Micron Technology, Inc.

Good afternoon. My name is Lateef, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron's second quarter 2021 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker 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, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Thank you. And welcome to Micron Technologies Fiscal Second Quarter 2021 Financial Conference Call. On the call with me today are Sanjay Mehrotra, President and CEO, and Dave Zinsner, 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 the gap to non-gap financial measures can be found on our website. As a reminder, our 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 the statements made today. We refer you to the documents we filed with DSCC, specifically our most recent Form 10-K and 10-Q, for a discussion of risks that may affect our future results. Although we believe 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 statement to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Micron delivered strong FQ2 results above our original projections driven by solid execution and higher-than-expected demand across multiple N markets. The D-NAN market is in severe shortage, and the NAN market is showing signs of stabilization in the near term. The execution from the Micron team and these strengthened conditions enabled us to set revenue records for mobile MCPs and automotive products and to reach normal levels of inventory ahead of schedule. Following last quarter's introduction of 176-layer NAND into volume production, in FQ2, we began volume production on our one alpha DRAM node, solidifying our technology leadership in both DRAM and NAND. We are in an excellent position to capitalize on the strong demand for memory and storage driven by artificial intelligence and 5G across the data center, the intelligent edge, and user devices. I'll start with an update on our operations. The Micron team is doing everything we can to meet customer demand, despite the challenges of the pandemic, non-memory component shortages in the electronics industry, and disruptions that occurred in our Taiwan fabs in December. We are confident that our COVID-19 safety protocols will allow us to continue at full production levels, and we are encouraged to see vaccines become increasingly available around the world. Micron has been able to mitigate the impact of broad electronics industry shortages to our production output through our proactive supply chain and inventory management strategies. Investments made over the last several years in facilities infrastructure allowed us to minimize lost output caused by the power outage and earthquake at our Taiwan operations in December. Recently, due to the drought in central Taiwan, there has been a reduction in the water supply for one of our DRAM SAP sites. To mitigate the water shortage, we are accelerating our water conservation efforts and have secured alternative sources of water. At this time, we do not see an impact to DRAM production output. However, this is a developing situation that we are monitoring closely for the next several months. Now turning to technology and products. We continue to make solid progress on our key goals. First, to deliver industry-leading technology and improve our cost structure. Second, to bring differentiated products to market and improve our product mix. And third, to grow our share of industry profits while maintaining stable bid share. I'm proud to report that Micron was one of the top 20 U.S. patent registrants in 2020. This achievement attests to the brilliant innovation of our teams and is proof of the tenacious focus we have placed on technology and product leadership over the past several years. Our industry-leading 1-alpha DLAM and 176-layer NAND nodes are in volume production and are ramping on plan. We expect these nodes to be our workhorse for fiscal year 22, fueling our bid growth and contributing to our long-term cost reduction goals. Across both DRAM and NAND, we target our long-term cost reductions that are in line with the industry. In products, Micron is on track to support customers as they begin to introduce DDR5 in the fiscal second half of 2021. We are also driving an increased mix of QLC NAND, which helps to make SSDs more cost-effective and accelerates the replacement of HDDs with SSDs. QLC SSD adoption continues to grow, and we achieved a record-high QLC bitmix in SQ2. Earlier this month, Micron took a decisive step to exit 3D cross-point development and manufacturing. As mentioned on our recent 3D Crosspoint update call, Micron is prioritizing investment toward other memory solutions that use the Compute Express Link, or CXL, and we are excited about addressing this market opportunity with differentiated products. Most of the R&D teams previously working on 3D Crosspoint have already been transitioned to other programs, including accelerating introduction of CXL-enabled memory products. This change will allow Micron to better address future needs of our data center customers and also drive higher ROI and shareholder value. We are running an open process to identify the best acquirer for the Lehigh Fab, which provides an excellent location for advanced foundry, logic, and analog semiconductor manufacturing, and expect to finalize the sale within calendar 2021. We anticipate that the overwhelming majority of the highly skilled Lehigh manufacturing team will find strong career opportunities with the buyer. Turning to end markets, in data center, AI and data-centric workloads will drive long-term growth, with memory and storage becoming an increasing portion of server BOM costs. Micron is positioned for success in this market with a broad portfolio of high-quality and power-efficient products. Enterprise demand, which had been anemic for the last few quarters, is starting to improve as IT budgets increase in anticipation of economic recovery. Enterprise DRAM bit shipments grew sharply quarter-over-quarter but were still down year-over-year. Cloud DRAM bit shipments also grew quarter over quarter, and we anticipate robust demand from U.S. hyperscale customers, especially as we enter the second half of calendar 2021. In data center SSDs, revenue declined sequentially as customers in certain segments reduced their higher-than-average inventory levels. We are continuing to expand our data center NVMe SSD portfolio with internally developed controllers and have new product introductions planned in the coming quarters. In PC, we continue to benefit from the remote work and learning trend that drove healthy notebook and Chromebook demand in fiscal Q2. Micron delivered record PC DRAM bit shipments despite pockets of non-memory component shortages experienced in the PC OEM supply chain. We also began sampling 1-alpha based DDR4 products. In client SSDs, we are on track to begin customer qualification of our next generation client SSDs using 176-layer NAND in the fiscal second half of 2021. By the end of calendar 2021, we expect to cover multiple segments of the market including consumer, value OEM and premium OEM with our 176 layer based client portfolio. In graphics, revenue declined quarter over quarter from an exceptional fiscal first quarter which benefited from the launch of new gaming consoles. Nevertheless, fiscal second quarter revenue grew significantly year over year Micron has an excellent position in this market with a broad product portfolio and deep customer partnerships. In mobile, revenue grew 21% sequentially driven by strong execution coupled with better than seasonal demand due to continuing recovery in smartphone volumes. We achieved record MCP revenue and nearly tripled our LP5 revenue sequentially. We have also begun sampling the industry's first 1-alpha LPD RAM and 176-layer NAND with mobile customers. Smartphone unit sales in China have been robust, and 5G momentum is continuing. In auto, we delivered a second consecutive record revenue quarter as auto manufacturing recovers around the globe and as memory and storage content per vehicle continues to grow. We have more demand than we can supply, and we are working diligently with our customers to address their memory and storage needs. We are also advancing our product portfolio targeted for automotive applications. In FQ2, we completed qualification of our auto-grade LP5 and began sampling the industry's first automotive LP5 that is hardware evaluated to meet the most stringent automotive safety integrity level, ASIL-D. Turning to the market outlook, calendar 2021 is shaping up to be a solid year and our overall outlook across DRAM and NAND has improved since our last earnings call with broad strength across nearly all end markets. The pandemic has driven changes in our economy that we believe will not only benefit us this year, but also serve to accelerate the digital transformation of the economy and drive new opportunities for Micron. Recovery from the pandemic and pent-up demand are expected to drive strong demand growth in markets such as enterprise, cloud, desktop PCs, mobile, auto, and industrial. Data center demand is expected to be strong in calendar 2021, particularly in the second half of the calendar year, due to a combination of factors. First, enterprise demand has started to come back as the economy recovers and is expected to further strengthen through the calendar year. Second, our opportunity at cloud service providers will continue to strengthen through calendar 21, driven by robust demand for their solutions and offerings, as well as secular growth in AI and data-centric workloads. And finally, the introduction of new CPUs will support more memory channels and higher-density modules contributing to increases in server memory content across both cloud and enterprise. Forecasts for calendar 2021 PC unit sales have increased from three months ago and are expected to approach an average of 1 million units per day. There is robust demand in notebook PCs, especially Chromebooks. We also expect the desktop market to improve as workers gradually return to the office this year. Mobile unit sales are expected to show robust growth this year, and we also expect to benefit from higher content in 5G phones, which are forecast to double in calendar 2021 to more than 500 million units. Auto unit sales are expected to grow significantly from last year, while secular memory and storage content growth trends remain strong as EVs proliferate. The strong demand across various end markets combined with disruptions at certain logic and foundry semiconductor producers has resulted in a shortage of these non-memory ICs for our customers, and we believe memory demand would have been even greater without these shortages. In DRAM, due to the stronger demand, we now expect calendar 2021 bid growth at 20% above our prior forecast of high teens. This growth builds on calendar 2020 bid growth, which was in the lower 20s percent range. As a result of disciplined CapEx investments since the start of the pandemic, we expect industry DRAM supply to be below demand. As a result of the strong demand and limited supply, the DRAM market is currently facing a severe undersupply, which is causing DRAM prices to increase rapidly. We see the DRAM market tightening further through the year. In NAND, we now expect calendar 2021 bid growth to be in the low to mid-30% range, above our prior expectation of 30%. While we are seeing stabilization in near-term pricing, the elevated levels of industry capex are a cause for concern, and more capex cuts are needed to allow for healthy NAND industry profitability. Long-term, we expect a DRAM bid demand growth CAGR of mid to high teens and a NAND bid demand growth CAGR of approximately 30%. Turning to micron supply, we target our long-term bid supply growth CAGR to be in line with the industry bid demand growth CAGR for both DRAM and NAND. However, there can be year-to-year variability caused by no transition timing. In both DRAM and NAND, we expect our calendar 2021 bid supply growth to be below the industry demand growth, and we have used our inventory to add to our bid shipment growth this year. We are targeting fiscal 2021 capex to be approximately $9 billion to support our long-term goal of maintaining a stable share of industry bid supply. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered very strong fiscal second quarter results with solid revenue growth, margin expansion, and positive free cash flow. Market conditions improved throughout the quarter, and DRAM and NAND volumes as well as DRAM pricing were above our original expectations. Before discussing the details of our fiscal second quarter results, I want to discuss the financial impact of our decision to cease 3D cross-point development and manufacturing. As a result of this decision, we wrote off $49 million of 3D Crosspoint inventory in our FQ2 GAAP financial results. This inventory exceeded our needs to fulfill customer commitments. We remain committed to fulfilling our customer commitments to manufacture 3D Crosspoint wafers and currently expect modest revenues consistent with recent history until the end of calendar 2021. Our Lehigh FAB was recategorized at the end of FQ2 as held for sale on our balance sheet. And beginning in FQ3, depreciation expense for the building and related equipment will stop. As a result, FQ3 gross margins will benefit from approximately $75 million of lower depreciation expense. The remaining costs will continue until the closing of the sale of our 3D Crosspoint fab in Lehigh, Utah. As we discussed on our 3D Crosspoint update call, Micron will continue to maintain our current R&D investment level and redeploy the 3D Crosspoint R&D teams to work on technologies and products that align with our vision for memory and storage. We have already made progress on this front since our update call. Now, moving on to our results for the fiscal second quarter. Total FQ2 revenue was approximately $6.24 billion, up 8% quarter over quarter and up 30% year over year. we saw solid growth in most of our end markets, notably in the data center, mobile, PC, auto, and industrial markets. FQ2 DRAM revenue was $4.4 billion, representing 71% of total revenue. DRAM revenue increased 10% sequentially and was up 44% year-over-year. Bit shipments grew in the high single-digit percentage range sequentially, and ASPs were up slightly quarter-over-quarter. FQ2 NAND revenue was approximately $1.7 billion, representing 26% of total revenue. NAND revenue increased 5% sequentially and was up 9% year-over-year. BIT shipments increased in the high single-digit percentage range sequentially, while ASPs declined in the low single-digit percentage range quarter-over-quarter, showing an improvement in trajectory in the NAND pricing environment. Now turning to our revenue trends by business unit. Revenue for the compute and networking business unit was approximately $2.6 billion, up approximately 4% sequentially and up 34% year-over-year. Revenue growth was broad-based and driven by a combination of volume and pricing across data center, networking, and client. Revenue for the mobile business unit was $1.8 billion, up 21% sequentially and up 44% year-over-year. Mobile demand remains strong as 5G momentum increases, and the mobile market continues to recover from the impact of the pandemic. Revenue for the storage business unit was $850 million, down approximately 7% from the prior quarter and down 2% year-over-year. Both SSD revenue and component revenue declined sequentially. We expect our storage revenue to increase as we introduce our 176-layer client SSDs into volume production. And finally, the embedded business unit generated record revenue of $935 million, which was up 16% sequentially and 34% year-over-year, driven by strong industrial demand and record auto revenue as demand recovered from pandemic-related shutdowns. The consolidated gross margin for FQ2 was 32.9%, up 200 basis points from the prior quarter. DRAM price increases and cost declines drove the margin expansion in FQ2. For fiscal 2021, due to product mix changes, we now expect that our DRAM cost reductions will be somewhat higher than our prior expectations of mid-single digits, while our NAND cost reductions will be somewhat lower than our prior expectations of low to mid-teens. Operating expenses were $797 million in FQ2. Operating expenses were slightly lower than our expectation as pre-qual expenses were less than we had anticipated. We continue to expect operating expenses to increase in the second half of the fiscal year as we incur increased pre-qualification and labor expenses. As always, we remain committed to tightly managing expenses. FQ2 operating income was $1.3 billion, resulting in an operating margin of 20% compared to 17% in the prior quarter and 11% in the prior year's quarter. FQ2 EBITDA was $2.8 billion, resulting in an EBITDA margin of 45%, compared to 43% in the prior quarter and 40% in the prior year. Net interest expense improved to $24 million, and we expect it to be approximately $25 million in FQ3. Our FQ2 effective tax rate was 10.1%, We expect our tax rate to be in the high single digits for fiscal 2021. Non-GAAP earnings per share in FQ2 were 98 cents, up from 78 cents in FQ1 and up from 45 cents in the year-ago quarter. EPS included one cent of non-operating income related to gains from investments in our venture arm, Micron Ventures. Turning to cash flows and capital spending, we generated approximately $3.1 billion in cash from operations in FQ2, representing 49% of revenue. Net capital spending was approximately $2.9 billion during the quarter. Through the first six months of the fiscal year, we have deployed approximately $5.7 billion, or slightly less than two-thirds of our expected annual capital spending. As we look ahead to the second half of the fiscal year, we expect capital spending to decline from the first half and continue to target approximately $9 billion in total for FY21. As a result of our strong cash flow from operations of $3.1 billion, we generated positive free cash flow of $174 million despite the relatively high level of capital spending in the quarter. The increased cash flow was driven by strong revenue growth and efficient working capital management. We expect free cash flow to continue to improve in the second half of the fiscal year driven by continued revenue growth, higher margins, and lower capital spending. While we did not have share repurchases in FQ2, we will begin repurchasing shares in the third quarter and remain committed to returning at least 50% of annual free cash flow to shareholders in FY21. Ending FQ2 inventory was $4.7 billion, or 99 days, which reflects the inventory reporting changes we announced on last quarter's earnings call. We ended the quarter with total cash of $8.6 billion and total liquidity of approximately $11.1 billion. FQ2 ending total debt was $6.6 billion. Now, turning to our outlook, DRAM prices have started to strengthen, and we expect the market to remain undersupplied this calendar year. In addition, NAND conditions are stabilizing. These improving market conditions combined with our significantly stronger competitive position, set us up to generate stellar financial results in the second half of the fiscal and calendar year. While demand is strong across both the DRAM and NAN markets, our supply is now constrained as our inventories are very lean, particularly in DRAM. This restricts our ability to serve potential upside to demand. On the cost side, we're facing additional headwinds due to foreign exchange rates and drought mitigation impacting our Taiwan operations. And as a result, our FQ3 DRAM costs could be sequentially up. We're also assuming that there is no impact to our production output due to the Taiwan drought. With all these factors in mind, our non-GAAP guidance for FQ3 is as follows. We expect revenue to be $7.1 billion, plus or minus $200 million, close margin to be in the range of 41.5 percent, plus or minus 100 basis points, and operating expenses to be approximately $875 million, plus or minus $25 million. Finally, based on a share count of approximately 1.16 billion fully diluted shares, we expect EPS to be $1.62, plus or minus 7 cents. In closing, as we reflect on our financial performance for FY20, which was a trough year for Micron in this cycle. And compared to the prior trough in FY16, I'm amazed by how far we have come. From FY16 to FY20, we substantially improved our EBITDA margin, and our revenue grew by more than 70 percent. During this time, we delivered average gross margins of 40 percent, EBITDA margins of 50 percent, and return on invested capital of 20 percent. We believe Micron's strong performance will continue cross-cycle and outperform the broader semiconductor industry. I'll now turn it back to Sanjay.

Thank you, Dave. None of our achievements are possible without the great work of our world-class Micron team. We seek to recognize and reward team member performance and to do so fairly. Last week, we announced that we achieved comprehensive global pay equity in total employee compensation across base pay, bonuses, and stock rewards, for women and all underrepresented groups at Micron. Pay equity is a key pillar of our diversity, equality, and inclusion strategy and core to creating an environment that attracts and retains the best talent. We continue to strengthen Micron's inclusive, values-driven culture, which is an integral part of our broader transformation. We have come a long way since Micron's founding as a startup in Boise, Idaho, more than 40 years ago, and today we are a global technology and product leader. As the United States' only remaining memory and storage manufacturer, we welcome the U.S. government's commitments to enhance America's long-term technology leadership and competitiveness in semiconductor manufacturing. This emphasis on our industry, which is reflected by governments globally, is a recognition of the critical role we play in today's digital economy. Memory and storage represent approximately 30% of semiconductor industry revenue today, up from 10% in the early 2000s, and DRAM and NAND are growing in importance as a critical enabler of the most advanced technologies, driving economic growth and well-being. Micron's innovation over the decades has created a strong foundation, and we look forward to delivering value for all our stakeholders as the data economy accelerates. Thank you for joining and for your support of Micron. We will now move to Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star 1 on your touchtone telephone to ask a question. 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 C.J. Muse of Evercore. Your line is open.

Yeah, good afternoon, Sanjay. Thank you for taking the question. You know, I guess I was hoping you could compare and contrast, you know, what you're seeing this cycle versus previous cycles on the DRAM side. You know, you're talking severe shortages, yet, you know, we're really not seeing anyone upticking on CapEx. And if you ordered a tool today, you wouldn't get it until Q1 next year at the earliest. So I guess, you know, how are you thinking about things as well as, What kind of changes are you seeing in terms of customer behavior, and how might that affect your business going forward? Thank you.

Thank you, CJ. And in terms of how we see the demand environment today versus what you referred to a few years ago, You know, no question that at that time the demand was driven with the increases in cloud primarily, and today the demand drivers are much more diverse. We are seeing shortages across all end markets. The demand is strong across all end markets. You know, when you look at cloud, you know, while cloud may have gone through some digestion over the course of last couple of quarters, when we look ahead, you know, cloud demand is expected to be healthy given the refresh with the new CPUs. that are driving greater content in the servers. Similarly, mobile with 5G is driving much greater content per 5G phone, and on a year-over-year basis, the number of smartphones being sold are expected to increase on a double-digit basis as well. So a strong driver of growth on mobile phones as well. Automotive experienced, of course, big decline last year, but on a year-over-year basis, a mid-double-digit range growth in automotive number of units sold. So automotive is also driving greater content increase as well as unit increases. So overall, the industry is experiencing strong demand virtually across all end market segments. The CapEx has been disciplined, particularly in DRAM, over the course of the last couple of years, and the environment is one of severe undersupply. We are very excited about the opportunities ahead, and we absolutely believe that Micron, in this environment, in terms of demand and supply considerations and our own execution from a technology point of view, having industry's leading edge one alpha node, industry's first, as well as having industry's first 176-layer node, we are well positioned to drive our growth ahead. and really well positioned to deliver stellar financial results over the course of next several quarters. And in terms of our customers, you know, a question that you asked as well, I mean, customers across the board are seeing that memory DRAM is in short supply, and that does affect, you know, some of the lead times that, you know, we expect from those customers, and by and large, those customers are supportive of those lead time considerations. And in this environment of extremely tight supply, the flexibility that is available for customers to switch between products is also becoming more limited. And this then does require customers to have longer lead times as well.

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is open.

Yeah, Sanjay, Dave, thanks for letting me ask questions. Congratulations on the song results. Sanjay, just sticking on the CapEx side, you're characterizing the DRAM market as a severe shortage. The NAND market is stabilizing, which is sort of an uptick of how you've been characterizing the market over the last couple of quarters. You're undergrowing industry bids, and you've got sort of an industry-leading cost position, especially in DRAM, with one alpha. And yet, when I look at your full-year CapEx versus what you've spent fiscal year to date, you're going to be down over 40% in the second half of the year. Why not get a little bit more aggressive on CapEx? What would you need to see? And at these levels, can you maintain your goal of being in line with industry bit share at these CapEx levels?

I think it is important to understand that we do remain disciplined with respect to CapEx. We want to make sure we manage it prudently. Our goal is that over a longer term in terms of supply growth CAGR to be aligned with industry demand growth CAGR. And we have made prudent decisions over the course of the last few years in terms of CAPEX investments. If you look at our fiscal year 21 capex of approximately $9 billion, this is really almost the highest capex that the company has spent in its history. And we are putting that into positioning us well for the future in terms of of course, creating more clean room expansion, but also investing in leading-edge technologies, which is what, as we look ahead, will drive our supply growth with our one alpha node in DRAM, as well as with our 176-layer NAND node. So, you know, even last year, while the industry was going through a trough period, Micron actually took the steps to invest for building for the future strength of the company. So all in all, we believe that our bid share in the industry would stay stable, and overall it is a good environment for us to operate in where our demand growth and our supply growth are on a CAGR basis aligned. Yes, from quarter to quarter there can be variations, But most important thing is that long-term supply growth category is managed in a disciplined fashion. And this is what is Micron's focus. And we believe we are well-positioned, as I said before, well-positioned to deliver stellar results over the course of next several quarters.

Thank you. Our next question comes from Timothy Arcuri of UBS. Your line is open.

Thanks a lot. I guess I also had a question on capex. Dave, given what you're guiding the back half of the year to, you're going to basically be exiting the year like, you know, annualizing roughly $6 billion in capex, something like that. So it requires a pretty big ramp just to get to that like, you know, 30% capital intensity number for next year that, you know, you've been kind of talking about. So is that still the right number to think about that you can get to like low 30s capital intensity for fiscal 22? because there's just not a lot of slots that, you know, you can get right now, even if you decide that you want to spend more money, those, you know, tool shipment slots aren't even really free until, you know, start of next year. So, thanks.

Right. Yeah, I mean, keep in mind that CapEx can be a little lumpy. You know, there are times where we need to make the investments ahead of our no transitions, and those sometimes can get more consolidated into a couple of quarters. And And I think that's essentially what you're seeing in fiscal 21. We're not ready to, you know, talk to numbers about fiscal 22 yet. We haven't finished fiscal 21, and we need to do that before we kind of formulate the plan. But I would tell you, you know, over the long term, you know, we feel very comfortable with our target CapEx spend of low 30s or 30 to 35 percent of our revenue in terms of CapEx. As Sanjay talked about, we take a very long-term view of CapEx. and align that CapEx investment to make sure that supply and demand are in balance for us. And, you know, we'll continue to approach it that way.

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your question, please.

Great, thank you. If I look at the sort of quarter-on-quarter bid growth for DRAM that you've given the last four quarters, I get to, you know, 40% plus type bid growth in February versus supply that you're sort of talking about, less than 20%, I think. So, you know, obviously there's some deceleration implied there that you unwound inventory a little bit in February. I know you talked about that a little bit after the pre-announcement, but maybe just give us a little bit of color on, you know, how you got to that bid growth and how that affects the next couple quarters.

So, of course, you know, if you look at last year, we had said that our supply growth was somewhat greater last year compared to the industry supply growth and the industry demand growth as well. So that positioned us well in terms of using our power inventory this year. And our supply growth this year is expected to be less than the industry demand Demand growth, industry demand growth, we have just raised our estimations to approximately 20% in calendar year 21. So our supply growth to be somewhat less than the industry, and of course, we have used up in DRAM our inventory to supply to meet the growing customer requirements. As we look ahead, our supply growth will be driven by our One Alpha technology in DRAM. We will be ramping it over the course of the next few quarters. It will be the workhorse of of technology for us in terms of bid growth in fiscal 22 as well. And, of course, as we bring out our products in this technology node, we have to get them qualified with our customers, and that's what we are focused on in terms of getting the ramp-up of this technology, OneAlpha technology, getting products qualified in time. to position us to drive our supply bid growth to meet the ultimate customer demand growth requirements during the rest of the calendar year.

Okay, that makes sense. But am I right in thinking that there's an implied kind of decline in kind of sequential bids as you, you know, you moved a lot of inventory in February, you don't have that inventory to move in May? Okay.

So, again, you know, our inventory in DRAM is really very lean at this point. And going forward, the growth will come from our one alpha node. And I think what's, again, important is that, you know, there can be fluctuations from quarter to quarter, but long term, it is really about having a stable market share driven by technology transitions, which is our focus and which we have delivered successfully. Whether you look at our one Z node in DRAM, that was the First one Z node in the industry, now one alpha node is the first one alpha node in the industry as well. So technology transitions is what we are focused in terms of driving our long-term supply bed growth category to be in line with the demand growth category. And from quarter to quarter, depending upon the timing of the technology transitions, there can be fluctuations. Second half, in terms of our year-over-year growth, will be lower than the first half, yes.

Great. Thank you. Thank you. Our next question comes from Chris Dainley of Citi. Your line is open.

Hey, thanks, guys. Just a bit of a longer-term question. uh sanjay slash dave if things continue to be uh strong for you know hopefully several quarters like you guys are talking about your cash pile is going to grow fairly substantially so you know theoretically speaking if we're sitting here a year year and a half out um what are you thinking about as far as the usage of that cash going forward and you know could could we see a dividend potentially in the future yeah well so our you know current obviously uh

approach towards returning cash to shareholders is through the buyback. We mentioned in the second fiscal quarter we didn't buy back stock, nor did we buy back stock in the first quarter. And that was really a function of the fact that cash flow was negative and we were protecting our net cash position. But as you suggest and as we talked about, we do expect to have good cash flow in the back half of the fiscal year. And we do expect this business to generate good free cash flow over time. So I think primarily you can look to us to buy back stock. We're going to return at least 50% of our free cash flow in the form of buybacks. And we have in the past returned more than that, so potentially we could do that in the future. There's a few things on the balance sheet as it relates to converts and debt that might use some of that cash as well. As far as a dividend, we haven't talked with the board about that. It's certainly a possibility, but I think we need to get through this year and discuss with the board if that makes sense.

Great. Thanks, guys.

Thanks. Our next question comes from Tashia Hari of Goldman Sachs. Your line is open.

Great. Thank you for taking the question. Dave, you're guiding gross margins up about 900 basis points sequentially for the May quarter. You talked about the exit from 3D crosspoint driving lower depreciation. I think it was 75 million. You also talked about DRAM costs potentially being up due to FX and the drought in Taiwan. But outside of those two items, how are you thinking about costs in your NAND business given the transition to second-gen replacement gate, and what are your thoughts on pricing for both DRAM and NAND? I think for DRAM, most of us are expecting, you know, 10 percent, 15 percent funded pricing increases. On the NAND side, perhaps, you know, I'll blow single digits, but how are you guys thinking about pricing, and how are you thinking about sustainability of pricing into the second half? Thank you.

Okay, thanks. So, as you point out, we do get the $75 million tailwind in the third fiscal quarter, due to the stoppage of the depreciation expense in Lehigh. That certainly will be beneficial and will help. The following quarter, it actually may be a little bit better than that, and so that will be a tailwind again for the fourth fiscal quarter. We talked about DRAM costs. We are affected by a few things. I mentioned the drought mitigation that is causing a little bit of a headwind on our costs on DRAM. We are, because of the significant tightness In our supply chain, we are seeing some, you know, some increased spending as it relates to the back end. So that's certainly a factor as well. And also, as I mentioned in the prepared remarks, you know, FX has been a bit of a headwind for us. In particular, it's Taiwan dollar, you know, which had about a 5% appreciation this year. So those things are driving a little bit of a cost increase. I would say, you know, that's probably... you know, kind of a one or two quarter type effect. You know, we're pretty excited about the one alpha node. It does have a great cost structure. It will be a workhorse node for us in fiscal 22, and so we would expect that, you know, to certainly help on the cost side on DRAM. On the NAN front, we are expecting costs to improve next quarter aligned with our, you know, kind of annual cost reduction assumptions which suggest it will be in the low double digits year over year. So, you know, that will certainly be a little bit of a benefit on the gross margins as well. The rest of the gross margin guidance is obviously a function of assumptions around pricing and mix. And we, you know, avoid, you know, specifics around that. Suffice it to say that, you know, we feel very good about the pricing environment in DRAM given the very tight supply situation we're in in DRAM. And, you know, we're cautiously optimistic on the NAND front, given the stabilization we've seen more recently. But outside of that, I prefer not to comment more on the pricing side.

Thank you.

Thank you. Our next question comes from Harlan, sir, of JPMorgan. Your line is open.

Good afternoon. Great job on the quarterly execution. Just given the DRAM tightness in what appears to be tightness in literally all of your end markets, is the team reallocating your production mix, let's say, from mobile towards more higher growth, higher margin segments of the market like enterprise and cloud and gaming as you move towards the second half of the year, especially on your view of strong cloud demand in the second half, improving enterprise trends, improving you know, gaming trends in the second half of the year. Is there any reallocation on the product mix in terms of wafers that you guys are starting today?

So remember the lead time, the cycle time of wafers in the fab tends to be in the two to three month range. And the wafers that you start today, by the time they are shipping to the customers, that time ends up being, including the time for assembly and test, ends up being three to four months later. So in this environment of really tightness across all end market segments, planning our wafer starts and dedicating them toward various end markets is really critically important. So this is the kind of activity that our team is always engaged in in terms of working closely with customers in understanding their demand mix. So not just total bid demand, but the bid mix of that demand between various product types, because it's extremely important that we start our way first in line with the expectation of our customer's demand. few months down the road, given, again, the cycle time considerations. So we are always managing this mix, but, again, would point out that we are seeing supply shortages for us across all end market segments. and across all nodes of DRAM as well. And in this environment, this is why, as I mentioned earlier, the lead time with customers is important, and it is an environment where flexibility in terms of for customers to switch between one product type to another product type is more limited now. When we had more inventory in DRAM before, that was easier to manage now that the inventory is running at these lean levels. Managing our supply mix, keeping it aligned with the customer mix, this is an ongoing activity here at Micron. And our team has done, I think, a great job. Our supply chain team, our Business units and our sales teams have done a great job working with our customers, understanding the market requirements and managing our business well. And you see the result in terms of how well we have been able to bring inventory both in DRAM as well as in NAND. And, of course, we are continuing to push. for SSDs and multi-chip packages toward our higher density solutions as well because, again, all those considerations are important in this environment of tight supply and the tightness in terms of supply only increasing as we go through the year. So this is getting a lot of focus, Arlan.

All right. Thanks for the insight, Sanjay. Okay.

Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Your line is open.

Yeah, thanks for taking the question, and also congratulations on the strong execution. I wanted to ask you a little bit about the longer-term secular growth drivers in the server DRAM market. How do you see kind of content growth on a per-server basis progressing? And, you know, I know you've talked about CXL. You know, what's the thoughts on what CXL means to that equation and when that starts to matter? Thank you.

So in terms of server content, as we mentioned in the prepared remarks, with the new compute platform architectures and the processors that are being introduced, they're all leading toward more cores, more channels, and greater usage of higher density modules. And, of course, the end market applications, when you look at, those workloads are becoming more and more data intensive, more AI driven, and ultimately driving for greater need for data and greater attach rate and greater content on a per server basis. So enterprise and cloud combined really, when you look at CAGR in terms of demand growth, expected to be a stronger CAGR in terms of bid demand growth versus the average of the market. So this is definitely... one of high growth areas. And the average content growth continues to be very strong and at a strong clip in terms of gigabytes per CPU. When you look at it for DRAM, that is more like, on a CAGR basis, more like 20% average capacity growing on a per-server basis, going from something like 200 gigabyte per CPU to growing to 300 gigabyte per CPU over the course of next two to three years. So DRAM has strong growth, and, of course, same for SSD as well in terms of performance. cost of ownership benefits that SSDs provide as well. And, you know, CXL is a new emerging trend, and this will create greater opportunity for differentiated solutions. And as we mentioned earlier, that these are opportunities that we believe will be very well positioned to capture with our emerging technology solutions that we are working on, which we believe will provide higher ROI as well as high-performance solutions for our customers. So CXL is, again, a development where Micron will be well-positioned to really address the memory hierarchy needs of our customers as they evolve over the course of next few years.

Thank you. Thank you. Our next question comes from Mehdi Hosseini of SIG. Your question, please.

Yes. Just a couple of follow-ups for me. I'm going to go back to inventory. Obviously, your commentary about the supply and demand environment suggests that prices are on the rise, but perhaps you want to lean your inventory or you want to continue to reduce because that inventory is not really fungible for new application that you're going to be shipping to in the second half. Is that the right way to think about this?

As it relates to our inventory, it's pretty lean at this point. I mean, all the inventory that you're seeing is either WIP or raw materials. There's a bit of finished goods, but it's just the amount of finished goods we need to stage to meet customer demand. So that... I think we're not in a position to lean it out anymore. We are quite lean at this point. Okay.

Got it. So there is no fungibility question. And then just moving on to NAND. And Sanjay, I see the same demand dynamics that are making you very bullish on DRAM also applied to NAND. As a matter of fact, CXL could be a material catalyst for NAND. What is it with your underlying assumption that is still keeping your long-term NAND bed growth to 30%. There's a ton of data created, and some of these architectural changes could actually be good for storage, especially SSD. And I'm just curious why you're not as upbeat as NMarket DataPoint would suggest.

So the long-term CAGR for DRAM, we have said, is approximately 30%. And, of course, this is something that we – constantly evaluate with working with our customers. And, you know, we do analyze this and as and when needed, we update these. But at this point, you know, our estimation for long-term DRAM CAGR is approximately 30%. I would like to point out that overall, you know, when you look at the price elasticity trends in DRAM and certainly when you look at post-pandemic growth and As I mentioned earlier, the cost of ownership benefit for NAND in the data center market and, of course, 5G driving greater content growth with respect to increasingly feature-rich smartphones as well. So the demand trends for NAND are robust, and I think the important thing to really monitor is the supply to be managed in alignment with the demand expectations, and this is where, as we have said before, that industry capex can be managed better in terms of supply growth aligned with longer-term demand considerations. I may have misspoken here. I may have said that approximately 30 percent In terms of the CAGR for demand growth, I may have said DRAM in that context. Of course, I was speaking about NAND. So I just want to correct myself that the 30% demand growth CAGR that I refer to is for NAND. Of course, as we have said, for DRAM, the long-term demand growth CAGR we see in high teens.

Thank you. Clear. Thanks.

Thank you. Our next question comes from Tom O'Malley of Barclays. Your line is open.

Good afternoon, Sanjay and Dave, and thanks for taking my question. This one's more related to Dave's You talked about DRAM costs in the May quarter potentially being up because of a couple factors, but you also took the full year guide for costs and said that they could be a bit better. Is that a comment on August costs accelerating and being a bit better there? Or can you just walk me through the dynamics of how you're seeing costs up in May and then the full year a little bit better in terms of overall costs?

First of all, good question, Tom. So really, we saw much better cost in the second fiscal quarter for DRAM And that really was the trigger to get the overall full year cost to be higher. Now, that was more a function of mix than anything, but that is what drove kind of the upside on the cost side. Yes, did I say higher? Yeah, sorry, I meant lower. Yeah, cost to be lower. I meant the higher number is what I meant. The May quarter or the August quarter then is, you know, we're not yet ready to provide some expectation. But I think the likelihood is that it wouldn't be, it certainly shouldn't be a step up in terms of sequential cost and, you know, likely will be slightly down. Thank you.

Thank you. Our next question comes from Ambrish Sivastava of BMO. Your line is open.

Hi, thank you for squeezing me in. Sanjay, I had a question on the shortages and then how are you reacting to, and you talked a little bit about the difficulty in planning and allocating wafers. So some of the semi-companies, you know, we're hearing companies, not hearing, they've talked about changing the order cancellation policy from 45 days to 90, and some companies talking about absolutely no cancellations allowed. So how are... Are your long-term arrangements changing with some of the key customers as a result of this so that it enables Micron to plan better? Can you just help us provide your perspective on how Micron is dealing with that?

Certainly working very closely with our customers and customers across all our end markets. As I mentioned earlier, certainly lead times with our customers in terms of supply commitments are increasing. The flexibility, I think our customers by and large understand that the flexibility in terms of mixing of their bid demand is getting more limited as well, given that not only our supply is in a very tight situation, but overall the industry is semiconductor industry with respect to materials and capacity is also in a tight position. Our supply chain team has done an excellent job over the course of last year in terms of really procuring materials and capacity early on so that even though we are running tight, we are able to meet our customer requirements, but yes, with less flexibility than before. And as Dave mentioned earlier, that some of this procurement of capacity does put some cost pressure in terms of our second half outlook as well. And so, of course, for FQ3, that's baked into our guidance. So our customers understand that this is an environment where we need to work closely with them and And overall, our teams are doing a very good job in managing this in this environment of tight supply. And we see this close collaboration that is going to be needed as we go through this year and as we go into 2022 as well. because really we are confident in 2022 demand as well. As the world recovers from this pandemic, you know, the economies across the globe are expected to be in a strong growth spurt mode, and of course technology demand will increase, and vaccinations are happening here in the U.S. first, rest of the globe coming in during the later part of the year. So the growth will be in 21 as well as 22, and we feel good about our outlook in terms of demand drivers, even in 22 timeframe. So this, working closely with customers to help manage the mix of their products and their supply requirements is going to be an important consideration, not just for next quarter or two, I believe well into 22 timeframe as well. And this is a great position for us to be in, in terms of particularly when you look at how we remain focused on our technology and product leadership execution, first with one alpha node in DRAM as well as first with 176 layer NAND, and remaining focused on bringing those technology nodes into production and customer qualifications over the course of next several quarters.

Thank you, Cynthia.

Thank you. And ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.