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spk14: Ladies and gentlemen, thank you for standing by and welcome to Micron Technologies' Third Quarter 2020 Financial Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker, Head of Investor Relations, Faham Ahmad. Sir, please go ahead.
spk01: Thank you and welcome to Micron Technologies' fiscal third quarter 2020 Financial Conference Call. On the call with me today are Sanjay Meharudra, President and CEO, and Dave Zinsbell, 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 and .micron.com. In addition, our website contains the earnings press release and 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 GAAP to non-GAAP financial measures may be found on our website. As a reminder, our webcasts we play 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 forms 10-K and 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 stage to confirm these statements to actual results. I will now turn the call over to Sanjay.
spk08: Thank you, Farhan. Good afternoon, everyone. I hope that you, your family, and your colleagues are safe and healthy. Along with Dave and Farhan, I am doing this call from Micron's offices. Micron's strong execution in the fiscal third quarter drew solid sequential revenue and DPS growth. We are ramping the industry's most advanced DRAM node and increasing our mix of high-value land. Our strong competitive position and diversified product portfolio put Micron in an outstanding position for the many exciting growth opportunities in the memory and storage markets. I'll start with an update on our operations. Due to the excellent work of Micron's operations team, most of our fab and assembly sites operated full production throughout the quarter, with our Singapore and Taiwan assembly and test facilities achieving record production. COVID-19's impact to our production early in our third quarter was limited to our backend assembly and test sites in Muar and Penang, Malaysia, and we quickly offset this impact with production adjustments at our other facilities. All our production facilities are operating normally at this time. We continue to prioritize the health and safety of all team members and contractors and have strong COVID-19 safety measures in place at all our sites worldwide. We are taking a conservative, phased, and site-specific approach to returning our team members on-site, prioritizing our manufacturing workforce and engineering teams. Now turning to the market environment. The pandemic has impacted the cyclical recovery in DRAM and LANDs, causing stronger demand in some segments and weaker demand in others. Market segments driven primarily by consumer demand have seen a negative impact. Calendar 2020 analysts estimates for end-unit sales of autos, smartphones, and PCs are meaningfully lower than -COVID-19 levels, even though estimates for enterprise laptops and Chromebooks have increased. The reduced level of global economic activity has also curtailed near-term demand. The pandemic is driving rapid change in consumer and corporate practices around the world. Consumers are significantly increasing online activity, including e-commerce, gaming, and video streaming, all of which drive additional data center capacity requirements. Trends like working from home and online learning are likely to drive long-term changes in how we think about workforce flexibility and education. Several governments around the world are considering ways to ensure a level playing field by considering significant programs that provide Chromebooks or tablets to students who cannot afford them as online learning becomes a necessity in these times. Additional government fiscal stimulus programs are also supportive of economic activity and will accelerate trends like electric vehicle production. Emerging technologies such as drone-based deliveries and the increased use of robotics across many applications are now being pursued with urgency. Technology solutions are rapidly helping society adapt and manage the temporary and permanent changes stemming from this pandemic. Clearly, certain trends that would have taken two to four years to develop have been accelerated into months. It is easy to see how these changes will drive higher consumption of memory and storage in the long term. The faster pace of digital transformation in the economy is here to stay. Looking ahead to the second half of calendar 2020, let me discuss certain key market trends. First, we expect the data center outlook to remain healthy. Second, we expect smartphone and consumer end-unit sales to continue to improve, accelerating inventory consumption across the supply chain. And third, new gaming consoles will drive stronger DNAM and NAND demands. Despite these trends, our short-term visibility across end markets remains limited due to COVID-19, macro and trade uncertainties, as well as customer inventory changes. The recent restrictions on Huawei are also impacting our opportunity in the near term. As these risks recede, we expect the resumption of industry growth with a long-term best growth of mid to high teams for DNAM and approximately 30% for NAND. This growth will be supported by powerful secular technology trends ranging from AI and machine learning to cloud computing, 5G, and the growth in edge computing and the industrial IoT economy. Turning to industry supply, second half 2020 supply growth may be somewhat muted compared to -COVID-19 expectations. Some suppliers have commented about delays in equipment deliveries, which can result in slower node transitions and lower bid growth. Specific to Mitron, we are proactively aligning our bid supply to market demand. Our fiscal year 2020 front-end equipment capex is down more than 40% from fiscal year 2019 and is at its lowest level in the last five years. While we expect to increase fiscal year 2021 capex to support high ROIC node transitions, this capex will be meaningfully lower than our -COVID-19 plan. We have also made changes to our DNAM utilization to align with the current lower demand in the automotive market. As N-market conditions evolve, we will remain flexible to make any needed adjustments to our supply. Since 2016, Mitron has made tremendous progress narrowing the competitive gap on leading edge technology nodes. In DRAM, we are ramping 1Z technology, which is the industry's most advanced node, and achieving yield improvements that reduce our costs. We have several customer qualifications underway for this technology. Our 1Y and 1Z nodes together now make up more than 50% of our bid production. We continue to make progress on our 1Alpha node, which we expect to introduce in fiscal 2021. We have begun sampling our first high-bandwidth DRAM memory product, which is competitive with the industry's most advanced products and will expand our AI data center opportunity. We are excited about entering this new high-value segment of the DNAM market and look forward to ramping this product after it is qualified with our customers. In NAND, our 128-layer first-generation RG NAND technology entered volume production in SQ3, and we are pleased to announce that we have recently initiated customer shipment. We are also making good progress on our second-generation RG node, which will be deployed broad-range across our product portfolio. We remain on track for RG production to make up a meaningful portion of our NAND output by the end of calendar 2020. Micron also continues to make progress with QLC. QLC bids now represent more than 10% of Micron's overall NAND production, contributing to our NAND cost improvement. Fiscal 2020 has been a year of extraordinary gains in the mix of our high-value solutions in NAND, which now make up over 75% of our quarterly NAND bids. We remain on target to increase this to 80% for fiscal 2021. The new Micron is undergoing a dramatic transformation to combine product leadership with technology, manufacturing, and supply chain excellence. Across our entire portfolio of DRAM and NAND products, we will continue to focus on product differentiation and portfolio expansion to grow our share of industry profits while maintaining stable bid share. Turning to end markets, we had record quarterly revenue in solid-state drive as cloud SSD revenue more than doubles quarter over quarter. We continue to introduce new NVMe products in our SSD portfolio while maintaining our leadership in the enterprise FATA market. Customer qualifications are progressing well for our next-generation products for both NVMe and FATA markets. Our client NVMe SSDs have also contributed to our SSD growth. In May, we announced a TLC client SSD and our first QLC client SSD, both using next-generation 96-layer NAND technology. As the only company with a portfolio of DRAM, NAND, and CD Crosspoint technologies, Micron is uniquely positioned to benefit from the secular data growth that is driving the cloud, enterprise, and networking markets. Our cloud DRAM sales grew significantly quarter over quarter with strong demand due to the work from home and e-learning economy and significant increases in e-commerce activity around the world. This quarter, we started early sampling of 1Z DDR5 for enterprise applications. Additionally, we also started sampling our higher-frequency DDR4 modules for Intel's .0-lake server platform, which we expect to drive server DRAM content growth. In networking, our DRAM bit shipments expanded significantly on a sequential basis, driven by rapid work from home infrastructure deployment as well as increased 5G deployment, particularly in Asia. Despite demand headwinds in the smartphone market due to COVID, our mobile business delivered healthy sequential and -over-year growth due to continuing momentum of our DRAM and NAND solutions. The outlook for calendar 2021 is promising, with 5G expected to drive a resumption in smartphone unit-based growth with a multiplier effect of higher memory and storage content. 5G phones will have greater content than 4G phones, and you can see this already in the 4G. We see the strongest memory and storage content growth in the low to mid-range part of the smartphone market, which is also the largest segment in terms of units. In this part of the market, 5G phones have 6GB of DRAM and 64GB and 128GB of NAND, versus 4G phones with 2 to 4GB of DRAM and 32 to 64GB of NAND. We are encouraged to see -$250 5G phones, which make 5G accessible to a broader market. This lower price point has been enabled by bomb cost reduction in semiconductor content outside of memory and storage. Micron is well positioned to help our customers win in the 5G era with an industry-leading product portfolio, including low-power DRAM and multi-chip packages. We continue to achieve design ends for LP4 and LP5 5G platforms, and our most advanced managed NAND products based on UFS 3.1 are now sampling at several major Android OEMs. In PC, our bid shipments declined modestly as we strategically moved supply of compute DRAM to address demand in the data center market. Demand was strong for certain PC sub-segments that are supporting increased work from home and remote learning activities, and our PC DRAM revenue was up sequentially as ASPs increased. While certain parts of the PC market have strengthened, overall PC unit shipments are expected to decline this year due to weakness in desktop PCs. In graphics, we have started shipping GDDR6 DRAM for next-generation gaming consoles, and we expect strong demand in the second half of calendar 2020. In auto, revenue declined significantly from the previous quarter due to broad auto supply chain disruption. Despite auto unit weakness, secular content growth from ADAPT and autonomous driving platforms resulted in record LP4 DRAM revenue for our auto business in the fiscal third quarter. As automotive production rates improve around the world, our auto business should return to a growth trajectory. I now turn it over to Dave to provide our financial results and guidance.
spk10: Thanks, Sanjay. Despite COVID-19, we achieved strong results thanks to resilient execution from our team members across the globe. Total FQ3 revenue was approximately $5.4 billion, up 13% sequentially and 14% year over year. Sequential revenue growth was led by the data center and mobile markets. FQ3 DRAM revenue was $3.6 billion, representing 66% of total revenue. DRAM revenue increased 16% sequentially and 6% year over year. Bit shipments were up by approximately 10% sequentially. ASPs were up sequentially in the mid single digit percentage range. FQ3 NAND revenue was approximately $1.7 billion, representing 31% of total revenue. NAND revenue increased 10% sequentially and was up over 50% year over year. Bit shipments increased in the lower single digit percentage range sequentially. ASPs increased sequentially in the upper single digit percentage range. Now turning to our revenue trends by business unit. Revenue for the compute and networking business unit was $2.2 billion, up 13% sequentially and up 7% year over year. CNBU's sequential growth was driven by double digit quarter over quarter pricing improvements and stronger demand for data center products. We were supply constrained for certain compute DRAM products, which limited our ability to meet some demand upside from customers. Revenue for the mobile business unit was $1.5 billion, up 21% sequentially and up 30% year over year. The sequential growth was primarily driven by strong growth in our LP DRAM bit shipments. MCP revenue remained strong and was up significantly year over year. Revenue for the storage business unit in FQ3 was $1 billion, up 17% from FQ2 and up 25% year over year. SBU operating margins increased dramatically to 17%, up from a break even level last quarter. This significant sequential improvement in operating margins was driven by improved pricing, stronger data center SSD mix, and overall record SSD revenue. And finally, revenue for the embedded business unit was $675 million, down 3% sequentially and down 4% year over year, primarily from a reduction in automotive demand. The consolidated gross margins for FQ3 was 33.2%. Sequential gross margin improvement was driven by pricing improvements in both DRAM and NAND, as well as our ongoing improvements in product mix that continue to underpin our financial performance. The impact of underutilization at our Lehigh Fab was approximately $155 million, or 285 basis points in FQ3. We expect underutilization to be approximately $135 million in FQ4, and expect gradual declines in underutilization through fiscal 2021. Operating expenses were $823 million in FQ3. As we said on last quarter's call, we've taken several actions to control our operating expenses, given the increased uncertainty surrounding COVID-19. As a result, we continue to expect favorable underlying OPEX trends to continue into fiscal Q4. FQ3 operating income was $981 million, resulting in an operating margin of 18%, compared to 11% in the prior quarter and 23% in the prior year. Net interest expense increased to $24 million, compared to $6 million of net interest expense in the prior quarter. This increased expense was primarily driven by the drawdown of our revolver and subsequent $1.25 billion investment grade note issuance in the quarter. We expect net interest expense will be approximately $30 million in FQ4, due to the decline in interest income because of lower interest rates. Our FQ3 effective tax rate was 3%, which benefited from approximately $19 million of one-time items. We expect our tax rate in the fourth quarter to be approximately 6%. Going forward into fiscal 2021, we expect our tax rate to be in the high single digit to low double-digit range. Non-GAAP earnings per share in FQ3 were $0.82, up from $0.45 in FQ2, and down from $1.05 in the year-ago quarter. FQ3 non-GAAP ETS was approximately $0.02 higher, due to the tax benefits reported in the quarter. Turning to cash flows and capital spending, we generated $2 billion in cash from operations in FQ3, representing 37% of revenue. During the quarter, net capital spending was approximately $1.9 billion, approximately flat -over-quarter. As we enter the final quarter of FY20, we are projecting fiscal year 2020 CAPEX to be approximately $8 billion. Our FY20 front-end equipment CAPEX will still be down more than 40% from last year. However, back-end CAPEX and building CAPEX, either of which add to bit supply growth, are up from last year. Free cash flow in the quarter was $101 million, compared to $63 million in the prior quarter. This represents the 14th consecutive quarter of positive free cash flow, reflecting the structurally improved profitability and working capital improvements of the new Micron. We repurchased approximately 929,000 shares, or $40 million in FQ3, at an average price of $43.54. In the nine months of FY20, we returned $134 million of capital through repurchases and paid $266 million to settle conversion of convertible notes. Combining the convert premiums and share repurchases, we have used $338 million, or 135% of FY20 free cash flow, towards reducing the share count. Ending FQ3 inventory was $5.4 billion for 131 days versus 134 days last quarter. Our overall days of inventory are above our approximately 110-day target level, partly due to elevated NAND inventory as we transition to replacement date. We are also carrying higher raw material levels as a precaution, given the increased supply chain uncertainty due to the pandemic. We ended the quarter with total cash of $9.3 billion and total debt of $6.7 billion. Total liquidity was approximately $11.8 billion, up from $10.6 billion at the end of the second quarter. In the quarter, we issued $1.25 billion of investment grade notes, and those proceeds, together with $1.25 billion of cash on hand, was used to repay the $2.5 billion revolving credit facility we drew at the beginning of the fiscal third quarter. Prior to providing our outlook and guidance, we'd like to remind everyone that our fiscal Q4 is a 14-week quarter. Now turning to our outlook, as Sanjay mentioned, while visibility remains limited overall, data center trends are strong, and new gaming consoles will be a tailwind to demand in the second half of the calendar year. While end-unit sales of consumer devices such as smartphones have started to recover, we are seeing an impact from the recent restrictions imposed on Huawei. It is also important to remember that we are a lagging indicator relative to the end demand. In addition, the risk of a second wave of COVID-19 infections is continuing to drive greater uncertainty for the economic recovery and our business. Lastly, inventory strategies of our customers are difficult to predict. We continue to closely monitor market conditions and respond to changes in the market environment in a timely and disciplined manner. With all of these factors in mind, our non-GAAP guidance for FQ4 is as follows. We expect revenue to be $6 billion plus or minus $250 million, gross margin to be in the range of .5% plus or minus 150 basis points, and operating expenses to be approximately $850 million plus or minus $25 million. Finally, based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $1.05 plus or minus $0.10. In closing, we are extremely proud of Micron's performance in this unprecedented period of market uncertainty and operational challenges. The tenacity, creativity, and dedication of our team members around the world drove strong results that surpassed our initial expectations. Micron remains on very solid footing with an investment-grade balance sheet, ever-strengthening product portfolio, and secular industry trends that will continue to drive long-term demand. I'll now turn the call over to Sanjay for closing remarks.
spk08: Thank you, Dave. The pandemic has impacted our financial performance trajectory, which was shaping up for a robust outcome this calendar year. Nevertheless, we have moved with agility to leverage the new opportunities in the marketplace and have further strengthened our product portfolio. Micron's portfolio is now dramatically better positioned from a competitive perspective, and we have driven a tremendous transformation here over the last three years. In the coming quarters and years, we will continue to strengthen our business foundation. And as the industry environment improves, Micron is exceptionally well positioned to take advantage of long-term trends and drive superior returns for our shareholders. Of course, preparing Micron for a bright future has to be about more than just quarterly business performance. We also have to be leaders in creating positive outcomes for all of our stakeholders. In that context, there are two topics that I would like to touch upon before we move to Q&A. First, earlier this month, we issued our fifth annual sustainability report. This year, we set challenging new goals for energy use, emissions, water use, and waste generation that aim to dramatically improve the environmental sustainability of our operations worldwide over the years ahead. We also established an aspirational future vision that will drive us to achieve even more. Reaching our goals will require investment, and we plan to devote approximately 2% of annual capital expenditures to environmental sustainability initiatives amounting to about $1 billion over the next five to seven years. These initiatives underpin our commitment to achieve significantly higher standards and help create a better planet. Second, I would like to address the social unrest and racial division that have driven our country. The senseless and tragic deaths of people in our black community in the U.S. must be addressed with real and lasting reforms. Hate, racial discrimination, violence, and social injustice have no place in our society. Micron is committed to creating a welcoming and safe work environment for everyone, and we are taking concrete actions to increase technical training, career preparedness, and opportunities for underserved populations. We are also actively engaging and investing in community programs that aim to create a more just and fair society for everyone. There is much work to do, and we look forward to being part of the solution. We will now open for questions.
spk14: Thank you. To ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Pitzer of Credit Suisse. Your line is open.
spk04: Good afternoon, guys. Thanks for letting me ask the question. Sanjay, David, congratulations on the solid results. Sanjay, if you think back 90 days ago when you gave guidance for the May quarter, there was a lot of uncertainty around the pandemic, and you guys guided accordingly, in hindsight extremely conservatively. I think your comment on the call last time was that you're building inventory, so you're assuming that your customers are building inventory. I guess as you look to the August quarter guide, was there a similar methodology used to inform this guide? And I guess specifically, there's a lot of consternation in the investment community about data center demand, and you seem to be arguing that in your fiscal fourth quarter it remains strong, and you expect it to remain strong in the calendar second half. I'm wondering if you could just share with us why you think that and why you're not as concerned as some perhaps in the investment community about inventory builds.
spk08: So specifically with respect to data center, you know, pre-COVID, we expected 2020 to be a year of strong growth in cloud. Again, with all the trends building around AI and that needing more memory and storage, we expected healthy demand for pre-COVID in cloud applications. And of course with COVID, as we discussed in the last earnings call, you know, certainly some of the trends got pulled in, work from home economy as well as e-commerce, gaming, video streaming. All of these drove strong surge in demand on the cloud front. As we look ahead at the second half, of course, you know, given the total COVID environment and uncertainties around COVID, around the globe, we basically have limited visibility. Yet we do believe that cloud demand in the second half of the calendar year will continue to be healthy for us. We work closely with our customers in terms of understanding their inventories. We understand what their demand trends are. And from what we can see, customer inventories with respect to cloud are in a healthy place. And of course, you know, there are other parts of the market, you know, such as mobile phone, you know, where there are other considerations such as geopolitical considerations as well as, you know, related to COVID as well, where customers may have built up some additional inventory. And in mobile in particular, you know, you saw in China that how in April post-COVID within China, the demand went up, surged up for smartphones. So some of the customers may be preparing for, you know, as the consumer comes back, given the low point that the world experienced in March, April timeframe, customers want to be prepared to supply the smartphone demand to them as well. So overall, you know, it's a mixed picture, you know, with respect to the inventory on the customer front. Cloud inventories are in decent shape, mobile, I would say somewhat in anticipation of demand, as well as, you know, managing to the supply chain considerations due to COVID and some geopolitical considerations as well. So overall, I would say when you look at fiscal first quarter, the environment is similar to what we have experienced in FQ3, FQ4. And of course, our best assessment, you know, is based into the guidance that we have provided to you.
spk04: Perfect. Thanks, guys. Appreciate it.
spk14: Thank you. Our next question comes from CJ Muse of Evercore. Your line is open.
spk13: Good afternoon. Thank you for taking the question. I guess a question on gross margins. How should we be thinking about mix, particularly DRAM, as we move into the August quarter? And I guess we'd love to hear as part of that what implied cost downs will look like and really just trying to understand the nice step up you're seeing, you know, how much of that is mixed versus cost down versus, you know, perhaps other?
spk10: So, well, let me step back to Q3 just for a second. So gross margins obviously expanded in the third quarter as well. As I said in the prepared remarks, I'd say that that was the pricing environment in both DRAM and NAND combined with just a richer mix of higher value products, which obviously carry with it better gross margins. You know, from a high value solution perspective, I think we see that again in the fourth quarter, that is helping drive an improved outlook for gross margins for the fourth fiscal quarter. You know, CJ, that we don't telegraph pricing and cost out for future quarters, but suffice it to say, you know, we take both pricing and cost reductions into account. And obviously the combination of those are pretty favorable. You know, the other thing I would say is in the third fiscal quarter, we did have some, you know, expenses associated with COVID-19, both in terms of just increased spending on our part to manage through some disruptions that we had early on. And then on top of that, we did have to move around the back end production that did increase our tariff expense in the third quarter. So those things we wouldn't expect to happen again in the fourth quarter, which is helping also on the gross margin front in the fourth quarter.
spk13: Thank you.
spk10: Sure.
spk14: Thank you. Our next question comes from Blaine Curtis of Barclays. Your question, please.
spk12: Thanks for my question. I like the other congrats. Just on capped back, things like this year, there was some returns that maybe lower at $8 billion. I guess when you look at next year, I don't know where your starting point was, but I was wondering if you could walk us through some of your moving pieces. You talked about 5G as being the big tailwind. That makes sense. I'm curious what you would highlight that you're taking into account for next year on the other way.
spk10: Yeah, I mean, the one thing to keep in mind is so capped back spending this year had a fair amount of construction expense. And actually, we drove the front end equipment expense down quite considerably on a year over year basis. So as I said in the prepared remarks, it was down more than 40 percent in both DRAM and NAND. So we cut back pretty heavily on the front end equipment side this year. Next year, we would expect some of that to come back. In particular, we're going through a full rotation into our second generation replacement gate that certainly will drive some capped back increases. And offsetting that, we'll have to look at construction and see what directionally we want to do there. I'd say we haven't firmed up the capped backs plans quite honestly for the year. As you know, we maintain a lot of flexibility around capped backs. We take a hard look at the demand profile of bits over the next few years. And we kind of manage the front end capped backs accordingly to make sure that we're staying aligned with that. So over the next couple of months, we'll continue to refine our outlook over the next year or two. And I think we'll be able to give you a better picture when we have our fourth quarter earnings announcement. I would say when we looked at coming in pre-COVID levels on the capped backs front for front end equipment and now that we look at it now, it certainly has been cut back. And our expectation is that will impact kind of our bit supply in the calendar fourth quarter.
spk03: Thanks, Ed.
spk10: Sure.
spk14: Thank you. Our next question comes from Harlan Sir of JPMorgan. Your line is open.
spk03: Good afternoon and congratulations on the solid execution. Now, last earnings call, the team highlighted the supply production shift and mixed from mobile to server DRAM to service the higher demand from your data center customers. Given the outlook for stronger data center demand, are you guys keeping the production mix more heavily weighted towards server DRAM or are you already starting to shift part of your DRAM production mix back to mobile?
spk08: So we, of course, manage our mix on an ongoing basis. We assess customer demand expectations and make judgments regarding managing that mix. So yes, like you noted, we had shifted some of the supply from mobile towards the server applications. And, you know, at this point, we continue to make study how the trends are evolving and we think we are in a good position with respect to managing our mix. But if some changes are needed, we'll, of course, revert to making those changes in the future. Great. Thank you.
spk14: Thank you. Our next question comes from the line that Timothy or Kerry of UBS. Your line is open.
spk11: Thanks a lot. Sanjay, you talked about Huawei, I think, twice or maybe three times. And I know you've been reshipping under the licenses and the new restrictions are really on ASICs, not on standard products. So is that comment really more around the fact that this is sort of the last extension of the commerce licenses and so you won't be able to ship to them, you know, in another few months? And can you sort of quantify how much is your quality exposure right now? Thanks.
spk08: So thanks for asking that question. Just to be clear, the Huawei placement on entity lists, we had applied for licenses and we secured those licenses for mobile and server shipments. And we do not supply into the networking side of the business. We never sought that license. So the entity list placement that had happened several months ago did impact some of our outlook, but we have been operating under the licenses that we have already received. The comments that I was making today is really related to last month's action by Commerce Department, which will go into effect sometime next month. And as a result of that action, we are already starting to see an impact in our fiscal Q4 as our customer reacts to the actions by the U.S. And quite frankly, impacts related to Huawei are still unfolding. We expect some of the impact to Huawei, yes, related to the foundries, but it affects their potentially overall considerations on managing their business, managing their supply chain. And we expect some of these impacts to continue in FU1 and beyond as well. And then this is compounded further by changing inventory strategies at customers, as well as market share shifts that happen between the smartphone players. So as far as we are concerned, you know that we have improved our revenue diversity. We have significantly expanded and strengthened our product portfolio, and we have good design and activity with all key players, particularly with new products that we have introduced, such as UFS 3.1, LP5, DRAM, and multi-ship packages. So we continue to work with our customer ecosystem to mitigate the effects of this, but the particular comments that you heard us talk about on the Huawei front really relate to the actions from U.S. government that had last month that had impacted the customer reaction, the Huawei reaction to those actions and impacting our outlook in FU4.
spk11: And then I guess just how much of revenue was it, maybe in May, Dave?
spk08: In the May quarter, the FQ3 quarter, that did not, the action announced last month, did not, action announced by the Commerce Department last month did not have an effect in FQ3.
spk10: Now, suffice it to say that we didn't list them as a, you know, over 10% customer, so you can make the assumption that it was below 10%. Okay. Thanks, Dave. Sure.
spk14: Thank you. Our next question comes from Alana, Joe Moore of Morgan Stanley. Your line is open.
spk05: Great. Thank you. I wanted to ask about customer inventory. I want to revisit that. To the extent that customers are wrestling with pretty unprecedented potential supply challenges, do you think they're building up buffer inventory to deal with that? I mean, we've seen single earthquakes in one region cause that behavior in the past. Now we're dealing with rolling outages across multiple continents. Do you think customers may be building inventory? And if so, do you think memory is sort of less or more impacted than other things from that level of thought?
spk08: So what I can tell you is that Micron itself in our supply chain operations has focused on making sure, given all the considerations around the globe, you know, with all the uncertainties around COVID and COVID containment and COVID spread, Micron itself in its supply chain operations is increasing the inventory for raw materials to make sure that we are well prepared to meet our customer demand. So this trend of higher level of inventory, elevated level of inventory is, you know, it's been talked about and is common in the tech supply chain. And, you know, with respect to our specific customers for memory and storage, so as I mentioned earlier, so yes, some customers may have built some inventory given their considerations, their concerns around supply, potential supply chain disruptions that may occur due to all the COVID related uncertainties. As well as I pointed out, some of the customers in the mobile may have done some inventory given US, China trade tensions and the regulations. So the thing is, you know, these are unprecedented times, uncertain times, not just for us or for the memory industry, but for our customer ecosystem as well. And customers' inventory strategies are changing. They are adapting as they themselves see how their market trends are evolving and, you know, how they want to best address their own inventory position as well. So this is the changing environment. We continue to work closely with our customers. And, you know, we make adjustments as appropriate. And key is to be adaptable and to be agile. And I think we have shown over the course of the first half of this calendar year that we have been really running our operations with tremendous amount of adaptability and agility and continuing to produce healthy results.
spk05: Great. Thank you for that. And then in terms of the strength that you guys are seeing in cloud in the second half, would you differentiate it all by geography? I think you mentioned China being stronger. But is there any different China versus the rest of the world in cloud?
spk08: You know, we're not going to break it down here between China and the rest of the world. But overall, you know, when we look at it in totality, we continue to see healthy demand trend in cloud in the second half of the year. And of course, you know, cloud, when you look at long term trends, I mean, long term cloud is still actually in early innings. And long term trends for cloud are strong because AI, as well as, you know, 5G, 5G driving more intelligent devices at the edge, growing more data opportunities. It's really the virtual cycle between cloud and intelligent devices at the edge. And then industrial IoT and everything around autonomous and robotics, all of these trends, you point to growth at the edge as well as in the cloud. So long term trends continue to be healthy. Will it ever be a little bit lumpy here or there? Certainly it can be. But the point is that long term growth drivers are solid and secular in nature for cloud.
spk05: Great. Thanks so much.
spk14: Thank you. Our next question comes from Miss Steves of RBC Capital Markets. Your line is open.
spk02: Hey, guys. Thanks for taking the question. So you mentioned two things on the call that I wanted to double click on. So the first one is you mentioned that some of the shipments of SemiCat didn't come in on time. So is this enough, in your opinion, to kind of impact the price of memory? I'm not looking for specific numbers, but was the shipment miss impactful enough that you think it's going to hurt supply enough to move the price? And then secondly, just by level, any comments on the U.S. government kind of incentivizing U.S. manufacturing? So we got TSMC coming to the United States and any impact you guys think it will have on you guys in the future?
spk08: So regarding the equipment piece that you asked, let me be very clear that Micron did receive its equipment in time because our equipment deliveries were rather early in fiscal Q3 toward our 1Z technology ramp and DRAM and of course other aspects on the NAND front as well. So we did not say that equipment deliveries were delayed for us during FQ3. However, it is well known and has been talked about in the industry that given the various challenges due to COVID such as logistics and transportation related challenges as well as supply chain challenges, some of the equipment deliveries have been impacted in the industry. And yes, you know, for us in the future, it is possible, you know, given the challenges of COVID that some of our deliveries in the future may get impacted. But in the past, you know, we have been in good shape overall with respect to our receipt of equipment again because the timing of most of that equipment delivery was such that we were able to actually escape some of the potential challenges in this regard. So from an industry point of view, if equipment deliveries get impacted, you know, which have been talked about, there have been reports, equipment suppliers have talked about some of that as well, then obviously that impacts technology transition capabilities and therefore it can impact supply, perhaps some supply growth somewhat lower than pre-COVID expectations due to the difficulty in making sure that the equipment are delivered on time as well as equipment installed and equipment ramp is happening smoothly given all the travel considerations involved as well. So yes, to the extent that affects the supply growth and lessens the supply growth, it obviously impacts the industry supply and demand environment. We have talked about that the demand also due to COVID in certain pockets, you know, certainly has been less, particularly those pockets related to COVID. So, you know, and we don't really comment on the pricing, but obviously supply has an important role to play on the pricing front. Your second piece of the question regarding, you know, possible U.S. incentives for semiconductor manufacturing. Let me first say that, you know, we are pleased that the U.S. administration as well as the Congress is considering incentives for U.S. semiconductor industry. This just goes to highlight that U.S. semiconductor industry is extremely important to our economy today. Semiconductor really forms the foundation of the economy of the future and also highlights the recognition of this importance by the officials in Washington, D.C. And really it's important that U.S. maintains its global competitiveness and innovation capabilities. So from that point of view, we are pleased that there are these considerations, the bill that has been put together. Of course, you know, a lot of detail still has to be worked out and the bills have to be approved. So we will continue to monitor this. And from the point of view of memory, I think the important thing is that cost and scale in memory are extremely important considerations. Micron in this regard actually has a well-diversified footprint of front-end manufacturing across the globe. And you know that we have fabs here in the U.S. in Manassas, Virginia, as well as in Utah and state of the art, Western class R&D facility in Boise, Idaho as well. And of course, we have R&D and manufacturing for memory in Asia as well. So we will, you know, continue to monitor these trends. But important considerations are scale, cost, and ROI on any investments is important. It's not just about government incentives. It's about managing the business in a healthy fashion, keeping in mind ROI considerations. And above all, it's extremely important that supply growth is managed in a cost-effective fashion, but also managed in a fashion to not disrupt the industry, to certainly not disrupt micron supply plants, and make sure that supply stagger is aligned with demand stagger. So while we welcome these incentives for growth of U.S. semiconductor industry and innovation agenda, we will continue to monitor this in a very disciplined fashion before we make any decisions in this regard.
spk02: Thank
spk08: you very much.
spk14: Thank you. Our next question comes from Chris Dainley of Citigroup. Your line is open.
spk07: Just a question. Can you just talk about the linearity of bookings during the quarter? Did they sort of build all quarter? Was there some volatility in there? And then you also mentioned that mobile and data center were the strongest end markets. Were both of those stronger than expected?
spk10: So linearity of bookings was pretty, I would call it pretty linear through the quarter. No surprises. And the mix, of course, as we said, data centers showed good strength through the quarter. And mobile was a bit weaker than perhaps we were thinking coming into it, but just in terms of linearity. But in general, I would say, you know, actually a fairly linear quarter for us.
spk15: Great, thanks.
spk14: Thank you. Our next question comes from Mitty Hasini of SIG. Your line is open.
spk09: Yes, thanks for squeezing me in. Most of the good questions have been asked. I just have a follow-up. I'm just wondering, Sanjay, what would it take for your customers
spk10: to
spk09: feel comfortable in signing multi-year, multi-quarter, rather, contracts? I remember when supply was tied back in 2016 and 2017, the industry was high-riding the longer-term contracts and the social that we enterprise. I think that has changed. In the context, how do you see this coming back and a more peccly part of the memory industry? Thank you.
spk08: So, Maddy, you were waking up a little bit. However, your question is a good question. And, of course, as you know, our customer base is extremely well diversified, you know, from automotive to data center to PC to smartphones and networking and industrial and consumer customers. So, you know, customer requirements with respect to discussions around supply and, you know, from us, they vary. You know, some of the customers are managing it on a monthly basis. Some manage it on a quarterly basis. And with some customers, we do have, you know, supply agreements that extend for years' time frame. Of course, you know, certain pricing discussions, et cetera, I mean, are not part of these contracts. They tend to be around supply and, you know, discussions around pricing tend to be on an ongoing basis. Auto is an example where the contract can be multi-year contracts, long-term contracts. So, it really varies from market to market. And you know that the technology and product mix continues to change as well. So, I think, you know, we want to be careful in terms of the length of the contract that we manage with the customers. And we manage, I believe, the diversity of our customers very well. And our customers value our supply. They are valuing the product portfolio that Micron is delivering. They are recognizing that, you know, we are the only company in the world that had NAND, DRAM, and 3D CrossPoint, and the ability to bring innovative products and solutions to them with a mix of technologies in them as well. And this really positions us uniquely. So, our discussions really regarding longer-term nature of product roadmaps and supply considerations, we ran all of these various aspects and are built around the roadmaps as well. So, things do change in this business. And therefore, multi-year contracts are more in the markets that are auto markets, where more legacy nodes are required to be in production for longer terms. But the parts of the markets where technology and products are moving fast, you know, it's not about multi-year contracts there, but varying length of contracts depending upon the end market customers.
spk09: Thank
spk14: you. Thank you. Our next question comes from Carl Ackerman of Cohen. Your line is open. Good afternoon, gentlemen. Thanks for letting me ask the question.
spk06: It's great to see the improvements in your SSE segment, both client and enterprise. First, what sort of percentage could QLC drives represent as a portion of your overall SSE mix next year? Could it be 25% or more? You know, and I'd appreciate hearing your perspective on the developments taking place in enterprise SSDs. You know, on one hand, your U.S.-based competitor has been adamant they're going to gain significant share in enterprise SSDs this year, yet merchant controller manufacturers do enable cloud providers to design their own in-house enterprise SSDs rather than just relying on -the-shelf SSDs from OEMs. So I was hoping you could just provide, you know, the opportunity that you see in enterprise SSDs this year versus peers and how you see that playing out over the next 12 to 24 months, particularly as some of the new technologies that you're introducing and providing, such as PCIe 4.0, becomes more mainstream. Thank you.
spk08: Thank you for asking the question. We are very pleased with our execution in SSDs, as we noted, that, you know, record quarter for us in SSDs and really solid sequential growth in SSDs. And this is happening, as we have said before, that during calendar year 2020, we will be expanding our portfolio of SSD solutions, introducing NVMe solutions for clients as well as data center markets. And we have said before that as we bring out those new solutions, as we qualify them with those customers, those NVMe solutions, it will give us an opportunity during the course of the year to gain share. And this is what has been happening during the course of this year with our strong performance in SSDs. We actually have been gaining share, yet our share is still relatively low. And as we continue to bring out new products in the future, and several are underway, and several qualifications are underway as well with our customers, we will have ongoing opportunities through the course of next year as well in terms of driving for profitable share gains in the SSD market. And regarding QLC that you asked about, we are really pleased with our execution on the QLC front as well. We are shipping QLC SSDs in the consumer market as well as we have product offerings that will be having drive future opportunity for us on the value side of the PC on the OEM front as well. And QLC SSDs are also being used in read intensive applications and replacing 10K HDDs as well. So you see there are multiple end market applications and opportunities for our SSDs. And we are already, you know, more than 10% of our total NAND consumption with respect to QLC. And this presents a good opportunity for us. And we fully expect our SSD mix to continue to increase as we bring out more new products over the course of next several quarters. So yes, I mean QLC as a mix of SSD percentage will go up for us going forward.
spk06: Thank you.
spk08: And let me just add that, you know, QLC is obviously an opportunity that instead of 3 bits per cell, it has 4 bits per cell. So obviously, you know, once done right and you really have all the bomb costs taken care of on the product side, it gives you lower cost and therefore improved profitability and opportunity as well. So we are certainly focused on increasing the mix of QLC. At the same time, you know, QLC will remain vast majority of the market for a considerable period of time.
spk14: Thank you. Our final question comes from the line of Mark Newman of Bernstein. Your line is open.
spk15: Hi. Thanks for screening me in. I think we have some strong numbers today. Just a follow-up question on the data center segment. There seems to be, and it sounds like everything you said today is very upbeat, quite bullish on data center demand remaining quite strong. There seems to be some worries in the market, particularly around some investors of hyperscalers inventory have been increased slightly. And I think the worry is stemming from what happened in 2018 with the cuts in orders in late 2018, which continued through much of 2019. So my question is how has the communication changed with the data center, the hyperscalers? Are you having more frequent and closer communication with them to determine, to try to get a better idea of what the inventory levels are or otherwise, how can you help soothe those fears that the data center demand is going to remain stronger for longer, as we hope it will?
spk08: So first of all, I would say on the inventory side, pre-COVID data center customers, as well as other customers largely, had inventories that had returned to normal levels. And certainly, supplier inventories were at normal level as well pre-COVID. And the COVID environment, work from home environment has driven strong surge in demand on the data center front. And as we mentioned, we expect demand trends to continue to be healthy in the second half for data center as well. In terms of inventories in the data center market, yes, while certain customers may be carrying higher levels of inventory, again for the reasons that I had mentioned earlier related to their own supply chain considerations, as well as changing environment with respect to the demand. But the point is that compared to 2018 or 2019 environment, customer inventories are really at a much better, much healthier levels. This is not like a 2018, 2019 situation, even if certain customers are carrying some higher levels of inventory, again, given the uncertainties around COVID. And the other point I would say is that while COVID does give us lower visibility and does bring about uncertainty, not just for us, but for our customers as well, cloud is an area where the long-term demand trends, as I mentioned earlier, are secular in nature overall. So memory and storage, given the kind of applications that customers, data center customers, hyper scalers are working on, those are requiring more memory and more storage. So the longer-term trend continues to be healthy. In the near term, yes, I mean COVID does have unprecedented amount of challenges and uncertainty in the entire tech ecosystem. And we are doing our best to continue to work with our customers. Our relationships today, since you were asking about those, are certainly a lot closer than they were in the previous time frame. I would say that even hyper scale customers have become somewhat more sophisticated in terms of understanding the memory dynamics and improving their own supply chain operations. So it's really a two-way relationship. We do work closely together with them. Having said all of that, of course, our visibility cannot be perfect in this area. We continue to focus on working closely with the customers, understanding the requirements and planning our supply chain accordingly. And what also helps is that the markets are quite diverse for us. I mean, yes, cloud is a strong driver of growth for the business, but also we are well diversified with strong mobile footprint as well as PC and between DRAM and NAND. And as we talked about, diversified into the gaming side, the new gaming consoles coming in, needing more DRAM, twice as much DRAM, new gaming consoles. So diversity of the business is certainly a helpful factor for us to manage through some of these uncertainties.
spk15: Thanks very much, Sandra. Very helpful. Thanks, Mark.
spk14: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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