first quarter on a -over-year basis really showing reduction points to inventory adjustments are well underway. And of course, you have to look at this in the backdrop that the output in the industry is coming down as well. We have announced our decisive actions here today and we have provided the outlook in terms of our output growth in calendar year 19, both for NAND as well as DRAM. And then as I said before, that second half of the year tends to be a seasonally stronger part in terms of demand compared to the first half. So you know, these all are definitely pointing to our confidence and built upon inputs from our customers in terms of second half of the year being stronger than the first half of the year in terms of demand trends and the industry fundamentals as well. And you know, let me just point out one more thing here that, you know, when you look at industry, I mean, compared to the past cycles, really the capex cuts are happening at much, much earlier level in the cycle and really in terms of happening even at much higher levels of profitability than ever in the past. So all this, you know, overall I believe bodes well for the long-term fundamentals of the industry as well as certainly for Micron.

All right, great. Thank you very much. Appreciate that.

Thank you. And our next question will come from the line of Aaron Rikers with Wells Fargo. Your line is now open.

Yeah, thank you for taking the questions. I was wondering if I could build on that last comment. You know, you've talked a lot about your own plans and your own plans for the future.

I think in that regard, you know as much as I do, you know, and over the course of the last couple of months, you know, there have been reductions that have been discussed, you know, in the industry, the reduction that you have heard about, that, you know, manufacturers have talked about, but also several analysts have indicated those as well. And of course, you know, the near-term outlook has also, as we said, continued to weaken through the course of our FQ1 timeframe. And, you know, even since our FQ2 has started, those demand-weakening trends have continued as well. So, you know, I think this is the information that is out there is what we are using, but we can only talk about ourselves, and we can, we certainly have taken here decisive actions in terms of managing our output growth in line with our demand expectations.

Okay. And then as a quick follow-up, just thinking about your product portfolio, particularly around the enterprise SSD market, I'm curious, it sounds like possibly you're seeing maybe even a quicker ramp towards NVME than what you previously have seen. So, I mean, is there a way to kind of quantify how much of maybe the enterprise SSD market, you know, is kind of moving away from you until you get your products into the market in the latter part of this calendar year or calendar at 19?

Well, you know, certainly as we have been speaking for a while, the transition from SATA to NVME is taking place at a fast pace in enterprise as well as in cloud applications. And we have been focused on developing our own products, and that's why we have said that in calendar year, our fiscal year 2019, as we bring out our new NVME products to the market, our 2019 calendar year ends up being more a year of transition for us, but there is no question that the market certainly is moving from SATA to NVME applications across the board. Okay, thank you. So, we have just introduced some of our early NVME products for consumer SSDs, and I talked about how we have introduced NVME products for automotive applications as well. And during the course of calendar 2019, we'll first be bringing out client NVME products to the market, and then later in the year, we'll bring enterprise and cloud NVME SSDs. And that's why we look at calendar year 2020 will be the one timeframe when we start gaining share again in our SSD market.

Thank you.

Thank you. And our next question will come from Rahmit Sa. Your line is now open.

Thank you. Sanjay, I heard you indicate that you expect that the market will be more open in 2020, and that you expect above average cost declines. But I guess my question is, aren't the actions that you've announced today probably more of a hit to cost per bit in 2020 versus 2019? How do we think about that?

I think what we have shown you today is that we are able to take decisive actions, and we are able to take them fast. I mean, just remember that FQ4 was a record year for the company, and FQ1 is when we first saw signs of inventory adjustment. During the course of FQ1, we have been able to react in terms of cutting down our capex as well as manage our output growth. So the point is we can react fast to the changes that are needed in the marketplace, and we remain, this is something we review very, very closely on an ongoing basis, very focused on making sure that we are maximizing the long-term profitability and long-term growth opportunity for Micron. So this is something that, you know, in terms of cost, we feel very good about our position for 2019, and, you know, going beyond that, we of course continue to make very good progress on our technology nodes. As I discussed with you, our technology on 1Z is progressing well. We feel good about that roadmap and continue to make good progress on our NAND roadmap as well, and that will all position us well for 2019 as well as for 2020 timeframe. And I just want to point out that our focus also is on shifting our portfolio to high-value solutions, and those will also strengthen our profitability profile.

You know, I guess that was my follow-up. You know, on capex, you know, you're cutting your forecast for the year, but capex is still up on a -on-year basis. You know, I'm curious if this downturn ends up being, you know, longer than any of us, you know, sort of anticipate. Is there leverage to reduce capex even further from current levels?

So I will just touch on capex. On your previous question on cost, I also wanted to point out that on the cost side, we are making tremendous progress on the back-end assembly and test cost reduction as well as managing, transforming our supply chain operations, which will give us significant cost benefits as well. So all in all, you know, 2019 and beyond feel very good about our technology roadmap, manufacturing roadmap capability, as well as overall cost capabilities. In terms of on the capex side, just keep in mind that we have said that with the adjustments that we just have made, our wafer equipment capex actually is coming down in fiscal year 2019 versus fiscal year 2018. And as we have discussed before, you know, Micron over the last few years has significantly under-invested in clean room shell capex in the facilities and the buildings that are needed to really implement ongoing future technology transitions. And a big part of our capex, as we had shared with you in the past, actually is going toward buildings and facilities, clean room that will be needed for future technology transitions as well. All of that capex does not contribute to big growth. And similarly, we have a significant increase in our capex in fiscal year 2019 over fiscal year 2018 on back-end test and assembly operations as well. And that is again intended to reduce costs and not, it doesn't go toward any big growth. And we have flexibility, as we have shown already in terms of managing capex. We will continue to look at this carefully. And if any factors require us to change our capex outlook again, we will absolutely address it in a timely and prudent fashion. We always continue to evaluate market environment as well as our own status of technology transitions, production requirements, and we are making real-time adjustments as needed.

I mean, it seems like the actions you guys are taking are very prudent, but I, the part that's confusing for me is, you know, if you're slowing your process migration, then, you know, there could be some impact to cost per bit. And I just, I guess I'm just not quite, I just don't quite understand, you know, what that impact is.

Again, you know, in terms of cost per bit, there are a lot of details that have to be looked at. We are not going to get into all of those details here. Key message here is that we are bringing our production output in line with our demand expectations. Second, we feel very good about our technology position and our cost position, and we'll continue to do very well in this regard. Cost position, of course, includes wafer level die cost position, but also includes the benefits of assembly and test cost improvements that we are making. And third is we absolutely stay focused on our high-value solutions strategy, and we are executing well in this area. We talked about how in mobile, even, you know, in a market environment of significant NAND oversupply, we actually have delivered strong gains in our mobile high-value solutions portfolio as well.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question and answer session for today. Thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day.