Thank you for joining us, and welcome to Micron's Second Quarter 2023 Financial Call. I would now like to introduce your host for today's program, Farhan Ahmad, Vice President of Investor Relations. Please proceed, sir.

Thank you, and welcome to Micron Technology's Fiscal Second Quarter 2023 Financial Conference Call. On the call with me today are Sanjay Mehrotra, our President and CEO, and Mark Murphy, our CFO. Today's call 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 financial conferences that we may be attending. You can also follow us on Twitter, @MicronTech. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results, and other matters. 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, including our most recent Form 10-K and 10-Q, for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements to conform these statements to actual results. I'll now turn the call over to Sanjay.

Thank you, Farhan. Good afternoon, everyone. Micron delivered fiscal second quarter revenue within our guidance range, and excluding the impact of inventory write-downs, margins and EPS were also within the guidance range. The semiconductor memory and storage industry is facing its worst downturn in the last 13 years with an exceptionally weak pricing environment that is significantly impacting our financial performance. We have taken substantial supply reduction and austerity measures, including executing a company-wide reduction in force. We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply-demand balance in the months ahead. Excluding the impact of inventory write-downs, we believe our balance sheet Days Inventory Outstanding (DIO) has peaked in fiscal Q2, and we are close to our transition to sequential revenue growth in our quarterly results. We are navigating the near-term difficult environment with our strong technology position, deep manufacturing expertise, strengthening product portfolio, solid balance sheet, and incredibly talented team. Beyond this downturn, we anticipate a return to normalized growth and profitability in line with our long-term financial model. Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness while managing node ramps to reduce our bit supply and align it with demand. In DRAM, 1-alpha represents most of our DRAM bit production, and we continue to make great progress in initiating our transition to 1-beta. In NAND, 176-layer and 232-layer now represent more than 90% of NAND bit production. We also continue to lead the industry in QLC. QLC accounted for over 20% of our NAND bit production and shipments in fiscal Q2. The Micron team's solid execution and implementation of smart manufacturing has driven superb yield enhancement across our leading-edge nodes. Yields on 1-alpha DRAM and 176-layer NAND have reached levels that are now higher than any node in our history. In addition, both our 1-beta DRAM and 232-layer NAND have reached targeted yields ahead of schedule and faster than any of our prior nodes. We are well positioned to qualify these leading-edge nodes across our product portfolio and will ramp them based on customer demand. We are also making good progress towards the introduction of our EUV-based 1-gamma node in 2025. Similar to our 1-alpha and 1-beta nodes, we expect this node to provide us with competitive performance, power, cost, and density improvements. Now turning to our end markets. As a result of inventory adjustments across our end markets, slowing demand growth, and an extremely challenging pricing environment, revenue was down year-over-year in all end markets. While our industry faces significant near-term challenges, we believe that the memory and storage total addressable market (TAM) will grow to a new record in calendar 2025 and will continue to outpace the growth of the semiconductor industry thereafter. Recent developments in AI provide an exciting prelude to the transformational capabilities of large language models, or LLMs, such as ChatGPT, which requires significant amounts of memory and storage to operate. We are only in the very early stages of the widespread deployment of these AI technologies and potential exponential growth in their commercial use cases. As more applications of this technology proliferate, we will see training workloads in the data center complemented with voice-based influence capabilities in the data center as well as in end user devices, all of which will drive significant growth in memory and storage consumption. In data centers, we believe that our revenue bottomed in fiscal Q2, and we expect to see revenue growth in fiscal Q3. Data center customer inventories should reach relatively healthy levels by the end of calendar 2023. We continue to see AI as a secular driver of demand growth in the data center. An AI server today can have as much as 8 times the DRAM content of a regular server and up to 3 times the NAND content. We are well positioned to capture the memory and storage opportunities that AI and data-centric computing architectures will provide. Our product roadmap includes exciting HBM3 and CXL innovations, and I look forward to sharing more details about these solutions in the future. In fiscal Q2, we expanded shipments of CXL DRAM samples to OEM customers that service enterprise, cloud, and HPC workloads. Micron is leading the industry with world-class DDR5 technology. We are shipping DDR5 in high volume to data center customers and achieved our first customer qualification for our 1-alpha 24-gigabit DDR5 product. The latest generation of server processors, AMD's Genoa and Intel's Sapphire Rapids, require DDR5 DRAM. Servers using these new processors will drive higher DDR5 industry bit demand in the second half of calendar 2023, towards mix crossover with DDR4 in mid-calendar 2024. In fiscal Q2, we also began volume production and shipments of the fastest PCIe Gen4x4 NVMe SSD in the market, our 9400 176-layer performance NVMe data center SSD, which excels in AI and high-performance computing workloads. In PCs, we now forecast calendar 2023 PC unit volume to decline by mid-single-digit percentage, returning PC unit volume to pre-COVID levels last seen in 2019. Although still elevated, client customer inventories have improved meaningfully, and we expect increased bit demand in the second half of the fiscal year. With our strong product lineup, we are well-positioned for the ongoing industry transition to DDR5. Client's DDR5 adoption is expected to gradually increase through calendar 2023, with DDR4 to DDR5 mix crossover in early to mid-calendar 2024. In fiscal Q2, our NAND QLC bit shipment mix reached a new record for the second consecutive quarter, driven by growth in both client and consumer SSDs. We qualified our Micron 2400 SSD, the world's only 176-layer QLC SSD qualified at OEMs, across the client customer base. In graphics, industry analysts continue to expect graphics TAM growth CAGR to outpace the broader market supported by applications across client and data center. Customers' inventory adjustments are progressing well, and we expect demand in the calendar second half of 2023 to be stronger than the first half. As the performance leader in graphics, we are excited to see our proprietary 16-gigabit G6X featured in the recently launched NVIDIA RTX 4070 Ti. In mobile, we now expect calendar 2023 smartphone unit volume to be down slightly year-over-year. While some customer inventories are back to normal levels, other OEMs' inventories remain elevated. In aggregate, we expect mobile customer inventory to improve through the remainder of calendar 2023, and we expect growth in mobile DRAM and NAND bit shipments in the second half of our fiscal year versus the first half. In fiscal Q2, we continued sampling and qualifying our industry-leading 1-beta 16-gigabit LP5X, receiving very positive feedback on its power, performance, and quality from customers. We expect to generate revenue on this 1-beta product later this fiscal year. We showcased our leading products earlier this month at Mobile World Congress, where we displayed 8 flagship mobile customer design wins. Last, I'll cover the auto and industrial end markets, which now represent over 20% of our revenue and contribute more stable revenue and profitability. Micron is the market share leader in these important and fast-growing markets. In fiscal Q2, auto revenue grew approximately 5% year-over-year. Our leadership in automotive was evidenced by several milestones in Q2. We reached a new record customer quality score, qualified the industry's first 176-layer e.MMC 5.1 automotive product, and began shipping the industry's first 176-layer UFS 3.1 automotive solution. We expect continued growth in auto memory demand for the second half of calendar 2023, driven by gradually easing non-memory supply constraints and increasing memory content per vehicle. The industrial market continued to soften in Q2, as our distribution channel partners reduce their inventory levels and end demand weakened for some customers. Inventories are starting to stabilize at the majority of our customers, and we expect demand to improve in the second half of our fiscal year. Now turning to our market outlook. Our expectations for calendar 2023 industry bit demand growth have moderated to approximately 5% in DRAM and low-teens percentage range in NAND, which are well below the expected long-term CAGR of mid-teens percentage range in DRAM and low-20s percentage range in NAND. The reduction in calendar 2023 demand from our prior forecast is driven by an assessment of customer inventories as well as some degradation in end market demand. We expect that improving customer inventories will support sequential bit demand growth for DRAM and NAND through the calendar year. China's reopening is also a positive factor for calendar 2023 bit demand. Public reports indicate that there have been significant CapEx cuts throughout the industry, and utilization rates have declined at all DRAM and NAND suppliers. We now expect that the industry bit supply growth for DRAM and NAND in calendar 2023 will be below demand growth, which will help improve supplier inventories. While the supply-demand balance is expected to gradually improve due to the high levels of inventories, industry profitability and free cash flow are likely to remain extremely challenged in the near term. Market recovery can accelerate if there is a year-to-year reduction in production, or in other words, negative DRAM and NAND industry bit supply growth in 2023. In response to the industry environment, Micron has taken a number of decisive actions in fiscal 2023. First, we are further reducing our supply. We have made additional reductions to our fiscal 2023 CapEx plan and now expect to invest approximately $7 billion, down more than 40% from last year, with wafer front-end (WFE) down more than 50%. In fiscal 2024, we expect WFE to fall further as we ramp 1-beta and 232-layer nodes in a capital-efficient manner. We have further reduced DRAM and NAND wafer starts, which are now down by approximately 25%. As a result, for calendar 2023, we now expect Micron's year-on-year bit supply growth to be meaningfully negative for DRAM. We also expect to produce fewer NAND bits in calendar 2023 than in calendar 2022. Excluding the impact of inventory write-downs, we expect Micron's DIO to decline sequentially going forward from its peak in the second quarter. Second, we have made further reductions to our operating expenses beyond the executive salary cuts and suspension of Micron's fiscal 2023 bonuses company-wide. We now expect our overall headcount reduction to approach 15%. This will occur through a combination of workforce reductions, which are now largely complete, as well as anticipated attrition through the remainder of the year. Third, Micron continues to execute a strategy of maintaining flat annual bit share in both DRAM and NAND. While we have had to reduce prices to remain competitive in the market, we have not done so in an attempt to gain share. As such, share changes at customers are generally transitory. Lastly, we have taken additional steps to ensure ample liquidity. Mark will go into further detail. Micron continues to have the strongest balance sheet among the pure-play memory and storage companies, and our strong liquidity will enable us to weather this downturn while ensuring our product and technology competitiveness. I will now turn it over to Mark.

Thanks, Sanjay. Fiscal Q2 results reflected challenging market conditions with continued deterioration in pricing and profitability. Total fiscal Q2 revenue was approximately $3.7 billion, down 10% sequentially and 53% year-over-year. Fiscal Q2 revenue included $114 million from an insurance settlement disclosed at the time we provided guidance. Fiscal Q2 DRAM revenue was $2.7 billion, representing 74% of total revenue. DRAM revenue declined 4% sequentially, with bit shipments increasing in the mid-teens percentage range and prices declining by approximately 20%. Fiscal Q2 DRAM bit shipments benefited from the timing of shipments between fiscal Q1 and fiscal Q2. Fiscal Q2 NAND revenue was $885 million, representing 24% of Micron's total revenue. NAND revenue declined 20% sequentially, with bit shipments increasing in the mid- to high-single-digit percentage range and prices declining in the mid-20s percentage range. Now turning to revenue by business unit. Compute and Networking Business Unit revenue was $1.4 billion, down 21% sequentially. And on a sequential basis, cloud revenue was down while client revenue was stable. Revenue for the Mobile Business Unit was $945 million, up 44% sequentially. Mobile revenue benefited from the timing of some shipments between fiscal Q1 and fiscal Q2. Embedded Business Unit revenue was $865 million, down 14% sequentially. On a sequential basis, automotive markets were relatively stable, following industrial and consumer end markets experienced weakness. Revenue for the Storage Business Unit was $507 million, down 25% sequentially and impacted by challenging conditions in the NAND market. Consolidated gross margin for fiscal Q2 was negative 31.4%. This result was negatively impacted by approximately $1.4 billion or 38.7 percentage points of inventory write-downs recorded in the quarter. These non-cash write-downs, which lower the cost basis of inventory, resulted from projected selling prices falling below the cost of inventory and are not the result of obsolescence. Operating expenses in fiscal Q2 were $916 million, down roughly $80 million sequentially. We continue to aggressively manage our operating expenses and expect them to decline sequentially in both fiscal Q3 and fiscal Q4. We had an operating loss of roughly $2.1 billion in fiscal Q2, resulting in an operating margin of negative 56%, down from negative 2% in the prior quarter and positive 35% in the prior year. The operating loss included the $1.4 billion inventory write-down recorded in the quarter for a 39 percentage point impact to operating margin. Fiscal Q2 taxes were $53 million. As mentioned in previous quarters, despite a consolidated loss on a worldwide basis, we still have taxes payable in certain geographies due to taxable income levels reported in those geographies. Non-GAAP loss per share in fiscal Q2 was $1.91, down from a loss per share of $0.04 in the prior quarter and earnings per share of $2.14 in the prior year. Fiscal Q2 EPS included approximately $1.34 of losses from the impact of the inventory write-down. Turning to cash flows and capital spending. We generated $343 million in cash from operations in fiscal Q2, representing approximately 9% of revenue. Capital expenditures were $2.2 billion during the quarter. We expect fiscal 2023 CapEx to be 2/3 front-half weighted, with a higher mix of construction spend in the second half. Free cash flow was negative $1.8 billion in the quarter. Our ending fiscal Q2 inventory was $8.1 billion and reflects the impact of the $1.4 billion write-down. Average days of inventory for the quarter were 153 days, and excluding write-downs, 235 days. Inventory levels and days are higher in NAND than DRAM. Our actions on supply reflect our intent to work down days of inventories from these levels. At quarter end, we held cash and investments of $12.1 billion and had total liquidity of $14.6 billion when considering our untapped credit facility. Given macroeconomic uncertainty and the market environment, during the quarter, we bolstered our liquidity further through the addition of $1.9 billion of long-term debt. Our fiscal Q2 ending debt was $12.3 billion. Under a net debt position, our net interest income shifts to net interest expense in Q3. Micron's balance sheet is solid with ample liquidity, low net debt, and a weighted average maturity on debt of December 2029. Now turning to our outlook for the fiscal third quarter. Market conditions remain extremely challenging. However, we expect that for the rest of this calendar year, DRAM and NAND bit shipments will continue to increase, and supply-demand balance will gradually improve. Included in the fiscal third quarter guide is an insurance recovery, separate and unrelated to that recognized in fiscal Q2 of approximately $110 million, $70 million of which we expect to recognize as revenue. In fiscal Q3, we expect gross margins to be negatively impacted by pricing, write-down of inventory, cost of underutilization, and a higher mix of NAND. On write-down of inventory, our guidance assumes a write-down of approximately $500 million associated with inventory produced during fiscal Q3. Small changes to price expectations beyond fiscal Q3 could have a substantial positive or negative impact on the inventory write-down amount in fiscal Q3. Potential variances of inventory write-downs are not factored into the guidance ranges for gross margin and EPS. As market conditions remain weak, we will continue to aggressively manage our expense profile. As Sanjay mentioned, we increased our headcount reduction target to approach 15% from our previous target of approximately 10%. We now expect operating expenses to fall below $850 million in the fiscal fourth quarter of 2023. For nonoperating items, we expect net interest expense of approximately $5 million in fiscal Q3. We now project fiscal 2023 taxes to be less than $140 million. We expect profitability to remain extremely challenged in the near term. We do project profitability to improve sequentially due to lower inventory write-downs and free cash flow to improve slightly, driven by reduced capital spend. But we forecast operating margin and free cash flow to remain significantly negative through the fiscal year. With all these factors in mind, our non-GAAP guidance for fiscal Q3 is as follows: We expect revenue to be $3.7 billion, plus or minus $200 million; gross margin to be in the range of negative 21%, plus or minus 250 basis points; and operating expenses to be approximately $900 million, plus or minus $15 million. We expect tax expense of approximately $50 million. In closing, we continue to aggressively manage through this period of challenging market conditions, preserving our competitive technology and product positions, strong operational capability, and solid balance sheet. Following this downturn, we expect to capitalize on the secular demand trends and growth in memory and storage. We believe we are close to a transition to sequential revenue growth in our quarterly results. We are focused on significantly improving profitability and returning to positive quarterly free cash flow within fiscal 2024. We remain confident in our financial model, and we'll continue to operate the business in a disciplined manner to generate long-term profitability, cash flow, and shareholder returns.

Thank you, Mark. We are carefully managing our business to weather this industry downturn, preserving our technology and product portfolio competitiveness and manufacturing capabilities. Micron is the leader in DRAM and NAND process technology and one of only a handful of leading-edge semiconductor manufacturers in the world. Our team continues to drive new breakthroughs for our customers. Memory and storage are at the heart of systems and solutions that fuel the global economic engine, drive new efficiencies, create higher productivity, and spur advances that make life better for people around the world. We look forward to a normalization of market conditions, and we remain confident in the long-term demand for our solutions based on the value they create across multiple end markets. Thank you for joining us today. We will now open for questions.

Our first question comes from C.J. Muse from Evercore ISI.

I guess I was hoping to get your sense of how you’re thinking about the shape of the recovery. Obviously, things don’t look great today, but you’ve been through this before and will get through it. And so would love to hear your thoughts around how you think we'll come out of this. And given the CapEx cuts we've seen across the industry, it certainly looks like we're going to be in an undersupply situation, at least for DRAM in calendar '24. I'm curious what some of your largest customers are saying today, particularly in the data center as they start to consider this likelihood.

Thank you for the question. We can approach it from both the demand and supply perspectives. On the demand side, customer inventories, while still high, are improving overall. We anticipate that the volume of shipments for both DRAM and NAND will keep increasing sequentially from this point onward. On the supply side, industry players have made moves that are reflected in various reports, indicating reductions in capital expenditures and underutilization within the industry. These factors will reduce supply significantly. As a result, we expect the demand and supply balance to gradually get better throughout the year. We believe that days of inventory will also continue to improve, having peaked in the second quarter. Excluding inventory adjustments, we foresee ongoing improvement in days of inventory. For our business, we expect to see a transition to sequential revenue growth moving forward. Thus, with demand and supply improving, we also predict an upward trajectory for pricing. While profitability and free cash flow currently face challenges, the fundamental conditions of the industry are starting to enhance. With the measures we have implemented, there might be shortages in the industry around 2024. However, Micron is taking decisive actions in managing our capital expenditures, addressing underutilization in our fabrication facilities, controlling operating expenses, and focusing on supply growth. Regarding market trends, we’ve noted that PC inventories are significantly better and expected to keep improving in the coming quarters. In the smartphone sector, some customers hold more inventory than others, but overall inventories are also improving there. We believe that cloud revenue hit its lowest point around Q2. Although cloud inventories remain high, we anticipate that data center inventories will improve throughout the year and reach normalized levels by year-end. The introduction of new CPUs is driving DDR5 deployment in the cloud, and Micron is well positioned with our strong DDR5 offerings. This advancement is expected to support cloud demand by increasing memory content per server. These are all positive trends. While we are navigating the business through a challenging environment, I hope you recognize that Micron is responsibly managing its supply and continuing to focus on improving the demand-supply situation. As we have indicated, the industry's recovery could be expedited if the year-over-year growth in supply for DRAM and NAND turns negative. We have taken steps to ensure that our DRAM and NAND supply growth for the year is indeed negative.

And our next question comes from the line of Timothy Arcuri from UBS.

I have a two-part question. First, Sanjay, following up on the last question, what lasting changes do you anticipate the industry will implement coming out of this cycle? It's been significantly worse than we expected. Do you believe that the industry, and you in particular, will adopt stricter measures regarding the addition of bit supply? Can you also engage customers in more long-term agreements, considering the clear indications of where pricing is headed after this situation? Secondly, Mark, regarding the write-down for May, why continue production if you're going to immediately write down $500 million in inventory? Have you reached a point of utilization that you're unable to go below? I'm curious about the reasoning behind producing while also writing that amount down.

Considering the industry environment over the past three years, we have encountered unprecedented challenges, including a pandemic occurring once in a century, a significant war impacting the economy, and the highest inflation rates in four decades. These factors have led to considerable disruptions in demand, a surge in demand followed by necessary inventory adjustments, and significant changes in customer behavior. Currently, we are witnessing the beginning of a recovery process with the implementation of supply growth reduction actions, including those discussed today. This should ultimately allow the industry to return to healthier profitability levels, which have been unsustainable. It's crucial for demand and supply conditions to improve, especially since the industry maintained discipline for over a decade prior to these recent events, particularly in the DRAM sector. I believe that future investments will require healthy profitability and supply discipline to support industry growth, especially given strong demand trends. We anticipate that 2025 will be a record year for industry revenue, following two years of slow shipment growth. We expect 2024 and 2025 to be robust years that will spur significant growth. Actions are being taken on the supply side to restore the industry's health in the coming quarters. Additionally, the early stages of generative AI are emerging, indicating a long-term boost in demand for memory and storage. The future of our industry is closely tied to AI, and Micron is well-equipped with our technology and product strategies to capitalize on these growing opportunities.

Yes. Tim, on your second question, we have been actively taking supply out of the market. We took utilization levels down late summer. We increased that more in the fall. And as you heard on the call today, we've taken utilization down even further. And we're at levels now that none of us have seen before on underutilization at Micron and maybe in the company's history. So it's a significant reduction. I'll add that we do, as you know, build principally to WIP. So we're able to then finish those products later and minimize the amount of build. We've also very thoughtfully, when we've reduced utilization, done it in the way that we can maximize the cash benefits reductions that we get when we reduce. And then it's important to note that in the time horizon that we're looking at, we are seeing bit volumes increase sequentially from here on out. Now in the third quarter, I would like to mention that DRAM volumes saw a modest increase, while NAND experienced a significant rise. Although both face pricing challenges, NAND is encountering more difficulties. Nevertheless, we are observing growth in bits and anticipate that this marks the start of supply and demand moving towards better balance.

Our next question comes from the line of Chris Danely from Citi.

I have a couple of specific questions regarding the expected recovery. For the second half of this year, is your base case anticipating that PC and cell phone demand will return to normal seasonality? Additionally, how do you expect utilization rates to trend as you continue to increase DRAM and NAND shipments? Should we anticipate reaching full utilization rates in a couple of quarters, or can you provide a revenue or bit level metric that would indicate you have returned to full utilization?

We will keep an eye on industry demand concerning utilization rates, and it is crucial for us to reduce our days of inventory. Utilization may extend into fiscal year '24. Decisions regarding utilization will depend on our inventory situation and demand assessment. As for the smartphone market, we anticipate a year-over-year decline in unit volume for calendar year '24, although our Q2 performance exceeded seasonal expectations. As customer inventory levels stabilize throughout the year, normal demand patterns in the smartphone market will resume. Although unit volume might decrease year-over-year, it's essential to note that the smartphone market is increasingly favoring flagship phones, which require more memory. These trends will evolve as demand increases in the smartphone market over the year.

And our next question comes from the line of Harlan Sur from JPMorgan.

On the underutilization charge, I know last call the team had articulated roughly $460 million of charges recognized primarily in fiscal Q3 and Q4. So how much of this is embedded in your Q3 numbers and Q3 guidance? And given the lower utilization, tick it down to 25% or cut it by 25%. If you continue to drive lower utilization through the second half of this calendar year, how do we think about some of the utilization charges in fiscal Q4 and the second half of this calendar year?

Yes, Harlan, I'll answer your question briefly now and then discuss gross margins and effective utilization gross margin. Last quarter, we estimated around $900 million in fiscal '23, with about $460 million impacting FY '23 COGS. Due to the increased underutilization, we now anticipate about $1.1 billion for '23, which includes costs, inventory, and period costs, with approximately $900 million of that coming into FY '23. This change is influenced by increased utilization costs, inventory write-downs, and the pull forward of costs. If we take a step back to review our reported gross margin and outlook, they depend on various factors, including pricing, inventory write-downs that reflect our outlook on pricing, utilization effects, volumes, and the leverage on period costs, as mentioned last quarter. And then further, I'll add that at these lower levels of profitability, the margin forecast and the results are more sensitive to slight changes in assumptions, importantly, such as price. So on price, given the recent price trends that we've seen and our current view on pricing, as we reported in Q2, we took a material write-down of inventories of $1.4 billion. And then the Q3 guide contemplates a write-down of $500 million on these additional inventories produced. With these write-downs, we pulled forward inventory costs and thus, we've lowered the carrying value of on-hand inventories. And as those lower cost inventories clear in future quarters, we'll realize more income in those quarters than we would have without the charge. So as an example, we expect around a $300 million benefit in Q3 from the Q2 charge as a portion of these lower cost inventories sell through. So as for your question, we also now have the underutilization effects creating higher cost inventories and then adding additional period costs. And as mentioned, we see about $1.1 billion of underutilization impact in FY '23, and most of that, as I mentioned, we expect to hit the P&L this year, and some of it will carry over to next year. Now because of the effective write-down accounting, less of it will carry over to next year than would have otherwise. Now considering all this, we expect our reported second quarter gross margin to be the trough, so that 31.4%. And that, again, is driven in large part by the $1.4 billion write-down. With a much lower inventory charge forecasted in the third quarter, you see that we guided about 10 points better relative to Q2. Now again, these estimates are very sensitive to pricing changes, but in our current view, Q4 would be better than Q3 in the sense of a lower charge, if any. And then over time, as bit volumes grow as I talked about in the last call and we talked about today, we get leverage on our period costs and utilization improves.

Our next question comes from the line of Toshiya Hari from Goldman Sachs.

One question on the NAND business end market. You talked about your bit production being down year-over-year in calendar '23, which I believe is a little bit more draconian than most of your competition. Just curious how you're thinking about the strategy in NAND. Could this cause permanent damage to your relative competitiveness? And kind of related to that, one of your competitors has significant capacity in China. Wondering if you had customers come to you and express concerns around that, and if that could be a potential relative positive for you over the medium to long term.

So with respect to NAND, we are well positioned with our technology and product roadmap. We shared with you today that 176-layer NAND yields are doing exceptionally well. 232-layer NAND, we have begun shipping in the market already. And with 176, as well as 232-layer, we have been well ahead of any competitor in the industry. Over 90% of our supply today in NAND that we are shipping is 176 plus 232-layers. So overall, we are well positioned with our technology. Our underutilization actions, we really believe is what is needed to bring supply in line with demand, and we think these are the actions that are needed to restore the health of the business. And we have said in our prepared remarks that the industry recovery could be accelerated if NAND and DRAM supply growth, production growth, is negative on a year-over-year basis. And we certainly are taking our actions accordingly. And regarding China, I can't really comment on the part of other customers. But what I can tell you is that our customers really do see a strong technology execution and product execution from Micron, and it's our product portfolio. We have done well with leveraging our NAND and DRAM in mobile markets with multichip packages. In automotive, I talked about some of the NAND product portfolio expanding and creating opportunities to strengthen our leadership position in automotive markets. And certainly, in the data center market, SSDs is also an opportunity. Our Gen4 NVMe SSDs have been continuing to do well in the client market as well. So our customers see our execution and innovation capabilities in technology and products, and that's what is bringing us stronger relationships with our customers for the NAND business. In terms of market opportunities, they remain strong with NAND replacing HDDs in data centers, and Micron has the right products to capitalize on these opportunities moving forward. We have previously lacked presence in NVMe SSDs and data centers, but now we have a solid product portfolio and we are excited about expanding our presence in this area in the future. Overall, the combination of NAND with DRAM provides us with a significant competitive advantage for our customers. Micron is well positioned with our technology and product roadmap, and we believe that our supply strategies are well considered.

And our next question comes from the line of Aaron Rakers from Wells Fargo.

So Mark, I apologize, I just want to go back to the inventory discussion a little bit. Is there any way to bridge the prior comment of the $460 million, again, that Harlan had brought up relative to that? It sounds like $900 million for fiscal '23. I'm just curious on what's embedded in the gross margin for underutilization this quarter. And I guess on inventory, is there any risk of obsolescence of inventory? Or is the inventory good, it just gets sold through at a lower cost of goods at this point?

Yes, the inventory remains in good condition. The cost basis for the inventories is lower. Regarding your question on underutilization charges, last time we reported total underutilization charges of approximately $900 million incurred in fiscal year '23, with around $460 million expected to impact the profit and loss statement in that fiscal year. This $460 million was made up of costs associated with clearing inventories and period costs. With the rise in underutilization, our estimation is that costs will reach $1.1 billion in fiscal year '23, and we anticipate that $900 million will be reflected in the second half of the year, consisting of both inventory-related costs and period costs.

And our next question comes from the line of Joseph Moore from Morgan Stanley.

I appreciate the detailed explanation on gross margin. Regarding the lower cost or market adjustment, could you explain how you arrived at the number for the February quarter, which I believe is a little over $1.4 billion? I understand that you assess inventory against market prices. How far out does that market price assessment extend? Also, if there are multiple quarters of sell-through being adjusted, how do you determine the price for those periods?

That's correct, Joe. You provided a good response to the question. I recommend looking at our public filings for more information. We assess the recoverability of our inventory as a single pool, a method we've consistently applied. We evaluate it based on the quantities and values available at the end of each quarter. We estimate the sales period for that inventory using our latest forecast and take into account the expected selling prices during that timeframe. As for the pre-write-down inventory, it stood at around 235 days, which projects to nearly three quarters. The difference between our inventory carrying costs and the anticipated sales values, adjusted for selling expenses, determines the charge. This resulted in a $1.4 billion write-down in the second quarter, and we expect a similar process will lead to a $500 million charge in the third quarter.

Our next question and final question for this session comes from the line of Krish Sankar from Cowen.

This is Eddy for Krish from TD Cowen. It seems you adjusted the language regarding your DDR4 and DDR5 crossover date from mid-2024 to mid-to-early 2024, so slightly better than prior outlook. It’s a bit surprising given that data center inventory for DDR4 is pretty high. Is that improved outlook driven by better-than-expected demand for new CPUs from Intel and AMD? Or is it a function of you seeing higher share than expected in DDR5? Or is it more of data center customers buying ahead and taking advantage of low price environment? Any color regarding the improved outlook would be helpful.

The observations I made about the transition from DDR4 to DDR5 are still consistent with our earlier expectations. This transition is largely dependent on the deployment of new CPUs, such as AMD Genoa and Intel Sapphire Rapids, in server and data center environments. We are observing that these CPUs are now being widely adopted and we anticipate this trend will continue throughout 2023 and 2024. Therefore, our projections regarding the timing of the DDR4 to DDR5 transition have not changed, and we are well positioned with our DDR5 products in the market.

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.