Ladies and gentlemen, thank you for standing by. And welcome to Micron Technology's Fiscal First Quarter 2021 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. It is now my pleasure to introduce Farhan Ahmad, Vice President Investor Relations.

Thank you. And welcome to Micron Technology's fiscal first quarter 2021 financial conference call. On the call with me today are Sanjay Mehrotra, President and CEO; and Dave Zinsner, Chief Financial Officer. Today's call will be approximately 60 minutes in length. This call, including the audio and slides, is also being webcast from our Investor Relations website at investors.micron.com. In addition, our website contains the earnings press release and the prepared remarks filed a short while ago. Today's discussion of financial results will be presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of the 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 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'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon and happy new year, everyone. Micron delivered strong revenue and earnings in the fiscal first quarter. I am proud of the Micron team for continuing our business momentum and putting Micron in a better technology and product position than ever before despite the ongoing challenges posed by the pandemic. We began shipping the industry’s most advanced NAND with 176 layers. And in DRAM, we made good progress on our 1-alpha node and are on track to begin volume production in the first half of calendar 2021. We believe DRAM is past the bottom of the industry cycle and expect improving trends through calendar 2021 as the digitization of the global economy continues, fueled by artificial intelligence, cloud, 5G and the intelligent edge, including smart vehicles. Against this backdrop, Micron is poised to emerge stronger and we are excited about our future. I will start with a quick update on our manufacturing operations. In early December, two separate events affected our Taiwan DRAM operations. The first event was a power outage at our Taoyuan facility, which occurred on December 3rd, the last day of our fiscal first quarter. The second event, a 6.7-magnitude earthquake off the northeast coast of Taiwan occurred on December 10th. The earthquake was felt at both our Taoyuan and Taichung locations. The investments we have made over the last few years in facilities’ redundancy and cleanroom control substantially mitigated the impact of these two events. However, these disruptions have reduced our available fiscal second quarter DRAM supply and negatively influenced our costs in the short term. The expected impact of these events is factored into our outlook. Micron continues to make solid progress on our key goals; first, to deliver industry-leading technology and improve our cost structure; second, to bring differentiated products to market and improve our product mix; and third, to grow our share of industry profits while maintaining stable bit share. From fiscal year '16 to fiscal year '20, we substantially improved our EBITDA margin for our combined DRAM and NAND business, while the rest of the industry, in aggregate, was roughly flat. And over the last few years, we have accelerated our technology roadmap in both DRAM and NAND. As a result, for the first time in our history, Micron has technology leadership in both DRAM and NAND simultaneously. Now that we are leading the industry in technology capability, going forward, we expect to maintain this competitive position through a more typical cadence for node transitions consistent with the rest of the industry. In DRAM, we are making good progress on our 1-alpha node. This will be an outstanding technology node for Micron, delivering a 40% improvement in bits per wafer over our 1z. A substantial portion of this improvement comes from our chip design concepts that provide greater memory array efficiency. Following the extraordinary improvements of our 1-alpha node, we anticipate lower gains in bits-per-wafer growth as more complex interfaces such as DDR5 are introduced and as DRAM technology scaling challenges continue. We are also making progress with differentiated DRAM products such as GDDR6 and 6X for graphics. In the fiscal first quarter, we saw strong growth in bit shipments for these products. We also began revenue shipments of HBM2E products. In NAND, in early November, we began volume production of our second generation replacement-gate node, which is the most advanced in the industry, combining our replacement-gate architecture, CMOS under the array and advanced charge-trap process technology. It also features double the power efficiency and write performance of Micron’s 96-layer 3D NAND. These improvements are essential for addressing future high-end mobile applications. We began shipping 176-layer consumer SSDs in the fiscal first quarter and will be introducing products built with this technology across the rest of our product portfolio over the course of the next several months. We are also driving product innovations and cost reductions through an increased mix of QLC NAND, and we are leading the industry with the broadest portfolio of QLC SSDs across client, consumer and data center markets. QLC helps to make SSDs more cost-effective and accelerates the replacement of HDDs with SSDs. QLC SSD adoption continues to grow and our bit mix of QLC SSDs increased further in FQ1. Turning to end markets. In data center, cloud and AI will drive long-term growth, with memory and storage becoming an increasing portion of the server BOM cost. New compute architectures are enabling more memory channels and higher density modules, contributing to increases in server memory content. Micron is positioned for success in this market with a broad portfolio of high-bandwidth, high-quality and power-efficient products. Cloud and enterprise DRAM revenue declined sequentially from a very strong 14-week FQ4, with ongoing enterprise market weakness. In FQ1, we began revenue shipments for our ultra-bandwidth HBM2E memory, which is used for data center AI training and inference. We are making progress on the DDR5 transition, which will double bandwidth and reduce power consumption, and we plan to start that transition in the second half of fiscal 2021. In data center SSDs, we continue to make progress on our NVMe portfolio and completed several customer qualifications in FQ1. We also continue to maintain our leadership position in SATA. Data center SSD revenue declined sequentially but was up year-over-year as cloud growth offset a decline in enterprise. We remain focused on strengthening our data center NVMe SSD roadmap with internally developed controllers and have new product introductions planned in the coming quarters. Our FQ1 mobile revenue was up sequentially, driven by solid execution and improved handset demand. A better-than-expected transition of Micron’s mobile business from Huawei to other mobile customers also contributed to our revenue upside in FQ1. Micron is well positioned to win in the 5G era with our industry-leading product portfolio. We had several key achievements in our mobile business in FQ1. We maintained LP5 solutions leadership and grew our LP5 shipments, were the first to market with uMCP5 and achieved record MCP revenue. In PC, the continued remote work and learning trend drove strong notebook and Chromebook demand in the quarter, despite pockets of non-memory component shortages in the supply chain. We delivered strong sequential growth in PC DRAM shipments driven by this demand. In client SSD, NVMe represented over 90% of the client SSD bits, with nearly half of those NVMe SSD bits being QLC. Consumer SSDs had a second consecutive record quarter for bit shipments, and we shipped the world’s first 176-layer-based consumer SSDs. In graphics, we achieved strong GDDR6 and 6X bit shipment growth, driven by new game console and PC graphics product launches. Micron has a strong position in this high-growth market, with a broad product portfolio and deep customer partnerships. We had a record auto revenue quarter, resulting from the resumption of auto manufacturing around the globe and the continued growth of memory and storage content per vehicle. We also achieved qualification of our 1z LP4 DRAM and began sampling our 96-layer-based UFS NAND. Electric vehicles have higher semiconductor content and as EVs continue to proliferate, we expect our auto business to continue to excel. In addition, as autonomous driving features advance, this content growth trend will accelerate further. Micron’s quality and market share leadership uniquely positions us to not just benefit from this growth, but also to drive innovative solutions for next-generation vehicles in collaboration with our ecosystem of customers and industry partners. Now turning to our view of calendar 2020 industry demand. During FQ1, overall demand was strong across most end markets despite shortages of non-memory components in PC, mobile, auto and graphics. Cloud demand was healthy while enterprise demand was weak due to the economic environment. As a result of the stronger-than-expected demand at the end of the year, we now estimate that calendar 2020 industry DRAM bits demand growth was slightly above 20%, while NAND bit demand growth was in the mid-20s. Now for our calendar 2021 outlook. In DRAM, we are past the bottom and the industry is in tight supply across major market segments. As a result, we are already seeing our calendar Q1 pricing starting to increase in several parts of the market. 16 gigabyte adoption in client in data center modules has increased, causing the same supply tightness that was previously seen in 8 gigabyte to also now be visible in 16 gigabyte. We expect calendar 2021 DRAM industry bit demand growth of high teens, with DRAM industry supply to be below demand. Stronger-than-expected industry demand has reduced supplier DRAM inventories. Low inventories, combined with disciplined industry CapEx in 2020 and the vaccine-driven recovery from the pandemic, should result in further tightening of the DRAM market through calendar 2021. In addition, we will also benefit from higher content in 5G phones, which are forecast to double in unit sales in 2021 to around 500 million units. We anticipate healthy unit growth in the PC market, and graphics should continue to benefit from new gaming consoles and from new gaming cards launched in the second half of last year. We expect the cloud market to grow at a healthy pace and enterprise market recovery will be driven by the timing of the broader economic recovery. Calendar 2021 industry NAND bit demand growth is expected to be approximately 30%, with supply potentially higher. The NAND market is challenging in the near-term. However, we believe that as the year progresses, elasticity coupled with pandemic recovery should lead to improving demand. We believe the market can stabilize over the course of 2021 if suppliers moderate their production growth. Long-term, we expect DRAM bit demand growth CAGR of mid to high teens and a NAND bit demand growth CAGR of approximately 30%. Turning to Micron supply. We target our long-term bit supply growth CAGR to be in line with industry bit demand growth CAGR for both DRAM and NAND. However, there can be year-to-year variability caused by node-transition timing. In both DRAM and NAND, we expect our calendar 2021 bit supply growth to be below the industry demand growth, and we plan to use inventory to support bit shipment growth that is in line with industry demand growth. For fiscal 2021, we expect DRAM cost reductions in the mid-single-digit percent range with somewhat higher levels of cost reductions on a like-for-like basis. We anticipate NAND cost reductions in the low-to-mid-teens percentage range. We are targeting fiscal 2021 CapEx to be approximately $9 billion to support our long-term goal of maintaining a stable share of industry bit supply. If demand expectations change, we remain flexible to adjust our CapEx. As we look ahead, we are excited about the growth and health of our diverse end markets, which continue to benefit from powerful secular technology trends, including AI, cloud, 5G and the intelligent edge. These trends are already enabling the data economy and increasing the importance of DRAM and NAND. Memory and storage industry revenues have grown faster than the broader semiconductor industry from approximately 10% of semiconductor industry revenues in the early 2000s to now approaching 30%. We expect that our TAM growth will continue to outpace the rest of the semiconductor industry over the next decade. Micron's focus on technology and product leadership, operational excellence and deep customer partnerships positions us well to grow our relevance and profit share in the industry. I'll now turn it over to Dave to provide our financial results and guidance.

Thanks Sanjay. Micron delivered very strong fiscal first quarter results with revenues and earnings coming in well above the guidance ranges provided in our last earnings call. We saw an improving business environment through the quarter, and demand and pricing were better than expected for both DRAM and NAND. Total FQ1 revenue was approximately $5.8 billion, down 5% quarter-over-quarter but up 12% year-over-year. Adjusting for the extra week in the prior quarter, revenue increased 3% sequentially, driven by strength in a broad set of markets, including auto, graphics, client, mobile and consumer. FQ1 DRAM revenue was $4.1 billion, representing 70% of total revenue. DRAM revenue decreased 7% sequentially but was up 17% year-over-year. Bit shipments were down in the low single-digit percentage range sequentially and ASPs were down in the mid-single-digit percentage range quarter-over-quarter. FQ1 NAND revenue was approximately $1.6 billion, representing 27% of total revenue. NAND revenue increased 3% sequentially and was up 11% year-over-year. Bit shipments increased in the high-teens percentage range sequentially, while ASPs declined in the low-teens percentage range quarter-over-quarter. Half of the decline was attributable to a change in mix, which included a greater portion of components. Now turning to our revenue trends by business unit. Revenue for the Compute and Networking Business Unit was approximately $2.5 billion, down approximately 16% sequentially but up 29% year-over-year. We had solid sequential growth in graphics and client revenues, while data center revenues declined sequentially, coming off a particularly strong quarter for cloud, the loss of the extra week, and continued weakness in enterprise. Revenue for the Mobile Business Unit was $1.5 billion, up 3% sequentially and up 3% year-over-year. Mobile demand remains strong as 5G momentum increases and the mobile market recovers from the impact of the pandemic. Revenue for the Storage Business Unit was $911 million, roughly flat from the prior quarter and down 6% year-over-year. As a reminder, 3D XPoint revenues are now reported in the Compute and Networking Business Unit. Excluding 3D XPoint from the prior year’s quarter, SBU revenues would be up 14% year-over-year. Finally, revenue for the Embedded Business Unit was $809 million, up 24% sequentially and up 10% year-over-year. EBU revenue was the highest since Q1 fiscal '19, driven by a record auto revenue as demand recovered from pandemic-related shutdowns. The consolidated gross margin for FQ1 was 30.9%, down 400 basis points from the prior quarter. Our gross margin was impacted by pricing declines and a greater mix of NAND. Operating expenses were $811 million in FQ1 as we continued to tightly manage expenses. We are expecting to increase operating expenses in the second half of this fiscal year as the previously delayed fiscal '21 salary increases take effect at the beginning of FQ3 and we incur additional prequalification related expenses in FQ3 and FQ4. As a result, we anticipate that FQ3 expenses will increase approximately 10% sequentially from FQ2, but of course we remain flexible to reduce operating expenses from those levels should business conditions warrant. FQ1 operating income was $973 million, resulting in an operating margin of 17% compared to 21% in the prior quarter and 12% in the prior year’s quarter. Net interest expense was flat quarter-over-quarter at $31 million. We expect the net interest expense to be approximately $35 million in FQ2. Our FQ1 effective tax rate was 7.4%. We expect our tax rate to be in the mid to high single digits for the remainder of fiscal '21. Non-GAAP earnings per share in FQ1 were $0.78, down from $1.08 in FQ4 and up from $0.48 in the year ago quarter. EPS included $0.02 of non-operating income related to gains from investments in our venture arm, Micron Ventures. Turning to cash flows and capital spending. We generated approximately $2 billion in cash from operations in FQ1, representing 34% of revenue. Net capital spending was approximately $2.8 billion during the quarter. We expect approximately $9 billion in capital spending for fiscal '21 with spending weighted towards the first half of the fiscal year. Free cash flow in the quarter was negative $816 million. We expect free cash flow to remain negative in FQ2 but to improve from the FQ1 level, driven by increased cash flow from operations. As we said previously, we expect to generate healthy free cash flow during the second half of fiscal '21. Although we didn’t repurchase shares in FQ1, we remain committed to returning greater than 50% of our annual free cash flow to shareholders through share repurchases. We made a significant improvement on our days of inventory and ended FQ1 with $5.5 billion of inventory or 125 days versus 135 days last quarter. As we look ahead to FQ2, I want to share some changes to our upcoming inventory reporting. Starting in FQ2, we will be using a FIFO or first-in first-out approach to inventory valuation as opposed to the average cost method that we have historically used. Concurrently, we are introducing a new costing methodology that uses standard costing. These changes will help us improve our business reporting by valuing inventory at the most recent production costs and aligning with general semiconductor industry practices. While we expect no material impact to our non-GAAP results from these changes, we do expect to record a one-time non-cash charge of approximately $300 million, which will impact our FQ2 GAAP results and reduce the carrying value of our inventory. Unlike certain valuation adjustments or write-downs to inventory, this is a permanent methodology change that will not result in a material impact on our future costs or margins. Concurrently with these changes, we will also reclassify spare parts from inventory to other current assets, which also better aligns with the rest of the industry. This new representation will reduce our inventory balance and consequently, our days of inventory will decline by approximately 10 days versus the old methodology. Applying this 10-day decline, our FQ1 days of inventory would have been approximately 115 days, and our new days of inventory target is approximately 95 to 105 days. We expect to reach our days of inventory target in the second half of fiscal '21. We ended the quarter with total cash of $8.4 billion and total liquidity of approximately $10.9 billion. FQ1 ending total debt was $6.6 billion. Now turning to our outlook. We have seen improving conditions across multiple DRAM end markets with strong demand in cloud, client, auto, and mobile. This demand recovery would be even stronger if it weren’t for the shortages of non-memory components in several markets. On the supply side, as Sanjay mentioned, a power outage and an earthquake have limited our DRAM supply, and we are rapidly drawing down on our inventory across DRAM and NAND. From a gross margin perspective, the power outage and earthquake impact will be a headwind to our DRAM cost reductions in FQ2. Additionally, the timing of new DRAM and NAND node ramps also limits our cost reductions for FQ2. With all these factors in mind, our non-GAAP guidance for FQ1 is as follows: We expect revenue to be $5.8 billion, plus or minus $200 million; gross margin to be in the range of 31%, plus or minus 100 basis points; and operating expenses to be approximately $825 million, plus or minus $25 million. Finally, based on a share count of approximately 1.15 billion fully diluted shares, we expect earnings per share to be $0.75, plus or minus $0.07. As we look beyond FQ2, we anticipate that a vaccine-driven economic recovery combined with secular trends such as 5G adoption and AI will result in stronger demand. In the second half of FY21, we expect improved financial performance, driven by strengthening market conditions and stronger cost reductions across DRAM and NAND. In closing, we’re confident in Micron’s ability to deliver strong long-term revenue growth and cross-cycle profitability. Over the last four years, Micron has delivered average gross margins of 40%, EBITDA margins of 50%, and return on invested capital of 20%. We believe Micron’s strong performance will continue cross-cycle. As we look to the expected upturn in the DRAM business in calendar 2021, Micron’s relentless focus on execution positions us well to generate solid returns for our shareholders.

Thank you, Dave. Over the last year, Micron delivered strong performance in the face of significant challenges from COVID. I am thankful to the Micron team whose tenacity and resilience enabled us to navigate this challenging period and maintain production at normal levels while continuing to advance our technology and product portfolio. Micron is poised to emerge stronger in calendar 2021 as the world recovers from the pandemic. We are confident in our roadmap to further enhance our competitive position while exercising supply discipline. We are in a better position than ever before, and this has been recognized by our customers. Recently, Micron received supplier awards from multiple customers, including from tier 1 China smartphone OEMs. We also continue to make great strides in advancing our corporate responsibility agenda. In November, Micron published our fiscal year annual diversity, equality and inclusion report, detailing our progress over the year and our commitments for fiscal year 21. In 2020, we increased our female board representation and also made investments to improve the representation of all underrepresented groups, including Blacks and Latinx in technical and leadership roles. We expanded our pay equity initiative beyond gender to also include other underrepresented groups and to consider total compensation across pay and equity awards. We are working with industry organizations to establish best practices in supplier diversity and to support the inclusion and competitiveness of diverse suppliers in the semiconductor industry. And finally, we leveraged the power of Micron's influence in the communities where we live and work to advocate for greater social justice and safety globally. We are also proud to report that in November, we were added to the Dow Jones Sustainability Index, joining the ranks of the most sustainable American companies. We aim to build on this recognition as we advance on our sustainability goals this year. Thank you. And now we will open the call for questions.

Our first question comes from the line of Chris Danely with Citigroup.

In terms of what's impacting you, I guess you can sort of control or fix the power outage and the earthquake, but you also mentioned that there's shortages of non-memory components out there that are impacting you as well or impacting the memory industry. Can you maybe quantify those and is that issue getting any better or could it get any worse? And could this, I guess, hinder any sort of upturn in DRAM this year?

So let me be clear that when we're referring to non-memory component shortages, we were referring to those and our end markets, our customers experiencing certain end market shortages. And yes, without those non-memory component shortages, yes, the overall demand could have been even somewhat higher. And these non-memory component shortages that some of our customers are experiencing, they relate to general tightness in the foundry space, logic, 8 inch, 12 inch nodes, there's some of our customers and there is end market hardware are experiencing certain shortages, so that's what we are referring to. Of course with respect to our supply chain, this is an area given some of the foundry shortages that are existing today, we are continuing to manage our supply chain today. We do not see for this quarter any specific shortages in terms of our ability to supply any non-memory shortages with respect to our ability to supply product to our customers. Of course, as we highlighted in our script, we do see certain shortages in memory, particularly in DRAM across several parts of the market. And with respect to our supply chain aspect, we have factored those in the outlook that we have provided. And the supply chain has really excellent operations team and we continue to work with our suppliers, with our partners to make the best assessment in terms of managing our own supply chain. So again, to be clear, we were not pointing to any non-memory component shortages in this quarter for our own manufacturing supply chain, we were referring more to our customers’ end markets where they're experiencing certain non-memory component shortages. Of course from the point of view of our own supply chain, we continue to monitor some of the trends that are there in the tech supply chain, there's certain parts of the supply chains running tight, we continue to monitor those in terms of any impact on our business, as well as work closely with our customers to understand those demand trends.

And our next question comes from the line of John Pitzer with Credit Suisse.

Sanjay, I wanted to go back to your comments you made about your expectation for DRAM demand, both this year of high-teens and longer term of mid to high-teens. I'm just kind of curious if you can give us a little bit more insight as to how you're building up those models. And I'll push back a little bit because we've got a very strong gaming console this year. We've got the move to 5G, as Ice Lake ramps, we're going to go from six to eight channels in the server market. It seems like the risk to that forecast on demand is for the upside this year. And then conversely, as you think about servers as a percent of your DRAM business over the last five years, it's gone from 15 to 30 approximately. And given what we see around DRAM density going into next generation compute, especially around AI workloads, I would think that the historic 20% bit growth in DRAM demand should be something the industry should be able to maintain. I'm just kind of curious as to why you don't believe that?

John, we are providing our best estimates regarding demand evaluation. You are correct that end market demands are showing strong trends. The ongoing trends in AI, 5G, cloud computing, and intelligent edge technologies, including smart vehicles, are significant growth drivers for memory and storage in the coming years. Notably, during the latter part of calendar year 2020, we observed a marked increase in demand. For DRAM demand growth in 2020, we estimated a year-over-year increase of over 20%. This has influenced our forecast for 2021, where we project a high-teens growth rate for DRAM demand. Our methodology for these numbers involves close collaboration with our customers and analyses from our market intelligence team regarding end market demand trends. We anticipate that over the next few years, mobile demand for DRAM will surpass the market average, with 5G serving as a long-term growth catalyst. In 2021, we expect 5G phone production to double, increasing from 250 million units to 500 million units, and the average DRAM content in these devices will significantly increase, with at least 6 gigabytes in the latest 5G smartphones. Additionally, graphics and gaming sectors, including new consoles and graphics cards, will also significantly contribute to DRAM growth in 2021. Based on reports from various cloud service providers regarding their capital expenditures and their shifts towards AI and machine learning, we anticipate robust demand. The automotive sector will also see a strong demand in unit sales. We believe all the markets mentioned—mobile, graphics, cloud, and automotive—will outperform the overall market average in 2021. However, the PC market appears weaker than the average, although it will still see unit growth in 2021, with Micron well positioned within this market. That said, I believe that DRAM bit growth in PCs will be below the industry average. The enterprise segment has been somewhat weak, but we expect it to recover as we move through the year post-pandemic. This is our perspective on the end market for 2021, which leads us to forecast a high teens growth rate following an impressive over 20% bit growth in 2020. Looking ahead, we foresee a mid-teens to high-teens compound annual growth rate (CAGR) for DRAM over several years, with variations from year to year. Our team remains engaged with our customers and assesses their demand closely, backed by annual supply agreements with various market players. This process allows us to develop the insights that guide our projections. We continually review these figures and adjust them as needed, which also informs our supply management to align with industry demand growth on a CAGR basis.

And our next question comes from the line of C.J. Muse with Evercore.

I guess I'd like to focus on cost downs, and you talked about down mid single digits in fiscal '21. And curious what kind of impact is embedded in that number for the disruption that you have seen in the last month? And then as you think about the ramp of 1-alpha and the 40% increase in bit output versus 1z, I would love to hear your thoughts on what kind of acceleration we should see in cost downs on the DRAM side beyond August, and when we really see that uptick in savings through your 1-alpha ramp? Thank you.

For this year, we expect mid single digit cost reductions in DRAM, which already account for the disruptions we faced at the start of this quarter and at the end of last quarter. As we move through this year and into next year, 1-alpha will increasingly make up our volume, which should positively impact our cost reductions. That’s why we anticipate that most of the cost decline in DRAM will occur in the latter half of FY21. We also expect these developments to contribute to further cost improvements in FY22.

Our next question comes from the line of Karl Ackerman with Cowen.

Maybe just to follow-up on CJ's question on DRAM cost decline, I'd like to move over to NAND. I appreciate the commentary on NAND cost improvement, which you called out low to mid teens. Is there a way to quantify the cost headwind from your transition to replacement gate? Because I would imagine that would be fairly sizable even in fiscal 2021. And I have a quick follow-up.

So if you looked at last year, FY20, our cost declines were pretty negligible actually on NAND, because of the transition to the first generation of replacement gate. And really the only area where we got any sort of cost declines was in the change over and depreciation for NAND from five to seven years. As we move into the second generation, as we talked about the 176 layer has a particularly good cost structure. And so that will obviously be the big factor in terms of driving our cost declines in the low teens for this year. And again, we're going to be ramping this through the year and into next year. So we do feel like this will be a tailwind for our cost reductions as well. You didn't ask about this but on top of that, as we talked about on the call, we have good momentum in QLC that should be also a good tailwind for NAND costs as well.

You recognized a record of graphics DRAM quarter. Just kind of curious if graphics are now closer to 20% of this segment now. And then I guess, what sort of graphics DRAM demand are you seeing from GPUs used for cryptocurrency mining now that those currencies are now at all time high? Thank you.

In terms of graphics, it remains in single digits both industry-wide and within our business, although Micron is a leader in the graphic segment. Our advanced, high-performance, power-efficient DRAMs, specifically our GDDR6 and GDDR6X products, are well-positioned with top specifications in the graphics market. The GDDR6X, which utilizes the PAM4 interface, offers double the data transfer rate compared to traditional DRAM. We take pride in our leadership within the graphics market, which also serves the crypto mining sector to some extent. Our graphics revenue includes contributions from graphics cards featuring GDDR6 and GDDR6X memory, among other graphics memories, utilized in crypto mining applications. This trend in crypto mining highlights another aspect of the ongoing digitization of the economy and serves as a growing application. Cryptocurrency will undoubtedly play a crucial role in the future, requiring high-performance memory, and Micron's DRAM and graphics products are well-suited for that market segment.

Our next question comes from the line of Timothy Arcuri with UBS.

I just had two. First, Sanjay, I wanted to double click on a prior question. So I understand that the demand was better during the late part of last year, but you also took down your forecast for this year. You were thinking of 20 and now you're up more like high-teens. So is there any component of digestion that you're fearing in mobile? Is that part of it too, or is it just the math that you have the same number of bits off of the higher base last year? And then I had a follow-up for Dave? Thanks.

Yes, it's simply is, Tim, the later of what you just said that it is, the overall demand in 2021, we absolutely based on all the demand drivers that we see, that we describe in our script, we see really continued strong trend of demand in 2021. So it is what you said that 2020 has a higher base, because 2020 demand for DRAM went above 20% with that higher base compared to our prior expectations we have said that high-teens. Nonetheless, let there be no confusion, I mean 2021 overall DRAM demand trend across the board, across our market except for the enterprise where we have said enterprise demand will go away once the pandemic recovery takes hold fully on the economy. But whether it is auto, or it is smartphones, or it is cloud, or graphics, all of these end markets are pointing to strong demand of units, as well as strong demand for average content increases in 2021. So we are very excited about the demand opportunities. And keep in mind this is in the backdrop of CapEx management, disciplined CapEx management in the DRAM industry leading really to a supply environment where we think that the supply growth will be less than the industry demand growth in 2021, which steps up 2021 very nicely for the DRAM fundamentals. And that too with Micron's execution on technology and products continuing to strengthen our position there really very proud and excited about Micron's position with industry leading 1-alpha node now, which of course over the course of next selling quarters will be ramping into production.

Yes, I wouldn't read too much into it. I mean, if you look back over the last couple of years, I think we generated mid $4 billion levels of cash flow. And if you combine the converts and the buybacks, we spent probably closer to $4.7 billion or so on all of that. So we're definitely committed to the buyback. I would expect that our target is certainly just to generate free cash flow for the year. And I think you can expect us to remain committed in terms of returning at least or more than 50% of the free cash flow in the form of buybacks. But one other metric that we do to try to focus on is our net cash, our cash excess of our debt. And of course when we're not generating cash, when we're going to need cash, we eat into that a bit. And so I think just to be cautious, we wanted to make sure that we didn't eat into that net cash balance too much. But I'm not really reflective of any view on the stock price and we remain buyers of the stock over time.

And our next question comes from the line of Harlan Sur with JP Morgan.

Your cloud business remained relatively healthy for calendar year '20, and I know that the team is expecting strength this year. But maybe more from a near-term perspective. Is there seem to be some growing indications that data center spending is going to start to reaccelerate here in the first half of this calendar year? On top of that, you have some of the new processor ramps that are coming to the market as well. Is the team seeing the strength here in Q2 and in your orders or customer forecast? And then can you just give us an update on your DDR5 server products? Are you guys finished with qualification of these new products ahead of the second half adoption cycle?

So with respect to cloud, yes, I mean, compared to our pre-COVID expectations, 2020 was a strong year for cloud and we did well. It was good for the industry and it was good for us as well. And yes, we definitely in 2021 as well continue to see strength in cloud, healthy business environment, and continuing to work with our leading edge technology nodes as we get that ready into production with 1-alpha to get that qualified with our customers. So yes, cloud is a long-term secular demand driver for our industry. And again, it is the trend of AI and ML and the workloads that are requiring more memory. And you are absolutely right to note that companies are in 2021 introducing new CPUs and compute architectures, which will have more cores, which will have more channels, and more DRAM attach rate. And with the end market appetite of need for more memory and the compute architectures and processes enabling greater DRAM attach rate in the servers, yes, this trend of more memory in the cloud environment will continue in this trend. It's here to stay for a considerable period of time even beyond the 2021 timeframe. With respect to DDR5, that is really in the very early innings at this point. We are happy with our product position there. And the DDR5 will start picking up in terms of revenue opportunity later on in 2021.

Your next question comes from the line of Joe Moore with Morgan Stanley.

You continue to express concerns about NAND, but you also mentioned that it could improve as companies adjust their plans throughout the year. It appears that spending is concentrated in the first half of the year and may decrease later on. What indicators are you using to assess whether the situation might improve or worsen as the year progresses? Would it be accurate to say there's a bit more optimism in your wording on this matter?

So certainly, NAND as traditionally has been the case, has elasticity that is an important part of the NAND market and even elasticity will continue to drive greater content in the various end market applications from the smartphones, to client notebook computers, to data center applications as well. And post the pandemic, we definitely expect that across the tech space, there will be release of pent-up demand and that itself for a couple of years is going to drive increasing demand. Overall, when we look at 2021, we expect the demand growth in NAND to be approximately 30%. And our estimation is that supply perhaps somewhat above demand. And as elasticity kicks in, as the post-COVID, post-pandemic and what demand environment builds up, as well as with greater focus from the industry in terms of management of the supply then we do believe that NAND fundamentals can strengthen. As far as Micron is concerned, I mean, we definitely are extremely focused on managing our supply growth with discipline. With our 176-layer NAND, we are very excited about our industry-first position with this technology, but we manage our supply growth. And we expect that Micron's overall supply growth will be below the industry demand growth. And of course, we will supplement that with some of the inventory. So that in terms of our shipment growth in 2021, it will be in line with the industry demand growth expectations. But management of the supply, I think, is an important factor in the industry in terms of overtime, returning to the healthier levels of the NAND industry along with elasticity and post-COVID NAND demand environment.

Thank you. Your next question comes from the line of Toshiya Hari with Goldman Sachs.

I wanted to ask about capital expenditures and what the internal discussions are currently at Micron. Clearly, you haven't adjusted your full year budget of $9 billion. Regarding DRAM, Sanjay, is it reasonable to say that given the outlook for the next year, there is an internal inclination to increase spending? Conversely, on the NAND side, to address Joe's question, you've expressed caution over the past few quarters. I understand you are being quite careful and focusing on your transition. What would need to happen for you to adopt a more conservative approach to spending in NAND? Thank you.

So again, I think both for DRAM and for NAND, I think it is extremely important for us at Micron on an ongoing basis to stay disciplined with respect to supply growth, with respect to investments in CapEx to manage our supply growth to be in line with the industry demand growth expectations on a CAGR basis. And this is where our focus is, because that's the best way to generate ROI on our investment. We feel very good about our CapEx discipline and are focused on really driving profitability of the business through increasing our share, not just chasing bit share but increasing the profit share of the industry. And this is where our focus is on differentiated solutions, both in NAND as well as in DRAM to strengthen our position, to strengthen the merits of the product portfolio is an important part of our strategy. But with respect to the CapEx discussions, it always is about really discipline on supply growth, staying in line with the demand growth.

And our final question comes from the line of Mitch Steves with RBC Capital Markets.

I wanted to delve deeper into the DRAM impact for the second quarter. Can you explain the extent of this impact, specifically how much of the 31% midpoint is being negatively affected by DRAM? Any qualitative insights would be appreciated. Additionally, regarding NAND, it seems there's some caution on your part. Could you share your expectations for the smartphone market, considering that we'll have an elevated Q1 due to changes in product cycles? How should we anticipate the demand for smartphones in the second half of the calendar year based on your current outlook?

So I'll take the first one and Sanjay will take the smartphone question. So yes, of course there was a cost impact, or will be a cost impact in the second quarter associated with this disruption. I wouldn't say it's a massive, it's measured in tens of basis points, not hundreds of basis points that we factored in the quarter.

And with respect to smartphone content growth, certainly with 5G the average content continue to increase in smartphones. We have talked about in the past that how DRAM content in smartphones is 8 gigabytes to 12 to 16 gigabytes, even in certain phones and average content increase in the smartphone market will be in the double digit. And again, in the smartphone, I think it's important to understand that not only is it about the 5G number of units increasing, more than doubling calendar year '20 or calendar year '21 going from 250 million 5G smartphones in '20 to 500 million plus in 2021. But the average content of DRAM is increasing in these 5G phones as well. So that's the multiplicative impact with respect to the DRAM demand growth in the smartphone market. And if you look at the calendar of DRAM content over the course of next three years or so, that CAGR of average content growth in the smartphone market is in the double digits range. So smartphone will continue to be a strong market and we are very well positioned with our NAND and DRAM combination to address the growing opportunities in the smartphone markets. We mentioned in the earnings call prepared remarks that our MCP revenues, MCPs with multi-chip packages that include DRAM as well as NAND we are extremely well positioned being the manufacturer of both DRAM and NAND that MCP revenue hit a record in our fiscal Q1 timeframe. So smartphones, continue to be a strong and the largest market for DRAM and NAND and we are really well positioned there and quite excited about the opportunities here, including introduction of our LPGDDR5 and uMCP5 industry-leading solutions.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.