Micron Technology, Inc.

Hello, thank you for standing by and welcome to Micron's first quarter 2022 financial call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Farhana Mehd. Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Micron Technologies Fiscal First Quarter 2022 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 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 risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after today's date to conform these statements to actual results. I will now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. Micron delivered outstanding results in Fiscal Q1, achieving strong year-over-year revenue growth and solid profitability. Our strong start to the year and our product portfolio momentum keep us on track to deliver record revenue and robust profitability in fiscal 2022. We are rapidly ramping our industry-leading 1-alpha DRAM and 176-layer NAND products and achieving excellent yields, and these products are now shipping across our major end markets. We achieved significant product advancements and customer wins, including launching our first DDR5 solution, introducing our vertically integrated Gen4 NVMe data center SSD, validating the world's first low-power DDR5X with MediaTek, and shipping our GDDR6 for AMD's Radeon RX 6000 graphics card. The secular demand for memory and storage, along with Micron's focus on building our technology and product leadership and deepening our customer relationships, continues to strongly position us to create significant shareholder value in fiscal year 22 and beyond. With a successful ramp of 1-alpha DRAM and 176-layer NAND products across major N markets, we are several quarters ahead of the industry in market deployment of these leading-edge process technologies. The combination of 1-alpha and 1-Z DRAM nodes represents the majority of our DRAM bit production, and 176-layer NAND now accounts for the majority of our NAND bit production. Our strong execution on these advanced nodes sets us up for the successful fiscal year 22. We are also investing to scale our technology for the next decade. We are planning for volume DRAM production on EUV in 2024 with our one gamma node. Integrating EUV with our existing multi-patterning immersion lithography expertise will help us maintain DLAM technology leadership for many years to come. And in NAND, we have successfully transitioned to replacement gate and have a roadmap to scale for several generations while leveraging our leadership in CMOS under array and QLC to maintain a bit density leadership. In addition to being a technology leader, Micron is the industry quality leader with two-thirds of our customers ranking us number one in quality. As a technology and quality leader and as an innovation partner with strong global manufacturing network, we have become a strategic supplier to our customers. Amid ongoing semiconductor supply chain challenges, Micron has leveraged our deep relay partnerships with customers and suppliers to support DRAM, NAND, and Nord supply continuity. On the customer side, we are seeing greater commitment and collaboration on supply planning, including the use of long-term agreements. Today, over 75 percent of our revenue comes from volume-based annual agreements, a significant increase from five years ago when they accounted for around 10 percent of our revenue. On the supplier side, we have entered into strategic agreements to secure supply of certain components that we need to manufacture our products. As a result of these agreements, the current tight supply of these components is expected to gradually improve for us throughout calendar 2022. Now let us review our end markets. Demand for memory and storage is broad, extending from the data center to the intelligent edge and to a growing diversity of user devices. Memory and storage revenue has outpaced the rest of the semiconductor industry over the last two decades, and we expect this trend to continue for years to come, thanks to AI, 5G, and EV adoption. In addition, the build-out of immersive virtual worlds, often referred to as the metaverse, will offer even more opportunity due to the intensive use of significant memory and storage in these applications. Our team's execution on strengthening our product portfolio has been outstanding, With several new product launches and customer qualifications in FQ1, achievements we are very proud of. I will highlight some of these achievements as I discuss our end markets. Data center is the largest market for memory and storage, and we expect it to outpace the broader memory and storage market over the next decade. Memory and storage is growing as a portion of server BOM, supported by new and heterogeneous computing architectures, the growth of data-intensive workloads and AI, and the ongoing displacement of HDDs by SSDs. In the fiscal first quarter, data center revenue grew more than 70% year-over-year as a result of continued cloud demand and a resurgence of enterprise IT investment. Our strengthening product portfolio also contributed to strong profitability. In FQ1, we launched the 7400 SSD, the first data center NVMe SSD to utilize our internally developed controller and firmware along with our DRAM and NAND. This Gen 4 NVMe product has already been qualified by two key customers. Looking ahead, we expect a strong ramp in our data center SSD revenues in FQ2 and driven by increased sales of our NVMe SSD products. In addition, we launched the industry's leading DDR5 and see strong demand as customers prepare for new server product launches in calendar 22. While PC end demand remains strong, our client revenue declined sequentially due to the PC production impact from ongoing non-memory component shortages and related customer inventory adjustments of DRAM and NAND products. Consistent with the expectations we articulated in our last earnings call, the inventory adjustment at most PC customers is now largely behind us, and we are seeing signs of stabilization in demand in this end market. As we enter calendar year 2022, we expect PC unit sales to be in line with those for calendar year 2021. Mix of enterprise PCs in calendar year 2022 is projected to be higher as companies invest to support hybrid work environments. This shift in the mix of PC unit shipments should increase average PC DRAM and NAND content. Low-power DRAM has grown to 20% of the PC industry DRAM bid demand today and is projected to become the majority of the PC market in five years. Given our industry-leading solutions in low-power DRAM, we are well-positioned to benefit from this trend. In FQ1, we achieved qualifications in volume production of our 176-layer Gen 4 PCIe client SSD at several PC OEMs, as well as our first revenues for DDR5 memory. Across the PC industry, demand for DDR5 products is significantly exceeding supply due to non-memory component shortages impacting memory suppliers' ability to build DDR5 modules. We expect these shortages to moderate through 2022, enabling bit shipments of DDR5 to grow to meaningful levels in the second half of calendar 2022. We are poised to take advantage of this transition with industry-leading DDR5 solutions for PCs. In the fast-growing graphics market, Micron holds an excellent position with a broad product portfolio featuring our proprietary GDDR6X product line and deep partnerships with leading GPU suppliers. We increased our revenue sequentially and year-over-year. Our proprietary GDDR6X continues to have market success, including integration on NVIDIA's high-end gaming cards. In FQ1, we were pleased to announce availability of our GDDR6 memory solutions on AMD's Radeon RX 6000 graphics card, extending the value of GDDR6 memory to the entire gaming market. FQ1 mobile revenue increased more than 25% year over year. Mobile memory and storage demand continues to strengthen, supported by content-hungry applications, and the continued transition from 4G to 5G. Recent 5G phones feature more than 50% higher DRAM and double the NAND content versus 4G phones. 5G smartphone sales are forecast to exceed 500 million units in calendar year 21, with 700 million units forecast for calendar year 22. We expect mobile content to continue increasing as 5G phones benefit from further innovation in 5G-enabled applications. Following several industry firsts last year in FQ1, our 1-alpha-based LPDDR5X, the world's fastest mobile DRAM, was sampled and validated with MediaTek, further demonstrating Micron's leadership in the mobile market. We expect automotive and industrial to be the fastest-growing memory and storage markets over the next decade. and we are exceptionally well positioned as a market share leader with over 10% of our revenue coming from these end markets. In the near term, non-memory component shortages are limiting calendar year 21 auto unit production to be flat year over year, significantly below end consumer demand. However, our FQ1 year over year auto revenue growth remains strong at 25%, as a result of content growth from in-vehicle infotainment and driver assistance applications, which are advancing rapidly, especially as EV adoption accelerates. New EVs are becoming like a data center on wheels, and we are already seeing examples of 2022 model year EVs supporting level three autonomous capability with over 140 gigabyte of DRAM and also examples with over one terabyte of NAND. In addition to continued content growth, we expect calendar year 22 auto unit production to increase as non-memory component shortages ease. We entered into a new supply agreement with UMC to improve our ability to support our automotive customers with NAND solutions as market demand strengthens in calendar year 22. In industrial IoT, we saw more than 80% year-over-year revenue growth fueled by the continued ramp in applications such as factory automation and security systems. In consumer IoT, we saw more than 40% year-over-year revenue growth driven by applications such as VR headsets and smart home devices. We expect IoT demand trends to accelerate further as 5G speeds the adoption of data-intensive applications powered by intelligent edge infrastructure. Our view of calendar 2021 and calendar 2022 industry bid demand and supply growth is largely unchanged from last quarter. We expect calendar 2021 DRAM industry bid demand growth to be in the low 20% range and industry NAND bid demand growth to be in the high 30% range. We expect calendar 2022 industry bid demand growth to be in the mid to high teens for DRAM and approximately 30% for NAND, in line with our view of the long-term bid demand growth categories for each. We anticipate underlying demand in calendar 2022 to be led by increasing volume of data center server deployments, 5G mobile shipments, and continued strength in automotive and industrial markets. Non-memory supply shortages have constrained customer bills and pushed out some demand across many end markets. While these shortages may cause some variability to our demand, we expect them to ease through 2022, supporting memory and storage demand growth. Turning to our bid supply expectations for the year, Given prudent industry capex and very lean supplier inventories, we expect a healthy industry supply-demand balance in calendar year 22. Micron's calendar year bid supply growth for DRAM and NAND will be in line with industry demand. We are planning to deliver record revenue with solid profitability in fiscal year 22 with stronger bid shipment growth in the second half of the fiscal year. The stronger second half-bit shipments will be aided by the easing impact of non-memory component shortages on our supply and on customer demand, together with additional product qualifications of our 1-alpha DRAM and 176-layer NAND-based products. As expected in fiscal year 22, the continued ramps of 1-alpha DRAM and 176-layer NAND are providing us with good front-end cost reductions. As we mentioned before, our efforts to increase supply chain resilience and provide business continuity to our customers are headwinds for our assembly and packaging costs consistent with the broader 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. For both DRAM and NAND, we plan to achieve bid supply growth with no transitions alone through the middle of the decade. Beyond this time horizon, we anticipate the need to add greenfield wafer capacity for DRAM. However, for our NAND supply growth, we expect continued 3D scaling to be sufficient to to meet industry demand growth without the need for wafer capacity additions. We recently announced our intent to invest more than $150 billion globally over the next decade in leading-edge memory manufacturing and R&D. As part of our commitment to investing in R&D, we announced plans to establish a state-of-the-art memory design center in Atlanta. These announcements reflect our confidence in persistent long-term demand growth for memory and storage, and our ability to generate returns on these investments. We look forward to working with governments around the world, including in the U.S., as we consider sites to support future expansion. I will now turn it over to Dave.

Thanks, Sanjay. Micron delivered outstanding results to start the fiscal year, with revenue, margin, and EPS all coming in within our guidance ranges while also generating healthy free cash flow. Total FQ1 revenue was approximately $7.7 billion, down 7% quarter over quarter, and up 33% year over year. The sequential revenue decline was predominantly attributable to weakness related to non-memory component shortages at our customers, as Sanjay discussed earlier. FQ1 DRAM revenue was $5.6 billion, representing 73% of total revenue. DRAM revenue declined 8% quarter over quarter, and was up 38% year-over-year. Sequentially, bid shipments declined in the mid-single-digit percentage range, while ASPs declined in the lower single-digit percentage range. FQ1 NAND revenue was approximately $1.9 billion, representing 24% of Micron's total revenue. NAND revenue declined 5% quarter-over-quarter and was up 19% year-over-year. Sequential bid shipments were approximately flat and ASPs declined in the mid-single-digit percentage range. Now turning to our FQ1 revenue trends by business unit. Revenue for the compute and networking business unit was $3.4 billion, down 10% quarter-over-quarter and up 34% year-over-year. Cloud, enterprise, and graphics performed well in the quarter, while client revenues declined sequentially. Revenue for the mobile business unit was $1.9 billion, up 1% sequentially, and up 27% year-over-year. Micron continues to lead and manage NAN, and MCP revenue surpassed 50% of mobile revenue in FQ1 for the fifth consecutive quarter. Revenue for the storage business unit was $1.2 billion, down 4% from the prior quarter, and up 26% year-over-year. SBU profitability benefited in FQ1 from the strong progress made in ramping our 176-layer node. Finally, revenue for the embedded business unit was $1.2 billion, the second highest in our history. EBU revenue was up 51% year-over-year and down 10% from record levels in the prior quarter. EBU gross margin and operating margin improved sequentially, driven by strong execution. The consolidated gross margin for FQ1 was 47% at the midpoint of our guidance and down approximately 85 basis points from the prior quarter. A higher mix of NAND sales was a headwind to FQ1 gross margin. Operating expenses in FQ1 were $891 million. We continue to expect FY22 R&D to be up approximately 15% over FY21 as we invest to strengthen our portfolio. FQ1 operating income was strong at $2.7 billion, resulting in an operating margin of 35%, down slightly from 37% in FQ4, and up from 17 percent in the prior year. FQ1 adjusted EBITDA was $4.4 billion, resulting in an EBITDA margin of 57 percent, flat from the prior quarter and up from 43 percent in the prior year. Non-GAAP earnings per share in FQ1 were $2.16, down from $2.42 in FQ4, and up from 78 cents in the year-over-year quarter. EPS included approximately one cent of gains from Micron Ventures investments. Turning to cash flows and capital spending, we generated $3.9 billion in cash from operations in FQ1, representing 51% of revenue. Net capital spending was $3.3 billion during the quarter. We continue to expect fiscal 2022 CapEx to be between $11 billion and $12 billion, and it will be front-end loaded in the fiscal year. Due to the strong revenue and profitability, we generated approximately $671 million in free cash flow. In addition, we received approximately $900 million from the sale of the Lehigh Fab, which closed in the quarter. We completed share repurchases of approximately $260 million, or approximately 3.6 million shares in FQ1. Including our dividend payment, we returned around $371 million to shareholders in the quarter, which represented more than 50% of the free cash flow generated during the quarter. In addition, our Board of Directors approved a quarterly dividend of 10 cents to be paid on January 18th to shareholders of record on January 3rd. We remain committed to returning more than 50 percent of the cross-cycle free cash flow through a combination of dividends and buybacks. As we've mentioned before, we will be opportunistic in share repurchases and more aggressive when the shares are trading at larger discounts to intrinsic value. Our ending FQ1 inventory was $4.8 billion, and average days for the quarter were 103 days within our normal target range of 95 to 105 days. We expect to exit FY22 with days of inventory at less than 100 days, as we expect our DRAM and NAND supply to be tight for the year. We ended the quarter with $11.5 billion of total cash and investments and $14 billion of total liquidity. Our FQ1 total debt was $7 billion. Following our successful sustainability-linked credit facility in May and continuing with our strong commitment to enhancing our environmental and social performance, in FQ1, we achieved two important milestones for Micron, our inaugural green bond and inaugural long bonds. The total proceeds from these bonds were $2 billion, and several nationally recognized minority, disabled veteran, and women-owned financial institutions participated. The $1 billion green bond proceeds will finance eligible sustainability-focused projects, including reducing the company's greenhouse gas emissions, energy and water use, and waste generation. The $1 billion proceeds from the long bonds, along with cash on hand, were used to redeem Micron senior notes maturing in 2023 and 2024. The net result from the green and long bond offering was essentially leveraged neutral for Micron, while improving our net interest expense and increasing the weighted average maturity of our notes and bank debts from four years to nine years. Now turning to our outlook for the fiscal second quarter. We're starting to see stabilization in demand from PC customers, and end demand remains solid across our markets. On the margin front, we expect that mix improvements are a positive factor for gross margins in NAND. While we continue to have cost headwinds due to COVID-19 mitigation expenses and above-normal assembly, test, and component costs, our front-end costs continue to benefit from our ramp of 1 alpha DRAM and 176-layer NAND. We expect operating expenses to increase sequentially as we invest in next-generation technologies and products for both DRAM and NAND and accelerate our new product roadmap. With all these factors in mind, our non-gap guidance for FQ2 is as follows. we expect revenue to be $7.5 billion plus or minus $200 million, gross margin to be in the range of 46% plus or minus 100 basis points, and operating expenses to be approximately $975 million plus or minus $25 million. We expect our non-GAAP tax rate to be approximately 10% for FQ2. Based on a share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $1.95 plus or minus 10 cents. Our FQ1 results and FQ2 outlook keep us on track to deliver record revenue and solid profitability and free cash flow in FY22. In closing, our business is delivering strong cross-cycle performance. Revenue growth has significantly outpaced the broader semiconductor industry. Gross margins have averaged over 40%, and operating margins have averaged around 30%. The strong product and technology momentum and Micron's solid execution give us confidence that we can sustain solid financial performance in the future. I'll now turn it back to Sanjay.

Thank you, Dave. Micron's culture has played a significant role in driving our strong reserve. Our vision to transform how the world uses information to enrich life for all serves both as an inspiration for our team and as a foundation for everything we do. Earlier this month, we released Micron's 2021 DEI report entitled For All, which highlights significant accomplishments across the six DEI commitments that we introduced last year. These accomplishments include achieving comprehensive global pay equity, as well as increasing representation of underrepresented groups among new college graduate hires by 7%. We also publicly disclosed Consolidated Equal Employment Opportunity, or EE01, data for the first time. This report is available on our website. Demand for memory and storage remains strong. The broad integration of AI, proliferation of the intelligent edge, continued data center growth, EV adoption, and 5G deployment are creating expanded opportunities for Micron, to innovate and deliver new value to our customers. The strategic importance of semiconductors to economic growth has never been more clear, and ensuring the security of supply for customers across all industries has never been more important. We look forward to working with governments on initiatives to invest in domestic production, both here in the U.S. through the CHIPS Act and FABS Act, and in the other countries around the world. It is a truly exciting time in the industry. Our business is robust and growing, and our team is energized to seize the opportunities ahead of us. We'll now open for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from CJ Muse with Evercore. You may proceed with your questions.

Yeah, good afternoon. Thank you for taking the question, and happy holidays. I guess first question would be around more depth from you on kind of the current supply-demand environment, as this cycle is really different from any other cycle. Obviously, in the last quarter, you know, we've seen PC kitting issues. Now that appears to be largely resolved. You've talked about shortages in auto. I'm curious how you're thinking about kind of normal seasonality, if at all, into first half and middle part of 2022, where you're seeing ongoing tightness and how we should interpret that in terms of the sequential bid growth into the second half of fiscal 22 and beyond in calendar 22.

Thank you, CJ. So happy holidays to you too and to all our listeners on the call. With respect to the demand trends, You know, as we said, we see second half to be strong bid growth, supported by the easing of shortages across our customer base. These shortages that our customers have experienced have constrained demand for us. And, of course, their end demand trends have been strong. So as the supply chain shortages ease during the course of 2022, that will be a tailwind for demand for us, for memory and storage products. And of course, there is some aspect of seasonality, as you know, in the current quarter, particularly in some segments that are more consumer-oriented parts of our business. So second half, there will be a stronger seasonality aspect as well. Then is the product cycles of our customers. New products in data center with new processors with new architecture that are enabled with more memory channels, more cores in those processors, more AI and big data workloads driving greater demand for memory and storage during calendar year 22. We expect calendar year 22 to be a strong year for data center demand. 5G, with respect to smartphones, continues to drive strong content increases. as well as, of course, more 5G phones are being sold. And automotive, you know, we talked about some of the trends of new vehicles that will have more content, and certainly EVs with more than 140 gigabyte of DRAM, and some EVs having a terabyte of NAND content. This is the trend that's starting to build up as well. So overall, you know, the devices have more content. And actually, in automotive, if you think about it, You know, we have 90 million automobiles versus servers at about 15 million, so 6X of automobiles with increasing content. So, of course, this will be a strong demand driver, not just for 2022. I mean, beyond that as well. So the demand trends are secular here in nature. And, of course, we work closely with our customers, and we understand, you know, how they are looking at their own demand rolling out through calendar 2022. So demand trends are strong. We expect healthy demand supply environment in calendar year 22. On the supply side, of course, it has been disciplined CAPEX. And as we have highlighted, we expect DRAM to be in mid-teens to high-teens in terms of year-over-year supply growth, and approximately 30%. And, of course, on the supply side, the CAPEX has been disciplined by the supplier's But also equipment constraints, the long lead time that is there, that too gives us confidence regarding calendar year 22 supply outlook. So overall, you know, we believe we are well positioned to deliver a strong second half based on all the demand aspects as well as supply aspects that I just described here, as well as a strong profitability for record fiscal year 22 revenue and robust profitability.

That's very helpful. As a quick follow-up, Dave, can you speak to the cost side? You highlighted expectations for strong front-end cost down. I'm curious, how are you thinking about normalization of COVID-related expenses, and how should we be thinking about any mixed shifts in your product portfolio in calendar 22?

Sure. Thanks, DJ, and happy holidays as well. Let me join Sanjay in sending everybody happy holidays. Yeah, so from a cost perspective, let me just step back a little bit on the margin front, because I think it's worth touching on it just for a second. So we delivered very strong gross margins, as you saw in the first quarter, 47% right in line with where we thought we'd be. Just keep in mind that just a year ago, our gross margins were just a little bit over 30%. So this is a pretty significant improvement in the gross margins. And of course, some of that obviously comes from pricing, but it also comes from good cost discipline and, you know, the beginnings of the ramp of 1 alpha and 176 layer that we saw, you know, last year and into this year. As we look into the second quarter, we do expect to continue to see a tailwind from cost reductions associated with both 176 layer and 1 alpha node, and that should continue through the year. Also, as Sanjay mentioned, you know, we have a lot of product quals ahead of us for this year. that will improve the mix of our business into high-value solutions. And so we also expect that to be beneficial. You know, the question, the root of your question is these costs that we're seeing in terms of COVID mitigation and some inflationary pressure. You know, those are likely to continue through the year. Hard to say when they abate, but we do expect that they will continue through the year. But other than that, you know, the other areas where we have good control over I think we're executing very well in terms of delivering good cost reductions. And, you know, at these levels of profitability, you know, the ROI for us, ROIC for us, from a business perspective, is quite high. So we're in a good – what I think is a really good place.

Thank you. Thank you. Our next question comes from Vivek Arya with Bank of America. You may proceed with your questions.

Thanks for taking my question. You know, you mentioned, Sanjay, that you're starting to see PC customers less constrained from a component perspective. I'm curious, is that a near term or is that an expectation of second half of fiscal year 22 comment? So when do you expect your shipments to PC customers to start to improve?

So the comment is relative to what we saw three months ago. And as we had highlighted in our earnings call, last earnings call, you know, we had seen that certain PC customers had their supply chain challenges, making it hard for them to get all non-memory components, thereby limiting their production of PCs, even though their end demand of PCs was still strong. So compared to that, what we have seen is that their inventory adjustment as a result of their non-component shortages is now largely behind them, and we are certainly seeing recovery of demand on the PC front compared to the levels that existed three months ago. And overall, as I noted, that for calendar year 22, we expect total PC unit sales to be similar to calendar year 21 level. So PC, we expect, will be recovering for us in terms of demand as we go forward here in calendar year 22.

Very helpful. And for my follow-up, Sanjay, you mentioned 75% of your revenues are now based on these long-term agreements. What kind of assumption goes into that? Are these take-or-pay arrangements, you know, just given the cyclical nature of the industry, How fixed or dependable are these contracts from a price or volume or margin perspective?

Thank you. Again, I would like to remind you that about four years ago, five years ago, we used to have about 10% of our revenue based on these LTAs, and today we have more than 75% of our revenue based on LTAs. What the LTAs have done is bring us closer to the customer and really enable us to have a much closer dialogue on their planning, their forecast, and enables us to plan our supply and the mix of supply appropriately as well. These LTAs are non-binding in nature, but they do help build greater visibility, greater transparency, and over the long haul, build greater trust and accountability between us and partners. because value of memory is just continuing to increase, and, you know, there is sentiment of, of course, wanting to make sure that there is sufficient supply of memory available to our customers. So we work closely with them, and, you know, it helps us decide our product portfolio as well and manage our overall product portfolio and the mix of the product. So these agreements are volume-targeted agreements. They're not generally based on pricing, but they do help us, as well as our customers, plan our business far better and give us greater visibility. And, again, these have been worked on, improved upon over the course of the last few years, and we continue to look forward to continuing to strengthen these LTAs going forward as well. Thank you very much.

Thank you. Our next question comes from John Pitzer with Credit Suisse. He may proceed with your question.

Yeah, good afternoon, guys. Thanks for letting me ask the question, and congratulations on the solid results. Sanjay, I want to go back to your expectation for industry BIT demand growth for DRAM in calendar year 22 of mid to high teens. While that's in line with kind of your long-term view for BIT demand, it would be a relatively big deceleration for from this year, despite the fact that it sounds like you've got a lot of good tailwinds next year, whether it be PC mix improving, smartphone mix and units improving, or new architectural shifts on the server side that are going to significantly increase DRAM density per server. And so I'm kind of curious, when you look at that expectation for next year, is that being gated by what you and your peers can supply to the industry? Is it being gated by your view of demand? Is it being gated by components outside of your control?

So, I think you are right to note that, you know, certainly supply is limited. As I highlighted earlier, you know, CapEx in the industry has been disciplined. And, of course, as you know, that exiting 2020, you know, there was inventory in the industry. Supplier inventories are at lean levels as well. And, of course, you know, in terms of supply growth, given the various aspects of supply chain shortages across all industries that have been discussed. Equipment today has long lead time as well. So overall, when you really look at calendar year 22, overall supply is rather limited. And, of course, demand trends are strong. What I would like to highlight is that you really have to look at long-term CAGR. The long-term CAGR on DRAM of mid-teens to high-teens, is really driving strong growth, and it is there because of all of the demand trends we have discussed. And so you can't just look at one year. You have to continue to look at longer-term trends. These are secular trends in nature, driving more demand for memory and storage. And of course, what we have provided here is our estimation regarding the bed growth. This is what we expect, and we'll continue to monitor this. Essentially, we expect a healthy industry demand supply environment in calendar year 22, particularly on the side of DNAM. And I think, you know, again, my supply comments are based on, you know, some of the capex that we have ourselves said is in DNAM is guided down, but also by our other suppliers of DNAM in the industry.

That's helpful. And then, Dave, as a quick follow-up just on the OPEX line, both this quarter and last quarter you sort of characterized fiscal year 22 as an investment year, but you kind of came in at the low end of OPEX for the fiscal first quarter. Were there any sort of pandemic issues that are preventing you from investing at the rate you want? And as you think about the balance of the fiscal year, how do we think about linearity of OPEX and what are the two or three big buckets of incremental spend?

Yeah. So it's right to note that there's a little bit of tightness in the labor market, which, of course, it makes it challenging. But I'd say the biggest single contributor of the OPEX this quarter, in the first fiscal quarter, was just lower R&D expenses and related to prequalification expenses. And those can be a little lumpy, and sometimes you just fall over the transom between the first and second quarter. of a year. And so it just turns out that, you know, they didn't hit in the first quarter, but we feel very confident that they will hit in the second quarter. And we will really spend in, you know, absolute terms for the year at the same level as we were predicting last quarter. It's more of a timing situation. So we'll have this kind of step up in OpEx for the second fiscal quarter. And then it's, you know, a much lower sequential rate of growth in the third and fourth fiscal quarter that will get us to, you know, roughly call it 15% for R&D. And SG&A will be a bit below that, but overall, you know, would drive the number we're affecting.

Perfect. Thanks, guys.

Thank you. Our next question comes from Timothy Arcuri with UBS. He may proceed with your question.

Thanks a lot. Dave, my first question is for you. Can you walk us through the impact from the Lehigh sale? I think there was some underloading charges, and there was maybe like $100 million a quarter worth of OPEX. So can you sort of bridge that for us as it relates to Lehigh between the fiscal Q1 results and the fiscal Q2 guidance?

Sure. So we had about $100 million of revenue in the first fiscal quarter related to wafer sales. It was somewhat accelerated because we closed at the end of October. That's a little bit higher than we've actually been running for the last couple of quarters, so that does actually go away in the second quarter. On the margin front, it was actually pretty close toward the corporate average. Normally, that's lower, but we moved the assets to a held-for-sale status, I think, at the end of the second fiscal quarter of last year, and so that discontinued the depreciation expense there. we saw margins generally at relatively similar levels once you kind of factor that in. So a lot of the underloading got somewhat removed over the course of the third and fourth fiscal quarter, or let's call it the first fiscal quarter, such that it won't have a meaningful impact of gross margins in the second fiscal quarter.

Got it. Thanks, Dave. And then, Sanjay, for you, just back on the topic of long-term agreements with your customers specifically, obviously there's been quite a change in the tenor of sort of how you engage with them. And my question is sort of where do you see this all heading? I mean, when you talk to your customers, they're very, very concerned about procuring DRAM at a reasonable price. So, for example, do you envision a scenario where maybe you can get them to prepay you for bits? Thanks.

As we highlighted, I mean, our discussions with our customers and LTAs are more around the requirements of supply. And, of course, these lead to closer discussion in terms of understanding their product portfolio, their roadmap, and how our roadmap gets defined and how our portfolio fits in with their requirements. So, as I mentioned earlier, I mean, these discussions, these relationships with our customers have continued to evolve over the course of last few years, taking us from, yes, that 10% LTAs to now 75% LTAs. But they're also continuing to evolve in terms of, you know, a relationship that is based on value as well. So, of course, we will continue to look for opportunities, as I mentioned earlier, to strengthen these LTAs in the future as well. And I would just like to highlight that we are in this good position with the customers in terms of gaining greater visibility to their requirements and being able to drive these LTAs through a lot of good work that our team has done here, the sales teams, our business unit teams, and, of course, supported by strong technology, product portfolio, and supply chain execution that just gives these customers and our partners the confidence in engaging in these LTA discussions with us. Thank you.

Thank you. Our next question comes from Medin Hussein with SIG. You may proceed with your question.

Yes, thanks for taking my question. Sanjay, my first question is for you, and I was wondering if you have any thoughts as to how you see the mix of DDR5 as a percentage of overall server DRAM trending throughout 2022. And I have a follow-up for David.

So with respect to 2022, as the new processors that are able to use DDR5 get rolled out into the marketplace, that will drive adoption of DDR5 in the server space as well. As we noted, in the PC space, DDR5 adoption has already started. and we have begun to ship DDR5 product. DDR5 currently is in high demand. Actually, supply there is limited for DDR5 in the industry. So when I look at PC as well as for server, we expect that DDR5 will be ramping up first in PC, and as the processors with DDR5 new processors become available in the industry, We particularly see that ramping up later in calendar year 22. I expect that we will be exiting calendar year 22 with approximately 20% of the mix of DDR, I'm sorry, with approximately 20% of the mix of DRAM in compute space at approximately 20% there, okay? And so a stronger ramp in the second half versus the first half because, again, as those new processors ramp up into production with our customers, that will drive a ramp of DDR5 in the second half in the server space. And in PC, as I mentioned, it's happening all throughout calendar year 22. Got it.

Thanks for the detail. And for David, I'm just trying to better understand the supply and demand environment. And when I looked at your guide, revenue guide, and what you reported for DRAM and NAND ASP, it seems to me the underlying assumption is based on moderate decline in blended prices. And I'm not asking you for a guide, but is that a fair observation?

For a second fiscal quarter, you're talking, Mehdi? Yes. Yeah. Yeah, so obviously we can't comment on pricing on a forward-looking basis. I would just reiterate Sanjay's comments that we see a healthy supply-demand dynamic for the fiscal year for both DRAM and NAND, and we continue to ramp 176-layer and 1-alpha, which gives us a good cost structure going forward. We're going to continue to drive the mix You know, all of those assumptions are built into our margin guidance. Of course, there's a high and a low to that margin assumption based on how things can play out. Thank you. Sure.

Thank you. Our next question comes from Joe Moore with Morgan Stanley. You may proceed with your question.

Great. Thank you. I wonder if you could talk about the role of the sort of just-in-case philosophy that you talked about a couple quarters ago. clearly you're comfortable with your customer inventory levels now, but how are they feeling and do you expect there to be a higher level of inventory on a sustained basis from here?

So inventory strategies clearly vary from customers to customers. And, you know, some definitely, given what pandemic introduced in terms of supply chain shortages, are looking at strategically higher level of inventory than Some may also be doing it for geopolitical considerations. So we don't really yet see customers going back to pre-pandemic levels. But, you know, the strategy around inventory does vary from customer to customer. And overall, as I said, on an industry-wide level, you know, while there may be, you know, some pockets of some customers carrying extra inventory, overall, you know, given the current environment, customer inventory levels are in a decent shape. And, you know, just look at us. Micron itself is also in our own manufacturing. We are holding a lot more inventory of raw materials just to make sure that our supply chain has assuredness with respect to our ability to supply our customers. And our operations planning just in the current environment of somewhat higher uncertainty on the geopolitical front as well as pandemic-related front is operating with greater levels of inventory with non-memory components inventory. And similarly, customers have similar approach as well in terms of managing their inventory.

Great. Thank you very much.

Thank you. Our next question comes from Toshi Ahari with Goldman Sachs. You may proceed with your question.

Hi. Good afternoon. Thanks so much for taking time. taking my questions. I guess my first one is on the supply side. Sanjay, you talked about constraints in the equipment space a couple of times. Are you actually seeing delays or sort of decommits from your suppliers at all? I guess you've maintained your full year CapEx guidance, so perhaps not, but just wanted to clarify that. And then my part two of my supply question, was there any impact from the earthquake in Taiwan in the quarter, whether it be from a BIP perspective or in terms of your ability to reduce costs?

So our procurement team and our supply chain team works closely with equipment suppliers in terms of long-term planning and securing of slots for equipment. And we continue to drive that. And yes, we have, of course, seen lengthening lead times, but those have also been factored in in terms of our overall planning. And as I mentioned, I mean, we are really seeing a lot more collaboration with these suppliers in terms of driving our own demand timing of equipment. So, no, I would not say that we have seen any push-outs versus our own expectations, but, again, those expectations of equipment delivery are built based on our collaboration with the suppliers, with the visibility that we have provided, and with a lot of good planning work between us and our suppliers. And your second part of your question, I forgot now, what was the second part of the question? Can you please repeat that?

earthquake in Taiwan, any impact to Bitshub into the quarter or cost downs?

So the earthquake in Taiwan at the time of the earthquake certainly did reduce some of our bid production. By end of the quarter, our impact to our overall output was meaningfully reduced.

Got it. And then as a follow-up, I wanted to ask about your business in automotive and industrial. You talked about the two businesses or the two end markets combining for more than 10% of your overall revenue. In a fairly normal environment, whatever that is, both in automotive and industrial, how are you thinking about the sustainable growth rate in those two end markets. Um, you threw out a couple of growth rate numbers for, for the quarter, but curious how you're thinking about both auto industrial on a cross cycle basis. Thank you.

Yeah. Auto and industrial, you know, certainly, uh, will be high growth drivers for us, uh, across the cycle. Uh, I spoke to all the demand drivers in the automotive market. Micron is clearly an automotive, uh, leader in this space. Um, and, uh, We said that auto and industrial combined over 10%. If you look at automotive itself, our share of the market is somewhere mid-single digits. And this share we would expect to continue to grow based on all our experience in this market, our share leadership, the high quality we provide, and increasing demand for memory and storage content in these markets. And, of course, industrial is also growing for us, you know, with 5G enabling tremendous demand in the industrial segment with industrial IoT. This market is drones with surveillance equipment with automation in the factories. All of this is tending to drive greater demand as well. So we expect solid growth in both of these markets. We expect the overall, if you look at DRAM, content CAGR in the automotive market, that's approximately 40% over the course of next three years. NAND CAGR in the automotive market, above 50% as well over the course of next three years. So this really has legs in terms of sustainable growth And, again, we are well positioned in these markets, and we expect our percentage of revenue in these markets to continue to increase over the course of the next several years.

Very helpful. Thank you.

Thank you. Our next question comes from Shannon Cross from Cross Research. You may proceed with your question.

Thank you. I wanted to make a follow-up. I realize it's early in what's going on with regard to the current variant, But I'm wondering if you've seen any impact from it. And also, given here the first company, at least that I cover, that has had to provide guidance in light of some of the changes, I'm curious how you approach thinking about the variant. And then I have a follow-up. Thank you.

So first of all, with respect to our focus on the business, with respect to our people, and Micron has been proactive all throughout the pandemic in taking actions to protect the safety of our team members, whether it is managing strict protocols with our operations, on-site operations, with respect to, you know, masking, physical distancing, as well as vaccination. And, of course, as a result of that, we have been successful in continuing to run our operations all throughout the pandemic And despite various industry-wide challenges on supply, we have been overall generally quite good in terms of our ability to support our customers. With respect to the Omicron, of course, we will continue our stringent focus on safety of our team members as well as continuing to run our operations. We will not let our guard down in this regard and, of course, continue to monitor all the trends and developments here. I would like to point out that even with Delta, all our operations continued to run well. And, of course, as you saw, the demand for our products continued to be strong as well. And, of course, we saw in some parts of the business higher demand, you know, as a result of COVID for certain periods of time, whereas other parts may have had lower demand for certain periods of time as well. So, of course... We will continue to monitor the trend, and to the extent that Omicron has any impact on the macroeconomic environment, of course that might impact some of our business. However, you have seen that we have been extremely adaptive, we have been extremely agile, and we will continue to do so.

Okay, thank you. And then I'm just curious, you mentioned higher OPEX, you know, obviously OPEX, in fiscal 2022, and that would be accelerating the roadmap. I'm wondering if you can elaborate a little bit on what we can expect, and is that more sort of a 2023 comment in terms of roadmap benefit? Thank you.

Well, you're already seeing a lot of the benefit. We'll have a lot of good products coming out through 2022, which were the benefit of the investments that we made in prior years. To a large extent, it's a continuation of the progression of our products in all markets. Obviously, there's more that we have to do in the SSD front to fully capture all of the opportunity from an NVMe perspective, so there's going to be investment there. There's obviously, you know, the next set of process technologies, which will include, you know, continued investment in EUV for the one gamma that Sanjay mentioned. So lots of different products that we think will be necessary to address the whole market, plus continued investment on the process technology side, you know, to keep our pace in terms of a leadership position and, you know, cost leadership position.

Thanks.

Thank you. And that concludes our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.