Thank you for standing by, and welcome to Micron Technology's Fiscal Second Quarter 2022 Financial Conference Call. Please be advised that today's call may be recorded. I would now like to hand the call over to Farhan Ahmad, Head of Investor Relations.

Thank you, and welcome to Micron Technology's Fiscal Second Quarter 2022 Financial Conference Call. On the call with me today are Sanjay Mehrotra, President and CEO; and Sumit Sadana, our Chief Business Officer and Interim CFO. Today's call is approximately 60 minutes in length and is being webcast from our Investor Relations site at investors.micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call. Today's discussion of financial results is 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. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the company, including information on the financial conferences that we will be attending. You can also follow us on Twitter, @MicronTech. As a reminder, the matters we are 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 file 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, everyone. Micron delivered an excellent performance in fiscal Q2 with results above the high end of our guidance. We grew revenue and margins sequentially while driving favorable mix and cost reductions amid ongoing global supply chain challenges. We saw broad-based demand for our products with our SSD products achieving record revenue and our auto market revenue also reaching an all-time high. Execution was outstanding with our industry-leading 1-alpha DRAM and 176-layer NAND technology node ramps delivering strong cost reductions. Our portfolio transformation continues to gain momentum as we lead the industry on the DDR5 transition and grow our mix of NVMe data center SSDs. Following a solid first half, we are on track to deliver record revenue and robust profitability in fiscal 2022 and remain well positioned to create significant shareholder value in fiscal '22 and beyond. In fiscal Q2, 1z and 1-alpha DRAM combined represented the majority of our DRAM bit shipments, while 176-layer NAND represented the majority of our NAND bit shipments. Our 1-alpha DRAM and 176-layer NAND products are achieving excellent yields, providing us with solid front-end cost reductions and contributing meaningful revenue. We qualified additional products on these advanced nodes with a broad set of customers, which sets us up for continued strong revenue ramp in the second half of the fiscal year. We are tracking several quarters ahead of the industry in ramping products based on these leading-edge process technologies. We are also investing to maintain technology leadership for the next decade and making good progress in the development of future technology nodes. Micron is not only a technology leader, but also the industry leader in quality with the majority of our customers ranking us #1. Our leadership in quality is an important differentiator for Micron, particularly in fast-growing data center and automotive markets, where our quality scores are excellent. We have also strengthened our position as a strategic supplier to our customers, as demonstrated by our commitment to supply continuity amid ongoing semiconductor supply chain challenges this past quarter. In late December, a government-mandated COVID-19 lockdown impacted production output at our back-end facility in Xian, China. The Micron team executed with tenacity to return the Xian site back to normal output levels post-lockdown. As a result of this outstanding effort, we mitigated the lost output from Xian and delivered on our customer commitments for the quarter by leveraging our global manufacturing network. Additional COVID-19-related lockdowns in the region present a risk to the global electronic supply chain, and we continue to monitor the situation closely. The global semiconductor supply chain is experiencing pressure due to the impact of Russia's invasion of Ukraine. The region is an important source for the global supply of noble gases and other critical minerals that are used in semiconductor manufacturing. We have strategically diversified our supply chain over the last several years and maintained appropriate inventories of materials and noble gases. We currently do not expect any negative impact to our near-term production volumes because of the Russia-Ukraine war, but we do expect an increase in our costs as we secure the supply of certain raw materials that could be at risk. We also remain vigilant in this dynamic situation and are engaged with our key suppliers to ensure continuous availability of materials to support our operations. Now let's 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 2 decades, and we expect this trend to continue over the next decade, thanks to ongoing advancement of AI, 5G, and EV adoption. Our team's execution on strengthening our product portfolio has been outstanding with several new product launches and customer qualifications in fiscal Q2, achievements that we are very proud of. Last year, data centers became the largest market for memory and storage, eclipsing the mobile market. Looking ahead, we expect data center demand growth to outpace the broader memory and storage market over the next decade, fueled by secular drivers in cloud and healthy enterprise IT investment. Memory and storage share of server bond costs already exceeds 40%, and this number is even higher for servers optimized for AI and ML workloads. This growth is supported by new heterogenous computing architectures, the increase in data-intensive workloads, and ongoing displacement of HDDs by SSDs. In the fiscal second quarter, data center revenue grew more than 60% year-over-year, supported by robust demand across our DRAM and SSD portfolio. We have broadened the qualifications for our 1-alpha DRAM products and are well positioned to support the data center DDR5 transition driven by new CPU platforms, which are targeted to begin ramping later this calendar year and gain momentum in 2023. Following the introduction of our 7400 SSD, in fiscal Q2, we introduced the 7450, which is the industry's first 176-layer vertically integrated data center NVMe SSD. These Gen4 NVMe data center drives are generating an enthusiastic response from our customers. We are making robust progress in our qualifications for these drives with data center customers, which has contributed to a doubling of our fiscal Q2 data center SSD revenues year-over-year. We expect strong growth of data center SSD revenues to continue for the remainder of this fiscal year. In fiscal Q2, we saw recovery in our client revenue driven by strength in enterprise PCs, which more than offset softer consumer and Chromebook demand. We expect that calendar '22 PC unit sales will be flattish versus last year's sales, but we expect solid growth in DRAM and NAND content driven in part by increasing mix of content-rich enterprise desktops and laptops. We are leading the industry's client to DDR5 transition, and our DDR5 revenue continues to increase as multiple PC customers launch next-generation notebooks. Client DDR5 demand continues to outstrip supply, and we are seeing meaningful price premiums over DDR4 alternatives. Building on our QLC leadership, in fiscal Q2, we also launched our 2400 NVMe SSD, the world's first client SSD built on 176-layer QLC NAND. Micron maintains a leading position in the fast-growing graphics market. We have a broad product portfolio, featuring industry-leading product performance and deep partnerships with leading GPU suppliers. In fiscal Q2, revenues grew year-over-year driven by strong demand for the latest generation of gaming consoles and graphics cards. Our advanced GDDR6X continues to lead the industry in performance. And in fiscal Q2, we began revenue shipments of our next-generation GDDR6X solutions. Fiscal Q2 mobile revenue grew slightly year-over-year as the 5G transition continues in smartphones. We see some weakness in the China market as the local economy slows, smartphone market share shifts, and some customers take a more prudent approach to inventory management. Mobile memory and storage demand continues to be supported by content-hungry applications and the ongoing transition from 4G to 5G, which is driving 50% higher DRAM content and doubling NAND content. 5G smartphone sales are expected to grow to 700 million units in calendar year '22. In fiscal Q2, we achieved the first qualification of our 1-alpha LP5 DRAM, which delivers more than a 15% power improvement over the previous generation, enabling our customers to offer an improved 5G experience with better battery life. We are also seeing a very strong revenue ramp for our 176-layer NAND UFS products, which are now qualified in nearly 50 different OEM platforms. The automotive and industrial segments are expected to be the fastest-growing memory and storage markets over the next decade. Today, more than 10% of our revenue comes from these end markets, and we are exceptionally well positioned as a market share leader. In fiscal Q2, our auto revenue set a new record driven by robust demand for memory and storage. Auto unit production remains below demand, constrained by numerous supply chain challenges, including logic and analog semiconductor component shortages. The Russian invasion of Ukraine has also impacted auto builds. Nevertheless, the demand for memory and storage remains strong, driven by auto content growth. New EVs are becoming like data centers on wheels, and we expect over 100 new EV models to launch worldwide in this calendar year alone. These new EVs include advanced ADAS and in-vehicle infotainment features that have significantly higher memory and storage requirements. In fact, some of these Level 3 autonomous EVs have about $750 in memory and storage content, which is 15 times higher than the average car. In Industrial IoT, we saw approximately 60% year-over-year revenue growth, fueled by the continued ramp in applications such as factory automation and security systems. Turning to the market outlook. Our expectation for calendar '22 industry demand is largely unchanged from our last earnings call. We expect calendar '22 industry bit demand growth to be in the mid- to high teens for DRAM and approximately 30% for NAND. We anticipate underlying demand in calendar '22 to be led by data center, ongoing adoption of 5G smartphones, and continued strength in automotive and industrial markets. Currently, we see a healthy supply-demand balance across both DRAM and NAND given these demand trends, supply discipline across the memory industry, long semiconductor manufacturing equipment lead times, and reduced NAND supply from some of our competitors that experienced a contamination issue in their fab. Non-memory component shortages are improving, and we expect that further improvements should support memory and storage demand growth for the rest of this year. However, there are some pockets where semiconductor shortages have not improved as fast as we had expected, and these shortages are likely to continue into calendar year 2023. We are mindful of increased macroeconomic uncertainty and remain vigilant of any changes in market conditions. Turning now to Micron's bit supply growth expectations for the year. Consistent with the rest of the industry, we are experiencing a challenging environment for equipment and material suppliers. However, due to strong execution by Micron's operations team, our calendar year '22 bit supply growth for DRAM and NAND remains unchanged from prior expectations and will be in line with industry demand. We are on track to deliver record revenue with solid profitability in fiscal year '22, and we continue to expect strong bit shipment growth in the second half of the fiscal year. We expect our cost reductions to outpace that of the industry this year, driven by the exceptionally well-executed ramp of our world-class 1-alpha DRAM and 176-layer NAND nodes. However, across the industry, there are cost challenges stemming from supply chain and inflationary pressures, which will limit cost reductions this year for the industry. We remain confident in our long-term technology roadmap and our ability to drive competitive cost reductions for years to come.

Thanks, Sanjay. Micron delivered excellent fiscal Q2 results marked by record revenues across multiple products and markets, strong profitability, and generation of over $1 billion in free cash flow. I'm particularly excited about the execution of our industry-leading 1-alpha DRAM and 176-layer NAND technology ramp and the accelerating momentum of our product portfolio transformation. Fiscal Q2 revenue was approximately $7.8 billion, up 1% quarter-over-quarter and up 25% year over year. Revenue was particularly strong in client and cloud markets. Fiscal Q2 DRAM revenue was $5.7 billion, representing 73% of total revenue. DRAM revenue increased 2% quarter-over-quarter and was up 29% year-over-year. Sequentially, bit shipments increased in the high single-digit percentage range, while ASPs declined in the mid-single-digit percentage range. Fiscal Q2 NAND revenue was $2 billion, representing 25% of Micron's total revenue. NAND revenue increased 4% quarter-over-quarter and was up 19% year-over-year. Sequential bit shipments were flat, and ASPs increased in the mid-single-digit percentage range due to a stronger mix of SSDs, more than offsetting like-for-like price declines. Our ongoing portfolio transformation and solid front-end cost reduction drove sequential gains in gross margin in NAND despite sequential price declines in most products. Now turning to our fiscal Q2 revenue trends by business unit. Revenue for the Compute and Networking Business Unit was $3.5 billion, up 2% sequentially and up 31% year-over-year. Cloud generated record DRAM revenue, and client DRAM revenues also performed well in the quarter. Revenue for the Mobile Business Unit was $1.9 billion, down 2% sequentially and up 4% year-over-year. Our Mobile business continues to perform well, building on our leadership in managed NAND and MCPs as well as our strong relationships with all smartphone customers. Revenue for the Storage Business Unit was $1.2 billion, up 2% sequentially and up 38% year-over-year. We achieved record SSD revenues, which were up approximately 80% year-over-year. Our storage business is gaining momentum, growing revenue as well as profitability as we become the first in the industry to ramp several 176-layer NAND SSDs from QLC and TLC client products to vertically integrated data center SSDs. Finally, revenue from the Embedded Business Unit was $1.3 billion, up 5% sequentially and up 37% year-over-year. Our Embedded Business Unit saw strong demand across automotive and industrial markets, with auto revenue hitting a new record. The consolidated gross margin for fiscal Q2 was 47.8%, up approximately 80 basis points quarter-over-quarter. Gross margins benefited from improvements in our portfolio mix as we ramped several high-value solutions and from manufacturing cost reductions. Operating expenses in fiscal Q2 were $974 million, near the midpoint of our guidance range. Fiscal Q2 operating income was strong at $2.8 billion, resulting in an operating margin of 35%, flat quarter-over-quarter, and up from 20% in the prior year. Fiscal Q2 adjusted EBITDA was $4.5 billion, resulting in an EBITDA margin of 58%, up from 57% in the prior quarter and up from 45% in the prior year. Non-GAAP earnings per share in fiscal Q2 were $2.14, down slightly from $2.16 in fiscal Q1 and up more than 100% from the $0.98 in the year-ago quarter. The sequential increase in fiscal Q2 tax rate impacted Q2 EPS by $0.04 per share. Turning to cash flows and capital spending. We generated $3.6 billion in cash from operations in fiscal Q2, representing 47% of revenue. Net capital spending was $2.6 billion during the quarter. We continue to expect fiscal 2022 CapEx to be in the range of $11 billion to $12 billion, with the CapEx being roughly even between the first and second half of the fiscal year. Our free cash flow for fiscal Q2 was strong at slightly over $1 billion. We remain confident in our ability to generate significant free cash flow in the second half of the fiscal year, substantially higher than that in the first half. We completed share repurchases of $408 million or approximately 4.8 million shares in the quarter. Including our dividend payment, we returned around $520 million to shareholders in fiscal Q2. From the inception of the share repurchase program in fiscal 2019, we have deployed $4.7 billion towards repurchasing 94 million shares at an average price of $50 per share. In addition, we have deployed approximately $800 million towards settling convert premiums, which reduced our diluted share count by 19 million shares. Combining the share repurchases, convert premiums, and dividends, we have returned to shareholders $5.8 billion or 64% of our cumulative free cash flow in this time frame. We remain committed to returning more than 50% of the cross-cycle free cash flow through a combination of dividends and buybacks. As we have mentioned before, we will be opportunistic in share repurchases and more aggressive when the shares are trading at larger discounts to intrinsic value. Our Board of Directors approved a quarterly dividend of $0.10 to be paid on April 26 to shareholders of record on April 11. Our ending fiscal Q2 inventory was $5.4 billion, and the average days of inventory for the quarter was 113 days. Our fiscal Q2 DIO increased sequentially due to an increase in raw materials and WIP to support demand for the second fiscal half. Finished goods inventory declined quarter-over-quarter in both DRAM and NAND. We ended the quarter with $11.9 billion of total cash and investments and $14.4 billion of total liquidity. Our fiscal Q2 total debt was $7.1 billion. Now turning to our outlook for the fiscal third quarter. Our overall business is tracking ahead of our plans a quarter ago, and demand is strong across most end markets with some regional challenges that Sanjay referenced earlier. Near term supply and pricing trends are constructive. Our improved fiscal year financial outlook is increasing our variable compensation expenses, which will impact our costs in fiscal Q3. We are also seeing cost impacts from continuing inflationary pressures and from supply chain mitigation actions resulting related to industry-wide shortages. Additionally, due to the pull-in of cost reductions in Q2, we expect more modest front-end cost reductions in Q3 on a sequential basis. We do expect both DRAM and NAND gross margins to increase sequentially in fiscal Q3. A higher mix of NAND revenue in our consolidated total will affect our consolidated gross margin as our DRAM gross margins are substantially higher than our NAND gross margins. With all these factors in mind, our non-GAAP guidance for fiscal Q3 is as follows. We expect revenue to be $8.7 billion, plus or minus $200 million, which will represent a new record for quarterly revenues; gross margin to be in the range of 48%, plus or minus 100 basis points; and operating expenses to be approximately $1.05 billion, plus or minus $25 million. We expect our non-GAAP tax rate to be approximately 10% for fiscal Q3. Based on the share count of approximately 1.14 billion fully diluted shares, we expect EPS to be $2.46, plus or minus $0.10. We remain on track to deliver record revenue and solid profitability and free cash flow in fiscal 2022. In closing, Micron continues to deliver 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%. Micron's financial foundation and outlook have never been stronger as we build on the momentum created by our portfolio transformation, leadership technology roadmap, and manufacturing excellence. I will now turn it back to Sanjay.

Thank you, Sumit. I'm proud to note that earlier this month, Micron was named one of the world's most ethical companies by the Ethisphere Institute. This recognition reflects our global team's dedication to holding ourselves to the highest ethical standards both in how we operate and how we pursue environmental and social responsibility. We continue to manage our business with discipline and foresight that is driving industry-leading technology ramps, improving our product portfolio and strengthening our customer relationships. A strong first half performance and our guidance for an all-time record quarter show our continued progress toward delivering record fiscal '22 revenues and robust profitability. Given our technology leadership, Micron is in an excellent position to capitalize on the broad trends that are driving demand for DRAM and NAND solutions, solutions that transform data into better customer experiences and greater business value. I look forward to seeing you at our Investor Day presentation on May 12 in San Francisco, where we will discuss the technology drivers behind these trends in greater depth and detail Micron's strategies to seize the opportunity ahead. Thanks for joining us today, and we'll now open for questions.

Our first question comes from the line of C.J. Muse of Evercore.

I guess first question, as I look at your results, the mix and operational performance is excellent. And as you look ahead to the second half, you did talk about a pull-in of costs in the February quarter, but would be curious to hear how you're thinking about mix, both like-for-like in DRAM and NAND into the second half of the fiscal year and how we should think about the gross margin trajectory from here.

All right. So in terms of the gross margins and the mix, I'll just point out that for FQ2, for example, we had exceptionally strong performance in gross margin due to the ramp of our 1-alpha and 176-layer NAND and our portfolio mix. And our NAND gross margins actually improved due to mix effects alone. And of course, we had good cost reductions in 176-layer NAND. So that momentum is continuing. So as I look forward to FQ3, you have seen that the gross margin guidance at the midpoint is sequentially higher. So we are very positive on our gross margin trajectory going forward. I want to point out a couple of things that are important here. So both NAND and DRAM gross margins are expected to improve sequentially in FQ3. And as you highlighted, we have spoken about some cost improvements that got pulled into FQ2, so that’s going to have a little bit of a dampening effect on the cost improvements we will see sequentially. But there are a couple of important factors that are going to affect our FQ3 gross margin by about 100 basis points. The first one is that our variable compensation accrual is increasing sequentially from FQ2 to FQ3 because our overall profitability forecast for the fiscal year is quite a bit higher than we were expecting originally. So that is increasing our bonus accrual. That impacts costs in the following quarter. We have already taken that impact in the OpEx for FQ2, but it will impact costs in FQ3. So that's an impact on gross margin sequentially in FQ3. And the other aspect is that our NAND business in FQ3 will grow faster than our DRAM business in FQ3. So that has a little bit of an impact on consolidated gross margin. So both NAND and DRAM businesses will have sequential improvement, but NAND will grow faster. So mathematically, it will just have a little bit of an impact. So the 2 of these issues between the bonus accrual and the NAND mix has about just over a 100 basis point impact on gross margin going from FQ2 to FQ3. And in spite of that 100 basis point impact, we are forecasting improvement in gross margin in going from FQ2 to FQ3. So overall, really strong margin performance, I feel. And you asked a question about mix. You see that our data center SSD revenue is improving substantially. Sanjay mentioned in his prepared remarks that in FQ2, our revenue doubled year-on-year in the data center. We expect continued growth in the data center in the next couple of quarters as well. So that's a positive for our gross margins. We also have leadership in DDR5. That kind of mix improvement is also good for us because we do have good gross margins there. So overall, we feel positive about the trajectory into FQ3 and very constructive about FQ4 profitability as well. Of course, we are not going to guide for FQ4, so we'll leave it at that for now.

Our next question comes from Vivek Arya of Bank of America Securities.

Interesting to see that the strong outlook, and you're maintaining the full year kind of industry view unchanged also even though there have been some recent kind of softer data points and deceleration in PC and smartphone demand. Is this just the case of data center strength overpowering those headwinds? And what are you doing to make sure that you don't oversupply to the data center?

Let me address this question. In the PC sector, enterprise and desktop markets are performing well. While Chromebooks and consumer PCs have shown some weakness, the strength in enterprise and desktops is beneficial for us because they require more DRAM and NAND content. Although we anticipate that PC unit growth year-over-year will remain flat, the favorable mix of enterprise and desktops will positively impact DRAM and flash content needs. The data center market is also strong, and we expect the second half of 2022 to be robust due to the launch of new CPUs, which will increase content requirements in servers. Additionally, many hyperscalers have been discussing their capital expenditures in data centers. The demand for AI and machine learning workloads is further driving increased content needs in this space. It’s important to note that demand is broad-based, and we foresee continued strong demand moving forward. On the supply side, the industry has maintained discipline in capital expenditures, resulting in a contained supply. Additionally, a contamination issue affecting a competitor’s fabrication facility has notably impacted NAND supply. Overall, we observe a healthy balance between DRAM and NAND supply and demand throughout the year.

Our next question comes from John Pitzer of Credit Suisse.

Congratulations on the strong results. Sanjay, you've spent the last several years trying to reposition the NAND portfolio to higher-value products. I'm kind of curious, relative to the May guide of NAND growing faster sequentially than DRAM, can you help us better understand what products and end markets are really driving that? And is this really the fruits of some of your qualification labors? And as you answer the question, I'd be curious, when you think about NAND gross margins, what's the impact as the mix continues to improve? How much of the gap between NAND and DRAM do you think you can close over time? Or how much more upside do you think there is in the NAND gross margin business over time as you optimize the portfolio?

In NAND, our team has excelled in leading the industry with 176-layer NAND technology, which we are now deploying across various products. We highlighted in our earlier comments some of the SSDs we’ve launched for data centers, being pioneers in introducing data center NVMe SSDs featuring 176-layer NAND technology and vertically integrated solutions with our own controllers. Our manufacturing ramp has been outstanding, marked by exceptional execution in yields, production ramp, and quality. The efforts we've invested over the years are now paying off. We have seen significant gains in market share for mobile-managed NAND solutions, particularly on the MCP side that includes both DRAM and NAND solutions, as well as on the discrete NAND side. Our share has grown from low single digits a few years ago to the high teens in the market. This demonstrates strong performance on the mobile NAND side. Now our SSDs are ramping up significantly. With our client SSDs, the introduction of QLC 176-layer SSD, and data center NVMe SSDs, our vertically integrated efforts are making an impact, positioning us well to capture market share in both client and data center SSDs. All of this is built on our leading, highly cost-effective 176-layer NAND technology, which is enhancing our revenue and profitability outlook for NAND. Regarding the differences between DRAM and NAND, there are notable differences in industry margins, including those relevant to Micron. However, our NAND margins are improving due to the growing momentum of our portfolio and our capability to serve a diverse range of end-market applications from smartphones to client SSDs and data center SSDs, in addition to a robust presence in channel markets.

Our next question comes from Timothy Arcuri of UBS.

I just had a quick question on cost as well. So if I look at the slide, Sanjay, where you're talking about the current outlook, the verbiage change to basically reflect the fact that you're costing down better this year than the industry. And of course, there are headwinds on cost for the industry this year. But I'm wondering whether your ability to outpace the industry's cost down will also extend into next year. Because if I look at the verbiage on the slide, last quarter, you said that you think that you'll be competitive with the industry over the longer term. So I'm just wondering whether you think that this is a 1-year thing where you're costing down better than the industry? Or can this be sustained into next year?

We feel really good about our technology roadmap. And just like we have led the industry with our 1-alpha DRAM as well as with our 176-layer NAND, we certainly plan to lead the industry with our future generation nodes as well, and we are making good progress on those. And those nodes will be introduced sometime in the calendar year '23 timeframe as well. So really, it's our technology leadership position and our ability to successfully ramp it into production across a broad range of products that is key to our strength in continuing our cost position in the industry. So we feel very good about our cost position versus our competitors going forward as well.

Our next question comes from Pierre Ferragu of New Street Research.

I have, first, like very quick simple one on the mobile market. So it's slowing sequentially now. What kind of visibility do you have there? Do you think we are reaching like a plateau in content increase in the kind of growth that 5G generated in that market? Or is that something different and more temporary? And then I have like a broader question for you guys. Your peers in logic are very active on, I would say, the geopolitical front, investing in the U.S., investing in Europe to create a more balanced manufacturing footprint in the world. And we don't hear much about that in the memory market. And so I was wondering if there could be a topic there if there are conversations and is that something that could benefit Micron at some point.

So it's a great position to be in today that we have Sumit here as interim CFO as well as our Chief Business Officer. So I will actually let him address the first question of yours, and then I will take the second question. Sumit, go ahead with the first one.

Thank you for the question, Pierre. Regarding the average capacities in our model, we don’t see any signs of reaching a plateau. We remain optimistic about the growth in mobile content. The industry is undergoing a 5G transformation, especially in the handset market. Annually, about 1.4 billion smartphones are sold, and around 500 million of those were 5G devices sold in 2021. We anticipate a 40% increase this year to 700 million 5G handsets sold. Typically, a 5G device contains 50% more DRAM and over double the NAND compared to a 4G device, which indicates that this growth trend still has significant potential. Furthermore, we expect new applications leveraging 5G to emerge, which will continue to drive up average capacities for both DRAM and NAND. There’s ample opportunity for growth. In terms of overall smartphone volumes, we project low single-digit unit growth this year, along with a further increase in average capacity. Overall, growth is expected to remain strong. Additionally, we are entering a seasonally stronger period with new handsets set to launch in the fall, which will serve as another catalyst for our mobile business. I will now pass it back to Sanjay.

Thank you, Sumit. And Pierre, regarding your second question, so of course, as you know, Micron has made investments over the course of the last few years in our clean rooms in the U.S., in Taiwan, in Singapore, as well as Japan. In terms of cleanroom expansions in these locations, again, leveraging our globally well-diversified manufacturing footprint, these cleanroom expansions position us to implement the technology transitions in our production. And we have not added new wafer capacity, but we have invested really prudently over the course of the last few years in cleanroom expansion, positioning us well to deliver on technology transitions, which are positioning us to drive our cost reductions as well as bit growth in line with the demand growth. As we look ahead, we have announced in October of last year that we would be looking at investing more than $150 billion over 10 years in leading-edge memory manufacturing and R&D on a global basis. So of course, we have also, as part of that, highlighted that in the '25-'26 timeframe, we would be needing to add new wafer capacity for DRAM in order to continue to meet the increase in demand for the latter half of this decade through the 2030 timeframe. In that regard, of course, we are evaluating new expansion on a global basis. And certainly, in the U.S., the discussions that have been proceeding related to chips and the FABS Act, which are about upfront support for investments, new manufacturing capacity as well as ongoing investment tax credits, these are important aspects to help the U.S. bridge the gap with Asia operations. And these are things that we will, of course, continue to monitor. And we will be making our decisions regarding future expansions once again that is more about the second half of this decade because until then, we are well positioned with our cleanroom situation in our diversified footprint in various countries, including the U.S. today. And in this regard, we are very much engaged with the U.S. government related to the passage of the CHIPS and investment tax credits.

Our next question comes from Mehdi Housseini of SIG.

One follow-up for Sanjay. How should I think about DDR5 contribution, especially to the operating profit this year, which seems to be mostly driven by the PC end market compared to next year when the server application picks up?

So I think we mentioned in our prepared remarks that DDR5, of course, it is a bigger die because of the specs of DDR5. By the way, that has an effect in terms of moderating the supply bit growth in the industry as well as DDR5 continues to ramp in client and, in the future, in the data center space as well. So DDR5, we noted in our remarks, has a pricing premium in the industry as well. And Micron actually is leading in terms of DDR5 supply capability in the industry today as well. So it is a positive contribution to our overall DRAM margins with DDR5. And certainly, we are getting pricing premium for DDR5 in the industry. And as new processors get deployed widely in the data center space that can make use of DDR5, which are expected to begin later this year, you will see DDR5 continuing to ramp rapidly during calendar year '23 as well. We are well positioned with our DDR5 roadmap for client as well as for the data center market.

But there will be a pricing premium for server application versus desktop, correct?

DDR5, as we noted, has a pricing premium, yes.

Our next question comes from Chris Danely of Citi.

Could you provide insights on how the three main end markets for DRAM performed compared to your expectations? Additionally, how do you expect them to perform in the future regarding PC, server, data center, and mobile?

All right. So Chris, yes, I can take that. So in terms of our end markets, FQ2 was a really good quarter. When we think about PCs, PCs performed well. Mobile performed well. Data center continues to be strong. And in fact, a lot of the gross margin upside that we experienced in FQ2 came from pricing improvements that were driven out of actually both DRAM and NAND, but definitely in DRAM as well versus our expectations. So those markets have been strong in FQ2. And as we look ahead in FQ3, most of our sequential growth in FQ3 is being driven out of the compute market, which is mostly DRAM; and then the storage market, which is mostly NAND. So our Storage Business Unit and our Compute and Networking Business Unit, these 2 business units are going to be the primary drivers of growth. All four business units are likely to grow well, but these 2 are going to be exceptional growth drivers sequentially in FQ3. So we do expect continued strength in PC. As Sanjay mentioned, the average capacities are increasing because of the mix improvements in PCs due to the shift towards corporate PCs and laptops away from lower-end consumer. So that's helping there. Data center continues to be robust. We expect the rest of calendar '22 to be robust for data center because a lot of demand growth there at our customers who are allocating significant CapEx increases. And the mobile 5G shift continues to be positive for average capacities. And even though mobile is not going to be a big driver of growth sequentially in FQ3, we do expect it to pick up sequentially in FQ4 because of seasonality and these continued trends.

Our next question comes from Joe Moore of Morgan Stanley.

You mentioned the effects of the contamination problem in NAND at your competitor. Can you explain how significant that change was and your thoughts on the potential tightness in the NAND market as a result? Also, do you anticipate that the impact will last beyond the current period?

It certainly reduced the year-over-year supply growth in the industry by a few percentage points according to various estimates. This is favorable for the demand-supply dynamic in the industry because demand continues to rise for numerous reasons, whether it's in data centers, client applications, mobile phones, or even automotive markets. The demand for NAND, along with the demand for DRAM, is expected to keep increasing. We anticipate a healthy demand-supply balance for the NAND industry moving forward.

Our next question comes from Toshiya Hari of Goldman Sachs.

I had a question on NAND ASPs and how to think about the evolution going forward. I think in the February quarter, your ASPs were up mid-single digits sequentially despite the industry environment still being relatively soft from a pricing perspective. Sanjay, just given your comments around your success in data center SSDs and winning some of those important designs, is it fair to assume that your sequential ASP expansion going forward should outperform the industry throughout the year? Is that a fair assumption to be making? And then separately, Sumit, you talked about the headwinds associated with inflationary pressures and the supply chain mitigation actions. I think you said 100 basis points. At what point could that reverse? I know that's a hard question to answer, but should we expect those headwinds to persist for a couple of quarters? Or could those headwinds turn into tailwinds eventually?

Sumit, why don't you go ahead?

Yes. In terms of our cost pressures, certainly, if you look at the overall environment out there, things are continuing to be challenging. And this is an industry-wide statement. So whether you look at the price of oil and natural gas that are important commodities that impact even the price of electricity, to a lot of other raw materials and commodities that we purchase, noble gases, a lot of these things, even the pricing of OSAT external subcon services. And of course, you're seeing inflation and even foundry logic prices. So there are lots of vectors. And then, of course, we are also seeing wage inflation happening. So there are lots of vectors through which inflation is getting transmitted into the business. And of course, we are, I believe, doing a really extraordinary job of containing our costs. But of course, these inflationary pressures are there. So we are planning for these pressures to persist for several quarters. We are not thinking that these will let up anytime soon. And so our work is focused on continuing to find efficiencies, continuing to ramp our new technology as fast as we have been doing in an excellent way. So the rest of it comes from, of course, considering these costs as we think about how we price our products, and of course, driving a stronger mix of products so we can get not only good ASPs, but also have a positive gross margin benefit of products that have higher ASP, better high-value mix in our portfolio. And that mix improvement is happening on the NAND side. It's also happening on the DRAM side with examples like DDR5. So with that, I'll turn it over to Sanjay.

Our next question comes from Ambrish Srivastava of BMO.

Sumit, I'm a bit confused. I wanted to clarify the headwind mentioned in the previous question. I understood that the cost headwind of 100 basis points you referred to was due to variable compensation and not related to the ongoing mitigation costs, which are expected to continue for the next several quarters. Is that correct, that the 100 basis points is primarily due to this?

Yes. Yes, your understanding is correct. Yes, your understanding is correct. The 100 basis points impact to sequential gross margin in FQ3 versus FQ2 stemmed from the variable comp increase that I mentioned that's going to impact FQ3 as well as the NAND revenue mix that is going to increase in FQ3 and caused an impact to the consolidated gross margin just mathematically. So the sum of the two is over 100 basis points.

On the gross margin.

Yes, exactly.

I understand. You're trying to break this down because you've mentioned inflationary costs, which we all feel in our homes. However, you've also indicated that availability of some components is improving, which has previously been a challenge affecting back-end costs. I want to clarify these points. On one side, you have costs you need to manage, and I assume securing raw materials, including neon, falls under that. Could you help us understand how we should view these costs moving forward over the next few quarters? My first question is about this. Secondly, I appreciate the insights on inventory, which were useful. We had been waiting for the quarter. Seeing finished goods decrease quarter-over-quarter for both DRAM and NAND was informative. Is this a seasonal trend, or is there something else happening with the finished goods system?

In response to your first question about costs, we anticipate that the availability of components will significantly improve the shortages we've faced over the past few quarters. Although the situation is getting better, it won't completely resolve within this year as mentioned by Sanjay in the prepared remarks. We expect ongoing improvements throughout calendar year 2022. These improvements in availability will allow us to meet the full demand for memory and storage since our customers can now order matched sets of products. Our access to components is also improving, facilitating our ability to build products. However, we do predict that some component shortages will extend into calendar year 2023. While the availability of certain components is enhancing, we are still feeling cost pressures across the supply chain due to various commodities and input costs associated with operating our fabs and back-end facilities. This is a widespread industry issue that will persist despite improvements in component availability. Regarding inventory, we have been closely managing it, leading to a planned decrease in finished goods inventory quarter-over-quarter. We have increased work in progress to prepare for robust growth in the third fiscal quarter, as reflected in our guidance. We expect inventory levels to decline in the third quarter and stabilize within our normal range by the end of the fourth quarter. Our strategy remains to build inventory by the end of the second quarter before reducing it in the following quarters. Additionally, part of the inventory increase is to ensure we have adequate supply to consistently meet customer demand as we ramp up revenue. Yes. Exactly.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may disconnect.