Micron Technology, Inc.

Good afternoon, my name is Cherie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's fourth 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 and 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. In order to allow as many analysts to ask a question as possible, please limit yourself to one question. Thank you. It is now my pleasure to turn the floor over to your host, Mr. Farhan Ahmad, Head of Investor Relations. You may begin your conference.

Thank you, and welcome to Micron Technologies' fourth fiscal quarter 2019 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO of and Dave Zinsnow, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including the audio and slides, is also being webcast from our investor relations website at investors.micron.com. In addition, our website contains the earnings press release and the prepared remarks 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 gap to non-gap financial measures can be found on our website, along with a convertible debt and cap call deletion table. As a reminder, a 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 the various financial conferences that we will be attending. You can 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 risks 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 10-Q, for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in 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 confirm these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon. Fiscal 2019 was another solid year of execution as we continue to transform the new micron. Despite the challenging industry environment, we achieved the second-best year in our history of revenue free cash flow, and earnings, which underscores the strength of the new Micron. We improved structural profitability by further reducing the technology gap with competitors and by strengthening our product portfolio. We also made progress on our $10 billion share repurchase program by returning $2.7 billion to our shareholders. In the fiscal fourth quarter, the Micron team's strong execution resulted in financial performance exceeding our guidance ranges. Market trends were broadly consistent with our expectations discussed on the last earnings call. DRAM demand bounced back as the factors that impacted calendar first half demand largely dissipated. NAND elasticity is driving robust demand growth, causing industry inventories to improve rapidly. While the demand recovery in DRAM and NAND is encouraging, we remain mindful of ongoing macroeconomic and trade uncertainties. I will provide more color on our view of the market after the review of progress on our key strategic objectives. Since 2016, the actions we have taken to reduce our cost structure, increase our mix of high-value solutions, and enhance our customer engagement and go-to-market strategy have significantly improved our profitability relative to our peers. In fiscal 2019, our DRAM cost-per-bid declines led the industry to and exceeded our internal plans, despite the headwinds from our announced reduction in wafer starts. In the fiscal fourth quarter, we began mass production and volume shipments of the industry's first 1Z products, giving Micron feature-sized leadership for D-LAMP. We are also making good progress migrating more of our production to leading-edge nodes. While we entered fiscal 2019 with more than half of our bid production on 20 nanometer or older nodes, We ended the fiscal year with approximately three quarters on 1X and beyond, with a meaningful portion on 1Y. As previously announced, we are expanding cleanroom space in our Taichung, Taiwan site to support future node transitions of our existing wafer capacity, and we expect output from this facility in calendar 2021. In NAND, we continued to outpace industry cost declines during fiscal 2019. 96-layer 3D NAND is continuing to increase as a portion of our mix. Meanwhile, we achieved our first yielding dyes using replacement gate, or RG for short. This milestone further reduces the risk for our RG transition. As a reminder, our first RG node will be at 128 layers and will be used for a select set of products. We don't expect RG to deliver meaningful cost reductions until fiscal 2021, but when our second-generation RG node is broadly deployed. Consequently, we are expecting minimal cost reductions in NAND in fiscal 2020. Our RG production deployment approach will optimize the ROI of our NAND capital investments. In addition, we announced the grand opening of our Singapore clean room expansion in August, which will enable the transition of our existing NAND vapor capacity to future generations of 3D NAND technology. We are continuing to make solid progress with our 3D cross-point product development and remain on track to launch our initial products in calendar 2019. Now turning to highlights by markets. In SSDs, the industry transition from SATA to NVMe in fiscal 2019 continued at a rapid rate. While we have been late to the NVMe market, our progress positions us to gain share starting in fiscal 2020. For OEMs, For OEMs building on strong growth last quarter, we more than tripled revenue shipments of our NVMe client SSD sequentially with sales penetration in multiple Tier 1 PC OEMs. Our QLC-based NVMe consumer SSD was the best-selling SSD on Amazon Prime Day in North America. Our consumer SSD segment achieved record revenue and unit shipments, with bids posting triple-digit percentage growth year-over-year, driven by our strategy to pursue channel expansion that extends our geographical and customer reach. Price elasticity is driving an increase in attach rates and capacities, leading to solid demand growth across client and consumer SSDs. We are also making solid progress on advancing our roadmap of NVMe SSDs for the enterprise and cloud markets. In fiscal 2019, we introduced the high-performance 9300 line of NVMe products targeting high-end data center applications and are looking forward to increasing adoption of this product. In mobile, our portfolio featuring the industry's lowest power and highest density products is enabling our customers to bring differentiated capabilities to the market and helping us deliver outstanding financial performance in a challenging industry environment. In fiscal 2019, we delivered mobile revenue that was down only 3% from 2018's record performance, despite a significant drop in market pricing and the impact from the addition of Huawei to the entity list. Our mobile margins were resilient, and our managed and bid shipments in fiscal 2019 more than tripled year on year, driven by growth of MCP and discrete NAND EMMC and UFS products. In the fiscal fourth quarter, we started volume shipments of a new leading-edge UFS-based MCP that uses our 1Z LP DRAM. This new UFS MCP will bring flagship-like performance and densities to mid- and high-end smartphones. We are also leading the industry in power-efficient, high-bandwidth LP5 DRAM, which positions as well as 5G begins to accelerate in 2020. In data center, customer inventories for DRAM have reduced significantly, driving solid sequential demand growth for server solutions in both cloud and enterprise markets. New processor platforms are also creating an uptick in demand for higher density and higher performance DRAM modules. In graphics, we saw strong sequential bit growth with increases for graphics cards and gaming consoles as normal buying resumed following inventory reductions in DRAM. In the PC market, DRAM module and SSD shipments continued the growth trend from last quarter as CPU shortages further subsided. In automotive, we continued to increase revenue year-over-year despite weak auto industry unit sales and a challenging DRAM industry environment. Our growth was supported by secular content increases, our superior quality, and well-established customer relationships. LP4 shipments in the fiscal fourth quarter were over five times higher year over year, as lower power DRAM becomes increasingly important for new infotainment and ADAPT systems. We continue to have leading industry share in automotive. Before talking about the market outlook, I want to provide an update on our business with Huawei and the ongoing impact of trade uncertainties. As we noted last quarter, we started shipping some products to Huawei that are not subject to export administration regulations and entity list restrictions. In the fiscal fourth quarter, sales to Huawei declined sequentially and were down meaningfully from the levels we anticipated prior to the addition of Huawei to the entity list. We have applied for licenses with the Department of Commerce that would allow us to ship additional products, but there have been no decisions on licenses to date. We see ongoing uncertainty surrounding U.S.-China trade negotiations. If the entity-less restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters. Now turning to our market outlook, which assumes that the macroeconomic environment doesn't materially deteriorate from current levels. I'll begin with our industry outlook and then turn to Micron's outlook for DRAM and NAND. The DRAM and NAND industry demand growth in the second half of calendar 2019 compared to the first half is primarily being driven by a normalization of inventories at most customers and secular growth trends in various end markets. In recent months, we have seen increased demand from customers headquartered in mainland China, some of whom could be making strategic decisions to build higher levels of inventory in the face of increased trade tensions between the U.S. and China, as well as Japan and Korea. Our view of calendar 2019 DRAM industry bid demand growth remains unchanged at mid-teens, with supply exceeding demand due to previously discussed factors, that impacted first half calendar 2019 demand. Based on our early view of calendar 2020, we expect the industry to see bid demand growth of high teens to 20% above supply growth of only mid-teens, which should help normalize supplier inventories and enable a healthy industry environment. We expect the long-term DRAM bid demand growth category to be mid to high teens. Turning to NAND industry outlook, demand elasticity and industry supply reductions are resulting in improving market conditions and declining industry inventory. On the supply side, capex and wafer start cuts across the industry are leading to supply reductions. A power outage at a competitor's fab also reduced industry supply and inventory. We now expect calendar 2019 industry bed demand growth in the low to mid 40% range, which will exceed industry bid supply growth of approximately 30%. Based on our view of calendar 2020, we estimate industry bid demand growth of high 20s to low 30% range, with supply growing somewhat below demand. We believe that NAND industry margins, which are at the lowest levels in the last 10 years, should start increasing for the rest of the year. We expect the long-term NAND bid demand growth category to be in the low 30% range. Specific to Micron's DRAM outlook, we are seeing solid demand from customers across multiple segments. This is improving our inventory, and we have started to see pockets of tight supply, particularly in leading-edge nodes. However, we still have elevated inventory levels on older nodes. As a result, we are continuing with the previously disclosed demand DRAM wafer start reductions of 5%. We expect Micron's calendar 2019 bid supply growth to be slightly below industry demand growth of mid-teens and expect our calendar 2020 DRAM bid supply growth to be close to the market demand growth. We also expect our DRAM cost reductions to moderate in fiscal 2020 to high single digits. As we have said before, The increasing complexity of more advanced DRAM nodes is resulting in slower pace of cost declines for the industry. As our DRAM inventory improves, we are committed to maintaining price discipline. While we are having to respond to some aggressive market pricing, we have started walking away from some transactions as we look to optimize our profitability. Turning to Micron's NAND outlook, we expect our calendar 2019 bid growth to be slightly above industry supply growth, and in calendar 2020, we expect Micron's bid supply growth to be significantly below the industry demand growth as we transition a limited portion of our wafer starts to our first-generation replacement gate node and use inventory to support customer demand. Supply growth will also be impacted by our previously announced wafer start reductions of approximately 10%. We are seeing some capacity tightness in our back-end manufacturing operations due to significant increases in demand for high-capacity NAND products. This is another data point of elasticity kicking in on high-value NAND solutions. While NAND and DRAM market conditions are showing some promising signs, In order to bring our supply in line with the market demand, we are targeting our fiscal 2020 front-end equipment capex to be reduced by more than 30% from fiscal 2019. Our capex decision is also influenced by macroeconomic uncertainty and low industry profitability. Our front-end capex outlook reflects our strategy for limited ramp of our first RG node. While we are reducing front-end equipment capex, We are spending significantly more on shelf space to enable future node transitions and also investing in a new SSD packaging facility in Penang, Malaysia. As always, we will maintain flexibility and discipline while investing appropriately for Micron's long-term success. I want to emphasize that our goal is to manage our DRAM and land-based supply growth CAGR in line with industry demand. As we catch up on the technology and cost gaps to best-in-class competitors in DRAM and transition to RG technology in NAND, our supply growth may fluctuate, but we expect the medium to long-term growth rate of our supply to approximately equal the rate of demand growth across both NAND and DRAM markets. We are also focused on maximizing the ROI of our CAPEX investments, and for this reason, we are not emphasizing wafer capacity growth but instead focusing on bid growth driven by technology transitions. In addition, some of our CapEx is dedicated to increasing our internal capacity for assembly, packaging, and test, which helps us drive cost reductions without adding any bid growth and has good ROI. I'll now turn it over to Dave to provide our financial results and guidance.