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 fourth quarter 2021 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. In order to allow as many analysts to ask a question as possible, please limit yourself to one question. Thank you. It is now my pleasure to turn the floor over to your host, Farhan Ahmad, Vice President of Investor Relations. You may begin your conference.

Thank you, and welcome to Micron Technologies Fiscal Fourth 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 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 GAAP to non-GAAP financial measures may be found on our website. As a reminder, a webcast replay will be available on our website later today. We encourage you to monitor our website at micron.com throughout the quarter for the most current information on the company, including information on the various financial conferences that we will be attending. You can follow us on Twitter at MicronTech. As a reminder, the matters we will be discussing today include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, specifically our most recent form 10-K and 10-Q, for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after today's date to conform these statements to actual results. I will now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. We delivered outstanding results in fiscal Q4, achieving robust profitability and the second highest quarterly revenue in Micron's history. Strong execution drove healthy results across segments, including record quarterly revenue in NAND, as well as in our embedded business. Fiscal 2021 was a year of many records for Micron. We achieved our highest ever mobile revenue, driven by all-time high managed NAND revenue and MCP mix. Our embedded business had a tremendous record-breaking year, with auto and industrial businesses both at substantial new highs. And our crucial branded consumer business and overall QLC mix in NAND all hit records in fiscal 2021. Through the year, we successfully navigated multiple obstacles brought on by the pandemic and reached several key milestones. For the first time in Micron's history, we established technology leadership concurrently in both DRAM and NAND. Micron's 1-alpha DRAM and 176-layer NAND are the industry's most advanced nodes in high-volume production. And we further strengthened our product leadership by becoming first to introduce LP5X DRAM and UMCP5 Managed NAND in mobile, and the industry's first functional safety-capable LP5 for automotive applications. The secular demand for memory and storage, combined with Micron's focused execution and our rock-solid balance sheet, position us well to deliver strong financial performance and create significant shareholder value in fiscal 2022 and beyond. Demonstrating our confidence in our business trajectory, we initiated a quarterly dividend that we aim to grow over time. Memory is at the leading edge of semiconductor manufacturing, and Micron has leadership in both DRAM and NAND technology. This quarter, We reached mature yields in our ramp of 1 alpha DRAM and 176 layer NAND, 20% to 30% faster than prior nodes, and delivered performance and feature improvements that will help unleash customer innovation. We believe we are several quarters ahead of the industry in deployment of these process technologies. Additionally, through deeper customer collaboration, We have further accelerated the time to market for value-added solutions built using these nodes. 1-alpha and 1Z DRAM nodes combined now represent the majority of our DRAM bit production given by strong growth of 1-alpha production. And by the end of the calendar year, 176-layer NAND will make up the majority of our NAND bit production. Looking beyond one alpha DRAM and 176 layer NAND, we are investing to sustain scaling in both technologies for the next decade. Adding momentum to our years of R&D in EUV, we recently took delivery of the industry's latest EUV system, NXE3600, at our Boise headquarters, where we operate one of the world's most advanced centers for semiconductor research and development. The delivery of this tool is an important milestone toward our previously disclosed plan of implementing EUV in high-volume manufacturing in the 2024 timeframe. We expect that the integration of EUV with our existing multi-patterning immersion lithography expertise will help us maintain D-LAN technology leadership for many years to come. In addition to being a technology leader and an innovation partner, we are uniquely positioned as a strategic supplier to our customers. Micron is the only U.S.-based memory company, and our strong global manufacturing network provides us with a diversified source of supply, which has become increasingly critical to ensure that we continue to deliver product reliably to our customers. The advantages of this unique position have been proven throughout the past 18 months as we have successfully navigated the challenges of COVID-19 across our global manufacturing network while maintaining continuity of supply to our customers. Now let us review our end markets. The demand for memory and storage has evolved dramatically from the PC-centric era. Today, demand for memory and storage is driven from diversified end markets that extend from data center to the intelligent edge and to a growing diversity of user devices. As a result of growing memory and storage content per device, DRAM and NAND now account for an ever-increasing portion of the bill of materials for our customers. DRAM and NAND-TAM share of semiconductor industry has steadily grown over the last two decades from around 10% to approximately 30% today. The AI and 5G revolution is only in its infancy, and as these secular growth drivers gain further traction, we expect new data-intensive applications to continue to fuel significant increases in DRAM and NAND TAMs. In the fiscal fourth quarter, data center revenue grew sequentially and year over year, fueled by secular drivers in cloud demand and the resurgence of enterprise IT investment linked to improving economic growth. Data center has become the largest market for memory and storage, driven by the rapid growth in cloud. With our broadening portfolio of differentiated products across memory and storage, We are in a strong position to drive strong growth and profitability in this important segment. We have been engaged on DDR5 from initial specification development and are well-placed to support customer transitions to DDR5-enabled platforms starting later this calendar year. We are also enhancing our NVMe SSD portfolio and will soon introduce PCIe Gen4 data center SSDs with micron-designed controllers and leveraging the full benefit of vertical integration. These SSDs will strengthen our market position over the course of the coming quarters and years in the fast-growing data center NVMe storage market. Work and learn from anywhere trends are driving a second consecutive year of double-digit PC unit sales growth in calendar 2021. In the fiscal fourth quarter, PC DRAM revenue was up significantly year over year. We are making strong progress transitioning our PC DRAM to our one alpha node, which represented a meaningful portion of our FQ4 PC bit shipments. Client QLC SSD bitmix hit a new record and made up the majority of our client SSD bit shipments in FQ4. Our QLC leadership enhances our bid supply capability and product profitability. We also have continued momentum ramping 176-layer NAND products for the PC market, and we qualified our 176-layer NAND-based Gen 4 NVMe client SSDs with several PC OEMs during the quarter. In graphics, revenue increased sequentially and year-over-year, driven by a continuation of last quarter's strong next-generation game console and graphics card shipments. Micron holds an excellent position in the fast-growing graphics market with a broad product portfolio featuring our proprietary GDDR6X product line and deep partnerships with leading GPU suppliers. FQ4 mobile revenue increased more than 25% year-over-year, driven by continued unit sales and content growth. We expect overall smartphone unit sales to grow this year, with sales of over 500 million 5G mobile phones forecasted. These content-rich 5G phones feature more than 50% higher DRAM and double the NAND content than 4G phones. We expect 5G and AI to drive new innovation in applications, such as AI-optimized video capture and editing, that will fuel DRAM and NAND content growth for years to come. Our 1-alpha LP4 16-gigabit design is now fully qualified and ramping at multiple OEMs, while our 176-layer NAND achieved its first UFS 3.1 qualifications at two OEMs. These wins demonstrate Micron's leadership in the mobile market and our continued strength in managed NAND products, where MCP sales surpassed $1 billion for the third straight quarter. We are continuing to see strong demand in our edge markets, which includes automotive and industrial IoT. We expect the automotive and industrial markets to be the fastest-growing memory and storage markets over the next decade. As the number one player in these markets, Micron is exceptionally well positioned to benefit from these secular growth trends. Our automotive business delivered a fourth consecutive record quarter, driven by continued recovery in auto manufacturing and the growth of memory and storage content, driven by in-vehicle infotainment and driver assistance applications. Industrial IoT revenues also set records in the fiscal fourth quarter, benefiting from the continued growth of applications such as point-of-sales devices, factory automation, and surveillance. We expect industrial demand trends to accelerate further as 5G speeds the adoption of data-intensive applications powered by intelligent edge infrastructure. We are also seeing an acceleration in our consumer IoT business driven by rapid growth in devices such as VR headsets, smart exercise equipment, and smart speakers. Turning to market outlook, calendar 2021 is shaping up to be a strong year. We expect calendar 2021 industry DRAM BIT demand growth to be in the low 20% range and industry NAND BIT demand growth to be in the high 30% range. Overall, our preliminary view is that calendar 2022 industry bid demand growth will be consistent with long-term industry bid demand growth CAGRs in the mid to high teens for DNAM and approximately 30% for NAND. We anticipate underlying demand in calendar 2022 to be led by increasing data center server deployments, 5G mobile shipments, and continued strength in automotive and industrial markets. Additionally, non-memory supply shortages that are constraining customer bills across various end market segments and that are pushing out some demand should ease throughout 2022, supporting demand growth during the year. Given prudent industry capex and very lean supplier inventories, we expect healthy industry supply-demand balance and robust profitability for both DRAM and NAND in the year. In the near term, our FQ1 bit shipments will decline modestly in both DRAM and NAND from very strong levels in FQ4. Some PC customers are adjusting their memory and storage purchases due to shortages of non-memory components that are needed to complete PC builds. We expect this adjustment in our PC customers to be largely resolved in the coming months. We are also seeing constraints within our supply chain for certain IC components, which will somewhat limit our bid shipments in the near term. Bid shipment growth will resume in the second half of the fiscal year, and we are planning to deliver record revenue with solid profitability in fiscal 2022. Our calendar year 2022 bid shipment growth for DRAM and NAND will be in line with the industry. However, due to the strong shipments in fiscal year 21 and our below-normal current inventory level, for fiscal year 22, our bid shipment growth for DRAM and NAND will somewhat lag the long-term CAGR. In fiscal year 22, the continued ramp of 1-alpha and 176-layer NAND should provide us with good front-end cost reductions. Our efforts to increase supply chain resilience and provide business continuity to our customers will cause headwinds to our assembly and packaging costs, consistent with the trend in the overall industry. Overall, we expect annual cost per bit reductions to be competitive with the industry in fiscal year 22 and over the long term. Turning to capital expenditures. We expect fiscal year 22 CAPEX in the range of $11 billion to $12 billion. The year-on-year increase in CAPEX is driven by our continued 176-layer NAND transition, pilot line enablement for next-generation NAND and DRAM, and continued infrastructure and prepayments to support the introduction of EUV. Fiscal year 22 DRAM equipment CAPEX for manufacturing will decline from fiscal year 21 as we benefit from the capital efficiency of our mature 1-alpha node. For fiscal year 2022, our bid supply growth will be achieved through node transitions alone, as we are a few years away from needing wafer start additions to keep up with the industry demand. We also expect to increase fiscal year 2022 R&D investment by approximately 15%, from fiscal year 21 to deliver bold product and technology innovations designed to fuel the data economy, as well as to expand our portfolio to capitalize on opportunities such as high bandwidth memory and CXL solutions. Our leadership portfolio, product quality, supply chain agility, and deep customer relationships make us a preferred partner in many of our markets, and we are confident in our ability to continue to create long-term, sustained profitability and returns built on that leadership. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered excellent FQ4 results highlighted by our second-highest quarterly revenues, strong gross and operating margins, and our substantial positive free cash flow. Total FQ4 revenue was approximately $8.3 billion, up 11% quarter-over-quarter, and up 37 percent year-over-year. As a reminder, FQ4 of last year was a 14-week quarter and impacts our year-over-year comparisons. FQ4 revenue growth was broad-based with solid demand and price increases in both ERAM and NAND. Our robust growth in FQ4 contributed to strong performance in FY21 with revenue of $27.7 billion, which was up 29 percent from the prior fiscal year. FQ4 DRAM revenue was $6.1 billion, representing 74% of total revenue. DRAM revenue increased 12% sequentially and was up 39% year-over-year. BIT shipments increased in the lower single-digit percentage sequentially, and ASPs increased in the high single-digit percent range quarter-over-quarter. For the fiscal year, DRAM revenue increased 38% year-over-year to $20 billion, representing representing 72 percent of total fiscal year revenue. FQ4 NAND revenue was approximately $2 billion, an all-time high, and representing 24 percent of the total revenue. NAND revenue increased 9 percent sequentially and was up 29 percent year-over-year. Bid shipments increased by low single-digit percentage sequentially, while ASPs increased in the mid-single-digit percent range quarter-over-quarter. For the fiscal year, We achieved a new company record for NAND revenue of $7 billion, an increase of 14% year-over-year. NAND revenue represented 25% of our total fiscal year revenue. Now turning to our FQ4 revenue trends by business unit. Revenue for the compute and networking business unit was $3.8 billion, up 15% sequentially and up 26% year-over-year. Growth was led by the data center and graphics markets. Revenue for the mobile business unit was $1.9 billion, down 5% sequentially and up 29% year-over-year. Mobile demand remained healthy in the quarter with continued momentum from the rollout of 5G. MBU revenue for fiscal 21 exceeded $7 billion and set a new record. Revenue for the storage business unit was $1.2 billion, up 19% from the prior quarter and up 32% year-over-year. Data center SSDs had strong growth in the quarter driven by enterprise and cloud strength. QLC shipments set a new record in the fiscal year in terms of percentage of our NAND shipments. Finally, the embedded business unit generated record revenue of $1.4 billion, which was up 23% sequentially and more than doubled year over year. We continue to experience strong demand across the automotive and industrial markets. For the fiscal year, EBU revenue easily exceeded $4 billion, setting a new revenue record. The consolidated gross margin for FQ4 was 47.9%, up 500 basis points from the prior quarter. Pricing increases across DRAM and NAND, as well as strong execution in our ongoing product portfolio transformation, drove margin expansion in the quarter. Operating expenses in FQ4 were $891 million, on the lower end of the range we provided in last quarter's earnings call. FQ4 operating income was $3.1 billion, resulting in an operating margin of 37 percent, up from 32 percent in FQ3 and up from 21 percent in the prior year. FQ4 EBITDA was $4.7 billion, resulting in an EBITDA margin of 57.1 percent, compared to 53.3 percent in the prior quarter and 47.4% in the prior year. For the fiscal year, total EBITDA was $14 billion, up from $9 billion in the prior fiscal year, and represented 50.4% of revenues. Non-GAAP earnings per share in FQ4 were $2.42, up from $1.88 in FQ3, and up from $1.08 in the year-ago quarter. EPS included approximately two cents of gains from investments in our venture arm, Micron Ventures. For the fiscal year, total EPS was $6.06, up more than 100% from the $2.83 achieved in the prior fiscal year. Turning to cash flows and capital spending, we generated $3.9 billion in cash from operations in FQ4, representing 47% of revenue. For the fiscal year, Cash from operations totaled $12.5 billion, up from $8.3 billion in the prior fiscal year. Net capital spending was $2 billion during the quarter and $9.7 billion in fiscal 21. We generated positive free cash flow of $1.9 billion in FQ4 and over $2.8 billion for the fiscal year. The increased cash flow was driven by strong revenue growth, increased profitability, and efficient working capital management. As Sanjay mentioned, we expect our fiscal 22 capital spending to be between $11 billion and $12 billion. Like fiscal 21, we expect our capital spending to be weighted more to the first half of the fiscal year, which will constrain free cash flow in FQ1 and FQ2. We do expect to generate healthy free cash flow in fiscal 22, but weighted toward the back half of the year. We also expect to close our Lehigh fab sale within FQ1, and we will receive approximately $900 million in proceeds from the sale. We completed share repurchases of $1.1 billion, or approximately 13.9 million shares in FQ4. For the fiscal year, we repurchased $1.2 billion, or approximately 15.6 million shares. From fiscal 17 to fiscal 21, we generated over $20 billion of free cash flow. During this period, we used approximately $5 billion of that cash flow to retire debt and $7 billion towards buying back stock and eliminating the dilution from convertible debt, reducing our share count by 148 million shares. We also improved our total cash and investment position by $5.5 billion. We expect that we will continue to generate strong free cash flow in the future, and as we discussed on our capital return strategy call in early August, we are committed to returning more than 50% of cross-cycle free cash flow to shareholders through a combination of buybacks and a quarterly dividend that we expect we can grow over time. The first dividend payment of 10 cents per share will be paid on October 18th to shareholders of record as of October 1st. The initiation of a dividend is an important milestone that reflects the structural transformation Micron has undergone over the last several years, and it shows our confidence in the sustainability of our cash flow generation. Our ending FQ4 inventory was $4.5 billion. And average days of the quarter were 94 days, below a normal range of 95 to 105 days. FQ4 finished goods dollar inventory ended at the lowest level since the LP acquisition in 2013. We ended the fiscal year with $10.5 billion of total cash and investments and $13 billion of total liquidity. Our FQ4 total debt was $6.8 billion. Now turning to our outlook. End demand across our major markets remains strong. As Sanjay mentioned, our bid shipments are expected to decline modestly in FQ1 as we normalize our inventory position and work with PC customers as they manage through their supply chain challenges. And on the gross margin side, our outlook is similar to how we viewed FQ4. While we will benefit from our node transitions on both DRAM and NAND, we will continue to see near-term headwinds from COVID-related expenses in assembly and packaging. As a result, we expect the gross margins in FQ1 to be largely a function of the mix. With all these factors in mind, our non-GAAP guidance for FQ1 is as follows. We expect revenue to be $7.65 billion, plus or minus $200 million, gross margins to be in the range of 47%, plus or minus 100 basis points, and operating expenses to be approximately $915 million, plus or minus $25 million. Excluding the impact of any potential new tax legislation, we expect our non-GAAP tax rate to be approximately 10% for FQ1. Based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $2.10 plus or minus 10 cents. In closing, fiscal 2021 was a year of considerable growth and success for Micron. Looking at four-year average metrics reveals the sustained cross-cycle performance of our business. Over the last four years, our gross margins have exceeded 40% and our operating cash flow margins have been approximately 50%. Despite the challenges stemming from the ongoing pandemic, we have continued to generate significant positive free cash flow while making substantial investments to grow our business. Our technology, product, and financial position provide strong momentum as we enter the new fiscal year. I'll now turn it back to Sanjay.

Thank you, Dave. I would like to share a recent accomplishment that makes me especially proud of our company. Our strong Micron culture has played a significant role in driving our results aligned with to our broader vision to transform how the world uses information to enrich life for all. Our company culture, community leadership, and business performance is being recognized globally, earning multiple industry awards and recognitions this year. This month, we were ranked by Fortune as one of the top 20 best places to work in manufacturing and production, the only semiconductor company to earn this recognition. Fiscal 21 was an excellent year for Micron. As our fourth quarter results clearly demonstrate, we are delivering strong financial results. We are planning to deliver record revenues and solid profitability in fiscal year 22. Demand for memory and storage is solid across market segments. Industry trends, like the broad integration of artificial intelligence into all computing, proliferation of the intelligent edge, continued data center growth, and deployments of 5G networks create new and expanding opportunities for Micron. The importance of semiconductors to these markets is underscored by government initiatives to invest in domestic semiconductor production, both here in the U.S. through the CHIPS Act and in other countries around the world. We are focused on building our technology leadership to deliver bold new solutions that offer unique value to our customers. Our business is robust, and we are energized to seize the opportunities ahead of us at a truly exciting time in the semiconductor industry. We will now open for questions.

Prader, can you please open the line for questions?

At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. Star 1?

Yeah.

We have your first question from Harlan Sur with JP Morgan. Your line's open.

Good afternoon. Thank you for taking my question. You know, there are a lot of concerns on inventories in all of your end markets, especially PCs, just given the non-memory component shortages that are limiting notebook and desktop shipments in the second half of the year. Can you guys just qualitatively describe customer and channel inventories in PC, server, and smartphone segments of your business? And Also, as you normalize your inventories through the first half of this fiscal year, do you guys anticipate normal level of inventories on your balance sheet as you enter the second half of the fiscal year?

So I will have Dave comment on the second part of your question and on your overall inventory question. I would say that, by and large, inventory among our customers is in decent shape. Of course, we talked about the PC market, where due to semiconductor component shortages, our PC customers, some of them are not able to fulfill all of their end demand, and therefore they have made some adjustments in their purchases, impacting some of our demand in the near term into the PC market. And we think this is short-lived, and over the course of the next few months, this will work itself out. And on the smartphone side, of course, you know that new phone launches are coming up, and this tends to be a seasonally strong trend. quarter for new smartphone shipments as well. And while some customers may, because of geopolitical considerations or through the lessons learned during the pandemic or their own supply chain considerations or supply chain shortages, may be having a strategy of carrying more inventory than some other customers, Overall, the smartphone market continues to be driven by 5G transition, smartphones over the course of calendar year 22 with 5G increasing by 50% from the 2021 levels. And on the data center side, of course, the investment cycle is strong on the data center side. And, of course, the pandemic has driven a strong acceleration in digital transformation, and that's certainly extending into the cloud, cloud services, video streaming, e-commerce, all of these trends, along with new architectures, new technologies, processors that are being introduced that actually enable greater AI capability into the workloads and greater usage of, greater attach of memory in the servers. All of these also are creating new demands, so overall data center inventory levels also in decent shape. So inventory in our markets today is in much better shape than it was back in the 2018 timeframe. Again, some customers may have higher levels due to their strategic considerations, and they may choose to continue to do so in the longer term as well, given the challenges faced by the supply chains during the pandemic, as well as given geopolitical considerations. So this is what I would like to share with you on inventory. And, Dave, you can add the second part of the question.

So just as a reminder, you know, when we look at our optimal level of inventory, we like to see it be 100-plus in terms of days. We can operate slightly below that. We are definitely below the optimal level at 94 days. I'd say the lowest we'd ever like to see it go is below 95 days. And so we think we will make a little bit of improvement next quarter in terms of days. It will probably be up a few days. But I think it's going to kind of be still below that 100-day figure. As we look through the year, assuming we can make some progress on inventory, we think we can get it more into what we would call the optimal stage, which is 100 to 105 days of inventory. It's probably going to exit the year somewhere in the 100 days of inventory range. As we already talked about, finished goods inventory is really where we're particularly lean, and we do have to make some progress in that space to get ourselves into a better position. But overall, I'd say the back half of the year will probably be in the optimal range.

Yeah, thank you for the insights there. And you mentioned in your prepared remarks seeing constraints within your supply chain for certain IC components, which is going to limit some of your bid shipments also here. Can you just give us some examples of some of these IC components, both in DRAM and in NAND? I assume, for example, you have some NAND controller constraints, but what about in DRAM?

So, Harlan, you're right to note that some of the controller shortages are there with respect to SSD and particularly impacting the data center SSD. We also have certain shortages of analog ICs, and these kind of shortages are impacting our ability to ship to the full demand level that we are seeing from the customers. And But if we look at controllers, some of the analog ICs, as well as in general, overall supply chain is running tight, and we have done a great job by our supply chain team in addressing these needs in the past, and they continue to work on securing the supply for the future, and we would expect that over time this will get better.

Thank you, Sanjay. Okay.

Thank you. Our next question comes from the line of CJ Muse of Evercore. Your question, please.

Yeah, good afternoon. Thanks for taking the question. I was hoping to drill in into your gross margins. Pretty impressive despite the top line guide. So I guess a couple parts here. First, in terms of the cost down within the November quarter, I'm assuming more DRAM than NAND. Can you speak to that? Can you also speak to mixed shift in the quarter? And then for all of fiscal 22, how should we be thinking about the type of cost downs across both DRAM and NAND? You know, should we, you know, think 10 plus percent is sustainable year on year for DRAM and, you know, similar type number, if not higher on NAND, or how should we think about that? Thank you.

Okay, so let me start with the near-term outlook. I would say the cost declines for the November quarter are going to be pretty minimal. We obviously are getting a benefit from both our 1-alpha node and our 176-layer node in NAND, but we are running into some cost headwinds as it relates to the back end, mostly, you know, a function of the pandemic and the disruptions that's caused to the supply chain and so forth. And that's actually both a NAND and a DRAM comment, quite honestly. So no specific direction either way on DRAM and NAND. As it relates to mix, obviously, you know, we have a range. You know, it can go a couple of different ways, obviously. But, you know, there could be a little bit of a mix shift between DRAM and NAND that could impact where the gross margins end up. Also, by business unit, we could see some mixed shifts within the business units, which could impact our margins as well, and even down to the product level. So, you know, it's hard to call within a couple hundred basis points, so that's why we gave this range. As I've mentioned in the prepared remarks, it's pretty similar to the range we gave. In fact, it's exactly the same as we gave in the prior quarter. So we're roughly seeing things pretty similarly to what we saw in the fourth fiscal quarter. And I agree with you. You know, these are great gross margins. We're pretty happy with them. The operating margins that this generates is in, you know, mid to high 30s. We're expecting something similar for the first fiscal quarter. So, we think we're executing very well on the profitability side of the business. On fiscal 22, you know, we do expect really good cost declines on the front end side for both DRAM and NAND. Again, a function of 1 alpha in DRAM and 176 layer in NAND. you know, when we look at kind of longer-term cost declines for DRAM, we see them as being mid to high single-digit percent cost declines for the industry. You know, we think from a front-end perspective for DRAM, we'll do better than that next year. On the NAN front, we see cost declines over time being more in the mid-teens, and we think, you know, the 176-layer next year will drive, you know, cost declines in that range next year as well. You know, obviously, Q1, Q2, you know, we'll likely have these cost headwinds as it relates to the pandemic and the supply challenges. So those things, you know, might impact us in the first couple quarters. But, you know, hopefully over time that starts to go away and we'll start to see the benefit also on the back end. We've made a lot of investment on the back end to improve our cost structure. And I think, you know, once we get behind this or get this behind us, I should say, as it relates to the pandemic, you know, we'll start to experience a lot of the cost benefits that we've put in place on the back end as well. I'd also note that when we look at our cost structure today and as we're looking into next year all the way through the year, we think, you know, the cost reductions that we're seeing are very competitive with the industry. And the cost headwinds we're seeing are very similar to the cost headwinds that others within the industry, not only in memory but also across the entire semiconductor space, are seeing. So, you know, we think this sets us up for, as Sanjay mentioned, very good profitability for next year. And I think that pretty much covers it.

Thank you.

Thank you. Our next question comes from Shannon Cross of Cross Research. Your line is open.

Thank you very much. The first question I had is with regard to pricing. Can you talk about some of the pricing dynamics, especially with the pullback in demand from the PC vendors? Are you expecting to see any more aggressive moves from your competitors? Although, given your comments on gross margin, I'm guessing the answer may be no. And then my second question is just with regard to your PCOEM partners, how are you tracking confidence that they're going to actually see the demand come through in second half of the year? because I get a lot of questions from people about double ordering even just from their end customers. So I'm just wondering if you've changed any methodology in how you're tracking what your partners are seeing or how you're providing guidance as you look out. Thank you.

So with respect to pricing, we do not provide comments on pricing, but you can look at our FQ4 results, and, of course, we reported that both for DRAM and NAND in FQ4 pricing And you are right to note that our gross margin guidance for FQ1 is strong. In fact, same as Dave earlier pointed out, as our FQ4 guidance was. at the time of our June call. And as you look at not only just FQ1 for fiscal year 22, we are projecting record year for the company with solid profitability for the full year as well. And just remember that pricing is always a function of the mix overall as well. And with respect to your questions around PC, again, as I mentioned, the PC customers have been impacted by their own semiconductor shortages and their supply chain constraints. Their end demand, their end user demand is very strong. In fact, they have unfulfilled backlog generally of among these customers, which is quite extensive. And you know that even in the PC industry, while prices have gone up, you know, if the customers are able to maintain a strong backlog, that speaks to the end strong demand. It really is all driven by work from home, learn from home, the demand acceleration that has taken place through the pandemic will continue to support healthy environment for PC in calendar year 22 as well. Of course, in 2020 and 2021, PC has gone through a double-digit unit growth on a calendar year basis. We expect that to moderate in calendar year 22 to perhaps from flat to low single-digit year-over-year growth in terms of PC units sold, yet it will be a healthy market. And again, driven by the trends such as the dichotomy is opening, business is opening, workers coming back, you know, that drives a greater mix of enterprise PCs, commercial PCs. So while some of the consumer PC products such as Chromebooks, maybe compared to last year, maybe less in demand today, but the commercial PC demand is getting stronger as well. So overall, PC continues to be a healthy market, and we work closely with our customers, and today they are really constrained by their supply chain shortages. and that's what is adjusting their purchases. As I said before, we believe this is going to be short-lived, and we look forward to continuing to support our customers with our products. And as we highlighted, our new technologies, new products, one alpha transitions, PC customers are qualifying them fast, and we are focused on delivering those in calendar year 22, as well as fiscal year 22 timeframe.

Thank you.

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

Hi, good afternoon. Thanks so much for taking the question. I was hoping you could provide a little bit more context around your fiscal 22 CapEx guidance of $11 to $12 billion. If you can kind of speak to WFE within that number for fiscal 22 and then differentiate between DRAM and NAND, that would be super helpful. And then just remind us what kind of bit supply growth are you expecting purely from transitions in both DRM and NAND as you think about calendar 22? Thank you.

Okay. So maybe I'll go through the CapEx for you. So as Sanjay mentioned and as I reiterated, we expect CapEx to be in the $11 billion to $12 billion range. We were roughly a little bit less than $10 billion, $9.7 billion in fiscal 21. If you look at it by the elements of CapEx, We are going to invest more in pilot enablement this year. Last year was a relatively low year for us in terms of pilot enablement, so that's going to be a reasonable step up in our CapEx spending. We feel CapEx equipment in DRAM will be down year over year. We think we made a good investment in fiscal 21, and we don't need to invest as much in fiscal 22, so that will be down. NAND will actually step up pretty meaningfully in fiscal 22 versus 21. If you remember, we took CapEx way down in fiscal 20, goosed it up a little bit in 21. Now we're up to kind of a full investment level in 22 to support 176 layer. And that was caused because of this transition from floating gate to replacement gate when we made kind of a pause in terms of our CapEx investment to get the first line out at relatively minimal levels. Back end, we should be up a bit in back end spend as we continue to make investments on the back end to put that cost structure into better places. As I intimated before, we've been making investments to improve our cost structure there. Clean room will be down a little modestly. And, of course, we have EUV spending that also will impact our capex in fiscal 22 as well. One other thing just to remind you, so we will be kind of like 60% of our CapEx kind of weighted to the first half, probably 40% to the second half. So, you know, this was similar to what we saw in fiscal 21, we're likely to see in fiscal 22, which is kind of our, you know, has been our typical pattern over the last couple of years.

And Dave, the transitions, you know, you guys talked about calendar 22, bids growing mid to high teens on the DRAM side and approximately 30% on the NAN side in line with the industry. You know, what portion of that growth are you guys expecting purely from transitions to 1-alpha and 1-76?

Sorry, I didn't mean to forget that again. Yeah, so it's all from no transitions. We're not adding wafers. We don't see, for the foreseeable future, adding wafers in either DRAM or NAND. In the next few years, we might be adding wafers in DRAM, as Sanjay mentioned. But NAND, we think we can continue with. no transitions to support the growth.

Thank you.

Thank you. Our next question comes from Aaron Rakers of Wealth Fargo. Your question, please.

Yeah, thanks for taking the question. I wanted to ask about, you know, a little bit more about the end demand dynamics, particularly around the data center. I'm curious as we move forward, you know, how are you thinking about the bid demand profile of the data center and the server markets And what are you seeing as far as kind of the progression of, you know, kind of the progression of memory to compute ratio as we move forward to next generation CPUs? I'm just curious how you're rolling forward the expectations over the next year and that growth profile from a bit perspective.

Within the data center, both for DRAM and NAND, demand trends would be strong. In fact, data center today has become the largest market for DRAM and NAND, and will continue to grow faster than the average of the industry, both for NAND and DRAM in the foreseeable future as well. So it's really being driven by the trend of AI driving greater need for memory in addressing data-intensive workloads. The BOM is going from about, you know, the memory and storage part of the BOM in the servers in data centers is going from about 30% a few years ago to around 40% now and going to 50%. in a few years' time frame as well. And new architectures, new processors are enabling more cores, and more cores means more memory attached per core, therefore greater gigabytes per server for DRAM as well as for NAND. DDR5 is a transition that will be occurring over the course of the next couple of years as well, as new CPUs get launched into production. And DDR5 is a higher bandwidth solution. It, of course, enables more value, higher performance in the applications. So that adoption will be going on. And over the course of the years, of course, CXL and HBM, these ultra-bandwidth solutions, these will also be continuing to grow in the data center space. So average content per server for both DRAM and SSD will also be growing over 20% on a CAGR basis in each of these applications. So strong opportunity ahead, and Micron is very well placed with respect to our own product portfolio in terms of SSDs displacing HDDs, in terms of us providing higher density memory modules for server and data center applications. So as cloud gets bigger, the data center market gets bigger for us, and we are very well positioned. And this is an area we have focused on and continue to focus on expanding our product portfolio, particularly on the side of the data center SSDs. So we look at this as a strong growth opportunity for the industry as well as for Micron. The value that memory and storage solutions providing in this space is is really critical for the services that our cloud customers are providing. And just keep in mind that enterprise as well, while it grows at a lower rate compared to the cloud, we are seeing a resurgence in enterprise applications as well, driving for overall healthy demand trends in data centers in calendar year 22, fiscal year 22, as well as beyond.

And then as a quick follow-up, Dave, I'm just curious, as you start to, this last quarter, implement some share repurchases, how do you think about the liquidity on the balance sheet or managing the company from a cash-on-hand perspective versus continuing to lean more in on share repurchases? How much cash do you need operationally to comfortably run the company?

So we roughly are holding about mid-30s as a percent of revenue in terms of liquidity. But $2.5 billion of that liquidity is our unused revolver, so cash is obviously less than that. We obviously have more liquidity than we need, which of course is a good opportunity as it relates to the buyback. As I mentioned, we're also going to receive $900 million from the sale of our Lehigh fab that also can be utilized for returns to shareholders. And we're expecting healthy free cash flow in fiscal 22 as well, and so we'll be able to leverage that. We've committed to return at least 50% of it in the form of dividend and buyback, mostly buyback, and we could obviously go higher than that. Our authorized plan, we still have $6 billion left in our authorized plan for repurchases, and if we see the stock be weak, which, of course, is how we viewed it in the fourth quarter, you know, we'll be aggressive about buying back stuff. Perfect. Thank you.

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Please go ahead.

Great, thank you. I wonder if you could address what transitions going on in both DRAM and NAND to 1-alpha and RG2. Are there any issues that that creates from a mix standpoint in terms of it seems like there's quite a bit of demand for the older products? You know, where are you in terms of getting qualified in the newer products? Just how is that affecting you guys?

Actually, we are doing very well with respect to ramping up these new nodes in production. Right on our plan, in fact, in terms of yields ahead of our plans I highlighted that the yields in these 176-layer NAND as well as 1-alpha DRAM have ramped 20 to 30 percent faster than our prior 1Z generation node and the prior FG node, the last FG node. And customer qualifications actually are going very well with these nodes as well. As I mentioned earlier, that we are already shipping. our one alpha in the PC space, as well as broadening its shipments to other parts of the markets as well. In fact, customers are working closely with us in qualifying these products. One of our 176-layer NAND-based mobile products went from, you know, just introduction to one million unit shipments in a record time, fastest ramp, in the history of the company. So, overall, these nodes in production as well as in terms of deployment in the marketplace are doing very well for us. And, of course, this is all baked into our guidance that we have provided in terms of our revenue as well as our cost expectations.

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

Yeah, thanks, guys. Thanks for letting me ask questions. Congratulations on the solid execution. Sanjay, you're sort of characterizing the current environment as relatively short-lived. Are we supposed to read into that, that as we go into the February quarter, your business might normally kind of buck normal seasonal headwinds? And I guess, importantly, upturns to date, this memory cycle has been very different than prior memory cycles. Typically, you have sort of eight quarters of unabated ASP growth and margin expansion. We're kind of, you know, at least plateauing here three quarters into it. What's different about this cycle? And I guess what makes you confident this is just a pause and not something more nefarious?

So with respect to the comment on the short left, just to be clear, what I was mentioning was that with respect to PC, part of the market where our customers, some of our customers in the PC market have experienced semiconductor shortages impacting their decisions on purchases of memory. That's what I was mentioning short-lived because their end-user demand on PCs is still very strong and a lot of unmet demand that actually stretches the demand over time and makes the demand stronger for longer. But my comment regarding short-lived and addressing it in the next few months was related to the PC part of the market. And outside of that, in other markets, as we discussed earlier, We see strong demand trends, strong end-user demand trends. And, of course, the supply chain shortages that are being experienced in PC are also being experienced in other parts of our markets as well by our customers. But, of course, different customers are handling them in overall different fashion. But the underlying demand trends driven by AI and 5G from data center to the intelligent edge to the user devices are strong. They are secular in nature. COVID further accelerated it. Semiconductor supply chain shortages are only stretching that demand out because some of the demand gets pushed out. So, as I said, making those demand trends growth drivers actually stronger for longer as well. So you can call it pent-up demand, but that's what I'm referring to. So on the demand side, things are here overall strong. On the supply chain aspects, of course, this is something that you know, that the lead time in the semiconductors is long, and this will take several quarters to continue to improve. improvements, our expectation is that these will continue to improve as well over the course of the coming quarters. And also keep in mind that Our industry, the memory industry, over the course of the last couple of years, has tapped into the inventory to ship beyond the supply growth. And this is a phenomenon that has occurred across the industry. Certainly you have seen that how Micron has brought its inventory to the leanest level in many years, in fact, below our target inventory levels. So this is interesting. something that is common to all suppliers in the memory industry, and as we look ahead, the supply growth will not only have to meet the customer requirements, but it will also have to replenish the inventory that has been taken to such low levels. Inventory has to be replenished in order to make sure that we are able to service our customers and meet their demand requirements, which from time to time change. So these are all factors as well. Very lean levels of inventory by the suppliers and as well as need to replenish that inventory will drive for a healthy demand-supply balance in calendar year 22 timeframe as well. So, yes, some of this, you know, in terms of our own supply chain shortages and some that are being experienced by our customers, we expect to be addressed over the course of time. And some of these shortages on the semiconductor ecosystem may take through 2022 timeframe, you know, by the end of – 2022, maybe some of them will be relieved. However, we expect them to continue to be improving through the course of time all the way through calendar year 2022. But the demand dynamics of the underlying strong drivers and the supply dynamics that I discussed, including the prudent CapEx investments that have gone on in the industry, and the lean supply, all of this will lead to healthy supply-demand environment in the industry. So it's really the combination of the demand drivers and the supplier's supply capabilities and shipment capabilities. That combination, I think, really sets us up well as an industry for – revenue growth and strong profitability in 2022. And, of course, we have projected, based on our expectations, that we will have record revenue in fiscal year 2022 and solid profitability as well.

Sanjay, those inventory comments were very helpful. I'm just kind of curious as a quick follow-on. Your guidance for BITS to be down in the November quarter, how much is that a conscious decision by you to hold BITS off the market to help maybe cushion pricing? And how much of that is just be driven – by there's no demand for those bits and that's why bits is down.

Well, again, I think, you know, keep in mind that our inventory is very lean. It is at the leanest level and below our target levels. And that is impacting some of our ability to meet the demand. as well. And overall, our projection of bits with respect to FQ1 is really a function of our own supply chain capabilities in terms of where our inventory is and what we can ship at this point to the customers, certainly impacted by some of the component shortages, non-memory component shortages that we are seeing in the marketplace as well, and our assessment of overall demand. And the main thing there really is around the PC where some of the demand is impacted. But overall, when you look at our guidance for FQ1, which takes into account, you know, any aspects of seasonality as well, But the guidance for FQ1 at its midpoint is about 32%, 33% higher than the same quarter last year. So, you know, our inventory capability is also overall impacting some of the ability for our customers in terms of what we can ship.

Perfect. Thank you.

Thank you. Our last question comes from the line of Timothy or Curie of UBS. Your line is open.

Thanks a lot. Appreciate that. Dave, I guess I had a question on gross margin. I wanted to go back to a question asked earlier. It's down only a hundred basis points on your guidance on like an 8% down revenue quarter. And it sounds like bits are only down modestly in both DRAM and NAND. So it sounds like the Delta is probably pricing. I would think more on the DRAM side. And then, you know, somebody asked you about costs, and you said, well, costs aren't coming down very much. So I guess I'm trying to figure out how gross margin is, you know, so good. Is this going back to, you know, some of the mixed comments that you made last quarter? It seems like a more sustainable trend that maybe people are missing. So I'm wondering if you can kind of, you know, flip that for us. Thanks.

Yeah, sure, Tim. Yeah, so cost declines are going to be relatively muted for, remember that. There will be some mixed changes that might impact gross margins to bring it down somewhere within the range that we gave. Obviously, the rest is a function of pricing, and you have to infer what you can out of pricing. Obviously, if If mix is the predominant factor in driving gross margins, pricing and cost will not be major factors in driving gross margins. Maybe that's the best way to say it.

Got it. Got it. Okay. And then I guess just last thing. So just on the cost curve, so you said you reached production crossover on 176 and on 1-alpha and 1-Z. Okay. how much, like, what's the lag effect in terms of when that really starts to bend the cost curve in a, you know, favorable direction given that you've hit, you know, production crossover on those things? Thanks.

Yeah, well, to be clear, 1-alpha and 1-Z we've hit crossover. 1-76 we hit at the end of the year. They're already, by the way, benefiting us from a cost perspective. It's hard to see it maybe as much just because we're getting a little bit impacted, obviously, on the back end, which is impacting the cost declines. But next year, we do anticipate that both of them will drive good cost reductions for us on the front end side. So they will be good notes for us in terms of cost structure. And I think we'll see that from a front end perspective every quarter. Again, I think the first couple of quarters, it may not be as noticeable in our cost per bit calculations. because of this, you know, more of a headwind on the back end side of the cost structure. But after we get behind that, I think you'll see, you know, you'll see that show up on the cost per bit basis as well. The only other factor will obviously be mix as well. And, you know, we're going to drive like heck to get our mix to be more, to be a richer mix of higher value products and, you know, which is always our goal. And of course, you know, with higher value products, you get higher costs, but higher profitability, higher growth margins. So, that's a good strategy, but that also kind of distorts the picture and will distort the picture over the course of the year as well.

Perfect. Awesome. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now